State of Wisconsin SENATE CHAIR ASSEMBLY CHAIR Alberta Darling f'fm? John Nygren 317 East, State Capitol P.O. Box 7882 Madison, WI 53707?7882 Phone: (608) 266-5830 309 East, State Capitol PD. Box 8593 Madison, WI 53708-8953 Phone: (608) 266-2343 Joint Committee on Finance MEMORANDUM To: Members Joint Committee on Finance From: Senator Alberta Darling Representative John Nygren Date: February 21, 2018 Re: 14-Day Passive Review Approval DOR Pursuant to s. 565.02l7), Stats, attached is a 14?day passive review request from the Department of Revenue, received on February 21, 2018. Please review the material and notify Senator Darling or Representative Nygren no later than Monday, March 12, 2018, if you have any concerns about the request or if you would like the Committee to meet formally to consider it. Also, please contact us if you need further information. Attachments State of Wisconsin 0 DEPARTMENT OF REVENUE 2135 RJMROCK ROAD . P.0. BOX 8933 MADISON. WISCONSIN 53708-8933 FAX (608) 266-5718 0 February 20, 2018 The Honorable Alberta Darling, Co-Chair if it 1 1113 Member, Joint Committee on Finance 317 East, State Capitol 613% /2 Madison, WI 53708 The Honorable John Nygren, Co~Chair Member, Joint Committee on Finance 309 East, State Capitol Madison, WI 53708 Dear Senator Darling and Representative Nygren: Section 565.020), Wis. Stats., requires a report to the Joint Committee on Finance no later than March 1 of each year, containing the foilowing information: A. An estimate of lottery ticket sales and prize payment for the current and subsequent fiscal year; B. The prize payout percentages for each type of lottery game offered; and C. The Lottery's evaluation of the impact that prize payout ratios are likely to have open ticket sales and operating costs, and upon the Lottery?s constitutionally mandated mission to maximize revenue for property tax relief in Wisconsin. The report, which is attached, recommends a prize payout of 60.79% for FY18 and proposes a payout of 60.79% for FY19. Please feet free to contact me shouid you have any questions. Sincerely, Richard G. Chandler Secretary of Revenue En closure Lottery Sales and Prize Payout Report to the Joint Committee on Finance Wisconsin Department of Revenue Lottery Division Page 1 EXECUTIVE SUMMARY The Wisconsin Lottery?s mission is to provide property tax relief to Wisconsin homeowners by offering enter? taining games While operating with security, integrity and social responsibility. The Lottery?s sales outlook and ability to generate funds for property tax relief remain positive, with continued historically high levels of ticket sales. Since the sale of the first ticket on September 14, 1988, the Lottery has generated more than $4.1 billion in property tax relief for Wisconsin homeowners, over $877 million in commissions for Wisconsin businesses and more than $7.8 billion in prizes for players. in Fiscal Year (FY) 2017, the Lottery had its second highest overall sales year. Sales of instant scratch tickets set a record for the sixth consecutive year, and lotto tickets were the seventh highest in Wisconsin history. 0 Pull?tab ticket sales, while much smaller than the other two product lines, remained fairly consistent with recent ?scal years. Sales should remain strong in FY18 and FY19 as the Wisconsin Lottery continues to improve its game mix in all product categories. The projected breakdown for FY19 is as follows: Instant scratch sales: $388.1 million Pull?tab sales: $994,504 Lotto sales: $216.6 million Total sales: $605.7 million For FY19, the Lottery proposes an overall prize payout of 60. 79%, consistent with the projected 60. 79% pay? out in FY18. The projected breakdown for FY19 is as follows: Instant scratch prize payout of 66. 