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Lottery contractor likely $200M short on profits

Published: Sunday, June 22, 2014 11:22 p.m. CDT • Updated: Monday, June 23, 2014 12:05 a.m. CDT
Caption
(AP file photo)
Illinois Senate President John Cullerton, D-Chicago, speaks with an Associated Press reporter May 5 in his office at the Illinois State Capitol in Springfield. The private operator selected to run the Illinois lottery was supposed to do a better job than the state at bringing in much-needed revenue. But year after year, Northstar Lottery Group has failed to hit sales and revenue targets that some say were overinflated in the first place so the company could get the contract. Now lawmakers are calling on Gov. Pat Quinn to make a change.

SPRINGFIELD – Illinois’ private lottery contract has never reached the lofty sales promises it used to win a bid four years ago and is expected to fall more than $200 million short of what it owes the state when the budget year ends June 30.

But Northstar Lottery Group says it’s been hamstrung by state officials, with whom they have an already frosty relationship and accuse of throwing up road blocks – from canceling games it wanted to launch to prohibiting the sponsorship of Chicago’s Pitchfork Music Festival in 2013 because of headliner R.Kelly.

Regardless, Northstar’s 10-year contract with the state details that falling short of its goals by 10 percent two years in a row is grounds for ending the partnership, no questions asked. It missed targets by almost 20 percent last year, and is on track to do the same this year.

A top lawmaker has said he’s disappointed because a massive construction program was supposed to be funded with money Northstar claimed it could deliver.

The lottery giant’s contract has been under scrutiny from the start. A report released by Illinois Auditor General Bill Holland just days before Northstar took over in July 2011 showed irregularities in the decision-making process to select the corporation. In one case, a panel member submitted his evaluations of proposed business plans for the $2 billion state lottery after Northstar won the bid.

Yet, company CEO Tim Simonson says it has done well despite factors working against it.

“Those were ambitious goals we set for ourselves, and we have fallen short of those goals. But the full perspective, we believe is important,” Simonson said, arguing that his company has run the lottery better than the state.

In some cases, that’s true. Northstar boosted lottery profits by almost 10 percent in 2012 and improved income is expected – even if marginally – this year. Plus, Illinois has accumulated millions of dollars in penalty payments from the company when lottery profits don’t reach expectations.

Lottery customer service has improved dramatically, said Todd Jenney, the CEO for Huck’s Convenience Stores. But his lottery sales haven’t noticeably improved, which Jenney partly attributes to a cigarette tax increase and high fuel prices.

When Northstar took over the 40-year-old program, it promised contributions of $1 billion to the state in the fifth year of its contract. But it has been about $400 million short since in its first three years – money that is supposed to go toward schools, charitable organizations and a $31 billion capital construction program launched in 2009.

When Northstar fails to deliver, the state gets penalty payments that make up for part of the shortfall. State lottery officials and the company can also raise or lower the amount owed based on market changes.

The company has requested about $900 million in “downward adjustments” to reduce what it owes the state – including a quarter-billion dollars just months after the takeover.

“If we turn down anything, their habit has been to immediately give us a downward adjustment as to what they owe us,” Illinois Lottery Director Michael Jones said. “We have always been available or attempted to work with them and give them the benefit of our experience and advice. Sometimes it’s taken, most times it’s not.”

Northstar’s requests are based on a wide range of issues that company officials say are “completely appropriate” within the contract.

However, the lottery board also has requested more than $500 million in “upward adjustments,” seeking more money after the addition of online games, a new phone app and the delayed rollout of video poker. Even with the hundreds of millions of dollars in contract disputes, a mediator has only ruled to knock about $30 million off of what Northstar owes Illinois during the 10-year contract.

Other state officials are taking notice. Senate President John Cullerton has said he’s “extremely disappointed” in the company.

“The whole idea here was that a private manager would be able to deliver substantially better performance for the state,” the Chicago Democrat said two weeks ago. “As the numbers increasingly show that Northstar is unable to live up to its commitments, I would encourage the governor to hold the firm accountable and take whatever steps are necessary.”

Marengo Democratic Rep. Jack Franks has repeatedly called on Gov. Pat Quinn to fire Northstar, and warns that “people lose elections on incompetence and mismanagement, and this is something the governor ought to take more seriously.”

But the Quinn administration has been mostly silent.

“As we have in the past, we will evaluate all options available under the contract if Northstar misses its targets again,” Quinn spokeswoman Katie Hickey said.

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