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Has anyone noticed the change?

Topic closed. 14 replies. Last post 9 months ago by KY Floyd.

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TheMeatman2005's avatar - lightening
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Posted: February 21, 2016, 8:16 am - IP Logged

The Powerball cash value used to be approximately 62% of the annuity jackpot amount.

Now, it has been about 66% of the annuity jackpot amount.

Has anyone else noticed that and know the reason why the cash value percentage would change?

The Meatman

“The quickest way to double your money is to fold it in half and put it in your back pocket.” Will Rogers

Winning happens in a flash, Like A Bolt Of Lightning!  Patriot

    savagegoose's avatar - ProfilePho
    adelaide sa
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    Posted: February 21, 2016, 9:12 am - IP Logged

    its the time value of money.  ie interest rates. if the interest rates where as high as %6 then the cash could be lower. this will get interesting when  they go to negative interest rates,   thus making the cash value higher than the annuity!

    2014 = -1016; 2015= -1409; 2016 JAN = -106; FEB= -81; MAR= -131; APR= - 87: MAY= -91; JUN= -39; JUL=-134; AUG= -124; SEP = -123; OCT= -84  NOV=- 73 TOT= -3498

    keno historic = -2291 ; 2015= -603; 2016= JAN=-32, FEB= +12 , MAR= -86, APR = -77. MAY= -48, JUN= -29, JUL=-71; AUG = -52; SEPT= -43; OCT = +56 NOV = -33 TOT= -3297

      TheMeatman2005's avatar - lightening
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      Posted: February 21, 2016, 9:27 am - IP Logged

      its the time value of money.  ie interest rates. if the interest rates where as high as %6 then the cash could be lower. this will get interesting when  they go to negative interest rates,   thus making the cash value higher than the annuity!

      OK, so lower interest rates means that more cash is needed to generate the annuity jackpot amount.

      Why not keep it at the past 62% and just lower the annuity amount ?

      The Meatman

      “The quickest way to double your money is to fold it in half and put it in your back pocket.” Will Rogers

      Winning happens in a flash, Like A Bolt Of Lightning!  Patriot

        savagegoose's avatar - ProfilePho
        adelaide sa
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        Posted: February 21, 2016, 12:38 pm - IP Logged

        Im not sure how it works nowadays.  earlier post says its done by auctioning  the annuity payments to the lowest bidder. so my information is wrong. im working on how i thought it worked. im still trying to get my head around it actually works now

        2014 = -1016; 2015= -1409; 2016 JAN = -106; FEB= -81; MAR= -131; APR= - 87: MAY= -91; JUN= -39; JUL=-134; AUG= -124; SEP = -123; OCT= -84  NOV=- 73 TOT= -3498

        keno historic = -2291 ; 2015= -603; 2016= JAN=-32, FEB= +12 , MAR= -86, APR = -77. MAY= -48, JUN= -29, JUL=-71; AUG = -52; SEPT= -43; OCT = +56 NOV = -33 TOT= -3297

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          Posted: February 21, 2016, 12:42 pm - IP Logged

          Meatman wrote:  "Why not keep it at the past 62% and just lower the annuity amount?"

          "The" interest rate is the IRR of the returns from a ladder of investments over 29 years (30 payments, the first being immediate) that return the required annual payments.  The actual rate of return of each step of the ladder might vary; the IRR is the average rate of return.

          The required annual payment increases 5% each year.

          From this, the MUSL calculates an annuity factor (AF).  In Excel:

          =FV(5%,30,-1,0) / SUMPRODUCT(-PV($B$4,ROW(1:30)-1,0,(1+5%)^(ROW(1:30)-1)))

          where B4 is the IRR.  (Alternatively, replace B4 with a range of actual rates of return, which is probably what the MUSL does.)

          Ostensibly, the cash value (CV) is 34.00655% of total sales for the current drawing, plus any rollover.  So the grand prize (GP) is CV*AF.

          However, the initial GP is $40M, and the minimum GP increment is $10M.  If that exceeds the percentage of current sales plus rollover, the cash value is GP/AF.

