Skip to main contentLast year, Nike paid CEO Phil Knight $2.9 million. But the taxes Knight paid to Oregon on that income are pocket lint compared to Greg Thomas' contribution.
Thomas owns the Farm House restaurant, located at 3612 SE 82nd Ave., just south of Powell Boulevard. He doesn't make his money serving truffles or rare Pinots; his customers prefer the Farm House burger, which comes topped with ham, egg, cheese and bacon, chased with a draft Bud.
The Farm House may not be fancy, but last year it generated just under $1 million for the state's treasury--about four times the tax bill on Knight's paycheck.
How is it that a no-name restaurateur shoulders a larger share of Oregon's burden than the state's richest man?
That's the beauty of the Oregon Lottery, which owns and maintains the six video-poker terminals in the Farm House. Lottery's take from those machines last year: $970,657.
The days of debating whether the state should be involved in gambling are history, more so in Oregon than just about anywhere else. By just about any measure--per-capita lottery spending, dependence on gambling revenue as a percentage of state budget, or number of games offered--Oregon ranks at or near the top of the list.
The Oregon Lottery will contribute about 6 percent of the state's $11.5 billion budget in 2003-05. The vast majority of lottery dollars will come from the agency's most popular offering, video poker.
After the rout of Measure 30, Oregon will depend more than ever on Greg Thomas. Even before voters spoke last week, the Legislature asked the lottery to generate an additional $108 million in revenue in the current budget period.
That put Thomas and his peers in the crosshairs. Currently, they keep 32 cents of every video-poker dollar left after winners are paid. Their commissions totaled $159 million last year.
The contract between retailers and the lottery expires in June, and the pressure to cut retailers' take in order to fund schools and other services is immense.
That irks Thomas. "The more you do, the more they want to fuck you over," says the restaurant owner, who pocketed $389,000 in lottery commissions in 2002 and $310,000 last year. "I don't see any of them [lottery officials] willing to take a big pay cut, so why should I?"
Starting this month, lottery officials will hold hearings in preparation for the new contract. The debate pits lottery-dependent bars and restaurants and one of Salem's best-financed lobbying groups against critics such as political activist Steve Novick and a handful of elected officials. While retailers want to preserve the status quo, Novick says the current payout is "immoral, unconscionable and illegal."
The battle over the lottery cash is bringing an unusual level of prominence to the ultimate decision-makers--the Oregon State Lottery Commission. A group of volunteers appointed by the governor, the commission is largely invisible, exempt from legislative oversight and currently composed almost entirely of rookies. It oversees what has become one of the state's most powerful economic tools, but its loyalties are divided between the public interest and the retailers who provide access to gamblers' wallets.
Although the retailers and their advocates are determined to keep the arrangement as it stands, critics of the current payout say the decision is simple.
"The commission has a choice whether to support education, economic development, parks and salmon recovery or subsidize tavern owners," says state Sen. Ginny Burdick.
Last year, the Oregon Lottery contributed $751 million to the state treasury, nearly twice as much as Intel, Nike, Columbia Sportswear and all the rest of Oregon's corporate taxpayers combined.
When it was founded in 1984, after a ballot initiative funded by Scientific Games, a Georgia lottery ticket maker, the state's gambling business offered only "traditional games" such as keno and scratch cards.
Then in 1992, the Legislature authorized video poker. At the time, there were as many as 10,000 illegal "gray market" machines around the state.
Since that legislative decision, the growth of the lottery in Oregon--and the state's increasing dependence on retailers like Greg Thomas--has been nothing short of stunning (see chart, page 25).
The formula is simple: The lottery buys and maintains video-poker terminals and places up to six of them with retailers. The only direct cost to the retailer is dedicated phone lines connecting the terminals to lottery headquarters, which add up to $1,260 annually per establishment.
Initially, retailers received a flat 35 percent of net proceeds (money remaining after prizes are paid) from video poker. That payout was a legacy of days when retailers split the take from illegal machines 50-50 with the machines' owners.
In 1998, after the first six-year contract between the state and tavern retailers expired, commissions were trimmed slightly. They still began at 35 percent of the first $200,000 but declined five percentage points for each additional $200,000 until reaching a lower limit of 20 percent.
