Auditor Finds Lottery Broke Contract Policy : Government: Bid specifications for its computer system were so restrictive that only one company could meet them, report says. Without competition, GTECH got a pact with an estimated value of $600 million.
The California Lottery, in violation of its own policies, eliminated any competition for one the biggest contracts in state history by making bid specifications so restrictive that only one company could meet them, the state auditor found in a report issued Monday.
Ignoring warnings from her own finance director and complaints from competitors, former Director Sharon Sharp insisted on a time schedule for delivering a new system to operate the lottery’s computerized games that was so short no company other than the current contractor, GTECH Corp. of Rhode Island, could reasonably comply with it, the report said.
As a result, state Auditor Kurt Sjoberg said, no other companies responded to a request for bids and GTECH without competition won a contract in April, 1993, that has been estimated to have a potential value of $600 million. The contract provides for the operation and installation of a computer system to run five games of chance--Super Lotto, Decco, Fantasy Five, Daily 3 and Keno.
“Because the restrictive implementation schedules limited competition to a single vendor, the lottery could not be assured that it received the best on-line gaming system at the best price,” Sjoberg wrote in a 40-page report.
Sjoberg said that after GTECH won the contract, the company was not able to deliver all the bid requirements by the Oct. 13, 1993, deadline set by Sharp, although it did install a new computer system and have it operating by then. As recently as May, 1994, he said, 19% of items the contract had required had not been delivered by GTECH and accepted by the state.
Sjoberg’s criticism comes as the state’s contracting procedures in general and its handling of computer contracts in particular have come under fire. It bolsters critics in the Legislature who contend that the Wilson Administration has not provided adequate oversight of state government’s multibillion-dollar computer network. The Department of Motor Vehicles disclosed this year that it was abandoning a $44-million computer project because it did not function adequately.
The auditor’s report not only countered the lottery’s contention that the 175-day timetable for installing the new computer system was standard for the industry, but also raised questions about the role played by the five appointed lottery commissioners who oversee lottery operations. It said that the agency turned a deaf ear to rival companies that repeatedly complained that the time schedule was too short, and to lottery Finance Director Gordon Jones, who warned in numerous memos that the agency was moving down a path that would discourage competition.
A spokesman for Gov. Pete Wilson, who requested the audit, said the Administration has been aware of contracting problems at the lottery and has already taken steps to improve oversight by the commission. He said the panel has established subcommittees with specific responsibilities for monitoring contracting procedures.
“The governor’s management policy is that if there appears to be a problem to review it openly and honestly, and that is why he called for this audit,” said press secretary Sean Walsh.
Although the audit found that the time schedule for completing the contract stifled competition, Walsh noted that it had determined that the ultimate price agreed upon with GTECH was “within industry standards.” The contract calls for GTECH to receive 2.9% of the sales from computerized games.
He declined to comment on the criticism of Sharp or the commission, observing only that “clearly the Lottery Commission needs to be vigilant and will be vigilant in monitoring the lottery.” He said Sharp, who resigned under pressure late last year, has been replaced by an “excellent manager,” interim Director A. A. Pierce.
In the Legislature, Sen. Tom Hayden (D-Santa Monica), one of the most vocal critics of the lottery’s handling of the computer contract, said he was pleased with the audit results, although he complained that they did not go far enough.
“This completely blows the rationale for giving one of the biggest contracts in state history to a monopoly contractor named GTECH,” he said. “And I think it does blow up the rationale that had been previously given that the losers were merely sour-grape whiners.”
But he said the report was narrow in its focus and did not explain the reasons behind the lottery’s insistence on a short time schedule that clearly favored one company.
The auditor’s report criticized Sharp and the commission for following without question the advice of a consultant, Battelle Memorial Institute, which recommended the time schedule and insisted it was standard for the industry.
“If the lottery had questioned Battelle about the source of its advice before the final (bid specification) was issued, the lottery would have found that Battelle’s information was not based on any critical analysis,” he said.
In his own analysis, Sjoberg said he studied eight lotteries in other states that had recently let computer contracts and found six of them provided a longer time schedule to install a data system. He said two states had shorter time schedules but their contracts were not as complex as California’s.
He said the lottery’s handling of the contract violated its own policies, which require that it ensure that there be competition for contracts.
