MAY 19, 1997
During the blustery first week of March, New York was talking of nothing but riches. No matter that the stock market was slipping from its dizzying perch, New Yorkers were spending fortunes in their heads. "I would buy a big house and get lots of maids so I never have to clean again," one young woman told a local reporter. "If I win, I want to take my family to see Howard Stern’s movie this weekend," William Boutilette told the New York Post. Boutilette had come from New Jersey for a shot at the jackpot. The hopeful stood in endless lines, swarmed through newsstands at the rate of over 8,000 a day, all for the chance at $45 million, the New York State Lottery’s third-largest jackpot ever.
It seems so harmlessly all-American: the wide-eyed excitement, the giddy anticipation, the hope of winning it all. To most people, the state lottery is the great equalizer, the one time everyone has a fair shot at making it. Even those who know that the nation’s thirty-eight state lotteries (including the District of Columbia) offer a very poor, very distant shot at winning anything of value generally regard the games as no great evil. After all, some lucky souls do strike it rich, and the enterprise as a whole is to the good, since lottery profits go toward social—toward school systems and wildlife refuges, and so on.
In fact, state lotteries are the very antithesis of the American Dream. They are mechanisms by which the state seduces its citizens with the promise of riches, suckering them into gambling away their income and their unemployment checks on games that offer an almost infinitesimal chance of winning big. You are more likely to be struck by lightning, or to find a pearl in an oyster, than you are to win a multimillion-dollar jackpot. As for the argument that the means by which the lotteries raise money should be forgiven because of all the good that lotteries do, forget that too. State lotteries may be a method for converting individual contributions into works of collective good, but they are about as inefficient a way as could be designed. On average, only 34 cents of every dollar spent on a state lottery actually makes its way into a state treasury.
No one is really in the lottery business to help the elderly, improve the schools or save endangered species; those are just the sugar that make statesponsored gambling easier to swallow. The truth about lotteries is simple: like taxes, they exist to raise general revenues for state governments (even when lottery proceeds go to a specific sector of government, they still count as general revenue, because lottery income targeted for, say, education represents money that the state does not have to come up with from the taxsupported general fund). The thirty-eight state lotteries have been enormously successful at raising money: last year, they raked in over $35 billion. Overwhelmingly, lotteries draw their players from the poorer and less-educated members of society, those least able to afford to contribute to the state’s coffers. The states could raise this money openly through taxes, but taxes make voters angry. Lottery players, on the other hand, don’t get angry, because they choose to purchase tickets.They choose this because they believe the states’ lies that playing the lottery might really lift them from poverty or drudgery. They believe these lies because the states work very hard to make players believe them.
Lottery commissions are public entities and, as such, are not subject to the Federal Trade Commission regulations that mandate truth in advertising. Nor are they monitored by the Better Business Bureau.Lotteries are regulated only by the state governments themselves—the same state governments that depend on lottery profits to make up anywhere from 2 to 10 percent of their revenues. The result is that, in their quest for profits, more than a few state lotteries forgo their regulatory role, acting more like for-profit corporations than government agencies. State lotteries do whatever it takes—sophisticated advertising, specialized marketing techniques, clever slogans—to sell their product. They do this even when it means misleading players about their odds of winning, introducing more addictive games that aggressively target the poor and looking away while minors gamble. In their hucksterism, the states have been aided and abetted by the federal government, which, in a 1975 fit of devolution, gave the states complete autonomy over the lotteries.
The thirty-eight U.S. lotteries spend nearly half a billion dollars a year on advertising, placing them among the biggest advertisers in the country. They are also among the most disingenuous. Take a current Washington, D.C., lottery ad campaign for D.C. Daily Millions. The slogan is "a million a day—just play." D.C. Daily Millions would be more accurately titled D.C. Daily Thousands: no one has won more than $5,000 in the history of the game. The most common manipulation of facts in the lotteries’ advertisements concerns the odds of winning the games. About a half-dozen states, Virginia, Ohio and Wisconsin among them, do cite realistic odds in their ads. But the vast majority advertise only the top prize, which can be as high as $45 million in states like New York and California, and then give the odds of winning the lowest prize in the game, usually a free ticket. The odds for these small prizes can be as good as one in four, but they have nothing to do with a player’s chances of winning the big prize; for instance, the odds that one of the hopeful in New York would walk away with the $45 million top award were one in 12.9 million. If the states really wanted to give their gamblers a fair shake, they would run advertisements urging them to bet on horses, or to take their business to the nearest casino: the favorite in a thoroughbred race generally offers odds of one in three, the odds on hitting a winning combination in casino slots are one in twenty and a roulette player stands one chance in thirty-five of guessing right.
