Vice Squad
Thursday, October 18, 2007
Iowa Lottery Contretemps

On October 7, the New York Times initiated a series on state lotteries in the US. Vice Squad noted at that time that the data from the Times's interactive map had some weird entries for Iowa. On October 14, the Times published the second installment of the series, about privatization of state lotteries. The odd Iowa numbers, which indicate very high administrative expenses (relative to lottery revenues), seem to be connected with a sort of quasi-privatization -- and one that should serve as a warning to other states.

The story is nicely told in "The Iowa Lottery's TouchPlay Debacle," an article by Keith C. Miller that appeared in Volume 11, number 2 of the Gaming Law Review. While the Iowa lottery has been around for more than two decades, it was only in 2003 that lottery operations were moved from the state fiscal authorities to the nonprofit "Iowa Lottery Authority," which adopted a corporate outlook and aimed at increasing profits. Earlier, in 2002, the Iowa legislature had asked the Lottery to look into the prospects for dispensing lottery tickets via terminals with video screens. By April 2004, such video terminals were available on a statewide basis -- but the numbers were small, and the terminals tended to be placed in bars. In January, 2005, 422 of the machines -- known as TouchPlay -- were available across the state.

What do these machines actually look like? Well, as Vice Squad has noted before, it is possible for clever designers to arrange games that fall under the legal definition of bingo or lotteries nevertheless to look and play almost identically to slot machines -- and this was what the TouchPlay machines did. (They apparently had much lower rates of return than actual slot machines in Iowa, however, which are regulated to return at least 80 percent of bets on average.) So the adoption of video terminals by the state lottery looked a lot like spreading slot machines into new, non-casino locales. This might have been tolerated, except that those 422 machines of January 2005 suddenly morphed into 4,876 machines one year later (with some 4,000 more ordered); the machines often were located in grocery stores and other places where kids were a standard part of the clientèle. Iowans rebelled against the stealth invasion of slots into their daily lives, the legislature listened, and a ban on TouchPlay machines commenced on May 4, 2006. Why the high administrative costs? Presumably because the Lottery had to rely on contracts with private companies to provide the machines and ancillary services, and those firms needed to receive payment -- but this is just a guess.

The Performance Report of the Iowa Lottery Authority for fiscal year 2006 (July 1, 2005 to June 30, 2006) is available online (13-page pdf here), and it appears to be the source for the Times's Iowa lottery data. Here's an understated bullet point from page 1: "Net revenue from TouchPlay machines totaled over $121.4 million in fiscal year 2006, compared to $6.4 million in fiscal year 2005. The TouchPlay program was ended in May 2006." On page 5, we learn that the more than $121 million in TouchPlay revenue compared with the performance target of, er, $17 million -- a piece of Stakhanovite plan overfulfillment.

As for state lottery privatizations, Miller's article contains (page 96) an implicit warning, based on the change in lottery oversight to a non-profit organization charged with being more businesslike than the state entity that preceded it: "One might conclude that the 'depoliticization,' of the Lottery contributed to a climate of lax legislative oversight, and that the TouchPlay controversy was an outgrowth of this environment."

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