LITTLE ROCK — The Arkansas Lottery Commission put off making a decision Tuesday on the validity of its long-standing contract with ticket vendor Scientific Games until an internal audit can be completed, despite a threat from the vendor to withdraw a more than $2 million “good faith” settlement offer.
Last week it became public that the lottery’s auditor has questioned the validity of the scratch-off ticket contract, which the lottery has had almost from its beginning.
The Lottery Commission met in Little Rock for more than three hours Tuesday to hear from the auditor and Lottery Director Bishop Woosley about the auditor’s concerns.
Some commission members were exasperated at lottery auditor Michael Hyde’s preliminary findings because the issue has been raised repeatedly over the past 17 months, and the game firm is looking to resolve it once and for all.
Commission Chairman Dianne Lamberth of Batesville said she expects the commission to reconvene and make a decision in the next 14 days.
“I would like to get thisbehind us as quickly as possible,” Lamberth said. “We need to resolve this and resolve it very, very quickly.”
The audit should have been completed before the full commission met, said Commissioner Steve Faris of Central.
“We maybe jumped the gun a little bit,” he said. “I think there needs to be more dialogue from within.”
A 2010 audit raised concerns about the way the amendment was implemented. The commission subsequently took steps to address it and considered the matter put to rest.
Woosley, who was the lottery’s attorney from 2009 until commissioners hired himas director on Feb. 11, said the issue has been a looming distraction over other decisions for too long.
The 2010 audit found that on Aug.5, 2009, the commission approved the original instantticket lottery game service contract with a stated cost of 1.75 percent of net sales. On Aug. 13, 2009, the Legislative Oversight Committee reviewed, and in essence approved, that contract.
But the audit found that on Aug. 25, 2009, former DirectorErnie Passailaigue agreed to a “recital of selected options,” which is similar to a contract amendment, but did not ask the commission orthe oversight committee to consider it.
The recital raised the stated amount for Scientific Games to 1.92 percent of net sales, plus 1.5 percent of the prize pool. That amounts to an additional $3.9 million a year for Scientific Games, according to the 2010 audit. Passailaigue resigned Oct. 3, 2011.
Hyde, in his preliminary 2011 audit findings, questions whether the committee and the commission ever formallyapproved the amended contract, and whether the contract is valid because, he says, the recital goes beyond the original scope of the contract by making Scientific Games the exclusive ticket printer.
Hyde’s initial audit finding estimates that an amendmentto the contract has cost the state $7.29 million more than was in the initial deal the commission and its oversight committee approved. Over the seven years of the contract, he said, Scientific Games will receive an estimated $21.7 million more than it would have under the original deal.
Hyde’s analysis shows that the state has paid Scientific Games about $29 million since the contract began in 2009.
His analysis of the amendment shows that the change to 1.92 percent instead of 1.75 percent cost the lottery $7.29 million between Sept. 28, 2009, and Feb. 29, 2012. That means $1.95 million less for scholarships and $5.54 million less for lottery players.
His projection is that over the next seven years the amendment will increase Scientific Games’ take by $21.7 million more than was in the original contract, and means $5.65 million less for scholarships and $16 million less for lottery players.
Woosley disagreed, saying that the amount for players does not go to Scientific Games. He said that money goes to Play It Again prizes, which allows players to punch a losing ticket number into a website for another chance to win.
Philip Bauer, vice president and corporate counsel for Scientific Games, asked the commission to reaffirm the contract’s validity at its meeting Tuesday instead of waiting.
He could not guarantee that the company’s offer of more than $2 million in cash and prizes in exchange for resolution of the issue would still be good in two weeks, Bauer told the commission.
“While we understand the role of the internal auditor, and welcome and support transparency in government,we cannot stand by as our reputation suffers damage by these repeated and unjustified attacks,” Bauer said. “I cannot guarantee the same offer will be on the table 14 days from now.”
Bauer sent an e-mail March 16 to Woosley in which he wrote that in exchange for the proper approval for the Aug. 25, 2009, amendment to its contract, the company would give the state $2 million in cash over the course of the contract.
The firm also said it would amend the contract’s exclusivity clause to be less strict, provide a $200,000 credit to purchase merchandise for ingame prizes or the Points for Prizes store, and amend the contract to allow the lottery to purchase additional merchandise. In addition, it states that the rate that the lottery pays Scientific Games for Linked Games will be discounted.
The commission voted without objection to wait until it hears more before making a public declaration of whether the contract is valid.
Bauer’s comment, Faris said, made him feel like he was backed into a corner.
“The good faith kind of goes down the drain when you say that,” Faris said.
After the meeting, Woosley told reporters that commissioners need to remember that if the company doesn’t have the impression the lottery considers the contract valid, it could stop operating under the terms of the contract, potentially even stop ticket sales.
“That’s 84 percent of our revenue in instant tickets. Who do we answer to? The momma’s and daddy’s and students of Arkansas,” Woosley said. “If I was a student or a mother or father with a child in school, and we lost 84 percent of the lottery’s revenue, I’d be pretty angry. We have to consider that, we have to consider the impact on sales and the ramifications of what you are doing.”
Arkansas’ lottery has provided about $238 million for college scholarships since it began in 2009.
EVALUATIONS
The commission was scheduled to meet in executive session for evaluations of Woosley and Hyde. Those were delayed until the Lottery Commission meets again.
Front Section, Pages 1 on 03/28/2012