Behind the Lines: Podcast 
You Lose Again!
Once upon a time, the Texas lottery was the most successful in the world. Then the politicians got hold of it. The rest—and the lottery’s rosy future—is history.
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The Legislature did all this despite ample evidence of the consequences: California’s lottery hit the skids when its legislature got greedy for more revenue, and it has never recovered. GTECH lobbyists warned that sales would plummet. Players, especially frequent players, know when they are getting ripped off. In the early years of the lottery, GTECH ran a test in which two games, Cactus Cash and Grand Slam, were marketed identically. The only difference between them was that the payout for Cactus Cash was 65 percent compared to 55 percent for Grand Slam. In ten weeks, according to GTECH, Cactus Cash chalked up $63 million in sales, while Grand Slam had $33 million. If you want more revenue, GTECH told lawmakers, don’t cut the payout; increase it. But nobody was listening to GTECH anymore.
GTECH WASN’T GETTING A GOOD reception at the Texas Lottery Commission, either. In the spring of 1996, well before Ben Barnes’s contracts became public knowledge, the commission had to decide what to do about GTECH’s five-year contract, which was due to expire in August 1997. The company wanted to negotiate a five-year extension without going through the lengthy process of competitive bidding—something that is not unusual in the industry—but its old rival for the Texas contract, AWI, was back in town, telling the commission that GTECH’s share of the lottery proceeds was too high. (This was the same figure, 3.944 cents out of every dollar-ticket sold, that had been 30 percent lower than AWI’s bid.) AWI told the commission that it would be worth $60 million to $360 million to the state over five years to rebid the contract. Executive director Linares and the commission staff favored renegotiating—why switch horses in the middle of a revenue stream?—but AWI’s message appeared to be getting through to commission chair Harriet Miers. Only when AWI admitted that it wouldn’t be ready to bid for at least another year did Miers agree to the renegotiation. Ever since, she has been GTECH’s worst nightmare.
A striking woman with below shoulder-length light brown hair and ever-assessing blue eyes, Miers has a knockout resume: former president of the State Bar of Texas; president (formerly known as managing partner) of the blue-chip Dallas law firm of Locke, Purnell, Rain, and Harrell; attorney for Microsoft, Disney, and a fellow named George W. Bush, both personally and as general counsel of his transition team. Her politics have been confined to serving on the nonpartisan Dallas City Council, running for bar president, and helping judicial candidates. She has built her career on integrity and public service—about as far removed from the world of GTECH as you can get. In early encounters, GTECH officials felt that she had exhibited no interest in what they call “growing the lottery.” The term they sometimes used for her was “supercop,” and that signaled trouble ahead, because the lottery commission is like no other regulatory agency: It is a business partner of the company that it is regulating. No business can function effectively if its partners must have a totally arms-length relationship. The tension between public ethics and private business is part of the baggage that comes with having a lottery. Pay too much attention to one side of the equation and the other will suffer.
That dilemma confronted Miers not long after GTECH’s contract was renegotiated. In November 1996, shortly after GTECH included a warning in its annual report to stockholders that “[t]he company is aware of federal grand jury investigations in New Jersey, Georgia, and Texas,” the news broke that executive director Linares’ boyfriend, Mike Moeller, had gotten a five-month, $30,000 consulting contract from GTECH in 1992 through J. David Smith. (At the time, Moeller had been under indictment for misusing taxpayer funds at the Texas Department of Agriculture; he is currently serving a sentence in federal prison.) The contract called for Moeller to find hunting leases for GTECH in New Mexico. Linares maintains that she knew nothing of the contract, and that their relationship, while friendly, was not romantic at the time. These protestations would stretch credulity, except for two things: the contract required Moeller to keep his employment confidential, and lottery directors who fall into disfavor with GTECH have a history of losing their jobs. It happened in Colorado, in Arizona, in Kentucky, and says Linares in a suit she has filed against the company, to her. (“In an effort to have some potential, future leverage over Ms. Linares, Mr. Smith instructed Mr. Moeller to keep his consulting agreement secret from all others, including Ms. Linares,” her petition alleges.)
