Memos Raised Concern Over Lottery Bids

Beginning in July, the chief financial officer of the California Lottery repeatedly warned that the bidding process for the most lucrative contract in the lottery’s history so favored one company that others were unlikely to bid, according to documents obtained by The Times.

The warnings, largely disregarded by Lottery Director Sharon Sharp, were prophetic. At the Feb. 17 bidding deadline, the lottery was faced not only with having just one bidder for the $500-million contract, but also with accusations by a potential competitor that the process had been biased.

Gov. Pete Wilson has launched an inquiry to determine why the current contractor, GTECH Corp. of Rhode Island, was the only company that sought the new contract to install, maintain and operate the vast computer network that runs the Lotto, Fantasy Five, Decco, Daily Three and Keno games.

The lengthy memoranda written by Gordon Jones, chief of the lottery’s financial division since its inception in 1985, are expected to play a part in that inquiry. The documents were obtained by The Times through a public records act request.

Written from July to mid-February, the dozen memos show that the financial officer had repeatedly warned lottery officials that they were designing specifications in a way that gave GTECH such an advantage that other bidders might be “scared away.”

At one point, Jones warned Sharp that “this is a potential disaster waiting to happen.”

“If GTECH ends up being the only bidder, we should expect to encounter major public relations and or legal problems, and we could end up paying far more than we had anticipated for the needed goods and services,” Jones wrote in a Nov. 3 memo.

Two days later, he pressed his point again: “For this procurement in particular, I believe there is reason to question whether any company other than GTECH can aggressively bid . . . given the complexity of our current system and probable . . . time constraints.”

The internal memoranda bolster the position taken by GTECH’s chief competitor, Automated Wagering International of New Jersey, which challenged the process and raised questions about the lottery’s contracting procedures.

In an interview last week, Sharp called Jones the office pessimist and said that although his concerns were taken seriously, lottery officials relied primarily on professional consultants to guide them through the bidding process.

She insisted that the state bent over backward to ensure that the bidding process was open and fair, and to compensate for any advantage that might fall to GTECH.

“There is not a thing here that has not been done to open this up, to make it a level playing field,” she said. “It’s unfortunate we have one bid. I wish it could be different (but) it can’t.”

Sharp said her decisions were based on recommendations by Battelle Memorial Institute, a consulting firm based in Ohio that specializes in advising government agencies on their contracting procedures.

Officials from GTECH have declined to comment while their bid is pending. Jones said his memos, never meant for public view, were intended to point out problems in the bidding process that he, as the financial officer, feared could lead to a more costly contract. Without the pressure of competition, he said, there was no incentive for a single bidder to keep the costs low.

The contract is expected to pay about $250 million for the first five years, with an option for another $250 million for the next five years.

In his memoranda, Jones repeatedly voiced his concern that the lottery was allowing too little time for the installation of a new computer system, making it unrealistic for any company but GTECH to bid on the contract. The bid specifications called for the contract to be awarded April 24 and a new system to be up and running within six months--by Oct. 14, the date the current GTECH contract expires.

Jones outlined numerous obstacles that he said faced potential GTECH competitors:

* The uniqueness of California’s system. The winning contractor would have to grapple with all the factors that make the California system atypical--a wide variety of games, a high volume of ticket sales and a large number of terminals at disparate locations.

* The enormity of the task. The bid specifications required the new contractor to replace the computer network with a new system, which would mean replacing computer mainframes and installing 13,000 new terminals. Under the plan, a single contractor would install and operate the system, own the equipment and then be paid a percentage of the sales.

* GTECH’s inherent advantages. Because the Rhode Island company has held the lottery contract for nearly seven years, it has a functioning data center and a large work force in place in California. A new contractor would have to build its own center and hire and train technicians. Moreover, GTECH is knowledgeable about the gaming software used in California and the unique features of such games as Keno and Decco.

Jones suggested that the lottery could alleviate the problems either by eliminating some of the requirements in the bid specifications or by granting GTECH a short-term extension on its contract so that it would not be necessary to have a new system in place by Oct. 14.

Lottery officials initially decided that the winning contractor would have four months to install the system, then changed the deadline to six months. Jones said he feared that that still was not enough time.

On Jan. 6, he wrote: “I continue to be very concerned that the scope, complexity and implementation time constraints of this procurement could scare away all potential bidders except GTECH.”

On Nov. 24, he wrote: “I keep mentioning this concern to you, Sharon . . . and we all agree this is a potential disaster waiting to happen but, to my knowledge, we are not planning to take any corrective action. Am I missing something?”

Sharp, who became California’s lottery director 17 months ago, said Jones was one of many people offering advice. But she decided that greater weight should be given to the recommendations of consultants who had more experience with computer contracts.

Although Jones had extensive knowledge about the California Lottery, Sharp said he had never been involved in the letting of a multimillion-dollar computer contract.

“Who am I going to trust on this, Battelle or Gordie?” she asked. “Battelle is the most respected company in this business. They’ve done 10 or 14 of these. . . . Would I take Battelle’s (advice)? Of course I’d take Battelle.”

She described Jones as a prolific memo writer who tends to put the darkest interpretation on things and who appears to resent the fact that the lottery had sought the advice of an outside consultant.

“I wouldn’t change Gordie for the world, but it doesn’t mean I agree with him all the time. Gordie’s our pessimist,” she said. “As you can read through the memos, he doesn’t like Battelle that much. OK, that’s his personal problem.”

Jones said it was not that he disliked Battelle but that he was worried that the lottery was blindly agreeing to everything the consultants suggested.

“I think that what happened is that Battelle came in here and told us they were confident that they would get at least three bids,” Jones said. “They were very reassuring, and I think most of the people in this organization listened to them as the experts and I think they weren’t challenged very often in what they proposed.”

But Sharp said Battelle’s advice was consistent with the experience of other states in lottery contracts and with her experience in Illinois, where GTECH took over the computer contract from Control Data Corp.

Mark Huffenberger, a senior research scientist for Battelle who saw many of Jones’ memos, said his firm considered the timetable offered in the bid specifications to be reasonable. After studying other states, he said, the company concluded that”it would be a tight time frame, that it would be a crunch mode project, but that it was a doable project.”

Sharp said that in an attempt to ensure that there would be competitive bidding, the lottery agreed to a last-minute request by Automated Wagering that bidders be given an additional 109 days to install terminals. She acknowledged that those who chose to take advantage of the added time would be penalized slightly in the scoring process used to evaluate the bids.

Sharp said blame for the failure to get competitive bids did not rest with the lottery or Battelle, but with Automated Wagering, which she accused of trying to sabotage the bidding process.

She said she was shocked by the company’s withdrawal the day before the deadline because she considered it a major concession to grant the additional time for installing terminals.

A spokesman for Automated Wagering called the 109-day option illusory because of the penalty provisions.

Huffenberger said the consultants were surprised when only one company submitted a bid for the contract because at least two other corporations--Automated Wagering and High Integrity Systems of Sacramento--had shown an interest in bidding.

As for the contentions about GTECH, he said he believed that most of Jones’ concerns were overblown. “GTECH has to deliver virtually all the things anybody else does, even somebody from the outside. It is necessary for them to build a new data center, manufacture the thousands of terminals and train all retailers handling the new equipment,” he said.