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As Arkansas Lottery’s Luster Fades, Numbers Signal Challenges

8 min read

The Arkansas Scholarship Lottery is, of course, a numbers game.

Digits appear on scratch-off cards and the balls used in Powerball drawings; they light up on cash registers of retailers selling tickets and dance in the eyes of players hoping to hit it big.

But in the years since the first tickets were sold in 2009, the lottery has lost much of its glossy newness, leaving hard numbers to do the talking.

The lottery unquestionably provides big money for its beneficiaries — hundreds of millions to college scholarship recipients, prize winners, marketers and vendors.

But proceeds from the games, devised to provide scholarships for Arkansas high school graduates to attend Arkansas colleges, slumped for three straight years before an uptick last year. And fiscal 2016 operating revenue — $456.3 million as opposed to the peak of nearly $474 million in 2012 — was aided by a frenzy over the largest Powerball jackpot ever, a $1.6 billion prize a year ago.

The lottery’s total revenue in December was its worst ever for that month, slipping to $35.3 million, down 8.5 percent from December 2015. The value of scholarships over the past two fiscal years, about $158 million, is far less than the $189 million from the best two years, 2012 and 2013. The portion of operating revenue devoted to scholarships dipped from 21.5 percent in the lottery’s first year to 17.9 percent in fiscal 2015 before bouncing back to 18.8 percent last year. Money for scholarships, once projected to top $100 million a year, never did so, though it came close at $97.5 million in 2012. It hasn’t topped $86 million since.

To fight declining numbers, a predictable trend in lotteries after a burst of early enthusiasm, the Arkansas Department of Finance & Administration’s Office of the Arkansas Lottery turned to a consultant, Camelot Global Services. This month, state auditors concluded that the terms of the consulting contract, providing base pay of $3.25 million over five years, “are not as advantageous to the state as they are for Camelot.”

But supporters say the lottery’s overall success is also clear in the numbers. It has funded some 30,000 scholarships a year, more than 235,000 in total, worth more than $600 million. Countless Arkansas students and parents have praised the program and expressed gratitude. Testimonials dot the lottery website.

Former Lt. Gov. Bill Halter, the Democrat known as the father of the Arkansas lottery, said it has done its job well. “The goal was to create scholarships for Arkansas students to attend Arkansas colleges. Since 2009 it has done that to the tune of $600 million and 235,000 specific scholarships for students.”

Still, the value of the scholarships has been adjusted multiple times as revenue failed to keep pace and a surprising number of students sought and received them. Fewer poor students are getting awards these days, and critics note that more than 80 percent of operating revenue generated by the lottery goes to costs other than scholarships.

Longtime opponents like Jerry Cox of the Family Council in Little Rock concede that the lottery is a tighter ship than it was in 2011, when its original director, Ernie Passailaigue, resigned in a firestorm over his $324,000 salary and a favorable contract for one vendor, Scientific Games Corp. Bishop Woosley, the current lottery director, makes $165,000 a year.

But Cox and others fault how the state divvies up lottery cash, saying it spends more on prize money than other states and devotes too little of the proceeds to its core mission. The North American Association of State & Provincial Lotteries, an industry group that includes the Arkansas lottery, says that 27 percent of U.S. lottery proceeds go to beneficial causes, and about 63 percent is returned to players as prizes.

Since its first year, the Arkansas lottery’s outlay for scholarships has never exceeded 21 percent, and for the past three fiscal years the total has been under 20 percent. The percentage for prizes, 64.4 percent for 2010, has never again slipped below 66 percent, and last year it was 67.7 percent.

“The scholarship check is the last check the lottery writes,” Cox said. “That comes after the ad contracts get paid, scores of people who work for the lottery get paid, the people who sell the tickets, the services that print the tickets and manage the games, after all the prizes get paid.”

He offered a contrast, Louisiana, which by law devotes 35 percent of its lottery take to education and just 53 percent to prize money.

“Arkansas’ percentage of proceeds to the cause is near the lowest in the nation, and to me that’s the most egregious thing,” said Cox, who opposes lotteries on the general grounds that they “shift wealth from the pockets of poor people.”

Halter said the percentage-to-scholarships argument is a familiar one.

“Traditionally opponents use that argument to undermine the lottery,” he said. “If you set the percentage too high and cut into the prize money, players don’t win frequently enough and the winnings aren’t high enough, so people stop playing.”

He said that the lottery’s professionals, required by law to maximize scholarship funding, know their mission.

“Think of it as a thought experiment. They are going to set the percentages at the levels their experience tells them will work best.” That’s not to say that oversight isn’t necessary, he said. “There should be oversight, and it is provided by lawmakers, by reporters delving into this issue and by the general public.”

Halter is also generally confident that lottery officials will find the right levels for marketing, though the provisional awarding of a contract to Little Rock advertising firm CJRW late last year generated sustained controversy and two official protests.

“You need oversight but you don’t want micromanaging,” Halter said. “The public and Legislature should evaluate big-picture policy decisions, and it’s totally appropriate for lawmakers and the public to evaluate whether lottery contracts are as strong as they should be.”

(Also see Lottery Scholarship Has Evolved Since Halter’s First Proposal)

Millions to Consultant
One such contract is the Camelot consulting arrangement. The auditors’ main complaint was that the consultants reap a percentage of adjusted operating income when it rises above $72.28 million, a figure auditors saw as too low. The lottery has topped that threshold every year, and it does not benefit by setting “a vendor performance threshold amount lower than operating income based on its worst year of performance.” State officials defended the deal, saying that negotiators had considered downward trends in making the deal in 2015.

