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F I S C A L I M P A C T R E P O R T

SPONSOR Sanchez, M.

ORIGINAL DATE

LAST UPDATED

1/29/07

3/6/07 HB

SHORT TITLE

Lottery Board & Fund Distribution

SB 364/aSFC/aSFL#1/aSFL#2

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

$4,438.0

$6,680.0 Recurring

Lottery

Scholarship

Success Fund

(Parenthesis ( ) Indicate Revenue Decreases)

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

($4,438.0) ($6,680.0) ($11,118.0) Recurring

NM

Lottery

Authority

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to HB 87

SOURCES OF INFORMATION

LFC Files

US Census

Responses Received From

NM Lottery Authority (NMLA)

Think New Mexico

Higher Education Department (HED)

Department of Finance and Administration (DFA)

Senate Bill 364/aSFC/aSFl #1/aSFl#2 – Page

2

SUMMARY

Synopsis of Senate Floor Amendments

Senate Bill 364 was amended twice on the Senate Floor. Senate Floor Amendment #1 removed

the changes to the NM Lottery Authority Board, restoring the board to current law. Senate Floor

amendment #2 changes the title to reflect the change made by the first floor amendment.

Synopsis of SFC Amendment

The Senate Finance Committee amended Senate Bill 364 in the following ways:

•

Changes the title to include “NAMING THE TUITION SCHOLARSHIP THE

“LEGISLATIVE LOTTERY SCHOLARSHIP."

•

Changes the political party membership of the board to no more than five can be from the

same political party.

•

Adds a new responsibility of the NM Lottery board to support problem gambling and

provide information to players.

•

Phases-in the minimum distribution to the scholarship fund to 27 percent until December

31, 2008 and then 30 percent thereafter.

•

Changes the date for distributing revenue to the last day of the month following the

receipt of revenues to the scholarship fund.

•

Changes references to conform to new title. (See Technical Issues for more information)

Synopsis of Original Bill

Senate Bill 364 amends the New Mexico Lottery Act in the following ways:

•

Requires the New Mexico Lottery Authority (NMLA) to obtain board approval for

procurements greater than $75 thousand.

•

Places NMLA under the state procurement code

•

Adds two members to the NMLA board to represent four-year and two-year higher

education institutions

•

Requires NMLA to transmit 30 percent of gross revenue for the month to the state

treasurer for deposit into the Lottery Scholarship Fund (“Fund")

•

Eliminates the reserve fund

•

Requires that a copy of the annual audit be delivered to the legislative council service

library

The effective date of SB364 is July 1, 2007.

FISCAL IMPLICATIONS

Senate Bill 364 as amended would change the distribution to the Fund from net revenue—

revenue after expenses—to a flat 27 percent of gross revenues until 12/31/2008 and 30 percent

thereafter. This would add approximately $4.4 million in FY08 and $6.7 million in FY09. Half

of FY09 is at the 27 percent rate and the other half is at the 30 percent rate. The estimate is based

on the difference between the DFA/LFC consensus estimate of lottery revenue and that estimate

modified to incorporate the increased distribution. Over the last six years, the share of revenues

distributed to the Fund has average 24 percent.

Senate Bill 364/aSFC/aSFl #1/aSFl#2 – Page

3

Table 1: Fiscal Impact

FY07 FY08 FY09 FY10 FY11 FY12

Estimate Estimate Estimate Estimate Estimate Estimate

Total Revenue

$143.75 $146.14 $148.36 $151.17 $154.20 $157.30

Net Revenue - Current Forecast $34.50 $35.07 $35.61 $36.28 $37.01 $37.75

Net Revenue - SB 364 as Amended

$39.46 $42.28 $45.35 $46.26 $47.19

Fiscal Impact

$4.38 $6.68 $9.07 $9.25 $9.44

Share - Current Law

24%

24%

24%

24%

24%

24%

Share - SB364

27%

29%

30%

30%

30%

NMLA reports that this revenue would come out of their operating costs first but that lowering

prize payouts and cutting advertising expenditures may be necessary. Total operating expenses

are approximately $5.6 million so there is not much room for $4.4 million in cuts required. Prize

payouts, as a share of revenues, average approximately 55 percent, 5 percent above the statutory

minimum.

NMLA has identified options facing it to meet the 30 percent target:

•

Prize Percentage Payout:

The Lottery’s prize percentage payout, which determines the amount of dollars that

players receive as prizes, may be reduced by approximately 3% (or $4.7 million.) In

other lotteries, reducing the prize percentage payout has resulted in lost sales.

However, we are unable to predict with any degree of certainty what the impact on

sales in New Mexico might be.

In order to reduce the prize percentage payout effective July 1, 2007, all of the

Lottery’s instant tickets will need to be removed from 1,100 retail locations and be

replaced with tickets with a lower prize percentage payout prior to July 1, 2007. This

has resulted in litigation by players in other states.

