0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 FRIDAY, MARCH 23, 2007 § 8 9 COMMISSION MEETING 10 FRIDAY, MARCH 23, 2007 11 12 BE IT REMEMBERED THAT on Friday, 13 the 23rd day of March 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 3:57 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER C. 18 TOM CLOWE, JR. The following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 SPECIAL COUNSEL: 6 Ms. Sarah Woelk 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on the 5 implementation of recommendations contained in the Internal Audit Report on bingo audit 6 services, including development of rules ...... 8 7 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action on 8 nominations and appointments and/or a nomination and appointment procedure on 9 the Bingo Advisory Committee .................. 33/53 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action on the 11 Bingo Advisory Committee work plan ............ 44 12 AGENDA ITEM NO. V - Report, possible discussion and/or action on 4th quarter 13 and calendar year 2006 bingo conductor information .................................. 62 14 AGENDA ITEM NO. VI - Report by the Charitable 15 Bingo Operations Director and possible discussion and/or action on the Charitable 16 Bingo Operations Division's activities ........ 73 17 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 18 proposal on new rule 16 TAC §401.316, relating to "Daily 4" on-line game rule ....... 74 19 AGENDA ITEM NO. VIII - Consideration of and 20 possible discussion and/or action, including proposal on new rule 16 TAC §401.307, 21 relating to "Pick 3" on-line game rule ........ 74 22 AGENDA ITEM NO. IX - Report, possible discussion and/or action on lottery sales 23 and revenue, game performance, new game opportunities, market research and trends ..... 79 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on the closing 4 of instant games, including procedures and/or proposal of amendments to 16 TAC 5 §401.302 relating to instant games rules ...... 95/256 6 AGENDA ITEM NO. XI - Report, possible discussion and/or action on transfers 7 to the State .................................. 209 8 AGENDA ITEM NO. XII - Report, possible discussion and/or action on the FY 2008-09 9 Legislative Appropriation Request ............. 211 10 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on the 11 80th Legislature .............................. 212 12 AGENDA ITEM NO. XIV - Consideration of and possible discussion and/or action on the 13 Lotto Texas procedures ........................ 235 14 AGENDA ITEM NO. XV - Report, possible discussion and/or action on the agency's 15 contracts ..................................... 221 16 AGENDA ITEM NO. XVI - Report and possible discussion and/or action on the agency's 17 HUB program and/or minority business participation, including the agency's 18 Mentor Protégé Program ........................ 218 19 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action on 20 external and internal audits and/or reviews relating to the Texas Lottery Commission 21 and/or the Internal Audit Department's activities, including status of 22 implementation of SAO recommendation on incomplete transactions ....................... 223 23 AGENDA ITEM NO. XVIII - Report, possible 24 discussion and/or action on the Mega Millions game and/or contract ................. 239 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XIX - Report, possible discussion and/or action on 4 GTECH Corporation ............................. 241 5 AGENDA ITEM NO. XX- Commission may meet in Executive Session: 6 A. To deliberate the duties and evaluation of the Executive Director 7 and/or Deputy Executive Director pursuant to Section 551.074 of the 8 Texas Government Code. B. To deliberate the duties and 9 evaluation of the Internal Audit Director pursuant to Section 10 551.074 of the Texas Government Code. C. To deliberate the duties, appointment 11 and/or employment of the Charitable Bingo Operations Director pursuant to 12 Section 551.074 of the Texas Government Code. 13 D. To deliberate the duties, appointment and/or employment of an Acting 14 Charitable Bingo Operations Director pursuant to Section 551.074 of the 15 Texas Government Code. E. To deliberate the duties of the 16 General Counsel pursuant to Section 551.074 of the Texas Government Code. 17 F. To receive legal advice regarding pending or contemplated litigation 18 pursuant to Section 551.071(1)(A) and/or to receive legal advice regarding 19 settlement offers pursuant to Section 551.071 (1(B) of the Texas Government 20 Code and/or to receive legal advice pursuant to Section 551.071(2) of the 21 Texas Government Code, including but not limited to: 22 Cynthia Suarez v. Texas Lottery Commission 23 Shelton Charles v. Texas Lottery and Gary Grief 24 Stephen Martin vs. Texas Lottery Commission 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 Patsy Henry v. Texas Lottery Commission 4 First State Bank of DeQueen et al. v. Texas Lottery 5 Commission Employment law, personnel law, 6 procurement and contract law, evidentiary and procedural 7 law, and general government law 8 Mega Millions game and/or contract ...................... 249 9 AGENDA ITEM NO. XXI - Return to open session 10 for further deliberation and possible action on any matter discussed in Executive Session... 