ALC-Lottery Oversight Subcommittee

A college meeting of the ALC lottery oversight subcommittee to order Uh eyelash for comment from the represent Deffenbaugh in comments. Before we start I want to tell everybody that in June we will have another contract coming up and so we will have a meeting sometime in June we we've not set that yet we're going to get counted see which weeks revision which are not in the we'll try to get on the date of the to we may be here on some of the meetings. With that being said we will review the DFA's Office lottery. Director report the proposed budget to we trigger. Thank you Mr. You pull it over to you get a lot according to rector so. Can you hear me yes thank you if you would state your name for the record you're recognized by name is Erica we're I'm the executive director of the Arkansas lottery. One thank you today for allowing us to be here to present to you I brought members of my senior staff with me as well in order to answer any questions that you may have a wanted to make sure that I had all the folks here to answer your questions as timely as possible and get that information to you I'm gonna start by discussing with you the April results of the lottery I do have some high level takeaways before I turn the power point presentation that I think that you may find of benefits. The question frequently arises as to. What is the total amount of net proceeds from inception to current and as of April 30 of 2022. We have a generated net proceeds in the amount of 1000000000 150 3000080 2000 571 spot 54 so you're looking at 1.$1000000000 and net proceeds since the inception of the lottery in 2009. By comparison and I'll get to this number as part of the presentation but just by way of balance April net proceeds or $1000000 just a little over $8000000 that does not include unclaimed prizes which of course will go into net proceeds on June 30 of every fiscal year so that's just something to be mindful of. Taking you through the the power point presentation. We have comparative income statements from April 22 to April 21. You'll see a lot of red on this. And and and it's it's it is it it's exactly what it is we came off historic numbers that were pandemic driven stimulus money in the economy limited venues of lottery was essentially one of the few forms of entertainment that were available during the last fiscal year this year we've seen a little bit of a different scenario unfold venues opened options opened but we've also seen a lack of stimulus money and we've also seen runaway inflation and consumer budgets are are compressed now we saw Walmart to report historic losing numbers we're we're seeing target today do the exact same thing. We monitor these retailers as a guide for how we should be performing as well we don't sell in target we do sell on Walmart we can look at Walmart sales and we can see the effects and so there's absolutely no doubt that we're feeling inflationary pressure at the register and it's incumbent on us to keep these games front of mine and to ensure that they they they deliver on an exciting proposition and and provide the players with enjoyment. If you look at that are numbers you'll see that on April 22 we booked $51000000. That's total revenues a year ago we did 65000000 so you're looking at it a reduction of 20 percent and there's there's no 2 ways to get around that but we forecasted that so when we did the budget for fiscal 22 it raised some eyebrows and and some folks came to us and said from the street and said why are you why are you shooting so low are you sandbagging on the budget. And we explain what our mythology was when we determine the FY 22 budget and while we absolutely could not have predicted record fuel prices. We did we did forecast a downdraft we understood the effects of stimulus we understood the effects of the pandemic and we understood how we were unique and essentially benefiting from that scenario in our sales so we had to do was peel that that year out peel peel fiscal 21 now we had that we had to extract half of 20 and we had to go back and look at what we felt like what was the normal baseline of this lottery and how are we trending before the pandemic. In in in for sure we want to maintain as much of those pandemic driven numbers as possible but we also have to be realistic and setting our goals so that when we bring a forecasted budget to to the body politic that there's a rationale behind that and so what we're seeing here looks surprising to you it's not surprising to us and if you look at our budget you'll see that that in fact is true and if you'll remember those of you who were at the A. L. C. meeting in January of this year I've made my first early warning about revenue and I forecasted a downdraft and and at that point in time we were still producing pandemic type numbers and so I saw some kind of blank stares the what are you talking about these numbers are great but we can already begin to see it we look at our collection rate with our retailers just like all of you that run your business that's how we run the lottery and so we could start to see a little bit of a cooling and we're seeing a little bit more of a cooling right now you know we have goals for every week and as we look at these goals you know increasingly we're just making goal. So we have to go back every week and say what can we do to try to ensure we're doing everything we can to deliver on net proceeds and that's that's really what is driving this so as you go through here