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Illinois Lottery announces private manager owes state $20M for FY12 net income shortfall

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[March 19, 2013]  SPRINGFIELD -- Illinois Lottery officials announced Monday that Northstar fell short of its net income target in fiscal 2012 by only generating $757 million in net income according to the private management agreement, known as the PMA. This net income shortfall entitles the state to a $20 million payment from Northstar.

"The PMA is the contract that governs the relationship between the Illinois Lottery and Northstar. It contains provisions that reward Northstar for exceeding certain income levels and compensates the sate when Northstar fails to reach certain net income targets set by itself in the bidding process," said Michael Jones, Illinois Lottery superintendent. "Northstar won the private manager contract by projecting a net income of $851.2 million in FY12, but failed to reach this goal, consequently triggering a $20 million net income shortfall payment to the state. Northstar missed their initial net income commitment by $94 million. Our agreement requires Northstar be held accountable for this shortfall."

As provided under the PMA, Jones says the Illinois Lottery plans to recoup this shortfall by withholding the future monthly payments that Northstar regularly receives as part of its management fee for operating the day-to-day operations of the lottery.

"We look forward to continuing to work closely with the new team at Northstar to continue the creative marketing and brand-transformation efforts over the last six to eight months that broadened the lottery's player base and generated new sales and profits," said Jones.

Northstar is a consortium of lottery industry vendors Gtech and Scientific Games, and was paid a total of $85.1 million for fiscal 2012 services.

Background to the reduced net income target

The $757 million net income figure announced Monday by the lottery is the key figure used in fiscal 2012 calculations to determine whether Northstar is entitled to any performance bonuses or is required to provide shortfall payments to the state. In obtaining the first contract to manage a U.S. lottery, Northstar committed to reach $851.2 million in net income for fiscal 2012.

However, this net income target was eventually reduced over the strenuous objections of the Illinois Lottery. Under provisions of the private management agreement, Northstar initiated a series of letters to the lottery last July, the first month of fiscal 2012, seeking downward adjustments to PMA net income targets in an amount of $262.9 million over five years.

Pursuant to the PMA's dispute resolution provisions, a third-party professional reviewed Northstar's requests. This professional ultimately agreed with the state on many of its arguments and determined that only $28.4 million of the $119.2 million sought in fiscal 2012 downward adjustments should stand. (Only $2.9 million of the $143.7 million sought in fiscal 2013-16 downward adjustments was allowed to stand.) As a result, Northstar has only been held to an $822.8 million net income target for fiscal 2012 as opposed to the original $851.2 million Northstar originally bid.

See figures in right-hand column for fiscal 2012 net income calculation details.

___

The Illinois Lottery, founded in 1974, has contributed $17.5 billion to the state Common School Fund to assist K-12 public schools and the Capital Projects Fund. Lottery players must be at least 18 years old.

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Calculation of FY12 net income pursuant to the Illinois Lottery private management agreement

Profit and loss category*

FY2012

Total revenues

$2,677,124,029

Total net prizes

[$1,632,357,284]

Retail agents' remuneration

[$151,054,178]

Northstar management fee

[$15,171,000]

Total lottery expenses

[$110,693,920]

Employee use agreement expenses


[$8,924,020]

Provision for bad and doubtful debts


[$2,077,263]

Net income pursuant to the PMA


$756,846,364

*Deductions from total revenues shown in brackets

___

Profit and loss category details

Profit and loss category

FY2012

Sales

 

Draw-based game sales

$1,051,153,090

Instant game sales

$1,622,274,957

Other income

$3,695,983

Total revenues

$2,677,124,029

Prizes

 

Instant prizes

$1,142,535,237

Draw-based

$516,629,441

Unclaimed prizes

$26,807,395

Total net prizes

$1,632,357,284

Retail agents' remuneration

$151,054,178

Northstar management fee

$15,171,000

Lottery expenses

 

Gaming system operations and communications


$48,798,000

Instant tickets

$21,336,000

Advertising and promotions

$40,130,000

Additional rebranding fees paid to Northstar


$3,275,000

Adjustment to lottery expenses due to lower sales


$2,845,080

Total lottery expenses

$110,693,920

Total Northstar payments

$125,864,920

Employee use agreement expenses


$8,924,020

Provision for bad and doubtful debts


$2,077,263

Net income pursuant to the PMA


$756,846,364

___

Calculation of FY12 net income shortfall payment pursuant to the Illinois Lottery private management agreement

(Calculation reflects net income target adjustment of third-party professional)

Net income target

$822,800,000

Actual net income achieved

[$756,846,364]

Net income shortfall

$65,953,636

Net income shortfall x .50

$32,976,818

Incentive compensation for performance


[$12,853,909.20]

Net income shortfall payment to state


$20,122,908.80

[Text from Illinois Lottery file received from the Illinois Office of Communication and Information]

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