Part 1 of a 3-part look at the New Jersey Lottery
To lottery players, the scratch-off tickets and numbers games are a fun way to pass the time and maybe strike it rich.
For state government, however, the games serve a more practical purpose — a big business. A significant chunk of money from the lottery goes to causes such as colleges, public schools and veterans' homes.
By many measures, the system works: New Jersey ranks among the top five states in converting lottery sales to profit for the government. In fiscal year 2005, the $80.7 million spent to run the lottery and pay game vendors and other fees turned into $812 million for the state, and the numbers keep rising.
But in recent years, executive staff and salaries have grown and a larger piece of the lottery pie has gone toward prizes, while smaller portions have gone toward the institutions the lottery was created to fund.
As a result, the percentage of lottery sales going to state programs has plunged to 35 percent, an all-time low. In other words, the lucky individuals winning the lottery are getting far more, and the people running the games are getting more, fueled partly by a growing executive board with some political ties.
Meanwhile, funding for programs that affect the rest of the state is inching upward.
Basic administrative costs rose by 65 percent between fiscal years 2000 and 2005, from $16.7 million to $27.5 million. That includes a $6.5 million, 31 percent, increase between 2004 and 2005, driven mostly by increased spending on advertising.
Prize money grew by 31 percent between 2000 and 2005, to $1.3 billion.
In that same time span, the amount going to balance the state budget and pay for programs increased by just 13 percent, to $812 million.
Between 2000 and 2005 total lottery salaries grew by 21 percent, from $6.6 billion to $8 million.
At the top of the scale, the number of deputy directors jumped from four to six, helping boost executives' cumulative pay almost 59 percent since 2000. Nearly $150,000 each year pays salaries for two marketing positions, both created in 2002 and filled by people with ties to state senators. They handle what was once a one-person job.
In 1997, the lottery spent 19.8 cents to generate one government dollar. As recently as 2002, it cost 21.4 cents. In 2005, that rose to 25.5 cents.
For two decades, New Jersey consistently put more of its lottery revenue, 40 to 42 percent, back into programs. If the lottery had kept up the old rate, the debt-laden state could have had $149 million more dollars in its fiscal year 2005 budget.
That's roughly the same amount the state expects to raise in the new budget by imposing sales taxes on golf and health club memberships, shipping and handling, parking fees, limousine rentals and tanning, massaging and tattooing.
Assemblyman Jeff Van Drew, D-Dennis, said he believes lottery drawings are clean and fair but that the Assembly Tourism and Gaming Committee he chairs may seek to examine its operations.
"We want to make sure we're getting the maximum bang for the buck," Van Drew said.
New Jersey Lottery Executive Director Michellene Davis defends the administrative expenses.
"Like any traditional business, the lottery's expenses have been affected by the increased costs of goods and services," Davis said.
Growth at the top
Executive salaries, and staff, have grown partly because of two new sales positions created to handle duties that previously fell to just one person. The new posts were filled in 2002 by the brother of Sen. Shirley Turner, D-Lawrence, Mercer County, and a man aligned with Sen. Joseph Doria Jr., D-Bayonne.
Howard Fitch, who became deputy director for corporate sales, makes $74,940 at the lottery. He is also chairman of the Bayonne Local Redevelopment Authority; that position is unpaid. Doria is Bayonne's mayor.
Fitch first joined the state payroll in 1990 as an Assembly staffer, when Doria was the Assembly speaker. Two years later, when Democrats lost control of the Legislature, Fitch landed at the lottery, taking a $1,000 pay cut down to $40,000, according to the Department of Personnel.
In the second top sales position, Robert Kersey, Turner's brother, earns $74,940 per year as the lottery's deputy director in charge of retail sales.
Before Fitch and Kersey were hired in 2002, the lottery had one marketing director.
Turner said she had no role in her brother's hiring.
"I had nothing to do with it. It's his merit," Turner said. "He has 40 years in marketing and sales, and he certainly is abundantly qualified."
Doria did not return phone calls seeking comment. Neither did Fitch or Kersey.
The most significant growth for lottery outlays has come in prizes.
Davis, the lottery director, said New Jersey has had to keep the winnings attractive to fight off competition. While a $10 million prize once drew lines around the block, many lottery players will simply walk past a jackpot twice that large, Davis said.
"To stay competitive in our marketplace we need to keep our edge," Davis said.
That means roughly 56 percent of the lottery revenue now goes back to players in the form of prizes. That's about average among states, according to Philip J. Cook, a Duke University professor who has studied lotteries.
"They're competing with other states, they're competing with Internet gambling, they're competing, in New Jersey, with the casinos," Cook said. "People have a choice about where to go gambling."
The founders of the New Jersey lottery certainly didn't envision such financial arrangements when they created the games more than 35 years ago.
In a 1970 report, the State Lottery Planning Commission estimated the annual operating costs for the lottery would be between $4 million and $5 million — or approximately $26 million in today's dollars.
But over the years, the lottery broke its operating costs into multiple categories, such as "game vendor fees" in 1975, "online network fees" in 1996 and "drawing broadcast fees" in 2004. All together, administrative costs are now $80.7 million.
The state's take
The New Jersey system has kept money rolling into programs. In fiscal year 2005 New Jersey ranked fifth among state lotteries in turning sales into profit, according to a Tax Foundation study that relied on data from a national lottery organization.
Out of $2.3 billion in lottery sales in fiscal year 2005, about 35 percent came back to the state. California ranked best, having turned 54 percent of its sales into profit, according to the study, which used data from the North American Association of State and Provincial Lotteries.
If the New Jersey Lottery had returned 42 percent of sales to the budget over the last eight years, the perpetually debt-laden state would have had an additional $727 million in revenues.