Urges Reforms : Watchdog Panel Hits State Lottery

Urging administrative reform in the booming California Lottery, a state watchdog commission charged Wednesday that the lottery spends too much money for cars and office furniture, and employs a “minority” contractor that is actually a “shell company” for another firm.

The state’s Little Hoover Commission also revealed that Bally Manufacturing, whose Scientific Games Inc. subsidiary firm has won contracts to produce the lottery’s scratch-off ticket games, sold slot machines to South African casinos, even though Bally had denied dealing with South Africa in legislative hearings four months ago.

The revelations came as Little Hoover Commission members confronted Lottery Director Mark Michalko and chastised his administration for losing large numbers of tickets, slow reporting practices, incomplete files, and other administrative miscues, and urged him to upgrade administrative procedures.

Commissioners also criticized the lottery for failing to recoup between $12 million and $40 million in small payoffs that lottery winners failed to claim in the lottery’s first year of operation. Winners of $2 and $5 prizes are supposed claim their winnings from the 20,000 retailers who sell the tickets, but those that are not claimed end up in the pockets of the retailers.

“The lottery likes to describe itself as a Fortune 500 company . . . rather than seeing itself as a state agency,” Commission Chairman Nathan Shapell said. “However, we have found that the lottery actually enjoys the best of both worlds.

Exempt From Controls

“It is exempt from most normal state government controls and oversight and yet it does not have to comply with the public accountability and disclosure requirements that are characteristic of publicly held corporations.”

After hearing from state auditors, purchasers and personnel officials, as well as Michalko, Shapell apparently was not satisfied with the answers given to the commission and vowed to seek legislation to ensure further oversight of the lottery.

He called for yet another meeting between the lottery and the Little Hoover Commission within the next month. The ongoing investigation will result in a public report on the lottery.

“We’re dealing with money that is supposed to go to the education of our children,” Shapell declared, noting that by law at least 34% of lottery revenues must be turned over to California schools.

The lottery estimates that schools netted $800 million in lottery proceeds in the first year of the games. Gross ticket sales were about $2 billion.

In a prepared statement, Michalko defended the lottery, saying its 1,000 employees commonly work long hours and are “constantly looking forward, ever seeking ways to improve our performance.” While the commissioners criticized the administration, Michalko noted that the commission spent only 11% of its budget on administration last year.

Much of the questioning surrounded Bally’s dealings with South Africa. In a letter to the commission, Assemblyman Gary A. Condit (D-Ceres), charged that Bally misled the Legislature in June when Robert Mote, executive vice president and chief legal officer, advised legislators that neither it nor its subsidiary, Scientific Games, deals with South Africa.

However, in an Oct. 10 answer to a letter from Condit, Bally said it sells to distributors that in turn routinely sell slot machines to South African casinos--including 540 slot machines between 1983 and 1986.

“This is doing business in South Africa to my understanding,” Condit said in the letter.

Will Investigate

But questioned by commissioners, Michalko said “it hasn’t been shown they (Bally) have been lying.” He said he will look into the matter and bring it to the attention of the Lottery Commission if he determines that Bally lied.

Condit’s allegations are significant because the lottery, concerned about its image and wanting ensure the integrity of its games, could suspend its contract with Bally’s Scientific Games for “dishonest conduct.”

Scientific Games pushed the 1984 initiative that created lottery gambling in California. It has won tens of millions of dollars in contracts to set up the scratch-off games and now has a $20-million contract to supply tickets for the next year. The company, however, lost out on the biggest contract of all--the $121 million pact to run the computerized lotto game.

Commissioners also focused on allegations that the lottery gave a contract to what Shapell called a “shell company,” formed by five former Scientific Games employees who leased space from Scientific Games. The company, Security Packaging, was formed in July, a month before it won a $2.7-million contract to package lottery tickets.

Policy Matter

The lottery has a policy of awarding a portion of its contracts to minority and female-owned businesses, and looks favorably on such companies. A lottery official told commissioners that she is looking into the allegations.

Denying the allegation, Al Aramburu, chairman of the board of Security Packaging, said: “There is no question I am a minority; I’m a Hispanic.”

He said that he has never had an affiliation with Scientific Games and that there is no overlap in ownership of the companies. He attributed the allegations to “disgruntled competitors.” He said the other member of the firm’s two-member board is a former Scientific Games employee.

Another series of questions focused on the lottery’s purchasing practices. Unlike other state agencies, the lottery does not buy through the Department of General Services.

Cars Cost More

As a result, commission estimates show, the lottery paid $65,512 more for 38 staff cars--Fords used for undercover security work--than it would have spent if it had asked General Services to make the purchases.

Also in its first year in business, the lottery spent more than $600,000 to furnish its offices, patronizing only two companies and soliciting bids for only $50,000 worth of furniture.

“It seems to me that we’ve created a lottery czar,” said Assemblywoman Gwen Moore (D-Los Angeles), a commission members, noting that Michalko has the unprecedented authority to approve all contracts of less than $100,000. All other state agencies must put out to bid any contract of more than $10,000.

Michalko had no response, except to say he is following the law set down in the 1984 initiative.