HARRISBURG - Pennsylvania Attorney General Kathleen Kane on Thursday rejected a long-term contract sought by Gov. Tom Corbett that would let a British firm manage the $3.5 billion Pennsylvania Lottery, saying parts of it contravene the state constitution or are not authorized by state law.
Her politically fraught decision came after Corbett undertook a nine-month process to find and hire a private company to replace state employees atop one of the nation's largest lotteries. Corbett, who had endured months of criticism about the policy and process from Democrats, settled on London-based Camelot Global Services, the United Kingdom's official lottery operator.
Kane announced her decision in a short statement read at a news conference at her Harrisburg offices, but declined to take questions from reporters.
In a memo she sent Thursday to Corbett's Department of Revenue, which oversees the lottery, Kane's office revealed that it had asked Corbett to withdraw the contract because of a pending lawsuit filed by Democratic lawmakers and the union that represents lottery employees. Corbett refused.
Kane's office subsequently decided that state law does not allow the governor to privatize the operation or management of the lottery nor does it allow the expansion of gambling that the contract would permit.
Her office also concluded that the "indirect expenses" that Camelot can claim under the contract - essentially a management fee of up to 0.75 percent of the annual profit, or hundreds of millions of dollars over the life of the deal - are an unconstitutional waiver of the state's "sovereign immunity" protection against paying certain damages or claims.
Corbett and Camelot each later released statements saying they were disappointed. Corbett also reiterated that his motivation is to ensure that lottery profits keep pace with rising demand for programs for senior citizens that the lottery funds in a state that is among those with the largest elderly populations.
Successfully shifting lottery management to Camelot is a crucial test for Corbett, who promised when he ran for governor that he would look to privatize state services wherever he could.
Meanwhile, the rejection is likely to fuel animosity to the relationship between Corbett, a Republican, and Kane, a Democrat who has been in office barely four weeks.
Kane ran on a pledge last year to be an independent voice and to investigate how the attorney general's office under Corbett handled the child sexual abuse investigation into former Penn State assistant coach Jerry Sandusky in 2009 and 2010.
For now, it seems the lottery will remain managed by state employees, while it is not clear what will happen next with the contract.
Corbett can challenge Kane's decision in court, but would only say Thursday that he did not agree with the attorney general's analysis and was reviewing his legal options. Camelot's bid expires Saturday, and it would not say Thursday whether it will agree to extend it.
House Republican leaders said they expected that the Legislature will review Kane's decision, while the state Republican Party called Kane's decision "blatantly political." Democrats and labor unions were effusive.
Sen. John Yudichak, D-Luzerne, criticized Corbett's "misguided plan to privatize one of our most consistent and predictable sources of revenue." Rep. Mike Sturla, D-Lancaster, called the contract "ill-conceived" and riddled with loopholes and liabilities.
The attorney general's office reviews state contracts for form and legality, and Kane's office insisted Thursday that the contract's rejection was not politically motivated and was handled by professional staff who had worked for Corbett when he was attorney general.
"We certainly didn't tell them what to conclude one way or the other," First Deputy Attorney General Adrian King Jr. said. "We told them to do their job and follow the law."
The lottery employees' union, Council 13 of the American Federation of State, County and Municipal Employees, endorsed Kane in her fall campaign and gave her campaign $30,000.
Corbett, whose administration signed the agreement last month, has said he believes Camelot can produce higher and more stable lottery profits. Democratic lawmakers have criticized Corbett as diverting money from programs for the elderly to a foreign firm at a time when the state employees who run the lottery are achieving strong gains in profits and sales and keeping overhead low.
Corbett's agreement with Camelot is for 20 years. Camelot guaranteed at least $34 billion in profit to the state in that period and could earn another 10 years in extensions if it meets certain performance benchmarks. It was allowed to charge the management fee and receive cash incentives for exceeding its annual profit commitments. Those incentives were capped at 5 percent of annual profits.
Besides the lawsuit, other challenges were pending. Treasurer Rob McCord, a Democrat, had warned that he may withhold payment to Camelot unless he was satisfied that the company's still-vague plans to expand the scope of lottery gambling were allowed by current law.