$103 million drop in lottery ticket sales leads to $103 million payout for private company

The private company that runs New Jersey's lottery is on pace to reap more than $1.4 billion in profit — even as sales slump and the firm has successfully lobbied to lower its promised revenue targets for the state by $1 billion.

In effect, Northstar New Jersey will be paid more while it provides less revenue than promised to the state by the time its contract expires in 2029.

For example, Northstar oversaw a $103 million drop in lottery sales during 2017, but was still paid $103 million in fees and incentives, according to the lottery's yearly report.

All that means less money could be going to prop up New Jersey's ailing pension system, which now is the beneficiary of the revenue generated by the lottery.

"Anybody that represents the administration should be very interested in that amount of money that was awarded," said Assemblyman Ralph Caputo, D-Essex, who heads the chamber's gaming, tourism and arts committee.

Ever since former Gov. Chris Christie pushed through the contentious privatization of the lottery's sales and marketing, Northstar has struggled to meet its too-good-to-be-true expectations for the state budget.

But that hasn't hurt the company's bottom line, as it has worked to convince state officials that its financial shortcomings were owed to a host of factors beyond its control.

So far, Northstar has been paid $378 million in the first four years of a 15-year deal.

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Democrats who control the Legislature were set against privatization from the start, calling it a financially questionable long-term deal for short-term gain. They have called for greater oversight of the contract, and some have expressed hopes that it would be given closer scrutiny by Christie’s Democratic successor, Gov. Phil Murphy.

Caputo said he intends to speak with Murphy about the lottery privatization, but the administration is aware of past concerns and said it is "always carefully monitoring any fluctuations in major revenue sources."

“The primary focus now, as we begin work on the proposed FY 2019 budget, is to examine the situation we inherited more closely to ensure that performance metrics and revenue are meeting the necessary targets in a manner that ultimately protects the taxpayers’ interests," acting treasurer Elizabeth Maher Muoio said in a statement.

But at the same time, Murphy’s administration has adopted the same logic Christie used to justify continuing the contract with Northstar, even if the math doesn’t add up.

In the same statement, Muoio said that “lottery sales have steadily increased over the last five years, despite last year’s fluctuation, which was due largely in part to the unprecedented Powerball jackpot that occurred the year before.”

The lottery commission offered similar reasoning for last year’s drag in ticket sales.

Spokeswoman Mary Ann Rivell pointed to a record $1.6 billion Powerball jackpot in January 2016 that generated $57 million in ticket sales for the state in one draw. And that followed a $947 million jackpot that brought in $40 million, she said.

No Powerball jackpots came close in the 2017 fiscal year.

“Consequently,” Rivell said, “the ‘jackpot fever’ that was created, driving such high sales, was not as intense.”

But Powerball wasn't the problem.

The game actually propped up lottery sales last year while its other “draw” games flagged.

Northstar was expecting $186 million in Powerball sales for the year, but the game sold $213 million.

It's a familiar pattern for Northstar and the state: Blame the lottery's financial struggles on external factors.

Politically connected

Christie defied the Democratic-controlled Legislature in 2013 and turned the lottery’s sales and marketing over to Northstar.

To secure the contract, Northstar hired the public relations firm of Christie's chief strategist at the time, Mike DuHaime, and paid $450,000 to the public affairs group led by his political mentor, David Samson, who is currently serving a home confinement sentence. Samson pleaded guilty to bribery for actions he took as chairman of the Port Authority of New York and New Jersey.

At the time, Christie's administration touted it as a long-term benefit that would “ensure that the lottery remains a vigorous and successful competitor" that would "generate reliable and growing revenues for state institutions and educational programs far into the future.” The lottery was established to benefit social service programs, such as housing for disabled veterans and running psychiatric hospitals, but last year Christie signed a law diverting lottery revenue to the public employee pension fund. Now the social service programs must be paid through the general budget.

