s 352.439 L72FSPG 2009 1 A Report TO THE Montana Legislature Performance Audit Fantasy Sports Parimutuel Gambling Board ofHorse Racing Montana State Lottery September 2009 Legislative Audit Division 09P-02 MontanaStaleLibrary 3 0864 1005 8610 9 Performance Audits Legislative Audit Committee Performance audits conducted by the Legislative Audit Division are designed to assess state government operations. From the Representatives audit work, a determination is made as to whether agencies and programs are accomplishing their purposes, and whether they Dee Brown Betsy Hands can do so with greater efficiency and economy. Scott Mendenhall We Carolyn Pease-Lopez conducted this performance audit in accordance with Wayne Stahl generally accepted government auditing standards. Those Bill Wilson standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for Senators our findings and conclusions based on our audit objectives. We Greg Barkus believe thatthe evidence obtained provides a reasonable basis for John Brenden our findings and conclusions based on our audit objectives. Taylor Brown Mike Cooney Members of the performance audit staff hold degrees in disci- Cliff Larsen Mitch Tropila plinesappropriate to the auditprocess. Areas ofexpertise include business and public administration, journalism, accounting, economics, sociology, finance, political science, english, anthropology, computer science, education, international Audit Staff relations/security, and chemistry. Performance Angus Maciver PerformanceauditsareperformedattherequestoftheLegislative KoRi Minckler Audit Committee which is a bicameral and bipartisan standing committee ofthe Montana Legislature. The committee consists Financial-Compliance of six members ofthe Senate and six members of the House of Jay Phillips Representatives. Fraud Hotline Help eliminate fraud, waste, and abuse in Directcommentsor inquiriesto: state government. Legislative AuditDivision Call the Fraud Room 160, State Capitol Hotline at: P.O. Box201705 MT (Statewide) Helena, 59620-1705 1-800-222-4446 (406) 444-3122 (in Helena) Reports can be found in electronic format at: 444-4446 http://leg.mt.gov/audit LEGISLATIVE AUDIT DIVISION Tori Hunthausen, LegislativeAuditor Deputy Legislative Auditors Monica Huyg, Legal Counsel James Gillett Angie Grove September 2009 The Legislative Audit Committee ofthe Montana State Legislature: This report provides the legislature information about the development and administration of a new fantasy sports parimutuel gambling program by the Board of Horse Racing and the Montana State Lottery. This report includes findings and recommendations relating to the legal authority ofthe Montana State Lottery relative to fantasy sports gambling, and opportunities for improving the process used by the Board ofHorse Racing for selecting providers offantasy sports gambling games. We wish to express our appreciation to Board of Horse Racing and Montana State Lottery personnel, and staff in other executive branch agencies and offices for their cooperation and assistance during the audit. Respec itted, /a_^ Tori Hunthausen, CPA Legislative Auditor Room 160• StateCapitol Building• PO Box201705 • Helena, MT• 59620-1705 Phone(406)444-3122 • FAX(406)444-9784• [email protected] Table of Contents Figures andTables ii Appointed and Administrative Officials iii ReportSummary S-1 CHAPTER - INTRODUCTION I 1 Introduction 1 The Parimutuel System ofGambling and FantasySports 1 The Montana State Lottery 1 Background 1 Implementation ofHB616 and the Role ofthe Montana State Lottery 2 Financial Data for Fantasy Sports Parimutuel Gambling 2 Audit Scope 3 Implications ofRecent Federal Court Decisions 3 Audit Objectives 3 Audit Methodologies 4 Report Organization 4 CHAPTER -IMPLEMENTATION OF FANTASYSPORTS PARIMUTUELGAMBLING I 5 Introduction 5 Board Rule-Making Procedures 5 Basis forAdministrative Rules Is Unclear 6 Implementation ofBoard Rules for Fantasy Sports Parimutuel Gambling 6 Agreement With Lottery Circumvents Rule-Based Procedures 7 Problems ExistWith Board LicensingFunctions for FantasySports 8 Application ofthe Montana ProcurementAct to FantasySports Parimutuel Gambling..8 LackofOpen Procurement Process Benefitted Lotteryand Contractor 9 Licensing Function Is Inappropriate for Fantasy Sports Parimutuel Gambling 10 Statute Should Be Revised to Provide for Contracted Services 11 CHAPTERIII-LEGALAUTHORITYFORLOTTERY'S INVOLVEMENT IN FANTASYSPORTS 13 Introduction 13 Legal Challenges to Lottery Involvement 13 Interpretation ofStatutes Relating to Fantasy Sports Parimutuel Gambling 13 Involving the LotteryWas Expedient, But does not Complywith Stature 14 AGENCYRESPONSES A-1 Board ofHorse Racing and Montana State Lottery A-3 09P-02 Montana Legislative Audit Division Figures AND Tables Tables Table 1 FantasySports Retailers' Lottery Products Sales Revenue. 