Lottery Oversight Presentation

October 2017

Alice Garland,Executive DirectorNC Education Lottery

Courtney Crowder,Chairman

NC Education Lottery Commission

Lottery Led by Professional Staff and Nine-Member Commission

Courtney A. CrowderCommission Chairman

Appointed by Gov. Bev Perdue and named Commission Chairman by

Gov. Roy Cooper

Douglas BakerAppointed by

Speaker Thom Tills

Morgan BeamAppointed by

Gov. Pat McCrory

Richard E. BengelAppointed by

Gov. Pat McCrory

Amy EllisAudit and Finance Chair

Appointed by Senate President Pro Tem Phil Berger

Jody TysonOperations and Personnel

ChairAppointed by Senate

President Pro Tem Phil Berger

Randy JonesAppointed by

House Speaker Tim Moore

Tony RandRevenue Generating Chair

Appointed by Gov. Roy Cooper

Chris ShewAppointed by

Gov. Pat McCrory

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States with Lotteries (44)

3

Lottery Timeline

4

Lottery Timeline

5

Lottery Timeline

6

Lottery Timeline

7

Conversion to a New Operating System- Upgraded Lottery Operations Across the State -

768 meetings, 1134 hours from 9/8/2014 to 6/30/2017

• Completed 15 Functional Requirement Documents with over 1,800 pages with multiple revisions.

• Converted and migrated over 1 TB of data from the ES System to the new Aurora System.

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August 5, 2014 March 26, 2017

New Operating System Saves Money

Old Rates $ 21,545,897.00

New Rates $ 19,517,696.00

Difference $ 2,028,201.00

Savings 9.41%

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From 3/25/2017 to 10/07/2017

New Jersey Indiana California North Carolina

Inception 1969 Inception 1989 Inception 1984

Inception 2006

Currently Level 3

Level 4 Submission: Oct. 2017

States with World Lottery Association’sResponsible Gaming Level 4 Certification

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Draw Game Promotions

May 2017The Works

July 2017Cash 5 $100k Days

September 2017Pick 3 Prize Doubler

FY17

FY18

March 2017Pick 3 Double Draw

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Net Proceeds:

$5,227,624,234To The State of North Carolina

March 30, 2006 – June 30, 2017

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History of Lottery Sales

$229.5

$885.6

$1078.2

$1293.1$1421.3 $1461.1

$1596.7$1689.8

$1839.3$1972.2

$2383.6 $2428.0

$0.0

$500.0

$1000.0

$1500.0

$2000.0

$2500.0

$3000.0

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

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Sales in Millions

History of Lottery Earnings

Earnings for Education in Millions

$62.3

$315.6$348.3

$413.9$432.2 $436.2

$459.5$478.5

$503.1$521.2

$634.3 $622.5

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

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Earnings:

$622,505,029for Education in FY 2017

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FY 2017 Budgeted Proceeds

FY 2017 Proceeds $ 622,505,029

FY 2017 Budget Funding Required for Education 591,713,703

FY 2017 Surplus Proceeds Available for FY 2018 Budget $ 30,791,326

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"§ 18C-164. Transfer of net revenues. 2017(b1) Net revenues credited to the Education Lottery Fund shall be appropriated in an amount equal to the amount appropriated from the Education Lottery Fund in the Current Operations and Capital Improvements Appropriations Act of 2017.

(b2) The Office of State Budget and Management shall transfer any net revenues remaining in the Education Lottery Fund after the appropriations made pursuant to subsection (b1) of this section to the Education Lottery Reserve Fund, a special revenue fund, necessary to maintain a minimum balance of twenty-five million dollars ($25,000,000).

(b3) Any net revenues remaining after appropriation pursuant to subsection (b1) of this section and transfer pursuant to subsection (b2) of this section are hereby appropriated to the Needs-Based Public School Capital Fund.

