Lottery Privatization Truth Check (Updated 12/9/13)
1. Polls show the majority of Pennsylvanians are opposed to outsourcing management of
the Pennsylvania Lottery to a foreign company and the Attorney General deemed the
contract to be unconstitutional, so why is Gov. Corbett still pursuing this ill-conceived
idea?
o
According to a Franklin & Marshall poll, released Feb. 7, 2013, 64 percent of
Pennsylvanians oppose privatizing the lottery.
2. The commonwealth is currently on the hook to pay $4.4 million to Gov. Corbett’s lottery
privatization consultants and one of the consultants is entitled to a $40.4 million bonus
if the lottery is privatized.
o
Every dollar paid to a consultant is a dollar taken away from senior programs that provide lowcost prescription drugs, free and low-cost transit rides, and property tax/rent rebates.
o
Buried in the lottery’s 2012/13 administrative costs was $3.52 million for consultants. Without
the consultant fees, lottery profits would have been $10 million more than the previous year.
o
To date, the Corbett administration has paid lottery privatization consultants more than
$3.4 million of the $4.4 million allowed by the contracts. (See attached spreadsheet.)
o
What can $4.4 million buy for seniors?
o

More than 213,000 additional prescriptions;

More than 1.7 million additional free transit rides;

More than 9,000 additional property tax rebates; OR

About $84,800 more for each of the 52 Area Agencies on Aging.
Corbett has extended the lottery privatization bid 11 times; meanwhile, the legal fees
continue to climb.

o
The contract with DLA Piper LLC has been increased two times: from $375,000 to
$2.475 million and then to $3.35 million.
Gov. Corbett’s financial adviser — Chicago-based Greenhill & Co. LLC—will earn a
$40.4 million “success” bonus if the lottery is privatized.
3. The biggest winner from privatizing the lottery is the British company Camelot Global
Services, not Pennsylvania seniors.
o
Gov. Corbett refuses to disclose how much money Camelot could earn through this contract.
Estimates are between $1 billion and $3 billion.
o
Not only does Camelot take a cut of profits away from senior programs, Gov. Corbett plans to pay
ALL of Camelot’s operating expenses – including salaries for private executives and lottery
employees it may hire. (See Page 2 of the attached “Summary of Terms and Conditions.”)
o
In addition to being paid for its operating expenses to run the lottery, Camelot will take a
percentage of profits that would otherwise fund senior programs.
o
Camelot low-balled its performance targets for future years to guarantee it will receive higher
incentive payments.

In fact, the better the lottery performs, the more seniors lose because the incentive
payments to Camelot grow incrementally larger with better performance.
House Appropriations Committee (D)
717-783-1540
www.hacd.net[email protected]
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o
The PMA does not require Camelot to pay seniors the full difference between actual results
and its projected, so-called “guaranteed” funding for senior programs. Camelot may have to
pay only a portion of the difference (capped at 5 percent).
o
The state of Illinois, the nation’s first privately run lottery, has been in court fighting with its
private manager because the manager is trying to avoid paying the penalties in the contract.
Also, the private manager is trying to change the terms of its contract with the state.

The Illinois Lottery private manager is on track to miss its target for the third year in a row:
http://www.chicagobusiness.com/article/20131113/NEWS02/131119906/illinois-lotterysales-trend-not-a-winner#.
4. Lottery privatization is a raw deal for seniors because Camelot will continue to profit
handsomely while funding for senior programs will fail to keep pace with growing needs.
o
Camelot’s bid may look appealing in the short-term because it is front-loaded to generate
lottery profits in the first couple of years.
o
However, in the out-years, Camelot only guarantees lottery growth of just 1 percent when the
number of seniors needing services will be rising.

