NJ Lottery puts the whole shebang up for bids: includes marketing!!

NJ Lottery puts the whole shebang up for bids: includes marketing!!

Steve’s breakdown: This one could be complicated but if you were to pitch with a lottery company, which would surely help the cause, this could be giant! It includes the state lottery’s sales, marketing and game development.

TRENTON, NJ: Gov. Chris Christie’s administration is looking to hit the jackpot with the New Jersey Lottery.

State officials last Friday asked private companies for bids to take over the state lottery’s sales, marketing and game development. The winning bidder would have to pay the state $120 million up front but could be paid hundreds of millions over the next 15-plus years.

For lottery players, changes under a privately managed lottery could include more games, reward programs and online play. Lottery retailers might see increased competition, as the state suggests in its request for proposals that a private operator might seek to add another 600 or more retailers, particularly chain stores, to the 6,500 places currently selling tickets.

New Jersey could hand over operations of the nation’s eighth largest lottery as soon as March. In exchange for the $120 million payment, the winning bidder would get a contract through 2029 under which it could potentially earn 10 times that amount — if lottery revenues grow at a healthy 7.5 percent every year and the company reaches the income targets it guarantees.

“They would only earn that kind of money if they generated significant revenue growth that would be well beyond what the state is on track to do on its own,” said Bill Quinn, a state Treasury Department spokesman. “There would have to be a very large net benefit to the state for them to earn significant contract payments.”

The state’s costs would be at least partially offset by guaranteed yearly increases in lottery revenues, as well as reduced state costs to administer the lottery and advertise it. The state doesn’t say how many of its roughly 150 employees would lose their jobs, but it estimates that its expenses, currently around $37 million, would drop to $13 million the first year after outsourcing.

The contractor’s pay would be tied to how much it increases the lottery’s annual contribution to the state budget, projected at $995 million this year.

Here’s how: The state lists three levels of income for each year of the contract — the base, middle and upper level incomes. The company would keep 5 percent of the amount between the base and middle, 20 percent of the gap between the middle and upper and 30 percent of any portion above the upper amount. The total would be capped at 5 percent of net income.

But the flip side is the prospect of penalties for falling short of income goals. If net income falls below the state-identified base income, the company would owe the state the difference. For any amount above that base but below the income target promised by the company, it would owe the state half. That shortfall penalty would be capped at 3.8 percent of net income.

A private operator’s ability to avoid shortfall penalties will mostly depend on the self-imposed income targets it promises to win the contract, as finishing above the state’s base income is relatively easy — a growth rate over 15 years of 14.3 percent, around 1 percent a year. The lowest 15-year growth in the lottery’s history is 65 percent.

However, topping the 7.5 percent annual growth needed to achieve the 30 percent bonus would be challenging. That’s been reached just five times in the last quarter-century and never more than one year in a row in that time. The type of compounded growth needed to trigger that threshold has not been achieved over a 15-year period since 1982 to 1997.

Patricia McQueen, a gambling industry analyst for The Wagering Resource, which is based in Massachusetts, said New Jersey is different from other states that have broached the idea of a private lottery operator because its lottery is already successful.

“It doesn’t surprise me, given that New Jersey privatized the horse tracks. … But the New Jersey Lottery is a fairly well performing lottery, so you don’t often seen privatization efforts being made toward fairly well performing lotteries,” McQueen said.

The lottery is New Jersey’s fourth largest revenue producer and was the eighth largest among 44 state lotteries in fiscal 2011. Its per capita sales ranked fifth nationally, reaching $313 per person last year. Unless the state allowed things such as keno, video lottery terminals or Internet gaming, a private vendor wouldn’t have many obvious opportunities to wring out new revenue, McQueen said.

“I view privatization with a little bit of skepticism,” McQueen said. “Sometimes the agreements come with extra tools that the private manager could use, and if you’d given those tools to the lottery in the first place, they could probably do the same amount of money without the hassle of the extra layer of managers.”

The state’s request for proposals, issued Friday, said it seeks a manager for the lottery’s gaming system, game development, marketing and advertising and “opportunities for innovation, agility and market responsiveness.”

In a way, the cash-strapped state is looking to win the lottery itself through a one-time, lump-sum, payment of $120 million to be paid when the contract begins. It appears eager to move quickly, having written into the request for bids that “it is essential that the state and the Division of Lottery move forward quickly.”

“The term of the contract is 15 years. That’s sort of an advance payment on money that would come in later over the life of the contract. The idea is to provide some accelerated payment to the state for this very valuable asset,” Quinn said.

Privatization of at least part of the New Jersey Lottery isn’t new. Gov. Jon S. Corzine’s administration explored the idea, and a privatization task force assigned by Christie suggested it in 2010.

Illinois outsourced its lottery operations last year. Other states, such as Pennsylvania, are looking at it. Indiana hopes to complete a deal by Nov. 1.

New Jersey likely will face a short supply of potential bidders. The proposal says a bidder must have experience managing a government lottery with revenues exceeding $1 billion a year. The Illinois deal was won by a consortium called Northstar Lottery Group, which includes a partnership between the industry’s two biggest giants, GTECH Corp. and Scientific Games International.

By state law, 30 percent of the lottery’s revenues must be returned to the state budget. Last year, 34 percent of revenues was transferred to the budget, the lowest in history.

Bidders are required to attend a conference and visit New Jersey Lottery headquarters Sept. 6, and bids are then due to be opened on Nov. 15.


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