After grilling Lottery Director Bishop Woosley and State Procurement Director Edward Armstrong for nearly an hour over the process that awarded a $34.5 million, five-year lottery advertising contract to CJRW, a legislative subcommittee voted Wednesday morning not to approve the contract.
The tough questioning and rare vote "not to review" came after Woosley revealed that the contract's pay schedule had been revised downward late in the process, with the Little Rock ad agency agreeing to accept a 13 percent commission for media placement as opposed to 15 percent in the pay schedule originally listed in the meeting agenda. The ad-buying element makes up 77 percent of the budget, Woosley said.
The vote by the Performance Evaluation and Expenditure Review/Review subcommittee of the Joint Budget Committee pushed the matter back to the full committee, leaving lawmakers and Woosley puzzled about the next step. Later, the Joint Budget Committee accepted the subcommittee's report that it had not approved the contract, but it voted to send the contract back to the subcommittee, apparently for additional discussion and another review.
Woosley said the pay schedule change from 15 percent to 13 percent would save the state $80,000 to $90,000 a year, and result in budget equivalencies comparable with what the lottery was paying its previous agency, Mangan Holcomb Partners of Little Rock, which charged a 5 percent commission but also received hourly fees.
Avoiding those fees could provide particular savings compared with Mangan Holcomb's pay schedule in light of the lottery's ambitious plan to rebrand and market the lottery, Woosley said. He referred to a comparative analysis that suggested CJRW will receive total compensation of $600,600 in fiscal 2017, $650,000 in 2018 and $700,700 in 2019, all figures that were lower than what Mangan would reap factoring in additional budgeted projects, he said.
Subcommittee Chairman Sen. Gary Stubblefield, R-Branch, asked about the late change.
"We attempt to negotiate all the way up to the deadline, and when you're negotiating contracts, time and uncertainty are friends," Woosley replied. "People often come back and say we can come down, and we're excited about that."
After the meeting, Woosley said that the 15-to-13-percent change was unrelated to a letter from Sharon Tallach Vogelpohl, president of Mangan Holcomb, suggesting that CJRW was poised to make more from the lottery contract than previous firms doing the work. The letter was just one element in a strong response among Little Rock advertising professionals after CJRW was announced as the contract winner.
Mangan Holcomb and another rival for the work, the joint venture Ghidotti-Vines of Little Rock, officially protested the award, focusing on a perceived conflict of interest CJRW might face in marketing both the lottery and Oaklawn Park, the Hot Springs racetrack and casino that has been a longtime CJRW client.
Oaklawn was identified as a lottery competitor in an aggressive five-year business plan prepared by Camelot Global Services, a consultant based in Britain.
Armstrong rejected both protests, finding that under the terms of the Request for Qualifications seeking bids, potential conflicts were required to be revealed only after the contract was signed.
The conflict issue, subjectivity in the contract judging process and concerns about the appearance of bias among those picked to judge the competing advertising agencies dominated questioning by committee members.
Stubblefield expressed dismay over a process "that would ask the Legislature to approve a $34.5 million contract prior to understanding that the successful bidder may have a conflict of interest not in the best interest of the lottery."
Sen. Joyce Elliott, D-Little Rock, said conflicts should be disclosed "at the front end as opposed to the back end." Told that such an approach wasn't required by procurement law, she replied, "I am gobsmacked!"
Elliott noted that if "this is not the usual way we do business, are there any other contracts that were handled this way?"
"I’m not aware of any during my tenure that have come to my attention," Armstrong replied.
He described the conflict-of-interest requirement in the ad contract as a future obligation for the winning vendor to notify the lottery office of any conflicts within 15 days of discovering them. He conceded that in one section of the RFQ response packet, a "procurement specialist asked for people to submit any conflicts to be evaluated," but he said that was a mistake.
One point that Mangan Holcomb and Ghidotti-Vines made after their protests were rejected was that if revealing a conflict wasn't required until a winning vendor had been selected, it made no sense that they had been judged on the subject in the RFQ. Armstrong said that the RFQ passage "shouldn't have been in there, but it got in there."
