Oregon Lottery gathers most of its money from problem gamblers

Video pokerIn 2011, a team of Texas consultants hired by the Oregon Lottery visited dozens of Portland-area bars, restaurants and “delis” with video slot and poker machines to ask hundreds of patrons about their gambling habits.

What they found is the exact opposite of the fun-loving image the lottery has cultivated for years.

The biggest chunk of players, according to documents obtained by The Oregonian, park in front of a machine and gamble alone until all their money is gone.

READ2011 Video Lottery Player Trends Study (PDF, 968KB)

READ2012 Oregon State Lottery Tracking Study (PDF, 757KB)

READ – Oregon Lottery Marketing Plan FY 2014 (PDF, 1.6MB)

READ – Lottery Financial Statements (PDF, 2.2MB)

“Video lottery is currently a solitary exercise,” Mozak Advertising & Insights concluded in bold green type, adding that “running out of money” is the primary reason for ending a gambling session

It’s a classic description of problem gambling.

Oregon Lottery chart - Fewer players generate most of the revenueAnd it fits with other records analyzed by The Oregonian showing that most of the lottery’s revenue comes from just a sliver of players who lose thousands of dollars a year. Some wind up bankrupt, divorced, unemployed or suicidal.

Yet lottery officials expressed no alarm. Instead, they’ve embarked on one of the agency’s most aggressive marketing efforts yet to increase play on the machines, considered by problem gambling experts to be among the most addictive forms of gambling on the planet.

Together, the findings and marketing plan paint a disturbing picture of a state agency knowingly — and increasingly — siphoning money away from a relatively small group of problem gamblers to pay for schools, parks, business development and other programs.

“It puts the government in the business of vice,” says Roger Humble, an addiction counselor who has treated more than 1,300 problem gamblers at the Bridgeway clinic in Salem. “We play them as suckers to help us pay our taxes.”

The Oregon Lottery’s marketing plan declares that 2014 “will be a milestone year for Video Lottery,” with efforts to attract younger players and install new machines across the state.

It’s no wonder lottery officials are targeting video machines. The numbers tell the story:

In the fiscal year that ended June 30, the lottery netted $856 million from all its games: Powerball, Megabucks, scratch tickets, Keno and video machines. A whopping $737 million -– 86 percent — came from video.

A November 2012 survey  commissioned by the lottery shows that 48 percent of Oregon adults played at least one lottery game in the previous year. But just 10 percent played a video game and only half of those played at least once a month.

At the same time, an estimated 2 to 4 percent of the population has some kind of gambling problem, most experts in the field agree. Oregon’s share is estimated to be between 35,000 and 80,000.

Oregon Lottery chart - Who playsWhat games do they play? Addiction counselors report that 75 to 90 percent who seek treatment for gambling problems play Oregon Lottery slot and poker machines.

Lottery officials, along with state policymakers, have long known that addicted gamblers do more than their share to prop up state lottery revenues. What’s new is the state’s fervor in feeding their addiction.

‘Bled slowly’

The five-member state Lottery Commission last year approved spending $250 million over the next five years to replace the agency’s 12,000-plus video machines with state-of-the art models. The first 3,000 machines are on order and could be in taverns, restaurants, strip clubs, bowling alleys and gambling-oriented “delis” in Portland and along the Interstate 5 corridor by late spring.

Created with help from math experts and neuroscientists, the machines are part of a new generation of electronic slots meant to attract younger customers used to playing arcade-style video games. They feature detailed color graphics and exotic names such as Golden Goddess and Shadow of the Panther.

But they’re all designed with one goal, says Natasha Dow Schüll, an anthropologist at the Massachusetts Institute of Technology and author of “Addiction by Design,” a book about the link between video slots and compulsive gambling.

“They’re catering to the ones who want to zone out or escape,” Schüll says. “These machines are geared to provide that kind of experience.”

The idea, Schüll says, is to lull players into a sense that they’re winning even as they slowly lose by returning 60 to 90 percent of the money they drop into the machines.

“You don’t really notice that your money is going away,” she says. “As one industry designer told me, some gamblers like to be bled slowly.”

