Taxpayers pay millions in bonuses to lottery firm's staff despite poor performance

Illinois taxpayers have funded about $2 million in "retention" bonuses for employees of a private firm managing the lottery despite the firm performing so poorly Illinois is working to replace it.A Tribune investigation has found the state approved...

Taxpayers pay millions in bonuses to lottery firm's staff despite poor performance

Illinois taxpayers have funded about $2 million in "retention" bonuses for employees of a private firm managing the lottery despite the firm performing so poorly Illinois is working to replace it.A Tribune investigation has found the state approved...

11 April 2017 Tuesday 00:10
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Taxpayers pay millions in bonuses to lottery firm's staff despite poor performance

Illinois taxpayers have funded about $2 million in "retention" bonuses for employees of a private firm managing the lottery despite the firm performing so poorly Illinois is working to replace it.

A Tribune investigation has found the state approved paying bonuses as part of a complicated deal it struck in 2015 with the firm, Northstar Lottery Group. Northstar agreed to end its 10-year deal early if the state met a host of conditions, including paying Northstar "disentanglement" fees, which included the bonuses.

Records show Northstar offered an unspecified number of employees 30 to 50 percent of their base pay as a bonus for continuing to work through set periods. The bonus increased to 60 percent of base pay for those continuing to work the first half of this year.

While the bonuses made up the vast majority of disentanglement fees the state paid, those fees also included covering Northstar's additional travel and meeting expenses it says were related to the early breakup. Records show that ranged from one Northstar employee's $200 steakhouse dinner tab to nearly $800 to rent furniture for an empty apartment leased by Northstar.

Exactly who's benefiting remains hidden from the public. Northstar won't name the employees receiving the bonuses and reimbursements. The lottery said it has no records of its own that identify them, won't push to get them and won't explain why.

The extra, taxpayer-borne fees helped boost state payments to Northstar and its owners higher than ever despite the lottery's tepid performance in recent years. Also helping Northstar: It no longer has to pay penalties for poor performance as it waits for the state to replace it — a process already delayed with no specific timetable.

The extra fees illustrate one more questionable action in Illinois' first-in-the-nation experiment to privatize its lottery.

In December, the Tribune documented how the lottery, under Northstar's management, failed to award many of the biggest prizes for scratch-off games and how state officials repeatedly missed warning signs of the practice. The findings spurred state lawmakers to say they planned to hold a legislative hearing this spring.

Illinois Lottery's biggest scratch-offs didn't award 40% of grand prizes, Tribune finds Joe Mahr, Matthew Walberg and Angie Leventis Lourgos

It was called The Good Life and offered the biggest grand prize of any instant game the Illinois Lottery had ever produced.

Two lucky winners could scratch their way to $46 million each, paid in periodic installments. At $30, tickets weren't cheap, but millions were sold. Then the game ended before...

It was called The Good Life and offered the biggest grand prize of any instant game the Illinois Lottery had ever produced.

Two lucky winners could scratch their way to $46 million each, paid in periodic installments. At $30, tickets weren't cheap, but millions were sold. Then the game ended before...

(Joe Mahr, Matthew Walberg and Angie Leventis Lourgos)

As for the latest findings, a government contracting expert told the Tribune it's not unusual for vendors that know they'll be replaced to force the government to pay them more to keep them on the job in the meantime.

"Oftentimes the government agency gets pinned in a corner because they have no 'out,'" said Adam Williams, an assistant professor of public administration at the University of Illinois at Springfield.

But, Williams said, he wondered why, in this case, the state would agree to specifically fund Northstar's retention bonuses.

"Was it a situation where (Northstar was) threatening to walk away from the table if they didn't do that?" he said.

That's unclear. The lottery declined an interview request and also declined to answer in detail a set of written questions.

The disentanglement fees stemmed from an unusual evolution of an unusual contract.

In July 2011, Illinois became the first state to hire a private firm to manage its lottery; and to do so, it let two longtime lottery vendors form a firm that got a 10-year management deal. That management firm, Northstar, in turn awarded lucrative, no-bid subcontracts to the longtime vendors that formed it.

But Northstar struggled to make the lofty revenue projections it pitched in its bid, leading to years of disputes over who was to blame and how much in penalties Northstar should pay.

In 2014, aides to then-Gov. Pat Quinn brokered a deal to settle the disputes and end the contract early. That deal was invalidated, and Quinn lost to Bruce Rauner, whose aides then renegotiated the Quinn deal.

Both deals offered Northstar and its vendors to collectively be paid more money than ever, although they differed on specifics.

