Flat overall income has panel pushing to privatize Arizona Lottery - East Valley Tribune: Politics

Flat overall income has panel pushing to privatize Arizona Lottery

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Posted: Saturday, October 8, 2011 6:45 pm | Updated: 9:05 am, Mon Oct 10, 2011.

Citing what it calls lackluster returns, a gubernatorial commission wants state officials to consider contracting out operation of the Arizona Lottery to a private firm.

Members of the Commission on Privatization and Efficiency acknowledged that the state-run gaming system has shown a steady increase in ticket sales, even through the recession.

But the report also says that expenses — mainly how much the state has had to pay out in prizes — increased at a much sharper rate. The result is that since 2006 the net operating income has remained virtually flat.

Lottery director Jeff Hatch-Miller, a former state lawmaker, said he has no problem with looking at alternatives to the current operation.

Hatch-Miller suggested, though, that the commission report had “cherry picked” the data in a way that makes what his agency has done look far worse than the actual record.

He said the period covered started just as the economy tanked and the housing bubble burst. Hatch-Miller said had they chosen either a shorter or longer period to consider, the results — and perhaps the conclusion — would have been much different.

But Mark Brnovich, who chaired the commission, brushed aside the complaint.

“The numbers are the numbers,” said Brnovich, who also directs the Arizona Department of Gaming, which oversees the operation of tribal casinos.

And Leonard Gilroy, one of the commission members, said the review period, which went back to 2006, seemed to be the most appropriate. Anyway, he said, the only thing that really is relevant is how well the Lottery is doing now.

“You have an underperforming asset today,” said Gilroy, who also serves as director of government reform at the Reason Foundation.

Gov. Jan Brewer, who put the commission together to look at various aspects of state government that could be privatized, is so far taking no position on this specific recommendation. Press aide Matthew Benson said his boss is still reviewing the findings.

Looking strictly at revenues, the lottery has been a great success. Even during the recession, total ticket sales continued to increase.

Between 2006 and the just-completed budget year, sales went from $468.7 million to $583.9 million, a hike of nearly 25 percent.

But operating expenses went from $328.3 million in 2006 to $441.4 million last year, nearly 35 percent. The bottom line is that there was virtually no increase operating income, the money available to the state.

Hatch-Miller said virtually all of those expenses were in the form of prizes paid out. And he said there was a deliberate change in strategy enacted by the governor and others in 2008.

“There was a purposeful decision to pay more back to players, to give them more prizes, higher prizes, more often,” he said.

“The strategy was to grow the entire size of the buy” of tickets, Hatch-Miller continued. “We’re up 114 percent over 10 years.”

Similarly, he said if the commission had compared current figures with three years ago it also would show a sharp increase.

And Hatch-Miller said even if the computations are made from the 2006 level he considers misleading, he still believes the lottery’s numbers should be seen as a success, given the state of the economy then and now.

He specifically cited tribal gaming revenues, the other key form of legalized gambling in Arizona. He said the reports filed with the state by the tribes, part of a requirement for revenue sharing, shows those operations are making less now than they were in 2006.

Gilroy, however, said commission members think the state may be able to do better.

The report cites Illinois, which awarded a 10-year contract to Northstar Lottery Group, a partnership between GTECH and Scientific Games, where the company will take over responsibility for lottery operations, management and marketing in exchange for a share of revenues, capped at 5 percent.

What makes the arrangement worth exploring, the report says, is that the deal will guarantee Illinois about $4.8 billion by 2016, a figure that represents more than a $1 billion increase over the revenues projected were that state’s lottery to remain under state management.

Gilroy acknowledged he comes to the table with the biases of the Reason Foundation that there is a limited role for government.

“I tend to look upon government being in the business of business as ... certainly moving into the non-core functions of government,” he said.

Gilroy said states like Arizona have already made the decision that they want this form of legalized gambling. He said that leaves the question of whether there are other ways to operate lotteries.

“What we find is that often governments don’t do the most robust job of operating a business enterprise,” he said.

Hatch-Miller said he agrees that there are things the private sector does better. But he said his agency already is contracting out for many of its services.

And Hatch-Miller said he won’t raise objections to privatizing the entire operation if there are safeguards in place and real assurances that the state would do better than it does now.

“And you’d have to guarantee it, have some kind of surety bond or whatever so if they go bankrupt you’re not on the hook,’’

Arizona Lottery revenues (in millions)

Fiscal year Operating revenues Operating expenses Net operating income
2004 $366.70 $258.70 $108.00
2005 $397.60 $281.50 $116.10
2006 $468.70 $328.30 $140.40
2007 $462.20 $323.10 $139.10
2008 $472.90 $329.60 $143.30
2009 $484.50 $357.80 $126.70
2010 $551.50 $410.10 $141.40
2011 $583.90 $441.40 $142.50

Sources: Arizona Lottery (2004, 2005 and 2011) and Commission on Privatization and Efficiency (2006 through 2010)

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