Scientific Games’ lottery playbook succeeded, then spread

By JON MELTZER, LAUREN MOWRY, VICTORIA IFATUSIN and MICHAEL PURDIE / Howard Center for Investigative Journalism
Howard Center for Investigative Journalism

The growth of the lottery business nationwide was inspired in large part by the lobbying innovations of a single multinational gambling company, Scientific Games Holdings LP.

A 1986 memo from Scientific Games co-founder and then-Chairman John R. Koza described a “draft version of our new model state lottery law which we distribute widely each year to state legislators and government officials in non-lottery states.”

“We are seriously considering the possibility of supporting an initiative petition effort in Oklahoma and/or Arkansas to establish a state-operated lottery there in the November 1986 elections,” Koza wrote in a letter to Gaming Business Magazine.

Historian Jonathan D. Cohen found that Scientific Games’ political activities were key to the creation of state lotteries, primarily in the early 1980s, via ballot initiatives in Arizona, Washington, D.C., Colorado, Oregon, and finally the “bonanza” in California. The California lottery “was entirely the product of Scientific Games,” said I. Nelson Rose, a law professor, author of “Gambling and the Law” and a widely cited expert in the field of gambling law.

For other states, the process took longer. Oklahoma enacted a lottery in 2004, after Scientific Games proposed draft legislation in 1986 and contributed money to a pro-lottery effort in that state. In the end, Scientific Games was named primary contractor.

“There’s never been a grassroots movement for this,” said Les Bernal, national director of Stop Predatory Gambling, of lottery expansion. “It’s being driven by a handful of cynical public officials from both political parties (in conjunction with) powerful gambling interest groups that stand to benefit.”

Today, 45 states and Washington, D.C., have lotteries, as do dozens of countries across the globe. “While Scientific Games was not responsible for the creation of any new lotteries after 1984,” Cohen wrote, “its campaigns set the stage for the massive spread of legalized gambling across the Midwest, West, and Upper South in the late 1980s and early 1990s.”

Scientific Games spokesperson Therese Minella declined to answer questions and instead directed a reporter to the company’s website. Minella wrote that a Howard Center for Investigative Journalism question about the company’s lobbying and influence “is inaccurate as a premise,” and didn’t respond to emails or a telephone message seeking elaboration.

Scientific Games’ lottery business was purchased for $6 billion in April by Brookfield Business Partners LP, a private equity firm based in Canada. The remaining part of Scientific Games was renamed Light & Wonder Inc. and retained Las Vegas as its headquarters.

Adam McLaren, a vice president and senior analyst at Moody’s Investors Service Inc. who follows the lottery business, doesn’t necessarily see Scientific Games as the main driver of lottery expansion. Instead, it was states – looking for new revenue – which joined the lottery bandwagon after other states established them.

“Scientific Games played a big part in the start, but it’s hard to say they were the ones who spread the growth,” McLaren said.

According to interviews and court documents, the Scientific Games strategy to win public acceptance of lotteries has proven so effective that state governments have since become their biggest cheerleaders. The Howard Center found that state lotteries drive a multibillion-dollar wealth transfer to lottery contractors from players concentrated in low-income, high-poverty communities with lower levels of education and larger Black and Hispanic populations.

Some states go to unusual lengths to protect their lotteries. The Wyoming Lottery Corporation, for example, filed a lawsuit against a prominent critic after he wrote to national lottery organizations with complaints about the company’s handling of compulsive gambling. Edward Atchison, the former director of the Wyoming Council on Problem Gambling, accused the Wyoming Lottery of preying on people with compulsive gambling addictions.

Atchison’s lawyer, Tim Kingston, said it “amazed” him that a quasi-governmental entity like the lottery would pursue legal action against a private citizen. “He’s a citizen and has the right to speak out about a public issue,” Kingston said. “They’re just trying to shut him up.”

Atchison died in May 2016, before the case could proceed, and it ultimately was dismissed.

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The Scientific Games playbook

State lotteries’ origin stories follow a general pattern: a shortfall of state tax revenues and a growing need to build schools, fix potholes and pay for other government services drives officials to look for new revenue sources. States needed private contractors to handle the ticket printing, game design, database management and other operations. Scientific Games saw a great opportunity.