In the Oregon Lottery’s case, gamblers fed a jaw-dropping $9.9 billion into the machines in fiscal 2013, according to lottery financial statements. They walked away with about $9.2 billion, a return rate of 93 percent. But that 7 percent loss represents a $1 billion boost to the state budget every two years — money that few are willing to walk away from, regardless of who pays it.

Problem gamblers pay a steep price and so does society, counselors say.

Addicts steal from their employers, from stores and from family members to get money to play, says Humble, the Bridgeway counselor. They wind up in trouble with the law or ostracized from their families. Often, they contract health problems, such as hypertension, that land them in the hospital.

“It’s incredible how going like this,” Humble says, mimicking the motion of pushing a slot machine button, “can create a monster.”

Slots push aside poker

The Oregon Lottery uses electronic machines, considered among the most addictive forms of gambling.

The Oregon Lottery uses electronic machines, considered among the most addictive forms of gambling.

Oregon Lottery leaders plan to increase profits from video games by $10 million, or 3 percent, in fiscal 2014. The focus clearly is on electronic slot games — “line games” that mimic slots. The games are shoving aside video poker as the game of choice.

The Mozak study shows 55 percent of players prefer line games, compared with 28 percent who prefer video poker. The remaining players divide their gambling time evenly.

The agency’s marketing plan calls for on-site advertising to bring in new players, lottery-sponsored events to teach newcomers how to play slot machines, and research into potential “mobile gaming” — think iPads in bars — as an extension to playing video slots.

The agency’s enthusiasm for the games worries mental health and addiction experts. Jeff Marotta, a nationally recognized consultant on problem gambling who lives in Portland, read the Mozak report and came away shaking his head.

“The most disturbing aspect of this study is that it is clearly focused on assisting the Oregon State Lottery to strategize ways to increase player volume,” Marotta said in an email. “I don’t believe a state agency should be aggressively pushing the public to participate in an activity that has well documented risks associated with its addictive potential.”

Marotta, who has consulted with the Oregon Lottery on problem gambling, said the recent voter rejection of a private casino in Gresham shows the public doesn’t want an expansion of gambling in the state.

“So why,” he asks, “has the lottery recently invested in research and advertising to promote a form of gambling that addicts more Oregonians than any other form of gambling?”

Les Bernal, an outspoken critic of state-run lotteries, puts it more bluntly.

“That’s a government program that’s consciously exploiting the addiction of its own citizens,” says Bernal, who heads the Washington, D.C.-based group Stop Predatory Gambling. “How many people are injured every year by the Oregon Lottery’s machines? Instead of stopping, they’re saying, ‘You know what we’re going to do? We’re going to bring in new machines.’ How incredible is that?”

Director denies findings

The Oregon Lottery spends heavily to research nearly every aspect of its player base. Contracts with Mozak, the Texas firm that conducted the interviews of video players in bars, came to $275,000 alone.

As part of its research, Mozak also brought 130 gamblers into a room in Portland filled with video machines and closely studied their habits and preferences. Lottery officials rejected The Oregonian’s request to look at results from the study, citing a “trade secrets” exemption from state public records law.

Despite all the data, the lottery’s director either doesn’t understand or won’t acknowledge the extent to which the agency relies on problem gamblers for revenue.

In a lengthy interview with The Oregonian, lottery Director Larry Niswender defended the lottery’s practices and denied that the agency targets problem gamblers. He also disputed data showing that an outsize share of lottery revenue comes from a small group of players. He offered no explanation for Mosak’s finding that lone players gamble until they empty their wallets or purses.

“We’re operating under a framework set in the constitution, approved by voters,” said Niswender, who announced he is retiring from the lottery at the end of the month. Former state Labor Commissioner Jack Roberts takes over as director Dec. 1.

Voters overwhelmingly approved creating the lottery in 1984, Niswender said, and surveys show strong support today. And the whole point is to raise as much money as possible to substitute for tax increases, he said.

Niswender also pointed to a new responsible-gambling plan developed by lottery staff that will be implemented next year. The plan calls for the lottery to establish a “responsible gaming code of practice” but largely continues practices in place, such as clocks on game screens and prominent display of the 877-MYLIMIT help number for problem gamblers.

