LITTLE ROCK — The state lottery's internal auditor told the state Lottery Commission on Tuesday that preliminary audit findings raise questions about the lottery's contract with its vendor for instant-win games, but the lottery's director and a lawyer for the vendor said the contract is valid.

LITTLE ROCK — The state lottery’s internal auditor told the state Lottery Commission on Tuesday that preliminary audit findings raise questions about the lottery’s contract with its vendor for instant-win games, but the lottery’s director and a lawyer for the vendor said the contract is valid.

Michael Hyde, internal auditor for the lottery program, told the nine-member commission his review of the lottery’s contract with Scientific Games of Alpharetta, Ga., is not complete, but it appears that the terms of the contract are significantly different from the terms the company originally offered — and as a result the lottery has lost out on millions of dollars that could have funded college scholarships.

Hyde said that in July 2009 Scientific Games proposed two possible prices: 1.75 percent of instant ticket sales, or 1.15 percent of instant ticket sales if the lottery chose an optional program called Properties Plus, which allows players with losing scratch-off tickets to earn points toward other prizes.

He said the lottery entered into a contract with Scientific Games on Aug. 18, 2009, and on Aug. 25 2009, then-Director Ernie Passailaigue altered the terms, apparently without the approval of the commission or a legislative review. The changes brought the rate paid to Scientific Games to 1.92 percent of instant ticket sales.

The lottery also has utilized the Properties Plus option, even though that option originally was supposed to be paired with a 1.15 percent payment rate, Hyde said. He estimated that if the lottery had been paying the 1.15 percent rate since it launched, it would have collected $7.5 million more in ticket sales and raised $1.95 million more for college scholarships by now.

Over the seven-year term of the contract, the lottery’s ticket sales could have been $21.7 million higher and its profits to fund scholarships could have been $5.7 million higher at the 1.15 percent rate, Hyde estimated.

Hyde said he has tried to determine what services the lottery obtained for raising the payment rate, and the only answer he has received is that Scientific Games is using telemarketers to contact lottery retailers and remind them to re-order tickets. He said he believes four or five people are employed for that purpose.

“Four to five people, $7.5 million?” said Commissioner Bruce Engstrom of North Little Rock.

“I don’t know what kind of salaries (they make),” Hyde said.

Hyde also said he believes the service should not cost any extra because it was not listed as a separate option in Scientific Games’ proposal.

Lottery Director Bishop Woosley told the commission he has been talking with Scientific Games to try to resolve uncertainty about the contract, which he said has “gotten to the point where it’s disruptive within the agency and it’s difficult for us to act as a staff.”

But Woosley said he believes the contract is valid and binding. He said the commission chose the 1.75 percent rate the company offered, not the 1.15 percent rate.

“We took the higher price and selected Property Plus?” Hyde asked.

“That’s why we’re sitting here,” Woosley said. “We can argue all day long whether it was a good deal or not.”

“So it’s your position that whether we got screwed or not, we’re stuck with it?” Engstrom asked.

“I would say that it’s a valid contract,” Woosley said.

Commission Chairman Dianne Lamberth of Batesville also said she believes the contract is valid. Commissioner Patty Shipp of Morrilton said that whether or not the contract was a good deal is “water under the bridge.”

The changes that Passailaigue later made without approval of the commission were noted in a 2010 state audit and are “nothing new,” Woosley said. He said the commission discussed the audit at the time but did not then question the validity of the contract, which amounted to affirming it.

Woosley acknowledged that it might have been possible to negotiate a better deal, but he said lottery officials were dealing with many unknowns at the time.

“Quite frankly, whether we all want to admit it or not, this was a lot of guesswork,” he said. “Some things we got wrong, some things we got right. We’ve made a lot of money for scholarships; I don’t want that to get lost.”

Woosley also said that if the commission were to seek to cancel the contract and sue Scientific Games, millions of dollars for scholarships likely would be lost while the panel looked for another vendor.

Scientific Games has offered a settlement under which the lottery would receive $2 million as an incentive to keep doing business with the company. The company has not offered to change its payment rate.

Phillip Bauer, general counsel for Scientific Games, told the commission Tuesday the company entered into the contract in good faith, relying on Passailaigue’s assurances that it would be properly reviewed.

“We find it incredible that our reputation and our contract are repeatedly and unjustifiably being called into question in a very public manner, and respectfully call upon the Lottery Commission to take the corrective action by formally reaffirming the contract,” he said.

Commissioner Steve Faris of Central told Bauer the commission needed another week to 10 days to study the matter further.

“I cannot guarantee that the same offer will be on the table 14 days from now,” Bauer said.

“The good faith kind of goes down the drain then, doesn’t it?” Faris said.

Bauer said he could not make the guarantee because he did not know what would happen over the next 14 days.

The commissioners said they would hold a special meeting in about 10 days to discuss the matter further.