Colorado Legislative Council Staff

STATE

FISCAL NOTE

TABOR Refund Impact

General Fund Revenue Impact

Cash Fund Exempt Revenue and Expenditure Impact


Drafting Number:

Prime Sponsor(s):

LLS 98-522

Sen. Lacy

 

Date:

Bill Status:

Fiscal Analyst:

January 21, 1998

Senate Agr.

Harry Zeid (866-4753)

 

TITLE:            CONCERNING REGULATION OF THE STATE LOTTERY BY THE STATE LOTTERY DIVISION IN THE DEPARTMENT OF REVENUE, AND, IN CONNECTION THEREWITH, AUTHORIZING THE INSTALLATION OF VIDEO LOTTERY TERMINALS UNDER THE CONTROL OF THE DIVISION, CONTINUING THE AUTHORITY OF THE DIVISION BEYOND ITS CURRENT SUNSET DATE, AND MAKING AN APPROPRIATION.



Summary of Legislation


STATE FISCAL IMPACT SUMMARY

FY 1998/99

FY 1999/00

State Revenues

   State Lottery Fund*:

       Net Machine Income

       License Fees

            State Lottery Fund Total Revenues**



$43,200,000

      300,000

$43,500,000



$97,500,000

      300,000

$97,800,000

State Expenditures

   State Lottery Fund Expenditures and Distributions*:

       Compensation to Licensees (Racetracks)

       Lottery Division Cost of Administration

       Technology Provider and Vendor Fees

       Constitutional and Statutory Distributions***

            State Lottery Fund Total Expenditures



$19,400,000

1,100,000

6,500,000

 16,500,000

$43,500,000



$43,900,000

900,000

14,600,000

  38,400,000

$97,800,000

FTE Position Change

13.5 FTE

16.0 FTE

Local Government Impact — None

           *State Lottery Fund revenues and expenditure estimates have been rounded to the nearest $100,000.       **Of this amount, $6.9 million would be allocated to the General Fund in FY 1999-00; and $1.0 million would be allocated to the Colorado Promotion Fund in FY 1989-99 and $12.4 million would be allocated to the Colorado Promotion Fund in FY 1999-00.

           ***Distributions to the Conservation Trust Fund, State Parks, and Great Outdoors Colorado would be cash funds exempt. Distributions to the Colorado Promotion Fund and the General Fund would not be exempt from constitutional or statutory revenue or appropriations limits.



          This bill would allow licensed casinos, class B horse racetracks, and greyhound racetracks to apply to the Colorado Lottery Commission for the authority to act as lottery sales agents and operate video lottery terminals (VLTs) on their premises. A pari-mutuel licensee would be authorized to operate the VLTs extending from one hour before and ending one hour after the period in any day during which pari-mutuel wagering is being conducted at the licensee’s licensed premises. The Colorado Lottery Commission would be granted the authority to issue and revoke licenses, approve games, control the number and type of VLT machines that may be used, and monitor the play from the machines through a central computer system. Licensed horse and greyhound racetracks would be authorized to install at least 500 VLTs per location.


          The VLT machine would accept currency in the form of bills, and would be capable of printing pay vouchers. Each machine would be connected to and be monitored by a central computer system that is under the control of the State Lottery Division. The Division would use its best efforts to meet a target date of December 1, 1998, for the installation and operational readiness of the system.


          All expenses necessary to purchase or lease, install, maintain, and operate video lottery terminals, with certain exceptions, would be borne by the Colorado Lottery Commission or by a technology provider. The rate of compensation to be paid to sales agents that are pari-mutuel licensees or retail gaming licensees would be established at 45 percent of net machine income. In the case of a pari-mutuel licensee, 10 percent of the annual net machine income would be held by the sales agent to be used solely to fund purses for the live races at the licensed premises. The bill specifies that beginning with the first quarter of FY 1998-99, of revenues derived from the operation of video lottery terminals that are allocated to the General Fund, the first $12.0 million, adjusted for annual changes in Consumer Price Index, would be continuously appropriated to the Colorado Promotion Fund.


