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Oregon pays lottery sites larger share, audit finds

Jan 30, 2004, 6:50 am

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Oregon LotteryOregon Lottery: Oregon pays lottery sites larger share, audit finds

Leaders say the report shows retailers' portion of proceeds should be cut, but a lobbyist disagrees

The Oregon State Lottery pays retailers a bigger cut than similar operations do, a state auditors' report says, a finding that could bolster a long-standing drive to lower the compensation that bars and taverns get for carrying video poker machines.

Oregon retailers receive on average 32 percent of the net proceeds from video poker -- about $159 million last fiscal year -- according to the report released Thursday by the secretary of state's Audits Division. In contrast, the cut ranged from 15 percent to 25 percent in eight Canadian lottery provinces where auditors deemed the systems were most similar to Oregon's.

The lottery commission, under pressure from the Legislature and governor to generate more profit for the sagging state budget, asked for the survey as it prepares to negotiate a new six-year contract with retailers.

The report makes no recommendation on the retailer compensation rates, called commissions, but Secretary of State Bill Bradbury did.

"It's way too much money," Bradbury said. "Here's the fact that drives me: For every percentage point that the commission comes down, it means $5 million more for schools, salmon, parks and economic development. It's very compelling information that you ought to look at this again."

But any new attempt to reduce the rates faces opposition from the powerful Oregon Restaurant Association and other lobby groups, which helped kill several rate-cutting bills in the 2003 Legislature. A lobbyist for the restaurant group said Thursday that the report is flawed.

The rates have held mostly steady since video poker started in 1992, despite two independent government studies in 1994 that showed retailers would still profit generously with a 10 percent cut.

The new report "is a vindication of everything we have been saying," said Rep. Diane Rosenbaum, D-Portland, who introduced one of last year's bills. "We have a source of revenue that can be tapped for education, public safety and health care for our state, and we need to do that."

Bill Perry, a restaurant association lobbyist who has said cutting commissions wouldn't help revenues, said Thursday that compensation pays for business improvements that generate lottery profit. Cutting them could drive retailers to drop the games, he said.

Perry also said auditors erred in comparing the state to Canadian provinces that don't have to deal with Oregon laws that restrict the number of machines to six per bar or tavern, ban lucrative slot machine-type line games, and forbid retailers from deriving the bulk of their revenue from video poker.

"He was just trying to find a way to say our commission rates were too high," Perry said of Bradbury. "Explain to me how we're similar when they (Canadian provinces) have twice as many machines, line games and no dominant-use rules."

The five-member lottery commission could lower compensation when it implements the new contract with 3,400 Oregon retailers in June. Of those retailers, 1,973 carry video poker machines.

The Legislature balanced the 2003-05 budget partly by ordering the lottery to come up with an additional $67 million in profit. Lawmakers authorized bars and taverns to add an extra machine -- from five to six -- but left the lottery to decide how to come up with most of the new money. Cutting retailer compensation or approving easy-to-play line games is the most likely way to raise that much money, lottery officials have said.

State law directs the commission to maximize lottery profit and set a fair rate of return to retailers. The lottery averages about $350 million a year in profit that goes to schools, economic development, parks and salmon restoration.

The report will be presented today to lottery commissioners, who will set a date for a hearing on compensation.

Kerry Tymchuk, the commission's new chairman, said the report will be "one piece of evidence" as the panel tries to determine a "fair" rate. "Obviously, we need to hear the viewpoint of the retailers . . . and make sure we're comparing apples with apples and not with oranges," he said.

Auditors surveyed nine states, including Oregon, and nine Canadian provinces that have video lottery or other gambling. They determined the provinces were most comparable to Oregon based on the relatively small number of machines and because the government owns and operates its video poker terminals.

Retailers in places that differ from Oregon tended to receive higher compensation, the report said. For example, Montana retailers receive 85 percent of profit but split it with third-party operators.

In Oregon, retailers receive a 35 percent commission for profits of up to $200,000 a year. The rate drops to 30 percent on the next $200,000 in profit, a commission-ordered change in 1994. In fiscal year 2003, retailers averaged $80,000 in compensation.

The tiered rates have resulted in a "slowdown in growth but not diminishing returns" for retailers, Perry said. "But if he (Bradbury) thinks that you could go to 22 percent and not do any harm to the lottery, I don't think he has any idea what he's talking about."

But Steve Novick, a former legislative staffer who was unsuccessful in getting the issue on the ballot in 1998, said the climate is right for change. "I am confident that a governor who prioritizes children is not going to continue to spend three times as much per year on unnecessary tavern subsidies as on Head Start," he said.

Gov. Ted Kulongoski's spokeswoman declined comment. Kulongoski said last month that video poker "wasn't supposed to be 'Joe Millionaire' for the retailers."

Lottery director Brenda Rocklin said the auditors' report will join two notebooks of history, analyses and statistics, plus cost information from retailers, that commissioners will study before making a decision.

"One thing that might be important about the Canadian provinces is not so much the percentages, but really, over the course of years . . . they've lowered commission rates," Rocklin said. "And I think the commission will want to know: Did that have any impact on video lottery sales?"

Oregonian

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