INFORMATIONAL MEETING

 

TAPES 11-12 A,B

 

SENATE REVENUE COMMITTEE

JANUARY 25, 2005 9:00 AM STATE CAPITOL BUILDING

 

Members Present:††††††††††††††††† Senator Ryan Deckert, Chair

††††††††††††††††††††††††††††††††††††††††††††††† Senator Charles Starr, Vice Chair

††††††††††††††††††††††††††††††††††††††††††††††† Senator Gary George

††††††††††††††††††††††††††††††††††††††††††††††† Senator Rick Metsger

††††††††††††††††††††††††††††††††††††††††††††††† Senator Floyd Prozanski

††††††††††††††††††††††††††††††††††††††††††††††† †††††††††††††††††††††††

Witnesses Present:††† ††††††††††† Dale Penn, Oregon State Lottery†††††† †††††††††††

 

Staff Present:††††††††††††††††††††††††† Paul Warner, Legislative Revenue Officer

††††††††††††††††††††††††††††††††††††††††††††††† Mazen Malik, Economist††††††††††††††††††††††††††††††††††††††††††††

††††††††††††††††††††††††††††††††††††††††††††††† Barbara Guardino, Committee Assistant

 

 

TAPE 11, SIDE A

004

Chair Deckert

Calls meeting to order at 9:06 a.m.

 

INFORMATIONAL MEETING

020

Mazen Malik

Begins slide presentation on Oregon State Lottery (EXHIBIT 1), laying groundwork for this weekís discussion. Lottery Commission will take up the issue of approving line games.

 

030

Malik

Discusses Lottery Terminology Ė Revenue and prizes, net receipts, expense, net proceeds, page 2.

 

057

Malik

Discusses Lottery History, created in 1984 by initiative petition.

 

070

Malik

Continues discussion on Lottery History beginning with 1999 legislature action, page 3.

 

088

Malik

Discusses Traditional Lottery Games, 2003-04 Net Receipts, pie chart breakdown.

 

102

Malik

Discusses Traditional Game Revenue, page 4. Examines Traditional Game Revenue in percentages.

 

127

Sen. George

Asks why prize spread keeps getting broader.

 

130

Malik

Responds, this is done partly to maintain public interest. Also, video lottery has a higher threshold for prizes.

 

150

Malik

Resumes discussion on Video Lottery Revenue and revenue percentages, page 5.

 

164

Malik

Discusses Total Lottery Revenue, page 6, combining traditional and video. Growth in prizes has defied all logic and models. Discusses percentages of total lottery revenue including net revenue, prizes and expenses. Revenue continues to decline while prizes increase.

 

203

Malik

Discusses Lottery Transfers. In particular, bonds continue to increase, page 7.

 

219

Malik

Explains 2003-05 Lottery Distributions, pie chart.

 

234

Malik

Discusses Issues, which legislators will address this week, page 8. These include line games, video payout percentage, retailer compensation and lottery expense. Projects intake from line games for next biennium.

 

266

Chair Deckert

Did the state anticipate the lottery would grow as it has?

 

270

Malik

Responds, the state did not expect the growth. That is true for all of gambling.

 

290

Paul Warner

Agrees, growth exceeded expectations, but the going has not all been smooth. It is possible to over-estimate it, as occurred in the 1995-97 session.

 

315

Malik

Discusses Video Prize Percent, page 9.

 

324

Malik

Discusses Annual Growth: Video, trends since 1993.

 

346

Malik

Discusses Compensation Rates (old rates), page 10.

 

363

Malik

Discusses Video Compensation Rates (new rates 2004), for an overall blended rate of about 28.8%. Looking at year to date through December 2004 runs approximately 30.3 percent.

 

396

Malik

Discusses Retailer Compensation, one view of revenue, page 11. Debate ensuing on who gets the better deal, the state or the retailer.

 

426

Malik

Discusses another view of revenue, two points of view in the debate.

Compares the two views, page 12.

 

TAPE 12, SIDE A

031

Malik

Concludes presentation of Oregon Lottery with discussion on Lottery Expense Percents, page 12. With introduction of video games expenses dropped considerably from 16%.

 

059

Dale Penn

Gives brief definition of line games. They are similar to slot machines but donít have arms and donít pay out in cash. Begins slide presentation, Overview Presentation to Senate Revenue Committee (EXHIBIT 2). Most slot machines can be adjusted to offer line games.

 

080

Penn

Mission Statement, page 3. Goal is to maximize profits. Integrity is of utmost importance.

 

101

Penn

Explains Organizational Structure of lottery, page 4.

 

129

Penn

Skips to page 7, Game Development. Discusses changes that have occurred over the years.

 

146

Chair Deckert

Asks why Oregon does not expand lottery to sports action. Follow-up questions.

 

156

Penn

Responds, Oregon was sued by National Football League. Oregon is the only state with a program that allows for betting on games. As punishment, NFL will not allow any professional football team to come here.

 

176

Penn

Discusses Game Timeline, page 8.