          The MUSL does change these percentages and minimums from time to time.  The numbers here are as of 27 Jan 2016.

          Could the MUSL do it differently?  Sure.

          [EDIT] Re: the ladder of investments, savagegoose wrote: "earlier post says its done by auctioning the annuity payments to the lowest bidder".

          Currently, that is correct.  The MUSL Powerball Group Rules state:  "the best bid submitted by MUSL’s pre-approved qualified brokers shall determine the cash pool needed to fund the guaranteed annuitized Grand Prize".

            ArizonaDream's avatar - Lottery-009.jpg

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            Posted: February 21, 2016, 1:22 pm - IP Logged

            Im not sure how it works nowadays.  earlier post says its done by auctioning  the annuity payments to the lowest bidder. so my information is wrong. im working on how i thought it worked. im still trying to get my head around it actually works now

            The confusion seems to come from the state lotteries calculating it one way and PB/MM calculating it another way. 

            Some state lotteries, like Texas which was discussed in that other thread, start with a fixed annuity value and work backwards from that based on interest rates available and come up with a cash value. MM and PB, on the other hand, start with a cash value based on predicted/actual sales and then calculate how much an annuity would earn in interest to advertise an annuity value.

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              Posted: February 21, 2016, 2:05 pm - IP Logged

              The confusion seems to come from the state lotteries calculating it one way and PB/MM calculating it another way. 

              Some state lotteries, like Texas which was discussed in that other thread, start with a fixed annuity value and work backwards from that based on interest rates available and come up with a cash value. MM and PB, on the other hand, start with a cash value based on predicted/actual sales and then calculate how much an annuity would earn in interest to advertise an annuity value.

              Actually, both the PB and Lotto Texas calculations are the same, procedure-wise.  (The details like rates of return probably differ, of course.)

              From the Lotto Texas procedures:  "The interest factor is calculated by dividing the advertised jackpot by the estimated cost, including the initial payment required, to fund an investment stream that would yield the total advertised jackpot over a 30-year period".  The estimated cost is based on investment information from "appropriate financial institutions and/or brokers".

              If we look deeper into how the cash value is actually calculated, we see that is the actual percentage of sales plus rollover when that covers the estimated cost (e.g. 23 Jan 2016).  But the cash value is the estimated cost (grand prize) divided by the interest factor when the actual percentage of sales plus rollover is less than the minimum initial grand prize ($5M) plus minimum increments ($250K) (e.g. 14 Oct 2015).

              That is what I described, based on the MUSL Powerball Group Rules.

              (My formula for the MUSL PB annuity factor assumes a 5% increase in annual payments, per MUSL PB procedures.  I don't know if or how the Lotto Texas annual payments vary.  If they are equal, replace 5% with 0% in my formula.)

                ArizonaDream's avatar - Lottery-009.jpg

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                Posted: February 21, 2016, 2:18 pm - IP Logged

                I'm going to copy what someone else posted in another thread -

                It's important to understand what happens when a Lotto Texas jackpot is won. If the jackpot winner has chosen 30 Annual Payments, Texas Lottery officials provide the Texas Treasury Operations Division of the State Comptroller's Office with the jackpot amount. The Division submits a request for bids from previously approved investment firms. The contract is awarded to the investment firm that will provide the jackpot amount, paid over 30 years, at the lowest cost to the State. The Texas Lottery uses a portion of the sales for that drawing - plus any money rolled over, if there is any, from previous drawings - to buy the 30-year investment. According to the State Lottery Act, the funds must be invested in such a way as to ensure the payment of the prize. All interest earned on the investment is a part of the prize.

                A similar process is followed if the jackpot winner has chosen Cash Value Option. Texas Lottery officials still provide the 30-year jackpot amount to the Treasury Operations Division, which still calls for competitive bids from previously approved investment firms. However, the investment is not actually purchased. Instead, the winner receives one lump-sum payment equal to the amount of money that would have been required to purchase the 30-year investment. This is called the "net present value" of the jackpot. The lump sum payout for a given estimated jackpot varies due to changing interest rates. 