(b4) Notwithstanding subsection (b2) of this section, the minimum balance of the Education Lottery Reserve Fund may be less than twenty-five million dollars ($25,000,000) if funds are necessary to meet the amount of net revenues appropriated pursuant to subsection (b1) of this section. … (e) If the actual net revenues are less than the appropriation provided in subsection (b1) of this section for that given year, then the Governor may transfer from the Education Lottery Reserve Fund an amount sufficient to equal the appropriation by the General Assembly. Provided by subsection (b1) of this section.

(f) Actual net revenues in excess of the amounts appropriated in a fiscal year shall remain in the Education Lottery Fund."

Lottery Reserve Fund

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Lottery Reserve Fund Balance June 30, 2017: $ 109,440,485

Budget Savings in FY 2017

Administration Budget $ 60,339,000

NCEL Spent $ 53,365,162

Savings to Education $ 6,973,838

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FY 2017 Actual Sales and Contribution to EducationFY17 Sales % of Revenue FY17 Contribution % Return

Instant $ 1,695,232,342 69.82% $325,473,830 19.20%

Pick 3 306,018,460 12.60% 121,961,145 39.85%

Powerball 148,510,627 6.12% 60,729,529 40.89%

Pick 4 135,797,947 5.59% 57,597,737 42.41%

Cash 5 59,812,487 2.46% 23,868,609 39.91%

Mega Millions 54,332,136 2.24% 21,917,180 40.34%

Lucky for Life 19,904,592 0.82% 8,454,414 42.47%

EZ Match 8,462,988 0.35% 2,502,585 29.57%

Ticket Sales $ 2,428,071,579 100.00% $ 622,505,029 25.64%

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FY 2018 Budget of Lottery Revenue

64.0%

25.0%

7.0%

4.0%

Prizes to Winners

Earnings for Education

Retail Commissions

Administration

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How we are growing…

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MU

LTI-S

TATE

DR

AW G

AM

ES

IN-IS

TATE

DR

AW G

AM

ES

INSA

TNT

SCR

ATC

H-O

FF

GA

MES

Lottery Games

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Over $169.4 Millionin Retail Commissions Statewide

in FY 2017

6,919Retailers

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States with Keno (19)

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YEAR 1* YEAR 2

SALES $59,780,160 $135,399,180

RETURN $10,806,933 $30,931,066

Financial Estimates for Keno in North Carolina

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*Eight months of sales

Keno Focus Group Results

Similarly, most respondents didn’t feel that Keno was uniquely designed to appeal to kids under 18.

No one thought Keno promised or guaranteed a win.

If you don’t understand that not everyone who plays this game will win, then you probably shouldn’t be playing the lottery. (Infrequent)

“It is understandable that not everyone wins.” (Light / Lapsed / Millennial)

“It’s not appealing to kids because this game is more for the older crowd.” (Infrequent)

“I can’t see my niece or nephew interested in this because it is not a game on an app.” (Infrequent)

“I don’t see it being a problem with kids.” (Retailers)

I don’t believe with this information here anyone could not understand that wins in Keno aren’t guaranteed.” (Retailer)

“Showing the odds tell players that not everyone is going to win something on this game.” (Light / Lapsed / Millennial)

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How to Play Carolina Keno

1. Select how much you want to play per draw.

2. Choose how many numbers (spots) you want to play.

3. How many draws in a row do you want to play?

4. Pick your own numbers from 1 to 80.

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Carolina Keno Draw ShowGoes live Oct. 29

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Expanding Partnerships- 682 Retailers Go Live -

NewRetailers

Retailers withSocial Environment

New Retailer Applications Pending

132 550 107

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Where we could be…

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Increase to 1.5% $34,410,672

Increase to 2.0% $63,372,524

How Increased Ad Dollars Could Benefit Return to Education

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15.6%

24.3%

31.5%

13.9%

-5.9% -4.8%5.4% 3.2%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Advertising Impacts Sales

Media Off-Air due to

Election

Media Back On-Air

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Overall Monthly Sales Growth (% Change vs. PY)

How Increased Ad Dollars Could Benefit Return to Education

1.5% Increase 2.0% Increase

• 3 new months of Instant Scratch-Off advertised launches

• Powerball (to $0.044/cap above MUSL avg.) and Mega Millions advertising (build to $0.017/cap above avg.)