Instead, the states run ads like this one run by the Connecticut lottery a few years ago: "When I was younger I suppose I could have done more to plan my future. But I didn’t," said the smiling average Joe on the screen. "I guess I could have put some money aside. But I didn’t. Or I could have made some smart investments. But I didn’t. Heck, I could have bought a one-dollar Connecticut Lotto ticket, won a jackpot worth millions, and gotten a nice big check every year for twenty years. And I did! I won!" A voice-over intoned, "Overall chance of winning is one in thirty."
Ads like that one, which imply that playing the lottery is a smarter bet than saving and investing, are typical, as are ads depicting posh mansions, lavish resorts and flashy sports cars. Some ads are aimed specifically at those most likely to gamble on the lotteries—the poor. One infamous Illinois ad, placed on a billboard in one of Chicago’s poorest neighborhoods in the 1980s, read "this could be your way out." Lotteries also prey on the poor by timing ads to coincide with monthly welfare and Social Security checks.In their book Selling Hope, Charles T. Clotfelter and Philip J. Cook report that an advertising plan for Ohio’s SuperLotto read: "Schedule heavier media weight during those times of the month where consumer disposable income peaks.... Government benefits, payroll and Social Security payments are released on the first Tuesday of each calendar month."
The dynamic of any vice is constant destruction and renewal: as addicts burn out, new addicts must be recruited. Advertising is not enough. In addition to ads, lotteries have also enlisted sophisticated marketing tools to promote their games. As the beer and tobacco companies use televised sporting events to market their goods as celebrations of American individualism, the lotteries have designed and produced television shows to market gambling as wholesome American fun. Massachusetts, California, Illinois and Florida have all developed weekly lottery-based game shows. Just like "Wheel of Fortune" or "The Joker’s Wild," the lottery shows revolve around a theme, only that theme is a promotion, a tie-in to an actual lottery game. A show might be based on, say, bingo, or modeled after a $1,000-a-week-for-life game—it is, in essence, a lottery ad. Jonathan Goodson, who produces the shows, told one industry publication that "people who watch the shows are much more likely to play, and play more often." The shows portray the lottery as good family fun; says Goodson, "game shows are mom and apple pie."
Another dynamic of any vice is progression: the jaded addict requires stronger wine, faster cars. To keep players’ interest and to attract new ones, lotteries have developed a barrage of different games, and these games are meant to be more stimulating—more—than the basic lotteries. In addition to several forms of the traditional numbers games (Lotto, Pick Three, Pick Six, etc.), all thirty-eight lotteries now sell instant scratch-off tickets, thirty-three have instant bingo games, eight run Fast Keno (a casino-like video game, with drawings every five minutes) and five run video slot machines (VLTs). In an effort to entice customers with bigger and bigger jackpots, twenty states participate in Powerball, a weekly game that had a jackpot of $26 million during the last week of April, and six have joined in The Big Game, which has had top prizes as high as $77 million.
The most controversial of these new games are Keno and the VLTs. Both are highly addictive, and critics argue that they are too close to casino gambling, but, as far as state lotteries are concerned, the closer to the casino style, the better. A current television ad for the Virginia Lottery features a stereotypical casino lounge singer, replete with unbuttoned shirt, hairy chest and gold medallion, crooning the praises of the lottery’s new game, Casino Nights. "There are five great casino games on one ticket," he warbles."So you can have all the fun of a casino, as you will see. Without having to listen to terrible lounge singers like me."
