Lottery Officials Now Hedge Bets on Striking a Bonanza

In its infancy--back when the California Lottery was breaking national sales records left and right--there was boastful talk of even bigger things to come, things like world-record $100-million jackpots and world-record annual ticket sales of $3 billion.

Now, 2 1/2 years later, the talk is quieter. Jackpots are peaking at about $25 million and are likely to stay that way. In part because of that, annual sales are more like $2 billion and are not expected to climb that fast in the near future.

It’s not that the games, now in their adolescence, have fallen on hard times, according to the lottery’s current director, Chon Gutierrez.

He says it’s just a case of being more realistic.

When observers note that Californians spend only an annual per-capita average of about $72 on the lottery, compared to a national average of about $85, Gutierrez argues that Californians have idiosyncratic buying habits and says he’s doing something to cope with that.

When critics say the bulging lottery payroll is evidence of bureaucratic inefficiency, Gutierrez replies that relatively youthful enterprises like the lottery are always labor-intensive; that he’s working hard to trim the work force.

When opponents complain that revenues generated by the lottery are being used to replace normal school funds, rather than supplement them as originally intended, Gutierrez points out that the use of lottery funds is determined by local school boards, not state lottery officials.

‘Continued Improvement’

Gutierrez says that while a few refinements may still be needed, the California Lottery is in good shape, doing about as well as should be expected for an enterprise that no longer is the newest fad in town.

And Ralph Batch, a veteran director of several state lotteries who is considered an expert on the subject, tends to agree.

“I think the California Lottery is healthy,” said Batch, a director of the Maryland-based Public Gaming Research Institute. “And I think it will show continued improvement.”

Batch and others say the euphoria of the early days--back in October, 1985, when the California Lottery roared into being with record-shattering first-month sales of more than $300 million--has been replaced with a quiet satisfaction in steady, if less spectacular, success.

If the picture looks a little different these days, so does the man who’s painting it.

The man of the hour in 1985 was Mark Michalko, a tall, blond, 31-year-old whiz who parlayed his successes as legal consultant to the Ohio Lottery into appointment as director of California’s brand new gamble on wagering.

Michalko--photogenic on television, glib with the news media and smoothly effective with Sacramento’s legislators and bureaucrats--responded to the urgings of reporters with predictions of record success. And for a while, the California Lottery kept pace.

But then, as with every other lottery, the novelty began to wear off and public enthusiasm began to wane. Monthly sales of tickets for the so-called “instant games”--in which the purchaser need only scratch off the surface of each $1 ticket to determine whether it is a winner--dipped to less than $80 million by September, 1986, despite frequent revamping of the format in an effort to sustain interest.

Then came Lotto 6/49, the computerized game in which players use countertop computer terminals operated by sales personnel--most of them in liquor stores and convenience shops--to select six numbers between 1 and 49, with the winning combinations picked in televised drawings.

Decline Resumed

Michalko predicted that Lotto would reverse the decline, and for a while it did, with combined sales from the two games rebounding to $150 million by January, 1987. Then the decline resumed. Sales dropped to $102 million by last July, and Michalko admitted that Lotto 6/49 hadn’t lived up to his hopes--or his predictions.

It was about then that he bailed out, insisting as he left to start up a new lottery-consulting business that he wasn’t abandoning a sinking ship, he was just looking for some new challenges. Michalko said--and Batch agrees--that he had left behind a solid foundation on which to build.

The man who replaced Michalko at the lottery’s helm was Gutierrez, a stocky, bespectacled, 42-year-old who had built a reputation as a reliable and effective bureaucrat and trouble-shooter during his 24 years of service as an administrator for a variety of state agencies, the lottery among them.

If Michalko’s appeal was that of a television star, Gutierrez’s is that of a favorite uncle--quiet, unspectacular, easygoing and comfortable--a man who likes to work in his shirt sleeves and communicate through informal, one-to-one chats.

As he took over, Gutierrez talked not in terms of new records, but of the “traditional responsibility” of running a maturing organization.

He says now that he never shared Michalko’s optimistic predictions of soaring Lotto sales--based largely on the early successes of the instant games. Gutierrez says he pinned his expectations, instead, on more conservative estimates based on the experience of other states and the design of Lotto 6/49.

Gutierrez--and his chief of finance, Gordon Jones--explained that in opting for the 6-out-of-49 format, lottery executives chose a game that would permit players to hit the jackpot relatively easily (although the odds against it are still about 14 million to 1). But that, in turn, meant that the jackpots wouldn’t build as high, probably peaking in the $25-million to $35-million range.

Higher Jackpots

They said that had a 6-out-of-50 format (used in some other lotteries) or a 6-out-of-54 format (briefly under consideration) been selected, the wins would have been less frequent but the jackpots would be building much higher--possibly to the $100-million level talked about by Michalko.

Thus, while other states have had jackpots as high as $45 million, the biggest in California so far was the $25.4 million won by two players last October. And if there’s one generally accepted thesis in the lottery business, it’s that “the jackpot drives the sales,” with ticket purchases escalating sharply when a pot rises above the “lottomania” level of about $20 million.

