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Kentucky Lottery: More than 'state-sanctioned gambling operation'

Jan 27, 2005, 10:18 am

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Kentucky Lottery

This is the first story in a four-part series on the Kentucky lottery and its local and state impact

Since it was founded in April 1989, it has generated nearly $8 billion in sales and contributed more $2 billion in revenue to the state treasury. But this multibillion-dollar enterprise is not your typical big business.

The billions in sales it has generated come not from the sale of goods or services but from the sale of tickets. The $2 billion in revenue it has produced for the state comes not from taxes but from proceeds off the sale of tickets.

It is the Kentucky State Lottery Corp., a unique entity that is a hybrid - part business, part state government, part state-sanctioned gambling operation and part non-profit scholarship and grant underwriter.

And all good for the state, according to Chip Polston, vice president of communications and government and public relations for the lottery corporation.

"Overall, I believe the lottery has been a great Kentucky success story, no matter if you see the organization as a business or as part of state government," said Polston.

"As a business, we have generated millions for retail customers and retailers. As an organization with fiscal and statutory connections to state government, we have generated millions for the general fund. As an organization dedicated to improving education and the lot of the disadvantaged, we have awarded millions in scholarships and grants, for literacy and reading programs, for affordable housing."

Polston used some numbers from lottery corporation reports, from fiscal year 1989 to fiscal year 2004, with record-shattering numbers, to support his case:

  • $7.930 billion - total revenue from ticket sales.

Sales over the last five fiscal years increased from $583.7 million in 2000 to $725.250 million in 2004, setting new records each year. The more than $725 million in sales in 2004 represented a per capita expenditure on tickets of $176.03 for each of the state's 4.120 million people.

  • $4 billion - revenue that was allocated for prize money (60 percent of revenue).

Prize money over the last three fiscal years increased from $384 million in 2002 to a new record of $439 million in 2004.

  • $2.120 billion - revenue that was given to the state treasury (27 percent of revenue).

The total includes $1.4 billion in proceeds that went into the general fund and $600 million in scholarships, grants and other special programs and expenditures. The total proceeds increased from $172 million in fiscal 2002 to a record $193 million in fiscal 2004. The amount that went to scholarships increased from $94.6 million, for 86,657 recipients, in fiscal 2002 to a record $142 million, for 111,000 recipients, in fiscal 2004.

  • $1 billion - revenue that was spent on corporation operating and marketing expenses (7 percent of revenue).

Administrative costs ranged from 6 to 7 percent since fiscal year 1989.

  • $810 million - revenue that was spent on retailer commissions and bonuses (6 percent of revenue).

There were 2,945 lottery ticket retailers in fiscal year 2004 for a per-retailer cut of $27,500.

While the numbers, increasing almost every year since fiscal year 1989, appear to support Polston's claim that the lottery has been a successful business enterprise, Polston stressed that the organization has been more than a business or a state-sanctioned gambling operation and winners have included more than the customers who have won prize money.

He said the most important numbers are those that add up to the more than $2 billion in proceeds - the money leftover after prize winners and retailers have been paid and administrative costs have been covered - that has gone to the state. Calling the amounts "dividends" and "investments," he uses those numbers included in the total to address concerns that have been raised in the past about the lottery.

The early concerns were that the lottery was nothing more than another form of legalized gambling and would increase gambling addictions and it also would entice the poor to spend their small incomes in the odds-against hope of getting rich.

Those concerns were raised by fundamentalist ministers, gambling addiction specialists and advocates for the poor when the lottery became a campaign issue in the 1987 gubernatorial race and a proposed constitutional amendment on the 1988 ballot.

A third major concern emerged after the amendment passed and the legislature set its funding formula. The original formula called for all lottery proceeds to be put into the general fund. That move angered educators and many state residents who thought, because of pro-lottery advertising, that the money would go to elementary and secondary education with some to higher education.

"The lottery has been a windfall for Kentucky, there's no doubt about that," said 22nd District state Sen. Tom Buford, R-Nicholasville, who represents Boyle County. "But it has been a mixed blessing.

