SALEM -- Oregon Lottery Director Dale Penn, seeking to capture millions of additional dollars for schools and other state programs, on Tuesday (Feb. 16, 2005) proposed a nearly 50 percent rate cut for retailers offering the lottery's new electronic slot machines.

The rate cut, the biggest proposed by a lottery director since the state first ventured into electronic gambling 13 years ago, was cheered by school advocates who complain that bars, taverns and restaurants have been making excess profits off the lottery.

But the Oregon Restaurant Association, which represents many of the 2,000 video lottery retailers, immediately denounced the proposal and said few, if any, establishments would be interested in carrying the new games with such a low commission rate.

Retailers now receive slightly less than 29 percent of the roughly $531 million spent last year on the machines. Penn recommended that retailers get 15 percent of the cut for the new slot games, but he said they should be able to keep the current rate for video poker. Eventually, however, lottery officials expect the slot games to dwarf video poker in sales.

The five-member lottery commission will make the final decision sometime after the first part of April.

Penn, a former Marion County district attorney named to the lottery job last fall, is now largely coming down on the side of several economic studies done over the years that have argued that commission rates could be much lower and still provide a reasonable rate of return to retailers.

Until now, retailers have successfully fought off large rate cuts through a vigorous lobbying effort. They argue that they play a key role in making electronic gambling such a big success. The lottery is now the second-largest source of money -- after the income tax -- for the state's general fund.

Penn chose his words carefully Tuesday as he declined to criticize the current commission structure. Instead, he said he wanted to create a "financial bridge for the retailer network" by keeping the old rates on video poker games while the state introduces the new games.

Penn said he was able to propose a greatly lower rate for the new games only after recently learning that the lottery's computer network can track whether a customer is using a video terminal to play a slot game or video poker.

Eventually, the slot games are expected to be the favorite choice of gamblers. In the state's tribal casinos, more than 90 percent of the terminals are set up to play slots. Unlike the video poker machines -- which feature largely static graphics of playing cards -- the slots feature colorful animation, storylike action and simple rules.

Gov. Ted Kulongoski called for the lottery to move into the slot games, saying he needed additional money in his budget, primarily to help the Oregon State Police. Penn said he's confident the new games will raise at least the additional $60 million a year the governor wants.

Penn said he would not try to force existing retailers to offer the new games, but he said the lottery would work hard to convince them "that this is the game that customers want."

Lottery Commission Chairman Kerry Tymchuk said the commission may eventually agree on a different rate. But he added, "If (retailers) want to participate in the game they have asked for many years, they have to accept that the rates are going to be substantially reduced."

Michael McCallum, president of the Oregon Restaurant Association, said most retailers would choose not to offer the slot games if they face big rate reductions.

"I'm stunned by it," McCallum said of the proposal. "I believe retailers will be angered by it. . . . There are significant numbers who will not make money at a rate like that and will not" participate in the new games.

But others said they think the retailers will be prodded into offering the new games by the marketplace. If a nearby competitor offers slot games, they could be forced to go along to avoid losing sales.

And Penn said new video lottery retailers coming on board in the future would be required to offer both video poker and slot games.

"The competition will be such that if you don't have it, it will hurt you," said state Treasurer Randall Edwards, who called the Penn proposal "a step in the right direction" toward providing more money for schools.

Andi Jordan, vice president of legislation for the Oregon PTA, said she wished Penn had gone further.

"Good for Director Penn for having the guts to do 15 percent for line games," she said, using the technical term for the electronic slots. "But if 15 percent is good enough for line games, why isn't it good enough for video poker?"

Ed Edwards of the Oregon School Employees Association said his organization would continue with its lawsuit charging that the lottery is failing to maximize revenues to the state as required by law. He said the lottery should use the popularity of the new slot machines to "play hardball" with the retailers and also require the 15 percent rate for video poker.

However, John Marshall of the Oregon School Boards Association said his organization continues to be concerned that lowering retailers' incentives to market the lottery could jeopardize the flow of money to the state. Last year, the video games produced $292 million in profits for state programs.

"Anytime you're affecting the income of your salesmen, you worry about whether they will move your product," Marshall said. "Hopefully, they have considered that."

Steve Novick, a longtime critic of lottery commissions who works with the Portland-based Citizens for Oregon's Future, argued that video lottery sales are primarily due to location and that retailers spend little to promote the games. The machines are owned and maintained by the lottery.

Jeff Mapes: 503-221-8209; jeffmapes@news.oregonian.com
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