Promised Revenues Not Showing Up

June 01, 2006

One of the most important jobs of any governor is to act as a CEO and financial steward of the state. History will no doubt look at the creation of a state lottery, the opening of the state to casino gambling, and the large increase in the tobacco tax as some of the most significant items of Henry's first term.

The Lottery
On March 20, 2002, state Senator Brad Henry said, "It's estimated a statewide lottery could gross $500 million a year for Oklahoma, pumping hundreds of millions of dollars into college scholarships, early childhood programs, capitol improvements for public schools and full health insurance coverage for educators."1 Henry wasn't quite as ambitious in his first newspaper interview after being elected governor, saying "I believe we can bring in an additional $300 million over and above what we have now for education. And I think that's potentially conservative if we do it right."2

Thanks in large part to Gov. Henry's efforts, the lottery was put on a statewide ballot and approved by voters, and now Oklahomans are using their hard-earned money to place bets at astronomical odds. But how are we doing on that additional $300 million (or $500 million) in education funding?

For FY-2006 education received $62,271,420 in total funding from the Education Lottery Trust fund.3 That comes in at just under 21 percent of the governor's $300 million estimate. Frankly, that's not even close enough for government work.

Even if one believes the governor's own Office of State Finance's current projections of $123,930,0004 for FY-2007, it brings the revenue to only 41 percent of the $300 million prediction Governor Henry used in order to garner the public's support.

What does the future hold for lottery revenues and education funding? Dr. John Hill looked at lotteries and reported, "Lottery revenues are inherently unstable due to increased competition, both from lotteries in surrounding states and from other forms of legalized gambling. In 1970, so few lotteries existed that their sponsoring states received an average of 43 cents for every dollar wagered. By 1998, that average had fallen to around 30 cents. ? In Kentucky, for example, competition from riverboat casinos along the state's northern border cut into lottery ticket sales in 1998, forcing the state to consider adding video lottery terminals to boost profits. In New Mexico, increased competition from video slot machines has been cited as the reason the state's three-year-old lottery has increased its payouts - and simultaneously cut its profit margin - to keep up interest in its games.

"Gambling industry experts themselves concede the error of linking important programs, such as education, to unstable sources of income. Paul Dworin, editor and publisher of Gaming and Wagering Business magazine, admits, 'States should get away from selling lotteries on the basis of education because lottery funding is not steady.'"5

Casino Gambling
The governor also negotiated and signed a casino gambling compact that a press release from his office said "would enable the state to regulate tribal gaming and share in the revenues generated by the machines, [and] is expected to yield about $71 million annually to strengthen Okla-homa's public education system."6

Early reports on the governor's projections are not promising: "Oklahoma's share of gaming revenues has been revised significantly downward by the new state finance director. Claudia San Pedro says the state is only going to see $19.7 million this year."7 That would bring the casino gaming revenues in at about 28 percent of the predicted rate, putting the governor's ability to project casino revenues on par with his lottery projections.

This lower-than-expected revenue comes despite the fact that Oklahoma has more casinos than the surrounding states - 83 tribal gaming centers, which is an increase of 25 percent over five years ago.8

Casino gaming revenues in general have a spotty performance record, with several states reporting declining or stagnant revenue. Illinois, where casino gambling has been in place since 1999, has had two straight years of decreasing revenues, producing a tax shortfall to the state of $115.7 million.9 Colorado's casino revenues have been flat, with almost zero growth in revenues since 2002. Even before Hurricane Katrina, Mississippi's gambling industry was experiencing stagnant revenue growth of less than 5 percent in total from 2000 to 2005.10

If Oklahoma follows the trend, revenues will increase as casinos are built until a point of saturation occurs. At that point revenues to the state will decline as less profitable facilities close and other facilities struggle to compete with each other for the consumer's dollar. This competition is not limited to the confines of Oklahoma's borders. Surrounding states that are already in the casino business are also competitors, not to mention Las Vegas. And that only considers the states that currently have casinos. What would be the impact on the casino in Thackerville if Texas passed casino gambling? In other words, these are most likely the "good times" in terms of revenue to the state.

Those of us with a few years under our belt will remember the promises made in 1982 about all the revenues that legalizing pari-mutuel horse racing would produce. In FY-2006 horse racing produced a whopping $1,733,055 in revenues11 for the state's coffers while consuming $2,360,889 of taxpayers' hard-earned money for "regulation."12 Not exactly what we were promised. One cannot help but feel a frightening sense of d?j? vu regarding the governor's gambling and lottery revenues. Twenty years from now, the revenue streams Governor Henry once trumpeted will quite likely be next to irrelevant as a state income source, but gambling's social costs will still be with us.

