Backdoor Attempt to Gut Lottery Scholarships

House Bill 2263 by Representative Ann Clemmer would mandate that 30% of all net lottery proceeds must be used for lottery scholarships. Currently, 21% of the lottery proceeds go toward scholarships, so the logic behind raising it to 30% would, on its face, seem to be a no-brainer. A mandated higher percentage for scholarships must mean there is more money for scholarships, right?

Actually, no, and believe it or not, mandated percentages actually lower the amount available for scholarships. It’s counter-intuitive, but when you examine surrounding states with mandated net proceed percentages you find their lottery sales are dismal.

That is because the biggest payout in a lottery is actually for prizes that go back directly to the players. With mandated net proceed percentages, lotteries must lower the amount of prizes awarded to meet the requirement, which then causes fewer people to play because they’re not winning, which then ultimately leads to less money for scholarships.

In short: more prizes leads to more players, fewer prizes leads to fewer players.

I helped lead the team that brought the lottery scholarship amendment before the voters in 2008 and we studied lotteries extensively across the country. We spoke with numerous lottery officials in states with mandated percentages and all of them told us that the mandates were crippling their respective lotteries. To a person, they all told us they wished their respective states did not have mandated percentages.

Texas actually enacted legislation similar to Clemmer’s back in 1997 and they saw their lottery sales drop by $900 million in two years. The Texas Legislature figured out they crippled their own lottery and reversed the legislation two years later.

Groups like the Family Council also studied lotteries extensively and smartly figured out one of the best ways to kill the lottery, which they vigorously opposed in 2008, is to push for net proceed mandates. By pushing for mandated percentages it gives them an excellent talking point on how their only goal is to have more money for scholarships.

Maybe so, but they also know that the facts show that mandated percentages cripple lotteries, which is their ultimate goal.

To be sure, the first couple of years of the lottery’s existence was marred by various controversies surrounding decisions made by Ernie Passailaigue, the first lottery director. But that does not negate the fact the Arkansas Scholarship Lottery has provided around $300 million in lottery scholarships to college-bound students. Moreover, the Arkansas Lottery now seems to be under stable leadership and heading in the right direction.

The current director of the Arkansas Scholarship Lottery, Bishop Woosley, released a statement today from the Lottery Commission outlining why they oppose HB2263 and then detailed the reasons why it leads to lower college scholarships.

I’ll let the lottery professional have the last word on why mandating net proceeds will harm the lottery and lead to less funds for college scholarships.

STATEMENT, ARKANSAS LOTTERY COMMISSION DIRECTOR BISHOP WOOSLEY
RE: HB2263
MARCH 18, 2013

House Bill 2263 mandates that 30% of total lottery proceeds be used to fund college scholarships. The Arkansas Lottery Commission (ALC) strongly opposes this bill because of the immediate and detrimental effect it will have on lottery ticket sales, revenues paid to our retailers in the form of sales commissions and most important, college scholarship revenue.

Setting aside a greater percentage of the lottery revenue toward scholarships may sound like a good idea. We all want as many Arkansas students as possible to have the chance to go to college. But if HB2263 becomes law, the Arkansas Lottery Commission will be forced to significantly lower lottery game prizes paid to Arkansas players. Lower prizes will depress ticket sales. Reduced ticket sales mean reduced scholarship revenue. In the end, Arkansas students would get a bigger slice of a much smaller pie.

The Arkansas Lottery now responsibly operates at 13 positions below its allotted positions under statute. The agency has reduced its salaries paid out by more than $750,000 in the past 18 months, placing heavier workloads on staff members. To attain the mandate of HB2263, the agency will face new and deeper cuts in already reduced operational costs, including staffing.

When ticket sales shrink, retailer commissions paid to over 1,850 businesses across Arkansas will go down, cutting into their profits. In addition, this mandate will likely result in future lottery vendors demanding higher contract rates, further diminishing the amount of money the lottery will raise for scholarships for Arkansas students.

Arkansans don’t have to speculate about what will happen if HB2263 is enacted. They need only look at the low per capita sales of the Louisiana and Oklahoma lotteries, where percentages are in place, and at the dismal sales of the Texas lottery following the enactment of similar legislation in Texas in 1997. That year, the Texas legislature imposed a prize payout limitation, and Texas lottery revenues slumped from $2.3 Billion to $1.4 Billion in two years. Upon convening in 1999, the Texas legislature reversed the legislation, but it took five years for the Texas lottery to return to its previous production levels. In those seven years, the Texas lottery’s sales fell a cumulative $3.54 Billion, cutting Texas lottery profits for the state by almost $1.1 Billion.

HB2263 would undoubtedly have a negative effect on the Arkansas Scholarship Lottery advertising budget. States with similar mandates have been forced to slash advertising dollars paid to statewide and local newspapers and television and radio stations.

Most important are the Arkansas students and their families who have relied on Lottery Scholarship funds for over three years and will continue to do so. If enacted, HB2263 will reduce by millions of dollars the scholarship funds for those students and families. Those scholarships in many cases make the difference between a student being able to attend college, or not, due to insufficient funds.

Just like the hundreds of small businesses to which it is so closely linked, the Arkansas Scholarship Lottery’s financial health depends on its ability to adapt to the market and make the most in dollars, regardless of percentages. For the sake of Arkansas students and families, and for those small businesses across Arkansas, the Commission will actively oppose HB2263.