The undisputed “King of the Ohio Lottery”, Ron Mottl’s dream finally came true in 1987 when the Ohio Constitution was amended to require ALL lottery profits be earmarked for primary and secondary education. Yes, that’s right, 1987!

In 1973, the original amendment that required all lottery proceeds be deposited into the GRF passed by an overwhelming margin of 64-34%. Each General Assembly would then decide how those profits were spent which meant that every budget cycle could have been different – though it wasn’t. Uniformity was accomplished in 1983 when language was inserted into the Revised Code that earmarked lottery profits for K-12 expenditures. Many of you have heard me say, “that’s why they call it the Revised Code…it’s meant to be revised”. Then in 1988, the Lottery Profit Education Fund (LPEF) was created to receive lottery profits.

The Legislative Budget Office cites in the Ohio Lottery Redbook for 2012-2013, that mature lotteries like Ohio’s, needs constant attention or sales will flatten out and be stagnant. Known as a “life cycle”, all products – including the lottery – goes through an introduction, a peak, and finally removal. To extend the life of a product, it must be improved and marketed on a regular basis.

In terms of public budgeting, the Ohio Lottery is an enterprise fund – quite simply, it’s a business and that business is gambling. Whether through ticket sales, intra or interstate ticket sales, Keno or Video Lottery Terminals (VLT’s), it’s a gambling operation that has to grow or it may die. And a new competitor is about to move in further threatening lottery profits and K-12 funding. Actually, it’s more like five competitors – in the form of casinos. You may recall that voters only approved 4 casinos but Cleveland gets two because of a common walkway. (The walkway is over a quarter mile long and should be entered in Guinness for the longest connector for a common business!) But, the Ohio Supreme Court will decide on this issue in the future. For now, here’s some more history.

The Ohio Lottery sales grew from 2001 to 2011 at a compounded annual growth of 4.4%, while transfers to the LPEF have only grown at 1.35%. But on the upside, since 2007, sales have grown at an impressive 6.48% while deposits to the LPEF have grown at a pace of 5.70%.

Contrary to the expressed desires of Governor Voinovich, who often complained about the mere existence of the Ohio Lottery, the lottery experienced robust growth throughout the early 1990s. In FY1990, sales were $1.6 billion with 37% or $594.7 spent for K-12. By FY 1996, sales jumped to $2.6 billion and $664.4 was deposited into K-12.

Unfortunately, by FY 2001, sales plummeted to $1.96 billion yet 35.9%, or $690.2 was rustled up for Primary and Secondary Education. By 2002, the pressure to join multi-state lottery games caused Governor Taft to propose abandoning the 30% requirement and allowing games that would increase the win payouts. As sales improved, and more profits flowed, the Director of OBM authorized payments to K-12. Believe it or not, when measured against the 30% requirement, the Taft administration’s budgets, between FY 2000-2007 injected an excess of $49.4 million into K-12. Then, for whatever reason, from 2006 the new methodology compared, to the repealed 30% requirement, education has lost out by $106 million. This continued during Governor Strickland’s administration to the tune of $180 million.

What does this mean? From 2006 to 2011, the new transfer process cost Primary and Secondary education $300 million. Would better marketing of underperforming products like Keno or the $2 ticket be improved? Sure – just a few weeks ago I received a two-for-one coupon for the $2 ticket and more Keno machines are on the way to various locations. For the state, both games are low cost/high return and just a few such marketing improvements should improve the bottom line.

In the coming months, I see the following problems and challenges facing the Ohio lottery:

First; only ONE horse racetrack applied for a VLT license. Interestingly, only one track (Northfield) even has its original owner at the helm. Six of the seven tracks were sold before a single slot lever is pulled. So much for that argument of saving the tracks. Their bank financing dried up ever since David Zanotti filed his lawsuit. If that case is not settled soon, the May opening of the casinos could lead to further lottery erosion.

Second; even though sales and profit estimates did take into account the opening of the casinos by reducing FY 2013 estimates by 6.6%, that may not be enough. Four separate studies show a range from 9.6% to 30%. Of the four studies, the most recent was completed in 2009 by the University of Cincinnati and estimated a loss of 11%. Sadly, one state – Iowa – lost 16% in 1995, the first year in which both casinos and VLTs were implemented. It took the Iowa Lottery nine years to recover.

At some point, the state will need to answer the question of whether it is in the best interest to protect its asset by advancing the necessary resources to set up temporary facilities, that are then leased back to the tracks, to operate while the court case is heard. When it’s over, let the tracks return to their original intention…owners. Better yet, put 10 machines at strategic locations in at least 1000 of our 15,000 bars and restaurants around Ohio. The ones near the new casinos would be perfect. Let the state get into the gambling business now – while the opportunity presents itself.