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Balancing Act
Weak economies and increased demands on governments lead politicians to re-examine their relationships with lotteries and gaming.

By Patricia A. McQueen

There’s a Bush in the White House, a war in the Middle East, an economic slowdown, and a lot of state governments are in fiscal crisis. It’s the early 1990s, and the United States is in the middle of the greatest period of gaming expansion it has ever known.
Flash forward to 2001-02. It’s almost a mirror image of that time that seems so long ago.

“We once again have conditions which are conducive to developing extensive growth [in gaming], and we’re starting to see it,” predicted Bill Eadington, professor of economics and director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno.

Indeed, legislative sessions this spring are teeming with gaming initiatives, ranging from minor issues relating to traditional lottery games, to keno, VLTs, and even casinos. Experts give some of them a reasonable chance of passing, more so than at any time in the past decade.

This time around, though, things will be a little different. In some ways, gaming is more socially accepted with each passing year, as it becomes a normal part of society. So gaming legislation is easier to swallow for many. At the same time, concerns about problem gambling are at the top of everyone’s list today but were virtually unspoken a decade ago. “We’re 10 years further into our accumulated knowledge,” said Eadington, “and we can’t be as naive as we were 10-12 years ago.”

He cautioned there are “some circumstances in which even a society relatively nonchalant about gambling” can get to the point where the public perceives there is too much, and the backlash begins, much like what has been happening in Australia and a few other jurisdictions.

He suggested there are two major questions governments should be asking themselves. “One is, what is the amount of revenue you need to accrue for government purposes, and how do you achieve that? The second question is, how much gambling do you want to have?”

He noted these questions should be answered independently of each other, and problems can occur when they get combined — for example, saying more gambling is needed because more tax revenues are needed for government purposes. But if you start from the point of needing more revenue and one of the alternatives is gambling — and if government makes a conscious decision to move in that direction because it’s perceived as better than other alternatives — then there might be less of a backlash.

“[Legislators] can take a hard look at the numbers, and they may realize there are some things that they just can’t cut, morally or politically, or they can’t realistically raise taxes, so sometimes it’s just smart government to find other sources of revenues,” said legislative analyst Mark Edwards Jr. Gaming, including lotteries, is a potential source of revenue that “is never a cure-all, never a magic wand, but can be part of the answer.”

Sometimes politicians believe they can find answers to the revenue challenge without taking any steps toward new forms of gaming. In Massachusetts, acting Gov. Jane Swift has included in her budget proposal a provision to cut the prize payout on instant lottery tickets from about 71 percent to 63 percent. She expects that cut to raise an additional $274 million in revenues for cities and towns, which are the prime beneficiaries of lottery revenues. The proposed numbers appear to include a very minor sales impact due to a reduced prize payout, but given recent experience in other jurisdictions, there may be significantly more of an impact than expected.

The Texas Legislature, for example, attempted to increase lottery revenue by reducing the prize payout on instant games from about 57 percent to about 52 percent. The reduced payout was effective from Sept. 1, 1997, to Aug. 31, 1999. During that two-year period, instant ticket sales fell from $2.4 billion to $1.4 billion, a 40 percent drop. Gross revenues from instant tickets (sales minus prizes) fell 29 percent during that same period. The strategy to increase revenue failed, as players recognized that the games were providing lesser pay-backs and they stopped playing in droves.

Although other factors likely contributed to the decline in sales, Texas’ experience is a clear-cut example of the impact of prize payout, and the effect was almost immediate. Just eight months after the reduction took effect, the state realized its lottery revenues were dropping dramatically. Quoted in local media reports, state Sen. Kenneth Armbrister said in April 1998 that the Legislature should either return the prize payout to former levels or let the Texas Lottery determine the optimal payout levels. With Texas lawmakers meeting every two years, it wasn’t until the 1999 session that prize payouts were restored. Sales have picked up considerably since then but are still not up to previous levels.

Looking back on the events, Armbrister today thinks it is unlikely that the Legislature would again try to increase revenues by reducing the prize payout, given the stinging experience of the recent past. “Players who are really dedicated know what the odds are, and if you change those odds, where is their incentive to play the games?”

In Massachusetts, much of the player incentive comes from the lottery’s exceptional prize percentage. Take away that high prize payout, and combine it with a virtual prohibition on advertising to promote any other aspects of the games, and the results could be what Swift’s political opponents project: disaster.

What does it take?
While Texas likely won’t want to cut the prize payout again, the state will be facing a huge budget shortfall when the Legislature convenes in 2003. With a constitutional requirement to have a balanced budget, Texas would have to find new sources of revenue to fill the shortfall. Armbrister expects conditions could be favorable to allow the Texas Lottery some leeway with respect to new games or other things deemed necessary to enhance revenue. “If it does turn out to be a $5 billion or $7 billion [shortfall], nothing is really going to be sacred,” he said. “The way our budget is crafted, the five big-ticket items are public education, higher education, transportation, prisons, and health care. Where are you going to cut?”

