You can't beat the lottery even when you get the tickets free. Read on.
I reported back in May that an investigation was nearly completed and a plea was expected shortly in the case of a theft involving a former employee of the Arkansas Lottery.
Took a little longer than expected.
Arkansas Lottery Director Bishop Woosley has a news conference scheduled at 3:30 p.m. today to discuss the news that Remmele Mazyck, 34, a former $76,000-a-year security official for the lottery, has entered a plea in federal court today to a scheme in which he stole almost $478,000 in lottery tickets between 2009 and 2012. The loss is covered by insurance, but Mazyck is committed to pay restitution up to $482,671, for tickets and store commissions, his attorney John W. Hall told me. But he has no resources to pay that amount.
Woosley told me in May that Maczyk had been placed on leave last October and then fired in November for failing to appear at a meeting on his work. Under the circumstances at the time, Woosley was only able to confirm his firing for failure to appear, not the underlying subject of the planned discussion. He declined at the time to confirm my tip that a plea bargain was in the offing related to ticket theft.
The case against Mazyck has proceeded against him under seal in federal court since Nov. 15.
Hall said Mazyck, when confronted, explained to authorities how he'd exploited a loophole in security to conduct the scheme. He checked out packs of promotional scratch-off tickets at the warehouse and used them himself, rather than dispensing them free as a promotional tool. He cashed $478,000 in winnings on the tickets at various retailers, always in amounts below the level that required presentation at the lottery office. He reinvested most winnings in more lottery tickets. He identified winning tickets by scanning them with a lottery scanning device to find winners, the basis for his wire fraud charge because the scans went through an out-of-state computer. He faced a money laundering count, too, for depositing more than $10,000 in cash into his bank account on one occasion. He'll have to file an amended income tax return to reflect the winnings and that will create a huge tax liability for him. The restitution will be set out in $100 periodic repayments.
High irony. Mazyck, like most lottery players, didn't end up with much money. He spent up his winnings trying to buy more winning tickets. "It's a cautionary tale, I suppose to gambling addiction," Hall said. "Even though you win $478,000 playing the lottery, you can piss it all right away." Hall said Mazyck also invested some money in the stock market, but lost on those investments, too. Hall said the plea was hurried this afternoon so Mazyck could be present for the expected delivery of his first child this weekend. He's been allowed to remain free until sentencing and faces punishment under the guidelines of 37 to 46 months in prison. He's living in South Carolina.
Hall contends the lottery came out ahead, after a fashion. Mazyck spent up his winnings on lottery tickets and insurance will pay for the nominal losses.
Woosley talked at some length at the news conference on how the scheme came to light — a retailer reported cashing of unactivated tickets — and Arkansas Business provides those details.
Mazyck came to Arkansas from the South Carolina lottery. He was hired by Ernie Passailaigue, the former Arkansas lottery director, who also came from South Carolina. He was an assistant to security director Lance Huey.
The criminal information was unsealed late today.
Also, the plea agreement was unsealed, but not a later modification.
The Lottery Commission release on the case:
A couple of stories worth noting:John Lyon reports for Stephens Media.
* BILLIONAIRE BOYS CLUB ATTACK ON PUBLIC SCHOOLS; A hearing was held today in federal court on the effort led by the Billionaire Boys go-to lawyer Jess Askew to essentially nullify any means for school districts to exempt themselves from a recently broadened school choice law. Askew (who won't tell me who pays for his various legal actions working against conventional school districts in the name of Walton/Hussman agenda items such as charter schools, school transfers and the rest) argues that there is no law governing school choice for the coming school year because of an ambiguous date in the law (it occurred before the law was passed), so all transfers must be accepted from white students trying to flee Blytheville for neighboring majority white districts. And he said all the federal court cases in which the Blytheville district has been involved over desegregation no longer constitute the history of desegregation for which the legislature clearly intended to give districts a way to exempt themselves from unfettered choice. Rob Moritz of Stephens Media has coverage. Federal Judge Kris Baker allowed the suit by parents hoping to leave the district to go forward, but didn't rule on merits or an injunction request.
Arkansas Lottery Director Bishop Woosley has issued a statement explaining his opposition to legislation that would require that 30 percent of lottery revenue be spent on college scholarships.
He's right, of course. The legislature has no business setting arbitrary takeouts from lottery income. The biggest expense in the lottery is the payout of winnings to players, not administrative expenses. To increase the share of revenue going to scholarships, it will mostly have to come from winnings in the form of longer odds to win. When the odds get longer, it can depress play.
I'm not lottery fan, but I'm less of a fan of legislative micromanagement. It's a backdoor way to kill the lottery. If you want to kill the lottery, just kill it. Slow strangulation only strangles college kids with steadily diminishing returns on scholarship expectations.