Does Gov. Corbett actually believe that 1 percent growth in Lottery funding for senior
programs will be sufficient to meet the demand for services from more Pennsylvania seniors?
5. Gov. Corbett’s sweet-heart contract with Camelot would tie the hands of future
governors and legislators until the year 2043.
o
A clause in the contract grants automatic contract extensions so Camelot’s profits can
continue for up to 30 years without legislative or public input.
o
It is risky to give a 30-year contract to a foreign company that has only been in business for 19
years.
o
Gov. Corbett’s deal with Camelot would span seven gubernatorial elections.
6. Camelot’s sales and profit estimates are primarily based on adding Keno, which is a game
the legislature could allow the state-run lottery to sell without privatization.
o
The lottery’s contract with Scientific Games International allows for Keno; therefore, it is
unnecessary and wasteful for the administration to hire Camelot to do it.
o
Scientific Games International also has more experience than Camelot – it has 40 years of
experience in more than 100 lotteries in 50 countries on six continents, as compared to
Camelot’s 19 years of experience with the UK lottery and a consulting contract with one U.S.
lottery.
7. The Camelot contract also includes online gambling, which could compete with casinos
and reduce property tax reduction and local economic development funds generated
from slots and table games.
8. Costs to operate the lottery would increase under private management.
o The state-run lottery’s administrative costs are currently just 2.07 percent of sales.
o Camelot’s administrative costs in 2013/14 would have been $16.3 million more
than the current lottery’s.
o Camelot proposed to spend $48 million on advertising in 2013/14, which is
$11 million more than the lottery currently spends.
House Appropriations Committee (D)
717-783-1540
www.hacd.net[email protected]
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9. Gov. Corbett has not been transparent with the public and legislators throughout the
lottery privatization process.
o
During the final days of the budget in June 2013, Gov. Corbett tried to sneak language into a
budget-related bill that would have allowed the lottery to be privatized.
o
Gov. Corbett at first tried to avoid public scrutiny by pushing a decades-long privatization deal
through when legislators were not in session.
o
Gov. Corbett failed to release details of the Private Management Agreement (PMA) as soon as
he narrowed the field of bidders to one.

o
After weeks of claiming he was barred from sharing the Private Management Agreement,
he gave in to bi-partisan cries for transparency and quietly posted the PMA online Dec. 6,
2012.
Gov. Corbett helped cut the number of bidders on lottery privatization.

On June 12, 2012, Gov. Corbett granted lucrative contract extensions to Scientific Games
International, the Lottery’s current vendor for terminal-based and instant games, in
exchange for not bidding on his lottery privatization scheme.
o
Gov. Corbett allowed just two days to consider a counter proposal from the American
Federation of State County and Municipal Employees (AFSCME).
o
Gov. Corbett denies any potential conflict of interest in Greenhill & Co.’s participation, despite
the fact that Greenhill was involved in the 2010 sale of Camelot Global Services.
o
Unlike the 2004 slots gaming law, this contract would allow United Kingdom-based Camelot
Global Services, and its executives, to make generous campaign contributions.
o
Gov. Corbett quietly returned Camelot’s $50 million bid security on Feb. 19, 2013. Without the
$50 million bid deposit secured through escrow or a promissory note, how is Camelot’s bid
still valid? Here are several instances where administration officials discuss the $50 million bid
security requirement:


