Audit: Lottery contract skewed

Legislative panel voted to OK pact

The terms of the Arkansas Scholarship Lottery's contract with consultant Camelot Global Services "are not as advantageous to the state as they are for Camelot," given the lottery's mandate under state law to maximize net proceeds for college scholarships, legislative auditors have concluded.

But lottery officials have defended their contract with Camelot, saying they fiercely negotiated and they're "ever mindful of the ... directive to operate the lottery in a manner that maximizes proceeds."

Arkansas Legislative Audit questioned the lottery's contract with Camelot in its audit of the state agency.

Legislative auditors released the audit late last month -- 14 months after the Legislative Council's Lottery Oversight Committee voted 8-5 to sign off on the contract with Camelot over the opposition of a committee co-chairman, Sen. Jimmy Hickey, R-Texarkana. Hickey also is co-chairman of the Legislative Joint Auditing Committee, which oversees Arkansas Legislative Audit.

"The lottery is in better shape than it has been in the past," Jake Bleed, a spokesman for the state Department of Finance and Administration, said Tuesday. The lottery is within the department. "We are moving forward and looking forward to the future for the Arkansas Scholarship Lottery."

The contract was signed Nov. 30, 2015, for five years with an option for two one-year extensions. The firm was hired to develop a business plan and help the lottery improve its operations. The firm will be paid base compensation of $650,000 in any fiscal year and reimbursed up to $100,000 in mutually agreed-upon expenses each year.

Camelot also will get a percentage of any "adjusted operating income" at the lottery above $72.28 million in any fiscal year. The company will keep 12.5 percent of income between $72.28 million and $80 million; 13.75 percent of income between $80 million and $90 million; and 15 percent of any adjusted operating income above $90 million.

"The dollar amount doesn't seem that unreasonable because they are going to be here 12 months a year working with us to get things turned around," Finance and Administration Director Larry Walther told the the oversight committee in October 2015.

The lottery has helped finance more than 30,000 Arkansas Academic Challenge Scholarships during each of the past seven fiscal years. The lottery's revenue and net proceeds declined in fiscal 2013, 2014 and 2015 after peaking at $473.6 million and $97.5 million, respectively, in fiscal 2012.




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Total revenue and net proceeds rebounded to $456.3 million and $85.3 million, respectively, in fiscal 2016, which ended June 30, with the help of a $1.6 billion Powerball jackpot in January 2016.

Hickey said Tuesday that he hasn't had a chance to review Arkansas Legislative Audit's conclusions on the contract.

"I didn't make any request of any sort or nature" for auditors to review the contract, he said.

Legislative Auditor Roger Norman said Legislative Audit questioned the Camelot contract as part of its regular audit of the lottery.

The audit noted that Camelot may receive up to $650,000 in annual base compensation "for income-enhancing consulting services, totaling a maximum $3.25 million over the initial five-year term, regardless of whether [the lottery's] operating income or net proceeds improve."

As to Camelot's tiered-performance incentive compensation, which is set at 12.5 percent or more of the lottery's adjusted operating income exceeding $72.3 million, that threshold is lower than the lottery has ever reported for adjusted operating income since it began selling lottery tickets in fiscal 2010, the audit said.

"It is not to the benefit [of the lottery] to set a vendor performance threshold amount lower than [the lottery's] operating income based on its worst year of performance for determining incentive compensation," Arkansas Legislative Audit said.

"With the baseline for tiered performance compensation set so low, Camelot is almost guaranteed an annual performance bonus with or without improved lottery sales. While the current terms of the Camelot agreement cannot be amended without financial loss to the state, we recommend [the lottery] negotiate more favorable terms before awarding future contracts to vendors," legislative auditors said.

In response, lottery officials said the agency solicited a consultant to provide a business plan and services that would help the lottery grow over a five-year period.

"The terms of the contract were fiercely negotiated over a period of 3 months," lottery officials said in their written response to the audit. "In negotiating the contract, the parties considered past trends and the state of the lottery in the summer and fall of 2015. Despite our hopes of improvement, the reality of the situation was that the lottery returned $72.6 million [in fiscal 2015] just months prior to negotiating and signing the consultant contract.

"At that time, the historical trends and the fiscal year to date numbers did not suggest an improvement upon that return in fiscal year 2016. In fact, the compound annual growth suggested that proceeds would likely to continue to drop each year. Based on that background, the baseline of $72.3 million was calculated as a benchmark for calculating incentive pay for improvement in proceeds. [The lottery] will continue to make every effort to operate in a manner that will maximize proceeds," lottery officials said.

During fiscal 2016, the lottery paid Camelot $2.3 million, according to lottery Director Bishop Woosley. That included $650,000 in base compensation, $25,181 in expenses and $1.6 million in incentive compensation, Bleed said. Through Monday, the lottery has paid Camelot $3.07 million since the beginning of the contract, Bleed said Monday.

In June, an official representing Camelot told lawmakers that the firm decided to forgo $760,000 from its incentive compensation in fiscal 2016 for the additional sales and proceeds resulting from the record Powerball run in January 2016.

Arkansas Legislative Audit said Camelot also failed to post a performance bond or other acceptable alternative, as described in the lottery's request for qualifications for a lottery consultant.

In its response to the audit, lottery officials said Camelot notified the lottery on Nov. 16 that three certificates of deposit had been placed at Arkansas banks in the amount of $650,000, which was the agreed-upon amount to assure performance of the major procurement contract.

Metro on 01/11/2017

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