Last year, the retailers raked in $159 million for what critics say amounts to doing little more than emptying machines, counting money and paying out the occasional winner.
Novick says the payout violates the state law governing retailer compensations, which calls for a commission structure that "maximizes the net revenue to the state for the public purpose consistent with providing a reasonable rate of return for contractors."
A number of studies support Novick's argument. "The lottery commission has set compensation at a level that is way out of line with costs," says economist Joe Cortright, who studied lottery payouts for the Legislature in 1994.
A report released in January by the Oregon Secretary of State compared Oregon's commission structure with other video lottery providers'. The report identified 17 other states and Canadian provinces that have video lottery. Only the provinces provided a basis for comparison, because only there does the government own and maintain the machines. The commissions paid in Canada to video lottery providers are all lower than Oregon's, ranging from 15 to 25 percent.
Critics argue that in order to maximize revenue, the lottery commission ought to cut commissions in half, thereby bringing in about $80 million extra annually.
Depending on your point of view, video poker has either provided life support to one of Oregon's biggest industries--bars and restaurants employ 107,000 Oregonians, according to industry figures, more than any other private-sector group--or provided the most egregious handout this side of Halliburton's no-bid contracts in Iraq.
Either way, there is no arguing that the threat of commission cuts is the Oregon restaurant and bar owner's version of mad cow disease.
In the past 10 years, video poker has become a--if not the--crucial ingredient for success in the Oregon restaurant and tavern business. "In most cases, the only money operators make is from lottery," David Clyde, a Eugene real-estate broker who has specialized in selling restaurants and bars for 30 years, wrote in a recent letter to Oregon Lottery Director Brenda Rocklin.
Video poker is so important to retailers that bars and restaurants are often sold at a price determined not by their revenue from food and beverages but as a multiple of their poker commissions. "I paid two times the net on video poker for my place," says Dwayne Young, owner of the Bucket Brigade Cafe and Ale House at Southeast 80th Avenue and Powell Boulevard. "That's the market for bars and restaurants [which have a large lottery component]."
Young and other poker-dependent owners say the state has an obligation to people who have bought and sold establishments with poker machines to maintain the current commission structure. "The lottery looked at my purchase and my financials. If they cut the commissions knowing what they know, then my business plan--the one they approved--doesn't work."
Connie Hunt, co-owner of East Bank Saloon on Southeast Grand Avenue, says the average lottery retailer--who takes in about $74,000 a year on video-poker commissions--is a mom-and-pop operation struggling with increasing utility, insurance, food and labor costs. "People have the equation the wrong way around," says Hunt. "We're the ones who take all the risks. It's our building, our taxes and our sweat that bring the customers in."
David Harmsen, a North Portland accountant whose clients include about 70 bars and restaurants, claims that a cut in commissions will lead to the rapid closure of several of his clients and dozens, if not hundreds, of establishments around the state. "There are three guys within a couple of blocks from here alone who will close," Harmsen says.
He adds that critics don't understand the business. Owners have seen customers shift spending from beer and burgers to poker, he says; they must keep lots of cash on hand and deal with theft, robberies and customers who are not always genteel. "There are two kinds of people who play video poker," Harmsen says. "Smokers and chain smokers."
As tough as business may be, it's not obvious why the state should be propping up marginal bars and restaurants when the same money could be spent on cash-strapped state services.
Cortright's 1994 study found that video- poker providers face no financial risk, overestimate the cost of providing games and would probably keep the machines even if commissions were slashed dramatically. "Most retailers would find it more profitable to keep the games rather than drop them even with a 10 percent commission," Cortright wrote in a staff report to the Joint Legislative Task Force on Lottery Oversight.
Now, after the failure of Measure 30, when it appears tens of thousands of Oregonians will be thrown off the Oregon Health Plan, schools will shut early and prisoners will gain early release, it would seem that trimming lottery commissions is a no-brainer.
But as in 1998, when the commission made only marginal cuts despite evidence of the lottery's generosity, such an assumption will collide with one of Oregon's best-funded special-interest groups, the Oregon Restaurant Association.
When people talk about powerful lobbying groups in Salem, they usually mention Associated Oregon Industries, which represents 20,000 companies with 325,000 employees, or the Oregon Education Association, which represents 44,000 teachers.
