ALC-Lottery Oversight Subcommittee

Members you would please find your seat. And we'll. Call this meeting of the ALC lottery oversight subcommittees order. Represent back you have any comments welcome right okay you know we're ready to get started we did not made to last year we try to meet in December obviously code gave us problem and then the we were going to schedule for a week and or one day in December in the governor calls special session and we were not required by law to have a meeting in that calendar year so we're here and the respective feud identify yourself for the record you'll be recognized. Thank you Mr chairman my name is Erica and I'm the executive director of the office of the Arkansas lottery we administer the Arkansas scholarship lottery. You're recognized thank you Mr I'd like to ask the chair's intelligence I did bring my senior staff with me today it was my understanding there were new members on the committee and I felt like if we put some faces with some names I could just take just just a few seconds to do so thank you Sir. UP present with me today are of chief fiscal officer Jerry Fetzer you're if you just go away well please please come to the. Right and and. Okay. We also have Angeles Springer who is our. Deputy director or director of security and compliance at the lottery. Thank. Good. Mike Smith is our gaming director he manages our game portfolio. Mr mark Kern is our sales director he manages a team of 24 field reps good. And then also our our commercial consultant from Camelot Mr John scrim shares here's well with this. And I'd like to acknowledge as well the 2 members of interliant who are our central gaming vendor also in attendance and and I'd like to acknowledge that fact that you know we also have a representative from scientific games here today as well. Also director of advertising and marketing is actually making that. Ashley joined us up several months ago and has been an absolute phenomenon and has really helped us move the needle and I thought they deserve recognition this is the team that the and also our executive administrator Katrina Burnett who keeps us all in line although you can tell us sometimes fallout one. This team generated 632.$5000000 in total revenues last year and they delivered 106.3 and six point three and net proceeds both of those were record numbers these are long tenured members of the lottery and I felt like they deserve some recognition and also with eager for them to see how this process works as well thank you Sir appreciate y'all doing a good job and few ever need anything out of us please feel free to call of upto staff that normally I'm available anytime today even if it's in the evening or on weekends so anytime there's problem please feel free to call thank you very much. Again I thank you for your time here today it has been some time since we've been here but we're really eager to be here today we we think we're on the right track and we think those numbers are reflected by the documents that we have on the overhead screen here with me today. In this first slide we're looking at comparative income statements December twenty twenty one yes No 5 the members that were on exhibit C. 1 continue thank you Sir. This is the comparative income statement. Where I would draw your attention to this. Is if you look you're over here. Total revenues are up 3.4 percent. That's coming off record numbers for the previous year we recognize that those numbers were partially enabled through the pandemic and a lack of alternative entertainment venues but that is no longer the case and yet we're seeing good performance if you drop down to the bottom line you'll see net proceeds the percentage variance 24 percent of the positive. No well net proceeds can change on a month to month basis and can be deceiving at times that's that at the end of the day at the end of the year that's how we grade ourselves our mission statement clearly says that we are to raise net profit maximizing that proceeds in a responsible manner and and we take that very seriously and we do not overlook the word responsible so when we look at the games we offer and we look at the various strategies that that are available to us we always keep in mind that we are fiduciary's and that we are administering a public trust. Go to the second screen you will see December 21 versus budget we set a very conservative budget I noticed on the agenda there was an item for discussing budget when we sat down and looked at the budget we were in a bit of a quandary much like every business coming off the pandemic environment we really honestly did not know what the future was going to look like and and we wanted to be conservative in that forecast because we recognize that with that uncertainty we needed to set expectations that a reasonable level we expected to exceed budget and we have we're approximately 20 percent up across all categories with regard to budget but if you look at the chart in front of you right now you'll see the total revenues for December 21. Versus budget. We exceeded that by 20.6 percent net proceeds we exceeded by 8 percent so on a performance basis currently 6 months into the year now working in the 7 we're we're we're out we're following trendlines and we're exactly where we hope to be which is above budget we you know that the best we can do is forecast out we do have and I will tell you this the next couple months will be challenging for us these were months last year that were absolute record setting months and when you're lapping year over year it's very difficult to to to run that kind of horsepower consistently through every month and so as we look at performance and we project forward through the year and enter year we we we find that that the we've got headwinds in front of us and and and so the question becomes is it had