Econ 101 concept stymies higher ed scholarships
Officials searching for answers as stagnant ticket sales, rising tuition, end of tax subsidy leave lottery program unable to meet demand
As colorful as the bottles on the shelves, the lottery tickets at Cliff ’s Liquor Store on Old Pecos Trail are not selling quite as well as they did a year ago.
“Nobody’s telling me why,” a manager at the store said with a laugh. “But if you ask people, I bet most would say, ‘I’m not winning; that’s why I’m not buying.’ ”
Fewer buyers at Cliff ’s and other retailers around New Mexico reflect a problem for the state’s lottery as well as the nearly 26,000 students at state colleges and universities who rely on the games of chance to help pay their tuition.
While customers may be gambling just a few dollars at a time with each scratch game or Powerball ticket they buy, New Mexico has a lot more riding on the lottery. Nearly 1 in 5 college students counts on ticket proceeds to help fund their scholarship.
But revenue from the lottery has plateaued, colleges have raised tuition and a tax subsidy to bolster the scholarship fund is about to end.
This unlucky combination of factors prompted the state Higher Education Department last week to reduce the share of college tuition that the lottery scholarships will cover, to 60 percent from 90 percent. It was largest decrease in the 21-year history of the Legislative Lottery Scholarship, as it is formally called.
And it raises questions about whether the state can really rely on lottery ticket sales to pay for New Mexicans to get a college education.
“Because of student enrollment, flat ticket sales and increased tuition, we have seen the scholarship fund go from 100 percent to 60 percent in a few years,” said Rep. Carl Trujillo, D-Santa Fe, who unsuccessfully pushed during this year’s regular legislative session to continue using revenue from a tax on liquor to supplement the scholarship fund. “It is completely possible to get all the way down to 30 percent.”
Launched in 1996, the lottery has grown to rake in more than $130 million each year from people willing to gamble in hopes of winning a jackpot. The lottery even saw record sales in fiscal year 2016, with revenue topping $154 million, some $46 million of which went to the scholarship fund. But revenue has not been growing at the same pace year over year as it did more than a decade ago.
Revenue grew reliably from 1997 to about 2004. But in the last decade, revenue has grown slowly or even declined.
Meanwhile, the number of students relying on the scholarships has expanded beyond what the lottery proceeds can cover. Demand is somewhere around $60 million a year, or about $20 million more annually than what has been raised in ticket sales most years in the past decade.
And as the state has cut funding for higher education, schools have raised tuition.
“More people took advantage of [the scholarships], and schools all through the 2000s raised tuition by a lot of percentage points,” said Rep. Bill McCamley, D-Mesilla Park. “The argument we heard by many board regents was, ‘The students are not paying for it. The lottery is paying for it.’ ”
Legislators have tried to curb the number of students eligible for the scholarships in an effort to shore up the program. Students must be residents of New Mexico, graduate from a state high school and maintain a grade-point average of 2.5. In 2014, the state cut the number of semesters students are eligible for the scholarship to seven from eight, and it required that students at four-year institutions take at least 15 credit hours each semester instead of 12. The scholarship money kicks in at the start of a student’s second semester. Students also were are required to enroll in college immediately after graduating from high school to receive the scholarship, unless they joined the armed forces, but the Legislature voted overwhelmingly this year to loosen that requirement. Students now have up to 16 months after high school graduation to enroll in college.
The number of scholarships has declined in recent years, from a high of 32,168 in 2013 to 28,710 in 2017.
The state Higher Education Department actually lists a higher number of scholarships than students receiving them. That’s because some students attend college at more than one campus and are counted multiple times as scholarship recipients.
Until about five years ago, the lottery covered 100 percent of tuition for qualifying students. But the Higher Education Department sets that rate and, amid a financial crunch and declining lottery sales, the department announced scholarships would only cover 95 percent of students’ tuition during the 2014-15 school year. The department cut back on the size of scholarships again during the last school year, to 90 percent.
It would have fallen even further if lawmakers had not tapped the state’s general fund and taken revenue from a liquor tax starting in 2014 to help pay for the scholarships. But the contribution from the tax ends July 1, and Trujillo’s proposal to extend it died during this year’s legislative session, forcing the state to stretch lottery money even further.
