Two of Rhode Island’s largest public companies are involved in a bitter dispute that has the potential to upend the state’s budget. The source of the conflict: whether the state should move forward in awarding a second long-term contract to International Game Technology PLC to provide lottery services.
The extended nature of the proposed expansion – a 20-year renewal – for IGT is unusual for a traditional lottery contract, according to analysts.
But as with so many other aspects of its business climate, Rhode Island isn’t typical. The lottery contract that is under discussion would replace the original 20-year agreement. Beginning in 2003, the current lottery contract had significant job requirements wrapped into the deal, just like the new proposed contract.
And unlike other states with gambling, Rhode Island has just one casino operator, Twin River Worldwide Holdings Inc.
The state lottery system effectively controls the slot machines on the state’s two casino floors, in Tiverton and Lincoln. For that reason, the business interests of IGT and Twin River are intertwined in the state contract. And the state budget is dependent on both.
Only two other states – New York and West Virginia – have similar combined lottery-casino operations, according to an analyst who follows the gaming industry.
The soured relationship between the two companies became public in late June, when terms of the proposed extension with IGT were announced by Gov. Gina M. Raimondo. The deal would require General Assembly approval but keep the company’s U.S. operations headquartered in Rhode Island.
Within hours of the announcement, Twin River publicly attacked the proposal as a vehicle that would damage state competitiveness.
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ADDED AMENITY: In addition to slot machines, Twin River has sportsbook locations at its casinos in Lincoln and Tiverton, allowing guests to place sports bets. Above, guests relax in a lounge at the sportsbook at Twin River Casino Hotel in Lincoln.
/ PBN FILE PHOTO/MICHAEL SALERNO[/caption]
SECRET DEAL?
Twin River, in its advertisements and statements, has called the agreement a no-bid “secret deal,” and used language that implies IGT is trying to pull something over on taxpayers.
Lawmakers have promised a thorough vetting of the agreement. But it was negotiated as the 2019 legislative session neared an end. Statehouse hearings are expected to be held this fall in advance of the next full session.
Assembly leaders were presented a broad overview of the agreement, and were aware of some of the terms, according to spokesmen, but were not part of the discussion on many other issues.
In the absence of public hearings so far, the two companies have been sparring publicly through the media and in advertisements.
The Senate Finance Committee has scheduled the first of a series of public hearings on the contract at 5 p.m. on Sept. 19. The House Finance Committee has not yet scheduled hearings.
Initially, the public debate focused on the nature of the contract itself, with Twin River executives saying it should have been publicly bid, and that Rhode Island should not change existing law requiring that.
“Twin River seems to spend its day creating political mayhem around here,” Robert K. Vincent, chairman of the IGT division overseeing U.S. lottery services, told Providence Business News in a recent interview. “Maybe they should focus on their product and what they have there.”
IGT, for its part, is running ads that emphasize its Rhode Island roots, starting as GTECH “in a tiny office over Capriccio’s.”
Under Rhode Island purchasing law, all state contracts that exceed $500,000 have to be awarded by competitive, sealed bids or by a form of electronic auction.
The proposed legislation for the contract, introduced at the end of the most recent session, would through the General Assembly authorize a negotiated agreement for the lottery services instead.
While lawmakers will have to sort through disagreement over the merits of the deal for the state, it is allowed under state law, according to Gary S. Sasse, a former director of the R.I. Department of Administration who now leads the Hassenfeld Institute for Public Leadership at Bryant University.
Sasse thinks the new agreement is too long. And it doesn’t necessarily lock in the best terms for the state, he says, because without a public bid, the state won’t know what competing companies could offer.
“We’re giving a 20-year contract during a period that’s highly fluid for the gaming industry,” he cautioned. “We have increased competition in Massachusetts, and I look for Connecticut to get back in the game too. The industry is going through rapid technological changes.”
Whatever happens, state and city resources will be impacted.
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U.S. HEADQUARTERS: Pictured is the IGT building on 10 Memorial Blvd. in downtown Providence, headquarters for the gaming company’s U.S. operations. IGT currently has a contract with the state to oversee the R.I. Lottery, which requires the company to maintain 1,000 Rhode Island employees. IGT is attempting to renew its contract with the state, which if approved by the General Assembly, would require the company to maintain 1,100 R.I. employees.
/ PBN PHOTO/RUPERT WHITELEY[/caption]
BUDGET BOOST
Lottery transfers represent the third-largest source of state revenue, behind income and sales taxes. That money comes from sales of Keno games, sales of scratch tickets, and casino-based table games and video-lottery terminals,” or slot machines.
The state budget in fiscal 2019 received $400 million from the lottery, including $317.5 million from more than 5,000 slot machines between the two casinos, according to the R.I. Lottery.
Beyond state revenue, Providence will be affected. The capital could lose one of its largest employers if the existing requirement to retain 1,000-plus jobs in Rhode Island isn’t continued. Most of the IGT employees, whose payroll exceeds $111 million, are based in a modern office building downtown, according to Vincent.
