Auditor, Former Commissioner Bash Arkansas Lottery's 10-Year Contract Extension

In the fiscal year that ended June 30, $335 million worth of instant tickets were sold, up 3.9 percent from the previous year.
In the fiscal year that ended June 30, $335 million worth of instant tickets were sold, up 3.9 percent from the previous year. (Michael Pirnique)
Lottery Director Bishop Woosley said in 2012 that the scratch-off tickets “made a lot of money for scholarships.”
Lottery Director Bishop Woosley said in 2012 that the scratch-off tickets “made a lot of money for scholarships.” (Jason Burt)

Former Arkansas Scholarship Lottery officials are critical of a recent decision to add 10 years to the contract of a vendor whose original contract was altered after lottery commission approval.

On Nov. 14, the lottery used its option to extend the contract with Scientific Games International Inc. of Alpharetta, Georgia, to continue providing scratch-off tickets and other services for the lottery until 2026. Scientific Games originally signed a seven-year contract with the newly created lottery in 2009.

Bruce Engstrom, a former lottery commissioner, said last week that he was concerned about extending the contract without taking competitive bids.

“But I don’t know the details, so I can’t express anything other than to say it’s a concern,” he said. “If I had stayed on the lottery commission, I would have insisted to have a very open and transparent bidding process. And apparently that didn’t happen, so it leads me to say I am concerned.”

Last year, the state Legislature abolished the independent lottery commission and put the games under the control of the Arkansas Department of Finance & Administration. Jake Bleed, a spokesman for DF&A, said the agreement to extend Scientific Games’ contract was in the best interest of the lottery.

Under the terms of the new contract, Scientific Games agreed to reduce its commission on sales of instant tickets, which are also called scratch-off tickets, from 1.81 percent to 1.3 percent, which could save the lottery millions of dollars over the life of the contract, Bleed said.

“We believe the SGI contract is a good deal for the State and look forward to working with them to make the Arkansas Scholarship Lottery the efficient, cost-effective operation that the Governor and the people of Arkansas expect and deserve,” Bleed said in an email to Arkansas Business.

For the fiscal year that ended in mid-2015, Scientific Games received a total of $10.47 million, which was up 1.6 percent from the previous year. Not all of that money was tied to the sale of instant tickets. Scientific Games also receives revenue for the Points for Prize program, which awards prizes based on tickets registered by players.

Michael Hyde, the lottery’s former auditor, said last week that he was surprised by the contract extension.

In 2012, Hyde concluded that SGI received $7.5 million more than it should have between August 2009 and February 2012 because the lottery was paying more than agreed upon in the original contract that the lottery commission approved. Hyde’s discovery led the commission to conduct hearings on how the contract had been handled between SGI and the lottery’s first director, Ernie Passailaigue, who resigned under pressure in September 2011.

Passailaigue said in a telephone interview from his home in South Carolina last week that he stands by his decisions made in handling the contract in 2009.

Scientific Games “offered in addition to the original bid, certain options which we thought were advantageous for us to undertake,” he said. “So we did that.”

He also added that the original contract with Scientific Games had an optional extension in it. “So I wouldn’t say it was a no-bid,” Passailaigue said. “It was actually part of the original bid.”

DF&A has rejected Hyde’s conclusion.

“We disagree with the methodology of the auditor’s report and the conclusions he reached,” Bleed said in an email to Arkansas Business. “The report was given a full airing in 2012 at open, public meetings that were covered by local media, and the concerns with the report were discussed in detail at that time.”

Still, in 2012, Scientific Games, without admitting any wrongdoing, agreed to repay the lottery $2 million and give a credit of about $200,000 to be used to buy more merchandise in the Points for Prize game.

“The fact that the vendor paid the Lottery $2 million and other concessions following the issuance of the report confirms that there were problems associated with the contract,” Hyde said in the email. “I am surprised that the Department of Finance & Administration chose to extend the contract with this vendor in lieu of a competitive bid process.”

Former Gov. Mike Beebe, whose term ended at the beginning of 2015, told Arkansas Business last week that his general philosophy was to issue a request for proposal to get bids from vendors.

“Normally, it is my belief that you rebid them, or at least you send out the request for proposals and look at what the options are,” Beebe said.

Beebe said, though, that he wasn’t familiar with how DF&A handled extending the contract to Scientific Games.

Julie Baldridge, the former interim director of the lottery, also said last week that she didn’t know all the factors that went into the decision to extend the contract.

“But I don’t see what the harm would have been to bid it out,” she said.

