Washington Monthly: Snake Eyes - Gtech's state lottery contracts

Even education programs can't redeem state lotteries

IN 1990, ZELL MILLER, RUNNING FOR GOVERNOR of Georgia, figured out a way to increase spending on education without raising taxes: Create a lottery to fund scholarships for high school achievers. Miller's proposal, "Helping Outstanding Pupils Educationally" (HOPE) caught on and helped sweep him into office.

HOPE works. It has financed higher education for hundreds of thousands of students in Georgia. It also seems wondrously simple: a voluntary tax (no one is forced to buy lottery tickets) to fund a clear, concise, and universally acclaimed goal. Every high school student in Georgia with at least a B average now has the opportunity to attend one of Georgia's universities; if they keep up their Bs in college they're funded until graduation. HOPE brought Miller national attention and numerous state governments are considering copying the program.

But despite HOPE's success, there's a trap in its seeming simplicity. Lotteries aren't taxes, but they certainly aren't free. They compromise values, feed a very dangerous industry, and end up snuffing out the success of even the most well-intentioned initiatives. Other states should copy the educational blueprint of the HOPE program, but they shouldn't copy the funding.

The trouble with lotteries begins when you hand over your dollar in a convenience store. The money doesn't go straight to the state government or to its college education fund; it is processed by a Rhode Island corporation called Gtech. Gtech prints the tickets for the states, provides the software for the gambling devices, organizes the drawings, and even trains convenience-store owners on how to run their computers. Gtech was founded in the early 1980s and, of the 38 lotteries run nationally, the company has won the contracts to manage 29--getting about a nickel from every dollar ticket sold. It doesn't seem like much, but these nickels have added up. The company has annual revenues of just under $1 billion, and is traded on the New York Stock Exchange.

Much of Gtech's success comes because it has something good to sell and it sells it well. It has always been able to work efficiently and, by most accounts, it has scrupulously fulfilled its contracts.

But to many people in the business, Gtech's extraordinary success doesn't just come because it gets up at dawn and eats its vegetables. It's because the company knows how to work the back alleys with sweet talk, hard bargains, and, its critics say, coercion. In California, a Gtech lobbyist on trial for bribing lawmakers was caught by a hidden tape recorder calling state lottery director Sharon Sharp "our gal." Sharp had handed Gtech the California contract without opening the process to competitive bidding. In Georgia, Lottery Director Rebecca Paul called a closed-door session with the company when Gtech's bid came in $50 million above the low bidder. After Gtech agreed to drop its price by just $23 million, Paul inked the deal. Did Paul cut Gtech a break because she was offered a job? Probably not, but she certainly knows that the company takes good care of lottery directors who show it consideration. Three directors of the New York state lottery have gone to work for the company as lobbyists or consultants, as have numerous directors from other states. After a conflict over Massachusetts' lottery, director James Hosker, a close friend of Gtech's, took the job managing Kentucky's lottery and secured a sweet deal for the company in that state. Where did Hosker move next? A lucrative job on the Gtech payroll.

As one person close to the company said anonymously, "If it loses a contract, it sues everybody. But it usually wins because it offers future jobs to every state lottery director." When asked why he insisted on being quoted off the record, he responded: "It's the third rail of the gambling industry. You touch it, you die."

But Gtech doesn't just make sure that what goes around comes around; it runs an operation that would make any K Street lobbying firm proud. One former gambling industry reporter recalled being taken out to play golf by Gtech. "I played 18 holes with the Gtech guy and he shot something like a 70 on a very hard course. That's almost like a pro and I was very impressed. I asked him at the end how he was so good if he also had to work for Gtech. He told me that Gtech had just hired him to play golf with clients."

Nor would Gtech be Gtech if it didn't understand the importance of well-placed friends, and the company corrals power from any angle it can find. In Texas, it hired the boyfriend of the state lottery director. In New York, it hired a dear childhood friend of Lottery Director Peter Lynch. In other states it retains former influential politicians simply to work the dinner-party circuit. In Texas, the company hired Ben Barnes--legendary former speaker of the Texas House of Representatives and the man who, according to many reports, got young George W. Bush out of the draft and safely into the National Guard--for the princely annual salary of $3 million. Other prominent Gtech lobbyists have included William Daley (now secretary of commerce) and William Broadhurst, an extremely close political advisor to the governor of Louisiana when Gtech was fighting for that state's contract. Broadhurst, of course, first came to the public's attention when he chartered the "Monkey Business" and introduced Donna Rice to his close friend Gary Hart. Hubert Plummer, the former president of one of Gtech's competitors famously once said, "We'd go out to dinner with the lottery director and find that Gtech had hired a yacht and taken out the whole goddamn legislature."