But perhaps the most concentrated muscle in Salem is found at the ORA, which represents about 3,000 members but in the past five years, according to figures gathered by the Money in Politics Research Action Project, has spent $2.16 million on lobbying--nearly as much as AOI and OEA combined.
The ORA is active on a number issues, from fighting minimum-wage increases to helping promote tourism, but nowhere is it more visible than on lottery commissions.
"Why have commissions stayed so high?" asks Oregon AFL-CIO head Tim Nesbitt, who has battled the ORA on wage issues and cooperated with it on initiative reform. "The Restaurant Association is a very powerful lobby. They are relentless and very skilled."
Former State Sen. Tony Corcoran (D-Cottage Grove) experienced the ORA's might firsthand. Corcoran introduced a bill last session that would have required the lottery to cut commissions to 15 percent when the contract between the lottery and retailers came up for renewal. (Although the lottery commission sets rates, the Attorney General has opined that it must follow the directive of the Legislature.)
Unlike similar measures Corcoran introduced in previous sessions, the bill got a hearing but died in the Senate Rules Committee, which was split evenly between Republicans and Democrats.
The reason? "I'll answer that in three letters," Corcoran says. "O-R-A. The Oregon Restaurant Association owns the Republican Party in this state, lock, stock and barrel." (Figures gathered by the Money in Politics Research Action Project bear that out. In 2001, for instance, 94 percent of ORA Political Action Committee's contributions to candidates went to Republicans.)
A bit player in Salem prior to the introduction of video poker in 1992, the ORA has become a financial colossus, with its expenditures increasing in tandem with the cash streaming from video poker (see chart, page 23). In effect, the state is paying the ORA to lobby for higher commissions, Novick says.
The association assesses membership dues based on overall sales and also asks for an additional voluntary contribution from video-poker retailers.
Bill Perry, the ORA's director of government relations, says his group's role is less important than a key underlying question. "Is the [video poker] system today unfair or broken?" Perry asks, rhetorically. "Nobody has proved that it is, so why change it?"
Perry and his boss, Mike McCallum, meet regularly with lottery director Rocklin and commissioners, and he says they bring a consistent message: "The state is benefiting more than the retailer, but it's a partnership. Our argument is, 'Why mess with a good thing?'"
Between now and the end of June, when a new contract must be finalized, the Lottery Commission will take input from retailers and the public on that question. It will begin public forums on the issue on Feb. 12.
Of the current four commissioners, only former state Agriculture Secretary Bruce Andrews, who joined the commission in 2001, has served for more than three months. (The commission's fifth seat is currently vacant and likely to remain so until after the commission has decreed new commission levels.).
The retailers' best hope for a sympathetic ear may be newly appointed commission president Kerry Tymchuk, an aide to U.S. Sen. Gordon Smith.
Tymchuk, a Republican, says he is not his boss's proxy, but it's worth noting that during Smith's time in the Oregon Senate, he was close to the Oregon Restaurant Association, which gave the Pendleton food processor $6,000 in 1994. In 2002, the group's umbrella organization, the National Restaurant Association, gave $10,000 to Smith's re-election campaign.
Tymchuk says that such past contributions will have no influence on his vote.
People who want to cut commissions will have to overcome not only the ORA's might but the longstanding mindset at the lottery that it plays by different rules from other state agencies.
As befits its wealth, the agency's Salem headquarters is distant from other state office buildings and trimmed in wood and marble rather than aluminum and vinyl. Despite the lottery's ever-increasing importance, however, it has about the same amount of visibility as Oregon's Freedom Socialist Party.
The agency's high-tech gaming and cash handling require technical sophistication, and it will spend nearly $10 million on advertising and public information this year. Yet here's some of what you won't find on the lottery's website: commissioners' names; a schedule of commission meetings; minutes from any previous meetings; and the agency's annual budget or number of employees.
In 2001, a scathing audit by the secretary of state found that lottery brass regularly flew first class, catered staff meetings lavishly and blew $800,000 on various other perks.
Then-Director Chris Lyons resigned under pressure. Rocklin, an assistant attorney general whose previous gambling experience consisted of prosecuting owners of illegal poker machines, replaced Lyons.
