Tuesday, June 28, 2011

Audits find mistakes in awarding lottery and video poker contracts

By Jamey Dunn

Two audits released today found problems with the way state government awarded contracts associated with two pivotal funding sources for the state's embattled capital construction plan.

An audit of the Illinois Department of Revenue took issue with the process used to choose Northstar Group as the new manager of the Illinois lottery. Northstar Group represents gaming vendors that have previously contracted with Illinois — Rhode-Island-based GTECH Corp. and New-York-based Scientific Games Inc., along with marketing partner Chicago-based Energy BBDO. Lawmakers approved a turnover of lottery management to a private firm as part of the capital bill with the hopes that a company could bring in greater profits for the state. The two other bidding finalists, Intralot S.A. and The Camelot Group, protested the state’s choice of Northstar, claiming the process was unfair. The state denied both protests.

Auditor General William Holland’s report found that some of the scores from members of the evaluation team were not certified by the department and some were not officially submitted until after the state had publicly announced its choice of Northstar as the manager.

However, Sue Hofer, spokesperson for the Department of Revenue, said the department had electronic copies of the evaluation team’s scores before a choice was made, and these copies were used to make a decision. “They provided their assessment twice, once electronically and once in a signed affidavit that said they had no conflict of interest,” she said. Hofer said the scores were valid whether submitted electronically or on paper, and the department provided Holland with the electronic copies of the scores.

But the auditor disagreed that the scores came in on time, whatever the delivery method. “The department’s response appears to want it both ways. They say auditors relied on the hard-copy evaluations, which we note were not timely. This is factual. Then the department wants us to utilize emails, which we also considered. However, as we note in the finding, these too showed the electronic submissions were not timely. The only constant was that all the discrepancies noted in the finding are from department documentation, whether hard copy or electronic,” the report said.

The audit also found that Oliver Wyman, a contracted consulting firm that helped the department with the bidding process, started work before it signed a contract with the state. Wyman sought and collected the names of firms interested on managing the lottery before the firm had a state contract. The audit also found that once Wyman was under contract, the firm failed to meet some of its deadlines, potentially shorting those considering bids time for a review process. “Failure to meet deliverable deadlines may have contributed to state evaluators having less than one week to evaluate the Request For Proposal responses in Step 1 of the process, a process that eventually would turn over a $2 billion state asset for private management,” the audit said.

“Those people were on a contract where they would get paid for product delivered. They were not getting paid by the hour,” Hofer said. “They started several days before the contract was officially signed, and that was at their own risk.”

Holland found that Kroll, a subcontractor hired by Wyman to provide investigative and consulting services as well as ensure that the bidding process was fair and open, had previous connections with Northstar. The report said two members of Scientific Games’ board of directors were previously Kroll board members and that a former incarnation of Scientific Games retained Kroll’s services in 2002. However the audit notes that the relationships ended three years prior to the work Kroll did on the lottery contract, so Wyman was not required to disclose them. The report also said Kroll was “very qualified” to do the work it was contracted for, and the auditor general’s office found no problems with reports submitted by Wyman and Kroll.

Overall, Holland’s report said: “The department should protect state interests and not allow vendors to work without an executed contract in place. Additionally, the department should enforce contract milestones or amend the contract to reflect updated priorities and time frames. Further, the department should ensure that all subcontractors disclose any relationships that may, even if only in appearance, impair the integrity of the procurement process.”

An audit of the Illinois Gaming Board also shed light on what went wrong with the bidding process for a central computer system needed to implement legalized video poker in bars and restaurants throughout the state. The revenue from video gaming is supposed to pay off borrowing for the state’s construction plan.

The board awarded the contract to Scientific Games, one of the companies in the Northstar Group, only to rescind the deal after it was found that the board had done its math wrong. “Lack of review for the scoring of pricing in the evaluation process of the Central Communications System (CCS) procurement resulted in the award to a vendor that was not the highest ranked,” the audit said. The report says only “one set of eyes” reviewed the pricing information that companies submitted with their bids. The audit also found that the board got different information from bidders, so it was not comparing apples to apples when it came to cost estimates, and it never followed up with the bidders to get like information. The board employee whose one set of eyes reviewed the cost estimates told auditors that the board was under pressure to make a choice, and any holdups would be “‘frowned upon.’”

Gene O’Shea, spokesperson for the gaming board, said that any pressure felt by the board or its employees is self-imposed. “There is no person or outside agency that is exerting any kind of pressure on the gaming board to get things done before they should be done.”

He added: “There’s just a lot of work to be done and few people to do it. … There’s people that are on the staff here that are working a tremendous amount of overtime to get the job done.”
The board has scrapped the original bid for the computer system and is in the process of a new bid.

Both the private management of the lottery and the implementation of legal video poker in some bars and restaurants in the state have been put on hold until the Illinois Supreme Court rules on a constitutional challenge to the capital plan.  However,  state agencies are continuing work on the issues in anticipation of a positive verdict or the approval of a new plan by the legislature.


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