The Right Way to Manage a Government Contract

The Illinois Lottery is showing that government officials can hold their own with their private-sector counterparts.

The story line is familiar. Government officials with less financial expertise than their private-sector counterparts cut a bad deal and taxpayers are left holding the bag. Just such a deal left the Massachusetts Turnpike teetering on the verge of bankruptcy before a 2009 reform law placed it under the same governance structure as the rest of the Bay State's transportation assets.

That's why it was refreshing to read that a private consortium that operates the Illinois Lottery has been assessed a fine for failing to collect as much money as it promised -- even though the lottery pulled in more revenue than ever before.

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Northstar Lottery Group's deal with the state of Illinois includes a provision holding the company accountable if it didn't bring in $822.8 million last year. The state claims Northstar collected $757 million, while the company says it took in $780.8 million. Either way, Northstar faces a $20 million fine despite the Illinois Lottery having its best year ever.

Some say Illinois Lottery Superintendent Michael Jones has a grudge against Northstar. Prior to joining the lottery, he teamed up with a group that narrowly lost out to Northstar in bidding for the Illinois Lottery contract. After a previous claim by Jones that the company was underperforming, stories leaked that the lottery director had taken taxpayer-funded European trips and directed state research work to his former company.

Jones responded that taxpayers paid for only one of his trips and the quality of lottery research was substandard when he took over the agency. But intrigue aside, the Illinois contract is a good example of how public-private partnerships are supposed to work.

Governments seek to contract with private firms for reasons that include access to private-sector technology that is often more advanced, employee performance incentive programs that usually aren't permissible under public-sector collective bargaining agreements, and shifting risk from taxpayers to private contractors. Collecting $20 million from a contractor that failed to meet its target -- even as the company turned in a record-setting year -- is about as good an example of shifting risk as you're likely to find.

Last month I wrote about Cincinnati's plan to contract out its parking meters and garages, a deal that would provide the city with upfront money to plug a short-term budget deficit but that might worsen the city's longer-term finances. Despite accusations of personal vendettas, the Illinois Lottery seems to have cut a deal that accesses the benefits of public-private partnerships without trading on the future or reinforcing the stereotype of government officials being outfoxed by private counterparts with far more financial savvy.

Principal of Chieppo Strategies and former policy director for Massachusetts’s Executive Office for Administration and Finance