Sunday April 1, 2012

Massachusetts cities and towns are increasingly relying on a thinning pool of lottery revenues to bridge their budget gaps, deepening the shaky financial footing of many poorer communities that rely heavily on state aid, an analysis of lottery and local aid data by the New England Center for Investigative Reporting found.

State aid data from the past three fiscal years show that many cities and towns are receiving dwindling amounts of "Unrestricted General Gov ernment Aid" -- a pot of mon ey, largely made up of lottery revenues, that local mun icipal officials use to shore up deficits in police, fire, education and other municipal budgets.

In Lynn, where 2010 census data show that nearly 20 percent of residents live in poverty, two years of cuts in "unrestricted aid" totaling more than $2 million have delayed paving projects and municipal building repairs and required the careful scrutiny of all nonsalary spending, said Mayor Judith Flanagan Kennedy. The city, however, came out of the cutbacks without any personnel layoffs.

The town of Adams wasn’t so lucky.

When it lost $225,682 in "unrestricted aid" between 2010 and 2012, the impact was even more severe. The drop in funds meant 10 positions were cut, including police officers and public works employees. Staff and programs were also cut at the regional school system to which Adams belongs.

"For communities like us that are more reliant on state aid, it’s made the budget very challenging," said Jonathan Butler, the town’s administrator.

Still, when it comes to state "unrestricted aid," Bay State communities are betting the house on the Massachusetts Lottery. That’s because almost all unrestricted local aid now comes from Keno and lottery sales, a NECIR analysis found.

"In terms of unrestricted aid, the lottery is it," said Geoffrey Beckwith, executive director of the Massachusetts Municipal Association, a nonpartisan organization that provides advocacy, training and other services to Massachusetts’ 351 cities and towns. Beckwith said the lottery has been "a lifeline" for communities, giving them money that can be used for any purpose, whether that be education, salaries or public works projects. Now, however, that lifeline is growing thin.

Bay State communities today receive about $400 million less from the state in unrestricted aid than they did in 2007, according to data provided by the Massachusetts Municipal Association. Five years of cutbacks in state contributions now means that almost all of that unrestricted aid money is coming from lottery dollars.

Things were different just a few years ago.

Between fiscal 2007 and 2009, the state added more than $300 million to that fund when the lottery fell short of revenues projected by the Legislature. Between $343 million and $379 million was also doled out to 159 cities and towns those same years as "additional assistance" to fund municipal projects, according to figures provided by the Lottery, the State Department of Revenue and the Division of Administration and Finance.

In 2010 when the lottery and additional assistance funds were merged into the unrestricted state aid fund, or UGGA, the state contributed about $122 million from the general fund to shore up that account, the figures show. In 2011, that number was cut to $97 million. One year later, in 2012, the state is expecting to contribute no more than $32 million, with the remainder -- about $802 million -- to come from the lottery, according to the figures.

Even as the state was cutting back on its contributions, lottery funds were slowly declining. In 2008, the lottery contributed $822 million to the fund, one of its largest contributions ever, the financial data provided by the lottery and Administration and Finance shows.

By 2011, the pool of lottery money contributed to that unrestricted state aid fund was $802 million, about $20 million less than the lottery contributed just three years earlier, those figures show. 

"The problem with the lottery is that it is all communities have left," said Beckwith, who advocates a better revenue sharing process to more equitably distribute state aid funds.

A lingering recession, however, has made that difficult. With lottery sales languishing at around $4.4 billion since 2009 and unrestricted local aid dollars drying up, lottery administrators are looking for other ways to boost the bottom line.

In March, the Massachusetts lottery joined the five other New England states in launching a regional lottery. New $2 and $10 scratch tickets, the agency’s most successful offering, were also recently introduced. Late last year, Treasurer Steve Grossman, who oversees the lottery, announced plans to study Internet gaming, a concept designed to attract younger players.

Some of those new initiatives seem to be working.

Lottery spokeswoman Beth Bresnahan said ticket sales have picked up substantially compared to 2011. Sales are already $170 million ahead of the same time period last year, Bresnahan said, and several "strategic initiatives," such as new games, have been put in place to "increase revenue and improve the products being offered to customers."

Yet even as lottery officials strain to bring more money into state coffers, only 21 percent of that money actually gets returned to Massachusetts cities and towns. With sales of $4.4 billion in 2012, revenue returned to the state account for less than 3 percent of the state’s $30.6 billion budget. Of the remainder, about 72 percent of lottery sales goes back to players while 6 percent is returned as commission to more than 7,000 lottery sales agents across the state.