Lotteries in AmericaThe lottery’s goal, Niswender said, “is to attract new players so we don’t have a few that play a lot, we have a lot playing a little.” He questioned lottery data showing the opposite.

“I have a hard time believing there’s a very small number of people generating what is probably between $12 million to $14 million a week in revenue,” Niswender said. “It’s got to be a broad diverse player base.”

But later, his research staff confirmed through lottery spokesman Chuck Baumann that the lottery’s video revenue does come from a small segment of players.

As far as the finding that most play alone, Niswender referred to surveys in which video players reported playing mainly for fun. “It’s to hang out with friends,” he said.

“Anything but a social thing”

A visit to just about anyplace with lottery video games offers a different view.

On a recent Wednesday afternoon at top grossing lottery outlets, people sat at the machines, quietly feeding in $5 and $20 bills.

At Ace Tavern on Northeast Sandy Boulevard, patron Amanda Elliot watched while two women who declined to give their names played slot machines in silence.

“Your focus is on the screen,” said Elliot, who rarely plays. “It’s anything but a social thing.”

Habitual players say they may go to casinos with friends, but they play Oregon Lottery alone.

“I have no interest in interacting with other people while I’m gambling,” says Kitty Martz of Northwest Portland, who recently completed a gambling treatment program. “I can’t stand to have someone even comment, ‘Looks like you’ve got a win there.’” She says she would wear a “gambling suit” that included ear buds to block outside noise and a scarf to hide her face.

Martz, 44, is a world traveler who once had a thriving home-remodeling business. Once she fell into the grip of video poker and slots, she started blowing through her and her now ex-husband’s life savings.

“A lot of people think it’s a tax on the stupid,” Martz says. “Really, we’re behaving exactly the way the machines want us to.”

A devil’s bargain

The lottery has always been something of a devil’s bargain, suggests Peter Bragdon, who helped lead a 1995 task force on state-run gambling. The task force, established by Gov. John Kitzhaber, issued a widely publicized report warning that the state was becoming overly dependent on money that came at least in part from gambling addicts.

Years later, Bragdon was serving as chief of staff to then-Gov. Ted Kulongoski, who also served on the task force and helped write the report. The state was in the middle of a budget crisis, and “pressure was intense” to increase lottery profits, Bragdon said.

At the time, the state had video poker but not slots because of their addictive allure. First the state loosened rules to allow six video poker machines per establishment instead of five. Then the governor decided to allow slot machines.

“It’s not pressure from gambling interests, it’s pressure from people who want to spend the money,” Bragdon says. “You’ve got the reality of getting people to play these games, but you’re also looking at a budget where you’ve got really vulnerable people losing medicine, losing shelter, school doors closing early.

“And you’ve got to make a choice.”

Slot machines exert statewide pull

The Oregonian, Nov. 25, 2013

If you took the slot machines from all nine Oregon tribal casinos and put them under one roof, they wouldn’t rival the state lottery’s gambling empire. Not even close.

The Oregon Lottery licenses more than 12,000 video slot and poker machines, compared with about 7,600 at tribal casinos by the latest count. The state’s arrangement allows it to offer Vegas-style terminals in every nook and cranny of the state.

“The reality is, the largest casino is the state of Oregon,” says Justin Martin, spokesman for the Confederated Tribes of Grand Ronde, which runs Spirit Mountain Casino northwest of Salem. “They certainly have more convenient locations.”

Voters, when they approved the lottery back in 1984, had no clue that it would one day offer rows of electronic slot machines. In fact, they also voted in a clause that specifically banned casinos.

But the state found a workaround. Casino-style gambling on slot and poker machines has now become the second-biggest revenue raiser for Oregon government, behind income taxes.

Family restaurants have gotten in on the action, tacking on “lottery lounges.” And so-called delis with little in the way of food openly flout a state law that prohibits businesses from making lottery games their “dominant use.”

Critics say the lottery puts slot machines within easy reach of problem gamblers and then – in classic fox-guarding-henhouse style – does a poor job enforcing the rules. State lawmakers have little power and, with so much money pouring in, even less incentive to do anything about it.

“The same agency that operates the lottery also regulates it,” says Jeff Marotta, founder of Problem Gambling Solutions and a frequent consultant for the Oregon Lottery. “The whole system doesn’t make sense.”