As the lotteries erase whatever distinction there was between their form of "clean" gambling and the sort that takes place in seedier locales, they have even physically become a part of vice’s demi-world.Keno terminals are most often placed in bars and restaurants, where their potential players will be a captive audience through a few dozen drawings, and where they will, like casino players plied with house drinks, be less inhibited about throwing away their money. VLTs have become popular at racetracks, spawning the term "racino." Says Bernie Horn of the National Coalition Against Legalized Gambling, "No one thought they were legalizing slot machines when they voted for the Delaware Lottery, but now any game owned by the state lottery is legal."
Are the states as effective at regulating the lottery as they are at selling it? A handful of states have taken steps to make their lotteries more responsible by restricting the types of advertising they can do, and requiring more accurate information on odds.Massachusetts took the most drastic step and cut its lottery’s advertising budget from several million to $400,000. But most reform attempts have met with extreme resistance. On the national level, Louisiana Congressman Jim McCrery introduced a bill in January 1995 to subject lotteries to Federal Trade Commission standards. The measure went nowhere. McCrery plans to reintroduce it during this session, but he doubts he will have much luck attracting cosponsors, and he doesn’t have high expectations that the bill will succeed. State legislators haven’t done much better. Nebraska State Senator Jim Jensen’s bill to prohibit the lottery from "inducing or enticing persons to participate in lottery games" was killed just days after Jensen gave testimony on it; and, in Iowa, House Majority Leader Brent Siegrist’s bill to prohibit all television and radio lottery ads never even made it out of committee.
At a recent industry convention that included officials from every state lottery, it was clear that reform wasn’t really on the top of the agenda. The convention included a segment called "Advertising Bans:What Price Is Paid?" During a panel discussion, Virginia Lottery Director Penelope W. Kyle complained that her state’s ad restrictions "tie you down," forcing the lottery to disclose those "horrible odds." That remark earned sympathetic chuckles from the audience, and one lottery official in the crowd whispered to the man next to her, "Thank God we don’t have to deal with that."
Even when states do take drastic steps to rein in the lottery, they don’t necessarily get the results they intended. Having its ad budget slashed didn’t stop the Massachusetts Lottery from deploying other, arguably worse, weapons in its arsenal. The Boston Globe reported in February that the lottery has saturated the poorer areas of the state with agents. For example, there is one lottery agent per 363 residents in Chelsea, a low-income suburb of Boston, compared with one agent per 3,063 residents in affluent Wellesley. This strategy works: the per capita annual lottery expenditure in Chelsea is $915; in Lincoln (a wealthy suburb similar to Wellesley), the per capita expenditure is just $30. And only a day after a Massachusetts Lottery official told me primly that they "don’t do any advertising whatsoever," the Globe ran a front-page story reporting that the governor and the Internal Revenue Service had called for an investigation into the lottery’s use of free-play coupons to find out whether the coupons "constitute an end run around [the] legislated cap on advertising spending." Instead of hard-sell television ads, it turns out, the lottery flooded its residents with $80 million a year in free-play coupons via direct mail, then paid the bills with free-play coupons instead of cash, so it could claim to be keeping within its ad budget.
In California, the state Supreme Court ruled last summer that Keno was illegal. But no matter. The state now runs Hot Spot, a video-based game strikingly similar to Keno. Denise Kimes, California’s marketing director, even gave a presentation at the lottery convention in March, titled: "Fast Draw Keno: Why Is It So Hot?"
But the most egregious example of lotteries ducking their responsibilities has been in selling tickets to minors. It is illegal in every state for anyone under 18 to gamble, but a recent survey of 15- to 18-year-olds in Minnesota showed that 27 percent have purchased lottery tickets themselves and 8 percent had another underage friend buy tickets for them. This is neither a new nor an isolated problem. In 1984, then-Arizona Governor Bruce Babbitt gave a speech saying that any prohibition on lottery sales to minors was unenforceable and that playing the lottery was "part of the culture" at his children’s school. A study, cited in Selling Hope, of New Jersey high-schoolers in the late ’80s showed that 45 percent had gambled on the lottery; 13 percent said they played weekly. The recent proliferation of instant ticket vending machines has made it nearly impossible for state lotteries to monitor who is buying the tickets, but the convenience of the machines means more people play, so the machines stay. And lottery retailers themselves pose a problem. The New York Lottery, which cleaned up its act last year under orders from Governor George Pataki, has been running a sting operation for the past eight months in an effort to crack down on lottery agents who sell to minors. Insiders say many retailers, particularly in New York City, don’t pass the test.
