Oct 21, 2017, 9:55 am
Hoping for better luck the second time around, state officials unveiled a deal Friday to put the fate of the Illinois Lottery in the hands of a British firm that pledges bigger returns than those generated under the manager the state fired.
In a do-over of the nation's first, controversial attempt at state lottery privatization six years ago, Illinois agreed to a contract with the only firm to bid for the potentially lucrative job: the Camelot Group. It comes as the state and Camelot pledge transparency while critics call the process too secretive, particularly when it involves the state's biggest moneymaker.
According to documents released Friday, the deal appears more generous to Camelot in key ways than the first deal, with a higher base management fee, extra "incentive" payments kicking in sooner and no penalties if the new firm dramatically underperforms.
But state and Camelot officials said it's a more realistic deal with enough incentives to ensure Camelot does what it says it can do.
"The state has gained a true partner that has aligned incentives and a shared commitment to greater transparency over the course of the contract," said acting Lottery Director Greg Smith.
Still, one vocal critic of the bidding process said it's difficult to know if the state got a good deal because only one firm made a bid.
"We're getting some big promises again, but unless we have a competitive bid to compare it to, we have no idea whether this is a good deal or not," said state Rep. David McSweeney, R-Barrington Hills. "Without competition, it's hard to tell whether this is a good deal or not."
State officials focused on another change in the deal: elimination of conflicts of interest.
The last deal, signed in 2011, let the lottery's two biggest vendors form a firm to oversee the lottery, then subcontract much of the work back to the vendors. The state later complained the vendors then squeezed the state for high fees arranged through their management firm, Northstar Lottery Group, even as the lottery failed to make ambitious profit targets pitched in the vendors' bid.
Camelot, instead, has inked deals with subcontactors that don't own it.
Northstar has faced criticism, including two class-action lawsuits alleging fraud, after a series of Tribune investigations over the past year showed how the lottery collected hundreds of millions of dollars from selling tickets to instant games in which it did not hand out all of the life-changing grand prizes — sometimes awarding no grand prizes before ending a game.
The Tribune found the lottery had printed an unusually high number of tickets and, when sales waned, pulled the games. To avoid the same issue, Camelot said it would do a better job of designing and testing games to ensure only enough tickets were printed that they believed could be reasonably sold.
"We have an excellent record of selling through," said Neil Brocklehurst, Camelot Global's managing director.
The state, which the Tribune found previously had missed warning signs of the practice, said it would monitor game design as well, and Smith said part of that is ensuring grand prizes are awarded.
Camelot said it will invest $60 million in a lottery that it has said suffers from declining trust among the public. It said the lottery relies too much on a small group of core players and must attract a wider swath of occasional players to grow, including through online play, according to state records.
"We're trying to get a lot of people to play a little," Brocklehurst said.
While state evaluators offered generally positive reviews, some questioned whether Camelot had the ability to invest much in the lottery to grow it, and whether Camelot's aggressive strategy for growing online sales would work in Illinois.
"That is a risky assumption since no other state has been able to generate the numbers that are being proposed, particularly during a major transition of all operations," the unnamed evaluator wrote.
Camelot said Friday it was confident in its plans to grow sales from less than $3 billion a year to $4 billion by the end of the deal.
And if it can grow profit, the deal could become very lucrative for the company in its first foray into managing a U.S. lottery. Camelot is known for managing the British Lottery since 1994, with more limited deals to help other lotteries, including some in the United States.
Camelot promised incremental growth in the first two years of its management of the lottery, which last year brought in more than $700 million in profit to the state.
Under the deal, Camelot projected it would bring at least $713 million in profits for the rest of the current fiscal year, and then at least $731 million in profits for fiscal year 2019. It projected profit of at least $858.6 million, and as much as $1 billion, by the final year of the 10-year-deal.
Camelot finished second to Northstar in the bidding for the 2011 deal because it offered more modest profit targets at the time.
And this time as well, Camelot has pledged more modest profit targets than Northstar did in 2011. Those targets are important because, the lower they are, the more likely Camelot gets extra payments from the state beyond the roughly $25 million in annual management fees.
Camelot, in essence, qualifies for a cut of the profit if it can grow the lottery at a little less than 2 percent a year. That cut grows — both in amount and as a percentage of profit — the faster lottery profits grow.
Figuring out exactly how much involves a complex formula. In the first full year of the new deal, if the state makes at least $731.3 million in profit, Camelot starts to get a cut of the profit. Camelot gets 17 percent of the next $18.7 million in profit, 22 percent of the next $30 million, and 27 percent of the next $130 million, until it hits a cap.
Those profit tiers rise each year — meaning Camelot has to keep growing lottery profit to keep getting cuts of it. Northstar had a similar arrangement.
Such arrangements, though, can get complicated, as the Northstar deal showed. If Camelot falls short of its profit figures, the contract allows the firm — just like Northstar before it — to blame outside factors caused by the state, such as another budget impasse. Smith said he didn't know if the provision was written in a way to be tighter or looser than the one in Northstar's deal.
In the case of Northstar, the firm immediately used the provision to argue that the lofty profit targets it set should be adjusted down because of what it said were other problems caused by the state. It led to years of controversy that ultimately led to the state working to oust the firm less than halfway into the original 10-year deal.
That sparked the latest process to pick a replacement — a process laced with complaints of slowness and secrecy.
The state inked a final separation deal with Northstar more than two years ago. It took 10 months for the state to open the bidding process for a replacement. That drew only one bid: Camelot's. It took another eight months for the state to tell Camelot it was a "finalist" and begin negotiations on key parts of the deal, and another six months to publicly announce the deal was awarded to Camelot, pending final negotiations.
That September announcement of the bid award signaled the beginning of a two-week period for anyone to review documents and protest the bid. The state then released the documents with many key portions redacted, particularly the financial details of a deal the lottery valued at $2.2 billion.
The secrecy — in the face of public pronouncements of transparency — led some state lawmakers to complain the process made it impossible to vet the deal. And it led a Springfield man to file a formal protest alleging the secrecy fostered the potential of corruption.
The General Services' chief procurement officer, Ellen Daley, rejected that protest last week. Daley wrote that the law requires only basic information be released.
Smith, at Friday's press conference, continued to pledge transparency. The agency he leads, however, has delayed the release of records.
The Tribune on Wednesday asked whether the contract had been signed. On Thursday, the Tribune filed a formal request under Illinois law for any signed copy. The lottery did not immediately respond, except to note a press conference would be held Friday morning to announce the contract had been signed.
Just before that press conference, the state posted the contract online. The contract noted it had been signed seven days earlier.
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