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Minnesota lottery cuts millions from budget

Jun 14, 2004, 8:32 am

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Minnesota LotteryMinnesota Lottery: Minnesota lottery cuts millions from budget

Told to cut the fat, the Minnesota State Lottery has trimmed staff, closed offices and reworked or severed business deals to save millions of dollars a year.

While the money represents a small share of lottery expenses, the savings will be welcomed by a state struggling to find ways big and small to avoid future budget deficits. The cuts and robust ticket sales mean that the lottery will send more money than ever to the state this year.

The changes occur as state gambling agents appear to be in the final stages of their months-long investigation into lottery contracts. The investigation was prompted by the suicide in January of lottery director George Andersen, and by auditors' questions about his relationship with at least one vendor.

Andersen took his life several hours after meeting with auditors to review a draft of their findings.

Lottery acting director Michael Vekich said last week that the cost-cutting is ongoing and he expects the savings to be fully realized next year.

"I think the number is going to be about $4.5 million when everything kicks in," Vekich said.

The layoffs of 42 employees will dventually save the lottery about $2.5 million a year after severance pay expires. Officials hope to pare another $1.5 million from promotions and save $500,000 by closing down or reducing the rent of district offices in Brainerd, Eagan, Marshall, Owatonna and Virginia.

"We still are in the process of renegotiating some of the leases the lottery had," Vekich said.

Contributions up

Lottery contributions to state environmental funds and the general fund rose to $94 million in the first 11 months of fiscal 2004, the highest ever and up from $79 million the previous year. Lottery lawyer Dale McDonnell said contributions are on pace to break $100 million this year.

McDonnell said cutting promotions has not adversely affected ticket sales, but research from other states suggests it will later.

"States that have cut back advertising have hardly seen any fall-off the first year, but in the long term there's some impact," McDonnell said.

The lottery's contribution to the general fund could ease state budget deficit woes. Gov. Tim Pawlenty used federal health care money to erase a $159 million deficit forecast for 2004-05, but the state faces the prospect of shortfalls in later years.

The lottery began examining expenses last year at the urging of former finance commissioner Dan McElroy, now Pawlenty's chief of staff, and the review picked up steam after the legislative auditor in February issued a scathing report on lottery spending under Andersen.

The lottery in fiscal 2003 contributed nearly $38 million to the general fund -- about 11 cents of every $1 spent on lottery games. It gave 12 cents to environmental and natural resources funds.

Meanwhile, it spent 13 cents per dollar -- a total of $47 million -- on operating expenses. Legislative Auditor Jim Nobles said the spending was excessive considering that similar state lotteries spent an average of 8 cents per dollar on operating expenses.

The Minnesota lottery's operating expenses have recently come into line with those of similar states.

But last year it spent more on promotions than did comparable lotteries, and the value was questionable, the legislative auditor said. It spent $400,000 a year to support the Minnesota Pro/Am Bass Tour, and paid for as many as eight staff members and a driver to attend tour dvents. Andersen was an avid fisherman.

The lottery also spent millions of dollars over the years on its "Environmental Experience" tractor-trailer that displayed lottery projects, and to produce a weekly public-access cable television show and radio spots.

The activities were put together by Media Rare, a St. Paul vendor founded by a fishing buddy of Andersen's. The auditor's report said the lottery never took bids for the work, overpaid Media Rare and hadn't measured the effect of the promotions.

After Andersen's death, the lottery severed its ties with Media Rare. The firm says it provided a valuable service and has sued over the cancellation of its contracts.

Trails to follow

Agents from the gambling division of the Department of Public Safety have been investigating the lottery since February and sought copies of contracts between it and Media Rare and an advertising firm, the Foley Group Inc. of Minneapolis., McDonnell said. He said investigators also reviewed the contracts of other vendors.

Acting Minnesota Public Safety director Michael Campion confirmed last week that investigators were looking at Media Rare and Foley. He said the agents are "still inquiring, trying to see if there is anything there or not." Campion said he hasn't heard of any evidence of criminal conduct.

"No one at Media Rare has been interviewed about any investigation," said Jeff Denney, the firm's current owner, who bought it four years ago from Andersen's fishing buddy, Michael Priesnitz.

Because of how the sale was structured, Priesnitz remained dependent on the success of the business, and the business remained dependent on its work for the lottery.

John Foley, president of the Foley Group, said agents asked to see his firm's contracts about six weeks ago but he hasn't heard back from them. "I don't know where their investigation is going to go," he said. "I think we're sort of on the sidelines."

Norm Pint, special agent in charge of the gambling enforcement division, said at the beginning of the inquiry that it involved reviewing hundreds of contracts for possible improprieties. Investigators are still interviewing people as well as reviewing documents, but Pint declined to discuss specifics.

"We've got a lot of documents to go through and we're making progress," he said. "But it will be a few weeks yet before we're done."

Star Tribune

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