“They’re everywhere”

On any given day, the vast majority of Oregon adults are within a few blocks of a place where they can feed bills up to $100 at a time into a state-run electronic slot machine, push a button and watch the virtual reels spin. And thousands do, losing hundreds of millions of dollars every year that help pay for public schools, parks maintenance, salmon habitat and other state programs.

Researchers and mental health counselors say the convenience factor only worsens problem gambling in Oregon.

“It’s an impulse control disorder,” says Brian Farr, who helped develop Cascadia Behavioral Healthcare in Portland, one of the state’s biggest problem-gambling treatment clinics. He now has a private counseling business.

“If they have to think about driving an hour and a half to gamble at a casino, they might not do it,” Farr says. “Compare that to passing three taverns with slot machines on the way home from work.”

Tim Murphy, executive director of the Bridgeway treatment clinic in Salem, says proximity to gambling offers more gateways for potential addicts, and makes it more difficult for problem gamblers to stop.

“They’re everywhere,” Murphy says of places to gamble. “I can look out my window and see four places where I can play video poker or slots.”

Kitty Martz, a recovering gambling addict, recounts with dark humor what happened when she attended counseling sessions at the Cascadia clinic in Southeast Portland.

“It’s a block away from Tom’s,” Martz says, naming a popular restaurant that has a bank of Oregon Lottery slot machines. “I would gamble before and after group therapy. Everyone who goes to Cascadia goes to Tom’s. It’s like the meeting before the meeting.”

Retailers cash in

Chart - Top 10 video retailersThe state-retailer gambling partnership has paid off handsomely, not just for the state but also for the bars, restaurants, delis and other storefronts licensed to offer Oregon Lottery machines.

The retailers get a cut of the losses, ranging from 11 to 27.5 percent, depending on how much gambling goes on. The average share is about 24 percent. Some do quite well. At the top of the list: Shari’s in Northeast Portland, just over the Interstate 205 bridge from Washington. Over the past year, gamblers lost $1.4 million on the six slot machines in the restaurant’s lounge. Shari’s share: $284,649.

In all, the lottery paid $176 million in commissions to about 2,300 retailers in the past year, an average of about $75,000 per establishment.

It’s not the easy money some make it out to be, says Bill Perry, lobbyist for the Oregon Restaurant and Lodging Association. Retailers who offer video slot machines take on risks and higher liability costs because it’s one of the few cash-only operations in the state.
where people play.jpg

Decreases in commission rates, the recession, a statewide smoking ban, liability issues and other factors have combined to make retailers think twice about offering slot and poker machines, he says.

“Fewer and fewer people are seeing it as an attractive way to make money,” Perry says. While the restaurant industry as a whole is growing faster than inflation, revenue from video lottery machines isn’t keeping up, he says.

The numbers back him up, to a point. The number of Oregon retailers offering video slot machines peaked in 2010, at 2,384. It’s now down about 4 percent to 2,278, mostly due to owners going out of business, according to lottery spokesman Chuck Baumann.

Upping the ante

Yet the growth of state-sponsored electronic gambling in Oregon has been nothing short of spectacular.

After the Legislature approved the introduction of video poker machines in 1992, 232 bars, taverns and restaurants gave it a try, installing 550 machines. Video poker proved an instant success, and the numbers exploded.

By 1998, the Oregon Lottery had licensed more than 9,000 video gambling machines in some 1,800 outlets. The growth in Oregon and elsewhere attracted federal attention, and in 1999, the National Gambling Impact Study Commission came down hard on the Oregon Lottery’s business model.

“Convenience gambling, such as electronic devices in neighborhood outlets, provides fewer economic benefits and creates potentially greater social costs by making gambling more available and accessible,” the commission concluded. “States should not authorize any further convenience gambling operations and should cease and roll back existing operations.”

Oregon Lottery payouts

The portion of money put into a game that’s returned in prizes.

Oregon ignored the advice. In 2004, the state Lottery Commission, with the blessing of Gov. Ted Kulongoski, approved “line games” -– video slot machines. The lottery continued to spread the machines to more and more retailers.

