Treasurer McCord Questions Legality of Payments to Private Manger for Lottery Expansion

HARRISBURG, Pa., Dec. 12, 2012 (GLOBE NEWSWIRE) -- State Treasurer Rob McCord today notified the Pennsylvania Lottery that depending upon the nature and extent of lottery expansion under a private management contract, his office would refuse to disburse payments to a private operator unless and until he is satisfied that the contract expenditure is lawful.

McCord raised his concerns in a letter to Secretary of Revenue Dan Meuser. He noted that the draft Private Management Agreement (PMA) engages a company to perform services intended to increase annual lottery revenue, in part by introducing new market opportunities. The agreement is vague, however, regarding what kinds of market opportunities the prospective manager will pursue. Some types of gaming expansion could require legislative authorization -- or approval of the Pennsylvania Gaming Control Board.

Lacking such authorizations, McCord's office could be legally barred from making payments of public money to the contractor. The state Fiscal Code, as part of a system of financial checks and balances, gives the state Treasurer the responsibility to make sure that all disbursements of public funds are "lawful and correct." Under those provisions, the Treasurer is required independently to audit all requests for payment from the Lottery Fund.

"Accordingly," McCord wrote in his letter to Meuser, "please be advised that I will not authorize the expenditure of public funds for lottery expansion unless I am satisfied such an expenditure is legally permitted under existing law."

In the 65-page draft agreement, the Department of Revenue proposes to turn management of the Pennsylvania Lottery over to Camelot Global Services, Inc., the sole bidder for the contract. The agreement contemplates an increase in lottery revenue through management of lottery operations and new market opportunities, but it provides no specifics. There has been public speculation that Camelot might turn to Keno, video lottery terminals, and internet gaming. The only formal statement, however, explaining how Camelot will increase revenue, comes from a Revenue Department press release that cites "industry best practices... including monitor-based games and internet products." That would appear to grant Camelot broad discretion to determine the future nature of gaming in Pennsylvania.

"My concern is that the Revenue Department might be using the contracting process to permit gaming expansion in a manner that is rightfully the prerogative of the state legislature," McCord said. "If that is the case, then my office could encounter legal obstacles in disbursing public funds to the contractor."

Although the draft agreement includes a statement that Camelot will obtain all "government approvals," including necessary legislative authorizations, it is unclear about when, or from whom, such approvals are necessary.

McCord also noted that besides legislative approval, some types of monitor-based games and internet products could fall under the 2004 law that authorized slot machine gambling at designated licensed casinos in the state, and thus could require approval of the Pennsylvania Gaming Control Board. Due to these various uncertainties and ambiguities, McCord said he expects Camelot to obtain all necessary approvals from the appropriate governmental body or bodies prior to submitting a request to Treasury for disbursement of money from the Lottery Fund.

"I support the Revenue Department's efforts to seek new and innovative ways to increase lottery proceeds for the benefit of Pennsylvania's senior citizens, but the process must be transparent and competitive, and it must be built on solid legal ground," McCord said.

By law, Pennsylvania Lottery proceeds benefit senior citizens. More than 2 million seniors in the state rely on services paid for by the Lottery. McCord noted that the administration is considering awarding a management contract that would extend for 20 to 30 years, therefore it is essential that it undergo a thorough review and be executed in a way that ensures continued adequacy of funding for seniors' programs.

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Editor's Note: The text of the letter from Treasurer McCord to Secretary Meuser follows.

December 12, 2012

The Honorable Daniel P. Meuser
Department of Revenue
Strawberry Square, 11th Floor
Harrisburg, Pennsylvania 17128-1100

Re: Pennsylvania Lottery Private Management Agreement (Draft)

Dear Secretary Meuser:

Prior to the execution of the draft Private Management Agreement (PMA) with Camelot Global Services, Inc., I write to provide notice of Treasury's intention to independently audit all requisitions for payment from the Lottery Fund associated with the agreement. Since 1929, the Fiscal Code has established an important system of financial checks and balances with respect to public funds -- in particular permitting the State Treasurer to disburse public funds only if the request for payment is "lawful and correct."1 This responsibility will include all payment requests made pursuant to the PMA with Camelot. Accordingly, please be advised I will not authorize the expenditure of public funds for lottery expansion unless I am satisfied such an expenditure is legally permitted under existing law.

The draft PMA engages a private company to perform services intended to increase annual lottery revenue by managing lottery operations and introducing new market opportunities.2 It is significant, however, that the sixty-five page PMA fails to describe or identify what new market opportunities a private manager will pursue. Nor does the PMA explain how the lottery will expand in order to increase annual revenue. While there has been much public speculation as to how lottery revenue may be increased (e.g., Keno, Video Lottery Terminals, and Internet gaming) the draft PMA is unfortunately silent as to the manner by which lottery expansion and new market opportunities will occur.

In fact, the only formal statement identifying how Camelot Gaming intends to grow lottery revenues has been a vague statement, which cites "industry best practices... including monitor-based games and internet products."3 As a consequence, the terms of the draft PMA appear to grant Camelot Gaming unfettered discretion to pursue lottery market expansion beyond the existing statutorily licensed lottery ticket agent system.4 In addition, "monitor-based games" and "internet products" may fall within the Pennsylvania Race Horse Development and Gaming Act's definition of "slot machine," which would make the introduction of these games subject to the approval of Pennsylvania's Gaming Control Board and limited to use within licensed gaming facilities.5

The use of the state contracting process to delegate future lottery expansion is an extraordinary grant of discretion and authority and has given rise to public questions concerning its legality. The only apparent limitation within the draft PMA on this is the requirement that Camelot obtain all "governmental approvals," including such legislative authorization as may prove necessary.6 Unfortunately, it is unclear by whom or when such governmental approvals are deemed necessary.

As a consequence of this ambiguity, I expect Camelot to obtain all governmental approvals -- including legislative authorization -- prior to submitting a request for the Treasury to disburse public monies from the Lottery Fund associated with the expansion of gaming beyond the statutorily prescribed lottery sales agent system.

To be clear, as Treasurer, I support your efforts to seek new and innovative ways to increase lottery revenue for the benefit of Pennsylvania seniors. I believe our state should pursue new ways to serve taxpayers and maximize the return that our public assets earn. To do so effectively, however, I believe that we must have a transparent and competitive process that incorporates the skeptical review of our partners in the public and private sectors. And of course, we must ensure that we only proceed with solutions that are built on solid legal ground.

With all of the above in mind, I write to manage expectations. Please know Treasury will not disburse public funds under any contract unless and until we are satisfied that the contract expenditure is lawful. The information provided to date is insufficient to make an affirmative assessment.

Please contact me if you have additional information that may satisfy this office's obligations. Until then, know that no disbursements under this contract will be made.


Robert M. McCord
State Treasurer

cc: Camelot Gaming, CEO

1. 72 P.S. § 1502.

2. Draft PMA, ¶ 1.1.

3. Press Release, Pennsylvania Department of Revenue (November 9, 2012).

4. See, 72 P.S. § 3761-305 (limiting lottery sales from licensed lottery ticket agents).

5. 4 Pa.C.S.A. § 1103 (slot machine includes any computerized contrivance, terminal or machine that, upon consideration, may, by chance or skill, provide anything of value in exchange); § 1518 (prohibiting the operation of any slot machine unless licensed by the Gaming Board).

6. Draft PMA, ¶¶ 7.8, 12.1.1, 13.5.1(c), 15.1.1(h), 19.1-19.3.

CONTACT: Media contact: Gary Tuma 717-787-2465

Source: Pennsylvania Treasury