New Jersey government officials have renegotiated a contract with the private operator of the New Jersey Lottery that is expected to save taxpayers up to $100 million over the next decade.
The new agreement raises the performance targets for Northstar New Jersey, a gaming conglomerate which has struggled to meet its financial promises to the state while also reaping tens of millions of dollars each year in incentives and fees. It had promised to generate "at least" $1.4 billion for the state over the life of the contract, which expires in 2029.
But those financial ambitions were drastically curtailed amid slumping sales of the popular games Powerball and Mega Millions, primarily due to what the lottery called "jackpot fatigue."
Former Governor Chris Christie slashed the company's total promised income to the state by $1 billion because of the sales declines and because the state had denied Northstar the ability to launch keno-style games, limiting its ability to generate sales.
But then it reversed course and Northstar launched Quick Draw in 2017, a game so widespread that it can be played at Garden State Parkway rest stops. Powerball and Mega Millions have rebounded, seeing record jackpots in recent years, but Quick Draw has had trouble meeting its goals, falling $1 million behind targets a week earlier this year.
But in 2017 the state did not take advantage of a provision in the contract that allowed it to seek more money from Northstar if market conditions change.
Once Gov. Phil Murphy took office in 2018, the Treasury Department began reviewing the contract "over concerns that the state and taxpayers were not fully benefiting from the launch of new games and from the contract as a whole," it said. The lottery is the state's fourth-largest income source and goes directly toward the state's troubled public employee pension system.
"We found the previous amendment to be egregious in that even if Northstar did little to nothing to boost sales, they were still entitled to an extremely generous incentive payment," Treasurer Elizabeth Maher Muoio said in a statement. "As a result of the due diligence of our staff, this newest amendment does far more to protect the taxpayers of this state, and our pension system, which benefits from annual Lottery contributions based on sales."
The 2017 fiscal year, the latest for which detailed data is available, illustrated Muoio's point. Even though sales dropped by $100 million, ending a seven-year streak of records, Northstar was paid $103 million in fees and incentives.
The state has negotiated a rebate that reduces the incentive payment to Northstar in the current 2019 fiscal year, which ends June 30. Beginning in 2020, the incentive payments will be more in line with sales growth rather than net operating income, treasury said.
The contract with Northstar has been a source of frustration for years among Democrats and unions who objected to turning over the sales and marketing to the gaming conglomerate. At a time of deepening financial troubles, former Gov. Chris Christie awarded the 15-year contract to Northstar on the company's $1.4 billion promise — plus an upfront payment of $120 million to help the budget.
New Jersey was the second — and so far, last — state to privatize its lottery's core functions. The first state to do so, Illinois, fired Northstar for failing to meet its income targets.
Two contract amendments allowed under Christie softened penalties for Northstar in addition to lowering its financial targets. Though the Treasury Department did not release the latest contract amendment, the details it provided the Network appear to be the most favorable to the state since Northstar took over.
The new contract increases the performance targets that are used to calculate incentive payments to Northstar, which has earned about $30 million in such payments in the 2016 and 2017 fiscal years. Northstar received a $31.9 million payment in the 2018 fiscal year, the largest yet, after generating $1.059 billion in income for the state, treasury said.
The latest payment to Northstar brings the total the state has paid it since 2013 — in fees and incentive payments — to more than $400 million.
At an expected net income growth rate of 1 percent annually, treasury said it expects to pay $79.5 million less in incentive payments to Northstar over the remaining 10 years of the contract. If growth is greater than 1 percent, the state could save close to $100 million over that period.
The new contract also strips out payments from the state to Northstar to pay for expenses related to personnel travel, meals and entertainment. It will not include Northstar management bonuses, either, which have been about $5 million a year.
The initial contract had allowed Northstar to pass all of its operating expenses on to the state, but those expenses will now be paid out of Northstar's future incentive payments, treasury said. If Northstar receives no incentive payment in a particular year, then the expenses will come out of Northstar's own funds. This is expected to yield the state additional savings as well over the remainder of the contract.
A representative for Northstar could not be reached Tuesday.