Call to Order and Roll Call
The first meeting of the Interim Joint Committee on State Government was held on Wednesday, June 27, 2012, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Mike Cherry, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Walter Blevins Jr., Alice Forgy Kerr, R. J. Palmer II, John Schickel, Dan "Malano" Seum, Robert Stivers II, and Johnny Ray Turner; Representatives Dwight Butler, Larry Clark, Tim Couch, Joseph Fischer, Danny Ford, Derrick Graham, Mike Harmon, Melvin Henley, Martha Jane King, Jimmie Lee, Brad Montell, Lonnie Napier, Sannie Overly, Darryl Owens, Tanya Pullin, Tom Riner, Carl Rollins II, Bart Rowland, Steven Rudy, Sal Santoro, John Will Stacy, Tommy Turner, Jim Wayne, and Brent Yonts.
Guests: Arch Gleason, Howard Kline, and Mary Harville - Kentucky Lottery Corporation; Mary Elizabeth Harrod, Kentucky Personnel Cabinet.
LRC Staff: Judy Fritz, Kevin Devlin, Brad Gross, Alisha Miller, Karen Powell, Greg Woosley, and Peggy Sciantarelli.
Kentucky Lottery Corporation – Overview of Financial Report
Guest speakers from the Kentucky Lottery Corporation (KLC) were Arch Gleason, President and CEO; Howard Kline, Senior Vice President and Chief Financial Officer; and Mary Harville, Senior Vice President and General Counsel. After introductory remarks by Mr. Gleason, Mr. Kline reviewed a slide presentation relating to lottery sales, net income history, distribution of lottery proceeds, operating results for FY 2007-2011, FY 2012 projections, and the FY 2013 budget. He pointed out that after two flat years of sales in 2010 and 2011, record sales of $817.7 million are projected for FY 2012, with $210.8 million projected to go to the Commonwealth and $8.5 million of unclaimed prize money to the KEES (Kentucky Educational Excellence Scholarships) Reserve Fund. Since inception of the lottery in 1989 through May 2012, sales have totaled $13.82 billion, with $866.7 million paid to retailers, $8.29 billion paid to winners, operating expenses of $961 million, and $3.69 billion earned for the Commonwealth.
From 1989 through June 30, 2011, $1.75 billion was distributed to the General Fund, including $214 million for the SEEK (Support Education Excellence in Kentucky) program; $1.66 billion to grant/scholarships and KEES Reserve; $36 million to literacy development; and $20.8 million to the Affordable Housing Trust Fund (FY 1999 through FY 2003). The KLC Board has budgeted dividend transfers of $223 million to the Commonwealth for FY 2013.
Mr. Gleason said he is grateful that the General Assembly in the 2012 budget conference decided not to reinstitute the 28 percent minimum requirement for dividend transfers to the Commonwealth. He said there was no question in his mind that the 28 percent mandate thwarted KLC’s ability to grow both sales and profit and was a factor in the decline in sales in 2010 and 2011. Removal of that provision will allow the lottery to be more competitive in the marketplace and ultimately more profitable in the future. The goal is to have a prize payout of 68.8 percent on instant (scratch off) tickets, which account for about 60 percent of sales. The lower level “free ticket” prize has been removed in some games and eliminated in others in order to increase cash prizes.
Mr. Gleason went on to say that in order to improve instant ticket sales, in the fall of 2012 KLC expects to launch a Player Engagement Rewards Program which will allow players to enter losing tickets at “kylottery.com” and accumulate points to redeem for merchandise and other prizes, as well as enter top prize drawings. The new program will be funded by one percent of the instant ticket prize fund and is expected to increase sales by 2-4 percent. States that have implemented this type of program have seen double-digit growth in ticket sales. “Points for prizes” programs are offered in Arkansas, Iowa, and Tennessee and will be launched this summer in North Carolina and Missouri.
When Representative Montell inquired, Mr. Gleason explained that the $214 million that went to the General Fund’s SEEK program was only for a two year period after the legislature dedicated lottery revenue to the SEEK program during the 1998 session. Subsequently, that revenue has been shifted from the General Fund to the KEES Reserve Fund and the need-based programs—Kentucky Tuition Grants (KTG) and College Access Program (CAP) grants.
Responding to questions from Senator Blevins, Mr. Gleason said that the great majority of winners are Kentucky residents but that there are winners from other states. Fifty cents of every dollar of ticket sales for the Powerball and Mega Millions games goes into a common prize pool shared among the states.
Senator Schickel said he would find it helpful to have a chart detailing how lottery proceeds have funded education for the past two years, and Mr. Gleason said KLC would be happy to provide that. He explained that in the current biennium the legislature in the budget process chose to dedicate 78 percent of net revenues from the Commonwealth to scholarship programs—after payment to the KEES Reserve Fund and literacy development—and 22 percent to higher education. When Senator Schickel asked whether there has been any discussion of again directing money to the SEEK program, Mr. Gleason said that this would be a prerogative of the General Assembly. He went on to say that the scholarship program has proven to be popular with the citizens of Kentucky and appears to be consistent with desires to raise the level of education. Representative Cherry added that he was a supporter of legislation that designated lottery proceeds specifically for education and that he is proud to be able to assure his constituents that all lottery dividends are funding scholarships and education initiatives in the Commonwealth.
