August 16, 2005
The state of the Lottery

We know that changes are coming at the Texas Lottery Commission after its summer of scandal. Now there will also be changes to the Lottery itself as the TLC struggles to reverse bad sales trends.

The Texas Lottery is on track to contribute $13.8 million less to the public school fund this year because of sluggish revenue from jackpot games, according to an analysis presented Monday that frustrated commissioners and led one to demand "decisive action" to reverse the trend.

Early estimates presented to the three-member lottery commission showed sales increasing slightly over the past year, from about $3.3 billion to $3.4 billion. Final numbers were due at the end of the month.

But net revenue to the state is expected to drop from $930 million to $916 million, largely because players prefer instant ticket games, which pay back a larger percentage than Lotto Texas and Mega Millions. Those jackpot games produce a higher return for the state.

"If I was the sole shareholder, I wouldn't like the way I see this going," said commission Chairman C. Tom Clowe. "We're working hard, we're wearing out our equipment and our people. We're selling a lot and we're moving a lot of dollars, but the bottom line is receding."


On revenue woes, Clowe said he feared lottery executives were "asleep at the switch" when it came to developing innovative sales and marketing ideas that would draw new players.

"My concern is we keep going back to the same players and asking them to spend more money," Clowe said. "I don't think that's a healthy trend."

About 74 percent of the lottery's total $3.4 billion sales came from instant ticket games this past year, according to the early figures for 49 weeks of the current fiscal year, ending Aug. 6.

Only 8.4 percent of sales came from Lotto, 7.8 percent from Pick 3 and 4.8 percent from Mega Millions. Cash Five and Texas Two-Step made up the rest.


About one-third to one-half of Texans don't play the lottery, Clowe said, and he estimated that about a quarter of Texans aren't too fond of legalized gambling.

"When fewer people buy more tickets, that's not good," Clowe said. "We really got to do a premium, first-class sales and marketing job to see this thing, as it moves through its various maturities, do what the Legislature has told us they want it to do for the schools."

Personally, I think they're shovelling sand against the tide. I see it as very unlikely that any kind of marketing job, first-class or otherwise, will convince a significant number of people who don't already play the Lottery in some form to give it a try. If you have moral objections, or if you can do the math, a slick TV ad isn't going to sway you.

That said, I suppose there isn't any harm in trying to lure the existing customer base from back to the higher margin lottery games. Making a pledge of no monkey business with jackpot amounts is a step in the right direction.

"Full speed ahead for a major overhaul of the game," said Gary Grief, acting director of the Texas Lottery Commission.

Under proposed rule changes the three-member commission that oversees the agency must still approve, any jackpot would be guaranteed. If funds from ticket sales and agency reserve funds run shy of covering a jackpot, the commission would now be authorized to tap other sources such as vendor license and application fees and other funds credited to the lottery's main account.

Players "will know the jackpot amount, at a minimum, is the advertised jackpot," a summary states.

More on that in a minute. They're also tinkering around the edges of the format of the game itself.

Grief said staff are also studying changes centered on changing the mix of numbers that would need to be matched for someone to win a jackpot, though no formal proposal has been made.

Jackpot winners must now match five of 44 numbers plus a "bonus ball" from one of 44 numbers. Grief said the agency is looking at suggesting a jackpot requiring players to match six in 52 numbers, six in 59 or six in 54, the mix in place from mid-2000 until May 2003.

He said the bonus ball feature could be eliminated.

Grief is quoted in this Star Telegram story saying that players "don't seem to like the bonus ball". Maybe some of them realized it lowered the odds of hitting the jackpot, or maybe they didn't like the idea that the bonus ball could be the same number as a regular ball, I don't know. It'll be interesting to see if they use this as a way to abandon the longer odds/higher prize approach that they have consistently employed each time revenue has lagged, for which they've been strongly criticized by Lottery watchdog Dawn Nettles.

Speaking of Nettles, that S-T article has an odd quote from her regarding the jackpot guarantees.

Although commissioners said the proposal, which is now subject to at least 30 days of public review, would help restore players' confidence in lotto, a vocal critic of the lottery called the move unnecessary. Dawn Nettles, who registered a complaint with the Texas Attorney General's Office over the falsified June 8 jackpot, said savvy lotto players understand that jackpots are estimated.

"I don't think you should ever guarantee something you don't have," Nettles said.

Since it was Nettles who blew the whistle on the earlier shortfall, that quote seems out of place. Going back to the original story, there's a bit more context to what she's saying:

Nettles, whose Lotto Report tracks trends for the Texas lottery and those around the nation along with stating her criticisms of the Texas Lottery Commission's policies, said players might expect the estimate to be off by a few thousand dollars, but not by more than $1 million.

One more piece to add, from the Chron story:

If sales are too low to support the advertised jackpot, the lottery could dip into other funds, including a reserve prize fund, and, if necessary, the lottery's general account appropriated by the Legislature.

That reserve stands at $35 million right now, according to the S-T article. I think what Nettles is saying is that dipping into reserves when sales are sufficiently slow that you've got a gap of $1 million or more is unsustainable, and for smaller differences it's not worth the extra accounting. I wish there'd been more to her quote, but that's what I think. In any event, I share that concern about the reserves. I suspect the TLC is banking on conjuring up a magic bullet to reverse the sales slide so that they won't need to worry about draining their reserves. All I can say is good luck with that.

Posted by Charles Kuffner on August 16, 2005 to Jackpot! | TrackBack

As a player, I can honestly say that the bonus ball is a bummer. I used to win at least something regularly. And then there was the evil bonus ball. I need to keep winning to feed my addiction, c'mon!

Posted by: Katie on August 16, 2005 6:04 PM