you'll see that the it's it's everything is an effective sales when sales go down that proceeds are going to go down everything goes down and that's essentially what is happening here we're down drafting back to essentially the 2019 numbers which if you look at 2019 that was a well performing your for the lottery and and and we saw outsized growth but now we're going to trend back but as long as we can catch that trend line and right now we're doing that successfully we're very pleased with how we're performing in a very very tough market so I'm happy to visit with you about any of the particulars on this particular slide but I think my answer largely is going to be in summary what I've shared with you here for. With regard to comparative income statements April 22 actual versus budget I think this is where it kind of comes home this kind of really completes the cycle of what I just talked to you about when you look at how we forecasted the year and how we're performing. We're on track in fact we're beating budget and you always want to beat your budget I mean nobody wants to set an unattainable goal that that kills morale in the organisation and it also just sends a message really don't understand your business for the market. So we're we're pleased to be beating budget and early in the year we were beating Budget hands down just by by about yards. In the question arose to me not from a member of the media do you anticipate revising your budget and that's something that is business people were all loads to do I mean we set a budget we do it under fundamental assumptions and unless there's some change in those fundamental assumptions revising your budget is tantamount to moving variables in the middle of your math calculation so I said no because what we really believe is is we will not see attrition at at at the register until later in the year and that's exactly what happened and so the latter part of this year we are now trending back down where you know our internal goal for sales on a weekly basis minimum floor where we can sleep at night is $10000000 that's very very good for the lottery historically when you look back on how it's performed in its earlier years. You'll see that really in essence we're a total revenues were 10 percent over budget total operating expenses you see a -9.9 the tractors a correlation net proceeds again were above budget there as well and we're pleased with that comparative income statements year to date. It's largely self explanatory I'm happy to answer any questions with regard to those numbers as well but there again you see the reduction from last year and net proceeds you see a reduction in total revenues it's it's it's just a function of the economy currently comparative income statement year to date 22 actual versus budget. Happy to answer any of those total revenues up 14 percent. The 8080 transfer analysis this is a summary that we have not provided you with regularity before but I thought it was important to include this in the report for if it's not necessary simply say the word and will open at this but I thought that having a little bit of a running log as to what is available to transfer to ADHD gives you a little bit of a snapshot as to how we're how we're proceeding if you look at the cumulative balance obviously we're where we're doing well we're over budget so. But I'll say this with some hesitancy but but I think it's important I would want to know what if I were in your chair. Right now is we look forward to the remainder of the fiscal year while we will not match the historic numbers of last year we expect to book the second best year in lottery history both sales and net proceeds and we're we're plowing through a serious recession the economy is not favorable to retail we sell in the retail market and when our retailers are impacted were impacted as well. So if you wanna net summary for April net proceeds. 4 516000 better year to date were 9.2000000 better unclaimed prizes we were up 450 5000 in April year to date 1.5 total proceeds 970 2000 year to date 10000000 600000. And and so we we when we look at budget and we look at performance we're happy with where we're at. I'll entertain any questions that you have also have much the fiscal officer Jerry Fetzer here with me today so if there's any specific drill down that you would like he's available to approach the table and provide testimony as well. Trying a little bit leave your name appears or we're trying to find playing these Carreiro might that are just a quick question you had mentioned that that your your contract this will be the second best year solved but you also mentioned that the first part of the year you had good returns and now you're saying this trend out so my question is is not on my side how do that too so. If we didn't have this first part of the year that's above average where would this year be tracking at I have it's my opinion we would be right at budget we would possibly be slightly below budget and I think that's a result of what historic record fuel prices we sell where fuel is sold and so we're we're you see impact at the pump you're going to see impact at the counter as well so we could not have anticipated that what we were anticipating the way we built the budget was as we peeled out what we felt like was the effective stimulus so whatever we felt like federal stimulus dollars enhanced unemployment PPP programs any of these things that that that increased cash into the economy we tried to extract those