How Tom Corbett Made Us All Losers in the Pennsylvania Lottery

Lost jobs. Less money for the state. What's the governor thinking?

In the winter of 1992, newly elected Mayor Ed Rendell inherited a city unable to pay its bills. Within five years, he found, the city would accrue an unworkable, unheard of $1.246 billion budget deficit. So the administration got to work, trimming bureaucratic fat, kneecapping labor unions in contract disputes, and perhaps most memorably, privatizing a wide swath of city services. A couple years later, Philadelphia was more or less out of the hole, and Rendell, of course, became “America’s Mayor.” (Lisa DePaulo’s infamous “Lady in Red” piece on Rendell is somewhat less remembered for the speech the mayor gives in New York on “the joys of privatizing.”)

Philly’s very public privatization experiment resonates well today for a few reasons. For one, it helped solved a serious budget crunch. By 1995, Rendell had awarded private companies 26 contracts to perform city services, resulting in an annual savings of about $24 million. In addition, relatively few workers were displaced (though the replacement jobs provided by the administration usually offered lower wages and benefits than their old union jobs). Finally, many services improved under private control. Take the Philadelphia Nursing Home, Rendell’s biggest privatization project, which the Daily News’s Dave Davies called a “chronic mess” until it was rescued from state control.

It’s unclear that Tom Corbett’s decision to privatize the state lottery, announced last Friday, shares any of the positive attributes of the Rendell efforts.

First, unlike 20 years ago, there’s no obvious need to replace the state-run lottery, which last year generated record sales of $3.5 billion, making it one of the most successful lotteries in the country. And while Pennsylvania’s finances are shoddy, lottery profits can’t directly address the problem, as they’re used exclusively to fund programs for senior citizens. So this isn’t a unavoidable Hail Mary to rescue a teetering fiscal ship; it’s a calculation that as the state’s aged population increases, it’ll need even better lottery management.

Fair enough–Pennsylvania is among the “oldest” states in the country. Curious then, that Camelot, the British firm to whom Corbett will award the 20-year contract, is promising a lot of growth in the first decade of its agreement (5.8 percent) and not much at all in the last ten years (1 percent). Not exactly a senior-friendly arrangement. Besides, as the left-leaning Keystone Research Center noted in a December report, Camelot’s projected figures–$34 billion in profits over 20 years—promise less growth than the lottery has already netted in the past decade.

Second, there’s not much free market appeal to this particular deal, as Camelot was the only bidder. “One and only one bid,” says Carolyn Adams, a professor of Urban Studies at Temple, and an authority on Philly’s city contracting history. “That right there defies one of the supposed benefits of this kind of competitive bidding—that you get the best price for the service.”

And what might happen when the bidding proves uncompetitive? You get a crappy deal. Look at Illinois, which became the first state to privatize its lottery in 2010. Northstar, the same group to which New Jersey is considering giving its lottery, was part of secretive, limited, bidding process for Illinois’s lackluster program. After Northstar fell at least $50 million short of the profits it had “promised,” it was naturally supposed to pay back Illinois. (As would Camelot, in Pennsylvania.) Instead, the firm claimed Illinois had somehow sabotaged it, and asked the state for extra money instead. Now the two sides are in court. Likewise, Camelot’s contract with Pennsylvania includes a provision that allows the firm to penalize the state if it feels its business plan has somehow been messed with.

Granted, there’s a big difference between the kind of contracting Ed Rendell did in the ‘90s, and the Camelot deal. (Or the suspicious no-bid contracting Rendell favored as governor.) Back then, the city was spending public dollars to pay private firms to do public things, as it does now with charter schools or security guards. In the current scenario, the state is handing over an entire department, or franchise, to a private firm, as Philadelphia did during the ill-fated Edison schools experiment in the ’90s. Though this sort of privatization reduces the potential for moral hazard (no guaranteed public money to fall back on), it also gives way to two potentially nastier side effects.

First, forget about transparency. All the public information requests and open records that come standard with public agencies are unlikely to be available. (The Corbett administration, by granting Camelot the contract three days before a public hearing on the proposal, didn’t set a great precedent either.) Second, because it is a private firm, Camelot is likely to extract as much profit as it can for itself, while providing the minimum to the state. There is disagreement [on whether privatized services work better] because there is such a strong motivation to cut corners on quality to deliver on lower price,” says Adams, the Temple professor. Indeed, Camelot is promising that 27 percent of its revenue will go to senior programs, while refusing to pay more than 30 percent. By contrast, says AFSCME Council 13, the union that represents most lottery workers, 35 percent of state revenue in the last decade has gone toward seniors. Meanwhile, Camelot will charge the state for performance bonuses if it exceeds expectations, opening up the possibility that it has intentionally lowballed its estimates.

The list goes on: There are hints of corruption. There are potential legal issues with even implementing the deal (AFCSME 13 is suing; Treasurer Rob McCord has disputed its legality and is mulling a suit). About 230 state workers, 160 or 170 of them members of AFSCME 13, will lose their jobs, and it’s unclear how many, if any, Camelot will re-hire. (Illinois, unlike Pennsylvania, forced Northstar to re-hire union workers.) And then there’s Camelot’s strategy for increasing revenue—getting 50-70 percent of the Pennsylvania’s population playing the lottery through Keno or other video games, as the British do. The current 10-30 percent level is plenty enough for many to swallow. Pennsylvania, now the third state to privatize, might have heeded the admonition Illinois’s own lottery superintendent delivered to Indiana last August, when the Hoosier state decided to go private: “It’s as if they didn’t learn anything.”