50%, to meet growing consumer demand for higher pricenpoint games. Pull?tab payout of 62.92% Lotto game payout of 50.56% Operating expenses, as a percentage of gross revenues, remain low. In FY17, administrative expenses were $36.0 million, 5.98% of gross Lottery revenue, well below the 10% cap set by state statute. The Wisconsin Lottery continues to be one of the most efficient lotteries in the country, with the nation?s fifth lowest per capita expenses in FY16, which is the latest year for which national figures are available. The Lottery continues to maximize funds available for property tax relief The proposed prize payouts will result in signi?cant revenues for that purpose. ?0358? Page 2 WISCONSIN LOTTERY PRIZE PAYOUT REPORT 2018 LOTTERY SALES Fiscal Year (FY) 2017 sales were $602.8 million, the second highest in Wisconsin Lottery history. Instant tickets (scratch and pull-tab combined) achieved the sixth consecutive year of record?breaking sales, at $385.9 million. Sales of lotto tickets Powerball and Badger 5) were $216.9 million, the seventh highest in Wisconsin Lottery history.I The Lottery?s sales outlook and ability to generate funds for property tax relief remain strong. The Lottery projects that gross revenues from the sale of lottery tickets will be $605.7 million in FY18.2 Gross revenues are also projected at $605.7 million in FY19. Lottery sales are dif?cult to project due to the volatility of jackpot game sales. These sales are largely driven by the size and frequency of the jackpots. Approximately 24% of all Lottery sales in FY17 came from these games? The Lottery has established a range to forecast future jackpot game performance based upon past performance, but that range is broad. Jackpot game sales from year to year can be tens of millions of dollars different from estimates. The Lottery continues to enhance its Wisconsin~only lotto games, such as Badger 5 and SuperCashl, through improve? ments to the games and limited time offers. The Lottery is engaged in a long?term growth strategy for instant scratch sales by meeting consumer demand for more games at higher price points, with strong sales continuing to build for tickets priced $10 and higher. This increase in higher price?point: ticket sales has driven the signi?cant growth in scratch sales in recent years. In response to consumer demand for higher price-point tickets, the Lottery successfully added a second $30 scratch ticket to its game portfolio in FY17, while continuing to offer innovative $10, $15 and $20 tickets. Sales by game type for the past three years, and projected sales for the next two years, are shown on Table 1. Table 1. Sales by Fiscal Year and Game Type Instant Scratch $356,370,186 $378,800,170 $384,817,222 $388,124,444 $388,124,444 Pull-tab $1,093,320 $1,130,803 $1,049,397 $994,504 $994,504 Lotto $217,167,877 $247,233,964 $216,906,158 $216,584,521 $216,584,521 Total $574,631,383 $627,164,937 $602,772,777 $605,703,469 $605,703,469 Note: Totals may not equal the exact sum of the ?gures in each column, due to rounding. Source: legislative Audit Bureau Report 174 5, August 2.017: Financial Audit of the Wisconsin Lottery. Figures rounded to the nearest dollar. Source: Wisconsin Lottery FY17 Unaudited Financial Statements, rounded to the nearest dollar, as of November 22, 2017. These financial statements are preliminary and subject to change. Source: Lottery Fund Condition Statement, October 5, 2017, used in certifying the amount of Lottery and Gaming Credit for property taxes levied in 2017, rounded to the nearest dollar. sales data is from the Wisconsin Lottery?s FY17 Unaudited Financial Statements as of November 22, 2017. These financial statements are preliminary and subject to change. 2Lottery Fund Condition Statement, October 3, 2017, used in certifying the amount of Lottely and Gaming Credit for property taxes levied in 2017. 