It Is Not Christie’s Fault the Lottery is Failing to Meet Expectations

The New Jersey lottery is not producing what the state put in its budget. Nor is it producing what Northstar and the governor promised when the lottery was privatized. No one is pleased, but they should not be surprised. No gaming option in New Jersey is hitting the governor’s or anyone else’s target. There are too many options, too much supply and not enough customers for casinos, lottery, online gaming, horse racing, church bingo halls and the competition in surrounding states. The articles on the lottery have been accusatory, but it is not someone’s fault or proof of incompetence – it is a sign of the times.

The state’s lottery is bringing in less money than Christie’s administration expected this fiscal year. Christie entered a 15-year contract with lottery company Northstar in 2013 to oversee parts of the state lottery…latest revenue figures showing the lottery is estimated to bring in $930 million for fiscal year 2015…shy of earlier estimates of $955 million, which were revised down from $1.04 billion. Michael Catalini, Associated Press, 5-19-15

Critics are quick to point fingers at the privatization. Privatizing lotteries, prisons or any other state institution might or might not be a good idea. I don’t have enough information to know the answer in this case or any other. However, I do know that any decision to privatize state institutions is a political one. It is an accepted plank in state Republican Party platforms. As such, it has a built-in adversarial group in the Democrat Party. Any analysis of the results is flawed and confused by that fact. New Jersey Governor Chris Christie wanted to monetize the lottery. Privatization was intended to produce immediate cash for the state and avoid the long wait and risk that is part of operating a state lottery as a source of tax revenue.

Governor Christie did not invent the concept. There is a thriving industry that buys long-term revenue streams and converts them into instant cash, at a discount. Contracts, lottery prizes and reverse mortgages operate on the principle. Three states have explored the idea with lotteries; Pennsylvania, New Jersey and Illinois. In each case the bid was based on projections of future lottery revenues, using historical models. However, times and economies change. The projections made before the recession were seriously flawed. No one anticipated the Great Recession or the increased competition for that matter.

The sheer volume of competition that has developed in the Northeast was not on anyone’s radar. It started as a trickle over ten years ago until it became the tidal wave it is now. Casino developers were no more accurate at predicting the future than governors or lottery operators. Take the Revel casino in Atlantic City as an example; Revel was conceived in a time of little regional competition. There were a couple of Indian casinos in Connecticut and New York and a few slot machines at race tracks, but that was all and that had little impact on casino revenues in Atlantic City. But before the plans of the $2.4 billion resort had been finished Pennsylvania authorized slot machines. By now that tale has become a very common one. That is what happened to the casinos in Ohio. The prospective casino licensees did not anticipate the racinos and the amount of business they world take from the casinos. In 2015, revenue from the seven racinos in Ohio is more than from the four casinos. Without the racinos the casinos in Ohio would be rolling in cash. As it is, however, they struggle. The same thing has happened to casinos in Michigan, Indiana, West Virginia and Pennsylvania. They simply did not anticipate the amount of competition they would be facing.

However, for Governor Christie and the New Jersey lottery, the recession and competition are not the only factors that have impacted revenues. There is another phenomenon that has altered ticket sales, not just in New Jersey, but nationally – jackpot fatigue created by mega-jackpots. Forty-three states have linked into two systems to create huge jackpots, the largest to date approaching $700 million. In the long run, the mega jackpots helped lottery sales. But in the near-term, they have created purchasing cycles that did not exist before the inception of the Powerball and Mega Millions jackpot systems. For the last three or four years, lottery sales have been slower and even depressed until the Powerball or Mega Millions jackpot reaches something in excess of $200-300 million. At that point, lottery ticket sales begin to increase dramatically with each drawing in which there is no winner.

When those jackpots get over $400 million they impact the national economy. The excitement over the jackpot shifts discretionary consumer spending. Those mega-jackpots create intense media attention. The bigger the jackpot the larger its impact on the national consciousness; they cause traffic jams, reduce worker productivity and work attendance. Powerball and Mega Millions changed the way people buy lottery tickets. Millions of people now wait for bigger jackpots before buying any tickets.

States with jackpot fatigue need increasingly bigger jackpots to lure in casual players who buy lottery tickets only when a prize is huge. People once impressed with a $100 million payout shrug until it reaches $300 million. Then fewer people play, so it takes longer to get to staggering prizes. Sales of Mega Millions and Powerball multistate games were down 30% through the end of March, New Jersey officials said. Michael Symons, Asbury Park Press, 5-26-15

Chris Christie may have had a good idea or not, that is a political argument; but the revenues of the state lottery cannot be judged on the basis of privatization. The lottery is suffering from jackpot fatigue and possibly the residue of the recession. But the core problem is competition; there is intense competition for every discretionary dollar in New Jersey and everywhere else. Christie might not be a good candidate for president of the United States or even for another term as governor of New Jersey, but he is not to blame for lottery’s revenue problems.

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