Oregon State Lottery Director's Paper Video
Total Page：16
File Type：pdf, Size：1020Kb
OREGON STATE LOTTERY DIRECTOR’S PAPER VIDEO LOTTERY COMPENSATION RATES and RETAILER CONTRACT 2015 JANUARY 29, 2015 I. BACKGROUND On June 28, 2015, the current retailer contracts expire. By this date, the Oregon State Lottery must have in place new retailer contracts to provide for the sale of Lottery products to the public. Without the Lottery’s network of retailers, the Lottery cannot sell its products, either traditional or Video Lottery. Thus the continuation of our contractual relations with our retailers is essential to generating revenue and meeting the Lottery’s constitutional and statutory mandates. II. LEGAL REQUIREMENTS (a) Balance of Goals: The Oregon Lottery Commission is required by law to maximize revenue for the state while providing a reasonable rate of return for the retailers who sell Lottery products on behalf of the Lottery. “In establishing its schedule of payments to contractors, the Oregon State Lottery Commission shall undertake to develop a system that maximizes the net revenue to the state for the public purpose consistent with providing a reasonable rate of return for contractors.” (emphasis added) ORS 461.445 In litigation brought by individuals seeking to maximize Oregon Lottery revenues available for education, the Oregon Supreme Court had the opportunity to interpret this statutory language and provide guidance on how the Oregon Lottery Commission is to accomplish this task. “Under ORS 461‐445, the Lottery is to “undertake to develop a system” that has two goals, viz., ‘maximiz[ing] the net revenue to the state” and “providing a reasonable rate of return” to the retailers. In that context, the 1 outcome—a “system”—is to be the result of a process— “develop[ment]”—by the Lottery that harmonizes two competing goals. Moreover, interplay of those two goals will differ to some degree for each of the hundreds of retailers with whom the Lottery deals. (Each has different costs in rent, taxes, personnel, and physical facilities, to name only the most obvious examples. Moreover, each of those factors may vary to some degree for each retailer from year to year.) Yet the Lottery’s “system” is to be imposed by a set of rules, which are quasi‐legislative policy choices of general applicability. See ORS 183.310(9) (defining “rule”). Such rules will, of necessity, affect some retailers differently than others. No system is possible that precisely strikes the statutory balance as to every retailer.” (emphasis added) Wolf v. Oregon Lottery Com’n, 344 Or. 345 (2008). (b) Statewide Lottery: ORS 461.300 also requires the Lottery to provide convenient locations throughout Oregon with a statewide network in both rural and metropolitan locations. “The Oregon State Lottery Commission shall adopt rules specifying the terms and conditions for contracting with lottery game retailers so as to provide adequate and convenient availability of tickets or shares to prospective buyers of each lottery game as appropriate for each such game.” (emphasis added) ORS 461.300(1). These provisions require the Lottery to ensure that the contract structure— presumably including the commission rate structure—allow for locations throughout the entire state, not just large metropolitan areas. III. HISTORY: (a) HISTORICAL REVIEW OF VIDEO LOTTERY COMPENSATION RATES AND CONTRACT LENGTH: (1) Video Lottery Compensation Rates prior to the 2004 Contract: Video Lottery began in 1992 and the compensation rate was a flat 35% of net sales. In July of 1995, the Commission adopted a tiered compensation rate structure of 35% on the first $200,000 in sales and 30% on sales above that, which resulted in an overall rate of approximately 33%. In July 1999, the Commission expanded the tiered rate structure and the overall compensation rate declined to about 32%. 2 (2) 2004 Contract: In 2004, the Commission adopted a revised tiered rate structure that required retailers to choose Option A or Option B each business year, with Option A favorable for low volume retailers and Option B favorable to high volume retailers. Overall, the compensation rates adopted were lower and the overall compensation rate declined from about 32% to about 28.3%. Advocates for still lower compensation rates filed a petition in the Oregon Court of Appeals for review of the administrative rule that adopted the compensation rates, claiming the Commission had misapplied its statutory responsibility in establishing the compensation rates and arguing the rates adopted were too high. The Oregon Supreme Court ultimately resolved this case, upholding the validity of Lottery’s administrative rule, the compensation rates adopted by the Commission, and the process by which the Lottery Commission determined the appropriate compensation rates. Wolf v. Oregon Lottery Commission, 344 Or. 345 (2008), referenced in section II(b) above. (3) 2005 Contract Amendment for the Sale of Line Games: When Lottery began selling line games in May of 2005, the Commission adopted an