Published: February 19, 2020

Pennsylvania Lottery says growth of skill games could lead to $200 million decline in profits

The proliferation of so-called skill games at Pennsylvania Lottery retailers are having an impact on the lottery’s ability to generate revenue to pay for programs for senior citizens, a lottery official told state lawmakers on Tuesday.

Lottery Executive Director Drew Svitko told lawmakers skill games could lead to a $200 million decline in scratch-off ticket sales this year. That’s on top of a $115 million hit last year.

Svitko attributed the higher projection to the rising number of lottery retailers having at least one skill machine on their premises.

“Those skill machines are absolutely having an effect on the lottery,” Svitko told the House Appropriations Committee on Tuesday.

Svitko also said the lack of huge Powerball and Mega Millions jackpots could make this a less profitable year for the lottery.

Last year, the lottery had its second consecutive record-setting year. Ticket sales generated $1.14 billion for the Lottery Fund, which helps pay for older Pennsylvanians' property tax and rent rebates, transportation, prescription assistance and funding for area agencies on aging.

The impact of skill games on the lottery consumed much of the attention of lawmakers at two separate budget hearings for the state Department of Revenue, which oversees the lottery.

The state police consider such skill games to be illegal. Pennsylvania’s casino industry is anxious about the growth of the games, fearing they could siphon business from slots parlors.

Svitko said that two years ago, only 8% of lottery retailers had at least one skill machine. Now, he said nearly 25% of all lottery retailers have skill games, and it’s causing some retailers to take a pass on expanding their lottery offerings to include Keno and Xpress Sports.

“Unless something's done about it, the impact is going to get worse and worse and worse,” Svitko said.

But not all lawmakers seemed convinced that skill games are an enemy to the lottery.

During the Senate budget hearing, Sen. Gene Yaw, R-Lycoming, challenged Svitko about how he arrived at his $200 million estimated loss in ticket sales and got him to point out that the Lottery Fund’s share of that potential ticket loss is $50 million.

If skill games were regulated and more fully taxed, Yaw said, “They can generate $200 million in tax revenue or maybe $350 million in a few years depending on how they are put together.”

Considering that, Yaw said that “might be a reasonable exchange.”

Several lawmakers suggested during the hearings that perhaps it's time for the state to bring the games of skill into the fold of legalized gambling options in the commonwealth.

Svitko, however, urged them to hold off on doing that.

“I think regulating is a risky endeavor because there is a lot of gaming in Pennsylvania, and I’m talking about the legal options right now. They haven’t all been rolled out yet,” he said.

“Until we're all able to understand and analytically prove the impact each one of those is having on the other legal forms of gaming, until we're in that position, I think adding more gaming is absolutely risky. It's a risk not only to the lottery but to all of the legal sanctioned, already approved gaming options available.”

Mike Barley, a spokesman for Pace-O-Matic of Pennsylvania, a software developer that makes the Pennsylvania Skill games, countered Svitko's argument after the hearing.

He said many small businesses, fire companies, small clubs and fraternal organizations are relying on income from the skill machines to keep their doors open.

“There has been an illegal market, a grey market, in the state for a very long time,” Barley said. “Pennsylvania Skill is offering a legal product that is able to be used that can drag this operation that has been in the shadows for a long, long time. Bring it out, tax it, give these small businesses and clubs an opportunity to make additional profit so they can exist and give the commonwealth additional tax dollars.”

Sen. Scott Martin, R-Lancaster, pointed out that the state’s senior population is the fastest growing demographic and “that leads to a lot of higher cost in a lot of various programs that we’re utilizing the lottery proceeds to fund. And that’s not going to change in any of the projections that I’ve seen.”

Martin said that behooves lawmakers to “get a handle on some sort of solution” on the legality, the regulation and the taxation of skill games.

“They are out there. They're competing. They're all over my district and I'm sure they're all over everyone else's,” Martin said.

Sen. Bob Mensch, R-Montgomery, asked if the lottery would be receptive to adding games of skill into their product lineup.

Revenue Secretary C. Daniel Hassell said that is a policy question that would require discussions with Gov. Tom Wolf before he could answer that question. Hassell said it would mean putting commonwealth-sanctioned gambling machines in convenience stores and other locations where young people can visit those machines.

Sen. Maria Collett, D-Montgomery, suggested that is the reason why she thinks the machines and winnings that they pay out should be regulated.

Senate Appropriations Committee Chairman Pat Browne, R-Lehigh, offered some closing comments at his budget hearing that hit on that point by looking to the other factor that Svitko cited as contributing to the decline in lottery ticket sales: the lack of big Powerball or Mega Millions jackpots.

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