Gov. Tom Corbett and others applaud Pennsylvania Attorney General Kathleen Kane after she took her oath of office at the state Capitol in Tuesday, Jan. 15,
Gov. Tom Corbett and others applaud Pennsylvania Attorney General Kathleen Kane after she took her oath of office at the state Capitol in Tuesday, Jan. 15, 2013, in Harrisburg, Pa. (AP Photo/Matt Rourke)

HARRISBURG - Pennsylvania Attorney General Kathleen Kane on Thursday rejected a contract sought by Gov. Tom Corbett that would let a British firm manage the $3.5 billion Pennsylvania Lottery, saying it contravenes the state constitution and is not authorized by law.

Her 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. He settled on London-based Camelot Global Services.

Corbett can challenge Kane's decision in court. His administration had no immediate comment.

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.

Kane read a short statement at news conference at her Harrisburg office 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 open and undefined "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 lawsuits.

Corbett, whose administration signed the agreement last month, has said he believes Camelot can produce higher and more stable lottery profits as the state tries to keep pace with rising demand for programs for senior citizens that the lottery funds.

Democratic lawmakers have criticized Corbett as simply 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.

Camelot runs the United Kingdom's official lottery. The attorney general's office reviews state contracts for form and legality.

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.

Camelot's bid expires Saturday, which allows it to get back a $50 million security deposit. The money was supposed to be used to pay the Corbett administration's consultants to the contract process.

Besides the lawsuit, other challenges had awaited.

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.

Also, top Republican senators have said they will introduce legislation that prohibits the Pennsylvania Lottery from competing with casinos through online gambling.

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