Lottery retailer commission rates

From Bend.com news sources

February 16 - In a December 16, 2004 letter to the Lottery Commission, Governor Kulongoski stated that with the addition of line games, he expected the Commission to also examine the current commission rate structure. During the past six weeks I have received several thousand emails, phone calls, letters and personal visits from representatives on all sides of the issue of retailer commission rates for Video Lottery. Two positions have emerged with very different methods of maximizing revenue for Oregon, while providing a reasonable rate of return for our Video Lottery retail network.

I. Retailer Network

Just six months ago, Video Lottery retailer commissions were reduced by 10%, the largest reduction in the history of Video Lottery. This reduction has caused financial difficulty for many retailers, although the number of retailers has remained at 2,000.

Most Video Lottery retailers (1,200) throughout Oregon receive less than $35,000 per year in Video Lottery commissions. Retailers in smaller towns are particularly financially vulnerable to additional reductions in commission rates. It is important to maintain a diversified statewide Oregon lottery system rather than forcing rural Oregonians to travel to three or four cities along the I-5 corridor to access lottery games much like traveling required to visit casinos.

Video Lottery has been very successful, producing $600 million for State services in 2003-2005. In addition, the retailer network produces substantial income for Oregon with traditional lottery sales, independent of Video Lottery sales.

Public education is the primary beneficiary of Lottery transfers to the State, receiving $445 million during 2003-2005, and over $2.1 billion since 1995.

It is important to insure the continued strength of Video Lottery to produce over $600 million of base funding for State services while attempting to introduce the new product of line games.

II. State Services

Many vital State services are facing program reductions including the State Police and Education. This has placed extraordinary stress on the State¡¦s budget process and has resulted in a careful review of the Lottery¡¦s goal to maximize revenue for Oregon.

Governor Kulongoski requested the Lottery Commission to authorize line games only because of the need to provide an adequate and stable revenue source to fund the Oregon State Police Patrol program for important public safety and economic stability.

Governor Kulongoski has personally told me several times that consistent with the statutory guidelines of maximizing resources to the state while providing the retailers with a reasonable rate of return, he would also like the Lottery to produce additional revenue for State services, including Education.

III. Lottery Commission

The Lottery Commission has carefully reviewed studies which place rates from 15% to 35%. Rates began at 35% and have been reduced over the years to the present rate of 28%.

Lotteries are complex businesses and past experience has shown that simplistic, yet dramatic, changes can result in diminished sales and diminished State revenues:

„X Texas reduced prize payout percentages in 1997. Sales and revenue dropped dramatically. Sales still have not surpassed 1997 levels even after corrective action in 2000.

„X Wisconsin cut advertising in 1993. Subsequent lost sales greatly exceeded the saved advertising costs. It was determined that every advertising dollar produced a $25 gain in sales.

The Lottery Commission has implemented and reaffirmed the finding in the 1997 KPMG Study which stated: ¡§The study team believes that changes to compensation should be implemented in a cautious manner over a period of time.¡¨ (KPMG, at p. 54)

IV. Director¡¦s Proposal

No one questions the need to maintain the base level of State funding provided by the Oregon Lottery. No one questions the need for additional services in Public Safety and Education. Lottery staff has worked exceedingly hard to develop a proposal which can produce both desired outcomes.

We have re-examined the base assumptions of my January 5, 2005 proposal. One difficult problem was that our gaming central system currently does not separate commission rates by game. This meant that we could not pay different commission rates for poker games and line games. By shifting priorities and resources, we can expedite changes to the central system allowing us to separate commissions by game. This will enable the Lottery to pay video poker commissions consistent with our contract for poker games, which was signed less than one year ago. The Lottery Commission determined this was a reasonable rate of return to Lottery retailers for the sale of video poker games and this will maximize State revenue by protecting the $600 million base revenue from these games.

Line games are a new product which will reside on almost all of the same Video Lottery terminals (VLTs) already in place throughout Oregon. The Lottery will purchase new software and computer chips to place in these VLTs which will allow them to offer line games as well as video poker games. Because line games will not significantly increase costs to retailers, and will add incremental sales, I propose a new flat commission rate for line games of 15%.

V. Process

This proposal is simply the beginning of rule-making to formally adopt a rule through an open, public process. There will be a public hearing at the Oregon State Fairgrounds on March 25, 2005 at 9:00 a.m.

I anticipate that in April, perhaps at a special meeting, the Lottery Commission will adopt a formal rule setting the commission rate for line games. After the public hearing process the Commission may adopt a rate different than my proposal today.

Dale Penn, Director
Oregon State Lottery