The Journal Gazette
Wednesday, March 16, 2016 4:18 am

Amended lottery vendor contract lowers revenue targets to cut risk

Niki Kelly | The Journal Gazette

INDIANAPOLIS – After failing the last two years to hit promised revenue targets, the private vendor running the Hoosier Lottery got a new, better contract Friday.

The Hoosier Lottery Commission voted to restructure the state’s contract with GTECH Indiana and substantially reduce the goals it originally promised to meet in the 2012 bidding process.

With vastly reduced targets and less likelihood to pay annual penalties, it essentially eliminates GTECH’s risk, said Phil Sicuso, legal counsel for the Hoosier Lottery Commission.

In exchange, GTECH Indiana agreed to lower its annual management fee next year and give the state a one-time lump sum payment of $18.25 million.

"The assumptions as it turns out weren’t valid," Lottery Commission Chairman William Zielke said. "What this plan does is reflect more accurately the marketplace based on their two years of experience, their understanding of Indiana.

"It probably was to their advantage to lower the number. It’s to our advantage that we share in the excess when they hit those minimum net income numbers. This was a negotiation that satisfied both parties."

GTECH’s new minimum goal for fiscal year 2016, which begins July 1, is $270 million, with an extra- incentive goal of $290 million. In fiscal year 2017, the minimum goal is $290 million with incentive goal at $295 million.

By comparison, under the original agreement, the goal for fiscal year 2016 was $365 million and $410 million for fiscal year 2017. If they didn’t meet the goals, they were forced to pay a penalty.

Over the remaining life of the 15-year contract, the reduction is easily $1 billion.

GTECH was tapped in late 2012 to take over a large portion of operations of the Hoosier Lottery. It handles day-to-day management over marketing, sales and distribution, such as retailer recruitment, game development, advertising and supply issues.

The State Lottery Commission through its state employees still handles security, prize payments and accounting. The five-member board also approves GTECH Indiana’s annual business plan.

The commission had the option to terminate the contract due to two years of not meeting the promised revenue but chose to avoid that "chaos" with the contract amendment. A consultant also gave a presentation showing the Hoosier Lottery weathering a "jackpot fatigue" better than other states.

Last year, about $251 million in lottery revenue was sent to the state government for pension relief and excise tax reductions.

This year, the number is expected to drop to $243 million. And that is after GTECH pays a $16 million shortfall payment for not meeting goals.

"Today’s news on the Hoosier Lottery Commission perhaps raises more questions about state contracts that don’t meet expected goals. Although there appears to be a restructuring deal, is there more that Hoosiers should know following this and the mismanagement and overcharges at the BMV?" Indiana Democratic Party Chairman John Zody asked. "Hoosiers need to know that their elected leadership at the Statehouse are being transparent with taxpayers’ money and that they are solving today’s problems for them."

Another big change in the contract is what happens to future unexpected windfalls. In the original agreement, GTECH would retain all revenue above the goal. Now there is a minimum goal the vendor must hit and an incentive goal. Anything between the two goals the state keeps. Anything above the incentive goal is split evenly between GTECH and the state. The annual management fee is dropping from $15 million this year to $13 million next year.

Commission members were disappointed in the performance but also believe the state would have done worse if GTECH was not there to maximize sales and revenue.

"To me, the crux of the issue is whether or not we are better off with GTECH," Commissioner Kate Snedeker said. "The answer is clearly yes, we – the Commission, tax payers and state – are better off today than we were before we engaged them."

She said the amendment was about changing the playing field to benefit both parties.

National lottery consultant Herb Delehanty gave a presentation to the board showing how the Hoosier Lottery’s performance remains ahead of the majority of its peer states.

He said a large decrease in Powerball revenue is hurting everybody, with little movement on the games until the jackpot hits at least $300 million.

Zielke noted that other metrics show the partnership is working – especially the fact that the Hoosier Lottery has closed the gap between it and other states.

Sicuso also said he wouldn’t expect another major change to the contract in two years.

"We only want to do this once," he said. "This is our attempt to rightsize the contract."

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