MEDIA GENERAL NEWS SERVICE
Readying for new leadership, the Virginia Lottery faces challenges to its record profitability -- from increasing competition across the border and around the world for gaming dollars to political pressure at home to produce even more dollars for public schools.
"What you want to do is position yourself to offer something that your neighbors don't offer," said Penelope W. Kyle, who steps down in June after 11 years as lottery director to become president of Radford University.
The Virginia game, approved by voters in a 1987 referendum and launched the following year, has grown to a $1 billion-plus-per-year enterprise, producing profits last year of more than $408 million -- funds designated for education under a 1999 amendment to the Virginia Constitution.
The selection of games has ballooned, with scratch-off games accounting for half of all sales in the just-passed fiscal year.
In 1996, Virginia was among six states to initiate a multistate game to compete with the popular Powerball, and the consortium of states participating in Mega Millions currently numbers 12. California, the nation's No. 4 lottery, is the latest participant in a game that, in May 2000, generated a record jackpot for North America: $363 million.
"The challenges are to keep the player base, keep them interested and grow that player base," Kyle said.
But the battle for the gaming dollar is intensifying. Casino gam-bling is growing, no longer confined to Las Vegas and Atlantic City, N.J. Virginia lawmakers, however, rejected floating casinos for Norfolk in 1996. Federally recognized Indian tribes operate 356 gambling ventures in 30 states. Legislation introduced last year extending federal sanction to Virginia tribes includes safeguards against casinos here.
Further, Internet gambling is spreading. Despite concerns that they might run afoul of federal law, at least two American lotteries -- Illinois and Georgia -- are considering online games that would be available only within their borders. A number of overseas lotteries can be played via the Internet.
"That's the situation that most lotteries find themselves in," said David Gale, executive director of the North American Association of State and Provincial Lotteries. "The economy has taken a downturn in recent years. There are other forms of gaming. Seven years ago, you had to get on a plane to go to a casino, and now everybody seems to be within a three-hour drive of one."
Virginia -- 15th in sales among the 40 state games -- faces new competition close to home. North Carolina, the only state on the East Coast that does not operate a lottery, is again considering one. Tennessee launched a lottery in 2004.
Along the Virginia-Tennessee line, some Virginia retailers were jittery about the new game next door. In the year before the start of the Tennessee lottery, residents of the Volunteer State purchased $17.9 million in Virginia tickets.
Patty Yates, owner of the Neighborhood Market in Cumberland Gap in Lee County, initially lost many of her Tennessee customers. But she said the players have returned because Virginia offers dozens of scratch-off games, compared with four in Tennessee.
"My ticket sales went down for a while, and it hurt me pretty big," Yates said. "But then they started coming back. They decided this is the place to be."
In Virginia communities on the North Carolina line, however, the prospect of a Tar Heel lottery can be worrisome for merchants.
Dianne Whittle greets the prospect of North Carolina finally adopting a lottery with the same chill that she gives when she looks at the fence erected by the Virginia Department of Transportation after it built an access road that drastically cut the traffic to her store.
Whittle, owner of Carter's Quick Shoppe II in Danville, frets that should North Carolina adopt a lottery and join the Mega Millions and Lotto South games, "my business would be pretty flat all the time. . . . People would just stay at home."
Kyle estimates that sales of Virginia tickets to North Carolina residents account for 7 percent to 10 percent of the Old Dominion's total annual sales.
Last Wednesday, the North Carolina House narrowly approved a lottery. The state's Senate, which previously backed a game, now takes up the measure. Gov. Michael F. Easley has pushed for a North Carolina lottery since he first ran in 2000.
In North Carolina, lottery profits are projected at $400 million a year and would go to public school construction, college and university scholarships for needy students and other education programs. There is no indication when a North Carolina lottery, if endorsed by lawmakers and the governor, would begin.
When the Virginia Lottery opened for business, then-Gov. Gerald L. Baliles proposed using profits for one-time expenses, primarily the construction of state buildings. His successor, L. Douglas Wilder, now Richmond's mayor, had lottery profits earmarked for everyday expenses in response to a recession that forced $2.2 billion in spending cuts.
With the election of Gov. George Allen, who appointed Kyle in spring 1994, the state declared that public schools would receive game proceeds, though there was nothing in law to prevent legislators from using the dollars for other programs.
It was five years later, under Gov. Jim Gilmore, before Virginians endorsed the Republican-authored constitutional amendment requiring that lottery profits be channeled to school districts.
Sixty percent of lottery funds are included in the complex basic-aid formula under which the state distributes money to local schools. The other 40 percent is sent directly by the lottery to public school systems. More than $145 million was distributed in 2003-04.
Neighboring Tennessee's young lottery -- it observed its first birthday in January -- also supports education. Profits underwrite a range of programs, from university and college scholarships to after-school programs. The Tennessee venture, in part, is inspired by the Georgia lottery, which heavily bankrolls college scholarships for qualified students.
This concept has been discussed in Virginia but has never advanced beyond the talking stage. The idea was first floated in the 1997 gubernatorial contest between Gilmore and then-Lt. Gov. Donald S. Beyer Jr.
Unlike many state agencies, the Department of the Lottery seems a model of stability, having had only two directors since its inception. Because the director is hired and fired by the governor, it falls to Gov. Mark R. Warner to select Kyle's successor.
Because Warner leaves office in January, it's unclear whether the next lottery director would be still be on the job. To avoid potentially disruptive turnover, there is speculation that Warner might try to find a lottery boss acceptable to the gubernatorial candidates.
The lottery relies on principles and practices that distinguish it as a bottom-line-oriented business rather than another cog in a grinding, public bureaucracy.
Under Kyle and her predecessor, Kenneth W. Thorson, who is now state tax commissioner, the lottery has established an enduring, widely recognized marketing symbol: "Lady Luck," the quirky, disheveled game-playing everywoman, portrayed by actor Melanie MacQueen. It has inspired a knockoff by the new North Dakota lottery.
Kyle, too, has become part of the face and voice on the Virginia game, often appearing at promotional events and in advertising. That, combined with her lengthy tenure, may have helped shore up public support in a state where the religious, social and cultural conservatives who oppose gambling are a potent political force.
"With the public, there's a name and face they can hold accountable," said Kyle, whose salary was $128,667 per year. "But that's a double-edged sword."
For example, she said, angry out-of-state players have called her at home at 3 o'clock in the morning, seeking information on drawings. The solution: Kyle's telephone number no longer appears under her name.
Kyle, a former railroad lawyer who has served two Republican governors and a Democrat, has moved to control expenses, farming out to the private sector functions long handled by the state, including the lottery warehouse near the Richmond Raceway Complex. That shifted 25 jobs off the lottery payroll, which is now 270.
The seven-year arrangement, with Oberthur Gaming Technologies Corp. and GTECH Holdings Corp., could save more than $40 million.
Next, the Virginia lottery may follow the lead of many of its counterparts across the country by hiring contractors to update and run its elaborate network of computers, possibly saving more than $5 million per year. The government numbers games relies on this equipment to speedily spit out tickets to players and generate the latest sales and cash-flow information.
Virginia has long owned its information-technology gear. Virginia and Massachusetts are among the last of the lottery states with government-owned-and-operated computer networks.
