If you were trying to develop revenues for the state of Colorado, which would you rather do: Spend four cents to make six cents, or one cent to make ninety-nine cents? I thought about this while reading the latest public relations' "spin" story touting 1995 lottery sales records and the lottery's past financial history, as printed in both Denver daily newspapers and the Colorado Statesman.
The article reported sales of $2.4 billion from Jan. 24, 1983 through Dec. 31, 1995; of the lottery providing $686.8 million to the state and counties and cities for parks, recreation, wildlife and prison construction. Lottery players "won" $1.3 billion in prizes although that amount may not have actually been "paid" out. So what number WASN'T listed in those stories? The cost.
If you deduct prizes "won" and contributions from sales, the overhead was $413 million. In other words, it COST $413 million to give $686.8 million to the state, cities and counties. The story certainly should have mentioned the money made by Scientific Games and G-Tech, neither of which are Colorado-home-based companies.
It did mention the five to six percent commissions made by stores selling lottery tickets, totaling $141.5 million. When Gov. Romer unsuccessfully vetoed the Lotto bill in 1988, he produced a chart for legislators showing that for every $1 raised by lottery, 50 cents went to prizes, 30 cents went for prisons and bond interest and open space, and 20 cents went for administration overhead and advertising. His chart showed the same $1 raised by additional taxes on tobacco and alcohol would have only cost one cent for overhead.
If Colorado wanted to provide $686.8 million for the same purposes served by lottery funds, and did it though a $1 increase in "sin" taxes on tobacco and alcohol, the overhead cost would have been $6.8 million, not $413 million, and the consumer would have had $1.8 billion to spend or save.
But then, there would not have been as much FUN involved. Being curious as to whether it does cost four cents to make six cents through the lottery, as the rough assumptions provided by the lottery's public relations story and Gov. Romer's chart seemed to indicate, I reviewed the 1995 and 1994 numbers as printed in the Colorado Lottery Financial Compliance Audit for Fiscal Year 1995, ending June 30, 1995.
Going to the nearest round number, we had in 1995 gross ticket sales of $352 million, of which close to $101 million was available for distribution for prisons and open space. There was close to $67 million for overhead or roughly four cents to make six cents out of every dime available.
It actually was worse in 1994. There was $74 million available for prisons and open space and it cost $60 million in overhead or close to 45 cents of every dollar. Retailers do pretty well on lottery commissions and bonuses, better than $22 million in 1995 and $17.5 million in 1994. That is more than six cents on every ticket sold. Wages and other benefits are actually the smallest part of the overhead, $5.7 million in '95 and $5.2 million in '94.
The biggest costs, other than retailer commissions and bonuses are two: Cost of tickets and online vendor fees were $12 million in 1995 and $11.6 million in 1994, which breaks down to 3.4 cents per ticket in 1995 and better than 4 cents per ticket in 1994.
"Marketing and communications" cost $8.9 million in 1995 and $8.8 million in 1994. This points out an issue I raised to the Joint Budget Committee many years ago: There is no relationship between the amount spent on ads and the amount of gross sales.
The lottery commission spent just $120,000 more in 1995 than in 1994 on marketing and communication, and the gross sales were $65 million more. In the years when national lottery advertising figures were available, I was able to show the JBC that Colorado spent MORE on its advertising budget than any other state lottery in relation to gross sales recorded.
Shortly after my articles and presentation, the national gaming magazines stopped printing the information.
For those interested, the last published information was for the fiscal year ending June 30,1990. Colorado grossed $140 million and $8 million went for advertising and promotional costs. As a percentage of gross revenues spent on ads, Colorado was NUMBER ONE in the nation. The average state lottery spent 1.5 percent of its gross revenue on ads and promotion. Colorado spent 5.7 percent, nearly four times more.
The numbers had no correlation with how long the lottery had been in operation. Many of the new lotteries in 1990 spent half of what Colorado spent for ads and promotion as a percentage of gross revenue. Colorado is probably no longer "number one" in the nation on this expense, but that is a guess.
Compared to gross revenues over the past two fiscal years, the ad budget was 3.5 percent in 1994 and 2.5 percent in 1995. This was still higher than the average state, but not as bad as five years ago. The latest numbers available, as reported recently in the Denver Post, showed lotteries nationally grossing $34.4 billion, and spending $350 million on advertising, slightly more than one percent of gross.
Another "overlooked" area in the Colorado lottery public relations spin is the increase in compulsive gamblers tied in to lottery sales. The same Post story reported: "In the past two decades, the number of compulsive gamblers has jumped from 0.77 percent of the adult population to between 3.5 and 5 percent today....between 6 and 10 million Americans. "Of the 40,000 calls to the Council on Compulsive Gambling's national hotline, 52 percent were from lottery players." Those 40,000 phone calls were from gamblers who wanted help, a small percent of those addicted, but an indication of what could become a major source of white collar crime in Colorado.
Instead of spending $8.9 million for "marketing and communications", perhaps the lottery commissioners ought to consider taking slightly less than a million dollars from a budget that urges people to play the lottery and use it to pay for treatment of an addiction that wouldn't exist if the lottery weren't legal in Colorado.
Jerry Kopel writes a column for the Statesman based on 22 years past experience as a state legislator.
Copyright 2015 Jerry Kopel & David Kopel