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State of Kansas takes more than its lottery makes

An audit shows that the Kansas Lottery brought in $170.6 million in net profit during the fiscal year that ended in June. But it transferred out $171.8 million to the Kansas Public Employees Retirement System and the state budget.
An audit shows that the Kansas Lottery brought in $170.6 million in net profit during the fiscal year that ended in June. But it transferred out $171.8 million to the Kansas Public Employees Retirement System and the state budget. File photo

The Kansas Lottery ran a deficit for the sixth year in a row this year, because the state’s pension fund and the Legislature take more out of the game than it brings in, according to an audit of the agency.

The legislative post audit shows that the lottery brought in a record $170.6 million in net profit during the fiscal year that ended in June.

But it transferred out $171.8 million to the Kansas Public Employees Retirement System and the state budget.

With that $1.2 million deficit, the lottery continued to fall further behind and ended fiscal 2016 at a negative $5.9 million position, the audit said.

KPERS costs were responsible for $1 million of the $1.2 million shortfall. “The remaining $0.2 million is the result of transfers to the State of Kansas exceeding the amount of revenue the Lottery received,” the auditors said.

The situation was worse last year. The lottery had to put $6.3 million more toward its pension obligations to comply with new federal accounting standards, and the Legislature took out another $2 million in excess of the lottery’s income. That turned a $3.6 million starting surplus into a $4.7 million year-end deficit, the audit showed.

Matt Schwartz, finance director for the lottery, said there’s no cause for worry.

He said the fundamental purpose of the lottery is to provide money for the state budget and the agency has worked hard to tighten its retailers’ rules, with the goal of collecting money from the sale of lottery tickets faster.

Our goal is to dividend that out to the state as quickly as possible.

Matt Schwartz, Kansas Lottery finance director

“Our ultimate goal is to keep as little carryover equity (as possible) trapped within the system,” he said. “Our goal is to dividend that out to the state as quickly as possible.”

He said over a 10- to 20-year time frame, operating gains and losses should roughly even out. And, he said, the lottery did carry over a positive balance from when it started in 1987 until 2014.

It did that, in part, by spending down reserves. Now those reserves are gone, and the lottery is running a $5.9 million deficit.

Fiscal 2016 marked the sixth year in a row that the lottery ended with an annual operating deficit, although it did get some boosts in overall revenue along the way from capital contributions related to the development of state-owned casinos, according to this year’s report and previous audits.

The 2016 audit was presented to the joint House-Senate Legislative Post Audit Committee about two weeks ago.

After the meeting, it was unclear what the overall impact will be for the future of the lottery.

With the makeup of the Legislature and its committee structure in flux following the November election, it was also not clear whether the state will take action to cut back on the money it withdraws each year.

But the committee chairman, Sen. Michael O’Donnell, R-Wichita, said it’s an indicator of the state’s financial problems that it keeps taking more money from the lottery than the games make.

“To me it sounds like the state of Kansas is just receiving too much,” he said. “If it wasn’t for the transfers, they (the lottery) would be more than fine.”

It’s been happening throughout the Brownback administration. … It’s something that’s going to continue to happen until the lottery director stops it.

Sen. Michael O’Donnell, R-Wichita, chairman of the Legislative Post Audit Committee

Of the annual deficits at the lottery, “It’s been happening throughout the (Gov. Sam) Brownback administration,” O’Donnell said.

“It’s something that’s going to continue to happen until the lottery director stops it,” he added.

He doesn’t see that as likely.

“Terry Presta, an appointee of the governor, is not going to say anything negative about it,” O’Donnell said. Presta, the lottery director, was not available for comment.

O’Donnell said he sees the lottery situation as a symptom of deeper problems in state budgeting. He said it’s similar to other “sweeps” of funding from state agencies that get their money from user fees, license charges and other outside sources.

“I don’t think it’s a good situation (for the lottery), but I don’t think it’s unique,” O’Donnell said. “We have been sweeping funds from those agencies year after year to fill holes in the budget.”

O’Donnell won’t be in the Legislature to address that. He didn’t run for re-election and in January, he’ll step down from the Senate to take his new position as a Sedgwick County commissioner.

The good news for the lottery in the audit report is that its overall income continues to rise.

The $170.6 million profit the lottery brought in during fiscal 2016 set a record and was up $10.5 million from the previous year.

Traditional lottery games such as scratch-off tickets and Lotto were big winners, with sales increasing from $250 million in 2015 to $272 million this year.

The three state-owned and privately operated gambling casinos brought in $364.4 million, down slightly from their 2015 peak of $365 million, the report said.

Where the money goes

Lottery funds are disbursed by formulas in state law.

The first $50 million of traditional lottery profit goes into a state gaming fund.

Eighty-five percent of that goes to economic development programs to attract and expand business in the state. Fifteen percent goes to adult and juvenile prison construction.

A fund to help people with gambling addictions gets an automatic $80,000 grant each year.

Anything more than $50 million is transferred to the state General Fund, where it can be spent for any governmental purpose.

Casino income is split 73 percent to the management company, 22 percent to the state, 3 percent to the cities and counties that host casinos and 2 percent to the problem gambling fund.

The traditional lottery was originally designed to pay the state 30 percent of the money bet by the players, said Sherriene Jones-Sontag, deputy executive director of the Kansas Lottery and a former press secretary for Brownback.

About 10 years ago, the Legislature began waiving that percentage and building a proviso into each annual budget bill telling the lottery how many dollars would need to be transferred to the state.

Jones-Sontag said that’s been a positive development for traditional lottery sales. It allows for more flexibility to offer expensive multi-play tickets and give more generous payouts to those who bet more money, she said.

For example, $1 tickets return 58 to 62 cents to player prizes, while $20 tickets can pay off as much as 70 cents for each dollar wagered, Jones-Sontag said.

If the lottery had to give the state a flat 30 percent, it wouldn’t be able to offer games that pay players 70 percent, Jones-Sontag said.

There wouldn’t be money available to cover retailers’ commissions, printing and delivery of tickets, and other costs associated with running the games, she said.

“When you factor all of those associated costs, it would prohibit us from offering a $10 or $20 price point,” Jones-Sontag said.

Dion Lefler: 316-268-6527, @DionKansas

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