NJ lottery operator Northstar wants $97 million raise and less money for New Jersey

Dustin Racioppi | NorthJersey

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Since taking over the core lottery operations five years ago, private operator Northstar New Jersey has slashed its projected returns to the state by $1 billion, tinkered with its games and added new, instantly gratifying products designed to attract more players.

Now it is looking for yet another way to pump up ticket sales while reducing its financial obligation to the state. It wants to keep more of the money it takes from sales and cut back on how much it sends to the state.

The gaming conglomerate has revived an aborted attempt made late last year to lower the legal minimum percentage of lottery revenue that is directed toward the nation’s worst-funded public employee pension system from 30 percent to 27 percent.

If the state agrees, that would mean Northstar would see its share of lottery sales jump by $97 million, according to last year's revenue figures.

Northstar contends that by lowering the mandatory minimum return to the state it can increase prize payouts on games, particularly scratch-offs, and increase players’ chances of winning. The theory, according to the bill, is that "the more people win, the longer they stay in the game, which results in higher sales and profit.” Under the contract with the state, Northstar is expected to return $1 billion to the state for the 2018 fiscal year.

But a so-called poison pill of the measure says that if Northstar does not generate at least as much ticket sales as it did the year before, then the 27 percent minimum would be “null and void.” A similar provision was included in a bill Northstar had proposed last year and was sponsored by Senate Budget Committee Chairman Paul Sarlo, D-Wood-Ridge, but he pulled the bill.

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“The whole goal is to maximize the amount of revenue that will go to the lottery” to support the pension fund, said Sen. Troy Singleton, D-Burlington, the bill's primary sponsor. “I wouldn’t do it if it did not have some level of guarantee,” he added. “We have to at least make sure we’re meeting that number moving forward.”

The bill, S-2126, was introduced May 31. An Assembly version, sponsored by budget committee chairwoman Eliana Pintor Marin, was introduced a week later.

It says that lowering the mandatory minimum is a “guaranteed method to grow and maximize the profit potential of the New Jersey Lottery in order to sustain and enhance future funding of the good causes the Lottery supports.” It notes that “this fundamental principle in prize payouts is true across every lottery in the United States.”

While some lotteries have had success raising revenues this way, it is by no means the guarantee Northstar’s lobbyists assert it is.

In neighboring Pennsylvania, the Legislature in 2014 approved decreasing the minimum profit margin from 27 percent to 25 percent and projected net revenue would increase by $40 million over the following three to four years. Since the change, Pennsylvania’s net revenues decreased cumulatively by $35 million, according to research by the Institute on Taxation and Economic Policy.

Still, a spokesman for Pennsylvania’s lottery said in an email that lowering the mandatory minimum gives the state flexibility to offer more games to players, and Democratic Gov. Tom Wolfe has proposed in his 2018-2019 budget to do away with the minimum.

In Florida, lowering the minimum hasn’t translated to more money for the education programs the lottery supports. It decreased its minimum by 1.5 percentage points five years ago. Between fiscal year 2016 and 2017, sales increased by $100 million, but the education contribution decreased by about $40 million, according to the institute.

It is no guarantee that New Jersey would gain from lowering the mandatory minimum, but Northstar likely would.

Even though Northstar has failed to meet the revenue targets it initially promised and has struggled to increase ticket sales, it has averaged earnings of $100 million a year since taking over the sales and marketing of the lottery. That's because it earns a percentage of every ticket sold. If the proposal were to pass and the lottery does in fact sell more tickets but with a lower minimum owed to the state, Northstar would stand to gain.

"It’s cutting the state’s take but they’re going to get paid the same and perhaps even get paid more," said Robert Kohler, a Texas-based consultant who used to work for that state's lottery. "At the end of the day, who it makes the money for is the vendors. Is that what all this is supposed to be about?"

Under Northstar, the lottery has become more reliant on scratch-off revenue than ever. Instant games accounted for 59 percent of sales in fiscal year 2017, the highest percentage since at least 2000, when they were 32 percent of all sales, according to an analysis of available financial reports.

As the company has come to rely more on scratch-offs to meet its financial promises to the state, sales in traditional “draw” games like Powerball and Pick-6 have fallen off.

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“To me I think you can take that as a clear sign of failure,” Dawn Nettles, who runs the Texas lottery-tracking website Lotto Report, said of the proposal to lower the minimum. Nettles is also suing GTECH, which became IGT, over its handling of a scratch-off game.

“The lotteries are running out of options," Nettles said "You take Powerball and Mega Millions and you look at what they’ve done to those games, all for the love of increasing sales.”

Nettles was referring to changes to the two big multi-state games that increased jackpot sizes but also lowered the odds of winning. Those changes were done to respond to what the industry calls jackpot fatigue, meaning casual players don’t gain interest in the games until the grand prizes reach unusually high levels because they don’t see value in spending a dollar or two for the chance to win $50 million.

New Jersey is one of three states that has not lowered its mandatory minimum. Louisiana and New Mexico are the others.

Treasurer Elizabeth Maher Muoio said in a statement that her department has taken a "close look" at Northstar's 2019 business plan and is "actively engaged in discussions on the proposal."

"At the same time, we are also looking at their performance under the contract with the end goal of ensuring that Northstar’s strategies align with the best interests of taxpayers," she said.

In New Mexico, the same lottery vendors that make up Northstar New Jersey have been pushing for several years to lower the state minimum. But it has been defeated in the legislature every time, largely due to heavy pushback by Think New Mexico, a bipartisan policy group that questions the math behind the proposal.

At the beginning of June, New Mexico announced it was increasing its lottery education scholarships.