But if many of the company's critics are to be believed, Gtech doesn't just buy and schmooze with people, it intimidates them--charges that Gtech emphatically denies. When Bruce Mayberry, the Arizona lottery director in 1993 (now an employee of one of Gtech's competitors) got into a dispute with the company, he soon found a crate of rotten mutton on his doorstep with a note attached: "Enjoy" A gruff Gtech spokesman explained that the meat was, of course, a goodwill present gone bad through a combination of Arizona heat and DHL's slow service. As he said later in a terse interview, "It's a rough business." Indeed.

Capitol Hill Roulette

But the rough business doesn't stop with Gtech. It climbs all the way up the political chain. Americans spent close to $600 billion last year gambling--more than we spent on movies, theme parks, and sporting events combined. Not surprisingly, swimming in this muddy river of cash, gambling and lottery interests have turned themselves into one of the most powerful interest groups in America. When Jim Hodges ran for governor of South Carolina, he was virtually pronounced dead until he decided that, despite his prior vehement opposition, he wanted to introduce an education lottery to South Carolina. Bingo. Money started pouring in and, with strong evidence of as much as $30 million dumped into his bank account by gambling interests, he was able to defeat Republican incumbent David Beasley. As Glen Stanton, a South Carolina activist who worked on that election, said to Harper's Magazine, "Hodges just took the lottery, turned it into a blunt instrument and clubbed Beasley senseless."

The gambling industry knew that introducing a lottery into South Carolina would help open the gates for casinos. Having a lottery empowers gambling advocates and undercuts government authority to prohibit gambling. If it's moral for the state to do it, why should it be absolutely immoral for Donald Trump or a Native American tribe to do it too? Patrick Pierce of St. Mary's College in Indiana has shown statistically that by far the most important variable determining whether a state will introduce a casino in a given year is the existence of a lottery--it's much more important than state income, tax level, or even political makeup. Lotteries are "the camel's nose" for legalized casino gambling, writes Pierce.

Gambling interests also know that a lottery in one state often puts political pressure on its neighbors. Georgia estimates that 12 percent of their lottery ticket sales come from residents of neighboring states--one of the main arguments that Don Siegelman used while running for governor of Alabama in 1998 on a platform dominated by a proposal to create an initiative mimicking HOPE. Why, he argued, should residents of Alabama be supporting Georgia's educational system? Siegelman invoked the Georgia example 17 times in a 400 word op-ed piece in the Birmingham News supporting the initiative one year later. This also shows one of the core problems in our federalist system--when one state cuts harmful industries some slack, be they lotteries or sludge-belching factories, its neighbors often have to follow suit to stay competitive.

The Industry

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The momentum of lotteries becomes particularly troubling for opponents because the gambling industry has wrapped itself around much of America's political leadership. House Leader Richard Gephardt's chief fundraiser, David Jones, has enlisted Mirage Resorts owner, Steve Wynn, in an effort to raise $1.5 million in soft money for upcoming congressional campaigns. Wynn has given at least that much to Republicans, but like many other casino tycoons, he knows that a good way to win in politics is to bet on every horse in the race. An aide to Henry Hyde was covertly offered $10 million by Primadonna Resorts (see Memo of the Month) in return for landing them a casino license in Illinois; the plan was only foiled when a man chasing an unrelated conspiracy theory stumbled upon the critical files in a trash can. Senate Minority Whip Harry Reid (D-Nev.) unabashedly admits that he owes his career to gambling interests; Senate Majority Leader Trent Lott (R-Miss) is deeply involved in the National Republican Senatorial Committee (NRSC) that, according to the non-profit watchdog Public Citizen, received $1.26 million from the gambling industry in 1997-98. Mitch McConnell (R-Ky.), the man commanding the jihad against campaign finance reform, has raised at least $1 million for the GOP in the last three years from the gambling industry.