Where indeed? That was the question asked by Florida state Sen. Steven Geller, resulting in his sponsoring a bill this session to allow lottery-operated VLTs at Florida’s pari-mutuel facilities. Explaining that the recent need to cut $1.5 billion out of the state budget was “exceptionally painful,” and that Florida faces a further deficit of $4 billion over the next four or five years, Geller noted new revenue sources must be found.

He is supporting a VLT bill that could result in an additional $1 billion in tax revenues for the state. “If we’re going to have to choose between cutting education or social services by another $1 billion, or getting $1 billion from VLTs, I’m certainly going to go with the VLTs.” He added that VLTs would also help the struggling parimutuel industry, which can’t compete on even terms with tracks in other states that have allowed VLTs. “You think we’re in a recession now, guess what would happen if we lost all our parimutuels?” he asked, adding that tens of thousands of jobs are at stake.

He also said that by limiting VLTs to existing parimutuel facilities, they can be added to Florida’s gaming mix in a very responsible way. “It’s only going to be at places where people already make a conscious decision to go when they want to gamble.” And because he’s proposing that VLTs be operated by the lottery, the net proceeds would go to the Educational Enhancement Trust Fund, although there are also provisions for local government revenues.

Perhaps more than most legislators, Geller understands the nuances of gaming as well as its pros and cons. He is the president of the National Council of Legislators from Gaming States, and chaired that group’s Public Sector Gaming Study Commission.

Although Florida Gov. Jeb Bush has taken a position against any expansion in gaming, Geller believes recent experiences point to the fact that expansions have already taken place.

“The state of Florida cannot be a little bit pregnant,” Geller said. “In my district I have several Indian casinos that have the exact types of machines I’m talking about. And there are several [casino] cruises to nowhere. In neither of those cases does the state get any tax revenue. So we already have [gambling] here.”

Many politicians, however, don’t have the full understanding of gaming that Geller does. And for anyone who is totally against gambling, not even a horrible economy is going to change their minds, according to Edwards. But for just about everyone else, politics will ultimately determine if votes go for or against gaming. “When a lawmaker has some political ground to lose, when given the choice between raising taxes and legalizing a lottery or another form of gaming, all of a sudden the perspective can change a little bit,” said Edwards. “They get some wiggle room when the economy goes South.”

Crisis fosters cooperation
Perhaps no piece of comprehensive gaming legislation swept through the government approval process faster than what was passed in New York last October. The dire need for revenues was the catalyst for quick action, given the catastrophic events of Sept. 11. After months of haggling about the state’s budget through last summer, it all came together quickly in a special session last fall.

The gaming parts of the bill included new Indian casinos in Western New York and in the Catskills, lottery-operated VLTs at some of the state’s racetracks, and the ability of the lottery to join multistate lottery organizations.

Long before 9-11, gaming had its proponents in New York, and state Sen. William J. Larkin Jr. said gaming legislation was already very close to passing. Larkin is the chairman of the New York Senate committee on racing, wagering, and gaming, and as such has done a lot of research on gaming in the past few years.

From his perspective, New Yorkers should have the opportunity to spend their dollars on recreation in New York, not in surrounding states at casinos in Atlantic City and Connecticut. “We were being noncompetitive in providing this [type of] entertainment to the residents of our state and the border states, and we were exporting New York revenue.”

Larkin noted that when the economy started its downturn last spring, New York had to address ways to fill the void. “I brought attention to the idea that casinos, VLTs, and [multistate lottery] were three vehicles to help us address the issue. We were very close to it before September. It was an economy waiting for a slap in the face, and it got it [with 9-11].” Explaining that New York lost 14,000 businesses in the World Trade Center’s 16 acres, there was suddenly a need greater than imagined.

Larkin advised any legislator who was not comfortable with gaming as a solution to face reality. “You need money. The economy has slowed down. You have to generate revenues to fill the void. Raising taxes is not the answer.”

From everything he has learned in other jurisdictions, Larkin believes the Indian casinos and VLTs will help re-build and rejuvenate regions in the state where they will be located, so it’s a win-win situation. It accomplishes the original goal of many New York legislators, as well as Gov. George Pataki — to keep money earned in New York from being spent outside of New York, and to create private sector investment in communities that desperately need it.

The new legislation also addresses concerns about problem gambling, and more funding will be provided to the appropriate agencies as part of the overall gaming package.

Little things help
It’s not always about billion-dollar deficits. Missouri, for example, is expected to create needed education revenue when it adds the fast-draw keno game Quick Draw Lotto (a tentative name) in June.

Information about keno was provided to the state budget planning office as a possible way of increasing lottery revenues to education, according to Missouri Lottery director of communications Gary Gonder. With the economic slowdown, the timing was right, and Gov. Bob Holden chose to include keno revenue in his budget (he also proposed changes to the riverboat casino industry that would provide additional revenue). No legislative approval was needed for keno, and the lottery expects to raise about $21 million annually for education from the new game.

“We think we’re moving forward [with keno] in a socially responsible way,” said Gonder. The game will be limited primarily to adult-oriented establishments such as bars and fraternal organizations. Missouri already has a strong program in place to help compulsive gamblers, an alliance between five gaming and compulsive gambling agencies. Given the lottery’s participation in that alliance, it has already proven that it is proactive when it comes to responsible gaming concerns.
 

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