Lottery profits and school funds puzzle: math and language skills required

The State Board of Education has put a fifth of state school districts on a financial watch list. At the same time the Department of the Lottery is touting increases in sales record levels. How can schools be in trouble when all lottery profits go to the schools?

When considering the lottery's place in the state revenue picture, one needs to distinguish between two sets of figures. Like a private company, the lottery department reports its weekly, monthly and yearly sales. Like a private company profits are more significant than sales; what is important is how much the lottery produces for the state treasury. The amount transferred to the state, in effect, is the lottery's true "profit."

Caution must be taken when using the sales figure. It is a broad measuring stick for projecting the amount of money flowing into the state's coffers, and it can be misleading. In fiscal year 1988, sales were up $32 million (or 2.5 percent) over fiscal year 1987. But the more important figures, transfers to the state, were down $34 million (or 5.2 percent). Paul G. Vallas, executive director of the General Assembly's Economic and Fiscal Commission, said the public needs to be aware that while sales may be up at any given time in the year, the increase does not necessarily mean more state revenue.

Lottery Director Sharon Sharp pointed to three reasons for the drop in transfers from fiscal year 1987 to fiscal year 1988. First, "daily game players were very lucky," taking home $17 million more in prize money than the year before. Second, a new law channeled unclaimed prize money back into the year's final Lotto jackpot. Prior to 1988, unclaimed prize money was part of the profits. Last, and the only factor within the control of her department, was an increase in operating expenses: "Up a few million," she said.

The confusion over the difference between lottery sales and transfers pales beside the public's misperception of where the lottery money ends up. For a number of reasons, many believe that purchasing a lottery ticket translates into additional revenue for Illinois schools. It does not.

While all lottery profits must be transferred to the Common School Fund in accordance with legislation passed in 1985, the transfer is actually an accounting maneuver. Schools do not receive extra money from the lottery. When constructing an education budget, the governor and lawmakers do not consider lottery profits. Instead, they examine the entire revenue picture. When lottery profits are transferred into the Common School Fund, the education budget is already set. It makes no difference to Illinois schools where lottery profits are transferred.

Former state Rep. Charles Pangle, sponsor of the 1985 bill, admitted that transferring the lottery money to the school fund does not affect education spending. He had planned to introduce a second bill the following year that would have marked lottery money as truly additional money to elementary and secondary education. But Pangle resigned his seat in 1986 to become a recreation and resource administrator for the Department of Conservation, and there has been no meaningful discussion of a similar proposal since.

One of two senators who voted against Pangle's bill, Sen. John W. Maitland Jr. (R-44, Bloomington), today calls the law a "fraud." The senior Republican on the Elementary and Secondary Education Committee said that "it doesn't do a damn thing for schools" and added that he wastes "hours" explaining lottery transfers to constituents. Lottery advertising has added to the confusion since 1985. Maitland and others are convinced the misperception is in part fueled by the lottery's own ad campaigns tying the lottery to education.

Sharp defends lottery advertising that connects the purchase of a ticket to education funding. "By law [lottery] money is transferred to the Common School Fund. I have to say it goes to the Common School Fund because it does go there. If I was to say anything else, I would be lying," she said, though she is quick to emphasize that putting lottery money into the fund "makes no difference in how much is appropriated to schools."

March 1989 | Illinois Issues | 17

In 1986 a controversial lottery advertising campaign featured school children, and to many it strengthened the false perception that a direct link exists between lottery and education. "We have cut back on the image advertising that was confusing," Sharp said. But widespread public misunderstading still exists. Lee Milner, spokesman for the State Board of Education, said the accounting game makes little difference to the board. "It has proven a good way to promote the lottery," he said.

The lottery may not be a panacea for schools, but it is the fourth largest revenue source in the state behind income, sales and public utility taxes. In fiscal year 1988 the lottery brought in $524.4 million. Even those with a distaste for state-run gambling admit it is difficult to envision an Illinois without the current $500 million. Maitland and others are quick to point out that in fiscal year 1988 lottery transfers accounted for 4.4 percent of the revenues in the state's general funds, which combines the General Revenue Fund and the Common School Fund.

