Friday, September 08, 2017
NOTES FROM THE SENATE, SEPTEMBER 8, 2017
GEORGIA LOTTERY - A FURTHER LOOK III
In this last look at the Georgia Lottery, we examine transfers to education. Also, here is a look at Senate Bill 5 which would have placed some requirements on the Lottery to increase transfers to education, and lastly, review the highlights of the December 2016 Audit.
TRANSFERS TO THE STATE FOR EDUCATION
Net proceeds from the Georgia Lottery are transferred to the State Treasury quarterly to fund educational programs in the state. While there is no set amount that the Lottery Corporation must transfer to the state treasury, the statute dictates that net proceeds should equal "at least 35 percent" of the total lottery proceeds "as nearly as practical". The audit notes that the language in the statute is somewhat vague and as a result, remittances to the state have not equaled 35% of lottery revenues since 1997. Nominally, lottery ticket sales have been increasing steadily since 1993, which means that nominally, transfers have been increasing as well.
NO REAL INCREASE
However, when adjusted for inflation and population growth, transfers have declined since 2000. In fact, although the nominal amount transferred has increased every year since the lottery's inception, the percentage of net proceeds being returned to the state has decreased in 11 of the last 18 years. In fiscal years 2010-2016, the Lottery Corporation transferred on average 24.15% of lottery proceeds to the state. Compared to the lotteries in other states, the GLC is doing quite well in transfers to the state. In 2015, Georgia ranked 3rd out of 44 states in per capita net proceeds remitted to the state. Additionally, in 2015, GLC returned 25.1% of proceeds to the state, just below the national average of 25.9%.
SENATE BILL 5
During the 2017-2018 legislative session, Senate Majority Leader Bill Cowsert introduced legislation that would have amended the Lottery for Education Act in order to guarantee that the GLC maximizes transfers to the state. The bill eliminates the language "as nearly as possible" and in its original form, would require net proceeds to equal at least 26% of lottery proceeds in fiscal year 2018 and increase to 30% by 2020. To put those percentages into perspective, if, in fiscal year 2016 GLC had transferred 26% of lottery sales revenue to the Lottery for Education Account instead of 25.5%, it would have meant an additional $20.2 million available for scholarships and pre-kindergarten programs. If GLC had transferred 30% of net profits, the state would have received an additional $192.1 million. Opponents of the bill argued that a greater transfer to the state would mean a lower prize payout rate, which would depress ticket sales and result in less money being transferred to the state. However, the bill has a circuit breaker provision that if lottery ticket sales decrease by 5% after the percentage remitted to the state is increased to 28%, the percentage will be reduced to 26% going forward.
THE FINDINGS OF THE AUDIT
While the Dec. 2016 Audit validated some of the claims of success of the Georgia Lottery Commission, they found issues with transfers, prize payout research, vendor competition, advertising expenses and the whole issue of free tickets accountability.
1. While lottery ticket sales and payments to education have nominally increased over the years, when adjusted for population growth and inflation, they have actually declined.
2. The research performed showing a direct relation between prize payout and yield payout to education was found to be questionable. There were issues with key variables and the fact the study itself was conducted by a vendor who stands to gain by its results.
3. The Lottery Commission has used the same two vendors for gaming contracts for some 22 years without the contracts being rebid.
4. Advertising expenses, on a per capita basis, are higher than similar sized lotteries and the audit suggests the Commission does not know what the optimum level of advertising is.
5. In 2016, the Commission deducted from Operating Revenue some $307.9 million in "Free Tickets". The Audit found that the return on investment on those free tickets cannot be assessed because "information on the cost and the value players assign to these tickets is not collected." The expenses associated with these tickets include vendor cost (1%) and the 6% gross sales commission on the face value of the ticket. The Audit found that the use of free tickets would have to generate $82 million in additional sales to cover the additional cost of the tickets. Apparently no research on the value of the free tickets has been done.
The Audit recommended that future studies be validated prior to being used to make decisions about prize payout rates. They recommended studying the optimal amount of free tickets to dispense and to consider rebidding gaming contracts. They also recommended introducing advertising as a variable into the prize payout study to determine if that level has already been reached.
The Audit also suggested that the Commission collect data through the player hotline regarding game development and/or marketing. And finally, the Audit recommended that any future adjustments to the vendor compensation be evaluated for effect on returns to the state and education before implementing.