Here's what Woosley said:
Bill Halter, the gubernatorial candidate who drove creation of the lottery, takes exception to legislators who are pushing the line that lottery revenue is eroding. Halter cites arithmetic.
The simple numbers: In the first two years and nine months of the lottery, it produced $274 million for scholarships. Divide that by 2.75 years and you get just a hair under $100 million a year, which was the amount projected to be produced. Gross sales are off this year against last year by about 9 percent, but the net available for scholarships is down only about 1 percent because of a shift in lottery ticket purchases from scratchoff to more profitable draw games and other expense reductions.
Halter's point is that the legislature is now adjusting scholarship amounts downward not because of a shortfall in revenue but because more students have applied for the scholarships than expected. Also, more sought four-year rather than two-year college educations, which meant bigger scholarship grants. Thus, the legislature is "addressing the wrong problem," he says. His metaphor: If flu vaccines work, you don't make them more expensive, you produce more flu vaccine. If college scholarships encourage more kids to go to college — and encourage more student to go to four-year schools which have a better record at retention — you don't address the "problem" by cutting scholarships. You find additional resources to keep the program equally strong.
Well, you might do that in a world where budget-slashing Republicans are not in the legislative majority, anyway.
27 House members and Sen. Johnny Key have filed a bill to trim lottery scholarships to cope with lagging revenues.
As filed, the legislation ends two-track scholarships for two-year and four-year students. Instead, it would give $2,000 scholarships to students with fewer than 27 semester hours of credit; $3,000 for those with between 27 and 58 credits; $4,000 for 58 to 88 credit hours and $5,000 for those with more than 88 hours.
The bill seems to cover any college student at a two- or four-year college. (One wonders if the perpetual student could keep drawing $5,000 forever.) Currently, four-year students get $4,500 and two-year college students get half that
The legislature's lottery oversight committee today recommended a sharp reduction, more than 25 percent, in lottery scholarships next year because of stagnant lottery revenues. From Arkansas Business.
They'd drop from the current $4,500 to $3,300 for four-year college students and from $2,250 to $1,650 for two-year college students. The scholarships started at $5,000 in 2010, the first year of the program.
That $300 million has funded more than 90,000 scholarships, Lottery Director Bishop Woosley said in the release.
Not included in the release: In the last fiscal year, Arkansas's lottery did what it was designed to do — raise scholarship funds — more inefficiently than all but three state lotteries, according to figures provided by the North American Association of State and Provincial Lotteries. In other words, last fiscal year Arkansas netted a lower percentage of its total sales than all but the lotteries in Rhode Island, South Dakota and Massachusetts. Around 20 percent of the Arkansas Lottery's $473 million in sales went to scholarships last year. The most efficient lotteries — Oregon and West Virigina — netted 50 and 45 percent of their total sales, respectively.
What's the problem? At least in part, early lottery brass, Ernie Passailaigue and co., made inexplicably bad deals with vendors. The lottery's contract with Scientific Games got a lot of scrutiny last year, but as we reported earlier this year, its deal with Intralot, a Greek company that provides and services the lottery with the technological infrastructure to administer both instant ticket and so-called draw games like Powerball, is even worse.
Rather than getting a percentage of draw games only — terms Passailaigue negotiated for the South Carolina Lottery before heading Arkansas's — Intralot gets a percentage of total sales. It's a contractual difference that costs the lottery millions every year, and one that then Lottery Commission chairman Ray Thornton didn't seem to grasp when it was being reviewed by the legislative oversight committee. Intralot is currently the lottery's largest vendor, according to the lottery website's financial summary section. The Intralot contract doesn't expire until 2016.
Better terms alone wouldn't make the lottery efficient, keep it from maturing or address the funding shortfall on the horizon, but it's a clear example that legislators, as they're considering how to preserve scholarship funding in the upcoming session, need to pay careful attention to the numbers.
As of yesterday's Lottery Commission meeting, year-to-date revenues are back to where they were this time last year, following a jump in ticket sales attributed to a record $587 million Powerball jackpot. But according to Shane Broadway, interim director of the state Department of Higher Education, the lottery scholarship program is still on shaky ground. Even if the lottery generates $100 million a year for scholarships, at the present rate of awards, the program is only a few years from running out of money. Ninety million a year would fund the incoming class of freshman for four years, if scholarships were reduced by over $1,000 per student, from $3,300 per year for students attending four-year schools and $1,650 per year for students attending two-year schools — and even then, some funds will have to come from the reserve.
