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A History of Video Lottery in South Dakota

On October 16, 1989, the South Dakota Lottery pioneered the first state video lottery in the nation. Since its launch, video lottery has continued to be a successful product and has provided more than $1 billion in revenue to the State of South Dakota.

South Dakota's video lottery program had its beginnings only one year following the start of the Lottery, even preceding lotto games in the state by a year. Initial legislation to authorize video lottery failed by one vote in 1988, but was reintroduced and passed in 1989.

In the first year of operation, 700 establishments were licensed and generated revenues that surpassed projections by nearly $2.5 million. The number of establishments and terminals grew quickly, leveling off by 1994, but with steady growth to near the current levels of approximately 8,900 terminals in 1,470 establishments across the state.

South Dakota's video lottery terminals offer variations of poker, blackjack, keno, and bingo games, with both quarter and nickel games available. The maximum bet is $2 and the top prize is $1,000. Winnings from video lottery play are not dispensed right from the terminal, but rather a voucher for the winnings is printed by the terminal, which the player is required to claim at the establishment that same day. Terminals pay out - credits won as a percentage of credits played - between 88 and 92 percent.

The South Dakota video lottery model is unique in the degree of private sector involvement, with the Lottery serving solely as a regulator of the games. Four levels of licensees are authorized by the Lottery. Operators own the terminals and provide maintenance by technicians certified by the Lottery. Establishments, which must have an on-sale alcohol beverage license, are the businesses where the terminals are located. Manufacturers produce the terminals after the hardware and software have been tested and approved by the Lottery and an independent gaming laboratory. Distributors provide the terminals and parts to the operators.

The use of a central computer system is dictated by South Dakota law and is critical in asserting the Lottery's centralized control of a lottery product that has such high private sector participation. The highly sophisticated central system monitors every function of every terminal, and polls every terminal every day to ensure up to date accountability of the game.

The significant level of private sector involvement has allowed a high degree of efficiency in state operation of video lottery. Three Lottery employees: a testing specialist, a compliance manager and an accountant, work solely on video lottery operations. A computer systems administrator and three computer operators deal primarily with video lottery operations, but are also involved in other lottery product administration. Other staff, such as the Lottery's licensing employees, and security director are also involved in other Lottery activities in addition to video lottery.

The state receives its video lottery revenue as a percent share of net machine income, which is defined as cash in less cash prizes paid out. The state's share of net machine income began at 22.5 percent in 1989, increasing five times until it reached its present level of 50 percent in 1995.

The state currently splits net machine income with 50 percent of net machine income going to licensed operators (who in turn split their share with establishments), 49.5 percent deposited in the state's property tax reduction fund, and 0.5 percent used by the lottery for administration costs.

Revenue from video lottery was initially deposited in the state's general fund and by 1992 had become the second largest source of revenue to the general fund, surpassed only by the sales and use tax. Starting in 1995, a portion of video lottery revenue was also deposited in the state's property tax reduction fund, used to reduce local property tax levies.

All video lottery revenue has been deposited in the property tax reduction fund since 1997, and helps provide a 30 percent annual reduction in local property taxes.

The success of the video lottery program in South Dakota has not been without its challenges, surviving three statewide ballot initiatives and a lawsuit that resulted in a ruling by the state Supreme Court that the game was unconstitutional and an order to shut down the game.

However, the South Dakota video lottery system is well designed to maximize revenues to the state, with numerous safeguards and on-going regulation and monitoring to ensure security, integrity, and accountability. The success of video lottery has grown steadily for 20 years and has proved mutually profitable for the state and its private business partners.