The growth of the lottery business nationwide was inspired in large part by the lobbying innovations of a single multinational gambling company, Scientific Games Holdings LP.
A 1986 memo from Scientific Games co-founder and then-Chairman John R. Koza described a “draft version of our new model state lottery law which we distribute widely each year to state legislators and government officials in non-lottery states.”
“We are seriously considering the possibility of supporting an initiative petition effort in Oklahoma and/or Arkansas to establish a state-operated lottery there in the November 1986 elections,” Koza wrote in a letter to Gaming Business Magazine.
Historian Jonathan D. Cohen found that Scientific Games’ political activities were key to the creation of state lotteries, primarily in the early 1980s, via ballot initiatives in Arizona, Washington, D.C., Colorado, Oregon, and finally the “bonanza” in California. The California lottery “was entirely the product of Scientific Games,” said I. Nelson Rose, a law professor, author of “Gambling and the Law” and a widely cited expert in the field of gambling law.
Almost 60 years after New Hampshire started its lottery in 1964, 44 more states plus Washington, D.C., have established lotteries. Alabama, Alaska, Hawaii, Nevada and Utah remain the only states without lotteries.
Oklahoma enacted a lottery in 2004, after Scientific Games proposed draft legislation in 1986 and contributed money to a pro-lottery effort in that state. In the end, Scientific Games was named primary contractor.
“There’s never been a grassroots movement for this,” said Les Bernal, national director of Stop Predatory Gambling, of lottery expansion. “It’s being driven by a handful of cynical public officials from both political parties [in conjunction with] powerful gambling interest groups that stand to benefit.”
Today, 45 states and Washington, D.C., have lotteries, as do dozens of countries across the globe. “While Scientific Games was not responsible for the creation of any new lotteries after 1984,” Cohen wrote, “its campaigns set the stage for the massive spread of legalized gambling across the Midwest, West, and Upper South in the late 1980s and early 1990s.”
When were lotteries created in each state?
Scientific Games spokesperson Therese Minella declined to answer questions and instead directed a reporter to the company’s website. Minella wrote that a Howard Center for Investigative Journalism question about the company’s lobbying and influence “is inaccurate as a premise,” and didn’t respond to emails or a telephone message seeking elaboration.
Scientific Games’ lottery business was purchased for $6 billion in April by Brookfield Business Partners LP, a private equity firm based in Canada. The remaining part of Scientific Games was renamed Light & Wonder Inc. and retained Las Vegas as its headquarters.
Adam McLaren, a vice president and senior analyst at Moody’s Investors Service Inc. who follows the lottery business, doesn’t necessarily see Scientific Games as the main driver of lottery expansion. Instead, it was states – looking for new revenue – which joined the lottery bandwagon after other states established them.
“Scientific Games played a big part in the start, but it’s hard to say they were the ones who spread the growth,” McLaren said. “Once one state saw it, and saw there is a social aspect and they saw that it could be done in a safe way, then they wanted it in their state. It doesn’t have as harsh of a stigma as casino gambling.”
According to interviews and court documents, the Scientific Games strategy to win public acceptance of lotteries has proven so effective that state governments have since become their biggest cheerleaders. The Howard Center found that state lotteries drive a multibillion-dollar wealth transfer to lottery contractors from players concentrated in low-income, high-poverty communities with lower levels of education and larger Black and Hispanic populations.
Some states go to unusual lengths to protect their lotteries. The Wyoming Lottery Corporation, for example, filed a lawsuit against a prominent critic after he wrote to national lottery organizations with complaints about the company’s handling of compulsive gambling. Edward Atchison, the former director of the Wyoming Council on Problem Gambling, accused the Wyoming Lottery of preying on people with compulsive gambling addictions.
Atchison’s lawyer, Tim Kingston, said it “amazed” him that a quasi-governmental entity like the lottery would pursue legal action against a private citizen. “He’s a citizen and has the right to speak out about a public issue,” Kingston said. “They’re just trying to shut him up.”
Atchison died in May 2016, before the case could proceed, and it ultimately was dismissed.
The Scientific Games playbook
State lotteries’ origin stories follow a general pattern: a shortfall of state tax revenues and a growing need to build schools, fix potholes and pay for other government services drives officials to look for new revenue sources.
