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Communications and Marketing

Grote on the New Mexico Lottery

Assistant Professor of Economics and Business Kent Grote was tapped as an expert in a recent article on New Mexico’s broken lottery system in The New Mexican.

Can New Mexico save its ‘broken’ lottery?

By Thom Cole

The New Mexico Lottery was never a blockbuster. Still isn’t. Its sales of scratch tickets, on a per capita basis, are among the lowest of all state lotteries.

The promise that the lottery would pay full college tuition for qualifying undergraduates has been broken, a victim of profits not keeping pace with increases in tuition and the number of students qualifying for the scholarship program. This fiscal year, the lottery is projected to cover just 60 percent of a scholarship recipient’s tuition.

Launched in 1996, the New Mexico Lottery experienced steady growth in ticket sales for several years. Annual sales have jumped up and down since then.

The lottery had record sales in fiscal year 2016, but sales in fiscal 2017 were the lowest in 15 years. Sales have improved in fiscal 2018 but are projected to remain well below the average for the past decade.

“There’s no question the lottery is struggling, and it’s going to continue to struggle,” says educator Dan Salzwedel, chairman of the board that oversees the New Mexico Lottery.

Salzwedel and others say the cause is an 11-year-old state law that earmarks a minimum of 30 percent of lottery ticket sales for the college scholarship program. The argument is that the 30 percent rule is forcing the lottery to limit prize payouts for scratch tickets, making the tickets less attractive to players and driving down sales.

If the 30 percent rule were lifted, lottery officials say, the lottery could increase prize payouts for scratch tickets, attracting more play, increasing sales and producing more money for college assistance than is now possible with the rule.

But supporters of the 30 percent rule say it has been effective in forcing the lottery to lower its operating costs and increase college assistance. And there are a lot of students who want that assistance — in fiscal year 2017, about 29,000 received help.

The New Mexico Lottery repeatedly has asked the state Legislature to repeal the 30 percent law. Lawmakers have declined to do so.

Economists say it makes sense that higher prize payouts would lead to more scratcher sales for the lottery. The question is whether an increase in ticket sales due to higher payouts would more than offset the costs of those higher payouts and generate more revenue for college assistance.

Factors other than prize payouts also are at play, experts say.

New Mexico is a relatively poor state with an economy that has yet to fully recover from the Great Recession and a population that shrunk in 2016. The state gaming market also has suffered revenue declines in recent years, and the lottery faces competition from American Indian casinos, horse-racing tracks with slot machines, and veterans and fraternal clubs with slots.

“That makes for pretty low demand of lottery products,” says Kent Grote, a college professor in Illinois who studies state lotteries.

Scratcher sales

The New Mexico Lottery experienced its first decline in annual ticket sales in fiscal year 2005, when sales dropped nearly $8 million, to $134.7 million, from the previous fiscal year. Annual sales have averaged $141.5 million since then.

“That’s the whole lottery fatigue thing,” says Grote, a professor of economics and business at Lake Forest College in suburban Chicago. “That’s pretty normal, the sort of the life cycle of the lottery. … The attraction wears off. It’s just like anything.”

The rise and fall of New Mexico’s lottery fortunes are easiest to see in the past two years.

A $1.6 billion Powerball jackpot helped push ticket sales for the New Mexico Lottery to a record $154.4 million in fiscal year 2016. But sales plummeted to $126.1 million in fiscal 2017 as demand for Powerball and scratcher tickets fell. The New Mexico Lottery is projecting sales of $127.9 million for fiscal 2018.

The lottery offers an entire menu of games, including scratch, or instant tickets, and draw games, including its own numbers games like Roadrunner Cash and multistate games like Powerball.

Sales of scratch tickets make up the majority of revenues for the New Mexico Lottery, and those ticket sales have been volatile, as well, over the past decade or so. Lottery officials say there is a correlation between scratcher sales and what it has been able to pay in prizes to scratcher players.

Scratcher sales were $91.4 million in fiscal 2007 when the prize payout was 63.13 percent of sales. Sales dropped to $69.8 million in fiscal 2014 when the payout declined to 60.05. Sales increased to $83.1 million in 2016 when the payout rose to 63.29 percent. Sales dropped to $72.4 million in fiscal 2017 when the payout fell to 61.21 percent.

According to La Fleur’s Magazine, which tracks state lotteries, New Mexico’s scratcher sales were $35 per capita in calendar year 2017. More than half of state lotteries had per capita scratcher sales of more than $100 last year.

Only four other state lotteries had lower per capita scratcher sales than the New Mexico Lottery did in 2017, La Fleur’s has reported. Scratcher sales were off 10 percent in New Mexico last year, the worst decline of any state lottery.

The New Mexico Lottery is projecting a prize payout of 60.18 percent for scratchers in fiscal 2018 and a further drop in scratcher sales. Lottery officials say a higher payout would make for a better product and increased sales.

“If we don’t put out a good product, they [players] don’t buy it,” says David Barden, chief executive officer of the New Mexico Lottery.