One of Gutierrez’s first objectives was to find other ways to stimulate sales.

Sales Level Off

Last September, two months after he took over, he announced the doubling up of the Lotto games, with drawings to be held twice a week, instead of once. Lotto sales, which had started at about $5 million a week, climbing slowly before leveling off at about $11 million by last September, suddenly climbed again, finally leveling off in the $22-million to $26-million range in recent months.

The 6/49 sales here are good, totaling more than the lotto sales in any other state. But California is bigger than any other state, and on a per-capita basis, sales here lag behind the national average.

Gutierrez says that’s because of Californians’ mania for convenience.

“They like to do their shopping in supermarkets, at super malls,” he said. “The Lotto terminal beside the cash register isn’t designed for that. It’s more for the liquor store, the convenience store.” To counter that, Gutierrez said, the lottery is installing self-service terminals in large, multipurpose shopping centers.

Drop in Instant Games

That should contribute to a continuing increase in Lotto sales, Gutierrez said, more than offsetting a steady decline anticipated in the instant-game sales.

The combined sales total for the current fiscal year, ending June 30, is projected at $1.95 billion, up from about $1.4 billion last year.

Gutierrez says next year should be even better, although he’s reluctant to pick a figure.

Michalko, asked if he’s still sticking with his prediction of eventual annual sales of $3 billion, said, “You betcha.”

Asked about this, Gutierrez said, “That’s his style. I don’t begin to project that far in advance.”

One continuing fear of critics is that the state’s public schools--which, by law, receive at least 34% of the proceeds from lottery sales, with the remainder earmarked for payoffs (50%) and administration (16%)--will do their budgeting with such predictions in mind.

Education Funds

The education funds from the lottery--while expected to top $700 million this year--still account for only about 3% of the schools’ budgets. In an effort to ensure that these funds are considered “extra”--to be used for one-time purchases, rather than for underwriting a part of a district’s longtime, continuing commitments--the lawmakers who crafted the lottery’s enabling legislation wrote:

“Net revenues of the California State Lottery shall not be used as substitute funds but rather shall supplement the total amount of money for public education.”

But despite the contention of the California School Boards Assn. that its members are operating “within the spirit of the law,” some of the largest districts in the state say that, in fact, they are using a major share of the lottery funds to underwrite long-term commitments, such as multiyear contracts with teachers and other employees.

Making Ends Meet

While Gov. George Deukmejian insists that the state’s schools are getting as much General Fund money as ever, school officials say their percentage of the overall state budget is dropping, and many of them say they are making ends meet with lottery funds.

In fiscal 1986-87, for example, the Los Angeles Unified School District used 47% of its accumulated $134 million in lottery funds for teachers’ salaries. School officials in San Diego used $10.9 million of their $71.1 million for teachers’ salaries and to maintain instructional programs at previous levels.

Dr. Robert Golton, superintendent of San Francisco Unified, said the lottery money there was “plowed into our (general) budget.”

“In the end,” he said, “we used it to offset other shortfalls in revenue from the state.”

‘I Predicted That’

“It’s not supplementing,” said state Sen. Ralph Dills (D-Gardena), a longtime opponent of the lottery. “It’s supplanting. . . . They’re depending on it for ongoing expenses. I predicted that from the start.”

That’s not a problem that Gutierrez can deal with, since the use of the funds is up to the schools boards, which are prohibited by law only from spending them on research, new buildings and the purchase of real estate.

One problem he can deal with is the size of his payroll, which has risen from about 250 when the lottery started up to about 1,100 today.

“I would think he could find some way to reduce that by a couple of hundred,” Batch said. “I ran the Delaware Lottery with 13 people . . . although that was a lot smaller . . . and a while ago, so you really can’t compare.”

“There are too many people for the returns,” Dills said. “That means less money for schools.”

‘Sheer Geography’

But Michalko argued that “while it’s a lot of employees, part of it is the sheer geography of the state--you’ve got to have people in field offices all over the state.”

“Part of it is the lottery’s (relative) youth,” he said. “Over time, efficiencies will become more evident.”

Gutierrez, acknowledging his “concern about responsible staffing levels,” said he is assembling a management team to look into ways of reducing the lottery staff.

While Gutierrez says he will be concentrating in coming months on staff reductions, better ways to advertise and market the lottery and the development of new games to retain the interest of the gambling public, Michalko will be laboring to keep his newborn consulting firm--now called Gamma International Ltd.--afloat.

When he left California last year, there was talk of impending, and potentially lucrative, contracts to help states like Florida and Wisconsin develop their fledgling lotteries.

Scaled Things Down

Somehow, those contracts never materialized, and Michalko, based these days in the Cleveland suburb of Hinckley, has scaled things down a bit, talking instead of negotiations to help American Indians improve their on-reservation bingo games.

But Michalko remains as cheerful as ever, and just as optimistic about the future of the California Lottery.

“I’m confident in the staff that’s there,” he said. “I think it can and will be the best lottery in the world.”