The private operator of the Illinois Lottery faces a $20 million penalty because it fell nearly $66 million short of the profits it promised the state in its inaugural year, state officials said Monday.
Northstar Lottery Group will have to pay the penalty even though its sales were nearly $400 million higher in fiscal year 2012 than in the last year the state administered the lottery, state officials said.
The contract between the Illinois Lottery and Northstar requires the company, which took over management in 2011, to compensate the state when it fails to reach certain net income targets. Northstar promised to generate $823 million in net income in fiscal year 2012, but Illinois officials have estimated that it generated $757 million.
Avis LaVelle, Northstar's vice president for corporate affairs, said the contract requires Illinois to share an audit with Northstar under a "dispute resolution" clause in the contract, so the announcement came as a surprise to the company.
"We are in the dark on the assumptions they used," LaVelle said. "We have no way of determining on what the (state) is basing its claims on, no idea of the methodology of the calculations or whether they conform to generally accepted accounting practices."
Illinois Lottery spokesman Mike Lang said an audit isn't necessary to determine the shortfall. To recoup the $20 million, Lang said the state will withhold future monthly payments that Northstar regularly receives as part of management fees.
Northstar Lottery Group is a partnership between lottery giants GTECH, which holds the state contract for lottery machines, and Scientific Games, which provides Illinois' instant tickets.
Gov. Pat Quinn on Monday said there is room for Northstar to improve.
"We want to have a model that reaches everyone," Quinn said during an unrelated event in Chicago. "They have some work to do to make that happen."
Quinn didn't offer many specifics but suggested that perhaps the lottery could try to attract more new players, perhaps with special games.
"They've made a beginning, they just have to continue on a progress path. We want to make sure that happens," Quinn said when asked to rate the private group's performance.
Lang acknowledged lottery sales reached a record under Northstar, increasing from $2.3 billion to $2.7 billion. But he added that the year "wasn't good enough" for Northstar to avert the payments detailed in the contract.
Senate President John Cullerton, who pushed to privatize the lottery management, said the arrangement was an experiment that has "been full of challenges," but he said he still supports it.
Even so, he praised state officials for "holding the private manager's feet to the fire."
Illinois was first state to entirely privatize the management and marketing of its lottery as a way to boost revenue and attract new players. The state retains ownership and regulatory oversight.