Lottery Math and Political Calculus
From an announcement today:
Seeking more money for HOPE scholarships and pre-K funding, Lt. Governor Casey Cagle and Senate Majority Leader Bill Cowsert (R-Athens) have announced legislation they hope will ensure that pre-K and higher-education for children and young adults is funded at the highest possible level. Essentially, they’re proposing to raise the payout percentage until sales start to drop.
The trade-off is a classic business school dilemma. To maximize profits, you have to cut costs -but if you cut costs too much by spending less on marketing, or reducing the jackpots- you risk reducing total sales. But a mere 1-percent increase in returns to add as much as $40 million annually to pre-K and HOPE programs, according to Cowsert.
“Our goal is to make certain that we find that economic ‘sweet spot,’ where returns are maximized to pre-K and HOPE without significant reductions in overall sales,” said Sen. Cowsert. “Through a simple empirical formula, we are going to find that spot. Any adverse changes to the Lottery’s sustainability will be detected, and our formulas can be altered, quickly and easily.”
Current law requires the lottery to deliver “as nearly as practical” 35 percent of gross sales as profits; however the lottery has not hit that number since 1997. The Georgia lottery returns slightly more than 25 percent of its sales to the state for pre-K and HOPE programs. Senate bill 5 will mandate a return of 26 percent of gross sales to the state in fiscal year 2018. In fiscal year 2019, the Lottery will be required to return 28 percent of sales to the state. In 2020, the Lottery will be required to return 30 percent of sales to the state. In any year, if ticket sales drop by 5 percent or more, the percent return will be frozen and no further increase will be required.
Lt. Governor Cagle said he hopes “…this legislation will generate additional funds for these critical education initiatives and provide long term sustainability to the programs.”
If successful, the measure would also allow someone running for Governor in 2018 to announce $40 million extra education funding that hadn’t been tainted by the casino question.
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Mike Hassinger
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Sounds like a good idea to me, and it only took 20 years to think of it.
Maximize returns in the absolute and not relative sense, and that’s no need for much concern regarding total sales.
“Maximize returns in the absolute and not relative sense, and that’s no need for much concern regarding total sales.”
Huh? What am I missing? How does getting a bigger percentage of a smaller total make total sales not matter? If we get 25% of $1 billion, but by forcing the lotto corp to pay 30% of sales, and sales drop to $500 million, doesn’t that mean there’s less profit?
I meant the word absolute to mean total dollar return, which granted isn’t the typical point of reference/metric.
Not to discount that HOPE as a percentage of gross sales isn’t a very important metric, but $100M going to HOPE on $500B in gross sales, 20%, is better than $90M going to HOPE on $180M gross sales, 50%, other things being equal—mainly what’s happening to the $400M or $90M in the economy respectively.
It’s too much to ask that HOPE go back to its original intent to educate Georgians who would otherwise never consider post-secondary education. Especially with certain parties looking to gain new office, no one will be pushing for means testing any time soon, to name one alternative.
Good luck to the new plan but I cringe when I hear pols use words such as ‘simple’ and ’empirical’.
Messing with the ga lottery website which has a chart and comments on 2015:
64% to players
26% to education
6%. to retailers
4%. admin & vendors (usual 2% vendors, 1 % admin)
1% then was about $43 million. There is more to juggle than advertising and jackpots.
Raising percentages to education unless sales decline should drive efficiency but in a 5% decline in sales it could get really tricky and we tend to apply “sell less you get less” anywhere but admin.