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New York Lottery accounting method questioned

Jan 30, 2007, 6:48 pm

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New York LotteryNew York Lottery: New York Lottery accounting method questioned

Billions of dollars in bets are kept off the New York Lottery's books.

That's because the state Lottery Division does not publicly report the wagers on its video games that go to gamblers as prizes.

The figures aren't included in the Lottery's annual reports or audited financial statements, and the Lottery initially declined requests for the amounts wagered on the video machines, and the prizes paid, since the machines were introduced in 2004.

Late yesterday, however, a Lottery official provided data showing that almost $11.9 billion in "credits played" — called the "handle" — was tallied between Jan. 28, 2004, and Jan. 20 of this year. More than $10.9 billion in "credits won" was distributed as prizes.

Critics said the Lottery's accounting methods withheld important information about its finances.

"There should be complete transparency," said state Sen. Frank Padavan, R-Queens. "Obviously, they don't want the general public to know what they're doing."

A spokeswoman said the Lottery reported only a portion of the wagers on the video machines because that figure was used to determine distribution of the revenues.

"The Lottery reports video gaming revenue at the point of net machine income since it is the remaining revenue after prizes are paid and the basis upon which aid to education is calculated," said Jennifer Mauer, who has since left the Lottery.

'Net machine income'

Before video gambling, figuring out how much money was wagered each year on New York's lottery games was easy: The first line of the Lottery Division's annual revenue and expense statements listed the total amount of ticket sales.

But after the 2004 introduction of video slots at upstate racetracks, the Lottery stopped reporting "ticket sales" and switched to "lottery revenue, net."

It kept counting every dollar generated by traditional games like Lotto and Mega Millions, but for the video games it added only "net machine income" — the money left after prizes were awarded.

And although the next line on the financial statements continued to list "prize expenses," the Lottery reported only the prizes paid by the traditional games, and nothing paid by the video games.

Under Section 1612 of the state Tax Law, "video lottery gaming" must pay out prizes that average at least 90 percent of wagers. All other games pay prizes that amount to between 40 percent and 75 percent of sales.

Last year, then-spokeswoman Mauer said VLT prizes had averaged between 92 percent and 92.4 percent of wagers during the past three fiscal years.

"If you wish to determine the amount wagered, you could easily do so on your own based on the prize percentages reported ... and the net machine income for each facility," Mauer wrote in an e-mail.

But in an e-mail sent after the close of business on Friday, Lottery Deputy Director Susan Miller said calculated figures based on the prize percentages were "misstated because while 'logged' on the machines, a portion of those items are actually 'credits played.' In other words, the prizes are not paid out, but accumulated by the machines and re-played by the customers. ... This fact renders all of the referenced figures misleading and inaccurate."

Late yesterday, Miller provided data showing that during 2005-06, more than $3.9 billion was wagered on the machines — more than half the $6.5 billion spent on lottery tickets during the same time period.

Between April 1, 2006, and Jan. 20, the video machines recorded more than $4.7 billion in credits played and paid out more than $4.3 billion in prizes, the data show. Of the $381 million remaining, $196 million went to school aid.

'Weird terminology'

The Lottery Division's commingling of traditional ticket sales and net machine income is not a typical accounting method, said Wesley Galloway, a project manager for the Government Accounting Standards Board, which develops principles for financial reporting by state and local governments.

But Galloway said that reporting only net income from video slots appeared to comply with the accepted method of reporting private casino revenues, so that the Lottery did not appear to be violating any generally accepted accounting principles.

"Would I prefer better disclosure so I can see revenue streams separately reported if they have dissimilar recognition criteria? Yes," he said. "Can I say that it's incorrect to combine those? No."

Data compiled by the North American Association of State and Provincial Lotteries show that some states — Delaware, West Virginia and Oregon — also reported only net VLT revenues. Rhode Island and South Dakota, however, reported all the cash generated by their VLTs.

In its 2005 annual report, the latest available online, the South Dakota Lottery discloses its total "cash in" for video lottery sales and its "cash out" for prizes. Its statement of revenues and expenses includes "video lottery revenue," "instant ticket sales" and "on-line ticket sales."

Padavan, a leading opponent of legalized gambling, called the Lottery Division's accounting method inappropriate for a state agency.

He accused the Lottery of intentionally minimizing the amount of money being wagered to hide how "profligate gambling is doing great harm to the people of the state of New York."

Frank Mauro, executive director of the labor-funded Fiscal Policy Institute in Albany, a tax and budget think tank, said the Lottery was employing "weird terminology" that hid "significant information" about its finances.

"The reason why lotteries are legal in New York is to provide aid to education, and the reason why video gaming machines are legal is because they've been deemed by the courts to be lotteries," Mauro said. "And so I would think that for public scrutiny and for official decision-making, that a key piece of information would be how much of what people spend goes to education."

Blair Horner, legislative director of the left-leaning New York Public Interest Research Group reform organization, likewise said, "It would be better for the public and policymakers if (the Lottery) made all the information available. ... And then people can draw their own conclusions. ... I can't even get into whether what they do is right or wrong, but generally speaking, government should be as transparent as possible, particularly when it comes to government money."