Sen. Johnny Key (R-Mountain Home) submitted a legislative proposal that scholarships be awarded in amounts that increased as the student progressed — $2,000 for freshmen, $3,000 for sophomores, $4,000 for juniors and $5,000 for seniors. Commissioner Bruce Engstrom pointed out that such a small amount of initial funding might discourage students from applying to college. Thus far, the Department of Higher Ed hasn't conducted any research to discover how far scholarships can drop before students become discouraged. This plan has been criticized as subsidizing privileged students who could most likely afford college anyhow.
Current scholarships are at $4,500 a year for students attending a four-year school, and $2,250 a year for those attending a two-year school. Broadway noted that one solution is changing scholarship eligibility requirements.
Lottery sales continue their precipitous decline.
As Stephens Media noted, sales in September were down $9 million. The story didn't note that sales were $39 million in September 2011, meaning a whopping 23 percent drop. Cost-cutting helped keep net for scholarships closer to target, but all the talk of new $20 scratchoff games and rebound of this gimmick or that gimmick doesn't cover the inexorable drop in year-to-year monthly results. The lottery, only three years old, "matured" even faster than anyone dreamed. Plus, there's talk of new competition from Mississippi. Plus, the only way to increase revenue is more games, more marketing and more access to gambling. These come with expenses in every case, including societal.
Inevitably, the amount awarded for individual lottery scholarships will decline further. Or the legislature will change the rules so that fewer qualify. The latter solution, if adopted, would favor higher income students, because any test- or grade-based criteria inevitably will track economic condition of the students.
Bill Halter, who championed the lottery's creation, is still right. If the lottery is to be of benefit to Arkansas — and that's an evolving debate — it must help more, not fewer, students and it must be aimed at attracting and keeping people in college who were less likely to attend or graduate. A subsidy for those most likely to succeed will undoubtedly be popular with the lucky ducks and their families, but do markedly less for the state's low attainment in higher education.
Halter is right, whether you love the lottery or, like me, don't.
Key has proposed a graduated lottery scholarship — $2,000 first year, with an additional thousand each succeeding years as students progress toward graduation, so that college seniors receive $5,000. Currently, the lottery scholarship caps out at $18,000 per student, over four years. The proposed changes cap the scholarship at $14,000 over four years.
This will do two things: 1) favor higher income students who are better able to attend in the first place to the detriment of poorer students who now qualify for $4,500 at four-year colleges 2) equalize first-year spending among two-year and four-year students and thus push more students into cheaper two-year institutions (think that fine ASU branch in Mountain Home.)
These are my points, not Halter's. Though lottery revenues have ticked downward lately while college costs continue to climb, Halter makes a couple of unassailable points: 1) Net revenue has been near the $100 million projected annually; 2) the scholarship amounts had to be trimmed back from an initial $5,000 at four-year schools not because of revenue shortages but because of greater than expected demand. In other words, the scholarships seem to have succeeded in increasing the college-going rate and, it's hoped, the completion rate.
"You don't follow up a success by reducing the financial incentives that got us there in the first place," Halter told me.
More coming on this topic from Cheree Franco, who was on hand for the meeting. Halter is still not talking about politics. He's widely expected to seek the Democratic nomination for governor in 2014, a position for which Attorney General Dustin McDaniel is already running.
UPDATE: According to the Bureau of Legislative Research, as early as next fiscal year, funds for the lottery scholarship may not be able to cover all qualifying Arkansas students.
As of last Saturday, 13,560 Arkansas students will receive lottery scholarships for the current semester — a number that will most likely grow, since students have until October 1 to qualify. This year's freshman class alone will receive a projected $50 million payout in 2012-2013. But due to scholarship "dropout rates" (students leaving school or failing to re-qualify for scholarships), that same class is projected to only receive $31 million next year. Even so, at the current rate of funding, scholarship expenditures are expected to dip into the $20 million emergency reserve at some point in this fiscal year. And even with that reserve, there is a projected deficit by next year, and the $80 million cushion that's bolstered the fund thus far, garnered from getting the lottery up and running sooner than expected, is quickly being depleted.
The proposed change — increasing scholarships on par with individual students' earned college credits, was presented by the Bureau of Legislative Research as incentivizing students to graduate. As pointed out by Senator Mary Ann Salmon and other legislators, Arkansas has a high rate of college enrollment and a low rate of college graduation. But Senator Joyce Elliot said that "we've assumed this might be a better approach regarding retention. We don't know this for sure," and mentioned her concerns that Arkansas not repeat "the mistakes of other state lottery scholarships, such as Georgia's, by supporting the education of the most advantaged students" — those best situated to take the initial scholarship cut. Rep. Barry Hyde pointed out that $2,000 is half of what freshmen are currently offered and a "wholesale renovation of the program" based on, essentially, a year of data, "is awfully short." Other possible solutions include revising eligibility requirements and possibly reintroducing a minimum ACT score of 19, which some legislators worry will disadvantage minority and low-income students.
