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Lawsuit filed over effort to privatize Pa. lottery

Published On: Dec 18 2012 06:37:54 AM CST

Pa Lottery

HARRISBURG, Pa. -

A state employees union and seven Democratic lawmakers filed a lawsuit in Commonwealth Court on Monday seeking to stop the state from privatizing the management of the lottery, saying Republican Gov. Tom Corbett doesn't have the authority to make such a move.

AFSCME Council 13 wants the court to prevent Corbett's administration from implementing an agreement with Camelot Global Services to manage the $3.5 billion lottery, 1 of the nation's largest. The lawsuit claims the Lottery Act of 1971 doesn't give the governor the right to privatize the lottery without approval from the Legislature.

"This administration is trying to rush this deal through while the Legislature is not in session and without any public input or scrutiny whatsoever," the union's executive director, Dave Fillman, said in a statement.

Corbett spokesman Kevin Harley called the lawsuit "frivolous."

"Nothing's been privatized yet," he said. "We are doing our due diligence."

Under the proposed contract, the state could end the deal for no reason after three years, plus six months for Camelot to finish up. One catch is the termination fee, which could be substantial. That amounts to the remaining value of Camelot's investment in things like equipment, technology and personnel, plus 10%.

Camelot would be unable to challenge a termination for convenience by the state, although it could dispute the calculation of payment obligations spelled out in the management agreement as the "sole and exclusive liability for terminating for convenience," Department of Revenue spokeswoman Elizabeth Brassell said Monday.

The state may also terminate the contract if Camelot consistently fails to meet its annual profit commitments, among other reasons.

In the 1990s, the state paid $145 million - about $220 million in 2012 when adjusted for inflation - to settle a lawsuit over the cancellation of an auto emissions testing contract after then-Gov. Tom Ridge decided to shift policy toward a decentralized private network of service stations.

Currently, the 41-year-old Pennsylvania Lottery is run by the Department of Revenue, and profits benefit programs for the elderly, including transit, rent and property tax rebates, prescription drug assistance, senior centers and long-term care services.

Corbett has said he is gauging whether to hand over day-to-day management in exchange for Camelot's guarantee of stable profits that, in theory, keep better pace with demand for programs that benefit the state's growing elderly population. Under the proposal, the state would remain in control of the lottery.

Democratic lawmakers oppose Corbett's move to privatize, which also may herald an expansion of lottery gambling, such as the addition of online ticket sales or games, keno terminals in bars or restaurants and an aggressive new search for more lottery retailers.

The proposed agreement with Camelot would be for 20 years. Camelot would guarantee at least $34 billion in profit to the state over that period and could earn another 10 years of extensions if it meets certain performance benchmarks. An extension beyond that would require a mutual written agreement, and the state can negotiate a higher profit commitment for years 11 through 20. Camelot's offer expires Dec. 31.

Camelot would be able to bill the state for certain operating costs and could take home 0.75% of the profit as a management fee, or about $250 million on the 20-year profit guarantee of $34 billion. It also would receive a share of any profits above its annual profit guarantee, up to 5% of the profit.

If Camelot were to fall short of the profit guarantee, the state would have access to a Camelot cash reserve it could tap, but only up to 5% of the annual profit.