Oregon State Lottery WRITTEN TESTIMONY. Date: March 25, 2013

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1 Oregn State Lttery WRITTEN TESTIMONY Date: March 25, 2013 T: Frm: Re: The Hnrable Carlyn Tmei, Chair The Hnrable David Gmberg, Vice Chair The Hnrable Andy Olsn, Vice Chair Huse Cmmittee n Human Services and Husing Larry Niswender, Directr Oregn State Lttery HB 3377 Amends ORS and limits the amunt the Lttery Cmmissin may spend t advertise the state lttery in a biennium and requires that a fixed amunt be spent n advertising directed t prevent and treat addictin and ther emtinal and behaviral prblems related t playing lttery games. Gd afternn. Fr the recrd, my name is Larry Niswender. I am the Directr fr the Oregn Lttery. The Oregn Lttery is nt taking a psitin n this bill, as f tday. We are here t prvide factual and histrically relevant infrmatin t infrm the Cmmittee, t highlight relevant current law prvisins, t share plicy cnsideratins, and address any questins yu may have fr the Lttery. Histric Cntext and Discussin: Lttery s Missin The Oregn Lttery perates under a cnstitutinal framewrk which defines its missin: T perate a lttery with highest standards f integrity and security t earn maximum prfits fr the peple f Oregn cmmensurate with the public gd. The Oregn Lttery, under the directin f its five member Cmmissin, interprets this missin by breaking it int three areas f respnsibility: Return Maximized Prfits: Thrugh cst management, intelligent investments in marketing and systems and maximizing the efficiency f its labr pl, bth internal and 1

2 cntracted, the Lttery returns maximum prfits t supprt imprtant prjects and prgrams. Stable Sales Perfrmance: Thrugh ffering a diverse line f prducts that match the changing preferences f a brad and diverse audience f Oregn cnsumers, the Lttery is able t cntribute a steady return f prfits making the Oregn Lttery a reliable surce f revenue int the future. Cmmensurate with Public Gd/Balance: The Lttery maintains balance thrugh respnsible gambling prgrams and thrugh effective risk management. Key Operatinal Challenges The current key challenges t cntinue t meet transfer bjectives and remain a stable funding surce fr Oregn include: Ecnmy/Cmpetitin: The ecnmic dwnturn resulted in mre cmpetitin fr discretinary spending; and the smking ban, which resulted in declines in Vide Lttery SM and Ken sales and prmpted sme players t mve their play t tribal casins, where smking is still allwed; Player Base Changes: While favrability ratings f the Lttery are at an all time high, the pst-baby bmer generatin cnsumes media and entertainment prducts differently. It is mre difficult t reach this audience. Baby bmers wh represent the Lttery s cre player base are aging/retiring/passing n; Educatin Need: In rder t sustain revenue transfers, the Lttery needs t cntinue t reach ut t a diverse set f cnsumers t educate them abut the Lttery s prduct fferings. Prpsed Amendments: HB 3377 wuld place a 1 percent r less cap n the amunt f the Lttery s grss prceeds that culd be spent in a biennium n advertising and require that a $2 millin fixed amunt frm within the cap amunt be spent n advertising directed t prevent and treat addictin and ther emtinal and behaviral prblems related t playing Lttery games. 2

3 While the Lttery is nt taking a psitin n the bill, the bill still raises plicy, legal, fiscal, and funding surce cncerns. Nte: Lttery expresses n pinin n the cnstitutinality f this bill r any f its prvisins. Current Status f Lttery Advertising Expenditures The Lttery Cmmissin currently apprves an annual budget fr the Lttery peratins, versus a biennial budget. The manner in which the Lttery Cmmissin has allcated funds fr advertising activities has been at r belw 1 percent f the ttal frecast revenue r apprximately $10 millin r less per year. The budgeted expenditures fr the public infrmatin budget (Respnsible Gambling and Oregn Wins Prgram) have been at 0.5 percent r less f ttal frecast revenue per year. The FY 11 and FY 12 advertising budgets included $8.7 millin and $4.6 millin fr public infrmatin. In ttal, $13.3 millin was annually budgeted, which equates t $26.6 millin in that biennial perid. The FY 11 and FY 12 actual biennial expenditures were limited t $22.3 millin. Of this amunt, apprximately $2.9 millin was spent in the biennium n respnsible gamblingrelated cmmunicatins/activities. HB 3377 Advertising Spending Allwances Based n the bill, Lttery culd spend 1 percent r less f grss prceeds in a biennium t advertise the Lttery. A definitin f grss prceeds is needed r a change in the terms used. Frm Lttery s perspective, the ttal annual grss prceeds fr FY 12 wuld be $10 billin and a biennial amunt wuld be apprximately $20 billin. As such, 1 percent f grss prceeds wuld be ver $200 millin per biennium (r ver 10 times the Cmmissin s current budgeting guideline/practice). This is clearly nt what was intended. Based n the bill, Lttery wuld have had t reduce budgeted respnsible gambling-related expenditures fr FY 11 and FY 12 frm $2.9 millin t $2 millin. This is als clearly nt what was intended. Current Status f Legal Advice Spending fr Respnsible Gambling & Prblem Gambling Activities The Lttery has just received DOJ legal advice that prvided guidance n what Lttery administrative funds can and cannt be used fr relative t respnsible gambling and prblem 3