Take, for example, the budget squeeze in California. The state kicked off what would become known as the “Tax Revolt” in 1978 with the passage of Proposition 13, a ballot initiative that drastically reduced property taxes. California voters approved a lottery by ballot initiative in 1984.
As states began considering new sources of revenue such as lotteries, they needed private contractors to handle the ticket printing, game design, database management and other operations. Scientific Games saw a great opportunity.
Lobbyists at the behest of Scientific Games formed groups with names like Arizonans for Tax Reduction or Californians for Better Education. In what was among the first examples of “astroturfing” in the American political system, Scientific Games executives employed these firms to disguise their interests as genuine grassroots activism, Cohen and Bernal said.
Astroturfing, in this case, included “paying signature gatherers and writing legislation, and then forming citizens coalitions that were just total fronts for the company and its advertising efforts,” Cohen said in an interview.
The pro-lottery forces made sure to specify how lottery proceeds would be used for schools or other popular services rather than having funds mixed with the “black hole” of state general funds when knocking on doors for petition signatures, Cohen described in his book, “For a Dollar and a Dream: State Lotteries in Modern America.” An Arizona poll showed “the use of lottery revenue for a specific purpose held a 10 percent advantage over allocation to the general fund,” Cohen wrote.
Scientific Games’ efforts did not stop with signature gathering: The company wrote some of the bills that would ultimately be ratified. Cohen compared lottery language in ballot initiatives in California and Oregon to the generic version Koza shared. The state versions were so similar that Cohen called significant parts of them “word for word.”
Scientific Games’ efforts to bring a lottery to Oklahoma surfaced in 1986, when the company contributed $25,000 to pro-lottery organizations when legislation to enact a lottery was being debated in the Oklahoma House of Representatives, according to an article in The Oklahoman from that year. Ultimately, the lottery bill incubated for almost 20 years before 64% of voters approved it through referendum in 2005.
The initiatives, once passed, were essentially tailored so that only Scientific Games could serve as the instant ticket vendor, according to Rose and Cohen. Language in the California initiative required detailed financial disclosures from all of the executives, Rose said, knowing “their competitors at the time weren’t going to reveal all this confidential financial information about their executives.”
Contractors in California and Oregon were also required to be selling tickets within 135 days, a requirement that all but mandated lotteries offer scratch tickets off the bat, effectively making Scientific Games the sole competitor, Cohen said.
Scientific Games largely exited the political arena of lottery legislation after all five of its pet-project ballot initiatives passed, Cohen said, but it remained on the scene with a reduced footprint.
Scientific Games, by its own admission, had a forceful expansion strategy in the 1980s. Then-President and CEO William G. Malloy described in a 1993 interview the company’s shift in business strategy from the prior decade. “We aim for a constructive aggressiveness, but not aggressiveness in terms of what we saw in the early days of Scientific Games,” Malloy told Gaming and Wagering Business magazine. “We recognize that lottery executives are pretty knowledgeable these days and wouldn’t go along with it.”
A 1983 internal company study offered a sense of Scientific Games’ expansionary ambitions in that era. The company conducted extensive market research to argue that lotteries would not eat into the betting at horse races, known as parimutuel wagering.
Koza, then head of Scientific Games, said the potential market of lottery players was bigger than the typical blue-collar and male patrons at horse tracks. In defining these audiences, Scientific Games pointed out the consumers they subsequently targeted amid their plan to expand. “All available evidence indicates that the lottery player and the parimutuel wagerer are different, that the introduction of a lottery does not negatively impact parimutuel revenues” and can, by contrast, “help the parimutuel industry,” the study said.
Scientific Games’ expansion and success drew criticism, even from officials in states where they were operating. California Superintendent of Public Instruction Bill Honig said ”education was used to get the lottery passed, but education hasn’t benefited from it.” Arizona state Sen. Ray Rottas, a Phoenix Republican, lamented that he had “misgivings about them receiving the contract because this is the first time in the state of Arizona that an initiative has been bought and paid for.”
Legacy of Scientific Games’ strategy
The broad contours of Scientific Games’ lobbying innovations are evident in states that most recently implemented lotteries. Mississippi, which established its lottery in 2018, saw employees of its public programs vying for a share of lottery proceeds before a bill was even filed in the legislature.
