Reason Foundation

Reason Foundation

Annual Privatization Report

States Exploring Private Lottery Management

Illinois launched a groundbreaking privatization of lottery management in 2011 to increase revenues. Other states eye similar deals

Leonard Gilroy
May 21, 2012

On July 1, 2011, a private consortium took over operations of the Illinois Lottery, formally launching a first-of-its-kind lottery privatization initiative that is already prompting policymakers in other states to consider similar arrangements.

As reported in Reason Foundation's Annual Privatization Report 2010, Illinois Gov. Pat Quinn announced the winning bidder for a contract to take over the management of the state lottery in September 2010. Officials expect the move to generate $4.8 billion for the state over the next five years, a $1.1 billion increase over the revenues projected under state management. Under the terms of the 10-year contract, the winning bidder—Northstar Lottery Group, a partnership between GTECH, Scientific Games and Energy BBDO—will take over responsibility for lottery operations, management and marketing functions in exchange for a portion of revenues. The state will continue to exercise control and oversight over all significant business decisions, including the state approval of annual business plans and ability to access all vendor information regarding lottery operations.

The deal also ties the operator’s compensation to its performance at enhancing lottery revenues. Through a combination of an annual $15 million management fee and incentives for extra profits, Northstar stands to earn over $330 million over five years if it reaches state-determined revenue targets. However, the contract includes a 5% total net income cap on the potential profits for the contractor, as well as penalties paid to the state if the company fails to hit revenue targets. The contractor will retain all current lottery employees and has announced its intention to hire an additional 100 private sector employees.

Under the privatization initiative, enhanced lottery revenues will be earmarked for education funding and new capital projects included in an infrastructure program approved by the legislature in 2009. Northstar's strategy to increase revenues involves a combination of attracting more players, expanding the product line and adding hundreds of new outlets for lottery ticket purchases across the state. A June 2011 article in The State Journal-Register noted that Northstar is making progress on several of these fronts:

In August, the Illinois Lottery announced that it had ended the 2011 fiscal year with a record $2.28 billion in sales and record net transfers to the state totaling $686 million. “Northstar is taking our already successful business to levels beyond what we have seen before and will be able to continue to grow it through methods that would not have been possible as a purely state-run entity,” acting Illinois Lottery Superintendent Jodie Winnett said in an August press release. The press release also noted that five of the final six months of the fiscal year saw the highest instant ticket sales months in Illinois Lottery history, demonstrating that “the new energy and excitement brought by Northstar is yielding results,” given that the private operator began to take on management functions during an early transition that began in March 2011.

Illinois’ innovative shift to private management is already prompting policymakers elsewhere to consider similar transactions. For example:

Leonard Gilroy is director of government reform at Reason Foundation. A version of this article originally appeared in Reason Foundation's Annual Privatization Report 2011, released in April 2012.

Leonard Gilroy is Senior Managing Director, Pension Integrity Project &
Director of Government Reform

Print This