Lobbyists at the behest of Scientific Games formed groups with names like Arizonans for Tax Reduction or Californians for Better Education which were “just total fronts for the company and its advertising efforts,” Cohen said in an interview. Scientific Games executives employed these firms to disguise their interests as genuine grassroots activism, Cohen and Bernal said.

The pro-lottery forces made sure to specify how lottery proceeds would be used for schools or other popular services rather than having funds mixed with the “black hole” of state general funds when knocking on doors for petition signatures, Cohen described in his book, “For a Dollar and a Dream: State Lotteries in Modern America.”

Scientific Games wrote some of the bills that would ultimately be ratified. Cohen compared lottery language in ballot initiatives in California and Oregon to the generic version Koza shared. The state versions were so similar that Cohen called significant parts of them “word for word.”

Scientific Games’ efforts to bring a lottery to Oklahoma surfaced in 1986, when the company contributed $25,000 to pro-lottery organizations when legislation to enact a lottery was being debated in the Oklahoma House of Representatives, according to an article in The Oklahoman from that year. Ultimately, the lottery bill incubated for almost 20 years before 64% of voters approved it through referendum in 2005.

The initiatives, once passed, were essentially tailored so that only Scientific Games could serve as the instant ticket vendor, according to Rose and Cohen. Language in the California initiative required detailed financial disclosures from all of the executives, Rose said, knowing “their competitors at the time weren’t going to reveal all this confidential financial information about their executives.”

Scientific Games largely exited the political arena of lottery legislation after all five of its pet-project ballot initiatives passed, Cohen said, but it remained on the scene with a reduced footprint.

Scientific Games, by its own admission, had a forceful expansion strategy in the 1980s. Then-President and CEO William G. Malloy described in a 1993 interview the company’s shift in business strategy from the prior decade. “We aim for a constructive aggressiveness, but not aggressiveness in terms of what we saw in the early days of Scientific Games,” Malloy told Gaming and Wagering Business magazine. “We recognize that lottery executives are pretty knowledgeable these days and wouldn’t go along with it.”

A 1983 internal company study offered a sense of Scientific Games’ expansionary ambitions in that era. The company conducted extensive market research to argue that lotteries would not eat into the betting at horse races, known as parimutuel wagering.

“All available evidence indicates that the lottery player and the parimutuel wagerer are different, that the introduction of a lottery does not negatively impact parimutuel revenues” and can, by contrast, “help the parimutuel industry,” the study said.

Scientific Games’ expansion and success drew criticism, even from officials in states where they were operating. California Superintendent of Public Instruction Bill Honig said ″education was used to get the lottery passed, but education hasn’t benefited from it.” Arizona state Sen. Ray Rottas, a Phoenix Republican, lamented that he had “misgivings about them receiving the contract because this is the first time in the state of Arizona that an initiative has been bought and paid for.”

State governments have become the lottery’s biggest advocates in recent years. One vivid example of this advocacy involved a 2019 lawsuit by the New Hampshire Lottery Commission and other state lotteries that sought to preserve sales of lottery tickets online, which were threatened by a 2019 Justice Department legal ruling. In January 2019, the Justice Department reinterpreted the 1961 Wire Act to apply to iLottery tickets, which would prohibit iLotteries nationwide. Bernal said there was an immediate “uproar” from the states.

“Lotteries which are not making the games available on the internet within the next 10 years will lose an entire generation of players,” Charles “Charlie” McIntyre, director of the New Hampshire Lottery and former president of the North American Association of State and Provincial Lotteries, told Public Gaming magazine.

In Michigan, for example, iLottery sales increased by almost 1,300% from 2015 to 2021 while traditional lottery sales continued to rise. Michigan Attorney General Dana Nessel argued in a court filing that the Justice Department ruling would put vital state-level public services at risk of shrinking or disappearing.

A federal appeals court sided with the states, preserving this new online lottery venture. New Hampshire Gov. Chris Sununu celebrated a victory that would “protect public education in our state.”

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Jillian Diamond, Jamie Pinzon, Spencer Friedman, Rob Wells and Constance Mitchell Ford of the University of Maryland contributed to this report.

The Howard Center at the University of Maryland is funded by a grant from the Scripps Howard Foundation in honor of newspaper pioneer Roy W. Howard.