Arkansas Blog

At a meeting tomorrow afternoon, the Arkansas Lottery Commission is likely to consider a settlement with Scientific Games International (SGI), the instant ticket vendor that’s received almost $7.5 million more than it would have had a contract approved by the Arkansas Lottery Commission and the Arkansas Lottery Commission Legislative Oversight Committee been honored. Among the terms SGI has offered in a proposed settlement is a $2 million credit as an incentive for the state to keep contracting with SGI.

Commissioner Bruce Engstrom helpfully boils down the matter at hand. “There are two basic questions that need to be answered: Did we get screwed? And, if we got screwed, are we stuck with it?"

Below, consideration of those questions and a few more.

Did the lottery get screwed?

According to Arkansas Lottery internal auditor Michael Hyde’s preliminary report, yes.

As I reported last week, on Aug. 18, 2009, the Lottery Commission agreed to a contract with SGI to provide the lottery with scratch-off tickets. Nearly a week later, former Arkansas Lottery Director Ernie Passailaigue altered the terms of the contract without approval from the Arkansas Lottery Commission or the Arkansas Lottery Commission Legislative Oversight Committee. From when the lottery began in September 2009 until Feb. 29, 2012, the difference between the original terms and the terms to which Passailaigue agreed have cost the scholarship lottery $1.95 million and lottery players $5.5 million, according to a lottery internal audit. Over the seven-year life of the deal, the altered contract will cost the Arkansas Lottery $21.7 million more than the original contract, according to Hyde’s estimates.

What did the lottery get in return for the altered terms?

A customer service and sales operation called Tel-Sale, Passailaigue and former Vice President of Gaming David Barden contended in a meeting with other lottery officials on Sept. 15, 2011 (UPDATE: Passailaigue tendered his resignation the following day), according to notes from that meeting the Arkansas Times obtained via an FOI request. Tel-Sale is a turnkey operation run by Scientific Games in Arkansas that works solely on the behalf of the Arkansas Lottery to keep instant-ticket retailers stocked with tickets and tells them about new tickets and such, according to Arkansas Lottery spokesperson Julie Baldridge. According to notes from the 2011 meeting, Barden contended that Tel-Sale would have cost the lottery $750,000 to $800,000 a year to maintain in-house. A Scientific Games spokesperson said she wasn’t able to find out how many employees Scientific Games employees in Little Rock to operate Tel-Sell today. A manager at the Little Rock Tel-Sell operation referred all questions to the spokesperson.

Regardless of what it’s worth to the lottery, according to the internal audit, following the terms of the lottery’s Instant Ticket Game Lottery Game Services Request for Proposal, Tel-Sale should have been covered in the lottery commission’s original contract with SGI.

Why is the lottery negotiating with SGI for a settlement?

Likely because the brass is afraid that calling the contract invalid will open the lottery up to a lawsuit. It would also reflect poorly on current lottery Director Bishop Woosley, who was lottery legal counsel at the time the deal was altered and who has said he first learned of the contract change in September 2009; on lottery commissioners who knew about the altered contract and didn’t question Passailaigue about it, and on members of the lottery legislative oversight committee, who didn’t sufficiently dig into it after legislative auditors identified the issue in 2010.

Rather than challenge Passailaigue and risk lawsuit, all involved seem content to hide behind Woosley’s defense of the renegotiated contract, that “the commission delegated the power to [Passailaigue] through its procurement rules to negotiate with vendors.” Section J. of the Arkansas Lottery Commission Major Procurement rules says, “The Commissioners, the Director, and all Commission employees may conduct negotiations and other communications with vendors and potential vendors with respect to potential major procurement contracts and other contracts as they deem to be in the best interests of the Commission.” No mention is made of executing a contract.

Is the lottery stuck with the deal?

A state legislator looking to beef up his or her good government bona fides should request an attorney general’s opinion to find out.

But perhaps the more pertinent question is will the lottery accept the settlement?

Probably. SGI wouldn’t suggest a $2 million settlement — almost $3.7 million less than the internal audit estimates the altered terms will cost lottery revenues — unless it knew that the Lottery Commission felt exposed on the contract. Otherwise, an invalid contract would seem to be a pretty strong bargaining chip for the lottery to renegotiate with SGI for a better deal — say a flat-fee arrangement similar to South Carolina’s — or cause for the commission to open up bidding anew.

UPDATE II: One thing I forgot to mention, which may simply be a coincidence: remember the travel-related improprieties Legislative Audit dug up last year? A big part of that was related to SGI conferences in Georgia. Auditors weren't able to determine whether Barden and Passailaigue attended all of the conferences. SGI paid for the two to attend and then sought reimbursement from the state.