To see how clearly this money can burn up an open political process, consider what happened in March of 1998, when Sen. Dan Coats (R-Ind.) proposed eliminating the federal tax deduction for gambling losses--a tax deduction which counts money lost on the blackjack table as equivalent to money donated to Habitat for Humanity. Within five days, casino interests came up with at least $450,000 to donate to the NRSC and both the Democratic and Republican leadership grabbed their golden hatchets and worked to kill the bill before it could be debated. Sen. Reid promised to gut the bill with amendments. Senate Minority Leader Tom Daschle (D-S.D.) immediately denounced it. Trent Lott tried to work out compromises that could railroad the bill before it came to the floor. According to one Republican aide cited by Public Citizen, "Lott did not want us to get down there on the floor and debate it, because it was very difficult to defend." Not surprisingly, the bill died a sudden death--just like virtually every other attempt to regulate gambling in the public interest. A bill to give the casino industry a special tax exemption for free meals provided to workers made a slightly different journey one month later. Senator Lott slipped it, without debate, into a House-Senate conference version of the IRS Reform Bill.

Selling Sloth

The trouble with lotteries, however, extends well beyond Gtech and the gambling industry lobbying machine. By adopting lotteries, state governments put themselves in the awkward and self-defeating position of having to betray the values that they usually hold dear.

First of all, lottery officials rely on deceptive advertising of the sort that state governments normally try to harness. The whole business of lotteries depends on convincing people that their number might come up--in fact that their number will come up if only they play enough. After all, lottery officials reason, if people don't buy tickets there isn't as much money to fund education. The result is advertising like one television spot in Connecticut that showed a smiling young man: "When I was younger I suppose I could have done more to plan my future. But I didn't. I guess I could have put some money aside. But I didn't. Or I could have made some smart investments. But I didn't. Heck, I could have bought a one-dollar Connecticut Lotto ticket, won a jackpot worth millions, and gotten a nice big check every year for 20 years. And I did! I won!" A voice-over followed as the young man grinned, "Overall chance of winning is one in 30." One in 30, of course, was the chance of winning a small prize and a smile from your convenience store owner, not of striking it rich.

Unlike other sweepstakes and raffles, state lotteries are not required to publish the honest odds of winning. Why don't they? Because the odds are virtually zero. Perhaps the best example of the likelihood of success comes from the North American Association of State and Provincial Lotteries, a pro-lottery lobbying organization seemingly oblivious to its own irony. `Anyone can be struck by lightning any time, any day. You can only win Powerball if you buy a ticket and then only on drawing days ... Here's something to think about. Of the people struck by lighting in 1995, some were golfing, some were picnicking, fishing, boating or hiking--not one was playing lotto at the time."

States that run lotteries also focus their efforts, and in many ways their deception, on the people who are most susceptible to their message--the people who the state normally tries the hardest to support: the poor. One Massachusetts study found that the average resident of relatively unaffluent Chelsea spent $455 a year on the lottery while residents of nearby, prosperous Weston spent only $30. Taking advantage of this bias, an advertising plan for Ohio's SuperLotto read, "Schedule heavier media weight during those times of the month where consumer disposable income peaks.... Government benefits, payroll and Social Security payments are released on the first Tuesday of each calendar month."

States also often try to sell sloth as a way to convince potential customers that a lottery ticket offers a free ride to the high life. A 1996 Massachusetts state lottery ad contrasted two possible paths to millions on parallel sides of a poster. The first option: "Start studying at about seven years old, real hard. Then grow up and get a good job. From then on, get up at dawn every day. Flatter your boss. Crush competition ruthlessly. Climb over backs of co-workers ... Do this every day for 30 years, holidays and weekends included. By the time you are ready to retire, you should have your money." The second option: two lottery tickets.

Worst of all, state lottery officials have incentives to turn moderate lottery players into compulsive gamblers. Five percent of the population buys 50 percent of all lottery tickets and these people need constant fixes. Although state lotteries started out 20 years ago as simple, uninspired raffles (write your name on the back of this piece of paper and one day we will tell you if you have won), lottery officials soon realized that, in America, instant gratification sells. In due course, states started promoting instant games, supergames, and even started running flashing casino-like games. The worst of the lot is high paced poker played on video terminals--frequently referred to as "video crack" because of its addictive powers. "Almost without exception, my video poker patients report not excitement but anesthetized nothingness. It's a twilight-zone experience for them," says Robert Hunter, an expert on compulsive gambling. Video poker is run by the governments of eight different states. "There was one machine that I could confuse the most," said Betty Yakey to The Washington Post. Yakey, a 65-year-old widow, wiped out her grandson's college saving fund (set up by the sale of her family farm) by playing state-sponsored video poker in Louisiana for five or six hours daily. "When I played that machine, I didn't worry about nothing."