                 

                That's different from what I understand of the MUSL calculations.

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                  Posted: February 21, 2016, 2:18 pm - IP Logged

                  Savagegoose wrote: "this will get interesting when they go to negative interest rates, thus making the cash value higher than the annuity".

                  I doubt that because I don't believe the IRR over 29 years would be negative.  For example, if 10 years of negative rates (a "long" time, IMHO) are followed by 19 years of positive rates, the IRR can be positive, and the annuity factor can be larger than 1.

                  Of course, we can construct examples (albeit unlikely, IMHO) where the IRR is indeed negative.  But my point is:  negative rates per se do not necessarily mean the cash value exceeds the grand prize (annuity amount).

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                    Posted: February 21, 2016, 3:01 pm - IP Logged

                    ArizonaDream wrote:  "I'm going to copy what someone else posted in another thread ....".

                    And I believe that quote supports my explanation.  If you perceive a difference, I probably did not explain things clearly enough.  Let me know the specific difference that you perceive, and I will try to explain it better.

                    Nevertheless, I had anticipated some push-back, and I was going to add a PS to clarify that quote.

                    The quote is probably accurate insofar as what the Lotto Texas website says.  But we can see that it is incomplete, if we look deeper into Lotto Texas documents available from their website.

                    The first paragraph echos what I described for both the MUSL PB and Lotto Texas.

                    The second paragraph does, as well.  But it is missing one detail.  It states:  "the winner receives one lump-sum payment equal to the amount of money that would have been required to purchase the 30-year investment".

                    Both paragraphs are correct and similar to my explanation when the "portion of the sales for that drawing - plus any money rolled over" is less than the 30-year jackpot amount.  In that case, the difference is made up from the State Lottery Account.  The MUSL maintains similar reserve accounts.

                    But when sales plus rollover exceeds the amount needed to fund the annuity investments, the difference is added to the initial payment.  (Presumably, the relatively small difference arises because of rounding that applies to each investment.)  The MUSL calls this "breakage".

                    So in both cases, the entire "portion of sales for that drawing plus any money rolled over" applies to the amount awarded to the winner, either as a lump sum or as annual payments.

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                      Posted: February 21, 2016, 3:16 pm - IP Logged

                      The difference I think you are missing, is that Texas (and Illinois) bump up the the lotto annuity jackpot by a fixed 250,000 with every rollover, while the MM/PB jackpot goes up by an amount directly tied to sales. 

                      And that'll be the last from me, as I don't actually care enough to debate further.

                        savagegoose's avatar - ProfilePho
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                        Posted: February 21, 2016, 3:33 pm - IP Logged

                        thanks guys ;Arizona and math head, I now have a clearer view on how things are worked out.  And yeah the negative interest rates comment was a little tongue in cheek. Im sure its not a place we  want to go , negative rates.

                        I assume the %5 increase in annuity values is to  defeat inflation. so we can assume the states %5 is the rate iof inflation, not the sub 2% the gov puts out.

                        2014 = -1016; 2015= -1409; 2016 JAN = -106; FEB= -81; MAR= -131; APR= - 87: MAY= -91; JUN= -39; JUL=-134; AUG= -124; SEP = -123; OCT= -84  NOV=- 73 TOT= -3498

                        keno historic = -2291 ; 2015= -603; 2016= JAN=-32, FEB= +12 , MAR= -86, APR = -77. MAY= -48, JUN= -29, JUL=-71; AUG = -52; SEPT= -43; OCT = +56 NOV = -33 TOT= -3297

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                          Posted: February 21, 2016, 4:03 pm - IP Logged

                          Savagegoose wrote:  "I assume the %5 increase in annuity values is to  defeat inflation. so we can assume the states %5 is the rate iof inflation, not the sub 2% the gov puts out".

                          I don't think we can make any such assumptions.  The 5% increase for PB and MM annuities is specific to those games.  It is very different for Calif's SuperLotto, for example.  I don't know what it is for Lotto Texas.

