State auditor wants governor, Iowa Legislature to limit lottery's authority

State Auditor David Vaudt is recommending the governor and Legislature rein in some of the Iowa Lottery's authority, noting that salaries spiraled compared to other areas of state government when the state-run gambling enterprise became an independent entity in fiscal 2004.

Vaudt said Monday it appears switching the Lottery to a state authority in September 2003 had a “significant” benefit for lottery employees but less so for the state, and he cautioned against granting too much independence to other state entities, such as the Economic Development Authority, to operate under different financial accountability standards than most state departments and agencies.

Lottery officials countered that they operate a free-standing enterprise like a private business that receives no direct state funding while turning a profit that has generated more than $1 billion in deposits to the state treasury since its inception in 1985. Gov. Terry Branstad -- who noted the Lottery's authority status was put in place after he left office in 1999 -- also registered his vote of confidence for the leaders of the state-run gaming enterprise, calling their performances “exemplary.”

In his 44-page audit covering eight fiscal years issued Monday, Vaudt said key Iowa Lottery officials received significantly larger salary increases and higher overall salaries than their counterparts in other state entities once it was converted to an authority.

Vaudt, in an interview, said it was “impossible to know” if the pay increases were excessive because the Iowa Lottery Board “inappropriately delegated the compensation review to lottery officials who would be financially impacted by the results of the review” – a delegation which “caused flawed compensation review results and inadequately justified key personnel salaries.” Because of that, he said, it appeared the board failed to properly exercise its fiduciary responsibilities in determining and approving appropriate key personnel salaries.

After the Iowa Lottery became an authority not subject to some fiscal requirements of state agencies, Vaudt said the salaries of top Lottery officials significantly outpaced pay increases in other comparable state entities.

“In addition, a majority of state department directors included in the review did not receive any salary increases in fiscal years 2004 and 2005 while Iowa Lottery salaries increased substantially,” Vaudt's report indicated. “A majority of the state division directors included in the review recognized salary increases ranging from 6.12 percent to 13.38 percent. During this two-year period, the prior Iowa Lottery CEO's salary increased 68.55 percent and other key personnel received salary increases ranging from 13.86 percent to 27.55 percent.”

Lottery officials issued a response to the audit Monday, noting that current Lottery CEO Terry Rich is paid $180,377 – an annual salary set by the governor – and that yearly pay for other top lottery officials ranged from $130,915 to $53,997. Rich noted that the lottery's core products continue to register record sales and the authority has handled challenging circumstances in recent months which “clearly demonstrates the expertise of the professional, knowledgeable management team at the Iowa Lottery.”

“Here's the bottom line: Any business has to be concerned about budgeting and spending, and, it would be one thing if lottery sales and proceeds had gone down since the lottery became an authority,” Lottery spokesman Mary Neubauer said in a statement. “But our numbers are up – way up. That kind of success doesn't happen by itself. It takes a strong team to get there that is able to make good business decisions quickly, something the authority status has allowed the lottery to do.”

Former Iowa Lottery CEO Edward Stanek, in an email response, disputed many of Vaudt's claims and noted “the Iowa Lottery is an entrepreneurial enterprise that is in the entertainment business unlike the rest of the executive branch of state government. The report clearly shows a fundamental lack of business understanding on the part of the auditor's office and an apparent disregard by that office for accuracy and thoroughness.”

Stanek and lottery officials expressed disappointment that Vaudt did not interview board members or Stanek regarding his report, but the auditor said that would not have changed the data or the conclusions of his study.

In his audit, Vaudt noted the Iowa Lottery has generated more yearly revenues, but he said the experience has been similar in other states and the upturn did not related directly to shifting the operation from a state agency to an authority.

Looking at U.S. Census data for fiscal 2007, Vaudt said the Iowa Lottery's per-capital sales were 58.5 percent lower than the national average and its administrative costs were 10.2 percent higher than the national average.

Vaudt recommended the Legislature establish controls over compensation practices of all state authorities, including the Iowa Lottery, to ensure authority status does not result in salaries which are not based on employee responsibilities, experience and other valid documented considerations. He also advised lawmakers to determine if it is necessary to maintain key lottery positions and to conduct a comparison of all state authority salaries with pay levels at other state agencies “to identify any other salary anomalies.”

The state auditor also recommended the Lottery Board conduct an independent review of compensation practices for states of similar size and demographics to determine if current salaries for top Iowa officials are appropriate.

Tim Albrecht, Branstad's communications director, said the governor planned to review the audit findings and “make adjustments if necessary.” However, he noted the governor continues to support Rich and his lottery team “as they continue to successfully and effectively execute” the lottery's core functions and perform at “an extremely successful level.”

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