SACRAMENTO, Calif. — Californians who play lottery Scratcher games have apparently noticed a new and not unwelcome change in the way some of the games are structured: They win more.
As a result, they're playing more.
Scratcher sales leaped by $55 million in June, the first month that a new law allowed lottery officials to increase the percentage of revenues returned in prize money.
Officials are confident that trend will continue. In its budget for the fiscal year that began July 1, the Lottery Commission projects total annual revenues, including all games, will climb from $3 billion to $3.5 billion, a 16 percent increase. All of that increase is fueled by expectations of robust Scratcher sales, which are projected to jump 33 percent, to $2.2 billion.
"We're on a pretty good path," Lottery Director Joan Borucki said. "We're able to put a lot more prizes into the game."
The change, long sought by lottery officials, removes the requirement of the voter-approved 1984 Lottery Act that revenues be distributed through a rigid formula: 50 percent for prizes, 34 percent to schools and 16 percent for administrative and marketing costs.
Under AB 142, signed by Gov. Arnold Schwarzenegger in early April, administrative costs must be reduced to 13 percent and lottery officials are given flexibility in determining what percentage can go to winnings — as long as the dollar amount that goes to schools meets or exceeds the $1 billion they received for the fiscal year that ended June 30.
If that goal isn't met, the law will automatically be revoked.
For the fiscal year that just began, Borucki is projecting that payments to schools will rise to $1.1 billion.
Although school officials caution lottery revenues are only a tiny fraction of education funding, most will welcome the change, said Bob Wells, executive director of the Association of California School Administrators.
"The percentage of revenues coming to us isn't as important as the amount of money. We believe we're likely to come out dollars ahead," he said. "The lottery will never fund us at a high level, and it will never replace all the cuts we've taken from the state. But every little bit helps."
For example, the Conejo Unified School District just adopted a 2010-11 budget that relies upon $147.7 million in income. Of that, $2.8 million, or 1.9 percent, is anticipated from lottery distributions. If the Lottery Commission's projected increase in school distributions is realized, it would mean about $280,000 extra for the district.
The factor that will drive increased sales is that players will win more money and win more often, Borucki said.
She said the lottery will switch out about four existing Scratcher games per month through the end of September, at which point all games will have higher odds of winning. Spread across all games, more than 60 percent of revenues will be returned in winnings.
As an example, Borucki said the existing $2-per-ticket Lucky Tripler game now returns 55.5 percent in winnings and the odds of a player winning a cash prize on a given ticket are 1 in 9.3. It will be replaced by a $2 Red, White and Blue 7's game in which 60.5 percent will be devoted to winnings and the odds of winning a cash prize are lowered to 1 in 5.75.
As a general rule, the odds improve and the percentage of revenues devoted to winning goes up on higher-priced tickets. Three separate $5 games in which 66 percent of revenues go to winnings are in the works. The biggest promotion at the moment is a $5 Millions in Cash game in which 64 percent of revenues are paid back in prizes and in which 25 prizes of $1 million will be awarded.
Because California is perhaps the last of all state lotteries to increase prize percentages, Borucki said she has learned from the experiences of other states. Some immediately increased prize payouts to 70 percent or higher, which produced an initial spike in sales that proved unsustainable.
"We're trying for steady, sustainable growth," she said. "In other states, they'd get a huge blip and then it would fall off because the players start waiting for the next big thing. You really need to manage the expectations of players."
Paul Jason of the Public Gaming Research Institute called Borucki's strategy "very, very smart."
"It's like dieting," he said. "If you go about it in the wrong way, the net result isn't very positive. The manner and method in which this change is implemented will very much influence long-term profitability."
Jason said the California Lottery's historical practice of capping winnings at 50 percent of revenues "was just not an adequate value proposition" to attract players. Indeed, per-capita lottery sales in California have long been well below the national average.
"Giving more flexibility to the lottery operators to manage payouts will help the lottery create a better product," he said.
The idea of increasing winnings to drive higher sales had been kicked around in Sacramento for a number of years before the legislation was finally adopted this spring.
Initially, Schwarzenegger had proposed changing the rules — "modernizing" the lottery, he called it — as part of a plan to borrow against future increased lottery sales to help balance the current budget.
That idea was put before voters in the May 2009 special election, but was overwhelmingly rejected, 34 percent to 66 percent.
But because the idea of increasing payout percentages to yield a higher amount of money for education fit into the stated intent of the 1984 lottery initiative — which was to use revenues to benefit schools — officials determined they could take this singular step without voter authorization.
In large part, said lottery spokesman Bill Ainsworth, that was because the notion that the change would result in increased revenues for schools was no longer conjecture. "So many other states had done it that it wasn't speculation any more," he said.
Under the ballot proposal voters rejected, the anticipated extra $100 million that the lottery expects to provide to schools this year would have instead been used to pay off borrowing.
In the end, is this a better deal for the state than borrowing against future revenue increases would have been?
"That's for someone else to answer," Borucki said.