By John Lyon
Arkansas News Bureau

LITTLE ROCK — Arkansas Lottery Director Ernie Passailaigue today defended the lottery’s performance in its second fiscal year, saying the program remains strong despite failing to meet projected profits.

Members of the state Lottery Commission urged Passailaigue to work to bring profits up in order to head off any negative effect on the college scholarship program the lottery funds in future years.

State Lottery Director Ernie Passailaigue, standing, takes a question from Lottery Commissioner Ben Pickard during a meeting Wednesday in Little Rock. (John Lyon photo)

Scholarships for the coming school year are not expected to be affected by the shortfall, Shane Broadway, interim director of the Arkansas Department of Higher Education, told the commission. He said ADHE has awarded 12,377 lottery-funded scholarships to new high school graduates for the coming school year.

This year’s scholarships are $4,500 for four-year schools and $2,250 for two-year schools. The amounts were 10 percent higher in the lottery’s first year, net proceeds for which totaled $107 million.

Passailaigue told the commission that by the end of the fiscal year on June 30, the lottery had generated $94.2 million for scholarships, falling short of his $105 million projection from a year ago and the $98 million estimate he gave on June 30.

Passailaigue said Arkansans favor instant-win games, while other games with higher profit margins have proven less popular here. He said a large portion of the $10.8 million shortfall from the earlier projection went to prizes.

“It’s not in our coffers. It certainly didn’t go to students, but it went to people who play the lottery,” he said.

Passailaigue said prize payouts exceeded projection by $4.4 million, unclaimed prizes by $3.6 million and gaming contract costs by $4.5 million. However, general and administrative costs were under budget by $1.8 million, he said.

Regarding his June 30 prediction that net proceeds would be $98 million, Passailaigue said that was based on “quick math” that did not take into account certain transfers required at the end of the fiscal year, including a $1 million transfer to the unclaimed prizes fund.

The lottery’s net proceeds for the year made up 20.2 percent of its $465.5 million gross revenue. Some commissioners expressed disappointment with that percentage, saying they had been led to believe that one-fourth of the lottery’s proceeds would fund scholarships.

Passailaigue said the amount of profit is more important than the percentage. He said the commission could order him to set aside 35 percent of profits for scholarships, as was proposed in a bill filed during this year’s legislative session, but that would mean smaller prizes, leading to fewer ticket sales.

“I’m not saying 35 percent,” said commission member Ben Pickard of Searcy. “I’m saying just get back to what you said we would do when we started this lottery. Get to 25 percent.”

Passailaigue said changes are planned for some games, including increases in Powerball prizes and ticket prices — tickets will go from $1 to $2 in January — that should boost profits. He also said the lottery will use unclaimed prize money to promote certain games, possibly by offering a free ticket for a low-selling game when a player buys a ticket for a more popular game.

Also today, the commission voted to award a $55,100 contract to accounting and consulting firm Crowe Horwath of Irving, Texas, to prepare the lottery’s next annual financial report and provide training to lottery employees. No “no” votes were heard.

A state audit last year found that the lottery’s annual financial report was not prepared in accordance with generally accepted accounting principals.

Bishop Woosley, the lottery’s general counsel, said the contract is for one year. The training should eliminate the need to use the firm’s services again, he said.

The commission voted 7-2 to adopt a policy requiring the lottery to submit proposals to make new hires to the state Office of Personnel Management, as other state agencies do.

Newly appointed commission member Steve Faris of Malvern suggested the policy. As a constitutionally autonomous entity, the lottery does not have to follow OPM’s recommendations.

The commission also approved the preparation of a request for proposals for outside legal counsel. Pickard said he believed Woosley was doing an outstanding job, but hiring outside counsel would create more institutional memory as well as “an extra set of eyes” to look at contracts. No “no” votes were heard.