Lottery Fund solvency issues could hamper General Fund balancing

Pennsylvania’s Lottery Fund is having issues – issues so massive that they are commanding the attention of top budget crafters as they try to cobble together a fiscal plan for the coming budget year that is also dealing with a projected $1.7 billion deficit, increases in mandated costs and a move within seemingly all ranks of government to try to rethink how the state government works.

Budget Secretary Randy Albright emphasized that ensuring the Lottery Fund stays solvent will be a key part of painting a successful fiscal picture for the budget this year and for years to come.

The first step, he said, will be ensuring that areas of the General Fund that have been relying on only somewhat kosher transfers from the Lottery Fund are fully financed.

“[W]e will still likely have to increase our General Fund spend that was being supported by lottery fund revenue, so that those funds can be kept in the fund to retain solvency,” he added.

Pennsylvania’s lottery, operated by the Department of Revenue, was established by Act 91 of 1971; it is the only state lottery exclusively benefitting older adults.

Currently, 27 cents of every dollar spent on lottery sales goes to fund programs or services directly benefitting older Pennsylvanians; the lottery has sent $27 billion to the Lottery Fund since its inception.

In the last fiscal year, the lottery saw $4.1 billion in sales that resulted in $1.12 billion in contributions to the Lottery Fund.

According to Drew Svitko, executive director of the Pennsylvania Lottery, the lottery has seen a positive growth trend over the last 20 years.

“The lottery is very strong – we have a pretty long-standing growth trend,” he said.

Despite some flat years during the Great Recession – due largely to lottery sales being a retail impulse buy – the lottery has been able to weather the storm of changing consumer trends, competition from traditional gaming and small games of chance, and attempted privatization through reforms like lowering the mandated profit margin on ticket sales, opting in to multi-state, big-jackpot games like Powerball and Mega Millions, and recent expanded ticket sales at state liquor stores.

Currently, 70 percent of lottery sales come in the form of instant-win games.

The purpose of the money in the Lottery Fund has changed over the years. Originally established as a means to provide seniors with lower property tax and rent payments in the form of a rebate, it has since evolved to fund programs benefitting older Pennsylvanians like the successful PACE and PACENET prescription drug programs, senior centers, free and reduced fare transit, property tax and rent rebates, long-term living assistance and services through Pennsylvania’s 52 Area Agencies on Aging.

Many in the aging community consider programs funded by the Pennsylvania Lottery and the Lottery Fund – particularly programs like PennCare and transportation subsidies that allow Pennsylvanians to age at home or in the community – to be preferable, less costly options to nursing home care and related Medicaid subsidies.

The Lottery Fund also provides all of the state funding and 78 percent of the overall budget for the Department of Aging, which manages many of the programs funded by the Lottery Fund, as well as federally mandated programs helping older adults in Pennsylvania.

What’s going on with older Pennsylvanians?

Pennsylvania is the fourth-oldest state in the country, with 2.9 million residents ages 60 and over, of whom 300,000 are ages 85 years and older.

That’s just over 22 percent of Pennsylvania’s overall population.

Pennsylvania’s older population is also expected to dramatically increase.

According to the Department of Aging, by 2020, the population of older Pennsylvanians is projected to increase to the point where one in four Pennsylvanians will be over the age of 60. By that same year, the population of Pennsylvanians aged 85 and over is projected to increase by 20,000.

That increase in population will put a commensurate strain on programs dependent on the Lottery Fund, as well as those funded by traditional Medicaid programs.

“We certainly need to ensure we are utilizing the dollars entrusted to our care well and wisely so that we can respond to (the aging population’s) changing and diverse needs,” Department of Aging Secretary Teresa Osborne said. “I do worry what our service array would look like, but for the Lottery Fund.”

What is the Lottery Fund’s solvency issue?

The main issue, as articulated by Secretary Albright, is that some General Fund obligations like Medicaid nursing home reimbursements – while related to older adult services – have been funded out of transfers from the Lottery Fund dating back to the administration of Gov. Ed Rendell.

At one point, according to the Wolf administration, transfers from the Lottery Fund to the Department of Public Welfare (now Department of Human Services) got as high as $501 million to fund General Fund obligations – which leaves a smaller piece of the pie for those programs traditionally funded out of the Lottery Fund pot.

The problem has gotten to the point where some of those programs cannot serve the needs of those seeking services, especially the PennCare program, which has seen its waitlist grow to around 4,000.

According to AARP-Pennsylvania, an organization that advocates on behalf of Pennsylvanians aged 50 and older boasting 1.8 million Pennsylvania members, this has been a funding decision that defies logic.

“From our perspective, jeopardizing those kinds of programs to put money into the Medicaid nursing home program, it might answer a one-year fiscal problem, but over the long term…it doesn’t make any sense,” said AARP-PA Advocacy Manager Ray Landis. “You’re taking away a less expensive, more desirable form of care in order to fund the least desirable, more expensive form of care.”

