Ed Lane: The Kentucky Lottery celebrates its 20th anniversary this year. As its president and CEO since 1993, how would you describe the lottery’s successes over the past two decades?
Arch Gleason: The lottery has had a relatively moderate, but consistent, growth pattern. On an annual basis, it has averaged a 3 to 4 percent sales increase. Fifteen years ago when I joined the lottery, sales were just under $500 million. Today, we’re shooting for $800 million. In 1993, the lottery profits were just under $100 million, and today we expect to earn over $200 million. The growth in profits has been even more dramatic than the growth in sales.
EL: How are the profits from the lottery invested?
AG: Nearly all of the lottery profits are allocated to scholarship programs. The citizens of the commonwealth, for a long time, had a serious concern about the lottery’s money not going for education. They believed it was going to be dedicated to education when they voted on the lottery referendum back in 1988.
In the legislative session of 1998, Senate Bill 1 directly addressed that lottery funds would be used primarily for educational purposes. The legislation directed that 100 percent of the lottery revenues would gradually be dedicated to scholarship funds with the exception of $3 million annually being devoted to adult and early childhood literacy. In the most recent budget adopted in 2008, the General Assembly changed slightly, based on need, the funding formula for scholarships.
EL: Are most of the lottery’s year-to-year changes related to marketing?
AG: Yes, and revisions of the games. In the United States in particular, the growth over the last 10 to 15 years in lotteries has predominately been in a couple of different games. The states that expanded to more aggressive forms of gaming – like KENO and the video lottery – have had significant growth in revenues; two or three times the growth of lotteries like Kentucky, which stayed with more traditional games. By traditional, I’m talking about the instant scratch-off style ticket and the online games (the lotto-style game, Powerball, pick three, pick four and a handful of games in between those styles of games).
Surprisingly to me, the growth in the United States over the last decade has been significant in the scratch-off product. That’s really a demonstration of players wanting instant gratification. They enjoy a game where they can play and know the outcome – win or lose – in a relatively short period of time.
There’s also a modest amount of entertainment in actually scratching off the tickets.
EL: What is the lottery’s future in Kentucky?
AG: That’s really in the hands of the policymakers – the General Assembly and the governor.
The current statute mandates that the lottery periodically study games that are offered in other U.S. jurisdictions. So on an ongoing basis, I’ve submitted studies to governors and the leaders of the General Assembly on options available to the lottery. The studies included games like KENO and expansions to video lottery/slot machines at race tracks. In Canada, several of the lotteries actually operate casinos, and elsewhere around the world you find expanded lottery operations beyond what is customary in the United States.
EL: What types of changes does the Kentucky Lottery typically make in its annual business plan?
AG: From time to time, we discuss options, but for the most part we try to improve the products. We have to keep the players’ interest.
EL: How much of your organization’s efforts are involved in making sure the integrity of the lottery is not tarnished due to a breach in security?
AG: Obviously, integrity is an integral part of the success of the lottery, not only as an institution but also in the eyes of the players. The designs of the games are built on a high level of security. Scratch-off tickets are designed in such a fashion that they are nearly uncompromiseable. The same thing is true of computerized games. From an institutional standpoint, we insist on financial integrity and accountability; that is something that has been emphasized. In part, that was one of the reasons I was hired as president of the lottery back in 1993. I came from a financial background. My previous history in government service in West Virginia had demonstrated that I could run the lottery with a high degree of professionalism and integrity.
Actually there is some risk in any business. The lottery is in the luck business. Sometimes luck doesn’t run as well for us as it might otherwise. As a matter of fact, we dubbed 2005 the “year of the player” because the players actually won about $20 million more than they statistically should have. The players had a banner year. In a year or two, the pendulum swung back in the lottery’s favor. Over a 10- or 12-year cycle, the predictability of the games’ results are reliable. But the shorter the period, the more unlikely it is that you’re going to mirror the statistical probability.
EL: Kentucky law limits the use of advertising to promote the benefits of the Kentucky Lottery. What legislative changes do you believe would be appropriate?
AG: Every lottery has an implied rather an expressed restriction. The lottery is expected to advertise with the dignity a state institution would be expected to utilize. We hold back on humor and do not over emphasize the win-ability of the games. From a restriction standpoint, there is one that Kentucky has: Our law specifically prohibits mentioning the beneficiaries of the programs funded by the lottery in an advertisement for the lottery.