Lottery Deputy Director Miller, in an e-mail yesterday, said it was "misguided" to compare New York's video lottery operation with those in other states, because "New York operates the only central determinative system in the country."

"In a central determinative system," Miller said in an e-mail, "the video lottery games are built centrally via computer programs. Each individual play (electronic ticket) is created and randomly assembled into groups of tickets. These electronic tickets are then divided into smaller groups of tickets that are electronically transmitted to the video gaming facilities. The groups of electronic tickets are then forwarded to the corresponding machine/terminal that a customer is playing. This method greatly improves the accounting and auditing controls over electronic tickets, games and related reporting."

New York Lottery's Response

Susan Miller, deputy director of the New York Lottery, issued the following statement in response to questions about the Lottery's accounting of cash wagered on its video lottery terminals:

"The New York Lottery complies with all requirements of GASB (the Government Accounting Standards Board) as certified by its independent auditor, KPMG, Inc. In the Lottery's correspondence and discussions with you for almost a year, you have consistently rejected the information the New York Lottery has provided and insisted on using incorrect data that you created. Your comparison of the New York Lottery's Video Lottery Terminals to other states is misguided since New York operates the only central determinative system in the country. The total revenue generated by VLTs since 2004 and the commensurate aid to education has been provided to you as confirmed by KPMG."

History of the New York Lottery

Nov. 8, 1966: New York voters approve, by a ratio of 2-to-1, an amendment to the state constitution permitting a statewide lottery to benefit public education.

April 18, 1967: Gov. Nelson Rockefeller signs a bill creating a monthly lottery, with tickets selling for $1 each and a top prize of $100,000.

June 1, 1967: Sales are brisk as $1 tickets go on sale at almost 4,000 hotels, motels and banks across the state.

June 1968: The state reports only 62.4 million tickets sold during the lottery's first year, 300 million fewer than projected.

August 1969: The number of prizes is doubled in an attempt to spur ticket sales.

January 1972: Weekly 50-cent lottery replaces the monthly game.

January 1974: Gov. Malcolm Wilson proposes a daily lottery to discourage the illegal numbers racket.

July 1974: Daily drawings begin.

Sept. 10, 1975: Lottery begins its first TV ad campaign.

Oct. 22, 1975: Gov. Hugh Carey suspends sales after an error creates hundreds of duplicate tickets for $1.4 million Colossus game.

Nov. 3, 1975: Assembly Speaker Stanley Steingut calls the lottery a "gyp" after investigators allege that up to $5 million in revenue was deposited in accounts bearing no interest while the banks collected fees for handling the money.

Nov. 28, 1975: Carey fires the Lottery director and dismisses or reassigns all 324 Lottery employees.

Sept. 8, 1976: Ticket sales resume with a new $1 instant "scratch-off" game; prizes range from $2 to $1 million.

Sept. 16, 1976: Ticket shortages are predicted after a record 18.9 million are sold in the first week.

May 10, 1977: A weekly $1 lottery begins; prizes range from $20 to $1 million.

Nov. 11, 1978: First drawing for Lotto, with a $250,000 jackpot.

Jan. 21, 1980: Carey proposes a daily numbers game, projects $35 million in annual revenue.

Sept. 1, 1980: Daily numbers game begins.

Nov. 18, 1981: Maintenance worker Louis "Louie the Lightbulb" Eisenberg of Brooklyn wins $5 million Lotto jackpot, the largest prize ever.

Dec. 4, 1982: Lottery revenues for 1981 are $179.6 million, for 5 percent of all school aid.

Sept. 7, 1983: Plans are announced to double Lotto drawings to twice a week, with bigger prizes and longer odds.

May 12, 1984: Four winning tickets share the richest-ever Lotto jackpot of $22.1 million.

Aug. 20, 1985: Tickets sell at 19,000 a minute as the Lotto jackpot hits $41 million, the largest ever in North America.

Aug. 22, 1985: Legislative leaders criticize the lottery as a "gimmick" and a "fraud" after a $95 million windfall is used to offset general-fund school aid.

Aug. 11, 1986: Cash 40 game goes on sale, offering lump-sum jackpots instead of installments over 20 years.

June 3, 1995: Budget bills include a plan for a controversial keno-style game.

Sept. 5, 1995: Appeals court rejects New Jersey casino owner Donald Trump's bid to block the Quick Draw keno game.

Sept. 6, 1995: Quick Draw begins in 2,400 bars, restaurants, delis and bowling alleys.

Nov. 22, 1995: Officials propose letting Lotto winners take jackpots in lump sums instead of 20-year payouts.

Feb. 18, 1999: Major changes are announced for Lotto, including more prizes, in an effort to revive sagging sales.

Aug. 4, 1999: Gov. George Pataki calls for New York to join the multistate Powerball game.

October 23, 2001: A budget deal includes a multistate lottery plan and video lottery terminals at several racetracks.

May 2002: New York becomes the ninth state to join the Mega Millions multistate lottery.

Jan. 28, 2004: Video lottery terminals open at Saratoga racetrack.

May 3, 2005: State's highest court upholds the 2001 budget deal expanding gambling.

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