Lottery sales lagging once again

Lottery revenues are down and on track to make it the third year out of four that the private company running the games has missed its targets.

The sales slump comes as Gov. Chris Christie — who pushed to privatize the state-run games of chance at a time of deep fiscal challenges — is turning again to the lottery to help solve a sticky fiscal problem. Christie now wants to redirect revenue from the lottery, which pays for social service programs, to the public employee pension fund. In New Jersey, the lottery provides a significant portion of state revenues, ranking behind only the income tax, sales tax and corporate taxes.

While details of Christie's pension proposal are still being drafted, the lottery's pattern of falling short under an outside company highlights the risks legislators openly worried about when Christie insisted on the privatization.

The group, Northstar New Jersey, had promised during the bidding process — when Christie's revenue projections had fallen more than $400 million short — that giving it control of the lottery's essential functions would return "at least" an extra $1.42 billion to the state over 15 years. As part of the contract, awarded in 2013, Northstar paid the state $120 million to support its budget.

But Northstar didn't hit its aggressive income projections, and in the first two years of the contract it burned through a $20 million allowance to cover revenue shortfalls. Then, at the end of 2015, it renegotiated its contract with the state and got its revenue projections lowered by $1 billion over the remaining years of the contract.

Now Northstar is on track to fall short of even those lower targets. Christie's administration and the Office of Legislative Services agree on projections that in June, when the 2017 fiscal year ends, the state will get $970 million back from Northstar to support social service programs such as a school for the blind and disabled veterans housing. That's $20 million short of the $990 million income target in the amended contract (Northstar had originally promised $1.07 billion).

Northstar declined to comment. Northstar's pattern of underperformance in New Jersey is not unique. In Illinois, the first state to privatize its lottery, Republican Gov. Bruce Rauner fired Northstar after it fell nearly half a billion dollars short of its promised revenue targets in the first three years of a 10-year contract. Northstar does not operate in any other state.

Christie, who vetoed Democratic legislators' effort to block the privatization, said he isn't worried about the group's performance.

"Northstar put forth some very aggressive projections of what they would do, and they are coming very close to reaching what are really aggressive projections," he said. "No, I don't have any concern with what Northstar's been able to do. And if you look across the country, this is a pattern that's been happening with lotteries across the country."

While many state lotteries have seen a decline in big-jackpot games such as Powerball and Mega Millions in the last few years, all but one — West Virginia — posted revenue gains in the 2016 fiscal year, according to Insights, an industry magazine. But New Jersey is one of the few states whose lotteries are run in some part by a private entity. And Northstar is paid a variety of fees, reimbursements and incentives, which totaled $134 million last year, cutting into the state's bottom line.

The lag in ticket sales is linked to jackpot sizes, state officials say. Last year, changes to Powerball led to the first billion-dollar jackpot, which helped Northstar outperform revenue projections. February, the last month for which data are available, was a particularly poor month for ticket sales. All but two "draw" games — Mega Millions and Jersey Cash 5 — posted declines from the 2016 fiscal year.

"Jackpots still drive multi-state game sales and heighten media coverage," Willem Rijksen, a spokesman for the Treasury Department, said in an email. "No one can predict when jackpots will grow to record-breaking numbers or will be consistently won by players; the element of jackpot unpredictability directly relates to revenue, and in fact, it may provide an increase to current projections."

Legislative Services projects ticket sales to rebound in the 2018 fiscal year, when the state is owed $1 billion from Northstar. But Gary Schaer, the Democratic chairman of the Assembly Budget Committee, is skeptical given the group's "poor track record" in the first few years of the contract. And he is not satisfied with the reasons Northstar has given for the shortfalls, saying, "They blame it on everything."

"This is, one could argue, the premier organization in this area, so one can wonder why they can't meet their own projections," Schaer said.

Ticket sales could come into play should Christie put forth a proposal to transfer lottery revenues into the public employee pension system in an effort to lower its massive unfunded liability, which has been a main driver of the state's repeated credit-rating downgrades. Christie contends that the lottery is valued as a $13 billion asset and moving revenues into the pension system could also lower the state's annual payment into the retirement fund.

But the administration has not offered many details of the lottery plan for the pension. Although the state has been getting smaller returns than anticipated, lottery ticket sales have increased every year during Christie's tenure, potentially adding to its value. Assemblyman Declan O'Scanlon, the Republican budget officer, said the financial standing of the lottery "is going to have to pass the test of some rigorous valuation" as Christie's proposal moves forward.

While he is disappointed that Northstar has delivered less than promised, O'Scanlon said he still has confidence in Northstar.

"I don't automatically say they ran somewhat short so it's a disaster," O'Scanlon said. "You can't compare it to perfection. You just have to be sure that an honest, good-faith effort is being made, and I think that's the case here."