But Linares’ situation was untenable, and the commission fired her in January 1997. Miers felt that there was a potential cloud over the lottery. “From the beginning,” she told a Dallas Morning News reporter, “Ms. Linares has been consistently an advocate of GTECH and its performance. I would hope it has been based on objective criteria and performances, but that is obviously an issue that this commission has to look at.” The biggest project that Linares (along with three other commission staffers) had overseen was GTECH’s contract extension. It had cut GTECH’s share of lottery proceeds to an average of 3.54 cents (from 3.944) over the life of the new contract. It also called for GTECH to install six thousand new online terminals that would bring in a projected $1.03 billion to the state. Sure, GTECH’s share of the proceeds could have been smaller, but then GTECH would have provided fewer terminals—and new terminals, which generate increased sales, are worth more to the state than fractions of pennies per ticket. In any case, both the first contract and the second contract were great deals for the state as well as for GTECH.
But that baby was destined to go out with the bathwater. In February 1997 Miers said that “the time has come” to rebid GTECH’s contract. AWI and a company called Scientific Games submitted proposals. GTECH, contending that the process had been biased against the company and that it had a legally binding contract (despite a clause giving the commission the right to terminate the contract “for any reason whatsoever” with no less than thirty days notice), chose not to send in a proposal and filed suit against the commission. The Texas lottery had ceased to be fun, and when a lottery stops being fun, the public stops buying tickets.
THE DECISION TO REBID THE CONTRACT squarely raises the issue of whether a supercop commission can run the lottery. To focus on ethics to the detriment of revenue is as much a failure of the lottery commission’s duty as to focus on revenue to the exclusion of ethics. Miers’ critics second-guess many of her decisions—should she personally have fought harder to stop the threat to revenue?—but the larger question is not the past but the future. One concern is that since Linares left, revenue has not been a high enough priority with the commission. At its December meeting, commissioner John Hill, a former chief justice of the Texas Supreme Court, said, “If the lottery is less successful in dollars, it doesn’t mean it’s less successful, just less remunerative.” Sorry, less remunerative is less successful.
The question, then, is whether GTECH can be replaced as the operator of the Texas lottery without harm—additional harm, that is—to the revenue stream. If lottery operators were interchangeable, like, say, lead pencils, it would not matter with whom the state did business. But they are not. GTECH operates 29 of the 38 state lotteries and 49 more in foreign countries. Sad to say, they are the best at what they do. So why does the commission seem determined to get rid of them? “It’s not in the best interests of the state to get into a discussion of fault,” Miers told me, “when the contract gives the commission the right to terminate for any reason.”
And what of GTECH’s competitors? Scientific Games’ experience is in instant tickets, not running online games. As for AWI, it is proof that operating a lottery is no cinch. In Arizona its contract was canceled after its computers weren’t programmed to handle Leap Year, and then, a few days later, almost every ticket terminal in the state failed. In Minnesota its machines couldn’t read the bar code for instant tickets; they would say “no winner” when the ticket was a winner, or “$25 winner” when the correct amount was $5. In Maryland AWI posted incorrect winning numbers at retail outlets, so that many players thought they had won when in fact they had lost, and vice versa. Missouri rejected a bid from AWI because of doubts that the company could do the job. In Kentucky AWI won the contract in 1996 but withdrew after the state treasurer raised questions about AWI’s financial health. Even when nothing goes wrong, AWI doesn’t produce big sales numbers. Florida, AWI’s biggest prize, has had flat sales for years. Nothing in AWI’s history indicates that it is capable of running the Texas lottery as well as GTECH, if at all. For now, GTECH has a contract, but if GTECH goes away, so will the bad headlines, and the politicians will say that no one can speculate whether sales would have been better if GTECH had stayed on. Ethics or money: This is the kind of choice that gambling creates, and either way, You Lose Again!
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