back out in deal with what we called the pure economy and so the reality is much like many lotteries I was having a conversation with one of my staff members today and he informed me of an interesting fact he said only to lotteries are trending up an instance sales this year. Everybody else is not is is either flat or or down and so it's a it's a larger indicator across the lottery sector nationwide that you're saying and downdraft in lottery need to have the out liars you have one or 2 lotteries that are you know still reporting record sales and they're attributing this to you know look at what we're doing we're we're we're maintaining pandemic driven numbers when the reality is is there something else behind that driving that number such as. A different type of game that they launched or move into the digital space or something along those lines. Thank you. Your Mike one off 100 there you. You want to. Turning to the budget for fiscal 23 I believe this is exhibit C. 2. I won't belabor the details unless there are specific questions but I do have some highlights that I'd like to point out to you. First of all it's important remember that A. Ellis self funded we're not appropriated we don't receive any taxpayer funds so this budget is incumbent upon us actually selling enough to support the budget and we're mindful of that. Total operating revenues for FY 23 we forecast 535962000. So what we forecasted there is more than what we forecasted for this year. But it's still below the high water mark of last year we simply cannot benchmark last year is a as a viable number it we were thankful for that production we're thankful for the net proceeds that were raised but the reality is those days are behind us now and we have to go back to our meeting we have to go back to running the lottery without stimulus without pandemic in those types of things our total operating expenses are forecasted at 446000000. That's 83 percent of our total revenues I think Wall Street would reward that kind of efficiency our operating income is forecast at 80 9000000 950 8000 are not act operating revenue which is interest income is 1000000.$5 for income before transfers which is the important forecasted number that's essentially your net proceeds is 90 1000000 400 and 5050 8000. Now that being said I just sat here and told you that. If winds continue blowing the way they have been. We should come and that proceeds with the second best number so right now the second best number in that proceeds is 90 8000000 that I believe was booked in 2019 perhaps. 2016 don't don't on my feet to the fire was in here. But what we do know is is that we're going to hover right around 100000000 mark and had you asked me whether we could do that at the beginning of the year I would have said unabashedly that will be quite a reach but that's in essence what it looks like we'll be delivering something to the wheels could fall off tomorrow we don't know what the international environments gonna do which could blow back on the US economy but right now that's what we believe so 90 $1000000 we we want to stretch beyond that if we believe the forecast is 90 $1000000 for net proceeds internally we've set a goal that obviously we want to keep setting is as close to a record as we can to get the 106 again. To get the 631000000 again you're probably 36 months out and that's if you if the lottery Justice fortuitous and how we run the lottery and how that's received by the market place but what we want to benchmark and what we want to shoot for every year internally as $100000000 net proceeds if we can get to that point where we can deliver $100000000 in the state of 3000000 people but I think I think we're on the right track and then we'll have high years will have years where it's a little lower but those will be those of the business cycle years and it'll be largely dependent on what's happening in the retail environment. So that's the high level takeaway with regard to the FY 23 budget we were not quite as conservative with this budget as we were this year because we feel like we have a little more well we would like to think that we have a little more clarity on on what what will be flying into next year. I think we all wake up right now every day in the first thing we do is we go to read headlines because there are international events taking place that are necessarily impacting our local economy and that's the first thing I look at every day is a my gosh is Armageddon here and and each day it's not we're thankful and we move forward so that's that was our approach to FY 23 we set up what we think is a reasonable budget we expect as always to exceed budget but is far as putting pen to paper and saying if if if you were to bet on the lottery those are the numbers that we would point. And I'll entertain any questions with regard to FY 23 budget. Senator Hammer. Thank you Mr Emmett you kind of hit out just there for second but I'm thinking back to what it was like in 2008 you know when the bubble burst and some would say that's what we're about to experience maybe even worse so is 23 as far out as your thank you again for like to 24 ready or jumping about the the kids are out there maybe. That your ninth or tenth grade if I'm up here trying to think ahead so just kind of talk for that second yes Sir senator we do and and eat this used to be a much easier exercise I think 3 or 4 years ago we always said the budget exercises is it has been studied for years and there's white papers around and we