Audit knocks Mo. Lottery for repeat concerns

Missouri State Auditor Nicole Galloway earlier this month released an audit report on the Missouri State Lottery calling for action.

While the lottery received a rating of “good” – the second highest out of four ratings – the auditor noted four areas of concern, including two held over from her office’s 2012 report: advertising/sponsorships and contracts.

The findings follow a period of scrutiny for lottery officials in recent years as funding for education has slowed.

“The Missouri State Lottery needs to conduct further analysis to determine the appropriate amount of advertising expenditures needed to optimize sales and profits,” Galloway said in the most recent report.

“In addition, the Lottery has no comprehensive policies and procedures for investing in sponsorships and most professional sports sponsorships, and some local community event sponsorships do not provide a positive return on investment.”

In July 2014, Missouri Gov. Jay Nixon enacted the state Office of Administration’s comprehensive review of the state lottery’s operations. Two months later, the report called for a more systematic review of return on investment for both advertising and sponsorships.

The governor’s move followed a fiscal year where Missouri Lottery’s annual proceeds for education fell by 7.4 percent to $267.3 million.

The Missouri Lottery sets aside proceeds after expenses – typically about 25 cents on every dollar generated – for public education. Missouri Lottery’s biggest expense comes in the form of payouts to players – about 65 percent of revenue.

Concerns about operations have come from conservative lawmakers, as well, such as former Missouri House Speaker John Diehl, R-St. Louis, who was critical last year of Missouri Lottery’s roughly $56.7 million administrative costs, which are about 5 percent of sales.

In September 2014, the governor shook up the State Lottery Commission, appointing five new members, including chairman John Twitty, former general manager of City Utilities of Springfield, and educator Paul Kincaid, the former chief of staff for the president at Missouri State University. The commission sets the policies and goals for the lottery staff.

In fiscal 2015, the needle inched up with public education receiving $270.7 million from lottery proceeds, but this was nearly $28 million under projections, according to the audit.

Twitty said he’s aware of the concerns identified by the Office of Administration and the recent audit report, which reviewed three years of financials.

“We, as members of the Lottery Commission, and I think I can speak for members of the management for Missouri State Lottery, view these as opportunities to get better,” Twitty said.

In response to Galloway’s findings, several steps were noted as having taken place under the new commission to maximize returns for public education. Those include limiting last year’s advertising spend to $12 million; a new draw-games computer gaming system was competitively bid saving $700,000 per year beginning July 1; and a self-imposed 10 percent restriction of the unobligated 2014 expense-and-equipment budget, estimated to save $700,000.

On advertising, Twitty said the lottery works with Kansas City-based firm Barkley Inc. to market its nine instant games and over 40 scratcher tickets. He said while ad spending has increased significantly in recent years, it is in line with the expenditures of other states.

“Our advertising spending in proportion to transfers [to education] and sales are kind of right in the middle of surrounding states that have lotteries and national information about lotteries,” Twitty said.

For example, the Kansas Lottery’s fiscal 2014 administrative costs – which includes advertising, just as it does in Missouri – were 4.2 percent of sales. Missouri Lottery’s administrative costs were 4.9 percent of sales that year.

According to data in the audit report, for the five-year period of 2010 to 2014, Missouri Lottery’s ranking for budgeted advertising cost per capita rose 34 spots, from second lowest to ninth highest nationwide. For the same period, the ranking for budgeted advertising expense as a percentage of sales rose 24 spots, from the second lowest state to 19th highest.

“I think this Lottery Commission is very interested in what that sweet spot number actually is – whether that’s $16 million, $12 million or $20 million,” Twitty said of ad expenditures. “Candidly, as a member of the Lottery Commission – and I won’t speak for anybody else here – I’m not as concerned about the absolute number as I am about finding the number that gets us the best sales.”

The ad budget for fiscal 2016, which started July 1, is $16 million, Twitty said.

As for contracts with vendors, Galloway said lottery officials must do more to ensure the lowest bids available are secured.  

“The lottery continues to execute long-term contracts and to renegotiate and amend long-term contracts in lieu of periodically soliciting competitive bids/proposals,” she said in the report.

Twitty said efforts to improve are a focus, but there simply hasn’t been a lot of competition to consider.

“There aren’t very many bidders worldwide – and I really do mean worldwide – that provide the services that lotteries buy. Principally, there are three companies all across the world who provide services that lotteries have to buy to produce these games,” he said. “This is not like buying T-shirts where you could go out and get 10 companies to give you bids.”

Companies that sell lottery games and systems include International Game Technology and Scientific Games, both around Las Vegas, and Novomatic Lottery Solutions in Australia.

He said those contracts also come with extensions, which the Missouri Lottery has made use of in the past.

“That is something we want to take a very close look at,” Twitty said, noting all areas of concern were being taken seriously and would be addressed by the commission and lottery staff members.

Two other areas of concern noted by the auditor were the Points for Prizes program and travel expenses.

Points for Prizes is a loyalty program that issues players rewards for losing tickets. The auditor said lottery officials have not determined whether that program is profitable.

Galloway said employees did not always report travel expenses in a timely manner on personal disclosure statements submitted to the Missouri Ethics Commission.

Despite the concerns, the auditor’s rating indicates the entity is “well-managed,” according to the report.

“I think that says that we are doing many things well,” Twitty said.