wins you can comptroller head winds that you can't control the head winds that we can control we obviously have steps in place to do so but the market place creates headwinds and and we compete for discretionary Spencer that vein we do believe that we'll see some cooling we're hopeful that sales remain strong but I have just to be completely transparent with you the next 90 days will tell the tale of the year. Moving to the next slide. You have comparative income statement December 31 actual versus budget here again I will you can see the numbers I think the numbers that are most instructive for us at the lottery are we look at total revenues were up 20.4 percent we look at net proceeds were up 21.2 those are 2 measures that are very important to us there's a lot of drill down that I could visit with you about for quite a bit of time if anyone had interests were always available but I think those are the key metrics that are important with regard to current performance. Look at the next slide you'll see these are our transfers to the Arkansas department of higher education. That speaks for itself you can see what we budgeted to the right of that document actual performance to the left. We're pleased with that performance right now again that follows our trend lines that's exactly where we expected to be and. Where were were thankful that we can walk in here today and share with you that. I'll entertain any questions with regard to the financial documents that I've just discussed I do have additional information for you but I'll take questions on that if the chair is we do have a question Mr. Senator Hammer. Thank you thank you Mr chair in a thank just be the appropriate time to ask this question but mobile gaming is on the table for discussion coming up next time we meet with rules are you building into your budget what that might how that might impact you or do you anticipate that however that rule goes it would have a direct impact on the on the outcome of the numbers for the forecast absolutely senator we we we have built that and we are looking hard at that when we look at next year's budget we we took the initial steps this last year we added to positions and that was that was with an eye towards expanding into a a a a a what we call a multi channel distribution system it's an omni channel so it's more than brick and mortar it would allow for digital sales of lottery tickets we think there's an interim step we we currently you know have a of a mobile app but we believe there features we can build around that mobile app that will enhance the sales of lottery tickets in an interim step such as checking your ticket to see whether or not it was a winner locating a retailer who sells those tickets things of that nature that very much is front and center when we when we plan out the next 5 years stretch for the lottery and we look at where we believe the largest potential for growth is an and when I say growth growth in a responsible way we we believe that that's in the digital space. Okay a follow up Mr yes Sir and I'm just trying to mind read the numbers on one of I'm a reference page of 3 of our hand out. Where it talks about general and administrative under operating expenses. The budget was 793 the actual 886 can you explain that to me please and just help me understand is that over budget under budget or what is that please. That that is that is over budget and so general and administrative or are costs that we we can't control generator general and administrative costs that's one of 2 costs that we can control that aren't subject to market forces the. When you're growing and that's what we're doing you're going to see your G. in a grow it's not an out sized it's not something that's that's catching our attention is being a run away train but it's necessary as you as you move into higher and higher revenue numbers. Under. And. Well if I if I could defer to Mister Fetzer I think he could address your question completely whereas I think I made a 30000 foot view at the discretion as chairman president and your term like ownership please. Hi my name's Jerry said Sir I am the chief fiscal officer of the office of the Arkansas lottery's you're recognized. We have an unfavorable a general and administrative costs in December we have a a and a contract with a consultant that allows for incentive payments and part of that overage was because we've had a very successful here and the a cruel for that incentive payment exceeded what we had expected in the budget that's part of the overage we also have had we had in December we had edition all salary costs because December is wear them long term employees get their anniversary rewards awards when there achieve so we had an increase one time cost in December we had numerous employees who were had reached their 10 year anniversary the lotteries only been around well now a little less than 12 years and those are the 2 major reasons that we ran 93000 over budget in G. and a for December but year to date we are G. and a costs are running substantially under budget to the tune of 700000 at the end of December under what we've budgeted so in most minds were significantly under what we projected our G. and a costs would be. Okay all right thanks for the explanation thank you Mr. The representative that. Thank you Mr. I don't want to get you too far into the weeds on this but you mentioned that you said the next 90 days would tell us about the year what yours looks like you also made reference to that the previous to the same period previous year was very good and you can't really count stacking that stuff not necessarily so the my question is just we talk about the 90 days there could be some volatility there are you saying that it might go. Back to what it was preview prior to last year those type numbers. Or are you still there