State Lotteries Are Coming Up Snake Eyes

Revenues are down just when they're most needed

The cooling economy couldn't have come at a worse time for Ohio. With tax revenues this fiscal year likely to hit just $15.7 billion--$304 million less than expected--the state is struggling to fund new education programs that could cost $700 million annually. Why not turn to revenues from the state lottery, which are earmarked specially for education? If only Ohio could. Over the past three years, lottery proceeds have tumbled 8%, to $686 million. "I think [the lottery] is faltering," says state House Speaker Larry Householder.

Across the country, the story is much the same. Just a few years back, state after state bet that permitting a tepid form of legalized gambling would keep money rolling into state coffers. But despite their easy-money aura, lotteries haven't made the states rich. Lottery revenues are drying up as players grow more scarce and rival forms of gambling prosper. "The booming economy is not masking the long-term decline in lotteries anymore," notes John W. Kindt, a commerce professor at the University of Illinois in Champaign.

Indeed, the number of states that are seeing a slide in lottery profits keeps growing. In the last fiscal year, profits from 20 of the nation's 37 state lotteries fell. That's up from just eight states five years ago. Last fiscal year, annual lottery profits in Wisconsin, for instance, dropped 19%, to $110 million; in Texas they fell 8%, to $890 million, while Connecticut profits dipped 6%, to $254 million.

No one could have predicted this roll of the dice as states rushed to open lotteries in the 1980s and '90s. Legislatures promised the lottery would be a growing source of revenue--and in many cases, the money was pledged to support popular programs. Today, 14 states direct all lottery proceeds toward education, while five more target a portion. In Texas and Ohio, for example, lotteries foot 8% to 10% of each state's education bill, respectively.

So why the decline in lottery proceeds? Just like any other industry, lotteries today face much greater competition. Eleven states now have general casino or riverboat gambling, while Indian tribes have built casinos in 24 states since 1988. All are luring customers who once played the lottery. And that's not even counting the players lotteries have lost to online gambling--not to mention online stock trading.

SEDUCTION. But new rivals are only part of the problem. Many lottery games have done a poor job attracting younger people, so the pool of players is shrinking. To seduce more youthful consumers, states have tried new games: Illinois, Kansas, and Maine, for example, have launched scratch games featuring professional wrestlers. But so far, that hasn't been enough. And regardless of age, most players eventually tire of losing and quit. Consequently, it takes ever-increasing jackpots--such as those of Powerball--to attract players, but these games are harder to win. "It's a self-destructive cycle," says Kip Peterson, a consultant at Transnational Market Development Inc.

Moreover, bigger payouts translate into shrinking profits. Last year, for example, New York increased its payout per dollar of ticket sales to 65 cents, from 55 cents. So even though sales hit a record, the $1.43 billion in profits was 7% less than what the lottery brought in four years earlier.

Nor do the states have many other easy-money options. Interstate gambling laws prohibit states from selling lottery tickets over the Internet. And opposition to gambling has kept all but five states from installing popular video-lottery terminals. "The lottery is not what people made it out to be and never will be," says Texas legislator Paul Sadler. For most, counting on lottery revenues looks increasingly like a sucker bet.

By Robert Berner in Chicago

    Before it's here, it's on the Bloomberg Terminal.