"For one thing, I have the feeling that the wealthy generally aren't playing, that most players are lower-middle class to lower-class residents," said Buford. "And I also have the sense that the poor and those with a gambling habit are being drawn to lottery games, with little hope of winning more than few dollars.

"The odds of winning are like those of a meteor landing in my back yard, and the last time I checked, there aren't any craters back there," he said.

The biggest concern for Buford, though, is the one about education. While the situation has changed greatly in recent years with most lottery money now going at least to scholarships and grants, the senator believes the fact that Kentuckians were misled at the beginning still leaves a bad taste in many mouths.

"Most Kentuckians were led to believe that all lottery proceeds would flow to education but that did not happen. It was an unfortunate situation for the many people who voted for (the lottery constitutional amendment) with that understanding," he said.

Starting with the education concern, Polston noted that the legislature restructured the formula in the late 1990s so that a majority of the proceeds would go to scholarship and grant programs. While the record shows that $1.4 billion of the $2.120 billion that has gone to the state since fiscal 1989 has gone into the general fund, he pointed out that some of the lottery money put in the general fund actually has gone to K-12 education.

In fiscal years 1993 and 1994, the legislature earmarked a special allocation of $214 million of the lottery money put in the general fund for K-12 education, Polston said.

And while the money doesn't go directly to the state Department of Education, the restructured formula for allocating lottery proceeds given to the state has resulted in the awarding since fiscal year 1999 of more than $500 million in scholarships and grants under three different programs.

The original formula devised by the legislature required that all lottery proceeds go to the general fund, except for special allocations; under the formula put in place in fiscal year 1999, 80 to 90 percent of the proceeds have been are earmarked for scholarships with 10 to 20 percent going to the general fund, and in fiscal year 2006 100 percent of the proceeds will go to scholarships and grants.

In addition to the special allocation of $214 million in lottery proceeds to K-12 education in fiscal years 1993 and 1994, Polston noted that the legislature also to date has earmarked more than $15 million for early childhood reading and literacy programs.

Also, the legislature made another special allocation of $32 million of lottery proceeds to pay a one-time bonus for Vietnam veterans.

Regarding the concern about how the lottery would take advantage of the state's economically disadvantaged, Polston cited lottery corporation research that "clearly refutes the claim that the lottery preys on the poor."

Polston pointed to the "Kentucky model" of a "typical lottery player," and it shows that he or she is a "median income, employed, married Middle American" with an income in the range of $30,000 to $50,000 a year and is a high school graduate with at least two years of post-secondary education.

In addition, he said that a look at each income group shows that the "highest percentage of people of any income demographic (group) who have never played lottery" are in the group whose income is below the poverty level.

Furthermore, Polston said that the research also shows that people with an annual income of $75,000 buy lottery tickets "three to four times more often" than people who earn $25,000 a year.

While the lottery does not victimize poor people, Polston said it has helped some of them. He noted that, in another special allocation of lottery money sent to the general fund, $21 million was given to the Kentucky Housing Corp. in fiscal years 1999-2003 to build more than 2,770 units of housing for "some of the state's neediest citizens."

Regarding the concern that the lottery would increase gambling addiction in the state, Polston said the corporation has done what it can to prdvent that from happening. "We have taken the gambling issue very seriously and taken what we think is proactive action to address the issue," he said.

Actions by the corporation have included providing funds to increase the number of compulsive gambling counselors in the state.

"When we started in 1989 there was only one compulsive gambling counselor in the entire state, and he was in Louisville," said Polston. "Now there are 20 such counselors, in different cities and towns around the state, and more are in the pipeline."

Also, the corporation has developed a logo and set up an 800 hotline number that rings into a clinic in Owensboro where referrals are made to Gamblers Anonymous counselors around the state, he said.

The phone number is 1-800-GAMBLER and the logo is "play responsibly." Polston said that both the number and logo have been placed on signs at every lottery play station in every ticket retailer's store in the state and also have been printed on many tickets.

"We understand the concern about gambling, but we believe we have taken steps to address the potential problem," he said. "We consider these steps precautionary because our research shows that the vast majority of lottery players play responsibly and responsibly."

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