alternative compensation rate structure for those retailers who opted to sell both line games and video poker games. Under this new rate structure, the overall compensation rate dropped to about 25%. (4) 2007 Look Back Rule: In 2007, in accordance with the “Look Back Rule” which was adopted in 2005, the Lottery Commission lowered video compensation rates for those retailers selling line games. The overall compensation rate dropped to about 23%. It was anticipated that these new rates would result in an overall rate reduction to approximately 22% by 2010, but due to the smoking ban and the economic recession there was a drop in Oregon Lottery sales and therefore, the overall compensation rate did not decrease as low as expected. Ordinarily, the design of the rate structure operates to reduce the overall compensation rate for retailers as Oregon Lottery sales increase. (5) 2010 Contract: When the Video Lottery contracts came up for renewal in 2010, there was strong division of opinion between education activists who continued to believe that commission rates were still too generous to retailers and retailers who believed that fifteen years of 3 commission rate reductions, coupled with the no smoking ban and a severe economic recession, justified an upward adjustment in commission rates, particularly in the lower ranges. In effect, retailers believed that continual reductions in commission rates while sales volumes were growing—including the “look‐back” mid‐contract in 2007—now justified a “look‐back” for retailers to receive some relief from the significant revenue decline which they were already experiencing. Faced with continuing economic uncertainty, the Commission decided to leave rates unchanged for the next contract, the first time since Video Lottery began in 1992 that there had not been a downward adjustment in at least some of the rates. (6) Length of Retailer Contract: When Video Lottery began in 1992, the term of the retailer contract was three years. In 1998 the Lottery went to a six‐year contract to comply with business practices for leases, financing, and planning. This was followed by another six‐year contract in 2004 after review and discussion. In 2010, the Lottery Director argued that stability of a six‐year contract benefits both the Lottery and its statewide network of Lottery retailers and it comports with business practices in the industry. However, given the uncertainties facing the Lottery, the Commission approved a 5‐year contract, with the unintended effect of placing deliberations on the next contract within the election year of 2014. 4 (b) REVIEW OF LOTTERY SALES AND NUMBER OF RETAILERS: (1) Under the direction and guidance of the Lottery Commission, there was a tremendous increase in Oregon Lottery sales from fiscal year 2000 through fiscal year 2008, averaging 9.6% per year. In 2009, however, the statewide smoking ban and the economic recession reduced video sales by 12% in FY 2009 and 10% in FY 2010. Since then, revenues have only grown by an average of 1.2% per year. Fiscal Total Video Year Lottery Sales 2000 $436,531,650 2001 $462,398,035 2002 $480,201,739 2003 $498,712,314 2004 $530,996,187 2005 $579,650,266 2006 $732,888,437 2007 $853,505,565 2008 $895,111,696 2009 $786,746,726 2010 $706,981,950 2011 $720,510,190 2012 $727,124,878 2013 $737,370,280 2014 $742,730,503 (2) While total sales peaked in FY 2008, the number of retailers didn’t begin to decline until after FY 2010, the point at which the two‐year plunge in sales was followed by a period of stagnant sales growth. The decline in retailers, while less severe than the sales drop, has continued at a slow pace throughout the current contract period. One might expect that the decline in number of retailers would help offset the effect of a decline in sales for surviving retailers. However, since sales dropped by 21% then largely leveled off at the same time that the number 5 of retailers declined by 7%, the result is that sales per retailer have also declined 18% since the peak in FY 2008. Consequently, retailers have seen a significant drop in their lottery revenue since 2010 with very little recovery since the end of the recession. These developments have contributed to a demoralized retailer base that makes it difficult to sustain growth even as the overall economic climate is recovering from our worst economic decline since the Great Depression. The modest increase in sales per retailer and per Video Lottery terminal has been accompanied by a slow, but fairly persistent reduction in Video Lottery retailers. Sales per Sales per Fiscal Year Retailers VLTs Retailer VLT 2005 1,998 10,275 $290,115 $56,414 2006 2,044 10,560 $358,556 $69,402 2007 2,143 11,315 $398,276 $75,431 2008 2,258 11,918 $396,418 $75,106 2009 2,354 12,270 $334,217 $64,120 2010 2,377 12,414 $297,426 $56,950 2011 2,362 12,288 $305,042 $58,635 2012 2,314 12,093 $314,229 $60,128 2013 2,306 12,160 $319,762 $60,339 2014 2,271 11,989 $327,050 $61,951 Even though Lottery revenues have been stagnating, there are some positive signs.