D.C.’s Chief Financial Officer bets big with Intralot

Words and photograph by Jeffrey Anderson

Attendees of a D.C. Council breakfast on January 7 could’ve heard a pin drop as Chairman Phil Mendelson moved to wrap things up and begin the legislative session.

“Are we gonna talk about sports betting?” At-Large Councilmember Elissa Silverman ventured.

Mendelson had introduced “emergency” legislation being urged by D.C. Chief Financial Officer Jeffrey DeWitt, who oversees the D.C. Lottery, to hand a monopoly sports betting contract to current lottery operator Intralot and its local partner, DC09.

In “sole sourcing” the contract, DeWitt had argued, D.C. could beat Maryland and Virginia to the market with a wagering system that would let customers use an app on their smartphone to wager on all things sports related.

One by one, however, Silverman’s colleagues voiced concerns about the propriety of taking such a precipitous step on such short notice:

Ward 3 Councilmember Mary Cheh suggested the matter go through the customary legislative process.

At-Large Councilmember Robert White wondered what information the CFO had that the Council did not.

Ward 1 Councilmember Brianne Nadeau saw no cause for an “emergency” measure, and At-Large Member David Grosso called it a “huge mistake” to forge ahead so hastily.

Mendelson bemoaned inevitable delays and an “onslaught” of lobbying should the contract go out to bid, but At-Large Member Anita Bonds said “we can afford to take a minute.”

Looming over the entire discussion was an ugly competitive bidding process from a decade ago that devolved into allegations and investigations of contract steering. Silverman also thought it best to slow down and let DeWitt make his case to the public.

Seated at the other end of the 30-foot conference table from Silverman was Ward 2 Councilmember Jack Evans, who played a key role in the 2010 lottery contract, and who chairs the Committee on Finance and Revenue, which oversees the Office of the Chief Financial Officer.

Evans and DeWitt are close, working toward the same goal of a sole source contract that would maximize revenue. But as his colleagues weighed in, he sat quietly, watching, nodding, keeping his hands crossed on his lap.

Facing five votes that would kill a supermajority, a  thwarted Mendelson pulled the bill and scheduled a public hearing for January 28.

Jeff DeWitt came from Phoenix in 2014 following the 13-year, occasionally rocky tenure of predecessor Natwar Gandhi. Until recently, DeWitt has been the anti-Gandhi: Rarely visible, non-controversial, scandal-free.

But by casting aside the customary rules of procurement, he has pushed all of his chips into the center of the table, perhaps risking his first major misstep.

The last lottery contract, won by Intralot through competitive bidding, was a fiasco. Adrian Fenty was mayor, Vince Gray chaired the Council, and neither one of them wanted the other’s friends installed as Intralot’s local business partner.

Inside the OCFO, the director of contracts, a lawyer named Eric Payne, had received pressure from his superiors to remove Intralot’s first choice for a local partner, who was close to Fenty. When Payne complained to an internal affairs unit he was phased out and eventually fired.

According to an employment discrimination suit Payne filed in federal court, Gandhi and his underlings were acting at the behest of Evans, Gray, and now-deceased former Ward One Councilmember Jim Graham. (Payne endured years of litigation and eventually won a $3.4  million settlement from the District.)

In the end, Gray’s choice for the local vendor, a businessman named Emmanuel Bailey, replaced the Fenty ally, Warren Williams, and all hell broke loose.  Although no one was charged or implicated in criminal wrongdoing, this era of D.C. politics left a lasting stain.

Ten years later, Intralot, and Bailey’s firm DC09, are in the catbird seat once again. And once again, an abnormal contracting process threatens to undermine a major city contract in a heavily regulated industry.

Last May, the U.S. Supreme Court determined that states could enact sports betting. The gold rush was on. Nevada, New Jersey, Pennsylvania, Delaware, West Virginia and New Mexico now have laws to allow for sports betting, though not all have started accepting wagers.

Despite a casino state next door in Maryland, DeWitt soon had D.C. in a good position to capitalize on the ruling.

He’d recognized the lottery’s need to modernize in December 2017 and contracted with Wisconsin gaming consultant Herb Delehanty to draft a Request For Proposal for an upgraded digital system.

The $217,500 procurement contract did not contemplate sports wagering technology, according to OCFO Public Affairs Officer David Umansky. So when the Supreme Court ruling landed, the entire lottery contract came under review. On September 18, Evans and four of his colleagues introduced the Sports Betting Lottery Amendment Act.

