Inside the Bid to Privatize the PA State Lottery
The Pennsylvania House of Representatives is back. And one of the first orders of business seems to be dealing with this whole privatizing the lottery thing. On Friday, the Corbett Administration announced it’d be moving forward with a plan proposed by U.K.-based Camelot Global Services to run the state lottery system. And yesterday, lawmakers from both parties questioned the administration and British company over both the outsourcing and the legality of expanding the state’s lottery games, as required via Camelot’s contract. And said contract could be finalized as early as this Friday.
The Keystone Research Center, a left-leaning Harrisburg-based nonprofit, released a report in late December regarding the potential for privatizing Pennsylvania’s lottery system. Their message to Corbett: Slow. Down. “Rushing into a bad deal in the name of privatization,” the KRC’s report states, “is poor stewardship of public assets, shortchanging Pennsylvanians not just today but for years to come.”
The report’s analyses, outlined below, detail some of the obstacles the state will have to overcome seeing that, having put out a call last year for bids to privatize the lottery, it received only the one from Camelot Global Services, which as of November had established a presence in Delaware. The KRC found this lone bid to be a red flag over the process — and indeed, a state labor union is now suing the administration to block the privatization proposal. Should that suit fail, there are some noteworthy phrases written into the contract with Camelot that could allow a future governor to end the deal upon taking office… maybe.
The Immediate Concerns
In November, it was announced that Camelot Global Services’ bid to take over the lottery would guarantee the state nearly $34 billion over the next 20 years by adding keno and “other online games.” (So first let’s take a moment to note: Internet gambling is not currently legal in Pennsylvania.) This led to growing cries of outrage from liberals, union folks and Democratic lawmakers.
The first thing mentioned in the KRC’s report: the single bidder. “For a state seeking to privatize services — just as for a homeowner seeking a roofing contractor — getting only a single bid should be a red flag, a warning sign of a possible fleecing,” the report says. Only two states in the country, Illinois and Indiana, have to date privatized their lottery systems, and the report notes that both had several bids on the initial deal to run the cash-counting machine. (While only Camelot ultimately put in a bid for the Pennsylvania contract, other firms were in talks with the state beforehand.)
Among other potential problems the group found: The promised profits, themselves, aren’t much greater than the current rate of inflation over the next 30 years, which is the length of the contract. Thirty-four billion dollars sure sounds like more than the $22.6 billion the lottery made the state over the last 40 years, but is it really? The report also discusses potential conflict-of-interest issues with regard to the company that’s managing the state’s privatization deals, Greenhill & Co., as well as the fact that Pennsylvania’s current lottery system already has low administrative costs compared to other states’, so the potential cost savings are lower.
As the lottery is currently a state operation, it’s staffed by a union: the American Federation of State, County and Municipal Employees. So just as with the governor’s motions toward privatizing Pennsylvania’s wine-and-spirits stores, his yearnings to outsource the lottery to the private sector may be accompanied by the side effect of busting some unions.
The AFSCME Council 13, which represents 233 lottery employees, has filed a suit that seeks to prevent the administration from moving forth with privatization. The lawsuit was filed on behalf of four lottery employees and two senior citizens, whom many believe would get a raw deal from privatization. “The suit alleges that the Lottery Act of 1971 does NOT give the governor the right to privatize the lottery without legislative approval, and that any expansion to include keno and online ticket sales is not provided for in the law and must also be approved by the legislature,” according to AFSCME Council 13.
The governor’s spokesman, Kevin Harley, has already called the lawsuit frivolous. And it’s worth noting that union workers did not immediately lose their jobs after lotteries were privatized in the aforementioned midwestern states. But, for reasons we’re about to get to, the heads of the unions — and the AFSCME in particular — may have reason to be worried.
On the surface, the 20- to 30-year deal Corbett intends to sign with Camelot Global Services seems to give the state good terms, in part because it includes built-in accommodations for a future government administration to change plans. The state is allowed to terminate the deal unilaterally at the three-year mark (allowing six months thereafter for the company to wrap up its work). The state could also terminate thereafter if Camelot “consistently” fails to meet its profit commitments — which, as noted above, shouldn’t be too hard as long as they’re keeping up with inflation.
Problem is, the state may find itself needing to make more from the lottery down the road than those profit commitments. The Republican-run Legislative Budget and Finance Committee of the Pennsylvania House, in its own report regarding the lottery, has found that the future growth of state expenses for things like prescription drug benefits and senior centers — which lottery revenue helps to fund — may outpace not only current revenue but Camelot’s projections as well.
The conservative-leaning think tank the Commonwealth Foundation, meanwhile, has concluded Camelot’s bid is a good one. They’re going so far as to call the pacing of senior benefits “the lottery cliff,” equating it to the seeming urgency of the recently-debated “fiscal cliff” in Washington. “[T]his deal will be good for job seekers and taxpayers,” the Commonwealth Foundation writes. “Camelot will incorporate in Pennsylvania and pay the same state taxes as other businesses. The contract requires that 80 percent of lottery workers and hours worked be located in Pennsylvania. And Camelot has already indicated plans to expand the current lottery workforce.” (However, it was announced yesterday that a majority of currently lottery workers will likely lose their jobs and Camelot will be bringing in people from the U.K. to run the workforce.) The foundation concludes that critics — “in particular, AFSCME union leaders” — are worried about losing $100,000 from union dues “if 160 Lottery employees transition to jobs with a private company.”
But like we’ve already mentioned, if the deal doesn’t work out, there’s always the three-year termination clause, right? Well — maybe.
First off, a termination fee would accompany the end of the contract, amounting to the ill-defined “remaining value of investment in things like equipment, technology and personnel,” according to the Associated Press — plus another 10 percent.
In addition, according to the Keystone Research Center’s report, canceling the contract at the three-year mark, while allowable, could prove a tricky political hurdle. According to figures provided by the Pennsylvania Department of Revenue (as seen in the chart below, reproduced from the KRC report), the first four years of the contract are expected to show the highest compound annual growth rate, by a large margin, before profits then stabilize at a much lower 1-percent rate of growth:
That means, even if Corbett were not re-elected in 2014, a new Democratic governor would be hard pressed to deliver the lottery system back to the state at that time, considering the profits would be at an all-time high. But it would be a temporary high — a jackpot that would be quickly offset by subsequent decades worth of low-stakes business-as-usual.