Sleeping Watchdogs

Although state lottery ads are not regulated by the FTC or the Better Business Bureau, the press, particularly television, has not stepped in to play a watchdog role. One would be hard-pressed to find a TV station that explains the insane odds against winning when showing lottery drawings on the 7 o'clock news or that reports on state lottery ads with the same vigor with which it peers into political campaign commercials. There have been some exceptions, but the trend veers away from intense scrutiny.

The euphoric side of lotteries does of course fit better into our common television format: One winner jumping and screaming plays better than 20 million poor saps kicking the floor after they lose; a busty woman picking glowing balls out of a hopper has more appeal if there isn't a voice in the background explaining the futility of the charade. But another explanation for this one-sided coverage deserves consideration. State lotteries spend more than half a billion dollars a year on advertising on television, radio, posters, and in any other rewarding medium. The Maryland state lottery, for example, bought well over $1 million worth of ads with major television stations in the first nine months of 1999. As with all media advertising, there is scant direct proof that the purchases influence coverage, but commercial television producers know where every dollar their station or network gets comes from. And like lottery advertisers who can justify their machinations by the greater good created in the long run (manipulative advertising may be bad, but it does help education), the news media have the same argument on hand. If they can't maintain their revenue stream, they won't be able to fund their public services.

Unfortunately, the propaganda is getting through to Americans. According to a July 1999 poll by the Consumers Federation of America and Primericam, 27 percent of Americans believe that winning the lottery is their "best chance to obtain half a million dollars or more in [their] lifetime." This is a grim statistic which would surely change if states were to cancel their lottery ads and instead publicize the wonders of compound interest: $50 invested weekly with a 9 percent return would yield over $1 million in 40 years.

Betting on Schools

In his victorious race for the governorship of South Carolina, David Hodges milked the Georgia lottery issue as well as one could, arguing over and over again that mimicking the HOPE program would be his state's ticket to success. One of his ads showed a convenience store clerk in a Georgia Bulldogs T-Shirt, "Here in Georgia, we appreciate you South Carolinians buying our lottery tickets, over $100 million worth. Those Georgia tickets y'all buy pretty much pay for our world-class preschools."

Hodges is right to want to imitate Georgia's educational success but he is wrong to draw inspiration from the way Georgia funds its HOPE program. Instead, he should draw inspiration from one of his predecessors, Richard Riley.

In 1985, Governor Riley, now Clinton's Secretary of Education, decided that his state needed an educational overhaul. He didn't, however, look to a lottery. He convinced leaders in the business community that more skilled laborers would help South Carolina's commerce. He then convinced teachers' unions to support merit pay by offering them a 16 percent pay increase. Riley then mailed out thousands of copies of his plan to voters across the state and described his plan in hundreds of speeches. He pushed his plan through a reluctant state legislature by twisting arms, asking constituents to phone their representatives and arguing his case until he was hoarse. Although he had initially met with near-universal opposition, Riley's reforms passed and were paid for with a 1 percent increase in state sales tax. A RAND corporation study that year declared that Riley's plan was "the most comprehensive single piece of legislation improving education to come out of any state." SAT scores went up and more and more of the most talented high school students decided to continue their education.

Next fall, South Carolina voters will have the chance to accept or reject a referendum on Gov. Hodges' plan for a lottery to fund educational improvements. There's little doubt that gambling interests will provide the referendum with strong financial support. But even so, there are encouraging signs that voters are starting to turn against gambling and realizing that, as Riley did, it is possible to create good programs without funding them through lotteries. In Alabama, voters recently rejected Don Siegelman's lottery referendum based on the HOPE program only a year after electing him in no small part because of his lottery proposal. Even in South Carolina, the state supreme court and state legislature recently banished video poker, against the wishes of Governor Hodges, with polls indicating that 60 percent of the population was in favor of the decision. Of the 25 state referendums on gambling since 1994, anti-gambling advocates have won 19.

That's good news for South Carolina and it's not terribly surprising: Pro-gambling soundbites work well when there's a lot of other stuff on voters' minds. Anti-gambling arguments work well when there's time to think. This is why governors can often use the issue as a wedge to get elected when there are scores of other issues on voters' minds; but it's also why referendums fail more often than not when they are put under the microscope

South Carolinians will have plenty of time to consider the issue next fall and, if I were a betting man, I'd put my money against the initiative. After all, the HOPE program helps to create winners; but lotteries, no matter how well-intentioned, make losers of us all.

Research assistance provided by Nicole Morgan.