all can understand the process I think the pandemic kind of changed everything but what we look at is is we we look at a current operations and we try to we run that on a 5 year plan so internally we have numbers that reach out 5 years but those numbers are very fluid we we we do look a little further out than 12 months we always have about an 18 month window in the lottery is a little different and some other businesses in that we rely on vendors who print our tickets that they service other lotteries other lotteries have different initiatives so we have found that we have to have a little bit of a longer vision when we do short term planning because we have to we have to essentially deal with third parties whose calendars we can't control but we do we have a sliding scale of how we see the lottery and where we see the lottery going in and we have permutations to that so by way of example you know we we make decisions about if we were to add a new type of game what's the forecast on the revenue that we generate what would be the operational lift what's the cost benefit around that and so believe it or not we get pitched every day at the lottery on new ideas on how to grow our revenues and this is my chief fiscal officer Jerry fencers famous for saying the expenses are guaranteed when opportunity presents the revenue is a possibility and so we always have kind of a. An odds if you will as to whether or not we think that's a viable outlook so if you were to sit down with us in the lottery we could sit down and show you how we see 5 years out and how we'd like to get there but the reality is is in the current environment we're a little hesitant to and lest we see a clear path we are waiting to see how the world develops in front of us and we're keeping about an 18 month look fell Mr. Yeah. I don't maybe you said it and I just wasn't paying enough that I don't hear you say anything about the impact of the casinos on your budget or so how much do you factor the casinos that are coming into the state as far as going to impact of the budget. We were monitoring that and you know what we don't we haven't been able to peg a specific number while we are certain there's been some level of attrition the reality is is the proposition offered by lottery is so different than the casinos the casino was a destination and and lottery is something you pick up when you get your gas or your milk or your candy bar. Lottery requires a less of a commitment in time and expense and there's less engagement the casino environment is really more of a. It's an act it's activity driven the only to spend the day doing that activity whereas lottery is very much you do it within side your normal day that's in it we would be remiss if we said casinos don't affect lottery sales but we haven't seen it in such and we do monitor we we we we watched Jefferson County we watch Garland County you know we watch West Memphis we you know Crittenden we we do watch the counties and we try to watch sales I think we're we're seeing the real effect of the casinos and it's unrelated to lottery is. We'll I say it's unrelated it's it is related we we have been told by our retailers who are around the casino area they are selling less lottery interestingly Jefferson County as a whole is still performing in line with expectations so what that tells me is is that those lottery sales or simply migrating to a store further away from the casino so those that are in proximity of a casino are going to be more likely to shift their spend whereas those that don't have proximity to a casino and actually have to take it day in travel and kind of make the plans around that we're far less impacted their but I'm convinced that we are impacted at some level but I can't give you a figure or thank you thing Mr. Any other questions. We trigger for your continued thank you Sir. With regard to exhibit C. 3. This is a contract extension regarding our advertising and marketing contract that is currently with the C. J. R. W.. I have present with me today who can answer any specific questions around this I'm doctor actually make that who is our advertising and marketing director this is simply a 1 year extension on the currency J. R. W. contract there was a typographical error in and and I I own this error because I signed this letter it says this amendment will have $1 amount of 7.600007.$6000000 it does it's 6.880 it's 60 6000000 $880000 that's the maximum value of the contract the 7.6 number that was reflected in the cover letter is actually the budgeted amount for our entire advertising budget for FY 23 so if if that if that. Clears that up I apologize for the error but the actual value of the contract before you today is 6.8000006.8 8000000. This is a one year extension it's our last extension we will be putting a A. R. if Q. to market during fiscal 23 seeking proposals regarding the advertising and marketing services that are provided to the Arkansas scholarship lottery. Terms of contract rejected the same as this year just a one year extension. I know entertain any questions. Questions from committee. Yes. No questions. I think we probably need a motion to extend this. Okay we need. I met staff. This requirement should be extended. We will take everyone will be safe. Reprobate move. Your second will. Second all in favor say aye. All opposed thank you anyone else have any other questions. Check it in your presentation thank you and thank you for the appearance committee thank you all for being here we're Jr.