31ncludes Powerball, Mega Megabucks, and the daily game Badger 5. Page 3 PRIZE PAYOUT Each individual game has a unique prize structure that represents the value of its prizes and the odds of winning those prizes. The prize payout is the percentage of Lottery revenue that is returned to players in the form of prizes. While the Lottery carefully plans and projects aggregate annual prize payout percentages, the actual percentage of prizes paid for individual scratch games may be more or less than the planned payout. This can occur when sales of a particular instant scratch game are discontinued before all the tickets are sold, as is done when the last top prize in that game is claimed. Sales of games with drawing prizes may also accrue in one ?scal year, while the prizes are drawn and awarded in the following year. Finally, unclaimed prizes may be credited after the year in which the prize expense was accrued. It is also dif?cult to project the annual prize payout of lotto games because, unlike scratch and pull-tab games, they normally do not have a predetermined number of winners. The number of winners and the amount of the prizes won occur randomly. The Lottery is able to estimate the future aggregate annual prize payout percentages for each of its three main product types, by examining current market trends, evolving consumer preferences, and forecasted sales ?gures from the Lot? tery Fund Condition Statement. This Statement is used in certifying the amount of Lottery and Gaming Credit for property taxes. Scratch Tickets Much of the growth in instant scratch ticket sales has come from consumer demand for higher priced tickets which generally have higher top prizes, better overall odds of winning and higher payouts. Offering higher price~point tickets with higher payouts is consistent with the industry strategy of offering more in prizes as a player risks more in the pur~ chase price of a ticket. Players see increased entertainment value in a higher risk?reward proposition. Price points at or above $10 accounted for 45.7% of scratch sales in FY17, compared to 39.7% in FY14. This increase in higher pricewpoint sales has driven overali sales signi?cantly higher in recent years; instant scratch game sales have posted six consecutive record?setting years, trending steadily up From $320.1 million in FY12 to $384.8 million in FY17.4 Sales are expected to climb to $388.1 million in FY18. ?i FY12 data is from Legislative Audit Bureau Report 15-9, July 2015: Financial Audit of the Wisconsin Lottery. 1' legisgisconsin. gov! lab} media? 1 1883 li-qull. pdf) ?($933318 Page 4 Table 2 depicts the shift in sales from lower priced tickets to higher priced tickets. Table 2. Percentage of Total Net Sales Price Point $1 6.8% 6.0% $2 16.80%) 15.1% 3 12. 0/0 12.9% $5 24.4% 24.9% $10 16.2% 15.1% $15* 1.2% 1.1% 20 16. 0/0 17.0% 30 5.7% 7.9% Note: Percentages may not sum to 100% due to rounding. $15 price point is a seasonal (holiday) game. Through November 30, 2017. Ten years ago, six of the Lottery?s 70 instant scratch games were higher price?point games. In FY18, the Lottery antici? pates introducing 80 new games, 23 at the $10 price point and higher (Table 3). The total number of games launched has increased due to the incremental nature of game sales at higher price points. Table 3 Historical Perspective- Number of New Game Launches $Total Number Games Overall 64.76% 66.18% 65.81% 66.31% 66.50% 66.50% Scratch Prize Payout 85231 Page 5 The Lottery estimates that continued strong sales of higher price~point (higher prize payout) games will result in mar? ginally higher aggregate scratch ticket payout rates over the next two ?scal years. Payouts should be accompanied by continued robust sales of$388.1 million per year. Prize payout for instant scratch tickets was 66.31% in FY17. With sales of higher price?point games continuing to grow, and sales of low priceepoint games