Audit of Missouri Lottery generally favorable, but questions some contracts and spending
This article first appeared in the St. Louis Beacon, Nov. 27, 2012 - State Auditor Tom Schweich's latest audit generally praises the Missouri Lottery for its operations but recommends some changes in how it handles contracts, ad spending and promotional events.
In particular, Schweich said in an interview that he's concerned about the extension of a long-term operational contract without competitive bidding that means more than a decade "without competition."
A top official of the Missouri Lottery says the lottery concur with the audit's findings, but also believes that it has been engaging in negotiations aimed at reducing costs. A key issue is that only three firms in the country handle lottery operations, the Missouri Lottery official said.
The audit also cites community events sponsored by the the Missouri Lottery that fail to meet the agency's own cost-benefit analysis. Those events include some targeting minorities and women.
Lottery chief operations officer Gary Gonder said the Lottery is involved in such events because officials believe the positive exposure is worth any costs. Schweich said that may be the case, but suggests that the agency make that point clear.
In any case, Schweich pointed out that his audit overall gave the Missouri Lottery a "good'' rating for its operations.
The community events sponsorships, the auditor emphasized, involve "a relatively small amount of dollars" and aren't a major issue, as far as he or his staff is concerned.
The Missouri Lottery oversees and promotes the state's lottery operations, created by voters in 1984. Profits are to be used to bolster the state’s public-education spending.
Lotteries generate key cash for states
The attention on the Missouri Lottery comes as such games of chance are increasingly becoming significant sources of income for many states, including Missouri.
According to the audit, released Tuesday, the Lottery collected over $1 billion in sales during the 2011 fiscal year, the last year used in the audit, and directed profits of more than $250 million to public education.
About 65 percent of the agency’s income was doled out in prizes, with the remaining 10 percent spent on advertising, payments to retailers and administrative costs.
The audit focused primarily on the 10 percent, raising questions about whether the Lottery was competitively bidding contracts and why its advertising spending is spread out among several categories in its budget.
The audit contended that $4.9 million in advertising and promotional spending was not reported to the General Assembly, which approves the Missouri Lottery’s budget, during the 2010 and 2011 fiscal years.
Gonder replied that the agency reported all spending in its budget, but that it is required by the state Office of Administration to list certain types of ad spending in different budget categories, rather than in one line item, as recommended in the audit.
Schweich said that the agency could still make it clearer to legislators what the overall ad spending entails, so that lawmakers have a better understanding.
Gonder emphasized that the agency doesn’t disagree with any of the audit’s findings and that it is committed to following the necessary procedures regarding how contracts are awarded or extended.
Arguably the most audit’s most intriguing recommendation dealt with $421,000 spent by the Lottery to sponsor local community events during the FY2011 fiscal year.
“The majority of these events did not yield a positive return on investment, meaning the costs exceeded the benefits,” Schweich’s office said in a statement. “None of the five of most costly local community events they sponsored had a positive return on investment.”
All five of those events were in St. Louis and targeted the African-American community: Black Expo 2011 and 2010, the Gateway Classic 2011 and 2010, and 100 Black Men.
Other listed events that also saw costs exceed the financial benefits included the “Salute to Excellence in Education,’’ held in St. Louis; an event honoring St. Louis businesswomen; a St. Louis event called “Community Women Against Hardship”; and the Jim Butler Golf Tournament, also held in St. Louis.
The Lottery’s involvement often involved distribution of promotional items, such as T-shirts, along with helping to cover the events’ costs.
The audit recommended that the Missouri Lottery end all participation in events that cost more than the financial benefits. But Gonder said that the agency’s benefits aren’t just the bottom line.
“We really have a goal not just to sell tickets but also to have an impact in those communities,’’ Gonder said.
He also noted a gubernatorial executive order recommending that at least 15 percent of contracts go to minority-owned businesses and 10 percent to firms led by women. The Lottery is using those guidelines as it decides which events to help sponsor, Gonder said.
In response, Schweich said he and his staff weren't making a big deal about the Lottery's involvement in such events and that the audit was simply pointing out that some of the events don't meet the agency's own criteria. The Missouri Lottery simply needs to make it clear that cost/benefit isn't the only means of determining which events are worthy of sponsorships, the auditor said.
In any case, the Lottery’s finances have garnered more attention from the General Assembly and the Nixon administration, as state officials look for ways to generate more income without raising taxes.
The Missouri Lottery has been spending more in recent years on promotions, including ad spending, to generate more sales. Gonder said the agency set a record in fiscal year 2012, which wasn’t included in the audit and is on track to do the same in the current fiscal year, FY 2013.
Lottery ticket sales totaled $1.099 billion in FY2012. This fiscal year, the agency hopes to hit $1.15 billion.
The upshot is that $280 million in profit was forwarded for public education in FY2012. This fiscal year, the agency’s goal is $288.5 million.