Rocklin cut millions in administrative costs and set about changing the lottery's culture. "Some employees used to think, 'We made this money, and it's ours,'" Rocklin says.
The new director acknowledges that her agency operations are still less than transparent. "That needs to change," she says. "But we've had other priorities."
Since its founding 20 years ago, the state's gambling business has operated under different rules than other state agencies. "The lottery's a unique critter in that the Legislature does not approve their budget or their staffing," says Robin LaMonte of the state's legislative fiscal office.
Instead, the lottery commission approves an annual budget (most agencies do a budget every two years) and pays its employees, except for top managers, on a different scale from other state employees. "We're sort of a hybrid between the public sector and the private sector," Rocklin says.
Part of the lottery's culture is a legacy of Eugene V. "Debbs" Potts, a former state senator from Grants Pass who served as commission president from the agency's founding until three weeks prior to his death last December at the age of 94.
As a state senator, Potts was notorious for convening meetings of committees of which he was the sole member and moving bills through speedily. The Senate room he used for his "committee" work is named after him.
Former state representative and Metro executive Mike Burton summoned Potts to testify before a legislative committee in 1994. "He said, 'We're not subject to legislative oversight,'" Burton recalls. "He said he'd come testify, but he let me know he didn't have to."
Burton says he checked immediately with the attorney general's office, which confirmed the commission president's claim.
Given Lottery's traditional independence and its close partnership with retailers, it's not surprising that bar owners say increasing the take is a better option than cutting commissions.
"I have written every legislator arguing that line games [electronic slot machines] are the answer," the Bucket Brigade's Young says. "The way I look at growing my business is I don't cut costs, I increase sales."
That approach presents a couple of complications: The "dominant use law" bars lottery retailers from generating more than 60 percent of sales from gambling commissions, and many are already close to that cap. Second, line games--essentially slot machines without the handle--are the province of Native American casinos.
"We should only give taverns and restaurants line games if we're also going to give them smallpox-infested blankets," Corcoran says.
Corcoran has faith that Rocklin will do what he and legislators have been unable to do--cut commissions. "Brenda Rocklin is God," he says. "She has changed the whole tenor of the lottery."
The commissioners are not tipping their hands but say they will rely heavily on Rocklin's recommendations.
While perhaps not God, Rocklin appears to be the sheriff in Kulongoski's administration. He named her to the Public Employees Retirement System board--a position that already occupies much of her time. She has also been mentioned as a potential successor to the recently departed head of another controversial state entity, SAIF Corp.
The big question--and one that Rocklin won't answer--is whether she'll deliver the revenues that Novick and others say the state deserves or simply reprise the small cuts made in 1988.
"Do I think rates are going to come down?" Rocklin says. "Yes. Do I know how much? No."
The Oregon Constitution dedicates lottery revenues to the following uses: education ($511 million in 2001-03); to economic development ($122 million); parks and salmon ($111 million); and a problem-gambling treatment fund ($6.2 million).
The so-called "dominant use" law stipulates that lottery commissions cannot exceed 60 percent of sales. Some establishments skirt this regulation by selling high-value products such as cigarettes for little or no margin.
Of the $108 million extra the Oregon Lottery was ordered to earn in 2003-05, it projects that it will take in $70 million due to the placement of another poker machine in the most active establishments and growth in gambling.
Four of the top 10 video-poker establishments in the state are outposts of Dotty's Deli, a stripped-down purveyor of beer, cigarettes and video poker. Two of the top 10 are Purple Parrots, a downstate version of Dotty's.
The lottery has 409 employees and an annual budget of $264 million.
According to state law, "a video lottery game terminal shall be placed only on the premises of an establishment licensed by the Oregon Liquor Control Commission with a full or limited on-premises sales license. A video lottery game terminal shall be placed only in that part of the premises that is posted by the commission as being closed to minors."
Steve Novick, a former federal Justice Department lawyer and aide to Superintendent of Public Instruction Susan Castillo, says the state's commission policy is "spectacularly irrational." He has nothing against gambling per se. "If they were giving this subsidy to florists, I'd feel the same way," Novick says.
Besides Bruce Andrews and Commission President Kerry Tymchuk, lottery commissioners include Richard Solomon, a Portland accountant, and Stan Robson, a retired Benton County sheriff.
WWeek 2015