Illinois Lottery's private manager faces 2nd lawsuit alleging fraud Joe Mahr and Matthew Walberg

A second lawsuit has been filed accusing the Illinois Lottery's private manager of defrauding players after a Tribune investigation found the lottery did not award many of the biggest prizes in its largest instant ticket games.

The lawsuit was filed last week in Cook County Circuit Court by two...

A second lawsuit has been filed accusing the Illinois Lottery's private manager of defrauding players after a Tribune investigation found the lottery did not award many of the biggest prizes in its largest instant ticket games.

The lawsuit was filed last week in Cook County Circuit Court by two...

(Joe Mahr and Matthew Walberg)

Beyond waiving penalties and keeping a management allowance, both deals agreed to pay up to $17 million a year in disentanglement fees. The Quinn proposal made no mention of paying retention bonuses for Northstar employees, while the Rauner deal specifically mentioned them. Under the Rauner pact, those bonuses made up more than 80 percent of disentanglement fees paid to Northstar in the most recent fiscal year.

In a statement, Lottery spokesman Jason Schaumburg traced the idea of paying disentanglement fees to the Quinn administration.

"At no time did the Rauner administration agree to pay any additional amounts of disentanglement expenses beyond what had been previously negotiated and agreed to by the Quinn administration," he said.

The deals had another key difference: Quinn's deal had the state directly vetting expenses, while Rauner's assigned vetting to a third-party firm paid by the state and Northstar. That firm, StoneTurn Group, OK'd Northstar's disentanglement expenses and filed reports saying the bonuses appeared "reasonable" based on "market research of third-party sources."

Schaumburg said StoneTurn added "an extra layer of oversight," but there's no record the state independently vetted the expenses, and Schaumburg declined to answer how paying the bonuses for Northstar employees benefited taxpayers.

In a statement issued through one of its attorneys, David Dahlquist, Northstar said it is in "full compliance" with the new contract.

It's unclear exactly who's getting these bonuses and how much each has gotten.

The Tribune filed a request under Illinois' open records law, which generally requires governments to spell out how taxpayer money is spent, even if they need to get the records from government vendors. The lottery said it lacked records of how the money was spent. It said it went to Northstar, and Northstar provided the state heavily redacted records, with the identities of recipients blackened out, that the state then provided to the Tribune.

State employees routinely have their names and pay released to the public. But another Northstar attorney, Kim Barker Lee, said in a letter to the state that Northstar won't identify publicly who got paid what.

Rauner fires Illinois Lottery private manager Northstar Lottery Group Matthew Walberg

The nation's first private company to manage a state lottery was fired Friday by the Bruce Rauner administration after years of failing to make the lofty revenue targets it promised.

In a news release Friday, Gov. Rauner announced that his office had reached a termination agreement with Northstar...

The nation's first private company to manage a state lottery was fired Friday by the Bruce Rauner administration after years of failing to make the lofty revenue targets it promised.

In a news release Friday, Gov. Rauner announced that his office had reached a termination agreement with Northstar...

(Matthew Walberg)

"An employee of a private company should not be subject to the same scrutiny as a public employee merely because his or her employer chooses to do business with the state," Lee wrote.

The state won't say whether it has sought unredacted records from StoneTurn and, if so, why it hasn't provided them to the Tribune.

What's left are records of meetings and travel paid by the state, with names blacked out. Still, the remaining details raise questions.

There was nearly $700 in hotel, food and mileage expenses for an employee to travel to Chicago and Springfield for no specified disentanglement purpose — only notations that there were Christmas parties to attend in each place.

The same employee fronted nearly $800 as an "initial payment" to rent furniture for an empty apartment Northstar still had under lease for its onetime CEO, saying it would be cheaper to furnish it than stay at a hotel the next time he was in town.

There was also a $360 dinner meeting for four that included steaks priced up to $49 each and $16 glasses of wine.

And there was another $200 spent on just one Northstar employee's tab for another steakhouse dinner meeting — with no receipt explaining how one employee racked up such an expense.

Northstar, in its statement, noted all of its invoices are reviewed by StoneTurn to ensure they comply with the agreement. It referred additional questions to the lottery.

The lottery declined to say if and how it thought such expenses were justified.

The state policy governing travel doesn't list allowances for renting apartment furniture. But it does offer a limit for an in-state dinner for state employees, including those at the lottery: $17 per person.

jmahr@chicagotribune.com

mwalberg@chicagotribune.com

Twitter: @joemahr

Twitter: @mattwalberg1

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