ISSUES

 

Issues


Eugene DePasquale – Ensuring Integrity of the Pennsylvania Lottery

The Pennsylvania Lottery, which has provided efficient and transparent support to our Commonwealth's senior community since 1972, is the sixth largest lottery system in the United States. Since its inception, the Lottery has provided $21.5 billion to senior citizen programs including property tax and rent rebates, subsidized public transit rides, and prescription drug assistance. The growth of Pennsylvania's aging population means that the demand for services from this demographic will only continue to grow.

Earlier this year, the Corbett Administration unilaterally began pursuing privatizing management of the Pennsylvania Lottery by issuing a 'Request for Qualifications' (RFQ) from interested companies. With the Corbett Administration's plan to privatize management of the Pennsylvania Lottery, it is imperative that the needs of seniors are not put in direct competition with the wants of private interests.

In an April press release to announce the RFQ, Governor Corbett said, "This initiative is simply part of my administration's efforts to tap private sector innovation to make state government work more efficiently and effectively, which is precisely what taxpayers expect."i In FY 2010-11, the Pennsylvania Lottery attributed 2.3 cents of every dollar earned to operating expenses—the second lowest amount of total operating costs of the United States' top ten largest lotteries.ii Under the previous administration, total Pennsylvania Lottery sales grew more than 50% in eight years to a record $3.2 billion in 2010-11. More recently, as reported in the Patriot News, sales increased $273 million to a total of $3.48 billion in lottery sales during the 2011-12 fiscal year, breaking the previous year's record.iii

Governor Corbett stated in the April 2012 press release, "...we need to maximize funding for senior programs and services in a way that does not ask taxpayers to dig any deeper into their pockets".iv Ironically, in order to "maximize funding", Pennsylvania could see an expansion of gaming and more aggressive marketing efforts to entice Pennsylvanians to spend more of their income – from the depths of their own pockets – on the Lottery. The Associated Press reported at the time Illinois awarded the contract to Northstar to manage its lottery, "Northstar has said it will attract younger and more affluent players through aggressive marketing, expanding the number of retail outlets selling tickets, introducing new games and perhaps by selling tickets online."v

The State of Illinois became the first in the country to privatize management of its lottery system. Northstar Lottery Group won the 2010 contract and estimated the potential for over $300 million in its profits over five years.vi The Illinois Auditor General harshly criticized the State's handling of the lottery contract—panelists were not given sufficient time to review proposals, panelists' evaluations were provided after the decision to select Northstar was announced and $4.94 million in payments for services during the procurement process were not adequately monitored and reviewed.vii Furthermore, Pennsylvania Treasurer Robert McCord's "The McCord Report" noted that in the first year that Illinois' Lottery was privatized, administrative costs nearly doubled from the previous year.viii

The Corbett Administration's recent handling of the Pennsylvania Lottery's advertising contract has raised red flags in regards to their procurement processes. Earlier this year, a Pittsburgh advertising agency won a lucrative $187 million advertising contract for the Pennsylvania Lottery. After awarding the contract, the Corbett Administration reviewed the selection process, cancelled the contract citing "procedural issues" with the bidding process and agreed to compensate the firm for work performed. The Governor's Office did not specifically identify the issues that led to cancelling the contract, but stated, "... the Department of Revenue, having consulted with the Department of General Services and the Office of General Counsel, has decided it is in the best interest of the Commonwealth to terminate the advertising services contract between the Pennsylvania Lottery and [the Pittsburgh advertising firm]."ix Another Pittsburgh firm called the RFP and the state's recent actions "one of the most unfortunate and unprofessional processes I have seen in 25-years in the business."x According to the Pittsburgh Tribune-Review, Brunner won the contract "even though the firm submitted the most expensive of three bids reviewed and received the lowest score in a gauge of technical expertise."xi

The Governor's Office stated in a June 12, 2012 press release that a current Pennsylvania Lottery vendor, Scientific Games International, is serving as an advisor in the privatization process. If privatization occurs, one of Scientific Games' contracts will be extended through August 2017 and a second extended through the end of 2018.xii The Patriot News reported that a Chicago financial advisory firm could get paid $1 million, plus a minimum of $3 million if the state moves forward with privatization and a Baltimore law firm could earn a maximum of $375,000 to provide legal advice during the due diligence process.xiii The Governor's Office also announced in July 2012 that Kroll Advisory Solutions was hired to research the integrity and character of the firms who are vying for the Pennsylvania Lottery contract. It is not clear how these advisory firms were selected and/or what process was used. The consulting and legal fees associated with the privatization process will be funded through lottery profits—diverting funds from Pennsylvania's seniors.

