In Tough Economy, Arkansas' Lottery Launch Exceeds Expectations
By David Harrison, Staff Writer
The Arkansas Department of Higher Education is accustomed to fielding a few thousand applications for the state's college scholarship programs. But this year, the office has been swamped with about 55,000 applications, almost 10 times more than usual. Director Jim Purcell and his staff have spent weeks reviewing transcripts, rushing to sort through the piles before fall classes begin.
One reason for the deluge: the new Arkansas Scholarship Lottery. Since the state's first lottery ticket went on sale last September, more Arkansans than expected have been opening their wallets for a chance at a big payday that simultaneously finances a new scholarship program. Lottery managers thought they would bring in $1 million of revenue per day, at most. So far, even in a sour economy, they're averaging $1.4 million.
By June, when the fiscal year ended, the lottery had raised roughly $380 million. That was enough to fund 28,000 college scholarships and enough to keep Purcell and his staff putting in long days at the office. In the first quarter of this year, Arkansas' new lottery ranked fifth in per-capita sales of scratch-off tickets, thanks to the roughly 2,000 retailers who signed up to sell the tickets.
One of those retailers is Jackie Reed, who owns the Morrow Country Store in Canehill, where there's the store, a post office and not much else. Sales of lottery tickets there have been good, averaging between $50 and $175 per day. "I knew people were excited about it," she says. "We call them 'loafers' - farmers who come in and sit. It's kind of been a fun thing for them."
The question now is how long Arkansas' gamble can keep paying off. Lottery officials acknowledge that revenue could stabilize or even dip in the future once the novelty of the state's new lottery wears off. On the other hand, declining lottery revenues in the Missouri counties that border Arkansas suggest that Arkansans may already have been more in the habit of buying lottery tickets than was previously believed.
"I think people were ready for it," says state Senator Mary Anne Salmon, who sits on a legislative committee overseeing the lottery. The 2008 constitutional amendment creating the lottery passed by a margin of almost two-to-one, despite vociferous opposition from Christian conservative groups.
It also helps that lottery sales produce a tangible benefit in the form of college scholarships.
"I'll be honest with you, I wasn't for the lottery," Reed says. "I didn't vote for it when it went in because I heard so many people say, well, in other states it's going for scholarships and it does not. But I personally know 20 to 25 kids in our high school who did get scholarship money this year. They're doing what they said they would do."
Since 1964, when New Hampshire became the first state to launch a state lottery, government officials have found them to be a popular way to raise funds for schools or other causes. Today, 43 states run lotteries, including several that, like Arkansas, use the proceeds to fund college scholarships.
Voters have shown they find lotteries more palatable than tax increases. Also, unlike taxes, lottery revenues have traditionally held up or even increased slightly during economic downturns, although a recent study by the Rockefeller Institute of Government found that lottery revenues sagged in 2009.
"Thomas Jefferson called it 'the painless tax,'" says Richard McGowan, a Boston College economist who has studied lotteries. "People don't mind that they're losing and so people don't think of themselves as being taxed, which they are."
Graduation is the goal
From the start, Arkansas' biggest lottery booster has been Bill Halter, the state's lieutenant governor, who pushed for the constitutional amendment. Only about 19 percent of Arkansas adults over the age of 25 have a college degree, the third lowest rate in the country after West Virginia and Mississippi. The problem isn't that students don't enroll in college, Halter says. It's that they don't graduate. For many students, that outcome is more tied to financial difficulties than academic abilities.
"This is part of addressing one of the biggest inhibitors of students going to college and completing their degree," Halter says.
Arkansas directs all of its lottery proceeds to scholarships, which puts the money off-limits to legislators looking for a quick way to balance the budget. Students who score at least a 19 on the ACT or who maintain a grade point average of at least 2.5 can get $5,000 per year to attend a public or private four-year school in Arkansas. Alternatively, $2,500 scholarships are available to go to a two-year school.
The program has not been without controversy. A nine-member lottery commission, appointed by the governor and leaders from both houses of the Legislature, recruited Ernie Passailaigue, South Carolina's lottery director, and paid him $324,000 a year, a 49 percent increase over his salary in South Carolina. The commission also hired two of his South Carolina deputies and paid them $225,000 each. The salaries raised eyebrows in Arkansas but Dianna Lamberth, who chairs the lottery commission, defends the decision.
"It was money well spent," she says. "As quickly as they had us up and running and as much as we were making from day one, the salaries were paid for in less than a day. I don't really think you can begrudge that."
So far, about 22 percent of Arkansas' lottery revenue has gone to the scholarships, less than in most other states. (Prize money and administration count for the rest.) That ratio is not necessarily a bad thing, says Rebecca Paul Hargrove, who has started scholarship lotteries in Georgia and Tennessee. As sales of lottery tickets increase, Hargrove explains, so must the prize money. As that happens, the overall amount of money going to scholarships goes up, even as the percentage of overall revenues going to scholarships goes down.
But Alicia Hansen, a researcher at the Tax Foundation, says there are better ways to raise money. "It would be more efficient to raise extra revenue by slightly increasing the state income tax, or perhaps the sales tax," Hansen says. "With the lottery, you have to set up a whole new agency. You're paying new government employees."
Unintended consequences ahead?
While lottery scholarships enable more students to go to college and graduate, there is a risk that the new influx of students could lead to higher college costs. A 2003 Harvard University study suggested that Georgia's lottery-funded HOPE scholarship program might have led public colleges and universities to raise room and board fees. A South Carolina free-market think tank reported similar cost increases in that state after the introduction of lottery scholarships.
Indeed, having so many scholarships to hand out may only make it easier for legislatures to cut general-fund support for higher education. Purcell, the higher education agency director, says he hopes the Arkansas Legislature will maintain its support for colleges and universities. This year, however, tuition at the state's four largest colleges went up between 3 and 5 percent because of budget cuts.
The experiences of other states point to other problems that may come Arkansas' way. When lottery revenues level off, state higher-education agencies can find themselves with too many qualified scholarship applicants and not enough money for all of them. As Stateline reported last month, Georgia is struggling with dwindling scholarship revenues. Florida and West Virginia recently reduced the amount of their scholarships. West Virginia also increased the academic requirements necessary to get and keep scholarships.
Lieutenant Governor Halter brushes off these concerns. "Raising the number of students going to college and staying there is the whole point," he says. "I don't view that as a criticism, I view it as a goal. At the same time, I guess I'd say to those folks who view it as a problem that it's a great problem to have."