Lottery supporters frequently argue that the lottery accounted for 21.6 percent of the elementary and secondary education budget in fiscal year 1988. While technically true, a far more accurate figure would be the percentage of the lottery contribution to the general funds. Since the lottery accounts for 4.4 percent of the general funds, in actuality less than 4.5 percent of the elementary and secondary budget comes from lottery revenues. Put another way, the $524 million in lottery revenue does not translate into $524 million for Illinois schools. It translates into $524 million in additional state spending.

The $524 million comes from one of the most efficient lotteries in the nation. In fiscal year 1988, 40 cents of each dollar that consumers spent playing the lottery ended up in the state's coffers. Fifty-one cents was awarded to lottery winners, and another five cents went for retailer commissions and bonuses. Four cents of each dollar goes to the Department of the Lottery for expenses, which includes advertising and salaries.

What is today the state's fourth largest revenue source bounced back from near elimination in the late 1970s. In September 1979, after three consecutive years of declining sales, Gov. James R. Thompson recommended phasing out the lottery if the then-newly introduced daily game did not bolster sales. The daily games saved the lottery. Daily game sales in fiscal year 1980 were almost 50 percent of all sales, accounting for all the $21 million in growth from fiscal year 1979. Between fiscal years 1980 and 1982 the lottery's share of general funds rose from 0.4 percent to 2.6 percent. The lottery's share of general funds peaked at 5.2 percent in fiscal year 1987.

One problem with the growing reliance on the lottery as a revenue source is the volatility of sales. Bureau of the Budget Director Robert L. Mandeville in January adjusted his fiscal year 1989 estimate of lottery receipts from $525 million to $550 million. His legislative counterpart, Vallas, said he would be "more than thrilled" to have his fiscal year 1989 projections to be within 5 to 6 percent of his original estimates. "We are just learning about people's behavior. Gambling does not follow normal entertainment consumption patterns,"Vallas said. Although lottery officials label their games "entertainment," there is little direct relationship between per capita entertainment spending and that of the lottery.

The most reliable indicator for sales is the frequency of Lotto rollovers. Sharp said, "Lotto is the engine that drives all sales." Vallas agreed that there is a "direct relationship" between rollovers and sales of not only Lotto, but the instant and daily games as well.

In May 1988, a new Lotto format, "six of 54," was introduced. The new format decreased the odds of winning and thus increased the frequency of rollovers and larger jackpots. Two consecutive rollovers guarantee a double digit jackpot and free media coverage. Before the introduction of the new format, Lotto sales were stagnant at about $7 million a week. Since May, weekly Lotto sales are up almost a million a month. Mandeville said it appears a new baseline of lottery sales has been reached.

Throughout the lottery's 13-year history, each game introduced has taken a familiar route. Initial interest and higher sales are followed by an eventual decline in both interests and sales. Lottery officials were able to forestall a decline in Lotto sales by eliminating the unsuccessful Lotto 7 game in 1988 and starting up the new format. But state lotteries face the continual challenge to "top themselves," according to Sharp. "Lotto has been the biggest thing that has ever hit the lottery — ever. The worry of all lotteries now is what you do to beat Lotto. To find the new great game," she said.

The Bureau of the Budget believes there is still room for growth in Illinois lottery sales. Richard Kolhauser, deputy director of the bureau, points to the per capita spending on the lottery as proof that there is "headroom" for marked growth. Illinois ranks seventh in per capita lottery spending in the nation at $114. Massachusetts' $226 per capita spending is the highest in the nation. Of midwestern states, Illinois is first with Michigan second at $112. Per capita spending is Sharp's focus; "it is my mover," she said.

The lottery has prospered in the decade since Thompson nearly canceled it. It makes a significant contribution to state revenues, but it has not solved the financial problems of the schools. If you enjoy playing the lottery, buy a ticket. If you feel lucky, buy a ticket. If If you want to help schools, join the PTA.

March 1989 | Illinois Issues | 18