Arkansas lottery's revenue edges up in April

in Lottery

"Obviously the increased sales helped with the increase in proceeds. We also had a month where we did not have a huge prize expense which was also helpful in increasing the amount we returned for scholarships," lottery Director Bishop Woosley said in a written statement issued late Thursday afternoon.

The Arkansas Scholarship Lottery's revenue and net proceeds in April inched up over year-ago figures, according to the lottery's reports.

The lottery's revenue totaled $38.6 million in April -- up from $37.5 million in the same month a year ago -- because scratch-off ticket revenue increased, the lottery reported this week in its monthly report to Gov. Asa Hutchinson and the Legislative Council's lottery oversight subcommittee.

The lottery's net proceeds for college scholarships totaled $7.8 million in April -- up from $7.3 million a year ago.

"Obviously the increased sales helped with the increase in proceeds. We also had a month where we did not have a huge prize expense which was also helpful in increasing the amount we returned for scholarships," lottery Director Bishop Woosley said in a written statement issued late Thursday afternoon.

Earlier Thursday, Woosley defended the lottery's contract with consultant Camelot Global Service to state lawmakers, after a legislative auditor questioned the contract as part of an annual audit of the agency.

Deputy Legislative Auditor Jon Moore said the terms of the Arkansas Scholarship Lottery's contract "are not as advantageous to the state as they are for Camelot," given the lottery's mandate under state law to maximize net proceeds for college scholarships.

But Woosley told a legislative subcommittee that "the three months of negotiation were such that it was very difficult to try to convince the other party in the middle of a contract negotiation that I am going to make more than you think I'm going to make when I really didn't have any statistical information to back that up." At the time of the negotiations, the lottery's revenue and net proceeds had dipped for three consecutive fiscal years.

The lottery has helped finance more than 30,000 Arkansas Academic Challenge Scholarships during each of the past seven fiscal years. The lottery's revenue and net proceeds declined in fiscal 2013, 2014 and 2015 after peaking at $473.6 million and $97.5 million, respectively, in fiscal 2012.

Total revenue and net proceeds rebounded to $456.3 million and $85.3 million, respectively, in fiscal 2016, which ended last June 30, with the help of a $1.6 billion Powerball jackpot in January 2016.

During the first 10 months of fiscal 2017, the lottery's revenue totaled $373.2 million -- down from $382.8 million in the same period in fiscal 2016 -- and the lottery's net proceeds were $65 million -- down from $67.5 million in the same period in fiscal 2016 -- according to the lottery's reports. Under state law, the lottery transfers its unclaimed prize reserves, minus $1 million, to college scholarships at the end of the fiscal year. These reserves totaled $6.5 million as of April 30.

Woosley has projected that by the end of fiscal 2017, the lottery's revenue will be $463.4 million and net proceeds at $80.9 million. Asked if the lottery is on track to meet its projections, Woosley said, "At this point, we are up more than $2.7 million versus budget for proceeds. If that trend holds, we should exceed our projected proceeds budget for this fiscal year."

For fiscal 2018 starting July 1, Woosley has projected revenue at $459 million and net proceeds at $83.6 million. A year ago, Camelot's self-described ambitious business plan projected fiscal 2018 revenue at $517 million and net proceeds at $93 million.

Asked whether the Camelot business plan's projection for fiscal 2018 was unrealistic, the company's vice president of commercial operations, John Skrimshire, said, "Our research initially showed an optimal number of about 2,700 lottery retailers for the state of Arkansas, which is 780 more retailers than are currently active.

"The budget projections in the business plan are based on an estimated 600 [new] retailers being in place by the end of this fiscal year. Given the reduction in viable retailers following further research our budget projection was reduced accordingly," he said in a written statement issued through Woosley. "We are working diligently to increase the number of retailers, which we believe will help the Arkansas Scholarship Lottery improve sales and send more kids to college. We haven't hit the numbers we'd prefer, but we are still focused on growth and plan to add between 100-150 retailers in the coming months."

The lottery's contract with Camelot Global Services was signed Nov. 30, 2015, for five years with an option for two one-year extensions. The firm was hired to develop a business plan and help the lottery improve its operations.

During a meeting of the Legislative Joint Auditing Committee's subcommittee on state agencies, Moore said the terms of the contract are skewed to Camelot over the state in part because the company may receive up to $650,000 in annual base compensation "for income-enhancing consulting services, totaling a maximum $3.25 million over the initial five-year term, regardless of whether the lottery's operating income or net proceeds improve."

As for Camelot's tiered performance incentive compensation, which is 12.5 percent or more of the lottery's adjusted operating income exceeding $72.3 million, that income threshold is lower than the lottery has ever reported, Moore said. "With the baseline for tiered performance compensation set so low, Camelot is almost guaranteed an annual performance bonus with or without improved lottery sales."

Rep. Andy Mayberry, R-East End, said, "It wouldn't seem that it's to the state's benefit to offer a performance incentive based on amounts that the low bar on that is the least that the lottery has ever taken in in a given period of time."

In response, Woosley said the lottery "was about to finish our worst year that we had in lottery history" when it issued its request for qualifications for a lottery consultant in June 2015.

"In negotiating with Camelot, obviously as a director I felt we were on the rebound and going to make more money. However, the trend and the compounded annual growth rate didn't lie. The fact is every single year our sales had gone down and our return had gone down so when you are negotiating you have to come up with an agreed-upon number, and that number was based on actual analytics and data," said Woosley, who has been the lottery's director since February 2012.

"Obviously, we didn't know two months later that we would have a $1.6 billion Powerball and we've enjoyed some growth since that time," Woosley said.

During fiscal 2016, the lottery paid Camelot $2.3 million, including $650,000 in base compensation, $25,181 in expenses and $1.6 million in incentive compensation. The firm decided to forgo $760,000 from its incentive compensation in fiscal 2016 for the additional sales and proceeds resulting from the record Powerball run in January 2016, according to lottery officials.

http://www.courant.com/opinion/editorials/hc-ed-lottery-board-tries-to-game-the-system-20170511-story.html