•

Advertising

The advertising budget would be cut by approximately 50% (or $1.5 million),

reducing or eliminating the promotion of new and existing lottery games, current

jackpot amounts and the Lottery Success Scholarship program.

•

Promotions:

The sponsorship of statewide and university events and promotions would be reduced

or eliminated; as would retailer equipment such as instant ticket vending machines,

electronic store signage, computer equipment and lottery information centers.

•

Retailer Commissions & Incentives:

Retailer sales commissions, which are currently at 6%, may be reduced to 5% and

sales incentives eliminated. Cutting retailers’ commissions may negatively impact

retailer support and decrease the number of distribution points for Lottery products,

resulting in a significant loss of revenue. One NM-owned retailer chain has 118

Senate Bill 364/aSFC/aSFl #1/aSFl#2 – Page

4

stores and accounted for more than $17 million in lottery sales in FY 06 and

approximately $4 million in revenues. Decreasing the sales commission would result

in a reduction of approximately $170,000 in commissions for this retailer chain.

•

Staffing:

Salaries and benefits would be reduced by approximately $500,000, requiring the

elimination of certain positions and a reduction in benefits.

According to NMLA, eliminating the reserve would have little impact as the money in the

reserve is used for promotions, bonuses and incentives for retailers and those expenditures would

still be made, only out of a different line item.

SIGNIFICANT ISSUES

Mandating 30 percent distribution to Fund. Current assumptions are that lottery revenues

grow by inflation as measured by the consumer price index. The table below shows the current

Fund revenue estimates. Even though the average rate over the history of the lottery is higher

than currently forecast, many other states are forecasting slow, flat or negative growth in their

lottery revenues. Montana is projecting less 0.5 percent growth, for example, and Maryland has

been worried about their revenue growth. According to the US Census Survey of Government

Finances, the compound annual growth rate for revenues (defined as ticket sales less

commissions) is 3.9 percent from 1997 to 2004, the latest data available. During that time, the

amount available for states or net revenue only grew 2.5 percent.

Lottery Net Revenues Forecast

Year

Net Income (000s)

% Change

FY97 21,253

FY98 19,267

-9.34%

FY99 20,010

3.85%

FY00 25,680

28.33%

FY01 25,914

0.91%

FY02 29,604

14.24%

FY03 33,093

11.79%

FY04 35,939

8.60%

FY05 32,231

-10.32%

FY06 36,856

14.35%

FY07 34,500

-6.39%

FY08 35,074

1.67%

FY09 35,607

1.52%

FY10 36,288

1.91%

FY11 37,009

1.99%

Source: DFA/LFC Consensus Forecast, September 2006

Net Revenue is the amount that is distributed to the Lottery Scholarship Fund

The Fund promises to pay the instate tuition of any New Mexico high school graduate who

maintains satisfactory progress. The scholarship begins in the second semester of a student’s

first year and can be renewed if student maintains satisfactory progress and full time status. The

latest projections available from the Higher Education Department (HED), from September

Senate Bill 364/aSFC/aSFl #1/aSFl#2 – Page

5

2006, show both the number of eligible students and the costs of tuition increasing. Together, the

amount required to fund all scholarships has surpassed the amount of revenue the lottery

provides. The chart shows the scholarship expenditures exceeding revenues beginning in FY07

under current assumptions. Under SB 364, revenues would continue to outpace expenditures

until FY11, building the Fund for a few more years. HED could continue to draw upon the fund

to maintain current levels of expenditure until FY12 under current law and FY17 under SB364.

When the Fund balance is exhausted, additional funding will have to be secured to maintain the

current projections of scholarships or scholarship eligibility will have to be tightened to fit the

revenues provided by the lottery. The Higher Education Department forecast for lottery

scholarship expenditures is between eight and nine percent due to increases in tuition and

enrollment. Even if lottery revenues are higher than currently forecast, the Fund will run out of

money under current the current policy governing the lottery scholarship level.

DFA:

Setting a minimum distribution of 30% of gross Lottery revenues would increase the

amount of revenue available for Lottery Success Scholarships and likely extend the

number of years for which the Scholarship program would be able to pay full tuition.

Currently, Lottery Scholarships pay 100% of tuition costs, though this is not required in

statute. However, growth in the scholarship program is projected to be greater than the

corresponding growth in available revenue. For the next few years, growth in the

program can be supported through use of fund balances in the Lottery Tuition Fund and

the program could continue to pay 100% of tuition. However, as the fund balance is

depleted -- under current law estimated to occur around FY12/FY13 -- the program

would no longer be able to pay 100% of tuition. The Higher Education Department

(HED) has statutory authority to adjust the scholarship amount to a certain percentage of

tuition, based on available revenue (Section 21-1-4.4 NMSA 1978).

