Jerry Kopel

KOPEL: THE WORD 'CORRUPTION' APPEARS IN LOTTERY AUDIT

Too much money, too little oversight; lottery’s problems sound familiar

You scratch mine. I’ll scratch yours. Porno talk?

Nope. Just a conversation between two Colorado lottery players holding addictive instant game tickets costing $20 each.

The price of a lottery ticket is unlimited, except the lottery commission cannot, by statute, charge less than $1.

The addition of a $20 ticket was partly responsible for the largest ever sale of instant game tickets in Colorado. And the fiscal year ending June 30, 2008, produced a new high of over half a billion dollars in gross lottery sales — a $50 million increase. But, of that, only $3.2 million went to additional funds for Great Outdoors, Conservation Trust, Parks and spillover.

There’s also a new “inspector” in town. CRS 24-35-211 requires an annual financial audit. For the fiscal year ending June 30, 2008, the lottery hired Clifton Gunderson LLP, a certified public accounting firm from Greenwood Village. It replaced BKD of Colorado Springs, which did the independent audits from 2003 through fiscal 2007.

Clifton is a hardball-player firm. This is the first time I’ve seen the word “corruption” in the yearly financial audits.

First issue: Scientific Games has had the vendor contract since 2005. Each year the independent audit recommended that Scientific Games bill retailers and report taxes — which it agreed in its contract to do.

Every year, the lottery administration has promised that Scientific Games would live up to that part of the contract, but it never has. The result? Lottery employees did the manual labor required to obtain correct information. If the billing is done late, the retailer benefits by making interest on the money — and the same is true of late tax reporting.

Clifton wrote: “As long as the lottery must rely on manual balancing systems ... a risk of the loss of data integrity or corruption will always be present. (Clifton urges the state to) ... ensure that the process ... fulfills the requirements agreed upon as a part of the vendor’s contract.”

Is Scientific Games being paid for something they are not doing? I believe the 2009 fiscal year is the last year of the present contract. Will there be bidding on a new contract? How much has the manual labor cost the lottery so far?

Second issue: The lottery changed marketing firms for the fiscal year ending June 30, 2008, hiring Cactus Communications for the period from Sept. 10, 2007, through June 30, 2010.

Clifton found that “invoices lottery receives do not contain full support for the charges incurred by Cactus. As of August 2008, the lottery had yet to conduct an audit of the invoices and related charges submitted for payment by Cactus.” Lottery agreed to conduct a FIRST audit by November 2008. (I guess there will be no audit for September 2007 through June 2008.)

Third issue: Are you a big lottery winner? Are you going for a cash payout of a smaller sum, or an annuity from a qualified insurance company? As of June 30, 2008, there were 289 annuities still being paid by insurance companies for a total of $490 million.

If the insurance company defaults, the lottery is responsible for payment. Result: The lottery has a qualification policy for insurance companies.

Uh-oh! Six of the 14 companies with annuity contracts of $82 million total are NOT in compliance.

The six companies are still employed for the annuities previously contracted, and the lottery has promised to scrutinize their financial status and determine “if further action is needed.”

Even though the lottery hit a new high of $505.8 million — a $50 million climb — resulting in $3.2 million, the overall payout to Great Outdoors and other beneficiaries was almost like treading water.

The largest expense increase was “prize expense” at $38 million more than in fiscal 2007.

Gross ticket sales compared to fiscal 2007: Scratch was $39 million higher ($336 million compared to $297 million). Powerball was $8 million higher ($109.5 million vs. $101.5 million). Lotto was $1.2 million higher ($41 million vs. $39.8 million). Cash 5 was $1.7 million higher ($19.1 million vs $17.4 million).

There was $122.2 million available for:

Another change: Clifton claims spillover went to the Lottery Proceeds Contingency Reserve Fund instead of the State Public School Fund Contingency Reserve, but the statute referred to in the audit no longer exists.

In a future column: The recent five-year lottery performance audit by the state auditor and its implication for the lottery’s future.

Jerry Kopel served 22 years in the Colorado House.