State Lottery Chief Suddenly Resigns to Become Consultant
Lottery Director M. Mark Michalko, who built the California Lottery into the nation’s largest, unexpectedly quit Tuesday to become a partner in a private firm that will act as consultant to other state lotteries.
Michalko, 33, told a Times reporter as recently as Friday that he intended to remain as director here for at least another year, but on Tuesday he acknowledged that he has been involved for six months in negotiations with officials in other states and industry executives over joining the consulting business. Those talks recently resulted in an agreement that he “could not refuse,” Michalko said.
The company, Travis Enterprises, is based in Austin, Tex., and will assist new lottery states in getting their games under way. Twenty-two states now operate lotteries and four more, including Florida, will start games this year or next. A number of other states are considering lotteries and industry officials have identified Texas as the most lucrative untapped market.
“There is a little bit of risk (in joining the consulting firm),” Michalko said Tuesday. “We are trying to get this thing formed to go after those contracts.”
Within the last two weeks, a representative of the consulting firm approached Florida officials saying that Michalko and other lottery executives were ready to quit their jobs if Travis would be awarded a contract to set up the Florida games, the St. Petersburg (Fla.) Times quoted officials as saying last week. A Florida official said the group wanted a $4-million fee. No contract has yet been agreed on, but Michalko said the firm remains interested.
“That is an important one and that would be real great” to get a Florida contract, Michalko said Tuesday.
The new job will provide an opportunity “quite honestly (to) make a little more money,” said Michalko, whose California salary is $83,000. He said he recommended to the governor that James Barnett, his chief deputy, be named interim director.
“I don’t think the lottery is going to miss a beat when I walk out the door,” Michalko added.
In a one-page statement announcing the resignation, Gov. George Deukmejian said Michalko “will always be remembered for his significant role in building the nation’s largest lottery, the equivalent of a Fortune 100 company, from the ground up.”
The governor, who appointed Michalko two years ago, said the search for a replacement already has begun. Michalko plans to stay on the job until mid-July.
Richest in Country
Under Michalko, who was appointed in May, 1985, and runs the lottery under supervision of a five-member commission appointed by the governor, the California games became the richest legal lottery in the country, and richer than most foreign national lotteries. It began in October, 1985, with sales of “scratch-off” tickets at grocery stores, service stations and thousands of other retail outlets around the state, and broke all records in the nation by grossing $2.1 billion in its first year.
In this fiscal year, sales will dip to about $1.4 billion, Michalko said, attributing the drop in part to less-than-expected success of Lotto 6/49, the computerized numbers game that last October joined the “scratch-off” games in the lottery repertoire. The lotto game has fallen short of widely circulated predictions of record ticket sales and jackpots approaching $100 million. Although Michalko carefully avoided making such predictions himself before the inauguration of Lotto 6/49, industry analysts expected such success given the huge ticket sales for the scratch-off game.
Despite the large ticket sales, Michalko’s administration of the lottery has not been immune from criticism. For example, the Little Hoover Commission, a watchdog agency, criticized the lottery for skipping common government purchasing procedures, for paying too much for staff cars and office furniture, and for failing to keep complete files and meeting reporting deadlines.
“If he would have run the lottery perfectly, the commission wouldn’t have gotten involved. I’m sorry to him see him go because we spent so much time and energy on him,” said Nathan Shapell, chairman of the Little Hoover Commission.
Michalko came to California from Ohio, where he was legal counsel to that state’s lottery, bringing with him a clean image.
Like other officials in the lottery industry, Michalko insisted that the games and staff be free of even a hint of scandal lest the betting public assume that the games were rigged. He also spoke often of the social benefit of the games, emphasizing the millions they bring to California schools.
In deciding to go into consulting, Michalko follows a pattern common in the industry. Many executives for companies that run the games under contract to states are former directors or high officials in government.
State-run lotteries are a fast-growing and highly lucrative form of legal gaming in the United States, recording nearly $15 billion in sales last year, 2 1/2 times the take in legalized gambling in Nevada and Atlantic City combined.
Michalko’s role in California provided him a ready-made platform for a consulting career. As head of the largest and perhaps most flashy lottery, the polished director became a sought-after speaker at lottery conventions, and the Sacramento headquarters was visited repeatedly by officials from out-of-state and overseas lotteries.
In March, Michalko traveled to Barcelona, Spain, to observe El Lotto Rapida, the Catalonia provincial lottery, which is operated in part by GTECH, the largest contractor for the California lottery. Michalko also appeared on a Spanish television talk show with the director of the provincial lottery.
The trip led to reports within the lottery industry that Michalko traveled at the expense of GTECH. Michalko denied that and attributed the reports to rumors started by GTECH rivals who were shut out of California lottery contracts.
“It was paid for 100% by the government of Catalonia,” Michalko told The Times, adding that the rumors had nothing to do with his decision to leave his post. “It had zero relationship to GTECH. There is no way I would have gone (to Spain) under any other condition.”
“I think I can categorically state that not one penny of GTECH money was spent,” said Robert Sterns, executive vice president and co-founder of GTECH.
The director of the Catalonia lottery declined to be interviewed.
Word of Michalko’s resignation nonetheless surprised those at GTECH, the Rhode Island company that holds the largest lottery contracts with California and which works closely with Michalko.
“I’m shocked. I didn’t know about it,” Sterns said.
Michalko has been accused by some industry executives of being biased in favor of GTECH. In 1986, GTECH beat four companies to win an initial $121-million contract to install the statewide computer system for Lotto 6/49.
At Michalko’s recommendation, GTECH since has won Lottery Commission approval to expand the system by several thousand more computer terminals without competitive bidding. In all, GTECH has the potential to gross $200 million or more from its California contracts in the next four years. GTECH’s California deal has increased its revenues 290%, industry analysts estimate.
Dan Morain reported from San Francisco and Paul Jacobs from Sacramento