The lotteries’ hard-sell, misleading approach is particularly galling because it isn’t necessary. Lotteries that have experimented with low-key, "soft-sell" ads and stricter compliance standards have been surprised at the reaction. Over the past year, the New York Lottery has found that its recent attitude adjustment did not mean losing revenue. The lottery has pulled all advertising for its Quick Draw (Keno) game, because, as lottery spokesman Richard Grenell put it, "the state’s responsibility is to regulate the game; we have no responsibility to advertise and suggest that people play." Before Pataki’s involvement, ad campaigns were full of slogans like "all you need is a dollar and a dream," and "we won’t stop until everyone’s a millionaire." The new slogan, which refers to the lottery’s contribution to education, is "the new york lottery makes us all a little richer." The lottery backs this up with promotions like "Wired for Education," which recently connected 3,000 schools and libraries in the state to the Internet. New York’s lottery still advertises as aggressively as ever, but the ads now are much more realistic. Instead of promising endless riches, they highlight the fact that profits go to help the schools. And sales just keep going up.
Today’s lotteries have evolved into the opposite of what they were intended to be. In the early days of the country, lotteries were even more commonplace than they are today. They were sponsored by the states and held as needed, financing such projects as reconstructing Faneuil Hall in Boston and buildings on the campuses of Harvard and Yale. They gathered funds for a specific, limited purpose, and they offered modest rewards to the winner. These public works lotteries had far more in common with church and school charity raffles than with today’s state lotteries. They remained popular fund-raisers through the early 1800s. But then lotteries began to be privatized; individual dealers, instead of the state, began selling tickets. Eventually these dealers took over the management of the lotteries themselves. The resulting fraud and corruption forced every state to outlaw them in the latter half of the century.
In the absence of legal lotteries, illegal numbers games emerged; they, too, became increasingly popular, bringing with them organized crime. Hoping to divert money away from these games, New Hampshire and New York reinstituted state lotteries in the 1960s. By 1975, eleven states had followed their lead.The lottery proponents’ arguments were almost always the same: Wouldn’t you rather the state profit from gambling than the mob? Wouldn’t you rather have a lottery than higher taxes? The reasoning was logical, and the new lotteries might have gone along serving their purpose unobtrusively and relatively cleanly, if not for two equally significant developments. First, in 1975, the federal government lifted its ban on lottery ads—which prevented the lotteries from advertising on radio and television—and opened the door for the kind of manipulation discussed above. Second, having failed to learn their lesson from the early lotteries, the new ones began turning over the operation of their games to private companies.The introduction of private, for-profit companies has led, again, to widespread charges of corruption involving state officials and legislators.
At first, there were a dozen or so private companies competing to run the lotteries, but in the past two decades, that number has dwindled to two: GTECH and Automated Wagering International, Inc. (AWI). GTECH is, by an enormous margin, the most successful, with contracts for twenty-nine of the thirty-eight lotteries and 1996 revenues of $744 million. GTECH’s success comes in part because it is good at what it does, but also because the company has always been willing to go to great lengths to beat the competition.
In the past few years, GTECH officials or the company’s associates have come under grand jury investigation in four states. No charges have ever been made against the company itself, but one of the investigations resulted in the conviction of a former GTECH vice president, J. David Smith, for fraud and money-laundering in connection with various kickback schemes in New Jersey. Another investigation led to the conviction of a GTECH lobbyist for racketeering (he was charged with bribing a state senator) in California while working for other clients. He was acquitted of the specific charge relating to GTECH. These are not the only incidents where GTECH has had problems. In a Fortune article last November, reporter Peter Elkind showed that these cases are only the most extreme examples of the company’s aggressive business strategies. Among the tactics Elkind chronicled: the traditional wine ’em and dine ’em (former AWI President W. Hubert Plummer told Elkind, "We’d go to dinner with the lottery director and find out that GTECH had hired a yacht and taken out the whole damn legislature"); and hard-ball intimidation tactics: during a dispute with GTECH, then-Director of the Arizona Lottery Bruce Mayberry twice received packages of rotten mutton from Smith, who claims he didn’t know the meat was spoiled.