• Draw Game Promotion advertising for 3 months

• Two (2) $30 tickets on sale at same time and advertised

• 3 new months of Instant Scratch-Off advertised launches

• Powerball (to $0.044/cap above MUSL avg.) and Mega Millions advertising (build to $0.017/cap above avg.)

• Draw Game Promotion advertising for 6 months

• Two (2) $30 tickets on sale at same time and advertised

• Add additional 4th week of media to monthly instant scratch-off campaigns

• $20 large format instant scratch-off game launched and advertised

• Keno to Go at all 7,000 traditional lottery retailers ($0.08 weekly per cap)

• Keno Add-on (multiplier feature) launched with advertising

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1.50% 2.00%

Instant Scratch-Off Initiatives $19,296,172 $29,889,887

Increased Powerball, Mega Millions and Draw Game Promo advertising $15,114,500 $19,805,514.93

Keno to Go and New Add-On $13,677,123

Total Return to Education $34,410,672 $63,372,524

Total Gross Sales $184,967,561 $307,770,574

Incremental Spend $13,000,000 $26,000,000

Ratio 2.65 2.44

How Increased Ad Dollars Could Benefit Return to Education

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Current Web-Based Offerings

December2013

December2014

December2015

February2016

Subscription Services launches for Powerball, Mega Millions and Carolina Cash 5

Subscription Services launches forLucky For Life

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Evolution of NCEL Web-Based Offerings

Lucke-Zone Players Club

Feb 2011

Lucke-RewardsOct 2012

Subscription ServicesDec 2013

Mastercard Debit

FundingFeb 2014

Visa Debit FundingDec 2014

Lucke-Zone Mobile App

Mar 2015

Lucky for Life Added to

Subscriptions Feb 2016

Single Draw Sales for

SubscriptionsJun 2016

First Promotion for Subscriptions

Jul 2016

New Website with

Integrated Login & Cart

Oct 2017

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Expanding Web-Based Offerings Increases Sales

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$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

Visa Debit added

Record $1.5 million Powerball

Jackpot

Single Draw Sales begin

Mastercard Debit added

Powerball Jackpots from

$432M to $758M

Web-Based Sales

New Website with Integrated Login and Cart

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New Player Dashboard - With Account Status and Quick Links -

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States are Already Adding Digital Instants to Web-Based Offerings

States with Digital Instants

States Preparing to Implement Digital Instants

States Actively Considering Digital Instants

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Adding Digital Instants to Web-Based Offerings Could Increase Revenue to Education by

$130 MillionOver the First Five Years

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Digital Instants Benchmarking Study, Prepared by Delehanty Consulting

Low Probable High

Year 1 $ 4,604,969 $ 6,405,297 $ 9,984,438

Year 2 $ 8,477,718 $ 16,460,065 $ 43,396,414

Year 3 $ 13,166,793 $ 26,967,079 $ 80,312,328

Year 4 $ 18,643,407 $ 34,970,294 $ 98,183,394

Year 5 $ 26,333,430 $ 45,237,804 $119,737,647

TOTAL $ 71,226,316 $ 130,040,539 $ 351,524,221

Projected Digital Instants Gaming Revenues for Education

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Digital Instants Provides Additional Opportunities for Responsible Gaming

Current Online Play Responsible Gaming Controls:• Membership Requirement

• Age and Identity Verification

• Geo-fencing for Online Play Purchases

• Wallet Funding/Balance Limits and Winnings Disbursement Controls (including Anti-Money Laundering Safeguards)

• Play Limits

• Player-Enabled Limits and Change Waiting Period

• Self-Exclusion

• PIN Transaction Requirement

• Limited Funding Types

New Digital Instants Responsible Gaming Controls:• Increased Purchase Limit Options

• Play Breaks

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Integrating Retail and Digital Instants Channel

44

Michigan Lottery

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Georgia Lottery

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Kentucky Lottery

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Questions?

