Audit Ranks Lottery High in Costs, Low in Earnings

California spends more to operate Super Lotto, the Big Spin and other games of chance than any other large lottery state, yet its revenues lag behind lotteries in many other states, according to a government analysis to be released today.

The study by state Controller Kathleen Connell’s office will show that administrative expenses for California’s lottery far exceed those of most other big states in every category, ranging from the size of its bureaucracy to the costs of computer and advertising contracts.

While California spends an average of 15.5% of its annual revenues on administration, the audit reports that the 10 other states examined by the controller’s office only spend 8% to 13%.

Connell said the findings show a need for more efficient management and tighter controls over the size of staff and expenses at the state’s largest gambling enterprise.

She said that the state’s Lottery Act, passed in 1984, gave the agency too much independence and that its operations need more outside scrutiny. Of the 10 state lotteries that were examined--Florida, Texas, Ohio, New York, Pennsylvania, New Jersey, Michigan, Illinois, Georgia and Maryland--she said California’s lottery was the only one not required to have its budget analyzed and approved by the Legislature.

“I think the public’s angst about the lottery system [is justified],” Connell said. “I mean, are we gaining what we thought we were from establishing a state lottery in California? Is it having the beneficial impact it was intended to have?”

She said that as more dollars are spent on administrative costs, fewer dollars are spent on education, the recipient of lottery profits.

Lottery officials had not yet received the audit but complained that it was unfair of Connell’s office to compare California’s lottery to those in the East.

Norma Minas, the lottery’s public information officer, said lotteries in the East have a much older tradition and a stronger following than Western lotteries. In California, she said, the interest in daily games--the mainstay of Eastern lotteries--has not taken root.

When compared to Western states such as Colorado, Washington and Arizona, California’s administrative costs and per capita sales are similar, in part because their populations are relatively spread out, Minas said.

“You have to realize that California is a very large state with a very large population, as large as some countries,” she said. “I don’t think you can compare us to any of those other states because none of them--except Texas--have our geographic size.”

She said a fairer test of California’s performance would be to examine the growth of recent sales. Over the past three years, she said, sales have increased 60% and are expected to reach $2.3 billion when the fiscal year ends June 30.

The lottery spokeswoman also noted that this is the first time in the decade of lottery operations that the controller’s office, which has auditing responsibilities, has called for a reduction in costs.

Connell’s findings follow calls by state legislators and watchdogs for greater scrutiny of the lottery.

In a recent report, the nonpartisan legislative analysis found that the lottery’s mishandling of a computer contract had cost the state millions of dollars and could have been avoided if the lottery had been forced to abide by contracting rules governing other agencies.

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An earlier audit by the state’s Bureau of Audits two years ago criticized the lottery for tailoring specifications for a $400-million contract to operate its computerized games so that only one company could bid.

The controller concluded that the contract, granted without competitive bids, contributed to soaring administrative costs at the lottery.

The 15-page audit shows that no other state spends such a high percentage of its revenue to operate computerized games such as Super Lotto and Fantasy Five.

While Connell acknowledged that services performed by contractors vary somewhat from state to state, she said that in cases where California’s contracts are similar, the state pays more for services.

“We’ve [the lottery] been in existence for well over 10 years,” she said. “The initial cost should have been reduced by now. There should be some learning curve that benefits California at this point, and we’re not seeing it in this contract.”

Lottery officials say they plan to seek bids for a new contract when this one expires in 1998.

In other categories examined by the audit, the controller’s staff found that California devoted a higher percentage of its sales to advertising and spent more on staff and commissions to retailers than the other states.

Connell said she hoped to discuss the findings with lottery officials and work out a plan to reduce expenses. She cautioned that because the lottery is committed to many long-term contracts, it may be some time before any appreciable reduction in costs occurs.

She said one factor that has allowed the costs to be high is California’s Lottery Act itself, which permits administrative expenses to reach 16% of revenues. She said the other states have lower overhead caps.

“California’s administrative expenses, for example,” she said, “are 4.7% higher than Florida’s, and I think in large measure we’ve concluded that is because Florida’s lottery initiative stipulates a 12% cap on their administrative costs.”

Florida, like many of the other states that have lower administrative costs, has reported higher sales than California. So have New York, Texas, Maryland and Ohio.