$170-Million State Lottery Contract Awarded Without Competitive Bids

SACRAMENTO — Despite a request from Gov. Pete Wilson that it seek competitive bids, a California lottery commission majority voted Friday to give the GTECH Corp. of Rhode Island a $170-million contract to operate the state’s games of chance.

In a 2-1 decision, the commission agreed to halt bidding procedures and accept an offer from GTECH to operate the games under an agreement that lottery officials estimated would save the state $70 million over the five-year life of the contract.

Afterward, both Commission Chairwoman Lisa Hughes, who voted against the proposal, and interim lottery Director Maryanne Gilliard expressed disappointment that the commission majority had decided to abandon the competitive process.

“It’s a close call,” said Hughes. “[But] I thought the arguments were persuasive with reference to [continuing] the bidding process.”

Gilliard, who had announced only a few weeks ago that California would not extend GTECH’s current five-year contract and would seek competitive bids, said she had hoped for a different decision, although she had made no formal recommendation to the three-member board appointed by the governor.

“I’m very disappointed that the state lottery is not going out to competitive bids,” she said.

It was the second time in recent years that GTECH has won a huge contract from the California lottery without competitive bids. GTECH was awarded its current contract after rival companies declined to bid, alleging that the lottery had fashioned some of the specifications to give GTECH an unfair advantage.

A special gubernatorial task force investigated the accusations and found no criminal wrongdoing, but a state auditor’s report later concluded that the bidding process had indeed discouraged competition. The contract called for GTECH, the world’s largest operator of lottery games, to operate the agency’s computerized games, including Super Lotto, Fantasy Five and Decco.

The GTECH issue became a political liability for Gov. Pete Wilson, who ultimately pressured then-lottery Director Sharon Sharp into resigning.

Just before the vote Friday, Gilliard read into the record a letter from Wilson’s deputy chief of staff, Benjamin A. Haddad, reminding the commission of the governor’s “commitment to fair and open competition in the selection of all major contracts in California.”

Haddad said, while it was clear after reviewing the GTECH proposal that the offer from the Rhode Island company was “financially attractive,” the governor also was convinced that competitive bids would lead to “equally attractive financial outcomes.”

Calling their decision “extremely difficult,” the two commissioners voting to approve the contract said they had to weigh their desire for an open bidding process against the fact that GTECH had given them an offer that no other bidder was likely to match.

“I don’t think we can overlook the advantages we have in extending this contract,” said commission member Arthur Danner. “I’m persuaded that this is an offer that we shouldn’t refuse.”

Commission member Daniel Apodaca said the “‘politically safe” route would have been to reject the GTECH offer, but he said the commissioners had an obligation to consider the financial effect of their decision on California schools, which share in lottery profits.

“You can’t argue with the deal . . . presented to us,” he said.

In an analysis of the GTECH offer, the lottery staff said it would be difficult for any competitor to match GTECH’s offer because they would have the expense of having to provide new equipment. GTECH, they said, could offer lower costs because its equipment was already in place.

Privately, lottery staff had been concerned in recent weeks by the poor response to their initial notification to potential bidders that they intended to open the contract to competition. The staff had not yet begun to formally seek proposals.

But Assemblywoman Debra Bowen (D-Marina del Rey), said the lottery would never really know if GTECH’s deal was the best one unless it had competitive bids. She criticized the commissioners for making a hasty decision, noting that their decision to accept the GTECH offer came only 48 hours after it was received.

GTECH had specified that its offer would expire at 5 p.m. Friday. The company receives a percentage of lottery sales on a sliding scale. Under the contract expiring in October 1998, it receives 2.8%. Under the new one, the percentage would range from 2.3% to 2%.

The current five-year contract gives the lottery commission the power to extend it for five years.

One of GTECH’s competitors, Automated Wagering International, accused the commission of “perpetuating a flawed process” by its decision to award GTECH a contract without competitive bids.

But Stephen White, a spokesman for GTECH, said AWI, which had declined to bid in 1993, was using issues that were “3 years old” to draw attention away from an offer that was “a great deal for the state of California.”