In an interview after the House budget hearing in February 2013, Secretary of Revenue
Dan Meuser talked about returning Camelot’s $50 million bid security, and how they
would secure a promissory note in its place if they decided to move forward with the
private management agreement: http://www.roxburynews.com/ltdv.php?v=5962.
In testimony before the House Aging and Older Adults Services Committee in January
2013, Pete Tartline, Executive Deputy Secretary in the Governor’s Budget Office, said: “It
should be noted that in order to submit a priced bid, bidders were required to post $50
million in cash as bid security to be held in escrow that the commonwealth could collect if
the bidder withdrew its offer.”
http://www.repquinn.net/Display/SiteFiles/78/OtherDocuments/Aging%20Mtg_%20Infor
mation%20-%201-23-13001.pdf .
10. Camelot Global Services, the sole bidder, may try to take advantage of the “Delaware
Loophole” to avoid paying Pennsylvania corporate taxes.
o
On Nov. 13, 2012, Camelot registered its business address in Wilmington, Delaware at an
address that is home to 6,500 companies, but has just 35 parking spaces.
o
In the UK, Camelot is in some hot water for allegedly exploiting a legal loophole to avoid
paying taxes on its UK Lottery profits: http://www.express.co.uk/news/uk/439832/Yourotten-Lot-Outcry-at-6-2million-Camelot-bungle .
House Appropriations Committee (D)
717-783-1540
www.hacd.net[email protected]
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Lottery PMA Consultants
Bidder
Camelot Global Services
Consultant
Headquarters
Watford, Hertfordshire,
England; Owned by
Ontario Teachers' Pension
Plan
Headquarters
Bid Security
$50,000,000
Purpose
Current Contract
Amount*
Greenhill & Co. LLC
Chicago, IL
Assist in preparing procurement
documents and evaluating potential
bidders.
DLA Piper LLP
Baltimore, MD
Provide legal services related to
procurement and execution of
contract.
Kroll Advisory Solutions
New York, NY
Investigate winning bidder (criminal
history, financial history, business
practices, etc.).
Blank Rome LLP
Philadelphia, PA
Scientific Games
International, Inc.
Alpharetta, GA
Legal services to defend against the
union’s lawsuit.
Assist in due diligence phase of
PMA.
Total
$850,000
$3,354,000
Notes
Bid security returned to Camelot on Feb. 19,
2013.
Contract Amount if
PMA is Executed*
Notes
$41,308,340 Milestone-based contract w/ 4 Phases; currently
in Phase 3; Phase 4 includes an additional
success fee estimated at $40,458,340 if the PMA
contract is executed.
$3,354,000 Original contract was $375,000; increased to
$2.475 million on May 14, 2013, increased by
$879,000 on Oct. 8, 2013. Represented Illinois
during privatization of its lottery.
Subcontractor of DLA Piper.
$210,000
$4,414,000
$210,000 Original contract was $200,000; increased by
$10,000 on Sept. 19, 2013.
Current PA Lottery contractor for instant and
terminal-based games. As part of the
agreement, SGI could not submit a bid. If PMA
contract is executed, administration will grant
SGI a 3-year extension on its terminal-based
contract and 2-year extension on the instant
games contract.
$44,872,340
*Note: If the PMA is executed, the consultant fees (with the exception of Blank Rome) and Greenhill's success fee will be paid from Camelot's $50 million bid security. If the PMA is not
executed, the commonwealth is required to pay the consultant fees, per the contracts. The administration encumbered $3.52 million in the Lottery's 2012/13 administrative costs to
cover some of the fees owed to consultants. The consultant fees have continued to increase: from $1.4 million to $3.5 million to $4.4 million.
As of Oct. 29, 2013, $3.42 million had been paid to Greenhill & Co. ($850,000), Blank Rome ($209,999) and DLA Piper ($2,360,309).
House Appropriations Committee (D)
717-783-1540
www.hacd.net[email protected]
PENNSYLVANIA LOTTERY PRIVATE MANAGEMENT AGREEMENT
SUMMARY OF TERMS AND CONDITIONS
Objective: Governor Corbett is exploring a Private Management Agreement (PMA) for the Pennsylvania
Lottery to provide more reliable and predictable revenue to ensure the continued strength and viability of
programs supporting older Pennsylvanians.
PMA Description: First and foremost, if a PMA is
executed, the Commonwealth would retain
ownership of and actual control over the Lottery
and all significant business decisions.
The PMA is a contract between the Commonwealth
and a yet-to-be-determined private industry expert
structured to assure reliable and predictable future
funding to support Lottery-funded senior
programs.
The PMA establishes the management relationship
between the Commonwealth and private manager,
governs day-to-day operations of the Pennsylvania
Lottery, defines the scope and duties of services to
be provided by the private manager, establishes
expectations on Lottery growth opportunities,
employs industry best practices for marketing and
management of the Lottery and provides metrics
by which the contractor will be measured to ensure
the Commonwealth is getting expected results.
PMA Project Timeline
2011
December 2011
February 2012
March 2012
April 2, 2012
June – October
2012
Annual Profit Commitment: In order to grow
future funding for senior programs, the PMA would
contractually bind a manager to 20 years of annual
profit commitments. These are profit thresholds
that must be achieved by the manager in order for
the manager to earn any incentive compensation.
If a private manager fails to meet these annual
profit commitments, the Commonwealth will draw
shortfall payments down from the $150 million
cash collateral provided by the manager to secure
its performance, in order to preserve funding for
programs benefitting older Pennsylvanians. Such
funding protections are not available today.
Prior to executing a PMA, the Commonwealth will
verify that the private manager’s annual profit
commitments are significantly higher than the
profit levels the Pennsylvania Lottery could achieve
on its own, in order to justify the agreement and
incentive payments to the manager.
November –
December 2012
January 2013
Governor Corbett’s Advisory Council on
Privatization and Innovation considers
Lottery privatization among other publicprivate partnership ideas.
Corbett Administration secures financial
counsel regarding exploration of a PMA for
the PA Lottery.
Multi-agency committee established to
explore the feasibility of a Lottery PMA.
Legal counsel contracted to advise the
Commonwealth as a PMA is explored.
Request for Qualifications issued to gauge
industry interest in a PA Lottery PMA.
