Despite market challenges and a sagging economy, as a group U.S. lotteries continue to provide to worthy causes



Despite market challenges and a sagging economy, as a group U.S. lotteries continue to provide for these causes, transferring $17.8 billion in fiscal 2008, an increase of 1.5 percent over fiscal 2007.

Of that amount, nearly $15.5 billion was derived from $53.7 billion in sales of traditional lottery products and more than $2.3 billion was generated by electronic gaming devices in six states.

Traditional products include printed instant tickets and pull tabs, lotto, daily numbers games, keno and other online games sold at retail through computerized gaming systems.

It should be noted that the time period of this analysis doesn’t take into account the economy’s rapid decline in the last six months of 2008, since most lotteries end their year on June 30. Still, they experienced a considerably weakened economy throughout their fiscal year and performed admirably.

Table 1

Net revenue from traditional games was virtually the same as the previous year, so the only real growth came from gaming devices, which generated operating income 12  percent higher year to year. However, most of that was due to New York, which had its first full year of gaming at Empire City Casino at Yonkers Raceway, the state’s largest video gaming property.

Included in this year’s revenue report is financial data for each of the 43 lotteries operating in fiscal 2008, including sales, prizes, operating expenses, operating income, net income and revenue transferred to beneficiaries.

On average, U.S. lotteries paid out nearly 61 percent of total sales of traditional games in the form of prizes; they spent about 11 percent of sales on operating expenses (including retailer commissions, which generally range from about 5 percent to 7 percent of sales); and they generated operating income of about 29 percent of sales. (Note that these numbers add to more than 100 percent because some lotteries generate additional revenues from such things as retailer licensing fees and merchandise.)

Obviously there’s a wide range of variation from that average, affected by things such as sales volume, geography and population. As always, we remind readers that it is generally not appropriate to compare lotteries in different states. Numerous factors influence a lottery’s operations, including demographic characteristics of the population, urban versus rural geography, the range of product offerings, the competitive environment and promotion and distribution methods. Many of these things are out of a lottery’s control or are mandated by state policymakers.

Table 1A

While it would be difficult to account for how all these factors influence sales and revenue numbers in each state, certainly the prize payout  percentage (often determined by statute) and the ratio of instant and online games will have some impact on a given lottery’s bottom line. (These figures are shown in Table 2.)

For most American lotteries, instant games have much higher prize payouts than traditional online games such as lotto and daily numbers, so a lottery with a high percentage of instant games will generally return more prizes to players. As a result, the return to beneficiaries might seem low on a percentage basis but presumably more in dollars than it otherwise would be because higher prize levels should correlate with higher sales.

Nationwide, 58 percent of all traditional lottery sales came from instant games and pull tabs; 42 percent from online games, including lotto and daily numbers. Instant games continue their slight yearly increase in market share, gaining a percentage point over the previous year.

During fiscal 2008, six U.S. lotteries also offered video lottery terminals: Delaware, New York, Oregon, Rhode Island, South Dakota and West Virginia. Gaming machines of any kind are significantly different than traditional lottery products (and therefore the financial results for these machine operations are shown separately in Table 1A).

It is important to note that legislation enacted in each state is the primary determining factor of how much video lottery revenue is returned to governments. In addition, the four states with machines at racetracks (Delaware, New York, Rhode Island and West Virginia) share VLT revenue not only with the tracks but also with the purse accounts for horse and greyhound races. The expenses shown for those states include racetrack and purse allocations. The operating income from machine gaming shown in Table 1A should be combined with the operating income, net income or net to beneficiaries amounts from traditional games shown in Table 1 to obtain the relevant totals for each of these lotteries.

As a side note, West Virginia became the first lottery to offer casino-style table games in fiscal 2008, and they represent a new reporting challenge as they are quite different from both traditional lottery products and gaming machines. In this report, table game revenues and direct expenses are not included in West Virginia’s numbers, although the lottery generated additional net revenue of nearly $8.3 million from these operations during the year.

Table 2

A NOTE ON THE CHARTS ...

  Table 1 presents the revenue and expense results for all U.S. lotteries operating in the fiscal year ended June 30, 2008, and for New York (March 31), Texas (August 31) and the District of Columbia and Michigan (September 30).
  • Gross revenues are total sales minus total prizes paid, or the net gaming revenue for each lottery. (It should be noted that lotteries account for unclaimed prizes differently, usually depending on legislated requirements. Where indicated in the footnotes they are included as income and not deducted from current-year prize amounts since the amount of unclaimed prizes may or may not reflect current-year activities.)
  • Operating expenses are each lottery’s current-year expenses, including retailer commissions but excluding some identified non-operating items (such as interest).
  • Operating income is the net revenue generated by each lottery from current-year operations before non-operating items such as interest income, interest expense and any changes in the value of investments.
  • Net income includes current-year operating income adjusted for those non-operating items.
  • Net to beneficiaries represents the actual revenue transferred to the various funds that are beneficiaries of lottery revenues. The amount may or may not equal the net income from current-year operations depending on whether amounts were withheld from or added to retained earnings.