 

193

Penn

Explains Planning/Budget Process, page 9.

198

Penn

Reviews FY04 Revenue and Expense Distribution, Traditional Games, page 10. Compares this with Video Lottery, page 11. Prize payouts for traditional games is at 64.8 %; video lottery prize payout is 93.82%. It is important to be precise about what is an appropriate payout. Commission will examine this issue for line games.

 

240

Penn

Discusses Contingency Reserve & Administrative Savings, page 12.

 

265

Penn

Discusses 05/07 Capital Requirements, page 13. This includes replacing obsolete equipment. The software on the old machines cannot support line games.

 

335

Sen. Metsger

Asks if commission is satisfied with past negotiations with manufacturers for lease or purchase of machines in regard to support and replacement.

 

364

Penn

Responds, organization looks at this now. Oregon is the only video lottery that confines itself to poker. Other states have line games. Most manufacturers get a percentage of the take. Not so in Oregon, which owns its machines.

 

425

Penn

Discusses Update of Oregon Lottery Audits, page 14. Oregonís lottery meets or exceeds best practices.

 

441

Chair Deckert

Comments, it sounds as though past audit problems have been dealt with.

 

448

Penn

†Responds affirmatively.

 

464

Penn

Discusses Forecast 05/07, page 15. Governorís budget requests $933 million in transfers from the Oregon Lottery. This biennium lottery will transfer $770 million, although $813 million is projected.

 

TAPE 11, SIDE B

041

Penn

Continues discussion on forecast with a comparison to income spent on video retail network games in West Virginia minus its casino operation.

 

075

Penn

Discusses Video Lottery, Net Sales, page 16, shows growth of video lottery sales.

 

082

Penn

Concludes with discussion on 20 Years of Doing Good Things for Oregon. The lottery has produced over $4 billion since its inception. Anticipates lottery could transfer $1 billion every biennium.

 

106

Chair Deckert

Asks questions and makes comments concerning the issue of retailer compensation. What is the rationale behind a 26.5% recommendation?

 

137

Penn

Responds, Oregon is being sued over commission rates, which are a blended rate between 28 and 29%.

 

174

Penn

Expresses concern that the video product is projected to produce $660 million for state budget without discussing line games. If line games come into play, that number rises to $780 million as base. Over the last 2 years this retail network produced $600 million, and state would reduce that by 10%, while requiring retailers to produce additional revenues. All this and they would also take a 50% cut in returns. Line games will increase sales. Problem is to identify how much. Retailers are the lotteryís sales force.

 

247

Penn

Continues comments on retail compensation. Oregon has the lowest commission rates in the United States. Difference is other states purchase their machines. Compares Oregonís rates to Canada. Rate will be under debate over the next two months.

 

305

Chair Deckert

Agrees, Oregon Lottery is trying to find proper compensation. Would argue that Oregon has guessed high. Given this, he questions the wisdom of signing 6-year contracts.

326

Penn

Responds to question of 6-year issue.

 

414

Sen. Prozanski

Asks, how does the lottery define a reasonable rate of return? Expresses concern on stateís increasing dependence on lottery funds. Asks Penn to provide information on how many retail licenses exist. Understands higher-end restaurants such as Elmerís and Shariís are getting into the lottery. Believes the lottery is helping the hospitality industry make a greater profit.

 

TAPE 12, SIDE B

030

Penn

Responds to Sen. Prozanskiís points. Does not have a good definition of a reasonable rate of return. Hopes a definition will come out of the upcoming litigation.

 

078

Sen. Metsger

Believes it is important to indicate that there are arguments that counter Mr. Pennís arguments. The original intent of the lottery was not to create state support of gaming organizations, but to help support restaurants as well as the state. Other issue is deciding a reasonable percentage. If someone starts an enterprise and predicts smaller revenues, then a greater return will be needed.

109

Sen. Metsger

Asks how the governor will get around the constitutional limitations of the lottery.

 

116

Penn

Responds, Ways and Means Committee has asked for attorney generalís opinion on this issue. Governorís office sees state police as connected to ability to support economic development.

 

149

Chair Deckert

Asks what role the legislature can play in setting commission rates. Follow-up questions.

 

159

Penn

Encourages legislators to participate on the issue of line games.

 

198

Warner

Provides information requested in January 24 involving the local option issue. See School Local Option Property Tax (EXHIBIT 4). Refers to research report pages 6-8.

 

251

Chair Deckert

Adjourns meeting at 10:45 a.m.

 

 

 

Tape Log Submitted by,

 

 

 

Barbara Guardino, Committee Assistant†††††††††††††††††††††††††††††† Reviewed by Kim Taylor James

 

 

Exhibit Summary:

1.      Oregon Lottery, 2005 presentation, Malik, 12 pp.

2.      Oregon Lottery Overview Presentation to State Revenue Committee, Penn, 17 pp.

3.      Oregon Lottery Handouts, Penn, 60 pp.

4.      Research Report, School Local Option Property Tax, Warner, 8 pp.