Lottery sales and profits in the Buckeye State, which limits gaming to the state-sponsored numbers game and instant tickets, have been on the wane for the past five years. Profits dropped from $749 million in fiscal 1997 to $637 million in fiscal 2001--a 15 percent decline. All of Ohio's lottery profits go to the Lottery Profits for Education Fund, and by this spring, projections for that fund were sinking fast. "We were close to $50 million under what we projected we would send to the education coffers in profit," says Sandy Lesko Mounts, spokeswoman for the Ohio Lottery.
As a result, Ohio wound up raiding half-a-dozen different pots of state money--from disadvantaged pupil impact aid leftovers, to a catastrophic special education fund, to a lottery reserve fund--to make up the deficit. "We took a little bit from here, a little bit from there from other programs," says Jim Payton, assistant director of policy and research analysis. "In the future, who knows what will happen?" Ohio budgeters are being more conservative with their estimates on the lottery for the next several years.
Many factors have been taking a toll on lottery sales in a majority of the states that run lotteries. Competition from casino gambling, the surge in stock-market trading and an economic slowdown all have influenced how people spend their disposable income. Profits fell in 21 of the 37 states (and the District of Columbia) that were running lotteries in the past fiscal year. Although ticket sales increased by 3.5 percent nationally in 2000, profits rose by less than 1 percent-- far below the rate of inflation. That was also due to the fact that some states decided to increase the amount of prize money in an effort to re-ignite flagging sales.
Critics jump on the news as one more piece of evidence that lotteries are a bad idea and that states should not be engaged in gambling or be counting on those monies. State policy makers are concerned, particularly in places that have come to depend on the revenue stream for earmarked programs and have to adjust budgets to make up for the decline. And lottery officials are on high alert, concentrating on how to fiddle with games, payouts and promotions so that gamblers spend more on tickets than they have been lately and profits turn back upwards.
But the market for gambling now may have hit a point where the high- flying returns of years past may never reappear for most established state lotteries. The number and type of competitors for discretionary dollars have increased significantly. And most of the competition is not going to go away.
Probably the biggest competitor for the lottery dollar is the "faster" gambling that has become prevalent now that casino and Indian gambling establishments have cropped up in so many places. "Just about everyone in the United States is within a three-hour drive of a casino, an Indian casino or riverboat gambling," says David Gale, executive director of the North American Association of State and Provincial Lotteries.
Lotteries also have to compete with other lotteries. South Carolina just approved a state lottery for the first time, which could result in a decrease in lottery sales in neighboring Georgia. And a state lottery that increases prize payouts or has bigger jackpots can lure ticket buyers away from other states.
Certain types of lottery tickets are especially sensitive to economic conditions, which have softened quite a bit lately. About 70 percent of lottery retailers in Idaho also sell gasoline. When fuel costs spiked recently, people were paying 55 to 60 cents more per gallon in a state where gas prices were already among the highest in the nation. "They had less disposable income and were in no mood to spend money on lottery tickets when they just spent a buck seventy a gallon for gas," says Steve Woodall, acting directory of the Idaho Lottery.
It's not unusual for lotteries to follow general economic trends. "I don't think there's anything dire about this," says Woodall, who has seen a decrease of $4.8 million in the purchase of instant lottery tickets. "We've had downward trends before. I don't see this as a crisis situation."
It may not be a crisis, but lottery directors are not content to sit on the sidelines and watch sales slow to a trickle. Many are now scrambling to dream up ways to excite players to come back and spend more money.
One way is to have tickets with more of what Indiana Lottery Director Jack Ross calls "talk about" prizes in them. Those are the winnings that are not enormous but big enough that winners want to tell someone about them. "How much does it take in terms of a prize to tell people about it?" Ross asks. "If there's a $50 winner, you tell your friends. If you get a $2 prize, there's nothing to talk about. It's better to have a lot of those people out there talking than two people talking about a million dollars."
Perhaps it seems like stating the obvious, but state lotteries that pay out more in prizes, either by raising the top amounts or producing more winning tickets, tend to be more appealing to buyers. Ohio this year got permission to remove a requirement that 30 percent of every lottery dollar had to be regarded as profit, so it could increase payouts to ticket purchasers. "Because of the change, it increases the attractiveness of our product," says Mounts. "People are buying to win money. We needed to pay out higher on games."
Of course, states that try a strategy of paying more in prizes run the risk of giving out more money and not increasing sales enough to cover the payouts. But "studies have shown that when you increase the payout, people play more," says Ross in Indiana, which also plans to boost the money paid to players. "That's what we're banking on. There's a risk there, but we have to do something."
Massachusetts took the risk, and it seems to have worked. The state created a game that offers a payout of more than 80 percent. The average instant ticket pays between 68 percent and 72 percent in prize money.
Massachusetts players buy a $10 ticket with a chance of winning one of 30 prizes. There are 10 four-million-dollar prizes and 20 one- million-dollar prizes. The tickets come out once a year and when they are sold out, the game is over. This past year, the tickets sold out in the third quarter.
The state's net revenue from each ticket sale is smaller because of the higher payout. But overall, sales have gone up significantly and continue to grow, so the money keeps pouring into lottery coffers. "People look at the Massachusetts lottery and see how successful it's been over the years and wonder why," says Assistant Treasurer Dwight Robson. "It's because people have an opportunity to win. The payout percentage may be the highest percentage of any state that offers a traditional lottery."
There are some aspects of the roller coaster sales of tickets that lottery directors can't always control. When no jackpot is hit for awhile and the amount of the jackpot begins to climb through the roof, sales boom. People who may not otherwise play ante up a dollar in the hopes of hitting it big. Such an event is the luck of the draw. However, states can manipulate that to some degree.
Texas lottery jackpots have bulged because the state added more numbers to the selection process, making it harder to win a jackpot. Ohio also changed a lotto game to give out more money at the lower end and make it harder to win the jackpot so the top prize would grow. A couple of months ago, the game finally did what it was designed to do. The jackpot hit $54 million, the highest one in the state since 1990, and people bought tickets in droves.
In general, lottery directors have learned that they cannot stand still and expect their lotteries to bring in a steady stream of revenue. "There seems to be a natural evolutionary process of lottery sales," says Gale. When a state first starts up a lottery, it tends to go gangbusters for two to three years. Then a downward trend starts, whether due to the initial excitement wearing off, jackpot fatigue or boredom with the same old games. States then tend to introduce new or different games or manipulate how jackpots pile up, to help slow down the declining trend.
Or they introduce games not traditionally associated with the lottery that can compete better with casino games, online gambling and other distractions. Those games include fast keno, a game that pays out every few minutes or so, and video lottery games that are more like casino gambling than buying a lottery ticket and waiting days to see if it's a winner.
According to Gale, lotteries that have existed for a long time, such as those in Pennsylvania or Ohio, naturally reach a state of maturity and sales level off. "That doesn't mean there aren't new dollars out there," he says. "But growth is going to be a lot slower than when it was young and new."
Despite the recent decline, the bottom line is that lotteries are designed to make profits. "We're talking about $37 billion to $38 billion in gross sales last year," says Gale. Of that, some $12 billion went to states in net profits.
Some states play it safe with their take, not relying heavily on lottery money for budgeting purposes or specific programs. Indiana sends some profits to police and fire pension funds and a teachers' retirement fund, and uses some to reduce the auto excise tax. The balance goes to the Build Indiana Fund for capital projects. "When profits go down," Ross says, "there's less money for that, but it's not critical for the operations of the state."
