The Georgia Lottery has been a nationally recognized success and Georgia’s goals, administration and management have, over the years, proven successful and are a matter of pride in this state. I have been reluctant to join efforts to “force” through legislation goals for the Lottery and I have consistently supported any legislation asked for by the Commission.
But, in my opinion, after another look at the performance of the lottery, is that while it is certainly successful in some ways, and not the worst on any listing of lotteries in the country, Georgia’s Lottery is also certainly not at the top of the list in almost any category. We have highly-paid management and employees of the Lottery, and we should expect decision-making, goal-setting and action plans that reflect a desire to be the best in the country. So, I do not intend, at this point, to introduce or support any legislation affecting the Lottery, but I think we should all call on the management to set improvement goals and work towards being the best producing lottery in the U.S. or at the least start a pathway to improvement.
Toward that end, here are some thoughtful ideas on a starting point:
1. Administrative caps
The Lottery for Education Act specifies that — as close as possible — 35 percent of total lottery sales should be transferred back to the state to be used for education and an additional 45 percent of sales should be devoted to prize expenses. This leaves about 20 percent to be used for administrative expenses. The Georgia Lottery is currently under that recommended cap at about 16.49 percent. However, instituting a lower administrative cap could lead to more nominal dollars for education and transfer percentages closer to the 35 percent benchmark.
Top-selling lotteries systems in New York and California have administrative caps that are lower than Georgia’s, and the caps allow them to devote surpluses to their respective state treasuries. New York state law allows for 10 percent of video lottery gaming revenue and 15 percent of traditional game revenue to be devoted to operating expenses, while additional budgetary controls are also set in place through the yearly appropriations bill. The combination of these administrative caps allowed the New York Lottery to transfer a $455.7 million surplus in FY2014.
California has an administrative cap of 13 percent of revenues to be spent on operating expenses. FY2014 administrative expenses were only 12.4 percent of revenues, allowing approximately $30 million additional dollars in surplus to be returned.
As we discussed last week, there are some differences between the state agency and corporate lottery structures, but working towards a cap of even 15 percent of total sales would contribute approximately $60 million in additional dollars to education while only forcing the Georgia Lottery to reduce expenses by a relatively small percentage based on FY2014 sales.
2. Retailer commissions
Retailers currently receive 6 percent of gross sales as a commission for selling lottery tickets. Prior to 2011, retailers received a 5 percent commission on ticket sales, a 2 percent cashing bonus on all ticket validations at their location, and various other incentives for selling specific types of tickets with certain tickets yielding up to a 10 percent commission.
Of the five top-selling lotteries in FY2014, the retailer commissions ranged from 5 percent to 6 percent, with 1 percent to no cashing bonuses. Beginning July 1, 2016, pending the Governor’s approval, retailers will be eligible for additional incentive bonuses in years after $1 billion is transferred to the Lottery for Education Account. However, “incentive bonus” is not defined by the Lottery for Education Act, and revenues have exceeded the previous years in all but three years since the lottery began in 1994.
Reducing the flat percentage rate, removing or defining incentive bonuses, or increasing the threshold for incentive eligibility after a certain number of years at the $1 billion mark would allow the lottery to keep retailer commission costs down while still rewarding retailers who sell lottery products to the public.
3. Gaming contracts
The Georgia Lottery currently holds contracts with two companies that provide the necessary ticket terminals, software, and printing and distribution of instant win games. Under these contracts, the Lottery pays out 1.15 percent of all net ticket revenue for management of ticket terminals and software, and an additional 0.99 percent of net instant win games sales for the printing and distribution of instant win games.
Gaming contracts are expenses that are directly dependent on the annual lottery sales. Reevaluating contracts with outside vendors to consolidate services could avoid multiple fees. Although the current percentage that the Lottery Corporation pays to one of its major vendors is set to decrease with the next contract renewal, a provider that offers all necessary services may provide a rate that decreases the total percentage that is being paid for all outside services. The savings in the area of gaming contracts could be directly moved to education.
As mentioned in the previous column, the median and average salaries for FY14 show a large disparity in earnings of Georgia Lottery Corporation employees. The Lottery for Education Act limits the amount of bonuses that lottery employees can receive, but it does not impose any restrictions on the amount that employees’ base salaries can increase or decrease. Action by the Board or amending the Lottery for Education Act to include a percentage that overall expenses cannot rise above in a single year would allow salary expenses to be kept at a reasonable rate. Limits on pay increases could also decrease the large gap between top-earning individuals at the management level and general staff members.
5. Institutions receiving HOPE funds
There has been negative publicity concerning higher student loans and low graduation rates at proprietary institutions. Some of these institutions receive HOPE funds. There does not appear to be readily available separate data on graduation rates of students receiving HOPE scholarship funds at these institutions. But, there is an argument that could be made that schools with poor graduation rates should be influenced to improve in order to continue to receive HOPE funds. Probably a “sticky wicket” but an area that deserves attention.
I may be reached at
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E-mail at Jack.Hill@senate.ga.gov
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