Lottery wranglings could delay new D.C. scratch-off tickets for months

It could be many months before D.C. lottery players see their usual array of new tickets for sale, with a contract controversy that has depleted the D.C. Lottery’s supply of scratch-off tickets and has cost the District government hundreds of thousands of dollars showing no sign of ending soon.

The latest delay comes after city financial officials moved to cancel the most recent solicitation for a new lottery vendor in December, saying the lone respondent’s price was too high. The decision continues a saga that emerged into public view during the summer, when the D.C. Council questioned and ultimately rejected a previous contract award. Council members have aired concerns about local subcontracting requirements and the stewardship of public funds.

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In the five months since the previous contract lapsed, the D.C. Lottery’s instant-ticket sales have dropped more than 10 percent compared with the same period in 2012. That $2.4 million decline in sales means about $200,000 to $300,000 less has been transferred to the city’s general fund, D.C. Lottery Executive Director Buddy Roogow said. Such funding is spent on city priorities such as police, schools and housing.

The previous contract award — made to the city’s longtime instant-ticket vendor, Scientific Games — was rejected by the council in July because the company said it could not comply with a District law requiring winners of large city contracts to subcontract at least 35 percent of the value to local firms. A city agency refused to grant an exception to the law, and Scientific Games did not submit a rebid, which was due in September.

The sole bidder the second time around was a joint venture of Pollard Banknote, a Canadian instant-ticket printer, and Veterans Services, a local firm that also is a partner in the city’s other major lottery contract, for electronic numbers games.

Lottery contractors are typically paid a percentage of ticket sales, and a higher vendor fee ultimately means less lottery revenue ends up in the city’s coffers.

Scientific Games’ initial bid called for a fee of 3.35 percent, city finance officials said. In the rebid, the VSC/Pollard group initially submitted a proposal that included a fee of nearly 5.7 percent. A revised bid submitted by the group in December still exceeded 5 percent, unless scratch-off sales increased to $65 million a year, in which case the price would drop to 4.99 percent.

In 2012, D.C. instant ticket sales totaled $59.3 million; preliminary 2013 figures have the total falling to $56.2 million. Lottery officials are pessimistic about a quick rebound.

According to an analysis prepared by the Office of the Chief Financial Officer, which handled the procurement, the difference in price between the Scientific Games and VSC/Pollard bids would cost the city roughly $4.5 million during the four-year life of the contract — a 50 percent premium.

The finance office officially canceled the solicitation Dec. 11, saying the sole bid was “unsatisfactory . . . on the standpoint of price.”

VSC owner Emmanuel Bailey declined to comment on the city’s decision to reject his firm’s bid, citing the ongoing procurement, and two Pollard executives did not return messages seeking comment.

Roogow said further delays in getting a new contractor will continue to cost the city money — especially with stocks of the most popular $1 and $5 tickets nearly depleted. But he said it makes more financial sense for the city to negotiate a better deal.

“Usually when you get new bids, the price is coming down, because the technology is improving, the prices are getting cheaper,” Roogow said. “We just felt we should try to do better.”

But the decision to reopen bidding a third time threatens to again turn a city lottery contract into a political hot potato, and determining how to proceed stands to be a sensitive task for the incoming chief financial officer, Jeffrey S. DeWitt, who takes over for longtime CFO Natwar M. Gandhi on Friday.

Lottery procurements became a nettlesome issue for Gandhi. The 2008 award of the numbers-games contract came with allegations of improper political influence and whistleblower retaliation, leading to a federal investigation and civil lawsuits that have yet to be resolved.

David Umansky, a spokesman for the finance office, said officials there are still determining how to proceed. But he acknowledged one possibility would be to separate the contract for printing the tickets — a highly specialized process done by just three North American vendors — from the warehousing and distribution of the tickets.

That could allow the city to win an exception to the 35 percent local subcontracting rule. But any move to circumvent the inclusion of local firms — known in District government parlance as “certified business enterprises,” or CBEs — stands to be politically treacherous.

Barbara Lang, chief executive of the D.C. Chamber of Commerce, sent a letter to city officials in December inquiring about the decision to reject the VSC/Pollard bid. Because VSC is a certified business enterprise and has 51 percent of the joint venture, the group is considered certified under city law.

“It’s almost as though the lottery folks are trying to orchestrate this to keep a CBE from getting the deal,” Lang said Tuesday. “I hope that’s not what is happening, but on the surface, that’s what it sounds like. . . . It’s almost like we’re trying to reconfigure this thing to work for a certain vendor.”

D.C. Council member Jack Evans (D-Ward 2), who chairs the committee overseeing the lottery, said Monday that he has fielded “a number of calls” about the matter. “We’re looking at the situation closely,” he said. “After the first of the year we’ll determine what direction we’ll take.”

Another council member, Vincent B. Orange (D-At Large), said Tuesday that he would call a hearing if a city agency under his oversight grants the lottery an exception to the 35 percent rule.

Umansky said any suggestion that the lottery is biased toward a particular vendor is “totally untrue,” adding that it is the finance office’s preference not to pursue the waiver. The goal, he said, is to get a “fair deal for the taxpayers and one that includes small and minority businesses at the level set in the law.”

 
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