Lottery Net Revenues and Expenditures

0

10

20

30

40

50

60

70

80

90

100

Consensus Estimate

Lottery Expenditures

Consensus with 30%

It is important to note that the amount of the scholarships is not codified by statute although the

eligibility is. Under current law,

“Prior to June 1 of each year, the Higher Education Department shall determine the amount

of money available for tuition scholarships at state public post-secondary educational

institutions. Based on the amount appropriated by the legislature from the lottery tuition fund

and on the projected enrollment at all public post-secondary educational institutions, the

commission on higher education shall establish the percentage of tuition that shall be

Senate Bill 364/aSFC/aSFl #1/aSFl#2 – Page

6

awarded for qualified resident students attending New Mexico public post-secondary

educational institutions. The percentage of tuition awarded shall be the same for each

institution, regardless of the actual cost of tuition at each institution." Section 21-1-4.4 1978

NMSA

In other words, when the Fund runs out, the scholarships do not end but the amount of each

scholarship will have to be adjusted to match the expected revenues.

Criticisms about NMLA’s expenses. New Mexico’s lottery has been criticized for having high

costs relative to the revenues and as a consequence a lower distribution to the lottery scholarship

fund. Think New Mexico, a Santa Fe non profit organization, using data from La Fleur’s 2006

World Lottery Almanac, published a report in September 2006, that indicated the NM lottery’s

share of revenues that went to operating costs and administration, 19.6 cents per one dollar, was

too high compared to the national average. They came to the following conclusions:

• NM is 5th highest of 41 state lotteries in operating costs per dollar of revenue

• Among states with low populations, NM still is among the highest cost lotteries

• Among states with large rural populations, NM is among the highest cost lotteries

• Among states with low total sales, NM is among the highest cost lotteries

The main causes, according to the report, of the high costs include no statutory level of

beneficiary distribution, high vendor commissions, and an expensive contract with GTech, a

vendor for NMLA’s online games whose contract was extended in 2001 without the solicitation

of new bids. GTech has the online vendor contract with NMLA and receives a commission of

8.52 percent on all online sales. Think NM reports that this is far above what other comparable

states pay. Idaho, Nebraska, and New Hampshire pay less than 3 percent. Idaho is also a GTech

client. NMLA receives less than half of its revenue from on-line games. Renegotiating the

contract with GTech to 5 percent, for example, would add about $3 million to the lottery

scholarships. NMLA reports that they have issued a request for proposal (RFP) for the online

contract. They disagree with Think NM’s methodology comparing NM to other states since

other states have contracted with GTech for all of their lottery business and so have received a

lower rate. The NM contract only includes online games and so there is a higher rate which had

been negotiated down in 2001. The contract with GTech ends in November 2008.

PERFORMANCE IMPLICATIONS

Think NM reports that eleven other states have statutory minimums for beneficiary distribution,

similar to the one proposed by SB364, ranging from 30 percent to 35 percent. The latest

distribution percentage for NM is 24.9 percent and has never been above 26.7 percent reached in

FY97. NMLA reports that even though the percentage is lower than it was in FY97, the

revenues have increased and so the total amount of the distribution has gone up significantly.

They also note that four of the eleven states did not meet their statutory required distribution.

TECHNICAL ISSUES

DFA has reported technical issues with the SFC amendment changing the title:

The Senate Finance Committee amended the bill to rename the Lottery Scholarship to be

the “Legislative Lottery Scholarship." However, they only amended one section of the

authorizing statute for the lottery scholarship – there are several sections of the statute

that authorize the Lottery Scholarship program.

Senate Bill 364/aSFC/aSFl #1/aSFl#2 – Page

7

SFC amended Section 21-1-4.3 – which authorizes Lottery Scholarships at 4-year

institutions and their branch campuses.

However, SFC did not amend the following sections to rename the scholarship:

•

Section 21-13-10 – which authorizes Lottery Scholarships at community colleges

(Santa Fe CC, San Juan College, etc.)

•

Section 21-16-10.1 – which authorizes Lottery Scholarships at technical-

vocational institutions (CNM, Mesa lands, etc.)

•

Section 21-1-4.4 – which authorizes the Higher Education Department to

determine the level of Lottery Scholarship funding available

•

Section 6-24-23 – which creates the Lottery Tuition Fund

For consistency, all of these sections should probably be amended with the new name.

ADMINISTRATIVE IMPLICATIONS

NMLA reports that the effective date of July 1, 2007, places an incredible burden on their

operations. To comply by this date, they will have to curtail or eliminate promotions and

advertising, lower retailer commissions and prize payouts and reduce salaries and benefits.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 87 raises the eligible age to 21 from 18 to play and to sell lottery tickets.

ALTERNATIVES

Changing the eligibility requirements for the Lottery scholarship program or capping the amount

of the scholarship is more likely to result in long term solvency for the Fund.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

NMLA reports that they recognize problems with the operating costs and have been working to

resolve these issues, particularly with the Gtech contract which they have put out for bid. Its

focus is on increasing total revenues rather than concentrating on the net revenues and that has

resulted in higher distributions to the Fund but not increases in the percentage share.

NF/nt