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In the United States, 38 states and the District of Columbia (Washington, D.C.) have lotteries. A lottery is a form of gambling that is run by the state. Most states have several different games, including instant-win scratch-off games, daily games and games where you have to pick three or four numbers.
The game with the biggest jackpot is almost always Lotto. This game usually involves picking the correct six numbers from a set of balls, with each ball numbered from 1 to 50 (some games use more or less than 50).
Some states have joined together to run multi-state Powerball lotteries. Since so many people can play, they need a game with really large odds against winning. In this multi-state lottery game, the winner has to pick the correct five numbers from a set of 50 balls, and they have to pick the single correct number from a separate set of 36 balls. So the odds of picking the correct number in this game are:
36 x (50/5 x 49/4 x 48/3 x 47/2 x 46/1) = 76,275,360:1
Large jackpots tend to drive more ticket sales. If the prize is not large enough, ticket sales can decrease. On the other hand, if the odds against winning are too great, ticket sales can also decline. It is important for each lottery to find the right balance between the odds and the number of people playing.
In order to guarantee that the funds for all of these payments are available, the New York Lottery buys special U.S. Treasury Bonds called STRIPS (Separate Trading of Registered Interest and Principal of Securities). These are also known as zero-coupon bonds (see Financial Pipeline: Zero Coupon or "Strip" Bonds for more details about bonds).
A zero-coupon bond pays a certain amount of money when it matures. For instance, in March 2001, you could buy a zero-coupon bond that would be worth $1,000 in 10 years for about $610. The longer the amount time before the bond matures, the less it will cost you today. A bond maturing in 25 years for $1,000 would only cost about $260 today. If you did the math, you'd find out that if you invested the $260 at about 5.7-percent interest, in 25 years it would be worth $1,000.
When a winner claims his prize, the New York Lottery asks seven different bond brokers to quote a package of bonds that will pay each of the 25 future yearly payments. They buy the bonds from the broker at the best price for the complete package. An investment bank holds the bonds, and each year when one matures, the funds are automatically placed in the New York Lottery's cash account. The funds are transferred to the prize-payment account, and a check is written for the winner.
Typically, the whole package of 25 bonds ends up costing the New York Lottery a little less than half of the jackpot amount.
Most U.S. lotteries use the proceeds to help with their education budget. For instance, between all of the different games the New York Lottery runs, the total sales in 2002-2003 were about $5.4 billion. Of that, 57 percent was given out as prizes, 33 percent went to schools and the rest went to expenses related to running the lottery (see New York Lottery: Where the Money Goes for more details).
There are two main types of Lotto machines: gravity pick and air mix. The machines have a few things in common:
• They are designed and proven using statistical analysis to produce random combinations of numbers.
• The balls are always visible during the mixing and drawing process -- they never disappear inside tubes or chambers. This helps prevent tampering; and since the drawings are televised live, it gives the viewer confidence that the drawing is not being fixed.
For years, those states have heard complaints that not enough of their lottery revenue is used for education. Now, a New York Times examination of lottery documents, as well as interviews with lottery administrators and analysts, finds that lotteries accounted for less than 1 percent to 5 percent of the total revenue for K-12 education last year in the states that use this money for schools.
In reality, most of the money raised by lotteries is used simply to sustain the games themselves, including marketing, prizes and vendor commissions. And as lotteries compete for a small number of core players and try to persuade occasional customers to play more, nearly every state has increased, or is considering increasing, the size of its prizes — further shrinking the percentage of each dollar going to education and other programs.
In some states, lottery dollars have merely replaced money for education. Also, states eager for more players are introducing games that emphasize instant gratification and more potentially addictive forms of gambling...
Of course, the question of how much lotteries contribute to education has been around for years. But the debate is particularly timely now that at least 10 states and the District of Columbia are considering privatizing their lotteries, despite assurances decades ago that state involvement would blunt social problems that might emerge from an unregulated expansion of lotteries. These trends fly in the face of marketing campaigns that often emphasize lotteries’ educational benefits, like a South Carolina lottery slogan, “Big Fun, Bright Futures,” or an ad campaign in North Carolina featuring a thank-you note passed through schools and signed “The Students.” The New York Lottery’s Web site includes the tagline, “Raising billions to educate millions.”
Promotions like these have taken root. Surveys and interviews indicate that many Americans in states with lotteries linked to education think their schools are largely supported by lottery funds — so much so that they even mention this when asked to vote for tax increases or bond authorizations to finance their schools.