LITTLE ROCK — Its leading foe faults the Arkansas lottery for paying “one of the worst percentages in the nation” for public benefits - about 22 percent of total receipts.
The lottery director calls this “a fallacy ... just ... criticizing us for not generating 35 percent net profit.”
The foe, Jerry Cox, and the director, Ernie Passailaigue, have been poles apart since the lottery’s inception. Their latest point of conflict is over how much of the lottery’s receipts should go to scholarships.
It’s a timely topic. Last month thousands of applicants learned they’ll get $5,000 or $2,500 Academic Challenge scholarships this school year financed from lottery proceeds, but thousands of others learned they qualified but won’t get awards because of lack of funds.
Cox, president of the Family Council, makes no bones about his opposition to almost all things lottery, from its creation to its implementation to its expansion and, now, the distribution of its funds to prizes, operating costs (including Passailaigue’s salary) and scholarships.
Lately, Cox also has been trying to stall the deployment of 100 machines that will sell lottery tickets. He wants the lottery to wait so he can urge the Legislature in 2011 to outlaw the machines, something Passailaigue is loath to do since he sees machines as the future of the business.
Cox said he sent 420 letters last week to Dollar General, Family Dollar, Fred’s Discount and Walgreens stores in Arkansas and warned that “some store owners are going to lose customers if these machines pop up in their stores.”
Not using the machines would make it necessary to trim $5 million from his projection of scholarship money this fiscal year, Passailaigue said. So far, the lottery has raised $90.1 million for scholarships on revenue of $419.4 million (from Sept. 28-July 31, a net profit of 21.5 percent),he said.
Cox has predicted the machines will lead to gambling by minors, who aren’t legally allowed to play the lottery or to cash lottery tickets. He says the ingenuity of teenagers utilizing adults’ identification cards such as driver’s licenses will do the trick.
Passailaigue says security controls in the machines and watchful clerks at retail outlets will thwart would-be lawbreakers.
MONEY FOR SCHOLARSHIPS
Cox then made the broader complaint that too much of the lottery’s receipts aren’t going to scholarships and that there needn’t have been so many qualified applicants who didn’t get them.
Arkansas’ net-profit figure has been compared by Cox with 2006 figures reported by the National Conference of State Legislatures. The average among the state lotteries that year was 31.5 percent of ticket sales going to designated state purposes such as schools, highways or scholarships.
Only Massachusetts and Rhode Island at 21 percent and South Dakota at 20.6 percent “ranked worse than Arkansas,” Cox said.
In Delaware and West Virginia, more than 40 percent of revenue “went to the state, giving them the highest percentages in the nation,” he said, and Louisiana and Oklahoma are among states above 35 percent.
If Arkansas’ lottery had met the national average, it would have raised $45 million more for scholarships, Cox said.
“Proponents of the Arkansas’ lottery promised us a ‘world class’ lottery,” he said. “Instead, they’ve given us and the rest of the nation yet another example of Arkansas at the bottom.”
Passailaigue told the state lottery commission that the Legislature could increase the percentage of ticket revenue for scholarships by authorizing the lottery to have video lottery terminals. He said, however, that he would never advocate changing Arkansas’ law to allow the terminals.
“We are very conservative here,” he said.
Several states, such as Delaware and West Virginia, have video lottery terminals, he said.
West Virginia can’t be compared to a lottery like Arkansas’ with only scratchoff and draw games, said Rick Dempsey, chief accountant of the West Virginia lottery. “We are more of a gaming commission than a lottery,” he said.
The West Virginia lottery has a 14 percent profit margin on scratch-off tickets, 32 percent on numbers games,37 percent on video lottery terminals at dog and horse racetracks, and almost 50 percent at video terminals at bars and taverns, he said.
Arkansas’ law forbids “a video lottery” or “casino gambling.”
According to 2008 figures - the latest year posted - from the North American Association of State and Provincial Lotteries, the U.S. average net profit for lotteries was 29.5 percent.
‘PEOPLE PLAY TO WIN’
Without naming Cox, Passailaigue said “some people who are ill-informed say” a 35 percent share for scholarships “by the magic dragon” would generate “so many more dollars for scholarships. They don’t understand the business world and the lottery world, and guess what - people play to win a prize.”
He said the lottery would have to “collapse the prizestructure” to produce 35 percent net for scholarships. Cutting the prizes would “collapse the lottery” by causing ticket sales to decline, resulting, in the end, in less money for scholarships, he said.
“People think there is wild, crazy spending going on in the lottery when it is actually in the prize money to get people interested in playing,” Passailaigue said.
