Iowa has resisted a trend adopted by other states of funneling lottery proceeds straight into public education.

Yet, a myth that the Iowa Lottery, which hits its 30th anniversary milestone this year, directly supports public education is so prevalent that Mary Neubauer, Iowa Lottery’s vice president of external relations, said she continually has to clarify the misconception.

“When I give speeches on behalf of the lottery, I always ask the audience where they think the money goes. ‘Education’ is always one of the answers,” Neubauer said. “I then explain that while it is true that lottery proceeds help education through the general fund, in fact, lottery proceeds have never gone directly to education in Iowa.”

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Public education funding comprises the largest portion of the state’s general fund, which supports various state government functions. Some 55 percent to 60 percent of the general fund revenues are allocated for public education each year, budgets show.

But some of the confusion might come from the fact that Iowa Lottery’s advertising makes a point of saying public education is one of the entities profiting from its proceeds.

“Basically you can say every dollar you spend on the lottery, about 25 cents goes to state programs,” Neubauer said. The rest of the sales revenues go toward prizes and administrative costs. Less than 1 percent goes toward the Iowa Veterans Trust Fund, according to the proceeds data provided by the lottery.

Determining how much lottery money supports public education is difficult, if even possible.

Iowa House Speaker Kraig Paulsen, R-Hiawatha, said you could argue that an increased amount of lottery dollars has gone into education because funding for education, in general, has increased over the years.

“It would all just be proportional with the way it increased,” Paulsen said. “But obviously education funding has increased.”

Iowans have spent $6 billion on the lottery over the last three decades. During this time, more than $1.3 billion of that has been sent to the general fund, data the Iowa Lottery provided revealed.

In 2014, the Iowa Lottery deposited $72 million into the general fund, which equaled about 1 percent of the general fund’s total receipts. The fiscal 2015 deposit through November was about $27.7 million.

IowaWatch conducted analyses for this story as part of a collaboration between Columbia College in Chicago and members of the Investigative News Network

An IowaWatch review of all 44 state lotteries shows that 27 designate lottery proceeds for public education, including Illinois, Georgia and Kentucky. Iowa is one of nine states that contribute revenues to a state general fund.

Other state target lotteries send profits to particular purposes. For example, Wisconsin Lottery proceeds mainly support property tax credits, and Pennsylvania Lottery revenues go to programs that benefit elder services.

SHIFT IN FUNDING OVER THE YEARS

The Iowa Lottery is self-sufficient. Fund distribution has shifted since its first game was launched in 1985. Over the years, proceeds have funded directly state economic projects, gambling treatment programs and veterans programs.

No one had a clue how much revenue the lottery would generate when it was established. The state’s legislatures and governors have shifted lottery funding proceeds multiple times for different reasons.

Senate Majority Leader Mike Gronstal, D-Council Bluffs, said the shifts happened as state priorities changed. The Legislature decided to direct lottery money into certain purposes in the first years because how dependable a source of revenue it would be was unclear, he said.

From 1986 to 1990, proceeds were dedicated to a long-term economic development program, Iowa Plan.

Concerns about the environment led the Legislature in 1991 to allocate most of the lottery proceeds, $36 million, to a fund dedicated to environmental cultural issues, Gronstal said. It was not until 1992 that the lottery became an additional source of revenue primarily for the general fund.

CLICK HERE TO READ THE IOWA LOTTERY 2014 ANNUAL REPORT

“Over time, as that funding source was identified as a fairly stable funding source, they (legislators) felt they could commit it to the general fund,” Gronstal said.

DEALING WITH SOCIAL ISSUES

The Iowa Lottery placed over several years more than $15 million into the Gambling Treatment Fund, which offers treatment and counseling for problem gamblers, according to the lottery’s proceeds data.

The fund was eliminated in 2009. The state’s general fund directly funds Iowa’s gambling addiction treatment program now, according to the Iowa Lottery. Problem gambling has become more prevalent as state lotteries across the nation expanded, Sam Skolnik wrote in the book, “High Stakes: The Rising Cost of America’s Gambling Addiction.”

Since 2009, lottery proceeds have provided $15 million for veterans and their families through the Iowa Veterans Trust Fund, including $1.8 million from 2014. This fund is the only specific cause that lottery profits are targeted toward besides funding state projects through the general fund.

CONTROVERSY OVER OPERATING MODE

The Iowa Lottery’s 30-year history has included a few controversies, one of the most notable being a 2012 audit report that was critical of some of the lottery’s business practices. In particular, the audit questioned salary increases top lottery officials had received.

Lyle Muller/IowaWatch

The Iowa Lottery is not a charitable foundation; it is a state-run gambling business. In 2003, the Iowa Legislature approved changing the lottery from being run as a state agency into the Iowa Lottery Authority, a corporate-model enterprise, which granted it more operating flexibility. Lottery proceeds increased by $8 million the next year, from $48 million to $56 million, data the Iowa Lottery provided show.

While questioning whether the new operating mode led to the revenue increase, former Iowa State Auditor David Vaudt also questioned in the extensive 2012 audit report, which covered a review from 2002 to 2010, large raises lottery executives received after the switch.

That switch in how the lottery is run meant the authority would not be subject to the same level of general state government oversight given to state agencies. The oversight included setting the lottery’s administrative salaries.

“Our conclusion would be that they could operate at a lower cost when it comes to salaries,” Tami Kusian, a deputy state auditor involved in the review, said about the Iowa Lottery. “Our conclusion was that revenue would have been increased and therefore their contribution to the state would have been increased whether they were a department or an authority.”

Neubauer said the lottery authority did not agree with the audit report.

“We believe that the business focus that has been given to the lottery and the focus on entrepreneurism and security and integrity are the reasons behind the numbers that have changed,” said Neubauer, who started working at the lottery in 1999. “But we certainly respect the work done by the auditors, and understand that they can reach their conclusions and they don’t necessarily have to be the same conclusions with ours.”

The audit pointed out that the Iowa Lottery’s sales per capita in fiscal 2007 were near 60 percent lower than the national average but that administrative costs were 10 percent higher than the national average.

Neubauer said comparing lotteries is difficult. Operations vary greatly from state to state because of different situations and state laws and regulations, which would affect the proceeds that a certain lottery raises, she said.

“I think the Iowa Lottery is a strong performer in terms of the products that we offer and the numbers we’re able to achieve for the state,” she said.

Paulsen said House Republicans pay close attention to the lottery’s budget to make sure lottery proceeds are being spent properly. In the Senate, Gronstal said he believes most of Iowa Lottery’s profits, if not all, have been properly spent. He added that many people would think the top salaries for state government officials are too high.

CLICK HERE TO READ THE IOWA LOTTERY 2014 FINANCIAL STATEMENT

Bob Dvorsky, D-Coralville, chairman of the Senate Appropriations Committee, said legislators have the impression that the Iowa Lottery CEO Terry Rich has done a better job controlling the authority’s operation costs than his predecessor did.



This IowaWatch story was published by The Hawk Eye (Burlington, IA) and Des Moines Register and linked to by the Business Record (Des Moines, IA) under IowaWatch’s mission of sharing stories with media partners.