State Lottery Needs More Oversight, Report Says

The California Lottery’s costly mishandling of a multimillion-dollar computer contract demonstrates the need for tougher laws that would give the Legislature and the governor more control over the state’s biggest gambling operation, a government report said Monday.

The Legislative Analyst’s Office, a nonpartisan government watchdog, said the act that established the lottery more than 10 years ago has permitted it to operate with far more independence than other state agencies--spending money and entering contracts with virtually no outside oversight.

As a result, the analyst said in a critical 21-page report to Assemblywoman Debra Bowen (D-Marina del Rey), the lottery was able to engage in highly unusual contracting procedures that appear to have added millions of dollars in unnecessary costs to a new customer-friendly ticketing system scheduled to go into effect this summer.

“We believe that both the costly experience associated with the contract . . . and the difficulty we experienced attempting to obtain information from the [lottery] . . . suggest that a review of the Lottery Act is in order,” the report said.

Lottery officials said they could not comment directly on the report because they had not had time to study it. But they said they did believe they had negotiated an agreement in the best interest of education. Public schools receive at least 34% of lottery revenues.

Spokeswoman Jana Matal said officials believe the agency already received adequate oversight from a five-member commission appointed by the governor that “ensures there is maximum value for every dollar spent.”

In March 1992, the lottery awarded High Integrity Systems Inc. of Sacramento a $150-million computer contract designed to increase the number of ticketing outlets and make it easier to cash winning Scratcher tickets. But a year later, the lottery abruptly canceled the agreement, saying the company hadn’t produced the system it promised.

Both sides sued, and those lawsuits were finally settled last summer in an agreement that the analyst said reinstates the contract and forces the lottery to pay millions of dollars in additional costs. The report said the lottery’s refusal to provide information prevented the analyst from determining an exact figure, although the costs would include legal fees, which have already reached $7.2 million and could go as high as $9.2 million.

Bowen estimated that the termination and subsequent reinstatement of the contract would cost the state a minimum of $87 million, “yet it will provide no additional benefit to the lottery. . . .”

She said she suspected the lottery had refused to divulge more information because it really “doesn’t have a clue how much this contract will end up costing.”

“The lottery didn’t sign a contract. It signed a blank check to settle a lawsuit.”

The analyst questioned why the contract was terminated in the first place because it appeared that HISI was on track to finish the system.

Six months after the termination, then-Lottery Director Sharon Sharp recommended that GTECH--the company that runs the lottery’s computer-operated games--receive a portion of High Integrity Systems’ work. The proposal was rejected by the lottery commission.

The analyst said several provisions in the reinstated agreement violate normal state contracting practices, and others appear only to have been added to mask what are essentially payments to the computer contractor for damages resulting from the termination.

For example, the analyst said the reinstated contract gives the company up to a $4-million bonus if the system is operational in six months, a provision that is so “abnormal” in state computer contracting that “we believe that the completion bonus may also be part of the settlement payment.”

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In another instance, the analyst said the reinstated contract provided for an upfront payment of $25 million to cover the cost of equipment, yet the lottery declined to provide a detailed outline of what was being purchased.

“This leads us to believe that this is an abnormal situation where some portion of the $25 million should be viewed as a settlement payment,” the analyst said.

Also unusual, the report said, was a provision in the new agreement which requires interim Lottery Director A. A. Pierce to be involved in the contract oversight even if he leaves his current position.

The report said the lottery’s refusal to provide information had hampered the analyst’s ability to examine the contract. “We are disturbed,” it said, “by the position the [lottery] took with respect to providing specific information.”

Although the lottery claimed that to divulge the information would violate attorney-client confidentiality, the analyst said “some of the information requested was so basic it is difficult to comprehend how providing the information could compromise the lottery’s position.”

When it asked for a breakdown of the $7.2 million paid the Sacramento law firm of Downey, Brand, Seymour & Rohwer, the analyst said it was given a single sheet of paper with “no details.” It showed $2.9 million in payments to the law firm, $2.7 million in payments for professional fees and $1.5 million for a category titled “costs.”