State Budget Committee December 13, 2012

Agenda

1. Legislative intent for the lottery, in statute

2. Business case for considering outsourcing additional function

3. Contract Structure

4. Business Plan

5. Fiscal Results

December 13, 2012 State Budget Committee 2

Legislative Intent for the Lottery Section #1

Legislature’s Public Policy Intent for the Lottery

IC 4-30-1-1 Purpose

Sec. 1. The purpose of this article is to establish lottery games in Indiana that are the best available and that enable the people of Indiana to benefit from significant additional money for capital improvements.

IC 4-30-1-2 Intent Sec. 2.

(3) That the lottery games be operated as a self-supporting revenue raising operation.

IC 4-30-5-3 - Operation of lottery

Sec. 3. The director shall operate the lottery to maximize revenues in a manner consistent with the dignity of the state and the welfare of its citizens.

IC 4-30-5-3 – Allocation of Revenues and expenditure of funds

December 13, 2012 4 State Budget Committee

Legislature’s Public Policy Intent for the Lottery

Teachers Ret. Fund

$30M

Pension Relief Fund

$30M

Build IN Fund

Balance of Surplus Revenue


IC 4-30-16-3

Business Case Section #2

$29

$54

0

10

20

30

40

50

60

Hoosier Lottery US Average, excludes VLT

Hoosier Lottery Lags US Performance

Net Income: HL vs. US Lottery Industry1 2000-2011 (Indexed 2000 = 100)

50

100

150

200

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

1 Only lotteries that have been in operations since 1990 were included in the US Lottery calculation

Hoosier Lottery

US Lottery

7

Net Income Per Capita Comparisons FY11, USD

December 13, 2012 State Budget Committee

U.S. Lotteries Net Income Per Capita (Excludes VLT1) FY11

$29.0

($60)

($40)

($20)

$0

$20

$40

$60

$80

$100

$120

$140

$160

Mas

sach

use

tts

New

Yo

rk

New

Jer

sey

D.C

. M

aryl

and

G

eorg

ia

Co

nn

ecti

cut

Pen

nsy

lvan

ia

Mic

hig

an

Oh

io

Flo

rid

a So

uth

Car

olin

a V

irgi

nia

Ill

ino

is

Rh

od

e Is

lan

d

Ken

tuck

y N

ew H

amp

shir

e

Ten

nes

see

N

ort

h C

aro

lina

Mis

sou

ri

Wes

t V

irgi

nia

Te

xas

Mai

ne

D

elaw

are

V

erm

on

t C

alif

orn

ia

Ind

ian

a A

rkan

sas

Wis

con

sin

Ka

nsa

s Id

aho

M

inn

eso

ta

Ari

zon

a C

olo

rad

o

Iow

a W

ash

ingt

on

O

klah

om

a N

ebra

ska

Sou

th D

ako

ta

Ore

gon

N

ort

h D

ako

ta

Lou

isia

na

New

Mex

ico

M

on

tan

a

Source: La Fleur’s 2011 1 Government VLT profit was used as a proxy to exclude profit gained from VLT – some indirect costs were not removed may not have been removed

U.S. average = $54

Net

Inco

me

Pe

r C

apit

a ($

)

U.S. Lottery Benchmarks: Per Capita Net Income

8 December 13, 2012 State Budget Committee

Contract Structure Section #3

• Game design • Instant Ticket printing • Media planning and purchase • Advertising creative and production • Terminals and network

Incremental outsourcing – true risk-sharing

Contracted Services (95.3%)

In-house

• Executive management • Finance • Legal • Retail licensing • Prize claim verification • Security • IT

• Marketing • Promotions • Instant ticket distribution • Retailer service & recruitment

10

Before and after – Lottery composition


Contracted Services (88.1%)

Net Income Net Income

Penalty

Threshold Commitment (BNI)

Incentive Structure Incentives and security

Net Income Bonus

Provider receives bonus for each $1 over Threshold Commitment

December 13, 2012

But pays Lottery for each $1 under the Threshold Commitment

11 State Budget Committee

Incentive and Penalty are capped at 5% in compliance with DOJ ruling.