          Under current law, the State Lottery Division will terminate on July 1, 1999, unless continued or reestablished by the General Assembly. This bill would extend the termination date to July 1, 2004. The bill is assessed as having state revenue and expenditure fiscal impact. The bill would become effective upon signature of the Governor.



State Revenues


          Total revenue (after payouts) are projected to be $43.5 million for the six months of operation during FY 1998-99 and $97.8 million during FY 1999-00. This sum is comprised of net machine income (NMI) of $43.2 million plus annual licensing fees of $300,000 for FY 1998-99, and NMI of $97.5 million plus annual licensing fees of $300,000 for FY 1999-00.


          Table 1 provides a distribution of projected net machine income between the state share, the 10 percent purse account, and the track/sales agent proceeds for FY 1998-99 through FY 2000-01. The bill specifies that the sales agents may retain 45 percent of net machine income. However, in the case of sales agents that are pari-mutuel licensees, the bill requires that 10 percent of NMI be held by the sales agent to be used solely to fund purses for live races at the licensed premises. The 55 percent state share minus administrative costs (including the fees for the technology provider) plus the additional license fees that will be collected will equal the distributable proceeds that will become available for constitutionally authorized distributions. The bill specifies that of revenues derived from the operation of video lottery terminals that are allocated to the General Fund, the first $12.0 million, adjusted for annual changes in the Consumer Price Index, would be continuously appropriated to the Colorado Promotion Fund. The distributable proceeds among the constitutionally authorized recipients, as well as the Colorado Tourism Promotion Fund and the state General Fund are also identified in Table 1.


Table 1. SB 98-065 Projected Revenues (millions of dollars)

 

FY 1998-99

FY 1999-00

FY 2000-01

Net Machine Income

Minus: 10% Purse Account

Minus: 35% Track/Sales Agent Proceeds

Equals: 55% State Share

$43.2

4.3

    15.1

23.8

$97.5

9.8

  34.1

53.6

$109.7

11.0

    38.4

60.3

55% State Share

Minus: Administrative Costs

  (Including Technology Provider Fees)

Plus: License Fees

Equals: Distributable Proceeds

$23.8

7.6


   0.3

$16.5

$53.6

15.5

 

    0.3

$38.4

$60.3

17.3


    0.3

$43.3

Distributable Proceeds:

 Conservation Trust Fund

 State Parks

 Great Outdoors Colorado*

 Colorado Promotion Fund

 General Fund “Spillover”

   Total Distribution


$6.6

1.6

7.3

1.0

   ---

$16.5


$15.3

3.8

---

12.4

    6.9

$38.4


$17.4

4.3

---

12.8

    8.8

$43.3

                 *The GOCO statutory cap is projected to be reached in FY 1998-99 based on estimates

                   provided by the State Lottery Division.


          It is projected that the Colorado Promotion Fund will receive approximately $1.0 million in FY 1998-99, $12.4 million in FY 1999-00, and $12.8 million in FY 2000-01 from revenues derived from the operation of video lottery terminals. Revenues would be continuously appropriated to the Colorado Promotion Fund in each year thereafter. The General Fund “spillover” would therefore be zero in FY 1998-99, $6.9 million in FY 1999-00, and $8.8 in FY 2000-01


TABOR Refund Impact


          Section 20 of Article X of the Colorado Constitution, limits the maximum annual percentage increase in state fiscal year spending. Once total state revenue from all sources that are not specifically excluded from fiscal year spending exceeds these limits for the fiscal year, the state constitution requires that the excess shall be refunded in the next fiscal year unless voters approve a revenue change as an offset. Based on the current Legislative Council economic forecast, it is projected that the state will be in a TABOR refund position during each of the next five fiscal years. Any increase or decrease in state revenue from changes in fees, fines, licenses, or other revenue sources will affect the amount of the state revenue to be refunded.


State Expenditures


          Projected annual expenses of the State Lottery Division for FY 1998-99 and FY 1999-00 are summarized in Table 2. These expenditures would include personal services costs of $716,972 and 13.5 FTE in FY 1998-99, and $742,597 and 16.0 FTE in FY 1999-00. The vendor fees to the technology provider for lease and maintenance of the equipment are assumed to be at a rate of 15 percent of net machine income.