As Auditor General, Eugene DePasquale will:

  • Initiate an audit review of the Pennsylvania Lottery manager selection process to include, but not limited to, the process for selecting consulting and legal firms, specifically whether a competitive bidding or sole source process was used, the total amount of fees that were paid during the process, total costs to the Commonwealth and any conflicts of interest.

  • Initiate an audit review of the Pennsylvania Lottery manager selection process to include all predecisional data and information driving the privatization decision. This information will include, but is not limited to, projected revenues, projected profits of the selected private entity and projected administrative costs.

  • Initiate an audit review of the handling of the Pennsylvania Lottery advertising contract including, but not limited to, the selection process, the reasons behind canceling the contract and the actual costs to the Commonwealth resulting from the process. Actual costs will include those that were paid to the selected bidder as compensation following cancelation of its contract.

  • Initiate an audit review of the actual costs to administer the Pennsylvania Lottery if privatization of management is implemented.

  • Initiate an audit review of Pennsylvania Lottery's actual profits and revenues if privatization of Lottery management is implemented.

Privatizing the Pennsylvania Lottery potentially puts the needs of Pennsylvania's seniors at risk. Without considering all the facts, privatizing the Pennsylvania Lottery may negatively impact seniors by transferring an efficiently run operation and consistent revenue stream from the Commonwealth's taxpayers to corporate and, potentially, out-of-state stakeholders. The costs could be very high. As Auditor General, Eugene DePasquale will ensure transparency and integrity of the process to improve the performance of the Pennsylvania Lottery while also protecting Pennsylvania's seniors.

i Office of the Governor. (2012). Governor Corbett Launches Initiative to Maximize Funding for Older Adult Services Funded by the Pennsylvania Lottery [Press Release]/ Retrieved from www.portal.state.pa.us

ii Where does the money go? (2012, June 5). The McCord Report, page 1.

iii Nick Malawakey. (2012, July 30). Pennsylvania sets record with $3.48 billion in lottery sales for fiscal 2011-'12. Patriot News. Retrieved July 31, 2012 from www.pennlive.com

iv Office of the Governor. (2012). Governor Corbett Launches Initiative to Maximize Funding for Older Adult Services Funded by the Pennsylvania Lottery [Press Release]/ Retrieved from www.portal.state.pa.us

v Associated Press. (2010, September 15). Illinois Lottery Goes Private. NBC Chicago. Retrieved June 12, 2012 from www.nbcchicago.com

vi Scott Reeder. (2012, April 23). Illinois lottery contracts marred by conflicts of interest. The Southern Illinoisian. Retrieved July 12, 2012 from www.thesouthern.com

vii State of Illinois Office of the Auditor General. Financial Audit and Compliance Examination – Department of Revenue. Summary Report Digest (2010, June 30), page 1.

viii Costs to Operate Illinois' Lottery. (2012, June 5). The McCord Report, page 3.

ix Teresa Lindeman. (2012, April 19). Amid concern over bidding, PA lottery account returns to Marc USA. Pittsburgh Post-Gazette. Retrieved July 12, 2012 from www.post-gazette.com

x Patty Tascarella. (2012, April 27). Pa. Lottery account leaves Pittsburgh advertising community in dismay. Pittsburgh Business Times. Retrieved July 12, 2012 from www.bizjournals.com

xi Jeremy Boren. (2012, April 19). Pa. yanks $183 million lotto deal. Pittsburgh Tribune Review. Retrieved June 12, 2012 from www.centralpennbusiness.com

xii Pennsylvania Department of Revenue. (2012). Pennsylvania Takes Next Steps in Exploring Initiative to Maximize Pennsylvania Lottery Funding for Senior Programs [Press Release]. Retrieved from www.revenue.state.pa.us

xiii Jan Murphy. (2012, June 16). Could the Pennsylvania lottery be privatized? Patriot News. Retrieved June 12, 2012 from www.pennlive.com