gradually declining, the Lottery estimates that aggregate instant scratch game prize payout will be 66.50% in FY18 and 66.50% in FY19. This payout percentage will allow the Lottery to continue its strategy of meeting the market demand for higher price?point tickets. The Wisconsin Lottery?s planned prize payout is lower than the lottery industry?s average at all price points (Table 4). The average instant prize payout for U.S. lottery jurisdictions was 68.30% in FY17, which is 2 percentage points higher than Wisconsin. The Wisconsin Lottery payout for FY18 is anticipated to be 66.50%, which is 2.06 percentage points below the projected national average of 68.56%. The trend towards stronger sales of higher price?point games will allow the Lottery to continue to generate strong in? stant scratch sales. To support this strategy, prize payouts will rise modestly in the next two years, but will remain well below industry averages. Table 4. Average Payout Rate by Price Point $1 60.3% 59.0% $2 63.9% 62.0% $3 65.1% 63.0% $5 68.2% 64.5% $10 72.2% 700% $15 NA 72.0% $20 74.5% 74.0% $30 77.1% 75.0% Based on data presented in La Fleur?s Magazine: Vol. 24 No. 6, July 2' August 2017, TLF Publications. Pull?tab Tickets The Lottery continues to offer traditional pull-tab tickets without validation barcodes. Prize payout for pull-tab tickets was 62.78% in FY17. Sales and prize payout projections for the next two years assume no reintroduction of validation- coded pull-tabs. A prize payout of 62.92% is expected for FY18 and FY19. Wisconsin Lottery pull?tab ticket sales decreased to $1.05 million in FY17 due mainly to decreased demand from nonpro?t retailers. Total sales for all pull~tab tickets were $1.13 million in FY16 and $1.09 million in FY15. The increase in FY16 was due in part to new product launches at both the $0.50 and $1.00 price point. For-pro?t retailer sales were approximately $120,958 in FY16 and $120,715 in FY17. Nonpro?t sales were $1.01 million in FY16 and $928,683 in FY17. ?53500315! Page 6 The Lottery had annual pull-tab sales of more than $20 million when it was the exclusive vendor of pull?tabs in Wis? consin. However, the Lottery?s market share has been eroded by unregulated private vendors operating either illegally or under sec. 100. 16(2), Wis. Stats. The law was designed to allow limited?term games of chance by retailers McDonald?s Monopoly game) but provides few protections for those who purchase these private pull?tabs. Moreover, the playing ?eld is uneven. Private vendors can offer retailers a higher commission, whereas the Lottery?s commission is set by law.5 Lotto Tickets The prize payout for lotto games has traditionally been lower than that for instant scratch games. The primary appeal of most lotto games is the chance to win large jackpot prizes. The prize payout ratio for lotto games was 49.40% in FY17, ranging from 46.48% (Powerbali) to 60.49% (EZ Match). Table 5 lists the lotto games and associated designed prize payouts that are currently offered in Wisconsin. Ac- tual prizes paid, as a percentage of sales, may be less than the designed prize payout for several reasons, such as winners not claiming their prizes. Prizes paid, as a percentage of sales, may also be more than the designed prize payout due to the random nature of game drawings and limited time offers that the Lottery uses to enhance its Wisconsin-only lotto games, such as SuperCash! and Badger 5. Table 5 Lotto Games and Corresponding Start Dates and Prize Payout Rates* Powerball 4/19/92 50.00% Megabucles 6/ 1 8/92 53.50% EZ Match 2/4/91 52.80% Pick 4 9/15/97 48.40% Daily Pick 3 9/21/92 48.20% er 5 2/17/03 50.00% Millions 1/31/10 50.00% 5 Card Cash 4/6/14 60.29% Special Draw (Raf?e) 3/4/07 50.00% Re?ects anticipated rate based on game design and is approximate. The Lottery believes it can manage the lotto product line at this time without a signi?cant change to prize payout in the coming ?scal year. The overall lotto game payout is anticipated to be 50.56% in FY18 and 50.56% in PY19. 