Jerry Kopel

KOPEL: A MATTER OF LAW

Audits of the Colorado Lottery are needed to show compliance

I can hardly wait.

By this time next year, I will have reported to you on the State Auditor’s 2009 report on the Colorado Lottery. 

This will be only the fourth time the auditor has made an extensive review of a 25-year-old lottery based on issues requested by the state Legislature. The other reviews were 1987, 1997 and 2003.

The 2003 review almost didn’t happen, thanks to undercover actions by lottery proponents.
 
The lottery audit was part of the original lottery law of 1982. The lottery has always contained a date when it would be repealed unless continued by the Legislature. It was the auditor’s task to inform the Legislative Audit Committee of recommended changes.  
 
This was different from the annual compliance and financial audit by an independent public accounting firm that is usually made public in November based on the fiscal year ending June 30. And it was also different than the state auditor reviews of specific portions of the lottery law.
 
What almost didn’t happen in 2003 was discovered in 2002, when lottery supporters pushed for moving the repeal date from 2009 to 2024. The reason for the major time lapse was Great Outdoors Colorado (GOCO), which wanted to issue bonds that would take several decades to pay off. If the lottery was in jeopardy of being repealed, the bond- holders might not get paid off.
 
The bill to move the repeal date from 2009 to 2024 was being carried by House Speaker Doug Dean, R-Colorado Springs, as House Bill 1250. I attended the committee hearing and testified about the need for a Sunset review of the lottery. There was none in the bill or in the 2001 lottery statute.
 
When I had finished testifying, the lottery proponents smugly pointed out that I was wrong. They pointed out the lottery was never under Sunset review. They were right. The review had been done under a separate section of the lottery law, by the state auditor.
 
But in 2001, that review was no longer in the lottery statute. Where had it gone? The lottery proponents sheepishly admitted it had been repealed in 2000.
 
There had been a bill to wipe out obsolete and unused auditor reviews. The lottery proponents had added the lottery review by the state auditor to the reviews being removed from the law. It was not reported in the press, as it was hidden deep in the bill.
 
I believe Dean was visibly upset with what he had just learned. After the hearing ended, he sat down with me, and we worked up an amendment that re-created and re-enacted the state auditor’s review with the next review to be completed by Jan. 1, 2004. It was actually completed and published in November 2003.
 
Sometimes a wrong impression (such as a Sunset review of the lottery) can be a blessing.
 
HB 1250 provided the following under CRS 24-35-218:
 
At least once every five years, and more frequently in the state auditor’s discretion, the state auditor shall conduct an analysis and evaluation of the performance of the division and shall submit a written report together with such supporting materials as may be requested, to the general assembly. The first report shall be completed by Jan. 1, 2004.
 
In 2004, the Legislature was considering Senate Bill 204, a lottery bill, by Sen. Norma Anderson, R-Lakewood. I had tried unsuccessfully to follow the pattern of who was playing (and paying) for the lottery by comparing 1996 numbers in the 1997 audit report with 2003 numbers. It was not possible. The numbers used had been provided to the state auditor by the lottery division. So I suggested to several senators an amendment be added to the Anderson bill to make the next auditor’s review easier to understand.
 
The words “socioeconomic profile of persons who play the lottery” was changed to:
 
“A report on the results of the analysis prepared by the (lottery) division of the socioeconomic profile of persons who play the lottery, including information comparing the results of past analysis to assess the movement of persons from various categories.”
 
Another amendment added was to evaluate the effectiveness and efficiency of the division’s complaint, investigation, and disciplinary procedures instead of just checking whether it was “adequately protecting the public.”
 
Also added: “A report on any gifts and gratuities received by members of the (lottery) commission and employees of the division.”
 
SB 204 took effect July 1, 2004. So why this column?
 
The time to begin work on an auditor’s report is soon. CRS 24-35-218 gives the state auditor discretion to go beyond the statutory list. There might be discussion about a possible bill introduced in 2008 relating to “privatization of the lottery” and action on lottery supplier Scientific Games computer failures for the past three years.
 
If so, it would be logical to ask to have the pros and cons developed by the state auditor as a neutral observer for the 2009 session, when the auditor’s report would have had to be completed and made public.
 
The New York Times in 2007 did an extensive national review of state lotteries. Among other items it pointed out the stranglehold by Gtech and Scientific Games as suppliers for lottery tickets and machinery.
 
People have forgotten Scientific Games supplied all the funds ($90,000) to sell Colorado voters on voting for a lottery. And they ended up as the contract’s first supplier.
 
Over 25 years, the lottery “dance card” would switch between Scientific Games (SG) and Gtech. In November 2004 the lottery was back with SG again, heavily based on SG taking over and providing critical information through their on-line system beginning in May 2005.
 
According to the independent contract auditor’s annual reports in 2005, 2006, and 2007, it hasn’t worked. Some examples:
 
2005: Error in the SG system on game settlements and accounts receivable caused $21 million in accounts receivable not to be collected on a timely basis. (What a nice Christmas gift for the vendors!)
 
2006: The lottery has had to manually reconcile some daily systems balancing reports. “This workaround is time consuming and more prone to human error.”
 
2007: The lottery (still) does not have the required reports from SG related to retailer billing or tax reporting. The lottery response? “Will be implemented by June 30, 2009.”
 
The state auditor needs to tell us before the start of 2009 whether Colorado is paying for a non-working computer system, and if so, why?
 
Jerry Kopel served 22 years in the Colorado House.