Just how good of a bet are those lotto tickets?
By John Silveira
Issue #37 • January/February, 1996
I looked at the newspaper and tried to match up the lotto results printed there with my picks. I sighed. “Boy, I sure would’ve liked to have won that one.”
O.E. MacDougal, the poker player, was on the other side of the office disassembling his shotgun to put a plug in. We were going duck hunting in the morning. “Ever buy any of these lottery tickets?” I asked him. “The pot last night was worth about $20 million.”
He looked across the office and I held up my ticket so he could see it.
“Is that one of those California Lotto tickets?” he asked.
“Yeah. Ever buy them?”
He smiled. “Every once in a great while.” He went back to disassembling his shotgun.
“Do you think they’re a good bet?”
He looked up again. “No.”
“Then why do you buy them?”
“I don’t buy them often, but when the jackpot’s way up there, even I get suckered in.”
“Suckered in? Why, aren’t they such a good deal?”
“Well, in the first place, half the money in the pool goes right to the state. So your return is already cut in half.”
“Well, at least they give you the other half. And you’ve got to admit that the other half goes to a worthy cause—education.”
He paused for just a moment. “Well…” I thought he was going to say something but he just said, “Okay,” and went back to putting the plug in his shotgun.
“What were you going to say?”
“Well…” I could see he was still reluctant to say it. “In the first place, they actually keep all the money.”
“No they don’t. They pay out prizes. On this jackpot—$20 million— they’ll pay it out at $1 million a year for 20 years.” I could tell by the way he was looking at me there was something I wasn’t getting.
“Okay,” he said, “but look at it this way. What if you had $20 million and you felt inclined to loan it to me at 5% interest and all I had to do was make interest payments for 20 years?”
“That would be a pretty low interest rate.”
“Let me see…” I did the calculation in my head. “That would mean you’d give me $1 million a year.”
“Correct. And with the final payment I’d give you $1 million and what else?”
“The principal. The original $20 million.”
“Now, consider the lottery. The state holds the $20 million prize money and gets to use it at 5% a year. In the 20th year they give you the last 5% payment and…”
I thought a few seconds. “And nothing.”
He just looked at me.
“They get to use your money at 5% a year and, after 20 years they keep the principal,” I said.
“You could look at it that way.”
I looked at my ticket again. “I never thought of it like that before.”
The plug was in the shotgun and he was reassembling it.
“You know, you have a way of throwing cold water on a lot of things. I’ll bet now you’re going to say that there’s something fishy about the money they give to the schools.”
He worked the slide a few times. “Well, actually, the money doesn’t go to education—though I know they say it does.”
“What do you mean?”
“The way the lottery was presented to the voters was that the proceeds were going to be added to the school budgets, over and above the taxes that were collected for the schools. But what happened was that they saw how much lottery money was going to the schools, then they cut the existing state contributions to the schools by roughly the same amount. The schools don’t actually get any more money.”
“How do they get away with that?”
“It’s the way government works. The same thing happened with the funds raised by the civil forfeiture laws. Supposedly, the funds raised by civil forfeiture—that is, the money and property raised from suspected criminals—was going to be added on top of police budgets. But what happened was that the police budgets were cut by the exact same amount as the money the police raised by confiscations.
“It created a situation where the police in some police departments now have to make civil forfeiture quotas. Otherwise, their budgets will come up short and jobs will be lost.”
I threw the losing lotto ticket into the trash. “So you’re saying that the state runs a lottery to raise money for education, but they don’t actually give any extra money to education, and they only pay interest on the prize money—for 20 years—before they confiscate the principal?”
“You could think of it that way.”