251 11 AGENDA ITEM NO. XXII - Consideration of the 12 status and possible entry of orders in: A. Docket No. 362-07-1035 - Valdivia 13 Food Market B. Docket No. 362-07-1036 - Bob's Beer 14 & Wine #4 C. Docket No. 362-07-1038 - Carter's 15 Country Store D. Docket No. 362-07-1039 - 99-C World 16 & Discount Tobacco E. Docket No. 362-07-1115 - Handi Stop 17 Food Mart F. Docket No. 362-07-1439 - M.J. Food 18 G. Docket No. 362-07-1441 - Del Valle Food Mart 19 H. Docket No. 362-07-990123AM.B - In the Matter of the Removal of Certain 20 Respondents from the TexaS Lottery Commission's Registry of Approved 21 Bingo Workers: Daid B. Aguirre, Eric Arguijo, Amy D. Brackin, 22 Savannah L. Gomez, Ronald T. Jackson, Ryan A. Jorgensen, Jaron E. Loera, 23 Aaron Muschamp, Christopher D. Ochoa, Krissie A. Patrick, Michael A. 24 Ramirez, Ray Rylan, Laura L. Zlakovsky 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 I. Docket No. 362-07-990123PM.B - In the Matter of the Refusal to Add 4 Names of Certain Persons to the Texas Lottery Commission's Registry 5 of Approved Bingo Workers: Michael R. Aguero, Michael J. Anaya, Stevie 6 Barron, Ronald W. Carver, McClovia Farris, Kenny J. Gonzales, Bethany 7 J. Hayes, Jacob P. Hernandez, Stan R. Hoffman, Larry D. Lang, Jr., Tan 8 Minh Ly, Mary A. Machala, Emma Munoz, Lynn Ortiz, Melissa K. Reyes, 9 Teresa Whitehurst and Perry Wicks .... 244 10 AGENDA ITEM NO. XXIII - Report by the Executive Director and/or possible 11 discussion and/or action on the agency's operational status, activities relating to 12 the Charitable Bingo Operations Division, agency procedures, status of staff review 13 of agency practice concerning receipt of IRS Form 5754 (statement by person 14 receiving gambling winnings), and FTE status ........................................ 247 15 AGENDA ITEM NO. XXIV - Public Comment ......... 248 16 AGENDA ITEM NO. XXV - Adjournment ............. 258 17 18 REPORTER'S CERTIFICATE......................... 259 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 FRIDAY, MARCH 23, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9 o'clock. Today is March 23, 2007. Commissioner 7 Clowe is here. I'm Jim Cox. Let's call this meeting 8 of the Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 report, possible discussion and/or action on the 12 implementation of recommendations contained in the 13 Internal Audit Report on bingo audit services, 14 including development of rules. 15 Mr. Sanderson. 16 MR. SANDERSON: Good morning, 17 Commissioners. For the record, I'm Phil Sanderson, 18 Assistant Director of the Charitable Bingo Operations 19 Division. I would like to bring you up to date on the 20 implementation of the recommendations of the internal 21 audit as it related to the Audit Services Department. 22 First, Chairman Cox, you had asked that 23 I review the original target dates that were included 24 in the original management response to the 25 recommendations. I've taken the opportunity to meet 0009 1 with the bingo managers and discuss those timelines 2 and have prepared this slide to show you the revisions 3 to those target dates, as well as I'll also give you 4 an update as to where we are in the progress. 5 The first issue was regulatory objective 6 and approach. And the original target date for the 7 regulatory objective and approach was January 2007. 8 And as you remember, this regulatory objective was 9 developed and approved at the Commission meeting on 10 September 6, 2006. 11 The other recommendation out of Issue 1 12 was to develop risk-based factors for determining the 13 extent of the audit and review coverage of licensees. 14 We have worked on those risk-based factors, and we 15 anticipate having those in place by July of 2007. 16 CHAIRMAN COX: Okay. Now, do we have a 17 typo up there, Phil? You've revised it backward seven 18 months. Is that right? No. I'm sorry. You brought 19 it back. Okay. 20 MR. SANDERSON: From December 2007 to 21 July 2007. 22 CHAIRMAN COX: Thank you. 23 MR. SANDERSON: The second issue, 24 licensee experience, the recommendation was to adopt 25 processes to better ensure licensees a fair, 0010 1 consistent and open regulatory experience. The goal 2 of implementing this recommendation was to develop and 3 revise rules to help ensure licensees have a fair, 4 consistent and open regulatory experience. The 5 original target date was December of 2007, and we 6 revised that to July of 2007. 7 Currently we have one rule that's 8 proposed for public comment, permissible expenses, 9 which has a public hearing I believe scheduled for 10 March the 30th, and that addresses the terms 11 reasonable and necessary. 12 Additional rules being developed include 13 house rules and fair conduct of bingo rule, books and 14 records rule, general audit rule, dispute resolution 15 rule, corrective measures rule, as well as a final 16 audit report and an audit completion letter. The 17 recommendations to review past audit reports is 18 currently being performed, and we feel like that 19 review and any findings and/or recommendations should 20 be available sometime this summer. 21 The third issue is the audit methodology 22 and protocol. We've developed guidelines for the 23 minimum internal control standards and are currently 24 incorporating the minimum internal control 25 requirements into the house rules, the fair conduct of 0011 1 bingo rule and the books and records rule. The target 2 date for establishing the minimum internal control 3 standards has been revised from December 2007 to 4 May 2007. 5 The target date for the recommendation 6 to address the statutory charge and audit methodology 7 has been revised from May of 2008 to June of 2007. 