Operating Expenses

Management Fee

($000) FY14 FY15

Formerly paid by Lottery

$9,617 $10,024

GTECH Staff Aug. $5,079 $4,129

GTECH Investment $1,434 $1,439

Total $16,130 $15,593

Lottery Expenses

($000) FY14 FY15

Total $51,786 $58,802


Note: Lottery expenses are a function of sales (increase/decrease based on actual sales). Provider reimburses Lottery if under spent; “eats” spending in excess of. All expenses are included in developing the actual income. The provider must cover these expenses before incentive eligibility.

• Provider is reimbursed for expenses incurred for operating lottery functions. • Lottery Commission approves all budget expenses annually.

Lottery Governance Who makes the decisions?

December 13, 2012

Lottery Commission

Executive Director

Security

Marketing

IT

Sales Distribution

Finance

Provider CEO Prize Claims

Retail Licensing

Administration

13 State Budget Committee

Business Plan Section #4

Provider Commitment Exceeds Lottery Capability

Cumulative Income

FY14-FY28

100

150

200

250

300

350

400

450

500

550

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

$6.340B Threshold

$4.208B Lottery projection HL historical performance

15

Hoosier Lottery Income ($M) FY12 actuals; FY13-FY28 estimates

+$2.1B


16

FY16 State Income FY16 State Income

+% from projection:

+55% +21%

Miss threshold:

Incremental income

$250

$250

$53

$303

HL projection:

…the State wins…Every Example


FY16 State Income

Exceed threshold:

$250

$136

$386

FY16 State Income

+43%

Meet threshold:

$250

$106

$356

Business plan strategies: Overview

17

• Expand the Player Base

• Reengineer the Instant Ticket category

• Energize and innovate draw games

• Expand the retailer network

• Maximize advertising investment

• Align sales staff priorities

• Enhance Brand Equity

17 December 13, 2012 State Budget Committee

All of these are strategies that are employed by the lottery in limited degrees. The differences are:

velocity talent and expertise integrated use of advertising dollars

Benefits – a win for all stakeholders

18

Consumer

Employees

Retailers

• More Fun • Increased ways to win

Taxpayers

• Increased sales • Increased enthusiasm • More commissions

• Opportunity to work for world-class lottery manager

• Enhanced career opportunities • More training and support

• Every additional dollar contributes to the General Fund

• 58 New taxpayers added to the rolls


• $200M added commissions in 1st 5 years

• Avg. annual pay of new jobs: $79K

• 126 transitioned people

• 7.6% salary increase (incl. annual adjustment.)

Today’s Demographics

• Gender – 51% of players are women;

– 54% of players are between ages 35-54;

• Age - 12% are younger than 35;

• Education - 75% of players have more than a high school education;

• Location – 50% of players are from

central IN;

– 15% in the south of the state;

– 35% in the north of the state;

• Income – 31% of players earn between

$25K and $50K;

– 49% earn above $50K

• The median income in IN is somewhere around $46K.


Source: IPSOS. Survey conducted on behalf of the Hoosier Lottery

Fiscal Results Section #5

5 Year Budget Projection

Threshold Scenario

FY14 FY15 FY16 FY17 FY18

Bid Net Income (BNI) $256 $320 $365 $410 $410

Max. shortfall payment (5% of BNI) $13 $16 $18 $21 $21

Max. incentive payment (5% of PNI) $13 $16 $18 $21 $21

Provider Net Income (PNI) $256 $320 $365 $410 $410

Incentive payment earned $0 $0 $0 $0 $0

Shortfall payment paid $0 $0 $0 $0 $0

Lottery retained expenses $9 $9 $9 $9 $9

Surplus income (to the State) $247 $311 $356 $401 $401

Estimated internal organic performance1 $233 $242 $250 $258 $265

Improvement over internal ($) $14 $70 $106 $143 $136

Improvement over internal (%) 6% 29% 43% 56% 51%


State Budget Committee December 13, 2012 · rk y C. d gia ecticut ia an io a a ia is d y e essee a...

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Transcript of State Budget Committee December 13, 2012 · rk y C. d gia ecticut ia an io a a ia is d y e essee a...