State lotteries transfer wealth out of needy communities | Searchlight New Mexico

2022-07-30 02:06:50 By : Ms. Rosa Chen

story by Aadit Tambe, Stephen Neukam, Kate Seltzer, Rachel Logan, Henry Kuczynski, Emmett Gartner, Trisha Ahmed, Abby Zimmardi, Michael Purdie, Shreya Vuttaluru and Jamie Lin Pinzon

This story is republished with permission from the Howard Center for Investigative Journalism. 

While the growing expansion of casinos and state-sanctioned sports betting steal the spotlight, state lotteries have nearly doubled in size over the past two decades, driving a multibillion-dollar wealth transfer from low-income U.S. communities to powerful multinational companies.

A nationwide investigation of state lotteries by the Howard Center for Investigative Journalism at the University of Maryland found that stores that sell tickets are disproportionately clustered in lower-income communities in nearly every state — including New Mexico. The investigation’s analysis of cellphone location data shows that the people who patronize those lottery retailers come from the same kinds of communities.

Once rare, lotteries now operate in all but five U.S. states. Driven by more than a half-billion dollars in annual ad spending, increasingly sophisticated sales strategies and political pressure to increase revenue, lottery ticket sales have grown from $47 billion to $82 billion since 2005. In 10 states, lotteries generate more revenue than corporate income taxes.

The investigation also found that a key promise of lotteries across the country — that they support education — doesn’t hold up. Instead, lotteries often compound inequities by disproportionately benefiting college students and wealthier school districts far from the neighborhoods that fund ticket sales.

“Poor people are collateral damage to a cause of raising money for what the legislators feel is good purposes … public safety, local schools,” said Gregory W. Sullivan, former Massachusetts inspector general and now research director for the Pioneer Institute, a free-market think tank. “State governments become dependent on the revenue and any moral considerations get pushed out of view and out of mind.’’

The multibillion-dollar wealth transfer starts in places like Warren, Michigan, where Ashley Standifer buys tickets in one of the state’s poorest neighborhoods.

On a snowy day in April, Standifer stopped by the Korner Party Store in this Detroit suburb, its largest sign advertising “Beer Wine Lotto,” to buy scratch-off tickets.

She buys them three times daily, alternating between the Korner Party Store and a cluster of nearby gas stations and convenience stores. She said she won $1,000 on a $3 ticket four years ago, but she hasn’t won big since.

Standifer’s spending is one small part of the $82 billion now spent annually by lottery players, the first input in a nearly nationwide system that brings state-sponsored gambling directly into a majority of U.S. neighborhoods through more than 200,000 retail stores.

Standifer — and millions of players across the country — get about 65 cents on the dollar back as winnings. Put another way, they lose about 35 cents for every dollar they spend. Those losses are why the lottery exists.

“Yesterday I spent like $130 and I won like $85,” Standifer said on that snowy April day.

The $45 Standifer lost will leave this neighborhood north of Detroit, just a sliver of the $29 billion lost annually by players in the 45 states (plus Washington, D.C.) that have a lottery. Those losses fund government programs and enrich others, such as a Canadian private equity billionaire and a Japanese convenience-store conglomerate that profits from more than 10,000 U.S. lottery retailers.

In the popular imagination, the lottery is funded by people who spend a few dollars on a Powerball ticket when the jackpot gets big. This is not reality.

More than two-thirds of lottery sales are of instant scratch-off tickets — the same type Standifer bought — which range in price from $1 to $50. A sliver of players is responsible for most of that spending.

A 1999 report to the National Gambling Impact Study Commission found that the top 10 percent of lottery spenders accounted for two-thirds of all sales. The most frequent players, the study found, were disproportionately composed of people who were Black, lower-income or high school dropouts.

High school dropouts spent four times more per year on the lottery than college graduates. Black people spent, on average, nearly five times as much as white people.

The Howard Center submitted public records requests to nearly half of states with lotteries seeking detailed customer studies.

Some states, like Massachusetts, are fully aware of the importance of frequent players. A 2016  study commissioned by the state’s lottery showed that the top 10 percent of players account for about 40 percent of sales. The average player in that group reported lottery spending of nearly $200 per week.

In South Carolina, players with a household income of less than $35,000 a year spent more than twice as much as players with household incomes between $100,000 and $150,000, according to a 2014 state-commissioned research study obtained by the Howard Center. Black and Hispanic players each spent nearly 20% more than white players.

Cloyd White, 26, is a construction worker from Jasper County, S.C.  Surrounded by lottery advertisements in one of the state’s Shell gas stations, he said he knows people who would turn to the lottery to try to prevent cash-flow shortages.

“When people get down, they probably take the last $10 or $20 to try to make up $100 to $400,” said White, who is Black and estimated he spent $40 every day playing the lottery. “It’s a gamble and it’s risky, but I feel like it’s all about God.”

The Howard Center found states are more likely to collect and publish information about their customers that obscures the importance of frequent players. These states collect statistics that show the percentage of a given demographic group that “participates” in the lottery each year. 

“For state lotteries, having access to that data is like taking a giant money-sucking cannon and aiming it at those demographics,” said Les Bernal, national director of Stop Predatory Gambling, a nonprofit advocacy group based in Washington, D.C. “It dictates where they put the lottery retailers. There’s a reason why so many lottery outlets are concentrated in low-income areas.”

One factor that experts say helps explain the economic and racial disparities driving lottery play is the overconcentration of lottery retailers in lower-income, nonwhite communities.

The convenience store where Standifer bought her scratch-off tickets is in a neighborhood that has a poverty rate almost three times the state average and a Black population 25 percentage points higher than the state average. 

In Michigan, neighborhoods with a lottery retailer have a median poverty rate that is nearly double the rate in neighborhoods without lottery retailers and a median household income that is $16,000 lower, the Howard Center analysis found.