OR something else then it any other questions. Would be related to the. Overall the the year. You're are you saying that there's his or something in there it's voluntary are you saying something that says we may see some smaller numbers are just generally projecting that it's a general projection it's primarily a read on on on the market and the current status of games so by way of example power ball just got hit that jackpot was won so you'll see a reset on that so sales of power ball will necessarily you'll see some attrition and toilet Bills back up mega millions is rolling very well right now so we we believe that that will carry somewhat carried the day but you will we also believe that we will see performance closer to budget as opposed to this outsize performance that we've seen here for for the fiscal year we we we set the forecast with a nod towards and what I can tell you exactly how we did it we took the pandemic year and we thought that that was an anomaly year so we remove that from the equation we looked at at the last pre COVID year and we took half of the first part of the COVID year and we created a blended average within look at those numbers and we tried to forecast out what we thought the market was looking and and and retail in general and though that is how we set that but as we look at January and February and March you'll see it we think there's gonna be some delay in tax returns we don't have a sizeable jackpots the running simultaneous like we did the previous year and so we're just if we just look at the numbers as a whole and we look at our trans we think that you know we could see some tough sledding it's nothing that we could control it's simply a matter of market forces thank you. Represent Dotson. Thank you Mr chair. Looking on page I guess 5 and 6 is of your slideshow here. Looking down at the transfers net proceeds says it doesn't include unclaimed prize amounts. Which. Which line does included is the net proceeds or is that the income before transfers. On page 5 there again I'll defer to Mister Fetzer with the chairs permanent the net proceeds amount are only the current year net proceeds we accumulate and part claim prizes each month in an unclaimed prizes reserve account for statute until June 30 at which time whatever balance is left in that and claim prizes account last $1000000 isn't transferred the proceeds and transferred to the higher education trust account during the year unclaimed prizes are not included in net proceeds applied one you start off with $1000000 in that that as far as a yes there's a carry forward balance in the end claim pros proceeds account because there is a statute that allows us to use the on claim product prizes account for 3 specific functions related to either if we need additional reserves if we need to if we will want to have those funds available for a new game promotion and the third I can't remember the third but there are 3 specific specific statutory uses so there is always that at least a $1000000 balance in the young claim prize Reserve unless we use it for one of those. I think purposes and that that amount. I guess is not. Not reflected well it's for in the elected on page 6 on page the summary yes because in paid 6 because the second column to the goal of going over the first column is the net proceeds amount which is what you see on page 540 6000000 68166 the the next column over is the accumulated net proceeds for the current year it does not reflect the $1000000 carry forward this is only the fiscal year 2022 net proceeds south 3.8000000 is what we'll. At B. sweat down to 1000000 at the end of the fiscal year well know that 3.8000000 we'll all be that does not include the 1000000 this is the net proceeds so far this fiscal year okay so that's on top of the one yes okay so and and so if I'm reading this correctly. Not including unclaimed prizes which could inflate the amount once the swept at the end of the year the access is swept. You're running year to date 21.2 percent is going toward scholarships of the net at the December yes that's correct that's that's one of the highest levels I've seen in years if I recall correctly is that last year was almost equally as was I last year was a record year. Okay. Well let's keep it up there thank you. You. Hammer thank you I wanna go back to the mobile gaming I wanna make sure I understood right through the mobile gaming that's coming down the line are you all going to be beneficiaries of that and. We'll lottery tickets bill to be done. I am that we were not a part of that senator we we are our mobile app is separate from the the racing commissions okay with towards in app in my original question before was I I just wanna make sure that in your calculations if mobile gaming is going to increase over here is going to decrease your profitability in the world that you live in because people be spend money over here versus spending money on lottery tickets or are those 2 is that a relevant point or not or do you anticipate any impact to your bottom line because of that I think you'll see some impact that I don't know the percentage impact we're we compete directly for consumer discretionary spend but I think the the for the folks who buy lottery tickets verses the folks who want to. I want to wager on sports betting are not to the same okay 11 really didn't compete head to head with the other okay that's fine I just I just wanna know if that was in the mix or not on your mobile on your mobile app. And and I just don't know if I'm asking can people utilize an hours that under development and it will be launched at a time in the future it right now it's a vendor provided out that is our players club in our second chance club we weeks we're we're going to build that out where we have other features that bring it more in line with what we're seeing