Solvency concerns have also caused some program enhancements and reforms to be put on hold.

"Our consistent concern over the years with that fund is one of the reasons we did not expand the PACENET program and only addressed the pharmacy reimbursements during the last session," said Senate Republican caucus spokesperson Jenn Kocher.

There are other issues contributing to solvency concerns as well.

One main issue is the unpredictable revenue that comes from a retail-based impulse buy such as lottery tickets, especially in years that have unusually high jackpots like the Powerball that drive consumers to purchase lottery tickets.

In January 2016, when there was a $1.6 billion Powerball jackpot, ticket sales were through the roof and the lottery benefitted from increased interest in game play.

However, in January 2017, with no jackpot that large having come again, revenues from Powerball sales are underperforming last year’s numbers.

“We’re going to lose some ground over the next couple” years, Svitko said as a result of unusually high ticket sales due to last year’s Powerball. “I’d say we’re a little behind our goal right now, but that’s a good place to be. We’re always fighting for that goal.”

It’s this concern that, in addition to transfers being made out of the Lottery Fund to pay for traditionally General Fund obligations, has some in Republican circles worried about the status of the fund going forward.

“The last financial statement showed a negative balance in 2017-2018 and our projections are not as optimistic” as the administration’s, Kocher said. “We will continue to monitor the Lottery Fund, update projections and look for ways to address these concerns.”

Additionally, the increased costs of providing services in programs funded out of the Lottery Fund – like increased costs in prescription drugs for PACE and PACENET users and an increased demand for services due to an ever-growing aging population – have also provided cause for concern since that would mean less available dollars for use in the General Fund and, should the situation be reversed, an increased burden on the General Fund to make sure those programs remain afloat.

What’s to be done?

In the short term, it appears that the first step toward ensuring solvency is going to be continuing to lessen the reliance on Lottery Fund dollars to satisfy General Fund obligations.

In the FY 2014-2015 budget supplemental, $25 million of the traditional transfer was returned to the Lottery Fund. In the current fiscal year, the budget reduced the transfer from the Lottery Fund to the Department of Human Services for Medicaid programs by an additional $167 million.

According to AARP’s Landis, this mechanism to shore up the Lottery Fund is a welcome, prudent change in budget priorities.

“Without the lottery, without those programs that are helping people to stay at home and stay in their communities, it would force those individuals into the Medicaid program, which would force them to spend down their assets – which would happen really quickly, given the costs of nursing homes being what they are today – and then the burden gets put on the taxpayers,” he said.

However, the amount of success that will be ultimately realized in stopping the reliance on lottery funds for these General Fund obligations remains to be seen since support from the General Fund will necessitate either an increase in support from state taxpayers or the federal government.

With the latter unlikely to occur, a Republican-held General Assembly recalcitrant to tax increase, and Gov. Wolf saying he will not ask for broad-based tax increases in the personal income tax and sales tax, it is unclear how much money from a reimagined or reinvented state government will be available to fund the Medicaid programs currently bolstered by lottery funds.

The Department of Aging is also hoping to help offset costs by increasing awareness of programs for seniors that could help them live healthier lives, thereby allowing them to age in a way that lessens the likelihood they will need state-provided services or reduce the amount of such reliance.

“We feel like we need to do more educating individuals of all ages, in particular, our seniors and their family members, about how to remain active, engaged – how to remain healthy,” she added, noting the potential of partnering with other agencies like the Department of Health and local government agencies to promote programs and healthy living education in areas where seniors typically congregate.

Also, the lottery is always looking to increase its profit.

One area of potentially lucrative growth could come in the area of iGaming, which the Legislature is currently taking under advisement.

“To the extent that there are those conversations, the lottery – and we’ve been pretty consistent about this – has to be part of those conversations,” Svitko said. “If we are left out, there will be harm to lottery sales and profits.”

He said selling lottery tickets online or on a mobile app is going to be a competitive necessity, adding that the possibility exists to let consumers play lottery-sponsored games right on their computers or mobile devices.

Other states that have taken their lotteries online have seen sales increase from tens of millions to hundreds of millions of dollars above pre-internet lottery levels, Svitko stated.

“There are some states out there that are doing that,” he said. “If there is a desire for us to grow and be prepared for the future, really any of those kinds of games are possible. To the extent they are already happening, we know there is a demand for them out there.”

In that vein, the lottery has already boosted its online presence and even created an app that can act as a springboard in the event it is given the authorization to operate as an online entity.

The Lottery, Department of Aging, and the Department of Human Services will all have hearings on their budget requests in front of the House and Senate this spring, where more might be elucidated about how to move forward to ensure the solvency of the Lottery Fund now and into the future.

Jason Gottesman is the Harrisburg bureau chief for The PLS Reporter, a non-partisan, online news site devoted to covering Pennsylvania government.