4 gambling. This new advice cnfirms that expenditures n advertising cmmunicatins directed t prevent and treat addictin and ther emtinal and behaviral prblems related t playing Lttery games (as wuld be required by HB 3377) wuld have t cme frm an alternative fund surce. The new DOJ advice cnfirms that Lttery expenditures need t be limited t thse necessary r required t internally implement and manage the Lttery. Oregn Wins Messaging Fr years, the Lttery has budgeted fr Oregn Wins messaging t address tw very imprtant gals fr the Lttery and the State. First, it is an efficient and effective means f educating Oregnians n hw Lttery funds are used. Secnd, by understanding where Lttery prceeds g, Oregnians can make an infrmed decisin t spend their entertainment dllars n an activity that gives back t their State. Withut an nging means f educating Oregnians abut the gd things that the Lttery des, awareness abut the Lttery decreases, misperceptins can increase, and sales can be negatively affected. New Activities Required by the Bill Ways and Means Review Needed Since the bill requires new activities that wuld require an alternative fund surce, it wuld have a fiscal impact. As such, I am encuraged t see that it already has a subsequent referral t Ways and Means. This referral will allw time and pprtunity t identify and apprpriate necessary funds. Since it is pssible that amendments t this bill may serve t place a limit n Lttery s advertising expenditures, we wanted t take a few minutes t infrm the Cmmittee n the impact f advertising n sales. Impact f Advertising n Sales Fr the recrd, I am Stacy Shaw, Assistant Directr f Retail, Marketing and Sales fr the Lttery. Advertising allws the Lttery t d many critical things. These include the ability t: Intrduce new games and game features; Achieve business and revenue transfer gals; Remain cmpetitive; Maintain favrability; Supprt retailers; Cmmunicate with players; and 4

5 Build a diverse player base. Annually cnducted research cntinues t shw that there are wide audiences f Oregnians wh d nt knw that the Lttery ffers spinning reel (line) games. Many f them frequent the type f lcatins where Lttery prducts are ffered but have nt tried the games. Research has cnfirmed that there is an pprtunity t reach a brader player base (ptential players), if cnsumers understand what types f Lttery games ffered. Belw are excerpts frm a number f industry studies, including an analysis f Oregn Lttery and market data which was cnducted by Alan Resnik, Prfessr f Marketing at Prtland State University in 2006: Oregn Lttery advertising is effective: Spending t date is driving current sales levels; Campaign specific prmtins increase sales; and TV advertising drives brand awareness and pinin. Eliminating advertising creates market risks, such as: Reduced participatin f current Lttery players; and Inability t educate and attract new players. Advertising is critical t lng-term success: Advertising impact depreciates within six mnths; New prduct develpment requires launch advertising; Cntinued messaging is required t attract new buyers; Results frm ther state ltteries shw negative impact frm advertising cuts; and The Study cncludes that every 1 cent decrease in advertising resulted in a 31 t 38 cent decline in sales*. Oregn Lttery Cmparative Categry Spending is Lw** As cmpared t ther US ltteries, the Oregn Lttery s advertising budget as a percent f ttal sales is n the lw end f the range. Based n 2011 data, advertising spend as a percent f ttal sales acrss ltteries ranges frm.4% t 4.2 percent. The Oregn Lttery s advertising budget as a percent f sales is als n the lw end as cmpared t the range f advertising spend as a percent f sales bserved acrss ther industries. When lking at industries including Entertainment, Retail, Cnsumer and Packaged Gds, advertising as a percent f sales can range frm 2% t 6 percent. * Surce: Ecnmic Analysis f the State Ltteries in the United States, University f Maryland, 2004, p ** Surce: La Fleur s Wrld Lttery Almanac 5

6 *** Surce: Marketing Management Analytics industry benchmarks database Other Cnsideratins The number f retailers ffering Vide Lttery SM has reversed frm a histry f steady grwth t a decline. Fr example, in calendar year 2010, the Lttery had 2,370 vide retailers, but in 2011 it drpped by 17 (t 2,353) and in 2012, it drpped again by anther 37 (t 2,316). As such, in the last tw years the ttal has drpped by 54 retailers. Small Oregn retailers are struggling t survive in tday s ecnmy. A number f retailers in the fd and beverage industry, wh were challenged nt nly by the dwnturn in the ecnmy but by the smking ban, have shut their drs. Lttery advertising helps drive business t these retailers, many f whm cannt affrd t advertise n their wn. Oregnians can still engage in the play f line and pker games while smking at Oregn tribal casins, which have a far brader game selectin than Oregn Lttery retailers. The tribal casins als extensively advertise using all frms f media, including televisin, in rder t cmpete fr Oregnians discretinary incme. The Oregn Lttery has very strategically and in a limited manner used the tls it has at its discretin t help stabilize the incme frm Lttery games which is the secnd largest state revenue surce fr the state s budget. Lttery s Key Cncerns if Advertising Expenditures Wuld be Reduced In rder t sustain State transfer amunts, the Lttery needs t cntinue t have the ability t reach ut t a diverse set f cnsumers t educate them abut the Lttery s prduct fferings. Bills that wuld limit the Lttery s ability t advertise: Culd impse an uncnstitutinal burden n the Lttery Cmmissin s duty t establish and perate a State lttery and culd als threaten the stability f the Lttery revenue stream. Culd lessen the ability f the Lttery Cmmissin t intrduce new games, respnd t unpredictable changes in the ecnmy, maintain a diverse player base, and address nging and new cmpetitin fr entertainment dllars. Clsing This cncludes ur testimny. We wuld be happy t address any questins yu may have fr us. Thank yu fr yur time and cnsideratin f this testimny. 6