Most state lotteries enjoy a significant indirect benefit by advertising about the beneficiaries’ use of the lottery’s proceeds. If you were to go to Georgia and ask people on the street about its lottery, I’d be stunned if they didn’t all make reference to the Hope Scholarship program and what it has meant for the universities and colleges in Georgia. Over 90 percent of college students in Georgia benefit from the scholarship program.
EL: Does the Georgia lottery provide all of the funding for the Hope Scholarship?
AG: Yes. The Georgia Lottery is much larger than Kentucky’s. It has about $3 billion in sales, and its profit is probably approaching $700-800 million on an annual basis.
EL: What percentage of gross revenues are allocated to retail sales expenses, administrative and security costs, payments to winners and other expenses?
AG: Historically, since the beginning of time and through January 2009, the lottery has created over $11 billion worth of sales, and profited just under $3 billion, which is 26.3 percent. The players have won in that time frame about $6.8 billion. Within the next couple of months, the lottery will actually have paid over $7 billion in prizes to players, and we’ll have transferred over $3 billion dollars of profit to the commonwealth.
EL: What percentage of the lottery’s sales are paid out to the winners?
AG: It’s been 60.2 percent since the beginning of time; the national average is pretty consistent, 50 to 60 percent.
EL: Speaker of the House Greg Stumbo proposed that video slots for Kentucky’s racetracks, if approved by the legislature, would be administrated by the Kentucky Lottery. How difficult would it be for the lottery to assume management responsibility for video slot-machine gaming?
AG: House Bill 158 is before the General Assembly and would place video slots under the Kentucky Lottery Corp. For a number of years, the lottery has been in those discussions and made the argument that utilizing the Kentucky Lottery makes a lot of sense. We do have the infrastructure in place that would allow the lottery to make the implementation occur much faster than creating a new entity. Our track record as a successful, well-run, well-managed, professional, high-integrity organization would help create a high degree of public confidence.
The lottery would create a new division that could implement video slots at least six to 18 months faster than an organization that doesn’t exist.
EL: If video slots go to racetracks, would that mean the business would be seasonal?
AG: Video slots would be a year-around operation. The bill contemplates that tracks would be able to offer video slots in the same schedule that they offer simulcasting and racing days.
EL: Potentially, how much could racetrack gaming add to the state’s tax coffers?
AG: I think video slots would have a $700 million collective net win for the state.
The proposed statute provides something in the neighborhood of a 28 percent tax rate for the state; after five years, any revenues over $100 million per location would be taxed at 38 percent.
There are a wide range of state shares (percent of winnings) among the states that offer these types of games; it generally could be anywhere from 30 to 50 percent, depending on how the games are offered and the underlining purpose to be served by the funds. The rationale for creating the enterprise in Kentucky is to support horse racing.
EL: Does this bill dedicate tax revenues to specific users?
AG: There are specific purposes set up in the bill. A little over $110 million worth of relief is for motor-vehicle and motorboat ad valorem taxes. There’s also some financial support for county jails, economic development and education in general.
EL: You have served as president of the World Lottery Association since 2006. What are some of the major differences between the Kentucky Lottery and other lotteries in the United States and foreign countries?
AG: I was elected to the WLA executive committee in November 2004, named the first vice president in November 2004, and I moved up to president on Feb. 1, 2006.
The U.S., and its individual states, for the most part, are more conservative about gaming than most of the other parts of the world. In Europe, lotteries offer sports wagering. The lotteries were created in Europe after the Second World War to raise funds to rebuild sports facilities that had been destroyed during the war.
Nearly every lottery in the United States is a division of state government or, in the case of Kentucky, a corporation created by government for the benefit of government. So there’s a wide variety of how lotteries operate around the world.
EL: What is the mission of the WLA?
AG: Clearly one of the greatest benefits the World Lottery Association offers its members is the opportunity to develop a high level of professionalism in the work we do. WLA has 140 member lotteries in 75 countries on six continents that are doing $225 billion worth of lottery sales on an annual basis. WLA develops standards for security; Kentucky is the first lottery in North American to achieve certification by the World Lottery Association. Now WLA has about 135 to 140-plus members that have been certified.
EL: How will Kentucky’s economic downturn impact lottery sales?
AG: Actually the lottery’s done better than one might have expected. It’s on target from the standpoint of budgeted sales for the current year. In 2008, the Kentucky Lottery was fortunate enough to be up 4 percent over the previous year.