other lotteries to all right and it will that result in decreased sales at the store for people walking and to buy tickets or are those 2 things totally unrelated your your concern was my initial concern when I joined the lottery and began looking at this particular issue and it was interesting I began reaching out to other lotteries that actually have a lottery right now that's the term that they use for design a lottery and they sent back information and we believe that there will be in short order white papers that will will. Proposed that a lottery if done correctly can actually benefit your brick and mortar sales and you do that for cross promotion and limitations on what you're offering digitally versus what you're offering brick and mortar okay because I I mean the brick and mortar could be adversely affected if there was not business walking in their store and I that's what I was going down that trail but you answered that the contract while ago you said that part of the overreach which because it sounded like because you're doing well that the contractor actually got a bonus kick out of that is that correct or is it is Senator that's exactly the case and and when they're not doing good do they see a decrease in the contract so that if they're not doing good they don't get paid up to a certain level no matter what age they just simply don't get into the bonus period so they have a base rate and they have to if if sales reach a certain threshold then they they flip into a bonus pay as well so if they do good they get paid but if they don't measure up they still get paid but not to the level the bonus is that correct yes Sir and then the employees getting a bonus is that going to be a every year courage after this having reached I think you said the 10 year threshold there's just a one time payout bonus that's not lottery bonus paid that state government that so that's by state law that's nothing we do it's just updated it with the lottery proceeds right absolutely okay thank you. Okay members list so go to exhibit C. 2. You're recognized. C. 2 I believe is the. J. R. W. contractor C. G. R. W. contract what we did there is we had we had 21 year extensions on the C. J. R. W. procurement and 1 of the things that that confused me when I joined the lottery was the contracts were not aligned with the end of the fiscal year that was little confusing to me because typically in business we see the contracts run on the fiscal year and so we had contracts that were expiring all throughout the year and we tried we're trying to move those into a a fiscal year round and so 1 of the things that we did is our contract with them was up we had 21 year options available to us I reached out to their CEO and sat down and he agreed that we would do a 6 month extension to bring them on to the fiscal year at the end of 6 months we will have 11 year extension left available to us we are currently in the process of developing an R. if Q. we understand that once those extensions are are exhausted we'll have to go back through the bidding process in the procurement process and we are already starting that internally now. Members any questions. As an aside the follow up the terms did not change it was simply an extension of 6 months. Thank you. Seeing no questions will go to exhibit C. 3. And I don't have exhibit numbers if you could tell me what you're exhibit C. 3 as opposed fiscal year annual budget 2022 okay. With regard to our annual budget one of the late is explain your process for determining the annual budget and and how we arrived at that number we we've been asked internally you know should we should we revise that budget in light of the fact that we're performing and in a manner that's approximately 20 percent above budget. We still believe that the market is a little bit on certain right now and and and and we hear that from other agencies as well as well as other businesses on the street no one really knows exactly into were were completely through this this pandemic and we're beginning to hear the term endemic now and so we're hopeful that that there will be a a true reset of of whatever our future normal is what we what we see with regard to budget is we follow the trend lines so we're looking for trends and and our vendors help us do that and we do that on a weekly basis so we literally look at sales on a weekly basis compared that the budget and then we look at the market place at large and we have internal discussions about where are we are we still on track or is the market performing as we thought it would and currently it is. I ask Mister Fetzer join here today partially because he and Mister Smith have been absolutely key on my staff in formulating the budget so when you have when you when you're looking in your forecasting out one of the things that we do is we look at the games that are going to be in market we try to assign a value to each game you know those are that's that's how we we develop the numbers that you're looking at we're pleased to see the the outsize performance but as I mentioned earlier and and and discussed was up Senator back it's we we we've got we've got some some road I hope we've got January February and March that we really really need to see good performance and we're cognizant of that in our sales team in our advertising team or are steadfastly in front of that if there are any questions with regard to the specifics of the budget I'm happy to address those and Mister Fetzer as well. Members any questions. Representation. Thank you Mr chair so of looking here on your funding sources you got interest income it looks like historically there's over $2000000 and then last go round of 670 and projected to drop even the 330 is that because your cash holdings are down because. You're not getting a favorable interest rate or what. The reason.