COLUMN ONE : Lottery Wins Some, Loses Some : It celebrates its fifth birthday as the largest in North America. But officials admit they have had a string of bad luck as new games fail to increase revenues.

By all rights, it should be a phenomenal success story--a business that has grown from nothing to $10.6 billion in sales in five years, created 3,000 jobs and given schools $4 billion to boot.

But as the California Lottery modestly celebrates its fifth birthday this week, it is getting as much criticism as it is accolades.

Revenues on its major games--Lotto, Decco and Scratchers--are flat. Many of its hard-core players are angry about a change in the Lotto game that dramatically heightened the odds of losing. A public-interest group is starting a campaign against its advertising, labeling it “misleading and deceptive.”

Most troublesome of all, today, the day the lottery commemorates its first ticket sales in 1985, a state Senate committee is convening to question lottery officials about some of their business decisions.

Lottery officials, who see the creation of a multibillion-dollar business in five years as nothing short of “incredible,” seem mystified by the sudden onslaught of criticism. They concede that they may have miscalculated some players’ reaction to the change in the Lotto odds, but they say the lottery--like everything else--has been the victim of economic conditions.

“Is Disneyland mismanaged because the oil crisis is resulting in their tourism being down?” asked Chon Gutierrez, the ebullient director of California’s lottery. “Is government mismanaged because there is a recession and revenues are down and the budget is tight?”

Even in good economic times, he said, the lottery is a roller coaster business. Revenues soar when jackpots, new games and new twists in old games spark players’ interest and slide when the novelty wears off. Whenever there is a dip in enthusiasm, he said, lottery management adjusts the games to reignite player interest, but often it takes time to reach a new high.

Players are seeing a typical slide, he said, that is exacerbated by economic uncertainty.

I. Nelson Rose, a Whittier College law professor and expert on gambling law, agreed. He said it is common for lotteries to come under intense criticism after about five years of operation.

“Remember, this is a consumer item and it is a very poor consumer item,” he said. “The chances of winning a significant prize are so small that people are literally being frustrated every day of their lives. What they’re doing is airing that frustration. The state lottery isn’t doing anything it shouldn’t be doing. The problem is people are spending a lot of money on the lottery and losing.”

Even the criticism cannot overshadow the fact that the lottery celebrates its fifth birthday firmly entrenched in the California lifestyle. From an operation that began with four secretaries and three executives in March, 1985, it has become the biggest lottery in North America and the fifth largest in the world.

Since 1985, 90% of California adults have played the lottery at least once, according to state lottery figures. On its busiest days, it logs more transactions than the New York Stock Exchange. In five years it has made 577 people millionaires and distributed about $5.2 billion in prizes.

Who plays the lottery is a question that has been debated over its five-year lifetime. Critics claim it preys on the poor by capitalizing on dreams of a better life. Lottery officials say they try to attract urban professionals and the well-to-do. Independent polls by the Los Angeles Times in 1986 and 1987 showed the lottery was most popular with individuals who earn from $10,000 to $40,000 annually, with blue-collar workers and with men.

Enthusiasm for the lottery in California began before the first ticket was sold. On Nov. 6, 1984, voters overwhelmingly approved an initiative establishing California as a lottery state despite a vigorous opposing campaign from church groups and parimutuel gambling interests.

Leo McElroy, the political consultant who ran the campaign to try to defeat the lottery, said once the issue was settled at the polls, active opposition seemed to cease. “The people who didn’t like it didn’t have to play,” he said.

Its early success helped lottery fever spread to other states. In 1984, California was the 21st state to approve a lottery. Today, 30 states and the District of Columbia have lotteries.

Despite its popularity and general public acceptance, there are some public officials who acknowledge an uneasiness. Although at least 34% of lottery revenues must be dedicated to public education, there is a widespread feeling even among the original promoters of the lottery that it has not been that good for education.

So much emphasis in the original promotion of the lottery was given to the benefits for education, they said, that in many voters’ minds it became a solution to education’s money problems.

“People thought all of a sudden it would be this cornucopia of endless funds for education. It was an unrealistic expectation,” said Rose.

In the early years, bond issues and other efforts to raise money for education were defeated in part because voters believed the lottery had already taken care of education, critics and supporters agree.

Barry Fadem, a San Francisco lawyer who sponsored and helped author the initiative for Scientific Games in 1984, said the lottery’s promoters put so much emphasis on the billions of dollars that the games of chance would raise for education that voters never understood those billions only represented 3% of education’s total budget.

“My only regret is that a lot of California voters carried the impression that the lottery would solve all of California’s education funding woes,” said Fadem.

Supt. of Public Instruction Bill Honig said he originally opposed the lottery initiative, believing that it would never be the “icing on the cake” for education that its promoters promised. He said he suspected--and experience in the initial years has proved him right--that the money given to education by the lottery would encourage the governor and Legislature to provide less from other sources.

Honig, who has no criticism of the way the lottery is being run, talks, as do many public officials, of being troubled by the fact that a state-run gambling operation is used to finance the education of California’s young people.

“We are certainly appreciative of the money but I’m just uncomfortable encouraging people to gamble,” he said. “There’s a philosophical problem. Here we’re trying to tell kids work hard, study hard, make the long, slow effort to learn and it will pay off. And then we have advertising on television that says play the lottery and lightning will strike.”

Controller Gray Davis, whose office regularly audits the lottery, said, “If I had to grade the lottery I’d give it a B. It has fulfilled its mission to provide an additional 3% funding to schools. . . . On the other hand, I feel badly that revenue for important public services such as education have to be generated by gambling.”