Commonwealth takes next steps in exploring
initiative to maximize PA Lottery funding for
senior programs, kicking off a due diligence
phase as the first of two steps in an
Invitation for Bid procurement process.
PMA is developed through due diligence
phase as the Commonwealth interacts with
potential bidders to inform them of PA
Lottery operations and learn from them
industry ideas for improving operations.
Pennsylvania engages probity firm to ensure
bidder integrity.
Commonwealth and bidders finalize a PMA
so that bidders can develop and submit
business plans based on the contract.
AFSCME engaged in contractually mandated
process for providing notice of the proposed
contract, meeting with union officials to
discuss the reasons the contract is being
considered and affording the union
opportunity to propose alternate methods
for achieving the results the contract is
proposed to achieve.
Decisions expected:
1. Business plan acceptability
2. Whether or not to seek and evaluate
priced bids (IFB Step 2)
PMA could be executed between
Commonwealth and private manager.
PMA Details
Performance Security
Upon execution of the PMA, the manager would provide to the Commonwealth $150 million in cash collateral. It is
against this cash collateral that any shortfall payments would be drawn, if the manager fails to meet its annual profit
commitment in any year. If the cash collateral is depleted to less than $50 million at any point in the contract term,
then the manager would obtain letters of credit of $50 million to ensure the financial and performance-based
obligations of the agreement.
Manager Scope of
Services
The manager would provide all equipment and services and perform all functions necessary to operate the Lottery,
including gaming system technology; data reporting; sales channels; Lottery game development; instant game
logistics; retailer recruiting, training, supervising and managing; marketing, website and consumer research;
customer service; responsible gaming program; and appropriate and related staffing, procurement, compliance and
legal services.
CommonwealthRetained
Responsibilities
The Commonwealth would provide oversight functions in addition to performing specific functions including ticket
validation, payment of prizes, data validation, drawings, lottery retailer licensing, retailer accounting and collections,
tax reporting, security investigations, auditing and public reporting.
Operating Standards
As part of the PMA, the Commonwealth developed a manual describing the policies and procedures that will govern
the operational provisions for the performance of the manager’s scope of services.
Incentive Compensation: The manager would only be paid incentive compensation when it exceeds its annual profit
commitment. Incentive compensation is based on performance above the APC, with the manager receiving 25 to 50
percent of the incremental gain above the APC. The manager earns 25 percent of the incremental gain up to 1
percent over the APC, plus 50 percent of the incremental gain over 101 percent of the APC. Incentive compensation
is limited by federal law to no more than 5 percent of Lottery profit.
Example (for illustrative purposes only): Private manager sets an APC of $1.2 billion, then achieves profit of $1.3
billion that contract year. Incremental profit above the APC is $100 million. Five percent cap is $65 million.
Tier 1
Compensation
[0.01 x 1.2B x 0.25] +
$3 million +
Tier 2
[(1.3B- 1.01 x 1.2B) x 0.50]
$44 million = $47 million
Operating Expenses: Invoiced costs of managing the Pennsylvania Lottery, including payments to contractors,
personnel expenses, administrative expenses, etc.
Manager Expenses: 0.75 percent of profit, to cover manager’s indirect, non-invoiced expenses.
In any year the private manager fails to meet its annual profit commitment, a Shortfall Payment will be deducted
from the manager’s $150 million cash collateral, equal to the difference between the APC and the actual profit
achieved, up to 5 percent of profit.
The Commonwealth would expect to maintain a complement of about 70 Lottery employees to perform the
Commonwealth-retained responsibilities. These employees will occupy a combination of management and unioncovered positions. Which employees would be retained would be determined by applying provisions of the collective
bargaining agreement (union-covered employees) and Civil Service rules (Civil Service management employees).
Personnel
Bidders recognize the tremendous asset the Lottery’s workforce is to its success, and they have expressed interest in
incorporating current employees into private management operations. Current Lottery employees beyond the
approximately 70 retained by the Commonwealth would be invited to apply for job opportunities and interview with
the private manager during an employment transition period that may take up to a year.
The Commonwealth would provide advance notice to and pursue alternate placement for any current Lottery
employee not selected for employment by the private manager and not retained by the Commonwealth.
Subcontractors,
Vendors and Managed
Contracts
Implementing Industry
Best Practices for
Responsible Growth:
Internet Products and
Monitor-Based Games
Annual Business Plan
The manager could use subcontractors and vendors to provide products or services for the management of the
Lottery. The manager would be responsible for enforcing the existing Scientific Games contracts, extended to August
2017 (gaming systems) and December 2018 (instant games) upon execution of a PMA.
In exploring the viability of a PMA, it became evident that incorporating Internet products and monitor-based games
into Lottery’s portfolio is one of the most effective ways to responsibly grow revenues to benefit older
Pennsylvanians.
Bidders’ plans for implementing a secure Lottery subscription service, Internet-based games and Keno-like monitorbased games will be evaluated against the Commonwealth’s own implementation plans for such ideas to ensure
bidders’ plans are socially responsible, conform with Commonwealth policies and meet Commonwealth expectations
for profitability. Monitor-based games could be implemented in 2013, Internet-based games in 2015.
The manager would submit a business plan each year. Each plan must include details regarding organizational
structure, tactics for growing the customer base, measures of operational transparency, projected income
statements, innovative ideas for growing profit as planned, plans addressing social responsibility and information
regarding subcontract/vendor contracts.