El Gordo cost more than it took in Unclaimed prize fund covered shortfall of about $2.5 million

January 16, 1993|By Scott Shane | Scott Shane,Staff Writer

The Maryland Lottery's el Gordo game cost about $2.5 million more in promotion and prizes than it took in during its much-advertised run last month. Yet lottery officials cheerily announced a few days ago that the game had contributed $73,626 to the state budget.

Financial wizardry? Christmas miracle?

Not quite. The secret to this mathematical puzzle is the agency's unclaimed prize fund, the accumulated millions from all the winning lottery tickets that fall behind the radiator or lie forgotten in a raincoat pocket.

Lottery officials simply dipped into the unclaimed prizes and took out $2.5 million to cover the loss and squeeze from el Gordo -- "the Fat One" in Spanish -- at least a slender profit for the state.

Even after the unclaimed prize money was tossed in, the bottom line of $73,626 is a far cry from the $8 million to $10 million lottery officials predicted the game would add to state coffers when they launched the monthlong game Nov. 27. Their projection was based on a sellout of the 5 million tickets available. Despite the advertising blitz, only 2.2 million tickets were sold, perhaps because of the relatively high $5 price.

Lottery officials protest that it is unfair to say the game lost money, because the $2.5 million boost from unclaimed prizes was part of the original el Gordo plan. Moreover, they note that by law, unclaimed prizes must be paid out to winning players in other games, so the $2.5 million could not have gone to the state budget. The unclaimed prize fund, which has a rolling balance averaging about $6 million, is generally used to supplement Lotto jackpots and otherwise sweeten lottery payoffs.

"It's a true profit. It's not a fudge," Martin R. Goldman, the lottery's deputy director for marketing, says of the $73,626.

Marc Nicole, a legislative analyst who tracks the lottery for the General Assembly, says he wouldn't put it that way. "It's essentially a break-even game for the General Fund," Mr. Nicole says. "But on a cash basis, it lost $2.5 million."

Regardless of el Gordo's dismal financial results, lottery officials insist the game was not a failure and say they may try it again.

"It was an educated risk, and I think a successful risk," says Mr. Goldman. "Our job as a mature lottery is to try new games. We can't just sit there and let our sales stagnate."

Mr. Goldman says el Gordo was successful because it attracted new players to the lottery, many of them from middle- and upper-income areas of the state. Some of those players may now become customers of other lottery games, he says.

Terri La Fleur, who covers state lotteries for Gaming and Wagering Business, a trade journal, said she accepts the agency's claim that the el Gordo experiment was no failure.

"It's seen as successful because it brought in new players with higher disposable incomes," without significantly cutting into sales of existing games, she said. The results, while mixed, are promising enough that several other states are considering adopting a similar game, she said.

Based on a traditional Spanish game, el Gordo guaranteed one top prize of $10 million -- paid in in stallments over 20 years, so that the actual cost to the lottery is about $5.5 million. The number of other prizes, ranging from $1 million (also paid over 20 years) down to $25, was scaled to the number of tickets sold.

Lottery officials refused repeated requests to provide The Sun with a detailed accounting of the expenses associated with el Gordo. In a written reply to the newspaper's questions, approved by lottery Director William F. Rochford, the agency said it would not provide expense figures until they have been audited.

But at the same time, the lottery released the unaudited $73,626 figure last Friday in a news release claiming "El Gordo Brings New Dollars and New Players to Maryland Lottery," failing to note that the game's contribution to the state budget was less than 1 percent of the agency's projection.

The Sun obtained expense figures for el Gordo from a source outside the lottery. They show that advertising costs were $2.1 million -- more than twice the $1 million estimate Mr. Goldman had given in mid-December for advertising costs. A statement from the lottery Thursday said advertising spending was increased to counter negative publicity.

Other expenses included $700,000 in commissions to lottery sales outlets and a fee to GTECH Corp., the lottery's computer contractor. Roughly another $100,000 was spent on additional promotion and sales incentives.

Including $10.5 million to pay for prizes, total el Gordo expenses were about $13.43 million -- considerably more than the $10.97 million receipts from el Gordo sales. By coincidence, the $2.5 million from the unclaimed prize fund almost exactly covered the loss.

The list of top-selling el Gordo outlets supports the lottery's claim that the game was strongest in more affluent areas. State lotteries have long been under fire from critics who claim that government-sponsored gambling amounts to a tax on the poor.

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