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                            Posted: February 21, 2016, 8:14 pm - IP Logged

                            ArizonaDream wrote:  "The difference I think you are missing, is that Texas (and Illinois) bump up the the lotto annuity jackpot by a fixed 250,000 with every rollover, while the MM/PB jackpot goes up by an amount directly tied to sales".

                            I did not think we are "debating" per se; just trying to get our facts straight.  I am happy to have my mistakes pointed out.

                            I don't know anything about Illinois.  And I have not looked at MM rules recently.

                            -----

                            It should be self-evident that the Lotto Texas jackpot does not increase "by a fixed 250,000".

                            For example, look at the run-up to the jackpot on 23 Jan 2016.  The first 11 rollovers do indeed increase by $250K.  But the last 17 rollovers increase by $500K to $1M, non-deterministically.

                            Lottery documentation states that the jackpot increases "by at least $250,000".   And it "may be increased prior to the draw based on revised sales projections, if [...] sales have grown sufficiently to support an increased advertised jackpot".

                            References: http://www.txlottery.org/export/sites/lottery/Documents/002-LottoTexasJackpotEstimation.pdf and http://www.txlottery.org/export/sites/lottery/Games/Lotto_Texas/Estimated_Jackpot.html .

                            -----

                            It should also be self-evident that the PB jackpot is not always "directly tied to sales".

                            For example, look at the run-up to the jackpot on 13 Jan 2016.  The initial jackpot is $40M, and the first 7 rollovers increase by $10M, which is consistent with the minimums that I mentioned.

                            Moreover, the first cash value is $24.9M, and the second cash value is $30.5M.  If they were directly tied to sales, total sales would be about 36.6M tickets for the first drawing ($24.9M/34%/$2), but only 8.2M tickets for the second drawing (($30.5M-24.9M)/34%/2).  Hopefully, that does not follow common sense.

                            Lottery documentation states that the advertised grand prize "shall mean the estimated annuitized Grand Prize amount as determined [...] by use of the MUSL Annuity Factor".  But it also states that they "may offer guaranteed minimum Grand Prize amounts or minimum increases in the Grand Prize amount", and they have "determined that the minimum Grand Prize shall be $40 million annuity and the minimum increases in the Grand Prize shall be $10 million annuity".

                            Reference:  https://www.nmlottery.com/uploads/filelinks/82400d81a0ce468daab29ebe6db3ec27/pb_rules_effective_with_the_feb_3_2016_drawing___updated_jan_27_2016.pdf .

                            (Although nmlottery.com is a New Mexico website, the document title is "Multi-State Lottery Association Powerball Group Rules", and it reads like MUSL, not NM, rules.)

                            -----

                            That said, I agree that we have digressed from the original question.

                            I had only wanted to answer Meatman and to back up savagegoose's statement that the ratio of the cash value to the jackpot is determined by "time value" calculations, which are based on actual rates of return of (offered) investments over 29 years.

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                              Posted: February 21, 2016, 9:36 pm - IP Logged

                              thanks guys ;Arizona and math head, I now have a clearer view on how things are worked out.  And yeah the negative interest rates comment was a little tongue in cheek. Im sure its not a place we  want to go , negative rates.

                              I assume the %5 increase in annuity values is to  defeat inflation. so we can assume the states %5 is the rate iof inflation, not the sub 2% the gov puts out.

                              The information about inflation that we get from the government is real info based on what's actually going on. The annual increases in annuity payments for various lottery games are a fairy arbitrary amount. It's possible that the 5% figure was chosen in the expectation that future payments will have at least the same value as current payments, but that's not the real reason for the increases.

                              The lotteries have exactly one  primary goal, and that's maximizing revenue for the state(s). By advertising an annuity value they get to claim that the jackpot is significantly bigger than it would be if they advertised the cash value that almost every winner chooses. By using graduated payments that increase every year they get to promote an advertised value that's significantly bigger than it would be if they used an annuity with a fixed  annual payment, or if they used an annuity with a shorter period, as they did in the past. It's all about what benefits the lottery. If it's good for a winner who chooses the annuity that's just a happy coincidence.