5 For a fuller discussion of this issue see the November 2008 audit of the Lottery conducted by the Legislative Audit Bureau, Report 08?13, ?(10115111. Page 7 Total Prize Payout and Prize Expense Wisconsin law requires that at least 50% of Lottery gross sales be returned to players as prize payments.6 In FY16 the Lottery?s prize payout was 59.40%. ,By comparison, the overall prize payout for U.S. lottery jurisdictions was 63.25%.7 in FY17, 60.22% of Wisconsin Lottery gross sales were returned to players as prize payments. Over the next two ?scal years, the prize payout for Wisconsin Lottery games will continue to be below industry averages. Fiscal Year 2018: The Lottery expects to pay $368.2 million in prizes. Total prize payout for all Lottery games is estiw mated to be 60.79%. Fiscal Year 2019: The Lottery expects to pay $368.2 million in prizes. Total prize payout is estimated to be 60.79%. Prize payout increases have contributed to record sales. In FY07, the prize payout was 59.28%; sales were $492.8 mil- lion.8 Last year the prize payout was 60.22%; sales were $602.8 million. Going forward, the Lottery should continue to achieve its sales goals with only slight adjustments to its current prize payout percentages. The Lottery proposes an instant scratch game prize payout of 66.50% in FY18 and FY19. This marginal increase from FY17 will allow the Lottery to maintain the success?il higher price?point strategy. Pull-tab prize payout is expected to be 62.92% in FY18 and FY19. Total lotto game prize payout is also projected to go from 49.40% in FY17 to 50.56% in FY18 and FY19. The average prize payout percentages by game type for the past three ?scal years and the estimated prize payout per? centages for the next two ?scal years are shown 111 Table 6. A weighted average is used to more accurately reflect the performance of games with higher sales Table 6. Weighted Average Prize Payout Percentages by Fiscal Year and by Game Type* (Percentages are rounded) Instant Scratch 66.18% 65.81% 66.31% 66.50% 66.50% Pull?tab 62.95% 62.89% 62.78% 62.92% 62.92% Lotto 48.76% 49.58% 49.40% 50.56% 50.56% Total 59.59% 59.40% 60.22% 60.79% 60.79% Data in Tables I and 6 have been rounded and may not exactly match data in Table 7. Based on data in Legislative Audit Bureau Report 17 15, August 2017: Financial Audit of the ?Wisconsin Lottery. hit :Ule is .wiseonsin. ov/labfmedia726 71 l. Source. Wisconsin Lottery FY17 Unaudited Financial Statements as of November 22, 2017. Ihe ?nancial statements are preliminary and subject to change Based on Lottery sales estimates, Lottery Fund Condition Statement, October 3, 2017. 6 Sec. Wis. Stats. 7 Based on data from reporting lotteries as presented in La Fleut?s 2017 World Lottery Almanac, p. 245. is the iatest year for which national ?gures ?01 traditional ticket sales and prize payout are available. a egislative Audit Bureau Report 08 7 july 2008: Financial Audit of the Wisconsin Lottery. s: ie 1. iscr min. - Page 8 Table 7 shows prizes paid during the past three ?scal years and prizes expected to be paid in the next two ?scal years. Prizes expected to be paid in FY18 and FY19 are calculated by multiplying the sales projection for each game by its prize payout percentage. Table 7. Prizes Paid or Expected to be Paid by Fiscal Year and by Game Type." 3:24:21; $235,861,007 $249,280,245 $255,154,040 $258,102,755 $258,102,755 Pull?tab $688,267 $711,153 $658,791 $625,742 $625,742 Lotto $105,892,045 $122,567,099 $107,152,950 $109,505,134 $109,505,134 Total $342,441,319 $372,558,497 $362,965,780 $368,233,631 $368,233,631. Note: ?l'otals may not equal the exact sum of the ?gures in each column, due