10 Ul Appointed and Administrative Officials Board ofHorse Racing Ryan Sherman, Executive Secretary Sherry Meador, Contracted Legal Counsel Al Carruthers, Chairman Ray Tracy, Vice Chairman Susan Austin, Board Member John Ostlund, Board Member Susan Egbert, Board Member Mike Tatsey, Board Member Carol Lambert, Board Member MontanaState Lottery George Parisot, Director John Tarr, Security Director Jeri Duran, Sales and Marketing Director Paul Gilbert, Information Technology Director Elaine Taylor, Financial Services Director Montana Lottery Commission Robert Crippen, Chairman CraigAnderson, Commission Member Thomas M. Keegan, Commission Member Beth O'Halloran, Commission Member Wilbur Rehmann, Commission Member 09P-02 Digitized by the Internet Archive in 2011 with funding from IVIontana State Library http://www.archive.org/details/fantasysportspar2009mont S-1 Report Summary Fantasy Sports Parimutucl Gambling The involvement ofthe Montana State Lottery in the Board of Horse Racing's fantasy sports parimutucl gambling program does not comply with statute; further legislative action is necessary to ensure this new form of gambling is administered in an equitable and transparent manner. Audit Findings In response to a requestfrom the EconomicAffairs Interim Committee, the Legislative Auditor prioritized a performance audit of the Board of Horse Racing (the board) and its implementation offantasy sports parimutucl gambling. House Bill (HB) 616, passed during the 2007 legislative session, provided for fantasy sports gambling to be administered by the board. HB616 authorized extension ofthe board's authority over parimutucl gambling to fantasy sports leagues. In June 2008 the board entered into an inter-agency agreement with the Montana State Lottery (the Lottery) to provide fantasysports parimutucl gambling. The Lottery introducedtwoweekly fantasysports games based on professional football and auto racing. The games are offered by the Lottery through approximately 200 retail locations. Our audit objectives addressed the board's Fantasy Sports Gambling Statutory Revenue Distribution implementation of fantasy sports gambling We via administrative rule. also addressed Player'sPrize Pool $134,206 concerns over the legality of involving the BoardofHorse Racing $29,018 Lottery. We found the board lacks full legal authorityforadoptingfantasysports gambling MontanaStateLottery $10,882 rules under the Montana Administrative Retailers $7,254 Procedure Act. The rules that were adopted Total $181,360 did provide a good basis for implementing the new program, but the board's Source: Complied bythe Legislative AuditDivisionfrom Montana inter-agency agreement with the Lottery State Lottery records. essentially negated these efforts. The board behaved like it was procuring services under contract, as opposed to granting licensure, but none of the procedures associated with the Montana Procurement Act were applied. The board's actions were a hybrid oflicensing and contracting procedures, but ultimately satisfied the requirements of neither. Had the board followed the Procurement Act, several problems could have been avoided. Theseproblemsrelateto theabilityofothermarketentrantsto participate on an equitable basis, and the benefits that ultimately accrued to the Lottery and its main game contractor. 09P-02 S-2 Montana Legislative Audit Division Challenges to the legality ofinvolving the Lottery in fantasy sports gambling focused on the agency's legal authority to offer gambling games that are different from conventional lottery-type products. The Montana State Lottery Act established the Lottery and outlined its legal authority. HB616 did not refer to the Lottery or make any changes in the Lottery Act. Although HB616 did not identify a specific means of implementing fantasy sports gambling, the involvement of the Lottery does not comply with statute. The board, the Lottery and the Governor's Office have stated that involving the Lottery offered an expedient and effective means ofimplementing the legislation. Although the board and the Lottery obtained legal analysis, they did not seek a resolution of the issues through the Attorney General's office or through legislation during the 2009 legislative session. Either course would have offered an opportunity to clarify legal interpretations regarding the Lottery's scope ofauthority. Audit Recommendations In relation to the board's process for licensing fantasy sports gambling providers, we recommend legislation be enacted to provide the board authority to contract for services, rather than license provision offantasy sports gambling. Revising statute to provide the board with authority to contract for services would ensure greater trans- parency in the process and greater confidence in the results. In relation to the Lottery's legal authorityto offer fantasysports gambling, activities thatare outside ofan agency's legal authority and are not in compliance with statute should cease. We recommend the Board ofHorse Racing and theMontana StateLottery terminate their inter-agency agreement on fantasysports parimutuel gamblingwith immediate effect.