Table 2. SB 97-065 Projected State Lottery Division Annual Expenses

 

FY 1998-99

FY 1999-00

Personal Services

  Criminal Investigator II (8.0/10.0)

  Administrative Program Specialist (1.0/1.0)

  Applications Programmer III (1.0/1.0)

  Accountant II (1.5/2.0)

  Administrative Assistant II (12.0/2.0)

  Consulting Fees 

       Subtotal (13.5/16.0)


$425,270

46,938

41,652

57,923

45,189

  100,000

$716,972


$531,588

46,938

41,652

77,230

45,189

          ---

$742,597

Operating Expenses

Telecommunications

Leased Space

Capital Outlay - Equipment

Capital Outlay - Computer

Vehicle Lease Payments

Vehicle Operating Expenses

      Subtotal

$22,750

24,000

41,230

68,800

200,000

29,472

    10,800

$397,052

$24,000

24,000

45,220

---

---

36,840

    13,500

$143,560

Vendor Fees (15% of Net Machine Income)

$6,480,000

$14,630,000

Total Expenditures

$7,594,024

$15,516,157

Expenditures Not Shown


          Pursuant to the Joint Budget Committee’s budget policies, the following expenditures have not been included in this fiscal note:

 

            health and life insurance costs;

            short-term disability costs;

            inflationary cost factors; and

            indirect costs.



Spending Authority


          The fiscal note implies that the Department of Revenue would require cash fund exempt spending authority out of moneys in the State Lottery Fund for allocation to the State Lottery Division for compensation to licensees ($15,100,000), distributions to the purse account ($4,300,000), administrative functions ($1,114,024), and technology provider and vendor fees ($6,480,000) in the amount of $26,997,024 and 13.5 FTE in FY 1998-99 in order to implement the provisions of the bill.



Departments Contacted


          Revenue


FACTS AND ASSUMPTIONS



Assumptions

 

1.       That the VLTs at the one class B horse racetrack and the four greyhound racetracks in the state would come on-line January 1, 1999. Therefore, FY 1998-99 revenue and expenditures represent amounts for the six-month period.

 

2.       That each of the five racetracks in the state would be allowed to maintain 500 VLTs in FY 1998-99 (a total of 2,500 machines). The number of VLTs operating in the state is projected to increase to 2,813 in FY 1999-00, and 3,164 in FY 2000-01. It is assumed that no limited gaming casinos would opt to participate in the VLT program.

 

3.       That the Colorado Lottery Commission would set the maximum bet for VLTs at $5. The Commission would also establish the prize payout ratio and hours of operation.

 

4.       That the State Lottery Division will require 13.5 FTE in FY 1997-98 and 16.0 FTE in FY 1998-99 to administer the provisions of the bill. A description of personal services costs include:

 

            8.0 FTE - Criminal Investigator II, (grade 102, step 1) in FY 1998-99 and 10.0 FTE in FY 1999-00. This will be necessary to perform investigative and compliance functions, including the licensing of the manufacturers of the VLTs, licensing of the racetracks as lottery sales agents, establishing security rules and regulations for each site, as well as to monitor compliance. The annual cost for investigators will be $425,270 in FY 1998-99 and $533,588 in FY 1999-00.

            1.0 FTE - Administrative Program Specialist (grade 97, step 1). This individual will administer the central site system contract with the technology providers and act as a liaison between the Lottery Division and the vendors for problem resolution and systems development. Annual cost for this individual is $46,938.

            1.0 FTE - Applications Programmer III (grade 92, step 1). The Lottery MIS section will require additional support. Annual costs for application development will be $41,652.

            1.5 FTE - Accountant II (grade 89, step 1) in FY 1998-99 and 2.0 FTE in FY 1999-00. This will be to perform accounting functions associated with the new program, including assistance in the testing and development phase of the new product. Annual cost for financial control will be $57,923 in FY 1998-99 and $77,230 in FY 1999-00.

            2.0 FTE - Administrative Assistant II (grade 67, step 1). The administrative functions associated with issuing and tracking manufacturer licenses, tracking manufacturer licenses, key and support licenses, and VLTs will require 2.0 FTE. Annual cost for the administrative assistants will be $45,189.