Agency Response to Lottery Performance Audit #10-03

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Janice K. Brewer Jeff Hatch-Miller
Executive Director Governor

March 4, 2010

Ms. Debbie Davenport
Auditor General
Office of the Auditor General
th2910 N. 40 St.
Suite 410
Phoenix, AZ  85018

Dear Ms. Davenport:

The Arizona Lottery is pleased to respond to the performance audit and sunset review conducted by the
Office of the Auditor General. Our first meeting on this topic was held almost a full year ago; this report
clearly documents the hard work of your staff and the Lottery.

Early on in the process, your staff mentioned that a performance audit could also be an excellent
business development tool. We took this advice to heart, and considered your team to be a group of
consultants, eager to help us identify ways to improve our internal and external processes. Having this
expertise available at no cost has been an unexpected benefit of the audit.

We agree with the report’s findings and intend to implement all of the recommendations. You will note
in our implementation schedule that many of the recommendations are scheduled to be completed by
July 1, 2010. We are eager to start the new fiscal year with these improvements already in place.

We appreciate your staff’s dedication to conducting a fair and thorough review. We are proud of this
review, and the effort everyone put into making it a success.

Sincerely,

Jeff Hatch‐Miller
Executive Director

Cc: Leo Valdez, Chairman,
Arizona Lottery Commission

Phoenix Office · 4740 East University Drive · Phoenix, Arizona 85034 ·480.921.4400 · Fax: 480.921.4512
Tucson Office · 4010 E. Grant Road · Tucson, Arizona 85712 · 520.628.5107 · Fax: 480.921.4456
www.arizonalottery.com

Gambling Problem? 1.800.NEXT STEP (1.800.639.8783)

Arizona Lottery Performance Audit Response

Background
In four of the last five fiscal years, the Arizona Lottery has seen sales grow year over year. The Lottery has
introduced new products in response to player demand, offered incentives for retailers, promotions for
players, and developed a variety of marketing and promotional partnerships, all strategically intended to
meet our mission to maximize revenue for state programs. As a result, sales for fiscal 2009 were almost 22%
higher than fiscal year 2005, eclipsing the industry average of 10.8% growth for the same period.

Lottery sales in most states, including Arizona, have shown a more modest growth rate in the last three
years.  A report from the Nelson A. Rockefeller Institute of Government noted that state and local gambling
revenues from lotteries, casinos, and racinos declined by ‐2.6% in fiscal 2009—the first such decline in at
1least three decades. Revenues from tribal casino gaming in Arizona are reported to have declined every
quarter since the start of 2008, with a 13% drop in the fourth quarter of 2009. The Lottery believes these
Arizona‐specific indicators reflect a downturn in the economy and a general population with less disposable
income.

Although the Lottery’s 2.4% growth in FY 2009 could be considered leveling off, the Lottery believes any
growth to be a positive indicator when measured against the above‐mentioned factors, and the lottery
industry as a whole. Growth in the instant product line is significant, since it represents the products a
lottery can best control. For calendar year 2009, the Arizona Lottery was by a wide margin the top
performer of all US lotteries when ranked by instant games sales growth, and #2 nationally in total sales
growth.

Decrease in beneficiary distributions and low per‐capita sales indicate room for improvement.
When the Lottery’s statutory beneficiary distribution method was modified in the FY2008 legislative session,
it enhanced the Lottery’s ability to fully fund its current and potential new beneficiaries.  Under the old
process, beneficiaries received proceeds from the sale of specific products, often at different rates of return.
If Powerball jackpots were unusually high, those beneficiaries received full funding, while those dependent
on other products might not. Funding all beneficiaries from the sale of all products corrected this inequity.

Increased prize expense, as the audit report notes, is a factor in decreased distributions, but the ability to
offer increased payouts (prize expense) was essential to the substantial growth of the Lottery’s instant ticket
product. If prize payouts had remained at their pre‐2009 levels, the Lottery would have been unable to
introduce its $100 Million Cash Spectacular game. The estimated $7.4 million returned from this game’s
sales represented more than 5% of FY 2009’s total distributions. With sales to date of more than $67 million,
the game is likely to make a similar contribution to this fiscal year’s distributions.

Arizona’s per‐capita sales have been comparatively low since 1999. Several factors outside the Lottery’s
control contribute to this situation. First, this period coincides with unprecedented population growth in
Arizona, which the Arizona Department of Commerce estimates to have been slightly more than 30% from
22000 to 2009.   Second, Arizona also has a relatively high proportion of the general population morally
opposed to gambling and by extension, the Lottery. In a 2007 study commissioned by the Lottery, this group
3was estimated to be

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