Unlike the state’s doomed decision to outsource the processing of welfare applications, there is nothing fundamentally wrong with hiring a private contractor to handle the Hoosier Lottery’s marketing, distribution and sales. After all, 88 percent of the lottery’s functions are already outsourced; the plan announced last week to hire a private vendor for marketing and distribution brings it to 95 percent.
But make no mistake: For the contractor to meet the state’s lofty goal of increasing lottery profits $100 million a year over the next five years, Hoosiers will have to pay. And the deal may not prove to be the sure winner that officials claim it will be.
Providing welfare benefits – including Medicaid for people in nursing homes – is a government function, and Gov. Mitch Daniels’ decision to hire private companies to take applications over computers and 800 lines instead of in person at welfare offices proved to be a colossal failure.
But for the lottery, the new contractor – GTECH – will be responsible for selling a product to willing buyers. GTECH already contracts to sell scratch-off lottery tickets in vending machines. To the extent the company can find efficiencies and other ways to cut costs, state government will receive a higher profit.
But to boost income as much as state officials hope, the state has to sell more lottery tickets. Some sales will go to out-of-state visitors, but much more will go to Hoosiers. The lottery is essentially a voluntary tax, one that weighs heavily on lower-income people. The lottery’s director acknowledges the lottery commission wants GTECH to broaden the base of players.
GTECH may well successfully improve marketing and sell more tickets – to buyers whose odds, by the lottery’s very nature, are against winning more than spending in the long run.
GTECH will have motivation to sell more tickets. The contract will pay the company a bonus for revenue above a set benchmark; the company will pay the state if it falls short. The amount the state will pay GTECH in management fees is not yet determined.
In eight years, this may be the easiest and most obvious decision the state has had to make, Daniels said in a statement. With this contract, the only question is how much more money Indiana will receive than under the current system.
But when GTECH and a partnering firm fell short of expectations in Illinois, the case went to arbitration, and Illinois’ lottery manager cautioned that Indiana didn’t learn from its neighbor’s mistake. And when two companies pulled out of the bidding earlier this year, one claimed the state was seeking an unreasonably high benchmark.
The contract comes as the state’s overall gambling revenues are dropping, and competition from other states threatens to drag it down even more. The lottery now competes against more exciting forms of Indiana-sanctioned gambling at casinos and racetracks.
To be successful, GTECH will need to make buying lottery tickets more enticing and exciting – and that means more Hoosiers will lose money gambling.