NEWS ANALYSIS : Controversy Takes Its Toll on Lottery Commission : Contracts: Director weathered controversies and investigations in GTECH Corp. deal, but agency’s image has been tarnished and tougher scrutiny is likely.

She describes it as a “hellish” three months. First there were accusations that she mishandled one of the largest contracts ever awarded by the state by favoring the one company that bid. Then there were investigations of her actions by a governor’s task force and a legislative committee.

In the end, state Lottery Director Sharon Sharp weathered it all, but at a cost.

Sharp’s recommendation that the $400-million contract to run the lottery’s computer-operated games be awarded to the only bidder, GTECH Corp. of Rhode Island, was unanimously approved by the California Lottery Commission.

“We never tried to do anything around here but the right thing,” a relieved Sharp said in an interview last week.

With some bitterness, she said she viewed the controversy as a “political thing,” engineered by GTECH’s smaller competitors to discredit the contracting process in the hope that they could force a rebidding to their advantage. Their actions, she said, are typical for the lottery business, where competition for highly lucrative computer contracts is always cutthroat.

“There is no large lottery contract in this country that doesn’t have in some way a form of protest or legal action,” she said.

In the aftermath, it is clear that the lottery’s image took a drubbing and that Sharp’s actions are likely to face much tougher scrutiny in the future. Some legislators are suggesting the need for fundamental reform to make the lottery operations more accountable.

“The honeymoon is over,” said Assemblywoman Gwen Moore (D-Los Angeles). “I think we are going to watch it (the lottery) a lot more than we have in the past.”

Just last Thursday, the Senate, at the urging of Sen. Tom Hayden (D-Santa Monica), held up confirmation of two of Gov. Pete Wilson’s appointees to the Lottery Commission, saying it wants more time to look into the commission’s awarding of the computer contract to GTECH. Hayden contends that the commission, which is appointed by the governor, has become little more than a rubber stamp for Sharp.

Sharp’s troubles began when the agency sought bids for a contract to install, maintain and operate a new computer system but got only one response--from GTECH, the state’s current contractor.

Two other potential contractors--Automated Wagering International of New Jersey and High Integrity Systems of Sacramento--refused to bid. They accused Sharp of favoritism, charging that only GTECH, which already had a staff and equipment in California, could meet the tight six-month deadline the agency had set for installing the complex new system.

Calling their accusations “a bunch of hooey,” Sharp retorted that the timetable was standard for lottery conversions to new computers. Her assertion was backed up by the consultants she hired to advise her on contracting procedures.

Nevertheless, the Wilson Administration, embarrassed by the lack of bidders for a contract that was one of the largest in state history, appointed a task force in February to investigate. Six weeks later, Curtis Tucker Jr. (D-Inglewood), chairman of the Assembly Governmental Organization Committee, announced he also would conduct hearings.

The controversy heated up when a series of internal lottery agency memoranda contradicting Sharp became public. They revealed that for months the chief financial officer, Gordon Jones, had been warning Sharp and other officials that the timetable they were considering could favor GTECH and might produce only one bidder.

He said he feared that without competition the single bidder could get greedy and force the lottery to pay too high a price for its services.

The bombshell was somewhat defused when Jones later tempered his comments during testimony before Tucker’s committee. With Sharp sitting at his side, he said most of his concerns addressed a four-month deadline, which the lottery had initially considered. Jones said that when Sharp decided to give bidders six months to complete the project, he was still concerned, but “I was no longer convinced it (the deadline) was impossible.”

Despite hours of testimony on the subject, the issue of the timetable--whether its duration was reasonable to attract more than one bidder--was never settled by either the task force or the committee. Instead, each simply declined to interfere with the awarding of the contract.

Wilson, in a letter to the Lottery Commission, said he could find no evidence of criminal wrongdoing, the only legal justification for him to intervene. Likewise, Tucker said the committee had not found any “smoking gun” and was powerless to take any immediate action.

Even so, both legislators and the governor indicated they had concerns about the operations of an agency whose importance to state government is heightened by the fact that 34% of its revenues are earmarked for education.

“The information presented to the panel does raise troubling questions about the state lottery’s ability to conduct major procurements,” Wilson wrote commission Chairman John Price. Tucker said: “The whole process, I think, has left a sour taste in a lot of people’s mouths.”

Wilson refused to release a formal audit, but these appear to be some of the “troubling questions” left unanswered about the lottery contract:

* Did the agency, by attracting only one bidder, pay the lowest possible price for the multimillion-dollar contract?

Sharp, who negotiated a $62-million reduction in GTECH’s initial bid, maintains that the contract is a terrific bargain. For paying GTECH 2.89% of lottery sales, she said, the lottery would get a sophisticated new system that would enable it to more easily revise games and offer promotions.

But the New York lottery, which did attract competitive bids for a similar contract recently, agreed to pay GTECH only 1.5% of sales. Like California, the New York contract calls for the company to install, maintain and operate a new computer system. The New York price is also within the 1.5% to 1.7% range that Sharp’s consultants said in November was common for the industry.

Although the New York lottery is similar to California’s in sales and the number of games, Sharp argues that the two cannot be compared. She says the New York system is less expensive to operate because it is more geographically compact, has fewer terminals to maintain--9,500 compared to 13,000--and has more stable sales revenues.

* Did Sharp err by waiting too long to initiate the bid process? In January, 1992, Sharp announced that the lottery was immediately going to begin work on specifications for the new computer contract.

But it wasn’t until seven months later that Sharp hired consultants to tell the lottery how the specifications should be designed. The specifications then weren’t ready for release to potential bidders until the following January.

With the new contract awarded April 21 and the current contract expiring Oct. 13, the agency could only allow six months for the installation of the new system--the timetable that GTECH’s competitors said drove them away.

Sharp acknowledged that there was some delay in starting the bid process because it was several months before she determined that the agency would need outside help. After weeks of internal disagreement over the kind of new system that should be installed, she said, she finally realized that she needed a consultant to arbitrate.

Even so, she insisted that six months is “plenty of time” for any company to complete the project. She noted that Automated Wagering International has since told the Georgia lottery that it could install a new system there in four months. Automated Wagering officials say there is no comparison between the small system that Georgia is installing and the mammoth system that is operating in California.

* Was the lottery too hasty in its decision to replace the current computer system?

Jones’ internal memoranda suggested that the agency should have required a thorough analysis from its consultants before it accepted their recommendation that the current system be discarded.

Officials with Battelle Memorial Institute, the consulting company, said such an analysis would have taken too much time and forced the lottery to postpone the purchase of a new system.

In the aftermath of the dispute, lawmakers are considering whether the lottery and its director may have been given too much independence and too much leeway to let contracts and establish a spending plan.

The lottery’s independence was contained in the original initiative approved by voters in 1984, setting up the lottery in California. The lottery, unlike other state agencies, does not need legislative approval for its budget or Department of General Services participation in its contracting process.

Tucker said he is now pushing a bill that would put the agency’s budget under legislative purview.

Meanwhile, Sharp said she is working on implementing proposals from the governor’s office for revising the contracting process.

She predicts that once the new system is in place, it will so enhance the lottery’s ability to market and improve the games that the current controversy will soon fade from memory. “There are so many potential things out there that we just haven’t had the capability of doing before,” she said.

She said she doubts that any new games will be introduced in the near future, but that all kinds of changes to, and variations of, the current games will be possible. She said, for example, there can be special drawings on special days, joint promotions with major corporations and changes to the prize structure.

“Next year,” Sharp said, “if we don’t do anything else, we’re going to break the $2-billion (sales) mark,” she said.