New Terms

Under the extended contract, Scientific Games will receive 1.3 percent on the sales of scratch-off tickets compared with 1.81 percent, Bleed said.

The lottery is expected to save between $1.7 million and $1.8 million annually, assuming stable scratch-off sales, he said.

But the new contract also provides a lucrative new provision if instant ticket sales take off in popularity. If sales exceed $360 million in a year, Scientific Games will receive 4.5 percent of the sales, Bleed said.

In the fiscal year that ended June 30, $335 million worth of instant tickets were sold, up 3.9 percent from the previous year.

“Based on what we’ve determined, we would have to have instant ticket sales of $406 million for this contract to be more costly for the lottery than it was in the past,” Bleed said.

He said it made sense in this case to extend the contract to Scientific Games, which also will include providing the manufacturing and the storage of the tickets.

“SGI is a well-regarded company with whom the State has an established relationship,” Bleed wrote in the email.

Bleed also said that there are only three companies that provide scratch-off tickets and only two that provide all the services that the lottery was looking for.

Bleed said that RFPs and competitive bidding practices are generally “just good government.” But he also said that in some cases extending the contract is the correct move to make.

“In this case, SGI is one of only two vendors who can provide the services in question,” he said. “In light of the very competitive rates offered by SGI, it made sense in this case to extend the contract.”

IGT of Providence, Rhode Island, which bid on the contract in 2009 when it was known as Gtech Corp., couldn’t say definitively whether it would have bid had the lottery called for proposals. “We certainly look at each opportunity” when a state issues an RFP, spokeswoman Angela Wiczek said last week. “But at this point it would just be speculation” whether the company would have submitted a bid.

A spokeswoman for Scientific Games said in an email to Arkansas Business last week that she was “unable to assist you with your inquiry” about the contract extension.

The Issues

In March 2012, Hyde, the former lottery auditor, made his case in front of the Arkansas Lottery Commission concerning the problems with the original contract.

That contract was approved by the Lottery Commission and the Legislature reviewed it, as required by state law.

Within days, however, the contract was modified and approved by the lottery, but without the approval of the commission or legislative review, Hyde said.

That original contract price had either been 1.15 percent of ticket sales, as Hyde recounted, or 1.75 percent, as lottery Director Bishop Woosley said. Neither number was enforced. Under the modified contract, Scientific Games got 1.92 percent.

“Nobody can see where this change was ever brought” to the commission for approval, Hyde said during the more than three-hour meeting, a recording of which Arkansas Business reviewed.

Passailaigue defended the contract modification to Arkansas Business last week and said he had the authority to add the options.

It’s “sort of like buying a car,” he said. “You can buy a base model car; you can put air conditioning … and all of that.”

He said he stood by the decisions made to add options to the contract, which included a second-chance drawing. And, overall, the moves were successful, he said.

“As I recollect, we had one of the highest per-capita sales rates in the country when we started off,” Passailaigue said.

Still, Hyde said in March 2012 that the difference between 1.15 percent and 1.92 resulted in several million dollars more that Scientific Games received that it shouldn’t have.

During the commission meeting, lottery Director Bishop Woosley disagreed with Hyde’s findings.

Woosley said during the March 2012 meeting that the initial contract price wasn’t 1.15 percent but 1.75 percent on the commission of instant ticket sales.

“I don’t have any doubt about the 1.75,” Woosley said.

Woosley said during the March 2012 committee meeting that despite the questions surrounding the contract, “in the end we sold a lot of tickets, and we made a lot of money for scholarships,” Woosley said. “It’s really the only reason we’re here, to be honest with you.”

At that time, scratch-off ticket sales over several years totaled more than $1 billion and the lottery had paid Scientific Games a total of $31.97 million.

He also said that he felt the contract with Scientific Games was valid.

Phil Bauer, an attorney for Scientific Games, told the commission during the meeting that the company takes its “reputation for high integrity very seriously, and compliance with all applicable laws, rules and regulations in our business operations is of the highest priority to Scientific Games.”

He also said that any issues raised by Hyde were not caused by the company.

“While we understand the role of the internal auditor and welcome and support transparency in government, we cannot continue to stand by as our reputation suffers damage by these repeated and unjustified attacks,” he said. He asked that the commission formally reaffirm its contract with the company.

In June 2012, the lottery and Scientific Games amended the contract to say that Scientific Games would reduce its percentage of gross sales from 1.92 percent to 1.81 percent.

Woosley “expressed his appreciation of SGI officials for coming to the table and negotiating for many weeks to achieve this proposal,” according to the June 18, 2012, minutes of the Lottery Commission.