PA Treasurer Disputes Legality of Lottery Expansion

Lacking a precise description of the types of gaming to be deployed on video lottery terminals, it is currently impossible to determine whether such an expansion of the lottery under a private management agreement would be lawful, State Treasurer Rob McCord said today.

McCord wrote to Secretary of Revenue Daniel Meuser, responding to a December 28 letter in which the secretary contended that the state lottery law already gives his agency the right to introduce video gaming devices to Pennsylvania.

McCord pointed out, however, that Secretary Meuser’s letter stopped short of providing a clear description of the monitor or terminal games being planned. The Corbett administration is considering a contract to turn management of the state lottery over to a private company, the British firm Camelot Gaming. Camelot in turn has promised to increase lottery proceeds, based largely on an expansion into new types of games that McCord believes might require legislative authorization.

“In fact, there is substantial doubt the use or operation of ‘monitor-based games’ and ‘Internet gaming,’ as identified in your letter, are authorized by state law,” McCord wrote.

The Treasurer went on to note that some such devices could match the definition of a slot machine under the 2004 law that legalized casinos in Pennsylvania, and would thus fall under oversight of the Gaming Control Board. He also pointed out that although some video lottery terminal games may operate on the same premise of random number generation as scratch-off lottery tickets, they eliminate the use of a physical ticket and bypass a person who must activate the wager and/or deliver the payout. Those differences alter the nature of the lottery gaming experience and allow for much greater frequency of play in a manner that could constitute a substantial expansion of gaming beyond the limits of existing law.

“I acknowledge it may be worthwhile to consider transforming the Commonwealth’s existing retail lottery ticket sales system to one of centrally controlled slot machines / VLTs in an effort to increase revenue. I suggest, however, such a significant expansion of gambling is more appropriately considered by the General Assembly, not a state agency’s public procurement contracting process,” McCord wrote.

He cautioned that he would reserve judgment on disbursing money to a private lottery manager until he is certain that the lottery expansion does not go beyond existing law. As Treasurer, McCord has a statutory responsibility to ensure that all payments of public funds from the state treasury are lawful.

For more information, visit www.patreasury.gov.

Treasurer McCord’s letter to Secretary Meuser follows.

# # #

January 9, 2013

The Honorable Daniel Meuser
Secretary
Department of Revenue
Strawberry Square, 11^th Floor
Harrisburg, PA 17128-1100

Dear Secretary Meuser:

I am in receipt of your December 28, 2012, letter concerning the Pennsylvania Lottery’s draft Private Management Agreement (PMA) with Camelot Global Services, Inc.  Though I appreciate your attempt to address several of the legal concerns raised in my letter, the limited amount of public information concerning future lottery expansion plans leaves me unconvinced the intended deployment of “monitor-based games” throughout the Commonwealth is already authorized by the Lottery Law.[i]  As a consequence, I once again write to provide notice – prior to the final execution of the PMA — there is substantial risk Treasury will be required to reject payments associated with the business plan because it involves the deployment of monitor- or video-based gaming beyond that authorized by current statutory law.

Though your letter explicitly states the Lottery intends to introduce video gaming monitors (also known as video lottery terminals, or VLTs) in neighborhood bars and taverns this year, it stops conspicuously short of providing a clear description of those types of monitor/terminal games. The Lottery’s business plan for market expansion and revenue enhancement has been ambiguously characterized as the introduction of — “monitor-based games,” “terminal-based games,” “Internet products,” and “Internet gaming.”  Absent is a detailed explanation of the particular monitor-, Internet-, or terminal-based game Camelot intends to introduce into the marketplace.  Accordingly, there is currently no basis upon which to determine if the “monitor-based games” envisioned in the PMA fall within the existing statutory retail lottery ticket agent system.

In fact, there is substantial doubt the use or operation of “monitor-based games” and “Internet gaming,” as identified in your letter, are authorized by state law.  The legislature’s definition of “slot machine” within the Pennsylvania Race Horse Development and Gaming Act is broadly written to include “any mechanical or electrical contrivance, terminal, machine or other device . . . .”[ii]   As a consequence, a “monitor-based game” that, upon the payment of any consideration and by the element of chance, entitles the operator to receive anything of value would fall within this broad definition of a slot machine, thus subjecting the device to the regulatory oversight of the Pennsylvania Gaming Control Board – not the Lottery.

The fact the element of chance associated with a “monitor-based game” (e.g., a random number generator) is operated through a central computer system does not remove the device from the Gaming Act’s definition of a slot machine.  In fact, from a player’s perspective, the device would be indistinguishable from a traditional casino-located slot machine.  Though your letter uses the phrase “monitor-based game,” the more appropriate term is “Video Lottery Terminal or VLT” – a standalone device that allows gamblers to bet on the outcome of a video game (e.g., virtual scratch-off lottery tickets) with the outcome based on a random number generator controlled by a central computer.  The traditional features that distinguish a typical VLT from Pennsylvania’s existing statutory retail lottery ticket agent system are: (1) greater frequency of play or drawings, often measured in seconds; (2) the absence of a paper lottery ticket (using only virtual or computer images of a scratch-off ticket or other game theme image); and (3) the elimination of a clerk to activate either the wager or payout (direct payments from the terminal in cash or vouchers).

I acknowledge it may be worthwhile to consider transforming the Commonwealth’s existing retail lottery ticket sales system to one of centrally controlled slot machines / VLTs in an effort to increase revenue. I suggest, however, such a significant expansion of gambling is more appropriately considered by the General Assembly, not a state agency’s public procurement contracting process.

Please be assured it is my intention to reserve final judgment as to any particular disbursement request until after the request is submitted and Lottery is provided an opportunity to submit any supporting documentation.  The execution of the PMA, however, should not be based on an assumption that the payment of public funds will be authorized by my office to expand lottery gaming beyond the existing statutorily prescribed lottery sales agent system.

Thank you for your communication.

Respectfully,

Robert M. McCord

cc:     Richard Wheeler, Senior Vice President

Camelot Global Services, Inc.