Illinois' private LOOTery manager gets reduced penalties

From: Dianne M. Berlin


IL's private LOOTtery manager gets REDUCED PENALTY! (See how the rules only apply to the gambling suckers and not to the gambling interests.

Big penalty scratched for Illinois Lottery's private manager
By Paul Merrion
November 09, 2012

Although Illinois Lottery profits fell far short of expectations last year, its private manager could pay far less than $10 million in penalties, a fraction of what the state expected if contractual profit targets weren't met, an independent mediator ruled.

State lottery officials have been haggling for months with Northstar Lottery Group LLC, the Chicago-based consortium that won the management contract two years ago by promising far higher profits than its competitor offered.

In a final decision, an independent arbitrator ruled Tuesday that “adverse actions” by the state kept Northstar from hitting its profit target of roughly $825 million, reducing the penalty to somewhere between $3 million and $10 million, depending on actual net income, which is still being audited.

The arbitrator lowered Northstar's profit target for fiscal 2012 by $28.4 million and by $2.9 million this year. Without that reduction, Northstar would have faced roughly $17 million to $25 million in penalties.

Although Northstar and the arbitrator consider the decision to be binding, the state “continues to reject that it took any adverse actions,” said Illinois Lottery Superintendent Michael Jones. “We are studying what our options are,” which may include taking the matter to court.

Under its contract, Northstar has to pay a penalty equal to half the difference between actual and targeted profits unless the state, which ultimately controls the lottery, does something that impairs its ability to hit those targets. If the two sides can't agree how much the target should be reduced, a third-party mediator is called in to decide.

Primarily, the state's $18.5 million cutback in advertising and marketing just before Northstar took over the lottery hurt sales and so the firm should be allowed to lower its profit target under terms of the contract, according to the ruling.

“This is not a good day for the state of Illinois,” said state Rep. Jack Franks, D-Woodstock, a vocal critic of the lottery's private management contract. “If they didn't make their numbers we were going to get compensated. That's not happening here.”

A state inspector general's report last year found irregularities and questionable procedures in the procurement process to hire Northstar.

However, the state fared better than it did under the arbitrator's preliminary decision, which would have reduced the penalty to zero.

On appeal by the state, the arbitrator agreed that Northstar could not hold the state responsible for a 95-day delay in signing the contract because it was not yet in effect. Due to the delay, Northstar could have withdrawn its offer, but that “might well have resulted in a reopening of the bidding process, with the consequent embarrassment to the State and Northstar and perhaps selection of a different manager,” the ruling noted.

The profit target would have been reduced by $55.6 million if the state had not won that portion of its appeal, more than the estimated shortfall in profits.

A state inspector general's report last year found irregularities and questionable procedures in the procurement process to hire Northstar.

While the private manager will owe some kind of penalty, a Northstar spokesman said it will be offset in whole or in part by incentives in the contract for increasing profits about 26 percent to somewhere between $775 million and $790 million on revenues of $2.67 billion in the year ended June 30, 2012. Final, audited results have not yet been released.

The net amount of penalties and incentives will be “about $5 million, plus or minus,” according to Robert Vincent, senior vice president of communications for Providence, R.I.-based GTech Corp., which owns 80% of Northstar in a joint venture with New York-based Scientific Games Corp.

Apart from the ruling, the fiscal 2012 target profit of $851 million is already under negotiation to be reduced to roughly $825 million because Internet lottery sales did not start until the latter part of the fiscal year.

However, Mr. Jones noted that the state may demand upward adjustments in the profit target. For one thing, it was assumed that video gaming would be well underway by now, competing with the lottery, but that didn't start to roll out until a few months ago. “It's quite clear,” he said, that Northstar's bid “anticipated video poker being in the market and it affected what they promised to the state.”

Under terms of the contract, any dispute resolved by an arbitrator that amounts to less than 5% of the net income target cannot be appealed in court. “The parties agree that these are binding decisions,” said Mr. Vincent.

“There is still a lot of legal evaluation going on about that 5% rule,” said Mr. Jones.

http://www.chicagobusiness.com/article/20121109/NEWS02/121109730/big-penalty-scratched-for-illinois-lotterys-private-manager