The lottery takes two cents out of every dollar for operating expenses. That means in fiscal 2012, out of $4.4 billion tickets sold in Massachusetts, $3.5 billion was returned to players, adding 20 new millionaires to the 200-plus other ticket buyers who have won at least $1 million since 2008, data supplied by the Massachusetts Lottery shows.

That bountiful prize money has made Massachusetts second only to New York in terms of lottery sales, and one of the highest states for lottery spending in the nation, that same study found. According to the Massachusetts Lottery, Bay Staters now spend per about $700 per capita annually to chase their millionaire dreams. Only about $1 million annually is earmarked to fight gambling addiction.

So much lottery money is returned to players in fact, that Massachusetts ranked 38th out of 41 state lotteries when it came to generating revenue for the state, a 2005 study by the Taxpayers Foundation, a Washington, D.C.-based taxpayer education group. By comparison, other state lotteries keep about 30 percent of their sales. New York, which topped the list in ticket sales and profits, ranked ninth on the lottery list for generating state revenue, the study found. The Empire State’s lottery gives winners just over 67 percent of its sales, returning 32.9 percent in revenue to the state.

Bresnahan said the Bay State higher payouts have made the lottery one of the most successful in the nation and a model for other lotteries worldwide.

"That’s what has fueled the lottery’s success over 40 years," she said. "It’s the Massa chusetts model that the industry admires."

Players are also big fans.

When a plan to cut payouts and turn more money over to the state’s cities and towns surfaced several years ago, Bresnahan said, it provoked outrage from lottery buyers.

"The level of prize payout has a direct influence on sales, "she said. "Lottery players are savvy. They want to win a prize so, the more they win, the more they play."

Yet many worry that despite the lottery’s efforts, the state’s new focus on casino gaming could reduce that discretionary money even further.

According to a 2008 state-funded analysis of the impact on gambling, the Lottery Commission expects to see a 3 to 8 percent drop in lottery sales when the first casino opens with sales declining even further as more casinos open. Within five years, however, revenue could recover to pre-casino levels, the analysis found.

A 2006 study by the House Committee on Economic Development was even more dire in its prediction when it estimated a potential loss of 15 percent in lottery revenue during the first two years casinos are in operation. Language inserted in last year’s casino bill will bring some cash back to the cities and towns but exactly how much money that will be remains unclear.

Yet it’s not just about the money, some critics say.

Efforts to increase gambling, whether through lottery sales or casino, is fueling the state’s financial burden in the form of gambling addictions, fraud and crime, they said.

Dr. Robert Goodman, former director of the U.S. Gambling Research Institute and a professor of economics at Hampshire College in Amherst, doesn’t see more gaming as the solution.

"The interesting thing, from a political point of view, is that politicians will say ‘We brought in so many dollars’ and consider that a net benefit," Goodman said. "What they don’t look at is the impact on other businesses and the impact on problem gamblers."

"I don’t think there is any doubt that this is a failed public policy," he added, noting that the impact of bankruptcies, insurance and credit card fraud along with the cost to the criminal justice system, can collectively add up to millions of dollars annually. That information should be part of the state’s equation when factoring in the impact on communities, Goodman said.

Municipal officials also often cite the inequitable distribution of lottery funds among Massachusetts communities as a source of concern.

The town of Milton, home to Gov. Deval Patrick, for example, took in $2.52 million in unrestricted aid in 2012, about $500,000 more than Walpole and $200,000 more than Milford, even though both are similar-sized municipalities with higher poverty rates and lower property tax bases than Milton.

Amherst, which plays host to five colleges including the University of Massachusetts, has about 10,000 more residents and collects about $21 million less in property taxes compared to Milton, yet received $6.6 million in unrestricted aid, or about $4 million more than each of the three suburban Boston communities. A poverty rate that tops 30 percent got Amherst more cash.

Daniel Burtron, spokesman for the Massachusetts De partment of Revenue which is charged with distributing state aid, said often the discrepancy between similar towns is largely due to the "additional assistance," some towns receive. The merger of those funds with lottery aid will help the state come up with a more equitable distribution in the future, he said.

Until then, struggling communities across the state will just have to hope their luck holds up.

The New England Center for Investigative Reporting (www.
necir-bu.org) is a nonprofit
investigative reporting newsroom based at Boston University.