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History of Allocation of Lottery Funds

24%

26%

40%

10%

Classroom Teachers

Prekindergarten

School Construction

College Scholarships

2007 Lottery Allocation

50

History of Allocation of Lottery Funds

24%

20%43%

9%

4%

Classroom Teachers

Prekindergarten

School Construction

College Scholarships

UNC Need-Based Aid

2010 Lottery Allocation

51

History of Allocation of Lottery Funds

2011 Lottery Allocation

41%

17%

23%

7%

2%4% 6%

Classroom Teachers

Prekindergarten

School Construction

College Scholarships

UNC Need‐Based Aid

Reserve Restoration

Medicaid Shortfall

52

History of Allocation of Lottery Funds

2015 Lottery Allocation

44%

19%

13%

17%

5%2%

Classroom Teachers

Teacher Assistants

Prekindergarten

School Construction

College Scholarships

UNC Need‐Based Aid

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History of Allocation of Lottery Funds

2017 Lottery Allocation

63%13%

17%

5%

2%

Non‐Instructional Support Personnel

Prekindergarten

School Construction

College Scholarships

UNC Need‐Based Aid

54

History of Allocation of Lottery Funds

2018 Lottery Allocation

57%

12%

19%

6%

4%2%

Non‐Instructional Support Personnel

Prekindergarten

School Construction

LEA Transportation

College Scholarships

UNC Need‐Based Aid

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Operating Efficiently and Effectively to Grow Sales- We are a $2.4 billion business spending only 3.91% on administrative costs in FY 2017 -

$-

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

% Total Administration Total Sales

56

Administrative Costs as a Percentage of RevenueLottery has used, on average, about half of what’s allowed for administrative costs.

1.40% 1.30% 1.14% 1.07% 1.08% 1.04% 1.03% 0.98% 0.95% 0.83% 0.88%

0.89% 0.81% 0.86% 0.83% 0.94% 0.92% 0.90% 0.83% 0.97%0.84% 0.83%

0.84%0.57% 0.64% 0.64% 0.66% 0.60% 0.70% 0.65% 0.65%

0.53% 0.49%

1.64%

1.63% 1.59% 1.59% 1.60% 1.69% 1.65% 1.70% 1.51%1.75% 1.71%

3.23% 3.69% 3.76% 3.88% 3.72% 3.75% 3.72% 3.84% 3.93% 4.05% 4.10%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY 15 FY16 FY17

Salaries & Benefits Advertising IT Infrastructure, Regional Offices, Vehicles, Utilities Gaming System Services Balance to Education

8.0% Allowed

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Commitment to Responsible Gaming

The lottery’s goal is to have a lot of people playing a little, not a few people playing a lot. We do not need

sales from problem gamblers to be a successful lottery.

The lottery partners with the National Council on Problem Gambling and provide $1 million a year to the state program, its only source of funding.

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Commitment to Responsible Gaming

Each March, the lottery supports National Problem Gambling Awareness Month with advertising to raise awareness about the signs of problem gambling and available treatment options.

The lottery trains and educates all employees and retailers to recognize the signs of problem gambling and to empower them with knowledge of how to refer anyone to where they can get help.

The phone number for the North Carolina Problem Gambling Helpline, and a Play Responsibly message, is shared in all lottery tickets and advertising.

Estimates are that about 2% -- six to eight million Americans, including somewhere between 195,000 and 340,000 North Carolinians -- will experience an issue with some form of problem gambling during their lifetime.

2%

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