The program has made New Mexico’s public colleges and universities — already among the least expensive in the country when it comes to tuition — a bargain for qualifying students. In turn, higher education officials argue the lottery scholarships have given students an incentive to stay in the state and graduate from college in four years.
Some worry that a less generous program will lead some students to study elsewhere, drop out or put college out of reach.
“It is clear that the lottery scholarship has had an overwhelmingly positive influence in retention and graduation rates,” says Rick Bailey, president of Northern New Mexico College in Española. “I don’t think anyone wants to see that progress falter.”
For the long term, the lottery is hoping to boost sales.
“In order to survive, we have to adapt,” said Wendy Ahlm, a spokeswoman for the New Mexico Lottery Authority.
Administrators of the lottery say the games would draw more players if they could use a bigger share of revenue for prizes and enhance marketing efforts.
But because of a law approved by the Legislature in 2008, the lottery must turn over 30 percent of its gross revenue to the scholarship fund.
The lottery says it was forced to cut costs by $6.5 million as a result, slashing the prizes for scratch games.
Ending the 30 percent requirement, the lottery argues, would allow it to increase prizes and ultimately increase the amount of money raised for the scholarship fund.
But critics counter that lifting the requirement would be a gamble and could end with New Mexico students receiving less money regardless of whether sales rise or fall.
“The lottery managers blame the 30 percent requirement, but last year the lottery had its best year ever with that same 30 percent in place,” said Fred Nathan, founder and executive director of the Santa Fe-based think tank Think New Mexico.
Nathan says the requirement boosted the amount of lottery revenue devoted to scholarships by 6 percent while also leading to a decrease in operating costs.
Think New Mexico points to Texas as an example of what could happen if the revenue requirement were not in place.
New Mexico’s neighbor saw lottery revenue grow by 19 percent between 1997 and 2014, but the amount of money the lottery turned over for the Texas education system remained flat.
Legislators rejected a proposal this year to eliminate the 30 percent requirement, despite heavy lobbying from the lottery authority. Rep. Trujillo, for one, said he was “not sold” on the idea.
Some say the lottery could try to catch up on changes in the marketplace.
Consumers are carrying less cash, increasingly relying instead on debit and credit cards. But New Mexico, like many states, does not allow the sale of lottery tickets with debit cards in most cases.
The New Mexico Lottery is piloting the sale of tickets at over 20 gas pumps using electronic payment. So far, that effort has taken in about $125,000.
Legislators have opposed that move, too, but researchers say such changes could help boost sales.
But it may not be enough for a state like New Mexico to buck long-term national trends in lottery sales and keep up with the rising costs of higher education, says Lucy Dadayan, a senior researcher at the Rockefeller Institute of Government in Albany, N.Y.
“This growth is only temporary and not sustainable over time. Tuition is growing at a much higher rate,” she said.
Revenue from lotteries around the country has flattened since 2008, according to an analysis by the institute last year.
Dadayan points to younger consumers who are spending less money on gambling and buying fewer lottery tickets than older people. Older consumers who are usually among state lotteries’ best customers have less money in their pockets.
Dadayan says asking how states can boost lottery sales is the wrong question. She says states should look at the rising cost of tuition and search for more sustainable means of supporting higher education, preferably using money that does not come from the low-income consumers who tend to be the main market for lottery tickets.
“Relying on a lottery is not the best fiscal policy,” she said.
McCamley agrees. “It’s not rocket science,” he said. “It’s all about how much money you have. If tuition keeps rising and the amount of students receiving the scholarship stays the same, of course it can drop.”
Possible changes in scholarship eligibility and lottery sales practices could offer some short-term solution. But policymakers continue to disagree on whether and how the lottery should expand. It has a new game coming out next year, yet there’s pessimism about the market.
“We don’t anticipate growth. I see it continuing to decline,” Ahlm said.
At Kelly Liquors at Cerrillos and Siler roads, manager Hector Valeta said the days of customers spending up to $200 on lottery tickets in the span of a week appear to be over.
Lottery sales have fallen at his store by 20 percent since October, he said.
“There was this guy who ran a construction company, and he would come in and spend $180 to $200 in one day on tickets,” Valeta said. He hasn’t seen that man in a while.
“Even the scratchers that used to sell every day … no more,” he said. “It’s not that way anymore.”