In the same vein, Carl Oshiro, supervising attorney for the University of San Diego’s Center for Public Interest Law, has filed a complaint with lottery officials contending that its television advertising is misleading because it fails to disclose the odds of winning.

“Here we have the state of California teaching folks through its advertising that gambling ought to be part of their daily life, part of their daily routine and spending massive amounts of money to do it,” Oshiro said. “It didn’t seem to us that there was any money spent on putting out any other message either in terms of what the product really is or perhaps warning people of the consequences of excessive gambling.”

Gutierrez said it would be difficult to disclose the odds in a 30-second television spot. He said the agency is considering some type of advertising campaign to warn against excessive gambling. He said that under his direction the lottery has been careful never to use children in advertising or promote its link to education as reason people should gamble.

The lottery has been one of the top advertisers in the state--last year it spent $63.9 million on advertising and promotion--since it opened its doors in 1985 with a game called Scratchers, which allowed the player to scratch off the surface of each $1 ticket to determine if it was a winner. A year later, it was advertising another game, Lotto, which was to become its most popular offering.

Initially, players selected six numbers from a field of 49 and the winning combinations were picked during televised Saturday night drawings. Now, players pick from a field of 53 and drawings are held Wednesdays and Saturdays. The lottery has recently added Decco, a game using card symbols, and Topper, an add-on to the Lotto game that utilizes the names of California cities.

Except for Topper, the results for all games in recent months have been disappointing. Decco has not produced the revenue that Lottery officials anticipated. Scratchers has been in a steady decline and Lotto revenues have not surged to their heights of a year ago. At the end of the 1989-90 fiscal year, the lottery reported that its total sales revenues would be $100 million less than the previous year.

In a move designed to produce more super-jackpots, officials in June expanded the field of numbers from which Lotto players can pick. Instead of choosing from 49 numbers, players are allowed to choose from 53. The idea was that by increasing the odds from 1 in 14 million to 1 in 23 million, fewer jackpots would be won and there would be more roll-overs. An accumulation of roll-overs produces the super-jackpots.

Since the change, however, there has been no string of super-jackpots and revenue has not increased appreciably.

Larry Love, editor of The Lotto Edge, a Los Angeles-based newsletter that caters to regular players, said the change in odds caused the backbone of the lottery’s business--the hard-core player--to cut back.

“What’s happened is exactly what the regular players told them would happen a year ago. The consensus among us was we would either stop playing or play less (if the odds were changed),” he said. “Many of my readers did exactly that. People who were playing $40 and $50 a game or even $100 a game now play $5 or $10.”

Sen. Ralph C. Dills (D-Gardena), chairman of the Senate Governmental Organization Committee that oversees the lottery, has asked lottery officials to be prepared to defend the change and explain at his hearing today how they expected to increase sales by reducing a player’s chance of winning.

Gutierrez said the increase in sales would have come naturally if the change to 53 numbers had produced a number of super-jackpots. But the lottery has been faced with the same thing that many gamblers face--bad luck. Since the change, there has been one $44-million jackpot, and that unfortunately occurred at the same time Florida had a $106-million jackpot. The California jackpot, which in other times would have attracted major publicity, looked like small potatoes.

On top of that, Gutierrez said he could never have foreseen the crisis in the Middle East, which sent gasoline prices soaring, pushing the economy into a slump and leaving consumers with less expendable cash.

“Had we anticipated perhaps the things that are driving the economy to be a little bit soft like the gulf crisis, had all of this been in our crystal ball, then obviously we would have made the (change) a year ago,” he said.

Gutierrez said it is still early to determine whether the Lotto change is a success or failure. He said the lottery is taking the criticism from the players seriously and is planning a new game in a few weeks--possibly a Lotto game with a number field of 39--which will offer top prizes of about $1 million and better odds.

Meanwhile, experts disagree on the long-term significance of the criticism. Fadem believes it will quickly fade; Rose agrees but suggests that overall doubts about the lottery may linger.

“I don’t view this as a long-term problem,” said Fadem. “It (player interest) moves in cycles. Looking back over the last five years, I think they’ve done a helluva job and I think in general Californians are satisfied with the games that are available.”

Rose observed that lotteries, like their games, go through cycles. In post-Colonial days of the 1820s and 1830s, it was “easier to buy a lottery ticket than it is today.” By the Civil War, they had nearly disappeared. After the war, the economic devastation in the South sparked a revival. Then, by the turn of the century, there were no legal lotteries in the United States.

“We go through these great swings from permissiveness to prohibition,” Rose said. “We’re definitely on the upswing of a permissive era now, but the question is, ‘Will it last?’ I am sure after the Civil War it was inconceivable that they would ever be outlawed, but (several decades later) they were.”

(Southland Edition) STATE LOTTERY REVENUES

A look at the California State Lottery’s roller coaster revenues of the past five years--and its contributions to education.

CONTRIB. TO % TO TOTAL IN FISCAL YEAR SALES EDUCATION EDUCATION PRIZES ‘85-86 $1.8 billion $692.7 million 39% $886.3 million ‘86-87 $1.4 billion $504.3 million 36% $693.2 million ‘87-88 $2.1 billion $804.8 million 38% $1 billion ‘88-89 $2.6 billion $1 billion 39% $1.3 billion ‘89-90 $2.5 billion $980 million 39% $1.2 billion 5-YEAR TOTAL $10.4 billion $ 4 billion 38% $5.2 billion

Source: The California State Lottery.

NOTE: State law requires that at least 34% of the lottery’s revenues go to education. However, the lottery can give more than that--and has in each each year of its operation.