Privatizing PA Lottery Is A Dangerous Wager

As states look for ways to lower costs, a frequently stated idea is to privatize programs or functions carried out by the government.

During my brief time in the Legislature, we have considered privatizing the Pennsylvania Turnpike and the state liquor store system, neither of which came to pass. Now Gov. Tom Corbett is trying to privatize the Pennsylvania Lottery, and he’s trying to do it without the approval of the Legislature in a way that generates more questions than answers.
 
The only bid received came from Camelot Global Services, a British firm that runs the national lottery in the United Kingdom. Under the proposed deal, Camelot would guarantee profits totaling $34 billion over the life of the 20-year contract. The Corbett administration has said it expects Camelot's profits to be helped by the introduction of keno terminals in bars and restaurants.

That part of the plan raises all sorts of questions because adding keno would amount to an expansion of gambling and would therefore require legislative input and approval.

State Treasurer Rob McCord has threatened to withhold payments to Camelot unless he is satisfied its plans to expand gambling are legal, and the Legislature will certainly have more than a little to say about the perception of an end-around by Governor Corbett and the lack of transparency involved.
 
When asked whether I support privatizing a program or asset currently run by the government, I answer with a question of my own: If someone walked up to you and offered to buy your house, wouldn’t it ultimately depend on how much they were offering to pay? There’s no way you’d sell your house for $100, but probably no way you’d refuse to sell for $100 million dollars. It’s all about whether the sale makes financial sense—ideology about the role of government cannot be the primary factor in making a decision.
 
Much of the privatization argument comes from the idea the private sector is always more efficient than government, but reality doesn’t always match the rhetoric.

The Pennsylvania Lottery recently reported record sales and the highest profits in its 41-year history, providing record revenue to support programs that benefit older Pennsylvanians. The lottery achieved this unprecedented growth while spending just more than 2 percent of sales on operating costs.

In fact, the lottery’s administrative costs actually decreased from 2.3 percent of total sales in 2010/11 to 2.1 percent last year. That’s pretty darned efficient by anyone’s standards.

Privatizing the state lottery should make senior citizens especially nervous because seniors are the ones who exclusively benefit from the lottery’s profits.

In 2012, $1.228 billion was spent on various programs that benefit Pennsylvania’s senior population. These programs—including the Property Tax/Rent Rebate Program, PACE and PACENET for reduced cost prescription drugs, Alzheimer’s Outreach, Medical Assistance Long-Term Care and PENNCARE, which funds the Area Agencies on Aging in all 67 counties—are programs our seniors have come to depend upon as part of their everyday lives.
 
Like many of my colleagues on both sides of the aisle, I’m not willing to risk any of those benefits unless and until the Corbett administration answers some serious questions about this idea. Here are just a few of the issues that need to be part of the public debate in deciding whether this proposal is a good deal for the people of Pennsylvania.
 
The proposed privatization contract with Camelot Global Services would require the Commonwealth of Pennsylvania to pay Camelot’s operating expenses—including salaries for private executives. Those payments would be in addition to the company’s management fee—a cut of the state lottery profits, which otherwise would go to senior programs. Additionally, Camelot low-balled its performance targets for future years to guarantee it will earn more money.

In fact, the better the lottery performs, the more seniors lose because the “incentives” for Camelot are percentage-based to grow incrementally larger with better performance.

Despite Corbett administration claims of guaranteed annual profits for the lottery, the proposal does not require Camelot to pay seniors the full difference between actual results and its projections. It may pay a portion of the difference, or it may pay nothing at all.

In Illinois, private lottery manager Northstar Lottery Group is challenging that state’s financial penalties for falling short on its projected lottery profits. Camelot’s bid front-loaded profit projections in the first few years of the contract, but in the last 10 years Camelot only guarantees lottery growth of just 1 percent—at the same time the Corbett administration acknowledges there will be a spike in the number of seniors needing services through programs funded by the state lottery.

A clause in the proposed privatization contract would grant automatic contract extensions beyond the stated 20-year term, so Camelot’s profits can continue for up to 30 years without legislative or public input.

Finally, unlike the 2004 gaming law, which legalized casino gaming in Pennsylvania, the proposed Pennsylvania Lottery privatization scheme would allow Camelot, and its executives, to make generous campaign contributions in Pennsylvania.

The Pennsyvania Lottery is a well-run operation that provides many critical services for senior citizens across Pennsylvania. If there is to be a debate about whether the management of the lottery should be sold to an overseas firm, the Corbett administration owes it to the people of Pennsylvania to be up front and transparent about the realities involved and who the real winners and losers will be.