“Despite our hopes of improvement, the reality of the situation was that the lottery returned $72.6 million [in fiscal 2015] just months prior to negotiating and signing the consultant contract,” the state response said. It added that “historical trends” suggested 2016 numbers would not improve, and that “proceeds would likely continue to drop each year.”

The lottery has paid Camelot $3.07 million since the beginning of the contract, Department of Finance & Administration spokesman Jake Bleed told the Arkansas Democrat-Gazette this month. “The lottery is in better shape than it has been in the past. We are moving forward and looking to the future of the Arkansas Scholarship Lottery.”

Through Bleed, Woosley said he was too busy with the current legislative session to be interviewed for this article, asking Arkansas Business to submit questions in writing. Those questions, sent on Jan. 9, drew no response, and Bleed said on Tuesday that Woosley would not be available to answer them until this week, well after Thursday’s press deadline.

One Camelot recommendation was spending more to promote the lottery. Marketing and advertising expenditures have varied from $4.3 million to $5 million a year, but Camelot’s five-year plan calls for about $6 million in fiscal 2018, $6.5 million in 2019, $7 million for 2020 and $7.5 million in 2021 and 2022.

The DF&A announced in early December that CJRW was the choice to handle a $34.5 million, five-year marketing and public relations contract, a decision that brought protests from two rivals, Mangan Holcomb Partners and a joint venture called Ghidotti-Vines, a partnership between Natalie Ghidotti of Ghidotti Communications and Brooke Vines of Vines Media LLC.

After State Procurement Director Edward Armstrong rejected the protests, Sharon Tallach Vogelpohl of Mangan Holcomb, which has overseen lottery advertising for the past two years, issued a letter to Woosley comparing her firm’s compensation to CJRW’s expected pay.

She calculated that CJRW would get more, based on a 15 percent commission on spending for media placement, compared with a 5 percent commission for Mangan. While Mangan had charged agency fees that CJRW agreed to forgo, CJRW was still poised — by Vogelpohl’s math — to receive $759,965 compared with the $525,674 her firm received.

On Wednesday, a legislative subcommittee learned that CJRW had reduced its commission from 15 to 13 percent, providing significant savings, but lawmakers grilled Woosley and Armstrong on the procurement process and the conflict-of-interest issue.

The subcommittee chose not to approve the contract, but the full Joint Budget Committee kicked the matter back down to the smaller group for further discussion and review. The contract is scheduled to go back before the subcommittee on Tuesday.

Calls for Better Oversight
Cox, the Family Council lobbyist, wants more vigorous oversight of advertising spending — and less of it.

“One needs to ask this question: How much advertising does a lottery need to do?” he said. “I maintain that they have a monopoly on this kind of gaming. I think they could dial back the amount and be as diligent in contracting as possible.

“People think that because we are a faith-based group, Family Council must have biblical grounds for opposing lotteries. We have some, but the primary, obvious objection is the fact that lotteries prey mainly on poor people who can’t afford to lose the money.”

Lottery supporters call the preying-on-the-poor perception a myth, citing a national study by Vision Critical that found 44 percent of lottery players have incomes of $55,000 or more and that 77 percent make more than $25,000 a year. Figures from the DF&A say that 26 percent of Arkansans playing the lottery have incomes less than $25,000, and that 63 percent make less than $50,0000.

Advocates say the notion of “saving the disadvantaged” from spending too much on lottery games is paternalistic.

The North American Association of State & Provincial Lotteries, which reports that U.S. lottery sales topped $73 billion in 2015, says the key question is whether the less affluent spend an unduly large portion of their income on lottery tickets. “This has undoubtedly happened in some instances, just as it undoubtedly happened with junk food, athletic shoes and other consumer items.”

But it says restricting poorer people from buying lottery tickets would suggest that they “are somehow less capable of making decisions on how to spend a dollar than those of greater means,” or that they not entitled to the same entertainment and recreation choices.

Halter’s last word in defending the lottery came down to numbers. When put before state voters as an initiated constitutional amendment, the lottery got 648,122 votes to 383,467 against it.

“The public spoke on this in ’08, and they voted overwhelmingly for the lottery,” Halter said. “Since then it has produced hundreds of thousands of scholarships and hundreds of millions of dollars for them. What the critics should consider is what taxes they want to raise to support these students, or what scholarships they want to eliminate.”

Lottery Expenses by Year*

Game Prizes Retailer Commissions Gaming Contracts Comp. & Benefits Marketing & Advancement Education Trust Acct.
2010 $247.7 $21.6 $20.4 $6.1 $4.3 $82.8
2011 $307.5 $26.2 $24.1 $6.2 $4.6 $74.2
2012 $315.3 $26.5 $24.3 $5.9 $4.5 $97.5
2013 $292.1 $22.1 $22.1 $6.0 $4.4 $90.3
2014 $274.9 $23.0 $20.5 $5.9 $4.5 $81.5
2015 $280.5 $23.3 $20.6 $5.4 $5.0 $72.6
2016 $309.0 $25.7 $19.4 $5.2 $4.8 $85.3

Footnote: While the 2010 fiscal year began on July 1, 2009, the first lottery tickets were not sold until the following September.
*All numbers in millions of dollars.

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