Arbitrator's Latest Ruling Could Require Private Lottery Operator To Pay Millions In Penalties To Illinois

Northstar, a joint venture that includes the company to whom the Hoosier Lottery recently awarded a 15-year privatization contract, may have to pay the state of Illinois millions in penalties for failing to meet profit goals set out in its contract to manage the state of Illinois' lottery. The Chicago Tribune reports on an arbitrator's ruling in a dispute between the state and Northstar:

An arbitrator denied more than $230 million in concessions requested by the Illinois Lottery's private management company, which fell short of promised revenue goals last year.

As a result, Northstar Lottery Group could owe between $28 million and $36 million in penalties for underperformance, according to a Tribune analysis of the contract and revenues.

The company had asked for the concessions due to alleged "adverse actions" by the state that the company said hindered it from meeting its revenue targets. These actions included alleged delays in executing the contract and underfunding advertisement and marketing campaigns.

This week, the arbitrator granted the company concessions totaling more than $28 million for the past fiscal year and an additional $2.9 million for the current fiscal year.

"What we do with (the arbitrator's) final determination is still being evaluated," Lottery Superintendent Michael Jones said. "The state continues to reject that it took any adverse actions that impacted Northstar's ability to maximize revenue to the state under the first-ever private management agreement."

In July, unofficial lottery figures showed a net profit of a little more than $726 million for the 2012 fiscal year.

The company had promised to bring in between $825 million and $851 million.

Those net revenue targets are central to a complex set of calculations that determine whether the firm should be paid incentives or owe penalties for underperformance . . .

The Hoosier Lottery chose GTECH over Scientific Games in a competitive bid to manage Indiana's lottery for the next 15 years. Scientific Games is GTECH's partner in the Northstar joint venture which runs the Illinois lottery. Scientific Games is challenging the Hoosier Lottery's decision to award the contract to GTECH, claiming the scoring of their competing proposals was flawed. An analysis of the contract entered into by the Hoosier Lottery and GTECH by this blog revealed that it was virtually a cut-and-paste of the contract Northstar entered into with the Illinois lottery.