“Road builders [were] asking … for the lottery proceeds to go to the roads,” said Republican state Rep. Nick Bain. “Educators or teacher unions … came in saying we need education.”
In Wyoming, the pro-lottery sales pitch focused on residents traveling out of state to buy lottery tickets. Lottery supporters such as David Zwonitzer, a former Wyoming state representative and sponsor of the state’s lottery bill, argued this out-of-state spending should instead help benefit local retailers and the Wyoming state government.
A similar argument was made in Mississippi. “States were generating money from Mississippi residents [that were] using the lottery in their state, and Mississippi was not getting the revenue for that,” said Democratic state Rep. Tommy Reynolds.
The lottery messaging is now crafted by the North American Association of State and Provincial Lotteries, a trade association of lottery professionals in the U.S. and Canada. It does not directly lobby, but Bernal said the organization’s true purpose is to “make the lotteries seem like they’re any other business.” He added the group’s industry best practices effectively show “how to get people to lose more money more efficiently [to] state government.” Phone messages to the group were not returned.
State governments, armed with the association’s messaging, have moved on from their late-1980s reservations to become the lottery’s biggest advocates in recent years. One vivid example of this advocacy involved a 2019 lawsuit by the New Hampshire Lottery Commission and other state lotteries against the Department of Justice. The state lotteries sought to preserve sales of lottery tickets online, which were threatened by a Justice Department legal ruling.
In January 2019, the Justice Department reinterpreted the 1961 Wire Act to apply to iLottery tickets, which would prohibit iLotteries nationwide. Bernal said there was an immediate “uproar” from the states.
“Lotteries which are not making the games available on the internet within the next 10 years will lose an entire generation of players,” Charles “Charlie” McIntyre, director of the New Hampshire Lottery and former association president, told Public Gaming magazine. In Michigan, for example, iLottery sales increased by almost 1,300% from 2015 to 2021 while traditional lottery sales continued to rise.
The New Hampshire Lottery Commission, joined by other states and lottery vendors, sued the Justice Department to preserve online lottery sales. Michigan Attorney General Dana Nessel argued in a court filing that the Justice Department ruling would put vital state-level public services at risk of shrinking or disappearing.
Ultimately, a federal appeals court sided with the states, preserving this new online lottery venture. New Hampshire Gov. Chris Sununu celebrated a victory that would “protect public education in our state.”
Despite states’ support for lotteries, the industry still faces a stigma and challenges to expand in some areas. In early 2022, a bill to legalize the sale of scratch tickets in Wyoming to fund a recreation program failed. State Rep. Jeremy Haroldson, a Republican who voted against the bill, said the gaming industry’s influence in Wyoming is growing.
Consolidation of lottery managers
There are four multinational companies based outside of the U.S. that dominate service of state-backed lotteries: Scientific Games, Pollard Banknote Ltd., International Game Technology PLC and Intralot SA. They provide software, computer systems and scratch-off ticket printing, and allow operation of multistate lottery games such as Powerball.
Private companies play a major role in servicing lotteries and say they view this as a way to help local governments solve their budget problems. “With increasing budget deficits, we expect governments to rely even more on the proceeds generated from lottery programs as a funding alternative,” said Brookfield Business Partners LP CEO Cyrus Madon.
Charles Clotfelter, professor of public policy and of economics and law at Duke University who has written about lottery companies, said states are heavily dependent on these few tried-and-true vendors and are reluctant to try new companies. “States don’t want to get in a situation where they go to a new vendor and then something blows up,” Clotfelter said. “States tend to use the same vendors.”
Private businesses took in about $1.9 billion running U.S. lotteries in the 2020 fiscal year, according to a Howard Center analysis of state financial disclosures. More than half of all the states with lotteries saw an increase in contractor costs through the pandemic, demonstrating the expansion of vendor involvement. Scientific Games’ lottery revenues grew during the COVID-19 pandemic to $918 million in 2020 from $911 million in 2019.
Jillian Diamond, Jamie Pinzon, Spencer Friedman and Professors Rob Wells and Constance Mitchell Ford of the University of Maryland contributed to this report.
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