Update of the
PRELIMINARY PERFORMANCE REVIEW OF THE
West Virginia Lottery
The West Virginia Lottery Has
Adequate Controls to Assure the
Payout Rate From Video Lottery
Games Is Within the Rate
Required by Statute
Issue Area 1: The West Virginia Lottery Has Adequate Controls to Assure the Payout Rate From Video Lottery Games Is Within the Rate Required by Statute.
This further inquiry of the West Virginia Lottery Commission examines if video lottery games have a payout rate of 80% to 95% of the amount wagered as required by (WVC §29-22A-6(14)(c)(1). In addition, the inquiry examines the Lottery's internal controls to determine if it can monitor the payout rates of video games. The findings of this report are that for the most part, video games pay out at the appropriate rate, and monitoring controls are in place by which the Lottery can identify games that do not pay out at the appropriate rate. Table 1 illustrates the payout rates for each race track for the last two years. The standard lottery industry theory behind offering a high payout rate is that the higher the payout rate, the more consumers will play. This has the potential to increase a facility's net profit. The Lottery has monitoring capability which allow it to address games that are significantly outside the required payout rate.
Video Lottery Payout Rates Per Track
|Tri-State Greyhound Park||
|Charles Town Races||565,260,175||519,078,733||92%||936,008,758||856,791,054||92%|
The Legislature passed the Racetrack Video Lottery Act in 1994, making video lottery terminals available in the state's four racetracks, subject to the passage of local referendums. In 1994, three racetracks opened with 1,200 video lottery machines. The fourth racetrack began video gaming in 1997. As of 1999, there were 4,655 video lottery machines approved for play at the racetracks. Video lottery sales were 48.5% of the total 1999 sales.
Video lottery is a self-activated video version of lottery games. The keyboard operated games allow a player to place bets for the chance to be awarded credits which can either be redeemed for cash or replayed as additional bets. The coin operated games allow a player to use coins or tokens to place bets for the chance to receive either coin or token awards or replay. Whether the player obtains credits for cash or receives coins or tokens, it is referred to as a "payout." The payout rate is the total winnings of the game divided by the total money played. The Legislature determined the payout rate for video lottery games between eighty and ninety-five percent.
The Lottery Commission set the rate of payout between eighty and ninety-three percent. Payout rates average between 88 and 93 percent, except blackjack which the Commission has allowed to pay out as high as 95 percent. In order to increase the payout rate above 95% or decrease it to below 80%, legislation is required. The Lottery Commission may only adjust the payout rate, within the parameters set by statute, by a majority vote.
In order to determine whether payout rates are consistent with statute, the Legislative Auditor requested payout rate data from the Lottery for the 1999 and 2000 fiscal years. The agency provided general data by racetrack for the full fiscal years. As shown in Table 1, payout rates at each racetrack during this period were either 91 or 92%, falling within the rate as set by the Lottery Commission and the West Virginia Code. The total payout rate for the combined racetracks was 92% over the last two fiscal years.
Lottery Oversight of Payout Rates
The West Virginia Lottery's oversight process of payout rates begins before the video lottery terminals are installed at the racetracks. Management at the individual racetracks select the games they wish to offer to the public. The machines are bought or leased from manufacturers who hold permits issued annually by the Lottery Commission. Currently, there are six manufacturers of video lottery machines approved by the Lottery Commission.
The manufacturer is responsible for programming the game chip or EPROM (Erasable Programmable Read Only Memory) to set the payout rate. The Lottery's Security Division receives the EPROMs from the manufacturer. They are then tested by Gaming Laboratories International, Inc. (GLI) an independent contractor. GLI certifies that the EPROM will assure that the video lottery game will have a payout rate consistent with the statute over the life of the game. Under the supervision of lottery security, the approved chips are installed in 30 to 50 video lottery terminals for a seven-day test period. Only after successful completion of the test period are all of the remaining terminals connected.
If the Lottery Commission wants to change the payout rate of a game, the EPROM chip must be physically removed from the video terminal. A new chip would have to be placed in the game with the new payout rate. The payout rate is set solely by the game chip. A chip is only removed if it is determined to be defective or the track requests a new set of games. Only Lottery Security have the keys to access the part of the machine - the logic area - that houses the chip. See Appendix B for the Lottery's complete EPROM change procedure. The Lottery is notified via its computer system when the logic area is accessed.
The Lottery is able to generate reports that show payout totals for each game operated at the four licensed racetracks by day, week or month. A sample from one of these reports is shown in Appendix C. The Legislative Auditor requested a ten-month payout rate report from September 1, 1999 through June 30, 2000. These detailed reports show that the Lottery game machines, or individual terminals, are providing payout rates in the percentage range required by state law. The data show that some games fall below or above the 80 - 95% payout range. Of 292 game models, which are made by a specific manufacturer, seven or 2% fell out of the range. Two of the game models were below the statutory rate, and the remaining five were paying a higher payout rate than 95%. The following table shows the seven game model types and the number of terminals that were not paying game players within the statutory range.
Game Models Not Within the Statutory 80 - 95% range
September 1, 1999 - June 30, 2000
|Game Model||Number of Terminals with Game Model||Percentage Payout|
|Cats N Dogs||7||97.81|
|Wild 5 Times Pay||10||96.61|
|* Keno is listed two times because each model type is made by a different manufacturer and has a different credit denomination.|
The Legislative Auditor recognizes that the West Virginia Code states that the payout rate must fall within the statutory range within the expected lifetime of the terminal, which according to Lottery officials is approximately six or seven years. With the changeover to coin drop machines in 1999, many of the older machines were replaced before the estimated six-year life span. In addition, the game chip can be changed within a machine, thus a terminal could hypothetically last seven years, but have had the game chip changed several times. It is the Legislative Auditor's opinion that this two-year sample from fiscal years1999 and 2000, along with the detailed ten month detailed data, are satisfactory evidence that video lottery games are paying out the required rates.
The West Virginia Lottery ensures the appropriate payout rate required by statute is achieved for video lottery games. The Lottery Commission also has adequate controls to monitor payout rates and identify games that are not paying out at an appropriate rate. Video lottery games are controlled by the EPROM computer game chip that is tested by GLI, an independent consultant who certifies that the game is in compliance with the appropriate payout rate. In addition, the Lottery has security measures in place which prevent access to the game chip area without assistance by Lottery security. Payout rate data provided by the West Virginia Lottery show a 92% payout rate from fiscal years 1999 and 2000. In addition, a detailed analysis of payout rates by game model type also shows that the individual game types are following the trend of falling within the required statutory rate.