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Monday, August 28, 2017

NOTES FROM THE SENATE, AUGUST 28, 2017

ANOTHER LOOK AT THE LOTTERY

The recent $700 million dollar Powerball Lottery jackpot drew new attention to the Lottery in Georgia. But there are other events and reasons why now might be an opportune time to reexamine the Georgia Lottery and the December, 2016 Audit by the Department of Audits and Accounts. These reasons include:

--The FY 2018 Budget appropriates a record-breaking $1.13 Billion for the three educational purposes for Lottery proceeds: $357.8 million for Pre-K for 84,000 slots, $620.2 million for the HOPE Scholarship for college students and $109.05 million for the HOPE Grant for TCSG students..

--There is continuing discussion on the possibility of allowing a vote on casinos in Georgia which could or would affect Lottery revenues

--Legislation introduced and passed in the Senate this past Session but still in a conference committee that would have mandated an increase in the percentage being contributed to education from the lottery under certain conditions

--The fact that Lottery revenues in the FY 2018 budget represent an increase in the percentage going to education even though total ticket sales were down.

THE SENATE REQUESTS THE AUDIT

In the spring of 2016, the Senate Appropriations Committee requested that the Georgia Department of Audits and Accounts perform a special examination of the Georgia Lottery Corporation (GLC) in order to review their effectiveness as well as to provide recommendations for increasing profitability and maximizing transfers to the state. The audit drew comparisons between the Georgia Lottery and lotteries of comparable size and age in other states to allow for meaningful analysis through benchmarks. Here is a summary of that audit.

REVENUES AND SALES

The Georgia Lottery Corporation receives the bulk of its revenue through ticket sales. In FY2016, the GLC had net ticket sales (ticket sales minus free tickets) of almost $4.25 billion. Other sources of revenue include retailer fees and coin operated amusement machine licensing fees. Of the $4.299 billion in net operating revenue, $1.097 billion was returned to the state for educational programs. Since inception, net ticket sales have increased annually except in 2001, 2010, and 2011. Between FY2013 and FY2014, net ticket sales increased 2.9%. The following year, net ticket sales grew by 4.4%, and between FY2015 and FY2016, sales increased by 8.8%. However, these increases reflect nominal growth. Once adjusted for population and inflation, sales growth has slowed. Georgia's slowing growth trend is not uncommon when compared to lotteries of a similar age in other states. Out of the 44 states in the U.S. that operate a lottery, Georgia has the 6th largest traditional sales total (non-casino) and the 2nd highest per capita sales.


TWO CATEGORIES OF TICKETS

Lottery tickets in Georgia fall into one of two categories. Draw games include games such as KENO! and Mega Millions. Instant games, or scratchers, are those where the player scratches the surface of the ticket to reveal if they are a winner. Nationally, as well as in Georgia, players' preferences have shifted away from draw games in favor of instant games. Instant games have higher prize payout rates, and therefore yield a lower profit margin for GLC and the State. In FY2015, over 68% of GLC's ticket sales came from instant games and 31% came from draw games. The Lottery Corporation is working to increase sales of draw games through promotional offers and advertising.

EXPENSES

The Lottery Corporation's largest expense is prize payouts, which equaled about $2.75 billion in FY2016. Prizes for lottery winners represented 86% of GLC's $3.2 billion in operating expenses. The remaining 14% ($456 million) in expenses was spent on administrative costs such as retailer commissions, contractor fees, advertising, and salaries for GLC employees. The largest administrative expense, retailer commissions, totaled over $270 million in FY2016 and represents about 8% of GLC's operating expenses. Retailers are paid a 6% commission on ticket sales and do not receive any additional compensation for cashing prizes or selling winning tickets as they do in many other states. However, when retailer compensation is calculated as a percentage of net sales, Georgia's retailer compensation rate is 6.38%, which is comparable to the national average of 6.28%.

In next week's column we will look at contract fees and the relationship between prize payout rates, transfers to the Georgia treasury, and pending legislation.

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