Lottery forced to tap reserve

The state Department of Higher Education has spent nearly $113 million on lottery-financed Arkansas Academic Challenge scholarships in the fiscal year that will end June 30 - a $20 million dip from the previous fiscal year - after the 2013 Legislature overhauled the program and cut the scholarships for some future recipients.

Department Director Shane Broadway warned that the department could temporarily run out of funds to pay its scholarship obligations within three years under what he calls his worst-case scenario.

The department handed out $59 million of these scholarships in the fall semester and $54 million in the spring semester, so it’s spent nearly $113 million on these scholarships in fiscal 2014, Broadway said.

In February, for the first time, the department was forced to temporarily tap some of its $20 million lottery reserve fund to cover its Academic Challenge scholarship obligations, Broadway told the Legislature’s lottery oversight committee this week.

The Academic Challenge scholarships are financed through the lottery’s net proceeds plus $20 million per year in state general revenue, which is distinct from the reserve fund.

The Legislature created the $20 million reserve fund in 2009 so the department would be able to cover its scholarship obligations if there are short-term shortages, Broadway said.

More than 30,000 college students a year have received these scholarships during the past four years.

The 2013 Legislature overhauled the scholarship program, after the lottery’s net proceeds fell short of initial projections. Officials also underestimated the number of scholarships that would be awarded.

The lottery began selling tickets Sept. 28, 2009, nearly three months after the start of fiscal 2010. Then-lottery Director Ernie Passailaigue advised lawmakers to expect the lottery to produce about $100 million a year for college scholarships.

It raised $82.7 million for scholarships that year; $94.2million in fiscal 2011; $97.5 million in fiscal 2012; and $90 million in fiscal 2013. It has raised $59.9 million during the first nine months of fiscal 2014.

State officials forecast that the lottery would raise about $90 million a year to sustain the scholarship program after it was overhauled in the 2013 session, Broadway said.

But lottery Director Bishop Woosley in February reduced his projection for the lottery’s net proceeds for fiscal 2014 from $89.5 million to $82.7 million.

Broadway told lawmakers that if the Department of Higher Education borrows funds from the $20 million lottery reserve fund to temporarily cover scholarship obligations, then all of the lottery’s net proceeds that the department subsequently receives go back to replenish the reserve fund until it is fully restored.

“To finish out paying for this spring’s semester, we had to request $12 million on Feb. 21 from the reserve fund,” he said. “That’s the first time that we had to use the reserve fund to pay for any of our semesters so far,” he said.

The $20 million reserve fund has since been replenished and there is now about $1.3 million in the scholarship fund balance, “so we are starting to collect back to get prepared for the fall [semester scholarship payments],” Broadway said during a meeting of the Legislature’s lottery oversight committee in Little Rock.

Concerned about a nearly two-year trend of declining ticket sales, lottery officials are looking for new ways to raise revenue and boost proceeds.

The Arkansas Lottery Commission voted Wednesday to authorize its staff to proceed with the implementation of electronic-monitor games such as “keno,” one day after the majority of the Legislature’s 12-member lottery oversight committee declared its opposition to the games.

Woosley has compared electronic-monitor games to numbers games like Powerball and Mega Millions, saying lottery players would purchase tickets through a clerk. But drawings would be a lot more frequent - once every four or five minutes. Gamblers would watch the winning numbers selected, with the games broadcast on 40-inch monitors or television screens in venues such as restaurants, bars and airports, Woosley said.

The commission’s vote didn’t specify how many games would be developed, and no timetable was provided. Woosley maintained that those decisions haven’t been made, although he’s referred to the possibility that the games could be deployed this fall.

Lottery vendor Intralot of Athens, Greece, estimates that the lottery could sell $6.8 million in tickets and raise $1.9 million for college scholarships with 100 retailers offering monitor games; sell $13.6 million in tickets and raise $3.8 million for scholarships with 200 retailers; and sell $20.4 million in tickets and raise $5.8 million with 300 retailers; according to a slide Woosley showed the oversight committee Tuesday.

Broadway provided lawmakers Tuesday with projections for what he called the Higher Education Department’s “worst-case scenario” and the “best-case scenario” for the Academic Challenge scholarship program.

His “worst-case scenario” projects that the scholarship program would pay out $106.3 million in scholarships in fiscal 2015; $103.6 million in fiscal 2016; $105.7 million in fiscal 2017 ;and $106.6 million in fiscal 2018.

The projected cost for the program would drop from $112.8 million in fiscal 2014 to $106.3 million in fiscal 2015, in part, because many of the students with the earlier, larger scholarships will graduate and be replaced by students with the smaller, newer scholarships. In addition, new high school graduates who didn’t successfully complete the Smart Core Curriculum will no longer be eligible for a scholarship. Smart Core is the college and career-ready set of courses, according to the department.

But the cost of the program would increase in fiscal 2017 and fiscal 2018 partly as a result of the first-time scholarship recipients in fiscal 2014 and 2015 getting larger scholarships by then, Broadway said.

Broadway’s “worst-case scenario” outlines the possibilities if the annual total of the lottery’s net proceeds and unclaimed prizes fall into the $81 million to $91 million range.

“As long as everything holds, we can borrow from the reserve fund and pay it back and do it the same again each and every semester,” Broadway said.

The first time “you run into a problem and you don’t have enough is February 2017 if [annual] net proceeds is only $76 million [plus another $5 million from the lottery’s unclaimed prizes], then there would not be enough in the reserve account to be able to pay for that semester’s scholarships,” he said.

Even with the reserve funds, there’d still be a shortfall of $3.9 million, according to Broadway’s estimates.

If net proceeds and unclaimed prize money total at least $85 million a year, the fund wouldn’t temporarily run out based on his estimates through June 30, 2018.

The department’s “best case scenario” projects that the program would pay out $98.9 million in scholarships in fiscal 2015, $93.3 million in fiscal 2016, $92.2 million in fiscal 2017 and $89.8 million in fiscal 2018, and the program would have enough money to cover the scholarship obligations, Broadway said.

Under each of these scenarios, more than 30,000 students would receive the scholarship in fiscal 2015, 2016, 2017 and 2018.

So far, department has awarded about 8,400 Academic Challenge Scholarships to this spring’s high school graduates for the fall semester, Broadway said.

The department is waiting for more information, such as ACT scores, for about 8,000 additional high school graduates to determine their eligibility, he said.

He said the department hasn’t yet been able to verify whether about 4,000 of the 16,000-plus applicants took the Smart Core curriculum, a prerequisite for all new scholarship recipients.

Lottery scholars also must have at least a 2.5 grade-point average or score at least a 19 on the ACT college admissions exam or an equivalent score on a comparable college entrance exam.

The application deadline is June 1.