INDIANAPOLIS, Ind. — The Hoosier Lottery board voted Wednesday to hire a private company to oversee sales, marketing and other operations with the goal of earning the state about $2.1 billion in additional revenue through 2028.
The board chose Rhode Island-based GTECH — which provides similar services to the Illinois lottery and provides some computerized game services in Kentucky — at the recommendation of Hoosier Lottery officials, who conducted an expansive review of the two companies vying for the 15-year contract.
GTECH told lottery officials that it can generate $500 million more for Indiana over the next five years than the state had projected to earn without any changes. Currently, the state's lottery revenues significantly trail other states.
"We are not achieving our potential today," Hoosier Lottery Executive Director Karl Browning told the board. "We will under this contract."
Browning said that "under every scenario I can think of," the deal is better for Indiana government and taxpayers.
"And the numbers are big," he said.
Kentucky Lottery Corp. CEO Arch Gleason said his organization has never considered privatizing services as broadly as Indiana has.
He added that the Kentucky lottery's organization as a corporation, rather than an arm of state government, allows for more effective and efficient operation compared to systems in other states.
GTECH plans to grow Indiana lottery revenue by expanding the games to more retail locations, broadening the base of players and creating more games, Browning said. The company also plans to revamp lottery advertising and enhance its brand.
"They have a lot of thoughts about how we spend our advertising dollars today," Browning said.
But Hoosier Lottery Chairman William Zielke said GTECH can't make those changes without an OK from the board, which will review the company's business plan annually.
GTECH has set a threshold amount that it intends to earn for the state, which is roughly 50 percent higher than current profits from the games. If GTECH beats the threshold, it receives a bonus; if it falls short, the company pays the state a penalty.
Lottery officials will now begin negotiating the details of the contract, but the final deal will likely mean that:
- GTECH will take over lottery sales, marketing and distribution. That means GTECH will handle the lottery's relationships with retailers and oversee the creation and administration of state-based lottery games.
- Hoosier Lottery staff will retain control over prize payments, security, finance and legal issues.
- Roughly 125 lottery staff will be offered jobs at GTECH and are to receive comparable salaries and benefits, although they will continue to work out of their current locations. Less than 50 people will remain Hoosier Lottery employees.
Daniels: Decision easy
Hoosier Lottery officials have developed the public-private arrangement carefully to ensure the state doesn't run afoul of a U.S. Department of Justice opinion that states can't simply turn over their entire lottery operation to a private firm.
Gov. Mitch Daniels had considered that more dramatic step several years ago as a way to generate additional revenue for higher education and scholarships. Lawmakers didn't go for the idea and then federal officials nixed such arrangements.
On Wednesday, the governor — who leaves office in three months — said that in his two terms, "this may be the easiest and most obvious decision the state has had to make."
"Our lottery revenues lag far behind most states," he said. "With this contract, the only question is how much more money Indiana will receive than under the current system."
Daniels, whose administration has completed a number of controversial privatization deals, emphasized that 88 percent of the lottery's spending already is done through contracts with private firms. Retailers, for example, sell the tickets and outside firms are used to print and distribute them.
The new deal will move that number to 95 percent and "assures significantly stronger future net income," he said.
"It's no longer my job to suggest how these additional state fundsshould be used, but it is my job to leave Indiana in the strongest possible financial shape, and this step will make the nation's most solid state fiscal position that much stronger," Daniels said.
Other states' actions
Since the Department of Justice's ruling, other states have also been exploring how to privatize parts of their lottery operations.
Last year, Illinois become the first state to act. It hired Northstar Lottery Group — a collaboration between GTECH and Scientific Games — to run some of its marketing and sales operations. In its first under the new arrangement, the Illinois lottery's revenue improved by roughly $100 million, but the numbers were also short of Northstar's original projections by about $100 million.
That state and Northstar are now in arbitration over the revenue issues and possible penalties and the company is trying to reduce the profit commitment it made to the state when it won the bid.
Browning told the Hoosier Lottery board on Wednesday that the review team considered the Illinois issues as it studied GTECH's bid. But he said regardless of what Northstar promised Illinois, it did deliver additional revenue.
"The people of Illinois are $100 million richer than they were," Browning said. "If you think that's a problem, I'd like to have that problem."
The Kentucky Lottery contracts with GTECH to provide services for "online" games — such as Pick 3 and Powerball — and with another private firm for services related to scratch-off tickets. [Editor: The term "online" in the lottery industry refers to games with tickets that are printed at a retailer's lottery terminal — it does not mean tickets are available over the Internet, nor does it refer to the type of drawings (i.e., traditional ball drawings or computerized drawings) that are conducted for the game.]
Those contracts include incentives to improve sales, Gleason said.
The Kentucky lottery reported $823.5 million in sales in fiscal year 2012, a 2 percent increase over 2011.
"I am convinced that we have one of the best run lotteries in the nation," said Rep. Mike Cherry, a Princeton Democrat who chairs the House Committee on State Government.
Scientific Games was the losing bidder in Indiana. Officials from the company attended Wednesday's board meeting but declined to comment after the decision.