Consider Texas, the site of GTECH’s most recent public relations nightmare. At the center of a complicated web of accusations is, again, J. David Smith. The scandal began when Entrecorp, a lobbying firm co-owned by former Texas Lieutenant Governor Ben Barnes, was hired in 1989 to lobby for GTECH in Texas. Entrecorp’s contract gave the firm a commission of 4 percent of GTECH’s Texas revenues, amounting to about $3 million a year. Entrecorp employed J. David Smith as a consultant, and federal prosecutors allege the company paid him a third of its earnings from the GTECH account. The Houston Chronicle reported that a former Kentucky lottery official told investigators in that state that Smith bragged that he had paid off eight or ten Texas legislators, with up to $10,000 each, to give "favorable consideration" to the lottery bill when it had come before the state legislature in 1990. Smith has denied the Chronicle’s report.
In Smith’s New Jersey trial last fall, it also came out that, in 1992, Smith had hired the boyfriend of Texas Lottery Director Nora Linares as a consultant in New Mexico, a scandal that resulted in Linares’s firing this past January, even though both she and GTECH claim that they knew nothing about it. (Linares has since been exonerated by the lottery board and is now suing GTECH. Among her charges: GTECH "hired anyone and everyone who might be able to influence the award of the [original] contract"; and Smith secretly hired Linares’s boyfriend "in an effort to have some potential, future leverage over [her].") Combined with the revelations about Barnes, the Linares scandal resulted in the Texas Lottery Commission’s decision to rebid GTECH’s contract, which would not have expired until 2002.
GTECH responded with a letter-writing campaign, flooding state legislators with missives from lottery vendors raving about GTECH. But it turns out that many of the agents whose signatures were on the letters knew nothing about them. GTECH says it called lottery retailers and asked for permission to use their signatures. The retailers say GTECH callers must have asked whoever answered the phone for permission, regardless of whether that person had the authority to give it.
"They’ve just become so powerful they think nobody will stand against them," says Weston Ware, an anti-gambling lobbyist in Texas. And woe to those who try. GTECH is infamous among reporters who have covered the industry for its aggressive intimidation tactics. Letters or phone calls to reporters and editors threatening lawsuits are common (mine, which was both faxed and FedExed to tnr, said, "I am putting you on notice that I am concerned that you have originally contacted this office under the false pretense of doing a story on the lottery industry.... I am referring this matter to the Company’s counsel ..."). Reporters at The Atlanta Journal and Constitution, which has done two major stories on the company, say that a GTECH attorney tried to prevent a story from running in March by threatening to sue, and insisted, unsuccessfully, that the paper print a retraction of a 1994 story.
But more worrisome is the charge that GTECH also tries to intimidate lottery officials. In October, California Lottery Director Maryanne Gilliard told The Los Angeles Times that, in at least two separate meetings, she felt that GTECH officials were trying to intimidate her. In the first meeting, after Gilliard told GTECH officials that the lottery was not going to extend the company’s contract, the officials presented her with a very critical report that they had prepared on the lottery, and which they threatened to release."I think it was very interesting that one event followed the other in such a close proximity of time," Gilliard said. "This is a document that has a date on it of June, and we didn’t receive it until September 10." Gilliard also reports that she received calls from other lottery directors saying that they had similar experiences, but "they don’t want to go on the record.... They’re just flat afraid."
