Illinois Lottery Director Michael Jones today announced that the Lottery’s contract with private management company Northstar Lottery Group has been formally terminated.
The selection of a new private management company begins immediately, with Northstar’s operational vendors — Gtech and Scientific Games — continuing to provide essential services to the Lottery at reduced compensation rates.
“Today, the state has officially ended its contract with Northstar, giving the Lottery a welcome opportunity to take operations to the next level,” Jones said in a statement. “We have learned from the Northstar experience, and believe a private management model can be designed and implemented in Illinois that encourages competition, new ideas and products, and maximizes the potential of the Lottery in a responsible manner.”
Gov. Pat Quinn voiced serious concerns with Northstar’s performance in August and directed the Lottery to terminate the agreement within the confines of the existing private management agreement. Since that time, the Lottery, Northstar and the Governor’s Office have negotiated termination terms, which avoid protracted litigation surrounding the termination, and ensure that Lottery products will remain on sale without interruption.
The contract with Northstar was terminated, effective today.
The Governor’s Office helped broker an agreement that is fair to both parties and will ensure uninterrupted services and products for Lottery players and retailers.
The agreement includes lower compensation rates for Gtech and Scientific Games — the technical vendors that provide retailer terminals and instant tickets — which will remain in place through the transition to a new private manager.
The new compensation rate, effective immediately, is 12.9 percent below previous compensation levels paid to Gtech and Scientific Games under their contracts with Northstar. This change will save the state nearly $10 million annually, the office said.
Under terms of the agreement, Northstar is entitled to the actual expenses, up to $12.65 million, to reimburse the company for costs related to closing its doors (such as ending building and equipment leases, etc). As part of the termination agreement, Gtech and Scientific Games will continue providing reduced-cost subcontractor services through the life of their existing contracts — subject to the new private manager’s decision on rebidding those services.
Lottery sales dropped $30.27 million to $2.802 billion in the most recent Fiscal Year 2014, the first drop in annual Lottery sales in 10 years. Northstar missed its promised net-income target for FY14 by $237.4 million, marking the third consecutive year the private manager fell short of promised net income. During the first three years under Northstar, the state collected $97 million in net income shortfall payments for the people of Illinois. Through the first 23 weeks of the current fiscal year, Lottery sales are $45 million below last year’s same-period sales.
Northstar Lottery Group became the first private manager of a U.S. lottery in July of 2011, based on its winning bid to raise hundreds of millions of dollars in additional income over a 10-year period. During its first full three years, Northstar missed its net-income targets by more than $450 million.
With termination of the Northstar contract, the Lottery will exercise full authority over all Lottery day-to-day activities, including advertising and marketing — which will place greater emphasis on efforts to revitalize the Lottery’s overall brand image and to broaden the Lottery’s player base.
The multi-step process of selecting a new private manager will follow the Procurement Code and will be overseen by the state’s independent, chief procurement officer. The first step involves issuing a Request for Proposal in early 2015, which will be informed by the lessons learned from the first private management experience. A committee of evaluators will then independently evaluate potential candidates, ultimately selecting a new manager.