The average IGT salary is $103,000, well above the existing state household median of $61,043.
“All of that has a significant impact on the economy,” Vincent said. “I don’t think anyone is arguing against that.”
The company is the primary tenant in its building at 10 Memorial Blvd., occupying almost three of its four office floors. Constructed for the company in 2006, the building was sold in December 2018 for $71 million, according to city records. The IGT lease expires with the contract, which runs for four more years, Vincent said. If the contract is renewed, the lease will be.
In a letter sent June 24 to House Speaker Nicholas A. Mattiello, Twin River Worldwide Holdings CEO and President George Papanier offered to match the IGT deal.
Company officials say they were not invited to participate in any of the administration’s discussions about the contract.
In recent weeks, Twin River’s concerns have emphasized the mix of slot machines provided under the proposed contract terms and said the vast majority would remain under IGT control, hampering its efforts to compete effectively with casinos in Massachusetts and Connecticut. In materials provided to General Assembly members, Twin River has argued that the IGT machines generate less income for the state than those of competitors, such as Scientific Games Corp. and Everi.
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QUALITY CONCERN: Marc Crisafulli, president of Rhode Island operations for Twin River Worldwide Holdings, said Twin River is concerned with the quality of the slot machines on its floor. The concern is part of the reason why Twin River has attacked a proposed contract renewal between IGT and the state to have IGT continue running the state’s lottery system, which effectively controls the slot machines at the state’s two casinos in Lincoln and Tiverton. Both are owned by Twin River. IGT has 85% of the slots on the floor, according to the current contract.
/ PBN FILE PHOTO/MICHAEL SALERNO[/caption]
When asked what Twin River ultimately wants out of the dispute, Marc Crisafulli, president of Rhode Island operations for Twin River, said the company is most concerned with the quality of the slot machines on its floor.
“That’s our bread and butter,” Crisafulli said. “We’re competing with casinos all over the country that usually have three very strong, minority players on the floor.”
The proposed contract terms would continue to provide IGT with 85% of the machines. It started with a 50% share, as GTECH, but assumed a larger portion of the floor once it merged with IGT, gaining its 35% share.
In addition to the right mix of machines, the casinos need to have the outdated or poorly performing machines replaced, Crisafulli said.
“You want to keep constantly turning over and refreshing the content to bring in the newest games and the best games and the things that get traction,” he added. “For many people, the No. 1 reason they select a facility to go gaming is because ‘their game’ is there.”
The popularity of the machines matters to the state, as well as Twin River.
The slot machines make up the majority of the casino proceeds that end up in state coffers.
According to R.I. Lottery figures, the slot machines on the two casino floors generated $522.8 million in revenue after payouts were made in the fiscal year that ended in June, of which $317.5 million went to the state of Rhode Island. The total revenue represents an 8.5% increase from the previous fiscal year.
Although Twin River has published information that indicates the IGT machines are not performing as well as competitors’ models, lottery data indicates that the annual amount generated by the machines increased last year, with the opening of the new casino in Tiverton.
And IGT is held to a certain standard of performance with mandated yearly reviews. The 2019 evaluation resulted in 360 of the machines on Rhode Island casino floors, 8.4% of the company’s total in use, being taken from IGT. Those machines were then distributed to the company’s two competitors. The lottery machines were considered the low-performers, according to an R.I. Department of Revenue spokesman, but were not necessarily the oldest machines.
Industry analysts say an agreement allowing IGT to retain control of 85% of the slot machines is unusual.
The typical casino floor has a mix of companies providing the machines, said David Katz, an analyst who follows IGT for Jeffries.
He cited New York, another state where the state lottery runs the casino slot machines. In New York, casinos have opened with four suppliers providing the machines, each with an equal share. The shares then are reassigned at regular intervals, depending on performance.
“It’s not commercially usual that a single supplier would have that large a share of the commercial-gaming floor, and particularly in the case of Twin River, because it’s a large floor,” Katz said. “The question to ask is, does IGT have enough good product to populate a floor that large?”
Vincent, when asked about the issue of floor dominance, called the criticism a misinterpretation. IGT machines do not make up 85% of the slot machines, he said. The company contracts with other sources to provide about 40% of its share.
“A number of other major providers in the market cooperate with us. We place their machines there,” Vincent said.
Such arguments, he said, are meant to distract from the simple facts. “We have an economic-development agreement,” Vincent said. “The fundamentals of that agreement are we get to provide the machines we’re allowed today. In return for that, we have an employment-level obligation of 1,000 people. That is a major and unique piece of this agreement.”
Howard Stutz, executive editor of CDC Gaming Reports Inc., a Nevada publication that reports on the lottery and gaming industry, reported in July that analysts had critiqued the mix of games available to Rhode Island casino patrons.
