Council of the District of Columbia

Committee of the Whole

1350 Pennsylvania Avenue, NW

Washington, DC 20004

 

 

TO:                       Nyasha Smith, Secretary to the Council

               

FROM:              Phil Mendelson, Chairman

                                                               

DATE:                July 3, 2019

 

 

                Please place on the July 9th additional meeting agenda the following measure:

 

• PR 23-361, “Contract No. CFOPD-19-C-041, Sports Wagering, Lottery Gaming Systems and Related Services Approval Resolution of 2019”

 

                This measure approves a contract submitted by the Chief Financial Officer to award Contract No. CFOPD-19-C-041 with Intralot, Inc. (CA 23-168) to provide Sports Wagering, Lottery Gaming Systems, and Related Services to the Office of the Chief Financial Officer Office of Lottery and Gaming.

                I want to respond to concerns I have heard.

“We should reject the contract because the subcontractors are politically connected”:  I disagree for two reasons.  First, the proposed contract is between the District and Intralot.  The decision on who to hire as subcontractors was (and is) entirely and exclusively the decision of Intralot.  The District has no relationship with any of the subcontractors, did not choose them, cannot fire them, cannot direct them, does not pay them, etc.  Second, if this contract is rejected and an RFP is issued, I assure you that each of the new bidders will come back with equally connected subcontractors — we have seen it before and we know who they are — except there will be more of them and they  will be lobbying us to favor or disfavor the winning bidder.  We saw a taste of it last December when local companies and lobbyists for MGM, Monument, Lerners, Scientific Games, etc. were roaming the halls trying to change the legislation in their favor.  Not only will there be more subcontractors, and they will be actively lobbying us, but how we vote will be seen as favoring certain subcontractors, which is not now the case with the contract before us.  With regard to the Intralot subcontractor concern, we will not improve the situation; we will make it worse.

“We should reject the contract because we can get a better price with competition”: That can’t be said with any degree of certainty, especially because the OCFO testified that the cost of this contract compares very favorably to what other state lotteries, of similar size, are paying.  Arguments can be made that we would get a worse price if we reject this contract, for a variety of reasons.  Either way, the question is speculative.  What is most important is whether the terms of this contract are favorable.  The OCFO testified that only one other state had more favorable pricing: Idaho has a longer, 20 year contract, and does not have the “no-risk” provision that the OCFO negotiated.  All of the other state lotteries of similar size are paying more or substantially more than the contract before us.

“We should reject the contract because it is sole-source”:  I disagree for four reasons.  First, the Council voted in February to authorize sole-source.  Second, although we like competition because it gives a chance to local companies, incentivizes creativity, and gives the District greater choice, that’s not really the case with state lotteries where the market is controlled by three global companies.  Third, we like competition because we think it leads to better pricing.  But sole-source does not necessarily mean higher cost, and as I described above, the pricing of this contract is good.  Finally, I think some believe the District was at a disadvantage at the negotiating table because this was sole-source.  But, even though the Council authorized a sole-source contract, the OCFO was not bound by this; nothing in the law requires Intralot.  So Intralot had no special advantage over the District that would lead to unfavorable terms for us, and Intralot probably recognized that if they didn’t negotiate competitive pricing, the OCFO could walk.  The parties came to the table with relatively equal leverage.

 

“We should reject the contract because competition is better and there is no need to hurry.”:  No.  The CFO is firm in his belief that the likelihood of a substantially better contract through a competitive RFP is slim, and there is a real possibility it could be worse.  He thinks the cost would be higher and I think the unease over politically-connected subcontractors would be worse, much worse.  Further, while the need to hurry – to act before Virginia and Maryland – has lessened, rejecting this contract would delay the contract by around 2 years (explained below) and put us behind our neighbors.

“We should reject the contract because Intralot is junk bond status”:  I asked the OCFO about this at the hearing.  The answer was that all three of the global companies are junk bond status, that on this issue the competitors are little if any better, that it is generally a concern that the entire industry is rated poorly, and that there are protections for the District in the contract before us.

Finally, we should approve the contract because it will be good, fiscally, for the District.  The OCFO’s revenue estimates include lottery income from this contract; if we reject the contract the revenues will be delayed.  That would create a $17 million loss for FY 2020.  The OCFO estimate that if the contract is rejected the delay could be at least two years: the time to issue the RFP, evaluate the bids, negotiate a Best and Final Offer, and then the time to resolve losing bidder protests before the Contract Appeals Board.