DeWitt showed early on that he was determined to keep the contract in Intralot’s hands.

Intralot “has been in the government-regulated sports wagering business for decades and manages approximately $6 billion in wagers annually across 29 jurisdictions globally,” Umansky says in an email to District Dig. “It has secured a contract in New Mexico…and has extensive experience and leadership offering sports betting technology, trading and risk management services in government-regulated markets globally.”

Having endured a bruising process to secure the lottery contract in 2010, the Greek-owned gaming company was more than happy to avoid the competitive process altogether. But there was groundwork to lay.

On October 3, OCFO Contracting Officer Drakus Wiggins signed a letter agreement with Spectrum Gaming Group, a Pennsylvania consultancy specializing in economics, regulation and policy of legalized gambling worldwide.

The contract called for “an independent analysis/business case of the economic impact of regulating and operating sports betting through the Lottery,” and to be ready to testify in person as a qualified, cited expert “if needed.”

In positioning the District first to market, the contract  required Spectrum to compare the economic advantages and disadvantages of modifying and extending the existing contract with Intralot, to pursuing a competitive RFP process to select the company with gaming system technology best suited to mobile sports betting.

Intralot had already undertaken a similar analysis, and had retained Thorn Pozen, Director of Metropolitan Washington Airports Authority and former Special Counsel for the D.C. Office of the Attorney General to provide the same advice: whether the OCFO could simply amend the existing contract to include sports betting.

Pozen is the consummate lobbyist and D.C. government insider; he was legal counsel to Mayor Muriel Bowser’s notorious FreshPAC fund, and went with her and a host of D.C. officials and business bigwigs on the Capital Region Joint Trade and Diplomatic Mission to Canada in 2017.

In an October 12 memo obtained by The Dig, Pozen advised Intralot that “if the OCFO should choose to extend the Contract term and expand it to include sports betting…it has the legal authority to do so.”

This was music to Intralot’s–and DeWitt’s–ears.

However, the question arose whether the Procurement Practices Act allows for an expanded contract to include products or services that were not legal at the time of the original contract. On November 19, the OCFO General Counsel concluded the existing contract could not be amended to add sports betting, says Umansky, noting the Office of Attorney General agreed. (OAG confirms this.)

It was back to the drawing board for DeWitt, and Intralot, and Evans, who introduced legislation that would have the Council act on an “emergency basis.” The Sports Betting Lottery Act passed easily, by a vote of 10-2, on December 18. (Ward 6 Councilmember Charles Allen was absent.)

Spectrum Gaming Group dropped its report in a timely manner on December 27, further bolstering DeWitt’s narrative. The Group analyzed two scenarios: Expand the D.C. Lottery into sports betting in 2019, or expand in 2022–assuming it would take three years to conduct a competitive procurement.

If D.C. acted now, the report says, over a 10-year period the expansion would create on average 281 jobs, $51.0 million of business revenues, $28.3 million worth of “new economic activity,” and $3.4 million of “personal income.”

If D.C. waited to get sports betting off the ground until 2022, the report says, over that same 10-year period it would see on the average 144 jobs, $26.9 million of business revenue, $15  million of new activity and $2.0 million of personal income.

Thus, if D.C. couldn’t launch sports betting by 2022, it would lose $240 million in business, $133 million of “value added,” and $14 million of personal income, according to Spectrum.

Little did anyone know that competitive bidding had been Dead On Arrival for months.

Herb Delehanty has worked for the District for years. In 2016,  he produced a lengthy report that pronounced the D.C. Lottery in fine shape. But in September–about three months after the Supreme Court ruling, but eight months before his contract to draft an RFP was due to expire–the OCFO terminated him.

“The [Delehanty] engagement is set to expire in May 2019,” Umansky explains. “The Lottery was in the process of drafting an RFP for a central gaming system; it did not contemplate sports wagering technology, as it was not a legal form of gaming in the District at that time. The sports wagering bill’s introduction changed the course of action and it wasn’t determined precisely what the Lottery would need to acquire from a technology vendor until Council passed the bill in December.”

This was news to Delehanty, who also had a general consulting contract with the OCFO. Reached by The Dig on two separate occasions earlier this week, he seemed befuddled. “I don’t know what they’re doing,” he says when asked about his procurement contract being terminated. “I’m just waiting to hear from them.”

(Don’t wait up, says Umansky: Delehanty’s general consulting contract, which contained four, one-year options, ends this month, and the D.C. Lottery will be looking for a new consultant specializing in sports wagering and other emerging game categories.)