Rather than slow down gambling, state policymakers and the Lottery Commission helped goose play and profits. Among other actions, they increased the number of machines allowed per outlet from five to six, allowed machines to accept bills as high as $100, and approved games with jackpots of up to $10,000.

Delis with little food

The system has made for some interesting additions to Oregon’s eating and drinking scene.

Family restaurants added small lounges, resulting in children eating pancakes in one part of the restaurant as adults test their luck on a slot machine in another. At some Elmer’s locations, the “lottery” sign is almost as big as the restaurant name, and a “Lottery Lounge” sign greets visitors at the door.

By far, the most conspicuously casino-like are the “delis” that offer slot machines and little else. Dotty’s is the biggest chain, but it has many copycats, including Richard’s and Jasper’s.

Don’t go into one and ask for corned-beef on rye. Many offer a limited menu, often merely microwaved frozen food and bottles of beer. Many sell cigarettes as a big part of their business.

“They’re scams,” says Robert Whelan, senior economist at Portland’s EcoNorthwest, who has studied the gambling industry extensively. “The idea was it would be a supplement to your income, not your primary source of income.”

A 1994 state Supreme Court decision required the lottery director to confirm that gambling would not be the “dominant use” of a retailer before granting a video poker or slot machine license. The court did not define dominant use, but the lottery has rules that say at least 50 percent of a retailer’s revenue must be from sales of food, drink or other non-lottery items. The rule has gone largely unenforced.

A 2000 audit of lottery operations by the Oregon Secretary of State’s office put the problem in black and white.

Chances of winning

Game To win this amount … your odds are:
Powerball ($2 ticket) $100 1 in 19,087
$10,000 1 in 648,976
$1 million 1 in 5,153,633
Mega Millions ($1 ticket) $50 1 in 10,720
$5,000 1 in 739,688
$1 million 1 in 18,492,203
Megabucks ($1 ticket) $40 1 in 475
$800 1 in 24,348
About $9 million 1 in about 6,000,000
Lucky Lines ($2 ticket) $2 1 in 5
$100 1 in 2,185
$10,000 1 in 65,536
Win for Life ($2 ticket) $25 1 in 309
$10,000 1 in 338,319
$1,000 a week for life 1 in 1,353,275
Raffle ($10 ticket) $100 1 in 250
$20,000 1 in 25,000
$1 million 1 in 250,000
$3 Scratch-it, $30,000 Triple Play $10 1 in 40
$100 1 in 1,440
$30,000 1 in 180,000
$1 Scratch-it, Holiday Suprise $10 1 in 800
$150 1 in 12,800
$1,000 1 in 213,333

“Based on a review of sales information for the delis we visited, it was clear that their businesses were not primarily the sale of food or beverages,” the audit found. “Lottery was their main business and was not an adjunct to their deli business. All of the five delis we visited were operating out of compliance” with the dominant-use rule.

Then-Director Chris Lyons did little to stop the spread of lottery-based delis, as did the directors who followed her, Dale Penn and current Director Larry Niswender.

Lax enforcement

Of all the types of businesses that offer video slots, the delis are the most efficient at making money off them. In 2012, gambling losses at bars and taverns averaged $321,018 per establishment. Delis posted close to twice that: $607,833 in losses per place, on average.

With that kind of money changing hands, there’s little incentive for the lottery or the Legislature to crack down on businesses that seem to fit the casino definition. And the rules that apply are fuzzy.

The lottery relies on retailers to report their revenue. Even if revenue from lottery machines makes up more than half the retailer’s business, the lottery can consider other factors, such as appearance, floor space, menus and atmosphere before making a “dominant use” ruling.

Asked how many video slot and poker retailers have had their contracts terminated because they violate the rule, lottery spokesman Baumann did some quick research before emailing, “The short answer is one.” A handful of other retailers had their licenses taken away because their records were inadequate, according to an information sheet Baumann sent.

“The program was not designed to terminate retailers,” Baumann wrote. “It was designed to notify retailers of issues and give them the opportunity to make corrections so they can maintain their retailer contract with the Lottery.”

It’s no secret why the lottery is loath to take steps against retailers, Whelan says.

“It’s the golden goose for the state,” he says. “The problem is, it’s a symbiotic relationship. These Dotty’s and the like, they bring in a ton of money for the state.”