Senator Thayer brought up for discussion the fact that KLC is restricted by statute from advertising how lottery proceeds are distributed. Mr. Gleason suggested that the original intent of the prohibition was to prevent tasteless advertising in order to promote sales. He said that, to his knowledge, the Kentucky lottery is the only U. S. lottery that has such a restriction. He believes that citizens have the right to know where the money goes, but legislation to remove the restriction has failed in the past. KLC currently spends approximately $10 million annually on advertising. When Senator Thayer asked how removal of the restriction might impact KLC’s advertising policy and costs, Mr. Gleason said KLC would probably dedicate an annual campaign to advertise how proceeds are used but that overall advertising expenditures would likely not increase. He added that public service announcements for the lottery are less achievable today because of the wide dispersion of advertising in the marketplace, even though KLC is a significant spender of advertising dollars. Mr. Gleason assured the Committee that if KLC were to be allowed to advertise where the money goes, it would be done responsibly and in good taste. Answering further questions from Senator Thayer, Mr. Gleason said he believes that advertising would lead to increased sales. Other lotteries estimate that 5-10 percent of sales may be attributable to such advertising, although it is difficult to pinpoint an exact amount. In Georgia it is apparent that the citizens appreciate the benefit of that state’s lottery, which funds the Hope scholarship program. He said the model for the Georgia lottery corporation came directly from the KLC model.
Senator Thayer said that whether or not advertising would lead to increased sales, it would definitely lead to more understanding that the proceeds are funding education, as was promised when the lottery began in 1988. He emphasized that he raised the issue because he feels it is worthy of discussion but that he is not at this time advocating one way or the other. Mr. Gleason said he would be an advocate for the General Assembly to again consider the issue. He noted that KLC annually provides each member of the General Assembly with a letter summarizing scholarship program expenditures in the members’ districts. He expressed appreciation to legislators who have submitted the letters for publication in local newspapers for the benefit of both citizens and the lottery.
Representative Rollins spoke about the history and benefits of the KEES and need-based scholarship programs. He went on to say that KEES may have been modeled somewhat after Georgia’s program but that, in his opinion, it is much better than the one in Georgia. It truly is an intervention strategy that encourages students to study harder in high school, go to college in Kentucky, and exceed in college. It is unfortunate that KLC cannot tell the general public that approximately $200 million of lottery proceeds annually goes toward funding scholarship programs. Representative Rollins indicated he would encourage any efforts to remove the advertising restriction.
When asked by Representative Graham, Mr. Gleason said that the great majority of advertising dollars is spent on newspaper, television, and media within Kentucky. There has been advertising to some extent in the Cincinnati and the Huntington/Charleston area of West Virginia. Advertising in Bowling Green can reach the Nashville market, and Paducah covers the western part of the state. Representative Graham also advocated allowing KLC to advertise how proceeds are used.
When asked by Representative King, Mr. Gleason explained that KLC is permitted to advertise on its web site how proceeds are distributed and that the restriction on advertising pertains to paid advertising. The web site also includes KLC’s annual report. Discussion concluded, and Representative Cherry thanked the speakers.
State Employee Quarterly and Semi-Annual Reports
Guest speaker from the Personnel Cabinet was Mary Elizabeth Harrod, Director of the Division of Employee Management. Ms. Harrod provided a brief update of employment numbers for the Executive Branch. She said that there are currently 33,847 employees, compared to 33,967 at this same time in 2011. At the beginning of the current gubernatorial administration, the count was 35,325. The current workforce is the smallest it has been since 1974, based on the count of 33,700 on January 1, 2012, and the smallest 1974 count of 32,521.
When Representative Cherry asked about the number of contract and part-time employees, Ms. Harrod said she could provide information regarding the number of part-time employees but would have to contact the Finance and Administration Cabinet for information on the number of contract employees. Representative Cherry requested that State Government Committee staff research this question.
Representative Ford said he would like to see a breakdown of areas where the number of employees has decreased and also statistics relating to the number of Kentucky State Police. Ms. Harrod said she could provide that information also to the Committee. There were no further questions, and Representative Cherry thanked Ms. Harrod.
Kentucky Public Pensions Task Force
Representative Cherry and Senator Thayer, Co-chairs of the new Kentucky Public Pensions Task Force, briefed the Committee regarding the membership, meeting schedule, and planned activity of the Task Force, pending expected approval by the LRC. They spoke about the importance of addressing the serious problems facing public pension programs and noted that the Pew Center on the States has volunteered its expertise to assist the Task Force.
Adjournment
Discussion concluded, and the meeting was adjourned at 2:00 p.m.