Compared to competitors in Massachusetts and Connecticut, the Ocean State casinos lacked some of the most popular games, including the “Lightning Link” progressive game, which an industry analyst said was in almost all major casinos in the U.S., Stutz reported.
Although IGT has agreements with other slot machine manufacturers, the stock going to Rhode Island is not the newest games, Stutz reported.
JOB EXCHANGE
As a company, IGT has grown steadily through the years both internally and through acquisitions, according to reports by analysts. According to a 2005 agreement with the state, it provided services to more than half of the state lotteries in the United States.
According to analyst reports, IGT is experiencing organic growth, with revenue from North American slot machines 18% greater than in the second quarter 2018.
A report from Deutsche Bank rated its stock as a “buy” and said the company had accelerating replacement share in North America.
According to Katz, the company is well-known and dominant in online lottery games, such as MegaMillions and Powerball, which produce the most revenue for states beyond Rhode Island.
A top U.S.-based competitor, Scientific Games, which has headquarters in Las Vegas, is more dominant in scratch-off lottery ticket services, according to Katz.
Scientific Games, which recently won a contract renewal for the Florida Lottery, provides games, technology and services to more than 150 lotteries in 50 countries, according to its website. The Florida Lottery contract, which is estimated to generate $8.5 billion for the Sunshine State, continues a relationship between the state and Scientific Games that has spanned more than 30 years, according to news reports.
Despite the competitive marketplace, IGT is not losing ground to Scientific Games, according to Katz.
“Lotteries don’t change suppliers easily,” he said. “If you’re thinking about why that is, the importance of state lotteries in generating public funding, it’s so critical. You really need to mess up to lose a lottery contract.”
In Rhode Island, IGT has held the state lottery contract since 2003.
That agreement requires IGT to maintain 1,000 jobs in the state and provide $100 million in investment. The cash payment to the state totaled $12.5 million. The current proposal would require a $25 million payment to the state, and the maintenance of 1,100 jobs.
In exchange, IGT will be paid by the state a percentage of the lottery sales annually.
The formula for online and instant tickets: 5% of total sales up to $275 million; 4% of sales between $275 million and $400 million; and 5% of sales over $400 million.
The percentage for IGT of the casino-based terminals hasn’t changed under the proposed contract. The company would get 2.5% of sales up to $500 million and 1% of sales between $500 million and $1 billion.
Total sales over $1 billion would generate 2.5% in commissions for IGT.
Because IGT is paid on a commission basis, it is difficult to estimate what it might gain from a 20-year contract renewal. But the company from fiscal 2004 through 2018 earned $636.1 million for running lottery services for Rhode Island, according to an R.I. Department of Revenue spokesman.
Of the 1,000 employees now required in Rhode Island, only 60 or so are needed to serve the state’s lottery contract, Vincent said.
The job requirement, which Vincent says is the heart of the agreement, is unusual for a lottery contract. Katz, the analyst, said he was not aware of a similar structure among competitors.
“Just in general, the relationship that IGT has with … Rhode Island and the lottery is really unique,” Katz said.
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‘Twin River seems to spend its day creating political mayhem.’
ROBERT K. VINCENT, IGT Global Solutions Corp. chairperson / PBN PHOTO/MICHAEL SALERNO[/caption]
Vincent said he’s confident Rhode Island legislators – once they’ve seen the terms and had public hearings – will approve the contract. But the jobs are a significant factor for the state to consider, as well, he said.
IGT has more than enough room in Las Vegas for the employees who are based in Rhode Island, and not working on lottery services.
“As a company, going forward, you have pressures on you like any other company. And If you don’t have an employment-level commitment here, you’re going to look at things differently,” Vincent said. “That’s what we’ve said.”
But can state leaders find a solution that satisfies both companies?
Both Twin River and IGT are different companies today than they were even five years ago, noted Sasse, having gone through acquisitions and mergers. When the original contract was made, Twin River didn’t exist in Rhode Island and IGT was a smaller company. Now both have tremendous economic impact and importance in the state.
“At the end of the day, you want Twin River to be a strong company and you want IGT to be a strong company,” Sasse said. “You want to get the best possible deal for the taxpayer. The question is, can you get a better deal for the taxpayer through a negotiated agreement or by a bid? That’s the policy question.”
“Rhode Island is in a less than ideal situation here because it is pitting two important employers against each other in a virtual bidding war,” said Wendy Schiller-Kalunian, chair of the Department of Political Science at Brown University. “It also appears that there is little room for compromise that does not involve reducing the length of the contract for either company, which leaves no one perfectly happy.
“The most ideal approach is for the state of Rhode Island to try to reduce its dependency on gambling as revenue, which is a goal all states should try to meet. But short of that, working out a shorter-term contract with IGT that leaves room for reevaluation and competition seems like a reasonable compromise if it can be worked out.”
Mary MacDonald is a PBN staff writer. Contact her at Macdonald@PBN.com.