State Sen. Jake Files, R-Fort Smith, said the whole process had been mishandled and asked what the result would be if the panel declined to review the contract. The question seemed to stump the subcommittee chairmen and staff members. Jake Bleed, a lottery spokesman, said "we’re still considering our options and haven’t determined a next step. As far as how the subcommittee might handle the contract in the future and how we might respond, that all remains to be seen." One certainty is that the contract remains in limbo.
Vogelpohl of Mangan Holcomb, who missed the meeting while traveling to San Diego to address the Rotary International Assembly on Thursday, issued a statement Wednesday afternoon.
"We appreciate our elected officials' leadership in asking the logical and prudent questions," she said. "The questions and concerns about how this process has been managed are numerous and came from both sides of the aisle. Committee members hit on some of the same issues we have tried to shed light on, as well as broader issues that need to be addressed in the state procurement process."
She said she and her team were reviewing "CJRW's last-minute compensation proposal and are glad that our transparency precipitated the negotiations moving in the right direction."
She continued to take issue, however, with remarks by CJRW consultant Gary Heathcott several weeks ago that the new contract would save the state "hundreds of thousands annually." She noted that his comments "to several media outlets" referred to the original 15 percent compensation proposal. She said CJRW and the lottery seemed to be "getting closer to parity" by reducing the media commission and including "some speculative 'major initiative' budgets that make the numbers work."
Heathcott told the Arkansas Democrat-Gazette that CJRW would "like nothing more than to plead our case, but we have faith in the system. We'll remain confident in that, and continue to refrrain from commenting otherwise."
Sen. Jimmy Hickey Jr., R-Texarkana, a close follower of lottery matters, objected to the procurement system's use of a judging system that weighted 25 percent of the score on the advertising firms' philosophies and oral presentations. Woosley agreed that those kinds of subjective scoring methods should bear less weight. Hickey also suggested that the use of a request for qualifications as opposed to a request for proposals, a bid solicitation process that allows the state to focus more on pricing, had tied the state's hands.
Woosley and Armstrong replied that in the case of the lottery contract, the quality of the vendor was paramount, and that costs could be negotiated later.
Elliott said she was worried that the appearance of impartial judging was being undermined, and asked who chose the three judges of the advertising agencies' oral presentations. Chosen by the Office of the Arkansas Lottery, they were Joe David Rice of the Arkansas Department of Parks & Tourism, Donna Bragg of the Arkansas Scholarship Lottery and Esperanza Massana of the Arkansas Economic Development Commission.
"One of the evaluators is working for an agency that already uses the firm that was chosen," Elliott said, asking if there were no guidelines to discourage "choosing somebody who is even tangentially connected to those being considered, and can you see why that creates an appearance of something that maybe we should not be doing?"
Woosley and Armstrong said that finding judges with the right expertise is difficult, in that prospects must be qualified, willing to volunteer, and available to devote weeks of work to the process.
"We ask have they dealt with ad contracts and the state advertising industry, have they been an evaluator before," Woosley said, "because that's a great help... You look at people who have previously served. I think the person you are talking about (Rice) is with Parks & Tourism, and they have both CJRW and MHP as their vendors. One at AIDC (Massana)... It’s hard considering how small the advertising industry is in Arkansas. Everybody seems to have worked with someone or for someone at some point."
Woosley said he thought all three judges had worked with most of Little Rock's advertising community. Still, several lawmakers suggested overhauls in the entire state procurement process, and Armstrong agreed that some change would be desirable.
Gov. Asa Hutchinson, in a written statement issued after debate over the contract, said he wanted to "listen carefully to any legislative viewpoints on the procurement process and to learn from them. Ultimately, the contracting system of the executive branch needs to move forward." Hutchinson is in Washington for the inauguration of President-elect Donald J. Trump.
Shortly before the subcommittee vote, one lawmaker, Rep. Eddie L. Armstrong, D-North Little Rock, sought assurances that political favoritism had not been involved in the contract process. "No sir," Edward Armstrong replied.
