Lotteries Know They Must Evolve

WASHINGTON — Lotteries are a key source of revenue for 44 states nationwide, but players' evolving tastes and record-low interest rates have contributed to put lotteries in a precarious position, according to the head of the industry's leading interest group.

"The national challenges are huge, said Buddy Roogow, president of the North American Association of State and Provincial Lotteries and executive director of the District of Columbia Lottery & Charitable Games Control Board.

Roogow said simple numbers games were a huge hit, especially on the east coast, in the early days of state lotteries because they were closely descended from the illegal numbers games of the Prohibition era. They remained highly popular for many years, but D.C. and some other cities have since hit a ceiling as players have begun to demand more entertaining and engaging games with better payouts.

Although total lottery sales in the U.S. grew 8.9% from fiscal year 2011 to fiscal year 2012, jumping to $70.6 billion from $64.8 billion, Roogow still sees trouble on the horizon unless lotteries continue to evolve.

"Lotteries are in a somewhat precarious position," he said.

Lottery revenues are used different ways in different states, but are frequently funneled back into the general fund or into schools. Florida, Arizona, West Virginia, and Oregon have all made use of the relatively stable revenue streams produced by lottery sales to back investment-grade bonds to fund public schools and parks.

In 2010 the popular Powerball lottery game became available nationwide, and it is already struggling from a phenomenon known as "jackpot fatigue." The historically low interest rates in the market limit how fast lottery jackpots are able to grow, while modern players are less and less enticed to play for jackpots that would have been stunningly high a few years ago, Roogow said.

"It takes us longer and longer to get to those high levels," he said, noting that the jackpots for national lottery games twice threatened the $1 billion mark in 2012. But Roogow said lottery officials cannot continue to count on huge jackpots driving last-minute sales.

Natalie Cohen, a managing director of municipal securities research at Wells Fargo, authored a 2012 report on lottery bonds that shed light on some of those challenges as well. Her report hinted at Roogow's concerns that traditional numbers games and the scratch tickets that rose to popularity in the 1980's would need to give way to more exciting and modern games to contribute to continued lottery revenue growth.

"Lottery tickets and scratch-offs are a mature business and saturation limits future growth, in our view," she wrote. "Video lotteries, while contributing to a recent surge in revenue growth, are typically located in entertainment venues, which can be affected by competition in neighboring communities."

Roogow began 2013 with an appeal to NASPL members not to sit on their laurels.

"One thing we've all learned from past efforts to improve our games is that there is not a permanent solution," he said in a message to lottery officials around North America. "Constant refreshing is necessary."

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