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Another look at the lottery
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In this week’s column we will look at contract fees and the relationship between prize payout rates, transfers to the Georgia treasury, and pending legislation.

Contract fees total $90 million
The second largest administrative expense for Georgia Lottery Corporation is contractor fees. The Lottery Corporation primarily contracts with two gaming vendors; Scientific Games and International Game Technology. Scientific Games provides marketing services and market research. Additionally, they handle printing, warehousing, distribution, of instant game tickets. The second vendor, International Game Technology (IGT), manages ticket transactions through a centralized gaming system. Payments to these vendors are based on ticket sales and in FY2016, payments equaled more than $90 million.

Should the contracts be rebid?
The state audit noted that GLC has been utilizing the same two gaming vendors since 2002 and has not rebid the contracts since. Therefore, it is unclear whether GLC is getting the best rate for services and may be missing out on savings that could result from rebidding the contracts to the open market.
The Department of Audits found that overall; GLC’s expenses were similar to lotteries in other states. In FY15, GLC’s expenses, minus prizes and retailer compensation, represented 4.3 percent of net sales, below the national average of 6.7 percent.

Striking a balance between
prize payouts and sales
The Georgia Lottery’s primary purpose is to maximize revenues for pre-kindergarten and HOPE. The higher the ticket sales, the more proceeds will be transferred to the state. Finding the optimal payout rate is crucial because, according to the GLC, prize payout rates are the principal driver of sales and greater sales means more money in the state coffers for education. A prize payout rate that is too low could result in lower sales and therefore less proceeds.
If the payout rate is too high, although sales may be higher, expenses will also be higher and less money will be transferred to the state. Therefore, finding the optimal payout rate is critical for driving sales and maximizing revenue.

Is faulty research
driving decisions?
The GLC determines the optimal payout rate through private market research. For example, a 2013 study commissioned by GLC found that every 1% increase in the prize payout rate should result in an additional $13.5 million in additional revenue. However, the audit performed by the Georgia Department of Audits and Accounts found fault with the research methodology and the origin of the research.
Issues included a lack of statistically significant findings, omitted variables, and the fact that the research was performed by a GLC subcontractor, which could be seen as a conflict of interest[1].

Payout has increased
While the Georgia Lottery for Education Act only mandates that the GLC pay out “as nearly as practical” at least 45 percent of lottery proceeds as prizes, the audit found that since fiscal year 1994, the prize payout rate has increased from 51.6 percent to nearly 65 percent in fiscal year 2015. Georgia’s prize payout rate is comparable to other states, and ranks 12th out of 44 in overall payout rates.
Next, we will look into the history of transfers for education and purposed legislation.
As always, I welcome any questions you may have.

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