Understandably, many states are getting nervous. Law enforcement officials from eight states, all but one with GTECH contracts, met in early April to "compare notes on investigations involving GTECH Corp.," reported The Atlanta Journal and Constitution. But GTECH’s near monopolization of the lottery market means that, even in the light of these ethical concerns, states sometimes have no choice but to hire them. GTECH was the only bidder when the Louisiana contract expired last year; tiny AWI didn’t bid because it was concerned that, if it won the contract, it wouldn’t be able to handle the Louisiana system in addition to its existing seven clients. Charles Brooke, AWI’s spokesman, says the company plans to bid on the Texas contract, but in that state GTECH has so specialized its operations that it will be extremely expensive for AWI to take over, while GTECH, with systems already in place, will likely be able to offer a more competitive bid. Desperate to escape GTECH’s looming dominance, lottery officials in Kentucky are considering whether it wouldn’t be better to run the lottery themselves, as Virginia does. Of course, GTECH advises against that, saying that "there are things government does well and things the private sector does well."
And the private sector of the lottery world has done very well—the top three lottery companies (GTECH, AWI and Scientific Games) earn over $1 billion a year. They spend it well, too. Scientific Games, the world’s largest supplier of instant scratch-off tickets, spent over $325,000 in 1987 to pass lottery referenda in Florida and Virginia. GTECH won’t divulge how much it has spent on political donations in recent years, other than to say that it no longer makes corporate donations to individual candidates. But in 1986, the same year that GTECH won the contract for the California Lottery, the company was the sixth-largest contributor to state campaigns, giving more than $300,000.
At the federal level, FEC records reveal that, between January 1993 and October 1995, the company made $114,774 in political donations. During the ’96 election cycle, GTECH forked over $132,500 in soft money.
But, as we saw in Texas, the real money is spent on lobbyists, expenditures that are nearly impossible to track. In Maryland last year, the bidding war for the lottery contract cost GTECH and AWI over $100,000 in lobbying fees. And in Texas, even after the Ben Barnes revelations, GTECH, which according to testimony in the New Jersey trial spent a total of $11 million on lobbyists in 1993, is spending over a quarter of a million dollars to protect its contract worth approximately $130 million.
Even industry insiders are disgusted. In La Fleur’s Lottery World, co-publishers Teresa and Bruce La Fleur write: "There is too much money being spent to influence past and present government officials for lottery contracts. The millions of dollars doled out to lobbyists to win contracts is simply scandalous. It has a corrosive effect. It isn’t that it’s illegal. It just should be.... With slush funds, bags of dirty tricks and allegations of bribes, the lottery industry is not far behind a break-in at the Watergate."
Confronted with evidence that state lotteries rook the poor, mislead the public and encourage corruption, officials fall back on the argument that these concerns pale next to the social good that arises from lottery profit. On what side does the cost-benefit needle really fall? Consider the dollar you spend on a typical lottery ticket: a little over 50 cents goes to prize payouts, around 12 cents pays operating expenses—4 cents or so of that goes to GTECH or AWI, 2 or 3 cents goes to advertising. Only about 34 cents goes back to the state as profit. State lotteries are a terribly inefficient way to raise money—the average charity, by contrast, keeps 79 cents of every dollar it raises. Of the 34 cents that does go to the state, it is often hard to say what actually becomes of the money. Out of the thirty-eight states with lotteries, only ten earmark all of their profits for education; in twelve states, lottery earnings just disappear into the general fund; the rest put profits into various other programs ranging from parks and wildlife to tourism and property tax relief. In at least two states that have earmarked lottery money for education, Florida and California, spending on education as a percentage of general revenue fell in the years immediately following the introduction of the games. The reason: in many states, legislators estimate lottery profit for the coming year and then reduce the existing education budget by that amount, so education funds don’t actually increase. In fact, some educators complain that they have trouble mustering public support for education bonds because of the widespread perception that schools are rolling in lottery money. On average, states without lotteries spend 10 percent more of their budgets on education than states with lotteries.
But how else to raise revenue for cash-hungry states? There is another way. It’s called taxation. There is still another way: curb spending. Legislators can take their pick, but they won’t. The lottery remains entrenched because politicians are afraid of annoying the citizenry by doing either. And the joke is on the citizens.
"The Lottery, with its weekly pay-out of enormous prizes, was the one public event to which [they] paid serious attention.... It was their delight, their folly, their anodyne, their intellectual stimulant." A grandiloquent version of our opening New York scene? No, a passage from George Orwell’s 1984. Got a buck? Just hand it over to Big Brother.
This article appeared in the May 19, 1997 issue of the magazine.