To illustrate his point, he said the Oklahoma lottery’s profit was $69.9 million, or 35 percent, based on $199.9 million in revenue last fiscal year. Oklahoma’s population is 3.69 million, he said.
If Arkansas’ lottery had to produce a 35 percent net profit, Passailaigue estimated it would total $54.8 million based on ticket revenue of $156.6 million over 12 months. Arkansas’ population is 2.89 million, he said.
Passailaigue has projected the lottery as currently operated will raise $104.9 million for college scholarships based on sales of $464.2 million - a net profit of 22.6 percent - in the fiscal year that started July 1.
“I don’t think anybody on this [lottery] commission wants to go to speak to Mr. Hyde or Sen. Johnson or the governor’s office and say, ‘We just cut the lottery in half, but we got 35 percent,’” he said. He was referring to state Rep. Barry Hyde, D-North Little Rock, and Sen. David Johnson, DLittle Rock, co-chairmen of the Arkansas Lottery Commission Legislative Oversight Committee.
“I don’t think anybody has the appetite for that here in Arkansas based on the demand I have seen [for lottery-financed scholarships],” Passailaigue said.
The 21.5 percent net profit through July 31 developed after the lottery began, on Sept. 28, selling only scratchoff tickets, which have a “a lower gross” profit than tickets for numbers games, he said. The scratch-off ticket sales totaled $364.5 million during the first 10 months, he said.
During that period, scratch-off prizes totaled $248.1 million. On the financial statements, the accountants have assumed that each prize has been claimed so far, Passailaigue said. But the lottery actually paid out $231.7 million in scratch-off prizes, leaving about $16 million unclaimed, he said. He estimates about $10.9 million of that will remain unclaimed and go for scholarships.
The lottery also now sells tickets for the Cash 3, Cash 4, Powerball and Mega Millions’ number games and a raffle game.
The lottery will lean toward having about 24 or 25 percent of its gross ticket sales go for college scholarships after “this anomaly of[the lottery’s] startup ends,” Passailaigue said.
Passailaigue said a regional lottery game and a possible world lottery game might increase the lottery’s sales for numbers games that have “a higher gross profit.”
WATCHING THE LOTTERY
Cox said Passailaigue’s contention that requiring the lottery to produce a 35 percent net profit would cut in half the amount raised for college scholarships “seems to be a smoke screen.”
“The average for the nation is 31.5 percent,” Cox said, referring to the 2006 numbers. “That’s a full 10 cents on the dollar more than what we are paying in Arkansas.
“They promised us a world-class lottery and the purpose of the lottery is to fund scholarships, so it ought to at least perform at the national average,” he said. It might be unfair to compare Arkansas’ lottery to Louisiana’s or Oklahoma’s, he said.
A 24 or 25 percent net profit still is below the national average, Cox said.
Hyde said the lottery’s first year includes certain startup expenses that made the net-profit percentage lower than it would have otherwise.
“I am watching it and [legislative] staff is watching it, and Mr. Passailaigue knows we are watching as he is watching it,” he said.
“I am positive Mr. Passailaigue gets it. He understands he has to perform with the industry,” Hyde said. Passailaigue is paid $324,000 a year as director of Arkansas’ lottery.
House Speaker Robbie Wills, D-Conway, who was the House sponsor of the 2009 lottery law, said lawmakers who crafted the law were advised by other state lotteries that requiring “a set percentage to go to scholarships would lead to lower overall sales due to less money being available for prizes and advertising.”
“As a result, this would actually reduce the funds available for scholarships,” he said.
Oklahoma’s lottery has such a requirement and that’s “hurt their net proceeds,” Wills said.
He said the lottery commission “has done a good job managing the business side of the operation with the flexibility we gave them and I’ll continue to defer to their judgment.”
Asked on what basis Arkansas’ lottery should becompared, Arkansas lottery spokesman Julie Baldridge said, “You can’t spend a percent. You can only spend a dollar.”
She pointed out that the state Department of Finance and Administration a few years ago projected the lottery’s net proceeds would be only about $55 million a year.
David Gale, executive director of the Ohio-based North American Association of State and Provincial Lotteries, said he doesn’t believe one can compare state lotteries’ net profits.
“It’s like apples and oranges,” he said, because the lotteries have operated for different time periods and each has a different mix of products. Video lottery terminals, for example, are offered by lotteries in Delaware, New York, Oregon, Rhode Island, South Dakota and West Virginia, he said.
But, Cox said, state lotteries seem to work similarly and seem to offer the same products.
“I don’t buy it at all,” he said of arguments that state lotteries are difficult to compare.
“They seem to have much more in common than differences.”
Front Section, Pages 1 on 09/05/2010