to rounding. Rounded to nearest dollar. Amounts shown are based on the accrual method of accounting, consistent with generally accepted accounting principles (GAAP). Source: Legislative Audit Bureau Report 1745, August 2017: Financial Audit of the Wisconsin Lottery. Figures rounded to the nearest dollar. (httos Source: Wisconsin Lottery FY 17 Unaudited Financial Statements, rounded to the nearest do iiar, as of November 22, 2017. These ?nancial statements are preliminary and subject to change. Based on Lottery sales estimates, Lottery Fund Condition Statement, October 3, 2017. PRIZE PAYOUT IMPACT ON OPERATING COSTS In establishing the proper prize payout, the Lottery seeks to strike a balance between maximizing pro?ts and providing players with the rewards they expect. The Lottery has been very conservative in its use of prize payout to drive sales, with positive results. In FY07 the overall prize payout was 59.28%; in FY17 it was 60.22%.9 During the same period, annual sales in? creased $110 million, from $492.8 million to $602.8 million. Net operating income increased from $137.9 million to $163.6 million (preliminary). The Lottery carefully manages payout to maximize net operating income. Prize payout has had little effect on administrative costs. Total administrative expenditures as determined in accordance with sec. Wis. Stats, were $36.0 million (preliminary), down from $36.6 million the previous ?scal year. This amount represents 5.98% of gross Lottery revenues in FY17, well wi thin the 10% limitation set by statute.10 The Wisconsin Lottery continues to operate at highly ef?cient levels relative to other jurisdictions, Per capita expenses in Wisconsin are the ?fth lowest among traditional lotteries in the United States, as illustrated in Exhibit 1. FY07 data is from Legislative Audit Bureau Report 08?7, July 2008: Financial Audit of the Wisconsin Lottery. 544108- 1" Expense and Revenue ?gures are from the Wisconsin Lottery?s FY17 Unaudited Financial Statements as of: November 22, 2017. 'lhese ?nancial statements are preliminary and subject to change. Wink? Page 9 Exhibit 1 Fiscal 2016 11.5. Lottery Per Capita Administrative Expenses 1 Oklahoma 3.92 12.45 3.17 2 West Virginia 1.83 7.00 3.82 3 New Mexico 2.08 12.01 5.77 4 Louisiana 4.68 28.31 6.05 6 Arizona 693 43.76 6.31 7 Oregon 4.09 28.03 6.85 8 Colorado 5.54 37.94 6.85 9 South Dakota 0.87 6.35 7.34 10 Texas 27.86 205.64 7.38 11 North Dakota 0.76 5.90 7.78 12 South Carolina 4.96 39.50 7.96 13 Washington 7.29 58.88 8.08 14 Florida 20.61 168.36 8.17 15 Minnesota 5.52 45.32 8.21 16 California 39.25 327.15 8.34 17 Tennessee 6.65 60.79 9.14 18 North Carolina 10.15 95.33 9.40 19 Montana 1.04 9.79 9.40 20 Missouri 6.09 58.16 9.54 21 Iowa 3.14 32.06 10.23 22 Nebraska 1.91 19.77 10.37 23 Idaho 1.68 17.62 10.47 24 Kentucky 4.44 47.76 10.76 25 Illinois 19.780 15977 1032 Source: La Fleur?s 2017 World 26 Indiana 6?63 74'09 I 1'17 Lottery Almanac, pp. 253?260. 27 Arkansas 2.99 33.43 11.19 28 Virginia 8.41 98.67 11,73 Fiscal year ends June 30 except Texas 29 12.78 156.64 1225 (August 31), and Michigan (Sept. 30). 30 New Jersey 8'94 113.97 12.74 1 Delaware, Kansas, Maryianci, New York, 31 - New Hampshire 1'34 18'47 13'8?3 and Ohio are not listed due to expenses not 32 Rhode Island 1.06 14.67 13.89 being separated out for traditional lottery in 33 Wyoming 059 8.22 14.04 each of those states. 34 Connecticut 358 50.34 14.08 2 U.S. Bureau of the Census, July 1, 2016. 35 Michigan 9.93 146.59 14.76 36 Massachusetts 6-81 102-72 5-08 3 Lottery administrative and operational 37 Vermont 0.63 9.82 15.71 expenses as stated in La Fleut?s 2017 World 38 Maine 1.33 23.44 17.61 Lottery Almanac- 39 Georgia 1031 18546 17.99 Wis nsin ens DiSt' 0f COlumbia 0'68 2738 4094 La Fleur?s Alriianac Wire unaudited at time Total 265.88 2,607.89 9.81 of reporting. 1.011%?