Asked what Delehanty’s work on the RFP contract yielded, Umansky pointed to a “market study and competitive landscape analysis,” and work product that will shape what is required of the new gaming system: “Mr. Delehanty and his team delivered upon all tasks assigned.”

All was revealed on January 3, in a letter from DeWitt to Mendelson, in which the CFO asked the chairman to take additional emergency measures to waive the entire procurement code so that the D.C. Lottery could develop the technology platforms, gaming systems, and related services in time to launch sports betting in 2019.

The following Monday–January 6, the day before the  breakfast meeting–Mendelson held his usual legislative briefing for the media. A video of the briefing showed government watchdog and activist blogger Dorothy Brizill taking him to task for his “emergency” tactic. Local reporters sat and watched as Mendelson fended her off with talking points fed to him by DeWitt. (One reporter asked Brizill after the breakfast meeting the following day, “Who’s DeWitt?”)

The breakfast meeting meltdown prompted columnists Colbert King of The Washington Post and Harry Jaffe of NBC Washington’s First Read DMV blog to declare that  “the fix was in” for Intralot. On Monday, the Council will hear public testimony on the matter.

But who will they be listening to? Silverman and Mendelson practically completed each other’s sentences at the breakfast meeting and both are working off DeWitt’s script–as Evans looks over his shoulder.

Thus far, most on the Council are ducking questions. But Ward 5 Councilmember Kenyan McDuffie, who chairs the Committee on Business and Economic Development, says he gets the importance of being a market leader in this region; however, that does not justify doing away with established procurement practices, he says.

“My thought is we should always be transparent and lean toward competitive practices,” says McDuffie. “The law requires it, and given the history of this contract is extremely controversial, to go forward in the most open way possible is how the public will be best served.”

McDuffie does not buy into the mantra that if D.C. does not act right away the city will get beat to the market by Maryland, which reacted recently with a sports betting initiative that would likely require getting around a costly and time consuming voter referendum requirement.

“I just don’t think the ends justify the means,” he says. “A sole source lottery contract in lieu of competitive bidding does not justify being first to market anyway. It’s imprudent, and unwise.”

McDuffie also was surprised to learn of the canceled Delehanty contract. “Now you’re telling me something I didn’t know,” he says. “Why not expedite that contract and put the bid on the street? What are we waiting for? And if part of the argument is what happened in 2010, I’d say why would we want to sole source it now? That’s more of a reason to do [competitive bidding] and get it right, learn from the past rather than circumvent what’s on the books.”

Silverman takes a market-based view. Ordinarily she advocates for competitive bidding, but the lottery featuring sports betting is an anomaly, she says, because Intralot has only two major competitors. She calls this dynamic an “oligopoly,” with nothing substantial distinguishing the companies but cost savings that will be eclipsed by the amount of revenue the city loses if it waits too long to debut sports betting and start gaining “brand loyalty.”

“The slower we go, the more we lose,” she says, echoing the Spectrum report’s findings. (She also cites to “uncertain economic times” what with the Trump Government Shutdown and the prospect of a recession.)

Like Mendelson, Silverman also bristles at the amount of lobbying that goes on at the Wilson Building, and asserts that there is not a lot of interest in the discussion among the general public. “Who do you trust here?” she says. “The CFO and the people he’s talking to, or the lobbyists?”

Intralot and its competitors are large multinational corporations, but on the local level, small business and minority contractors are crawling all over the place too. They are known as Certified Business Entities that are afforded a 35 percent stake in major contracts such as the lottery. That’s where it got nasty in 2010, she says.

“The local vendor is just the CBE that is required,” Silverman says. “They are there to collect the check.”

Silverman’s view is oversimplified, according to government consultants and gaming industry contractors who complain that neither the D.C. Lottery nor the OCFO have done significant marketing cost analysis or due diligence with regard to community concerns such as gambling addiction or impact on small businesses.

But this is DeWitt’s show, observers say, and he has made moves that favor one contractor and one contractor only, which not only stifles innovation, but puts his good will and good name on the line.

“This is less about a clean financial analysis and more about politics,” says political observer and consultant Tom Lindenfeld, who has experience with clients looking to get into the gaming industry. “The CFO should be an arbiter of the best fiscal judgment, not the best political judgment.”

 

*This post has been revised: A reporter asked Dorothy Brizill Who’s DeWitt after the breakfast meeting, not the legislative briefing the previous day.

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