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Updated: Wednesday, 26 Sep 2012, 7:09 PM EDT
Published : Wednesday, 26 Sep 2012, 12:27 PM EDT
INDIANAPOLIS (WISH) - New details emerged Wednesday on a proposal to privatize some aspects of the Hoosier Lottery. The state's Lottery Commission could decide next week whether the odds of making the move are in the state's favor.
Lottery Commission members spoke publicly about the proposal for the first time Wednesday, saying any move to outsource lottery operations would only be made "on the state's terms."
Lottery Commission Chairman William Zielke said the lottery returned approximately $52 million to the state last quarter, and new financial projections forecast the state will receive about $221 million from the lottery this year. The state received $188 million from lottery proceeds last year.
“We are charged with operating as an entrepreneurial business enterprise by the state, operating to return maximum dollars to the state in a socially responsible way,” Hoosier Lottery Executive Director Karl Browning told the Commission during a meeting Wednesday morning.
The Hoosier Lottery has grown at a significantly slower rate than comparable states, Browning said, and outsourcing additional operations like marketing could increase net revenue. According to figures presented by Browning, the lottery currently spends 88 percent of its budget on outsourced services, including game design, printing, machine maintenance, media services, and shipping. Remaining items like administration and personnel are overseen by the state.
A recent study commissioned by the lottery showed a potential for 40-60 percent growth, or net revenues of approximately $350 million per year, Browning said. One way to help accomplish that would be by outsourcing additional services, like marketing and IT support, Browning said.
Outsourcing such operations could make up to 96 percent of the current lottery private. Functions like legal support, licensing and lottery administration would remain with the state, Browning said.
Full privatization of state lottery systems was banned by the U.S. Department of Justice in 2008, Browning said.
“All decisions would still need authorization from the Lottery Commission,” Browning said. “We keep that administrative control.”
In order to protect itself, the lottery would also require a "revenue guarantee" that Browning referred to as a “threshold.” Under it, a vendor would agree to pay the state a certain amount every year, even if that money isn't generated by lottery play. If the vendor were to reach and eclipse the threshold, it would be entitled to 5 percent of the total revenue earned by the lottery along with 5 percent of all money earned above the threshold.
So far, the lottery won't say what that threshold level is.
“Stay tuned,” Browning told said following the meeting. “You'll hear it when the commissioners hear the recommendation.”
We do now know that the lottery is seeking a longer 15-year deal. Initial proposals had been for a 10 year agreement. Options for an extension of the 15-year agreement could be included “for good performance,” Browning said.
The lottery’s five member “selection team” received bids from four companies in August and took two weeks to review the proposals. Two companies remain in the running — Rhode Island based GTECH and New York based Scientific Games. Both companies already work with the Hoosier Lottery, supplying and maintaining ticket machines and computer terminals.
Both companies were also involved in the nation’s first lottery privatization deal last year in neighboring Illinois, forming a partnership known as Northstar Lottery Group. The group promised to bring in revenues of $825 million, but fell approximately $55 million short, according to initial estimates. A federal mediator recently ruled that the language in the contract does not require the company to make up the difference.
Opponents of the privatization plan argue Indiana could be put in a similar situation.
“I think that’s what makes the drafting of the agreement--the writing of the agreement--very important. We need to look at these issues and write an agreement that's clear. We don't want litigation. We've had problems with the state fair. We don't always write things like we should. We don't always contract as we should,” said Rep. Ed DeLaney (D-Indianapolis).
“I think we have a very clear [contract],” Browning said. “I think we've done it very clear.”
Two other companies — British based Camelot Global Services (who also bid in Illinois) and Australian based Tatts Group initially submitted bids, but dropped out, saying the state's demands of 20 percent revenue growth were "not sustainable,” according to Browning.
Asked why the state believed other companies could sustain growth far above that amount, Browning thought for a moment.
“Stay tuned,” he said again. “You have to see the business plans to answer that question.”
Browning said he hopes company wouldn’t respond if they didn’t think they could make money. And, he said, the state would plan on making money along with any company it would
Asked why the state couldn’t realize that growth on its own, Browning again paused.
“Because of the kinds of things that one has to do require a continuity of management. In any state government agency—and this one is not excluded--you can't provide that. We're guaranteed to turn over when there's an administration change,” he said.
“Do they have a competence we don't have? And do they give us terms? It's the Toll Road thing all over again,” DeLaney said. “I don't want an irresponsible contract that forces the vendor to do things we don't want them to do. That's the balance we've got to get. I don't want them selling all the tickets to people who can least afford them and none to the people who can afford them just to give us revenue. That does give me concern.”
Lottery commissioners met behind closed doors following Wednesday’s public meeting to go over those the business plans presented by the two companies, but would not share them publicly, calling them “trade secrets.” Browning would not comment on what they contain, or whether they are similar or different.
Browning will make a recommendation to the commission next Wednesday on which direction he believes the lottery should go.
Either way, one thing is clear, Zielke said.
“If the recommendation is not to move on it or we decline a recommendation to work with one the companies, we have to do more work on our own,” he said.