Jerry Kopel

KOPEL: COLORADO LOTTERY CURES THE WANG WANG BLUES

New lottery computer system will cost state less than the old one

The sweetest blue sounds came to me during the second week of July by way of Jack Boehm, who was appointed acting director of the Colorado Lottery in April 2008 and became the official director in July 2008. That sound was the news that the lottery’s ancient Wang computer system had been tossed out and replaced by “CLASS,” an acronym for a lottery computer system manufactured by IBM and presently in use in nine other lottery states.

Does a column about a lottery computer system make sense? It does when you consider the turnover among legislators since August 2008. That’s when State Auditor Sally Symanski released a five-year performance audit detailing the lottery’s flaws, with the Wang computer system at the top of the list.

The Wang was the original computer purchased for the Colorado Lottery back in 1982. And it was still there in 2008, even though Wang Laboratories went out of business in 1992. The state auditor wasn’t alone in denouncing the Wang. Her complaints were echoed in similar reports, including the mandated independent annual fiscal report issued by certified public accountants.

The Wang was supposed to perform six critical tasks and several less important jobs. These critical back-office functions included management of retailer billing, scratch ticket inventory, cash reconciliation at ticket counters, sales and marketing events, and promotional inventory.

Wang could not do the job, so the lottery contracted with Scientific Games (Sci Games) the major Colorado Lottery supplier to do tasks for additional pay. But the auditor wrote, “neither retailer billing nor scratch ticket inventory has been fully migrated into the Sci Games contract and Sci and the lottery are unable to agree on what to do.”

“There is a risk” wrote the auditor “of the state suffering substantial disruption ... such as not billing retailers in a timely manner for millions of dollars in revenue from ticket sales.”

The auditor found no one in charge on the contract. She noted that from 2003 to 2008, lots of staff members (like individual ants in a colony) looked at tiny parts of the agency performance, but had no power to change anything. In February 2008, Revenue Department Executive Director Roxy Huber hired Boehm as chief operating officer.

A staffer told me that when Boehm arrived and saw the Wang Computer he raised his voice and demanded the lottery “get that piece of junk off the premises.” But the “piece of junk” stayed until early July 2009.

Where did the state find money to pay $5.5 million over three years for CLASS? After paying $5.5 million, Colorado will be responsible only for annual maintenance costs. Those costs actually will come to less than the cost of maintaining the gasping Wang system.

With the new computer in place, the contract with Sci Games has had a rider attached, which will cost Sci Games a $2 million contract reduction for each of the next three years. So in a roundabout way, Sci Games is buying Colorado a new computer.

Wang’s use of outdated technology also limited its ability to expand the number and types of games the lottery could offer and hampered its ability to generate additional proceeds.

One new game, One Match Play, is based on the Powerball approach. It would join Colorado with other states and, according to the auditor, would bring in $19.4 million in revenue during its first year. In the past, Wang, combined with Sci Games, could not adequately handle the additional accounting data One Match Play requires.

All told, not counting subheads, there were 16 recommendations for changes in lottery operations from the state auditor. One is not due until October and one other is not due until 2010. Most of the 14 others should have been completed by now, at least in part.

The statute giving the auditor authority to review the lottery mentions only that it must be done at least every five years. It can be done before that. For example, if it were done during the latter part of 2009, the auditor could see which suggestions had been implemented.

The October change may or may not occur. The auditor wrote, “evaluate the potential effect of lowering commission rates to better align with national average and determine the impact on the retailer base and on lottery net proceeds, taking action as appropriate.”

The auditor listed several states similar to Colorado in income and payment to vendors. One was Minnesota. As of 2006, total retailer compensation was $34.7 million for Colorado and $27.3 million for Minnesota.

Total ticket sales were $468.8 million for Colorado and $449.7 million for Minnesota.

Retailer compensation was 7.4 percent for Colorado and 6.1 percent for Minnesota.

If Colorado had been Minnesota, there would have been an extra $7 million going to use for Colorado programs.

What is interesting is that Boehm was deputy director of the Minnesota lottery and can validate its approach.

If the Joint House-Senate Legislative Audit Committee asks for a success report from the lottery before the end of 2009, I think the auditor’s office would be likely to comply.

The lottery recently revealed a gross sales performance for the fiscal year ending on June 30, 2009, of $493.4 million. When the independent CPA audit numbers are released later this year, this column will provide you an accurate compilation on money received and money paid out.

Jerry Kopel served 22 years in the Colorado House.