“There’s no debate that lotteries prey on poor folks,” Bernal said. “You have half the country that doesn’t have any assets whatsoever. They don’t have an emergency fund. They don’t have any investments. They don’t own property. Literally every street corner they are selling $30 scratch tickets.”

The North American Association of State and Provincial Lotteries, a lottery industry group, maintains that it’s misleading to examine where stores are concentrated, because people “don’t always buy their lottery tickets in the neighborhoods where they live. They purchase them on their way to or from work, while shopping or running other errands, or even at the airport.”

It’s unquestionably true that people “don’t always” buy tickets where they live. But the Howard Center’s first-of-its-kind analysis of mobile-phone location data shows that lottery retail customers are mostly local. The analysis used mobile location data from SafeGraph, a location intelligence firm that collects information about foot traffic at more than 6 million U.S. stores. 

The analysis, which examined store traffic patterns at nearly three-quarters of all U.S. lottery retailers, found similar patterns across the country. 

The New Mexico Lottery traces those same national trends, targeting disparities by locating retailers in lower income neighborhoods with higher Hispanic populations.

Players like Standifer fund the system by losing a total of $29 billion annually.

But there are consistent winners: the multinational companies that run the lotteries on behalf of the states, the stores that sell tickets — including large convenience-store chains, such as 7-Eleven and Circle K, advertising and media companies, and state administrators who oversee the process. 

Of that $29 billion, those entities will keep more than a quarter: $8 billion.

Private businesses took in about $1.9 billion running U.S. lotteries in the 2020 fiscal year, according to the analysis. 

The industry is dominated by two private companies, U.K.-based International Game Technology PLC and Canadian-owned Scientific Games Holdings LP.

Between the two companies, IGT and Scientific Games International have a hand in running lotteries in all but two states, Vermont and Wyoming. Operating under long-term contracts that are regularly renewed, these companies print scratch-off tickets, run computer systems that power the lottery and, in some states, handle marketing and advertising.

State-level lobbying by Scientific Games in the 1980s was critical to the expansion of the lottery from one state, New Hampshire in 1964, to nearly every state today. 

“While Scientific Games was not responsible for the creation of any new lotteries after 1984,” historian Jonathan D. Cohen writes, “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.”

The New Mexico Lottery also relies on outside vendors, and Scientific Games is the state’s primary provider of specialized gaming services. In that role, it earns 1.599 percent of total ticket sales in New Mexico. In 2021, a year of record sales, that fee amounted to $1.9 million, according to the 10-year contracts signed in 2018.

In the years ahead, the company’s control over lotteries is expected to expand significantly as more state officials take a step back. Illinois, Indiana and New Jersey already have essentially privatized their lotteries.

This increased privatization comes as Scientific Games just sold its lottery business to Toronto-based private equity firm Brookfield Business Partners LP for nearly $6 billion. Future profits will benefit Brookfield CEO Bruce Flatt, who is worth $4.5 billion and is the world’s 622nd-richest person, according to Forbes as of May 2022.

The sale also means the largest firms running state lotteries are all controlled by non-U.S. companies.

Convenience stores — including convenience stores located at gas stations — account for nearly two-thirds of all lottery sales. While the profit margin lags well behind cigarettes, alcohol and food, lottery tickets are an important tool in drawing customers into the store.

People who buy tickets at convenience stores spend nearly twice as much, on average, as other convenience store customers, according to the National Association of Convenience Stores.

After prizes are paid out and the costs of running the lottery are covered, $21 billion of the original $82 billion remains for government programs. These funds, according to states, justify the existence of the lottery.

Lotteries fund all sorts of programs, including economic development, pension systems, horse racing and tax relief.

Very little goes to combat problem gambling. The funding made available — $14.7 million across 10 states — means just $7 of every $10,000 made by the state lottery system goes toward helping chronic gamblers.

Nationally, at least two-thirds of lottery proceeds go to fund education programs. The Michigan lottery has for decades billed itself as a win for education. The vast majority of the state’s share of lottery funding is used for K-12 education funding. “For fun. For schools. For 50 years,” the state’s lottery website reads.

However, studies show the education funding formula is inequitable. Michigan received a grade of “D” for how it funds low-poverty districts, compared to districts with high poverty rates, according to a 2021 report from the Education Law Center.

A 2021 report from the Education Law Center classified 18 states’ funding-distribution systems as progressive — that is, a system where the state allocates more per-pupil funds to high-poverty districts than to low-poverty districts. (That is the case for New Mexico.)

At the other end of the spectrum, the report says 15 states have a regressive system: high-poverty districts receive as much as a third less per student than their low-poverty counterparts.

 “Lotteries are a bad way of raising school funding. Lotteries are a bad way of raising public funding, period,” said Zahava Stadler, a researcher with The Education Trust.  “Generally speaking, lotteries pull a lot of money out of the communities that actually need it the most.”

Some states earmark lottery revenue to pay for broad-access college scholarship funds.

New Mexico’s lottery is lauded by advocates as beneficial for the state, because legislation mandates 30 percent of the lottery’s total annual revenues be returned to residents through the Legislative Lottery Scholarship for higher education. 

Since sales began in 1996, the lottery has transferred $907 million to New Mexico for education, according to a 2021 financial audit report. Due to record sales and revenues last year, the state Lottery issued the largest return in its history: 46.5 million. 

The remaining 70 percent of revenues go towards the prize pool and operation and administrative expenses, including paying vendors like Scientific Games International. 

Howard Center reporters Brandie Bland, Jillian Diamond, Vanessa G. Sanchez and Lauren Mowry contributed to this story. Melissa Ellin, Isabel Tehan and Ethan Biddle of Boston University also contributed.

Howard Center for Investigative Journalism

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