State Audit criticizes Colorado Lottery's high prizes, $400,000 in questionable employee bonuses

DENVER - A state audit issued Monday criticizes the Colorado Lottery for high prize amounts and administrative costs, including lavishing nearly $400,000 in annual bonuses on sales staff without properly tying the incentive pay to established performance goals.

All this, the audit states, means the lottery is providing less money to beneficiary agencies, like the Colorado Division of Parks and Wildlife, the Colorado Conservation Trust Fund, the Great Outdoors Colorado Trust Fund,  and the Public School Capital Construction Assistance Fund.

The lottery is a money-making machine that has generated $2.6 billion in funding for its beneficiary agencies since the lottery was created in 1982.

Lottery officials agreed with all six audit recommendations and are working to implement the improvements.  

"We are in violent agreement that these modifications need to be taking place," said Barbara Brohl, director of the Colorado Department of Revenue, which oversees the Lottery.

"We understand there is room for improvement. We've already done a lot of evaluation and that we have put in place some changes already," Brohl added. "Many of the things the audit identified,  we were aware of and had already been making changes to."

The audit's findings include:

--Sales Staff Bonuses. The audit says the Lottery failed to follow its own Sales Performance Awards Plan, which says that bonuses must be used to reward employees for increasing lottery ticket sales, "which in turn increases the amount of proceeds available to the beneficiary agencies."

The Lottery's Awards Plan calls for rewarding employees whose current year sales increased 5 percent over the previous year's sales. Instead, auditors said, the Lottery compares a sales staffer's "current actual sales to a sales projection amount."

"According to the Lottery, comparing current to prior actual sales would penalize staff in some cases, such as when a retailer is moved from one person’s route to another person’s route. Therefore, comparing actual sales to a calculated projection that can be adjusted is preferred," the audit states.

But the Lottery hasn't kept records showing how it calculated who receives bonuses, auditors say, adding that  "the Lottery is ultimately unable to show the awards were fair and equitable and provided equal opportunities to all eligible staff."

"Overly difficult calculations or adjustments call into question the integrity of the bonus incentive awards by both the employees and the general public," the audit warns.

--High Prize Payouts. "The Lottery may be paying more in prize payouts than is needed to achieve optimal sales, thereby lessening the proceeds available for beneficiary agencies," the audit states. "The most recent data available in a national study showed that in Fiscal Year 2011 Colorado's prize payout percentage was 63 percent, 2 percentage points higher than the national average of 61 percent. The 2 percentage point difference equated to about $10.4 million."

--Ticket Auto-Reorder System. Auditors say the Lottery has not fully implemented a 3-year-old scratch ticket auto-reorder and courier system "to realize efficiencies that would result in administrative cost savings as intended."

The system calculates the supply and demand for scratch tickets for each retailer and automatically generates and processes orders based on the calculations and inventory at each retailer. "According to the Lottery, the auto-reorder system has contributed to the increase in sales over the past several years and to the decrease in the number of scratch tickets that remain unsold when a game ends and therefore must be written off as lost revenue for that game," the audit states.

Yet, years after the system was installed, auditors find that "sales staff sometimes override the system and manually enter orders for some retailers, rather than allowing the system to automatically generate orders."

"One sales representative manually generated more than 43 percent of the orders for his or her [sales] route, and another sales representative manually generated more than 30 percent of the orders for his or her route," the audit states.

An audit of a sampling of retailers from January through April 2013, found that 441 of the 3,058 retailers -- or 14 percent -- were "turned off" from the auto-reorder system. "In other words, the system was not automatically generating any orders for these retailers. Instead, the sales representatives assigned to these retailers manually entered all of the orders for these retailers into the auto-reorder system," the audit states.

--Security Investigations. Auditors found the Lottery did not consistently conduct annual security background rechecks of vendor employees.

"For the 277 vendor employees who received initial background checks between January 2008 and June 2012, the Lottery conducted a recheck for only 20 of these and could not say whether the other 257, or others, should have also received one or more annual rechecks. Vendor employees who have not undergone annual rechecks include Scientific Games employees who have access to the Lottery's gaming system and gaming terminals, and Cactus Communications employees who provide services that promote the Lottery and its image," the audit states.

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