N.J. Lottery Operator Bypasses Penalty as Revenue Misses

Nine months after Governor Chris Christie put New Jersey’s lottery into private hands, the contractor trailed its revenue target and drained more than two-thirds of credits against poor performance, designed to last through 2029.

Northstar New Jersey’s net income in the fiscal year ended June 30 fell short by $55 million, or 7.3 percent, according to financial statements obtained by Bloomberg News. Though that performance triggered a $14.1 million penalty, Northstar paid nothing to the state because its contract allows a $20 million cushion of error over the 15-year term.

Christie, a Republican seeking more revenue from weekly lottery drawings and instant scratch-off games, became the third U.S. governor to turn over operations to a contractor, against objections from the Democratic-led legislature. The sole bidder was Northstar, a partnership of Gtech, a Rhode Island unit of Italy’s Gtech SpA, Scientific Games Corp. and the Ontario Municipal Employees Retirement System.

If Northstar continues to miss its net-income figure and is penalized in excess of the remaining $5.9 million credit, ‘‘they will be writing a check to the state of New Jersey,” said Chris Santarelli, a treasury spokesman. As of now, the state and the company have an excellent relationship, he said.

Sales Effort

The lottery is New Jersey’s fourth-biggest contributor to the budget, generating about $1 billion a year for education and state chronic-care institutions. Revenue for the first five months of this fiscal year is 7.9 percent less than projected. Through June 30, Christie expects growth of 7.4 percent.

“The New Jersey Lottery continues to work proactively with Northstar to increase sales and contributions to the state,” another treasury spokesman, Joseph Perone, said in an e-mail.

New Jersey education and institutions received $965 million in lottery proceeds for the year ended June 30, according to the financial statements. That was $28 million less than projected in the state budget. For the current fiscal year, Christie has estimated a $1.04 billion contribution, second-highest in the lottery’s 44-year history.

Only New Jersey and Indiana have private lotteries. The first state to do so, Illinois, ended the experiment on Dec. 9 when Governor Pat Quinn signed an agreement terminating Northstar Lottery Group after three years of revenue shortfalls.

Illinois Experiment

Northstar has argued that Illinois was partly responsible for the performance, and in 2012 it won an arbitration case that prevented the state from collecting $25 million in penalties. In 2013, the contractor sought $556 million in concessions over five years, according to the Chicago Tribune, citing a letter to the state lottery superintendent.

Indiana fared better with Gtech, which it signed to a 15-year contract in 2012. While it fell $1.6 million short of the fiscal 2014 goal, Gtech delivered record revenue of more than $1 billion.

Northstar took over New Jersey lottery’s marketing and sales on Oct. 9, 2013, after a three-month transition working alongside the state. Within weeks, Carole Hedinger, the lottery’s executive director, said at a public meeting that sales were strong, though the budget goal was “very high” and “difficult to meet.”

On Jan. 17, 2014, the treasury approved Northstar’s request for a downward adjustment to the income target, citing the effect of Hurricane Sandy. That storm, the costliest in New Jersey history, struck 11 months before Northstar took control.

Instant Games

Michael Drewniak, a spokesman for Christie, referred questions about the lottery to the treasury. Mollie Cole, a spokeswoman for New York-based Scientific Games, didn’t immediately respond to a phone message seeking comment.

Angela Wiczek, a spokeswoman for Gtech, said Northstar shouldn’t be judged solely by its first results in a 15-year contract. Gtech was “pleased with the progress we’ve made,” she said by telephone.

By some measures, Northstar in its debut bested the state’s fiscal 2013 solo performance. Sales for instant scratch-offs and live drawings rose to $2.9 billion, from $2.82 billion. Retailers, whose ranks increased by 8 percent to more than 7,000, collected $4.2 million more in commissions. Still, growth is less than the company had projected.

“The working relationship between organizations is excellent, the retailers are thoroughly engaged, sales are increasing and a considerable amount of advanced technology and new equipment has been developed and deployed,” Perone said.

2014 Contribution

The Northstar contract called for a contribution of $120 million, an amount the state refers to as an “accelerated guarantee payment.” For fiscal 2013, Christie added that payment to the $965 million generated to benefit low-income students and chronic-care patients. The total was a record $1.08 billion, according to the lottery’s annual report.

Northstar’s fiscal 2014 contribution, $965 million in the financial statements, represents flat growth, according to Perone. That figure includes $8.19 million transferred from prior-year earnings.

Northstar had $705.5 million of a targeted $760.9 million in net income. Though the difference was $55.4 million, the state couldn’t collect that amount because penalties are subject to a 2 percent cap.

Democrats had objected to the Northstar contract because lawmakers weren’t privy to the negotiations with the Christie administration.

(An earlier version of this story was corrected by the Treasury to change part of the 2014 contribution from a credit allowed in Northstar’s contract to a transfer from prior-year earnings.)

(Updates with Gtech spokeswoman in second paragraph after “Instant Games.")
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