Northstar had not only paid $120 million up front as part of the lottery deal, but had promised to generate “at least” $1.42 billion in additional revenue for the state with the possibility of as much as $6.88 billion over the life of the contract. Even at the low end, the extra revenue was "above and beyond what the state could expect to see if lottery operations remain unchanged," the administration said.

That promise was quickly scratched.

Even though ticket sales reached a new high the first year after Northstar took over, it wasn’t enough money to match Northstar’s projections. The company blamed the $55 million drop on Superstorm Sandy, which struck a year earlier, and the administration agreed to lower Northstar's income target for that year.

Ticket sales once again set a record in the 2015 fiscal year, but it still wasn’t enough to meet Northstar’s promise. The company sought a downward revision to its income targets, citing a significant decline in the multi-state games Powerball and Mega Millions and the state’s refusal to let it roll out keno-style games in bars and restaurants.

In the final days of 2015, while Christie was in New Hampshire running for president, the administration announced it had agreed to lower those targets by a total of $1 billion over the remaining years of the contract.

“The idea is if you privatize, the winner of that contract basically is saying: We’re prepared to take the risk that a company can take that the state should not. And we’re going to do that so the state enjoys greater lottery profits,” said Gordon MacInnes, a former state lawmaker who is now president of the left-leaning think tank New Jersey Policy Perspective. "That hasn’t happened."

“The state instead has gone back and said, ‘Oh, gee, we’re so sorry you didn’t make money on that, not like we had anticipated and you want, so we’re going to change the contract,’ ” MacInnes added. “That said an awful lot about who was to benefit from this.”

Northstar declined to answer questions about its plans to increase ticket sales and deferred to the Lottery Commission. The commission did not respond to questions about the apparent discrepancy in Powerball’s role in the loss in ticket sales last year.

Lottery sales down

Despite changes to the game that raised the cost to $2 a ticket but also increased jackpot sizes, Powerball sales were down across most of the country in 2017, dropping 30 percent from the 2016 fiscal year, according to the North American Association of State and Provincial Lotteries.

“New Jersey actually did quite well,” said Patricia McQueen, a writer for the lottery association’s magazine, “Insights.” She noted that even with the decline in ticket sales, New Jersey’s budget received more money than it had the year before — $994 million, or $4 million more than the contractual target.

But that is also $76 million less than what Northstar had promised when it won the contract.

And even though Northstar was denied the launch of keno-style games in 2015, the state quickly reversed its position. The lottery launched Quick Draw last summer, but the income targets have not been adjusted, as the amended contract said they should be.

Northstar has been penalized for its shortcomings.

It used up $20 million it had set aside in its upfront payment to the state to cover its losses in the first two years of the contract. And in the 2015 contract revision that lowered the company's income targets, Northstar's incentives were capped at 3 percent, down from 5 percent.

Despite its inability to produce the lofty revenues it had promised, Northstar has been awarded an average of $100 million a year through the contract.

It is paid a management fee that increases each year; last year's was $5 million. It is also reimbursed for advertising and marketing, which totaled $25 million last year, and other "direct costs."

For meeting its income targets, it is awarded an incentive payout, which was $30 million last year. And Northstar gets 1.05 percent of ticket sales and charges a 1.216 percent fee for its instant tickets. Those fees totaled $59 million last year.

Northstar has floated other ways of increasing revenues, including playing the lottery online and on mobile phones and lowering the legal requirement that 30 percent of lottery revenues be returned to the state as a way to increase payouts.

Senate Budget Committee Chairman Paul Sarlo, D-Wood-Ridge, entertained a bill last year to drop the legal requirement to 27 percent of sales with the hope that the lottery could increase payouts and, as a result, sales. But he quickly backed off the proposal, saying it was too much.

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Now, he said, he intends to call Northstar in during budget hearings to try getting answers on how it intends to stop the bleeding.

"They need to demonstrate to us that thay are improving their marketability, especially with their younger customers," Sarlo said. "Anytime you have a loss of revenue in the magnitude of $100 million, as the budget chairman, it’s always concerning."