Tobacco Tax
Did the governor fare any better on his promises regarding what a tobacco tax hike would do for state coffers? During the first half of fiscal 2006, tobacco tax collections came in at about 20 percent less than predicted.13 While being within 20 percent of his promise looks good when compared to some of the governor's other promises, it is extremely problematic when you look at where the money was intended to be spent. The governor's tax-hike plan called for using the revenues to subsidize the state trauma system, provide health care premium assistance to small businesses, and keep rural hospitals open.14

The governor and the state treasurer, Scott Meacham, have blamed this shortfall on the failure of the Indian tribes to comply with the compact negotiated by Meacham when he was director of the Office of State Finance. At last check, however, even Meacham's own numbers indicate that the lower-than-expected collections from the Indian tribes account for only $20.9 million of the $62.8 million shortfall.15

Inevitably the program to provide subsidies for health insurance for small businesses - which is being expanded this year despite the negative revenue trends - will have to be funded by other sources. Over the past five years, the average annual increase in health insurance premiums for small firms has escalated an average of 15 percent annually.16 Even the governor and his Office of State Finance will be hard pressed to claim that they expect tobacco revenues to keep pace with this increase. The small businesses who obtain this subsidy will no doubt become dependent on this corporate welfare and, if faced with paying the rising costs themselves or having to discontinue insurance for their employees, will become aggressive lobbyists to protect their subsidy.

Even if Mr. Meacham is able to force tribes to decrease their use of the six-cent stamp, a decrease in revenue will result that will partially offset the increase immediately and will continue to trend downward over time as fewer adolescents smoke and older smokers either smoke less or change their buying patterns.

One doesn't need an MBA to realize that when an expense, like health insurance, rises at a rate that is faster (in this case much faster) than the revenue source that is paying for it, the result will be problematic at some point in the future.

In sum, the governor's fiscal record is consistent. But being consistently wrong is not an attribute that voters normally look for in a CEO.

Steve Anderson (MBA, University of Central Oklahoma) is an OCPA research fellow and a certified public accountant with private- and public-sector experience. He was formerly a state-certified teacher with 17 teaching certifications.

Endnotes
1 "Senator Henry Withdraws Lottery Legislation, Considers Petition for State Lottery Vote," Oklahoma State Senate Communications Division, 20 March 2002. Available at http://www.oksenate.com/news/press_releases/press_releases_2002/pr20020320.html
2 John Greiner and Carmel Perez Snyder, "Henry discusses plans for term," Sunday Oklahoman, 15 December 2002, p. 4-A.
3 "State Board of Equalization Proposed FY-2007 Revenue Certification," 17 February 2006, p. 4.
4 Ibid.
5 John Hill, PhD, "Lottery Revenues: An Unstable Funding Source for Education," Intellectual Ammunition (January/February 2001). Available at http://www.heartland.org/Article.cfm?artId=119
6 "Toby Keith, Gov. Henry Push for Jobs, Education," Office of Governor Brad Henry, 19 February 2004. Available at http://www.governor.state.ok.us/display_article.php?article_id=237&article_type=1
7 Associated Press, "Racino Revenue Falls Off Pace," 28 January 2006. Available at http://www.
kotv.com/main/home/storiesPrint.asp?id=97850
8 Associated Press, "Oklahoma tops list of gaming operations," 2006. Available at http://www.kten.com/global/story.asp?s=4838121&ClientType=Printable
9 Deutsche Bank Securities, Inc. report to the Illinois Gaming Board.
10 Mississippi State Tax Commission, Miscellaneous Tax Bureau, Casino Gross Gaming Revenues, April 12, 2006 report.
11 "State Board of Equalization Proposed FY-2007 Revenue Certification," 17 February 2006, p. 6.
12 Office of Budget and Performance Review, "Oklahoma House of Representatives: FY-2006 Legislative Appropriations," August 2005, p. 155.
13 Michael McNutt, "Amid criticism, tobacco tax is less than projected," The Oklahoman, 12 January 2006, p. 4.
14 John Greiner, "Voters to decide on tobacco tax," The Oklahoman, 22 May 2004, p. 1.
15 Oklahoma Council of Public Affairs, "Tobacco Tax Collections Lag," 26 September 2005. Available at http://www.ocpathink.org/ViewEvent.asp?ID=183
16 National Coalition on Health Care, "Health Insurance Coverage." Available at http://www.nchc.org/facts/coverage.shtml

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