The scratcher prize payouts of the neighboring states of Texas, Arizona, Colorado and Oklahoma range from 65.5 percent to 71 percent, according to the New Mexico Lottery.

Salzwedel, the chairman of the lottery board and the former executive director of the New Mexico Activities Association, says the Legislature has hindered the lottery by requiring that a minimum of 30 percent of all sales go to college assistance, limiting its ability to pay higher scratcher payouts and still cover the lottery’s operating costs.

“Handcuffed is a polite way to put it,” he says. “We have a harness on us.”

Pie slices

Only New Mexico and about a half-dozen other states have laws requiring that a minimum amount of lottery ticket sales go to beneficiaries, such as education.

The Louisiana Lottery has a 35 percent mandate, and its ticket sales grew 22 percent over the past decade, according to data provided by the North American Association of State and Provincial Lotteries. Other state lotteries with mandates also have been successful, including those in New Jersey, New York and Pennsylvania.

Most state lotteries return less than 30 percent for beneficiaries. Of the states that return 30 percent or more, most have lottery-run slot machines.

Some states — including Delaware, California and Oklahoma — have repealed percentage lottery mandates like the one in New Mexico.

The Oklahoma Legislature last year repealed a 35 percent profit rule for its lottery, allowing it to increase prize payouts to try to attract more play. The result: Oklahoma Lottery ticket sales were up 40 percent in the second half of 2017.

New Mexico Lottery officials point to the increased sales in Oklahoma as evidence that the same could happen here if the 30 percent mandate were lifted.

They say New Mexico is getting a big slice of a small pie with the 30 percent rule. It would get a small slice of a bigger pie without the rule, they say.

Officials say that without the 30 percent mandate, the percentage of ticket sales going to college assistance would go down, but the amount of money for the program would go up because of increased scratcher sales due to higher prize payouts. Lottery officials estimate scratcher sales profits would increase by $25.7 million over five years.

Barden says there is a sales ceiling for the lottery, but “we are just so far away from it. … The students, they are the people who are losing.”

There are skeptics.

According to an analysis by the Legislative Finance Committee, “The significant volatility in lottery sales over the last two decades makes it difficult to pinpoint low payouts on scratcher sales as the sole reason for falling revenues. Several other economic and demographic factors are likely to influence lottery ticket sales.”

Grote, the professor at Lake Forest College, says state lotteries often turn to bigger prizes to generate player excitement and more ticket sales. He says the New Mexico Lottery could see higher scratcher sales as a result of bigger payouts.

“But eventually that will go away,” he says. “There is a lot more competition for those [recreational] dollars than there used to be.”

A dying patient?

Of New Mexico Lottery sales in fiscal 2017, 53.3 percent was paid in prizes, 30 percent went to college assistance and 16.7 percent to operating costs. The lottery wants to use some of that 30 percent to increase prize payouts for scratch tickets.

The Legislature enacted the 30 percent mandate for the lottery to force it to spend less on operating costs and produce more for college assistance.

In fiscal year 2007, prior to the 30 percent rule being enacted, the New Mexico Lottery’s operating costs totaled $28.9 million, or 19.4 percent of sales. Operating costs were $21.1 million, or 16.7 percent of sales, in fiscal 2017.

Think New Mexico, a nonpartisan tax-exempt organization in Santa Fe, pushed for passage of the 30 percent mandate and has been on the front lines in defense of the rule in the Legislature.

“It’s been a very good thing for students, which is the bottom line,” says Fred Nathan, founder and executive director of the public policy group.

Since the 30 percent rule took full effect in fiscal year 2010, the lottery has averaged $42 million in annual revenues for the college scholarship program. Prior to the 30 percent law being enacted, the lottery never produced more than $40 million for tuition assistance in a single year.

“We know what happens when there is no 30 percent,” Nathan says.

He says he isn’t convinced that the 30 percent mandate is behind the New Mexico Lottery’s struggles. He points to other factors, including the state’s economy, competition from American Indian casinos and management of the lottery.

Former state Senate Democratic leader Michael Sanchez of Belen, who sponsored the law setting aside lottery profits for college assistance, says he doesn’t believe allowing the lottery to spend more on advertising and prizes would result in more lottery sales.

Sanchez says the focus of government policymakers should be on finding money from other sources to supplement lottery profits and ensure the college assistance program covers the full cost of tuition for qualifying students.

That’s the promise the state made when creating the lottery, he says.

“That promise, in my opinion,” he adds, “has been broken.”

But state Senate Finance Committee Chairman John Arthur Smith, one of the most respected voices in the Legislature when it comes to money matters, supports lifting the 30 percent mandate.

Smith, a Deming Democrat, says many lawmakers are comfortable with the lottery’s performance and some, particularly in the House, oppose gambling and would like to see the lottery go away.

He originally opposed a lottery but says it is now the law of the land and needs the tools to succeed the best it can.

“If the patient is dying on the operating table, you have to try something,” Smith says. “That is where the lottery is.”

–The New Mexican, March 17, 2018