It wasn't hard to explain Ernie Passailaigue's decision to resign as director of the Arkansas Lottery last September. He'd faced two firing attempts, two scolding legislative audits and was facing harsh criticism over a $100,000 fine levied by the IRS on the lottery for late payment of taxes withheld from lottery winners. But notes the Arkansas Times obtained via a Freedom of Information request from a meeting between Passailaigue, the lottery's internal auditor and other lottery officials held the day before Passailaigue tendered his resignation suggest another reason for his departure: Internal Auditor Michael Hyde's investigation into the validity and benefits of a contract with instant-win vendor Scientific Games International (SGI).
In August 2009, the Lottery Commission and the Arkansas Lottery Commission Legislative Oversight Committee approved a contract with SGI to provide the lottery with scratch-off tickets. Nearly a week later, Passailaigue altered the terms of the contract without approval from the commission or the Legislative Oversight Committee. From the lottery's start 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 Hyde. Over the seven-year life of the deal, he estimates the altered contract will cost the lottery $5.7 million in scholarships. That's more than 1,100 scholarships at the first-year rate of $5,000, many more at the new rate.
In exchange for the new terms, the lottery received the services of a sales and customer service operation that SGI operates solely on behalf of the lottery to support retail outlets. The operation includes four people operating phones. That's all Passailaigue could offer as a marked difference between the new terms and the original ones in his meeting to Hyde. A little more than three weeks later he left town. A month later Legislative Audit discovered a number of improprieties in trips Passailaigue was reimbursed for during his time at the lottery. Among the findings, auditors couldn't determine if Passailaigue had actually attended all meetings with SGI in Georgia that were billed to the state.
In an Arkansas Lottery Commission on Tuesday, Lottery Director Bishop Woosley disputed Hyde's understanding of the contract with SGI and the projected costs Hyde cited. He argued that commissioners had indeed granted Passailaigue the power to renegotiate the contract. His arguments were lawyerly (he was the lottery legal counsel previously). He said the commission "acquiesced" to the terms of the contract by not raising any objection once they knew of them. Asked by Commissioner Bruce Engstrom if he were saying, "It's your position that, whether or not we got screwed or not, we're stuck with it?" Woosley said he believes the contract is valid.
It seems abundantly clear that Passailaigue screwed the lottery. On behalf of the Arkansas lottery, he negotiated deals with the same vendors used by the South Carolina lottery, where he previously served as director, but with terms considerably more lucrative to the vendors. Over the terms of the contracts, we're talking about the difference of potentially more than $100 million. Why Passailaigue cost the state that money and what, if anything, he got out of it should be investigated.
At its meeting on Tuesday, commissioners delayed action on invalidating the contract or approving a settlement proposed by SGI for $2 million and other offers. Before the commission meets again to determine whether the lottery is stuck with the deal, commissioners should put the question to a team of lawyers with experience in state contracts. There's too much at stake to avoid a thorough review.
This column has been updated to reflect that the Arkansas Lottery signed favorable contracts with not just SGI, but also Intralot, an online vendor. Together, compared to the deals those vendors struck with South Carolina, the contract terms will cost Arkansas more than a $100 million.