The Arkansas Scholarship Lottery has received nearly $2 million less than it would have had a contract approved by the Arkansas Lottery Commission been honored, according to Lottery Commission Internal Audit documents that Times received through a Freedom of Information request.
On Aug. 18, 2009, the Lottery Commission agreed to a contract with Scientific Games International (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 Sept. 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 audit documents.
At a Lottery Commission meeting on Tuesday, as Leslie Peacock previously reported, Arkansas Lottery Director Bishop Woosley released an e-mail from SGI, in which the company offers the lottery a $2 million credit as an incentive for the state to keep contracting with SGI and "not in the performance of any obligation or as an admission of any kind of liability."
Following Tuesday’s meeting, Lottery Commissioner Bruce Engstrom asked internal auditor Michael Hyde to distribute copies to lottery commissioners of a draft-version of an internal audit of the Scientific Games’ contract modifications.
“I was already aware of some serious concerns about the existing contract — or lack thereof — and felt it was necessary and imperative that everyone be fully informed about them before they would be asked to take any corrective action,” Engstrom said.
The revisions to the original contract, authorized by Passailaigue in a document dated Aug. 25, 2009, raised the percentage of instant ticket sales SGI receives from 1.15% to 1.89%. The revised contract also made SGI the exclusive scratch-off ticket provider, a change that, according to the internal audit documents, “guarantees Scientific Games millions of dollars of additional revenues that could have been paid to another instant ticket game vendor.”
Woosley, who previously served as lottery legal counsel, said he first learned that Passailaigue had altered the contract “probably sometime in September 2009.”
Under what authority did Passailaigue renegotiate the contract? “I believe the commission delegated the power to him through its procurement rules to negotiate with vendors,” said Woosley.
Asked why he didn’t alert the commission of the change, Woosley said he thought Passailaigue had told the commission. According to the internal audit review, the minutes and audio for commission meetings on Aug. 5, 2009, Aug 12, 2009, Aug. 19, 2009 and Aug. 26, 2009 don’t include any mention of modifications to the Scientific Games’ contract.
Commissioner Ben Pickard, of Searcy, said that to the best of his recollection, he first learned that the contract had been revised from the fiscal year 2010 Arkansas Lottery Commission Audit Report prepared by the Division of Legislative Audit, released in Oct. 2010, which noted that the contract revisions were not approved by the lottery commission or the lottery Legislative Oversight Committee and offered this comment: “Lack of appropriate review of contracts and modifications of contracts could lead to a lack of transparency to the LOC and public.”
Internal Auditor Michael Hyde said he wouldn’t comment on the audit until he completes it, which he said is “weeks and weeks” away. Asked about the internal audit documents, Woosley said, "It's my understanding it's a preliminary report and can change." Asked if he thought Passailaigue's alteration to the original contract had benefited the lottery, Woosley wouldn't comment.
As Gerard Matthews noted in a cover story in the Times on the Arkansas Lottery in 2011, many states, including South Carolina, where Passailaigue previously served as lottery director, pay flat fees to their vendors, rather than a percentage. In fiscal year 2011, for instance, South Carolina paid less money to its vendors than Arkansas even though the state had more than twice the lottery sales.