The Virginia Lottery told state legislators Monday that the agency could lose $140 million in sales because of the “proliferation” of unregulated gaming machines, but not due to this summer’s opening of betting parlors .
In a presentation to legislators on the budget-writing House Appropriations Committee in Richmond, Lottery Executive Director Kevin Hall said with the increasing number of what he calls “gray machines,” lottery profits for public education have declined.
Gray machines look like slot machines but claim to have an element of skill that could allow them to elude the state’s prohibition on gambling. The machines have appeared in restaurants and convenience stores across the commonwealth in the past two years.
“We have noted with increasing concern the pace of the acceleration,” Hall said.
Hall said the Virginia Lottery counted about 500 machines in January at retailers that also sell its products. By August, the agency counted about 4,500 machines.
“What’s alarming here, beginning in spring, is the acceleration of the deployment of these machines into the retail spaces where we conduct the overwhelming majority of our business,” Hall said.
Among Hall’s other concerns with these unregulated machines is that they are not taxed or regulated, there is no age requirement to play and they hurt the Virginia Lottery brand because people may assume the state operates them.
The surge in these unregulated machines coincided with the introduction of historical horse racing machines. Those machines are operated by Colonial Downs, and they look like slot machines.
They are regulated by the Virginia Racing Commission and produce state and local tax revenue.
Hall said historical horse racing has had a minimal effect on Virginia Lottery sales.
“Our hypothesis is historical horse racing appeals to a consumer who is seeking a different type of gaming experience,” Hall said.
Hall said the Lottery checked that hypothesis, examining the gaming environment in Vinton.
The agency reviewed 15 Lottery retailers within a mile and a half of the Rosie’s Gaming Emporium near Lake Drive Plaza in Vinton. From July 2018 to April, those Lottery retailers performed close to the overall state average in lottery sales growth.
Vinton Rosie’s opened with 150 machines May 9. Half of the retailers near Rosie’s that didn’t introduce gray machines continued to have Virginia Lottery sales growth in line with the state rate during June, July and August.
However, Hall said the other half did install the gray machines, and their lottery sales declined during that same time period.
During the last fiscal year, the Virginia Lottery had record profits of $650 million. For the first two months of the new fiscal year — July and August — profits were down $23.8 million.
Sales and profits are expected to continue to decline over the fiscal year, which would mean $40 million less toward public education than the previous fiscal year.
Legislators appeared to be perplexed by how these machines have peppered the commonwealth without oversight or clear guidance on regulating them. Other states are grappling with similar situations with unregulated machines.
“Has there been some ruling that has given the green light to do this?” asked committee Chairman Chris Jones, R-Suffolk. “How did we get to this point?”
Hall said it started in July 2017, when the Virginia Alcoholic Beverage Control Authority sent a letter to a gaming machine company saying it had not determined its machines were illegal.
Travis Hill, ABC chief executive , said the letter, written with advice from the Virginia Attorney General’s Office, was intended to provide guidance for ABC agents for inspecting establishments with ABC licenses.
If establishments have illegal gaming on the premises, they risk losing their ABC license.
“What occurred was a kind of a broadcasting our letter representing that the commonwealth had somehow approved these devices overall,” Hill said.
Two years after the ABC sent its letter, Attorney General Mark Herring has left it up to local prosecutors whether the games are legal or not.
Hill said other gaming manufacturers have approached ABC for legal guidance on machines . Hill said he didn’t want the ABC taking on this role, so the agency sent letters to gaming companies saying it would follow the decisions of local prosecutors.
No prosecutors in the Roanoke and New River valleys have made decisions about the machines.
The ABC, Virginia Lottery and state legislators currently have their eyes on Charlottesville, where the prosecutor said the games were illegal. Queen of Virginia — a prominent gaming machine company in the state — then filed a civil suit, claiming the games are legal and the prosecutor’s decision hurt the company’s standing.
Jones wondered why businesses shouldn’t have to remove the machines until a prosecutor makes a decision, and why they haven’t been removed in Charlottesville after the prosecutor said they were illegal.
Hill said the ABC is waiting on the Charlottesville prosecutor to go through the legal process and prove the games are illegal.
Jones said he found it “incredible” this problem wasn’t brought before the legislature before .
Legislators said they may have to take up the issue on the machines during the next legislative session.
Lawmakers from both political parties have accepted a total of $224,000 from Queen of Virginia, according to the Virginia Public Access Project.