Lottery's burst of spending eats into aid for localities
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State Treasurer Timothy P. Cahill often says that the Massachusetts Lottery has enjoyed unprecedented growth under his leadership. But a review of lottery records shows that exploding administrative costs at the agency have soaked up a large portion of the new revenue, limiting the amount it shares with Massachusetts cities and towns.
Since Cahill took over five years ago, administrative spending has ballooned by nearly 50 percent, with higher costs for advertising, telephones, computers, and lottery ticket printing, including outside contracts signed with some of the treasurer's campaign contributors.
On Cahill's watch, the lottery increased its ranks of employees by nearly 10 percent. It bought 233 cellphones and BlackBerries for employees. It replaced most of its fleet of take-home vehicles for employees, spending $1.25 million to buy 73 new vans, crossover wagons, cars, and a Jeep in the last two years alone.
The lottery also agreed to a more costly lease to pay for $1.3 million in renovations at its Braintree headquarters, including a slick upgrade of the lobby. Visitors can now watch Keno and Mass Millions advertisements on two large flat-screen televisions as they lounge on lime-green art deco couches while a receptionist works under the glow of blue glass pendant lamps.
Cahill said in an interview that much of the spending was required to boost the lottery to a record $4.7 billion in gross sales this year, and that it was "very reasonable and very fiscally responsible." He added that the state lottery has the lowest overhead compared with revenue of any in the nation, as measured by a trade publication, La Fleur's World Almanac.
Even so, Cahill said he would not approve such an increase in spending now, during an economic recession.
"Would we buy new cars today? No," he said. "Would we [redecorate] today? Probably not."
In all, the administrative costs at the lottery shot up $33.4 million over five years, to $101.4 million in 2008. Over the same period, net revenue grew by $57 million, to $1 billion. The rise in administrative costs gobbled up most of that growth, leaving an increase of only $23.5 million available for aid payments to cities and towns. (The vast majority of gross revenues are used to pay winnings to lottery players.)
Making matters worse for cities and towns, the lottery is now burdened with higher administrative costs as the national economic recession reduces the public's appetite for gambling, taking a bite out of overall lottery proceeds and putting a greater pinch on local aid.
Cahill said the lottery got "some good deals" on the cars, which he said were needed to replace an aging fleet prone to breakdowns. And he said the lobby was redecorated in an effort to make it "more enticing" for visitors and winning ticket holders who come in to claim their money.
"We want people to have a good experience," he said.
The improvements to the building were not directly paid for by the lottery, Cahill added. He said the lottery's landlord agreed to pay for the renovations and in return raised the rent by $41,243 a month for five years.
The results of the Globe review of lottery operations raised concerns among some observers, three of whom called for an investigation of Cahill's management of the lottery.
"I think the treasurer is running the lottery more for the benefit of its administrators and employees than the taxpayers of Massachusetts," said David Tuerck, an economist and executive director of the Beacon Hill Institute at Suffolk University, a nonpartisan think tank. "The state needs to put the lottery on the list of agencies that need a thorough investigation of how they are run, with a view toward vastly improving performance."
Michael Widmer of the Massachusetts Taxpayers Foundation said the lottery has virtually escaped the tough scrutiny endured by other state agencies because it is considered a source of revenue, rather than an expense like most other state departments. Widmer, like Tuerck, thinks that should change.
"Especially in this current fiscal crisis and with lottery revenues expected to decline, it's critical that the entire cost structure be examined," he said.
Geoff Beckwith, head of the Massachusetts Municipal Association, which represents the interests of cities and towns on Beacon Hill, said "there certainly are areas that should be looked at."
Across the state, communities rely on lottery revenue to help pay for everything from firetrucks to library books; the unrestricted income helps keep a lid on local property tax increases.
"Clearly it's important to take a look at the lottery's operating budget to make certain now, more than ever, to make sure the budget is as efficient as possible," Beckwith said. "Communities are in desperate need of lottery revenues because they're facing very hard times."
But examining the agency's inner workings may not be easy. The lottery's financial records, which are public under state law, are difficult to obtain. Complete financial statements are not available online, and the ones distributed to those who request them do not provide details about what the agency is buying.
In response to a Globe public records request in October for a breakdown of administrative expenses, lottery officials issued a three-sentence reply, saying an "itemized breakdown is not kept by the Massachusetts State Lottery." The lottery later provided a code book to cross-reference expenses through a laborious manual process. Even then, the codes described broad categories, such as maintenance, but gave no details about what was maintained. Last week, lottery officials provided some details about the spending.
Among the new annual costs are $10 million in additional advertising, $9 million in higher telephone and telecommunications expenses - including $84,000 for employee cellphones - roughly $5 million for ticket printing, and another $5 million in employee salaries. Employee benefits and insurance accounts for $3 million more, and the remainder is split between postage for ticket delivery, employee cars, office supplies, and building improvements and rental.
Payroll costs climbed 24 percent to $27.4 million for 424 employees in 2008, up from $22 million for 388 employees in 2003.
Lottery officials said none of Cahill's decisions were made without approval of the Legislature, the governor, and the lottery commission. The commission is composed of the state comptroller, secretary of public safety, and two others appointed by the governor.
A spokesman for Governor Deval Patrick, Kyle Sullivan, placed responsibility on Cahill, saying the "treasurer and the staff at the lottery have primary day-to-day responsibility for managing the lottery and its budget."
Cahill, a former Quincy city councilor and Norfolk County treasurer, was elected to the treasurer's office in 2002 and reelected to a second term in 2006. In addition to overseeing state investments and the lottery, he also runs the state Alcoholic Beverages Control Commission, Abandoned Property Division, and Pension Reserves Investment Management Board.
Almost immediately after taking office, Cahill pushed the Legislature to restore millions of dollars in funding for lottery advertising that had been cut in the 1990s because critics said the advertisements targeted the poor. The lottery now spends more than $10 million per year on advertising.
The company that has received the multimillion-dollar contract to promote the lottery is Hill, Holliday, a large advertising firm whose executives have been major contributors to Cahill's campaign fund. In 2004, the year after the agency won its first three-year contract, executives and their spouses contributed some $20,000 to the treasurer. They have since donated an additional $26,000, records show. Such campaign contributions from vendors to politicians are routine throughout state government.
A spokesman for Hill, Holliday did not return a message left seeking comment.
The chief executive of the company that prints scratch tickets for the lottery,
The Globe reported earlier this year that Scientific Games also has paid one of Cahill's chief fund-raisers Thomas F. Kelly, more than $132,000 in consulting fees at the same time Cahill was steering contracts to the company. Kelly, who has not been accused of any wrongdoing, has not returned repeated calls to his Boston office.
Cahill says that his business decisions are not influenced by who contributed to his campaign coffers.