Senator Jonathan Dismang seemed to support tiered funding as a potential solution, pointing out that with other state budget shortfalls, the general revenue for lottery scholarships is unlikely to be increased. "We shouldn't wait till the last minute," he said.
There was also some discussion about increasing the $12 million in funds earmarked for non-traditional students, who are defined as any student who doesn't enter college directly from high school. Non-traditional students have higher lottery scholarship retention rates than traditional students.
December is the benchmark for the legislative committee to make a recommendation regarding these matters to the General Assembly.
That didn't take long. Arkansas started selling lottery tickets in September 2009 and three years later we have solid evidence — in a 7 percent drop in sales the last two months, according to an article in the Democrat-Gazette (pay wall) — of the inevitable maturing of the lottery.
The experience in every other state told us that, apart from population growth, percentage of free income is more or less unchanging. See Texas, to name one, where net lottery income has more or less been flat for nine years.
Unless you can find ways to encourage more people to separate themselves from more of their money, the growth arc of lotteries won't be great. Arkansas Lottery officials blame the economy and weather for the recent downturn, though there's some research that indicates hard times actually encourage desperate people to gamble more.
Whatever. The Arkansas Lottery can't count on exponential growth to expand the scholarship pool it finances, so legislators are figuring out ways to reallocate the money. This could mean future fights between two-year and four-year college students. One proposal would stairstep the money — more for each successive year along a degree path. This inevitably would favor those better able to pay in the first place, not simply those with better academic achievement. As the percentage of college costs paid by the lottery scholarships continues to decline, the likeliest dropouts will continue to have a high correlation with financial pressures.
Arkansas, like other states, will continue to search for ways to increase gambling. More marketing, more games. You can see why the dearly departed Ernie P. had an interest in keno and video lottery terminals. Illinois has even started online lottery ticket sales.
A new trial in a lawsuit over a $1 million dollar scratch-off lottery ticket that wound up in the trash — only to be picked up by the woman who eventually claimed the money — has been set. Trial will commence Oct. 18 in Searcy, with a pretrial hearing on Sept. 17.
In July 2011, Sharon Duncan bought the scratch-off ticket at a convenience store in Beebe, but apparently threw it away after an automated scanner said it was not a winner. The ticket was picked up by Sharon Jones. Back in May, a judge ruled that Duncan was entitled to the money and that Jones would have to pay back over $190,000 she'd already spent, but the case was later ordered to a new trial.
Of course, $2 million of that came from a partial giveback by vendor Scientific Games of the sweetheart contract revision deal cut without commission or legislative approval by former Lottery Director Ernie Passailaigue. The Commission has since okayed the sweetheart deal, but not until after payments in excess of the original contract at a rate, if all had been realized, of an additional $3 million a year.
Forgot one other small item, too.
The lottery saved at least roughly $500,000 in salaries ended with the departure of Passailaigue and the two other members of the $774,000 Gamecock trio that scuttled home last year after a brief run at the top of the Arkansas lottery pecking order. And that $774,000 was just their salaries, not employee match overhead. Salary savings alone knock the true lottery profit increase below the $1 million level. None of the Gamecocks was replaced, you'll recall. Existing employees took up their duties.
All this matters only because if the lottery profits are hitting a static plateau, that means scholarship growth won't occur and, against rising college costs, will count for less.
The Arkansas Lottery announced today that the fiscal year ended June 30 with total sales of $474.1 million for the year, about 2.2 percent, or $10 million, higher than sales the year before. The final figures on profit are not yet available, but if past performance is an indicator, the lottery net could rise by about $2 million over last year, when $94.2 million was available for lottery scholarships. That's enough for an additional 200 or so $4,500 annual scholarships to a four-year school and twice that at the $2,250 per year rate paid for two-year college scholarships.
More details follow:
In short, was it legal for former Lottery Director Ernie Passailiague's to unilaterally rewrite a contract with a lottery vendor, Scientific Gaming? Was it legal for the Lottery Commission to renegotiate that contract?
Is a civil lawsuit possible to recoup any of the money lost in lottery profits from the higher payments made to the vendor?
McDaniel said a review of state contracts is outside the power of his office's review function. Here's the full opinion.
Yes, but doesn't the attorney general sue private parties all the time for taking advantage of the state, such as drug companies?
What's the diff?
Others, I know, are looking into the question of whether legal action is worth pursuing here. Could Ernie P. write his own contracts? Does a cleanup of the contract months later really validate any illegal payments made in the interim? They sould like good questions to me.
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