8 Staff has currently drafted a written audit program 9 which is being modified as a result of information 10 that was obtained during the auditor training that was 11 conducted here on the yellow book standards two weeks 12 ago. 13 And the last recommendation was to adopt 14 the GAGAS and identify appropriate training for audit 15 staff. The Audit Department adopted GAGAS standards 16 in September of 2006, as well as developed an audit 17 charter. And the auditors completed their training 18 two weeks ago on the yellow book standards. 19 The last issue was the organizational 20 structure and responsibilities of the Audit Services 21 Department. The committee assigned to this 22 recommendation continues to meet. We have identified 23 the audit and non-audit activities and segregated 24 those activities. 25 We've completed draft job descriptions 0012 1 for the auditor positions as well as identified new 2 job descriptions for an inspector series which will 3 handle the non-audit activities previously performed 4 by the auditors. The committee is scheduled to meet 5 next week and review a draft of the recommendation. 6 The target date for this recommendation has been 7 revised from December 2007 to July 2007. 8 And that concludes my report on this 9 item. And I'm available to answer any questions you 10 may have. 11 CHAIRMAN COX: Wow! Phil, I've got to 12 ask, those are remarkable changes, and I'm very 13 pleased. Are you comfortable that you can meet them? 14 MR. SANDERSON: We have been meeting 15 with Ms. Melvin and her staff on the rules, revising 16 and drafting rules that we need to implement the 17 recommendations. A lot of it is time-consuming, but I 18 believe we're on track to have the rules ready for at 19 least proposal by July of 2007. 20 The other items -- and that's probably 21 the toughest item, will be the rules, because it 22 encompasses more than just the Bingo Division. You 23 have, you know, the Legal and other divisions that are 24 responsible for that. 25 And then the risk analysis I believe is 0013 1 complete. All we have to do is meet with Information 2 Resources staff to help develop program logic to 3 identify the accounts that we'll be auditing. 4 I feel like those dates are very doable 5 at this point in time, yes, sir. 6 CHAIRMAN COX: And did you discuss this 7 with Ms. Kiplin? And is she comfortable that she can 8 provide the legal staff to get all these rules 9 together? 10 MR. SANDERSON: I've not had the 11 opportunity to talk to Ms. Kiplin with these. But 12 Sandy Joseph has been in the meetings that we've been 13 discussing on the rules that we're currently working 14 on right now. 15 CHAIRMAN COX: Okay. Well, why don't we 16 gather up Ms. Joseph and Ms. Melvin. And who are the 17 other principal resources that will be working with 18 you on this, Phil? 19 MR. SANDERSON: Ms. Pyka and 20 Ms. Erickson is part of the restructure committee. 21 CHAIRMAN COX: Okay. Kathy, do you want 22 to come on up. 23 MS. PYKA: Certainly. 24 MR. SANDERSON: And Ed Rogers is also on 25 one of the committees. 0014 1 CHAIRMAN COX: Okay. Well, these seem 2 to be the principal resources. 3 Terry, you don't need to leave. Just 4 stay right there if you want to. 5 I would like for all of you to address 6 this schedule and whether you think that it will put 7 undue strain on your resources and, in general, 8 whether you think it serves us best to move it up this 9 much or should we give ourselves a little more time. 10 Do you want to start, Sandy? 11 MS. JOSEPH: Certainly. For the record, 12 I'm Sandy Joseph, Assistant General Counsel. 13 We have undertaken very ambitious 14 rulemaking activities. I believe that we can get 15 these rules ready for proposal by July, definitely. 16 We're working diligently and continue to do so, and we 17 can make it happen. 18 CHAIRMAN COX: Chairman Clowe, are you 19 planning to be here in July? 20 COMM. CLOWE: At the pleasure of the 21 Governor. 22 CHAIRMAN COX: Okay. So you're not 23 going to be in Argentina? 24 COMM. CLOWE: I will be in Argentina in 25 August, the Lord willing and the Governor willing. 0015 1 But I will be here in July. 2 CHAIRMAN COX: Okay. Catherine. 3 MS. MELVIN: For the record, my name is 4 Catherine Melvin, Director of the Internal Audit 5 Division. 6 I agree with Sandy's assessment also. 7 We are very supportive of the Bingo Division's efforts 8 here and especially their diligence in moving the 9 dates up. It's quite a bit of work. It has impacted 10 my division personally, since you asked that. It's 11 impacted our ability to go further on the performance 12 audit of the other functions in the Bingo Division. 13 But we balanced that, and we're certainly focused on 14 risk and priorities, and we believe that the 15 implementation of the recommendations and their 16 efforts in addressing those are priority for that 17 division now. And so we participate in those 18 discussions and offer our assistance. 19 CHAIRMAN COX: Kathy. 20 MS. PYKA: For the record, Kathy Pyka. 21 And my role has been involved with the 22 organization structure and responsibility group. And 23 I certainly believe that we are well on track to 24 complete our report here in the next couple of months 25 and certainly well before this July 2007 date. And I 0016 1 recognize that while our report will be complete, 2 there's additional steps that will need to occur 3 between the delivery of our report and final 4 implementation of this item. 5 CHAIRMAN COX: Okay. 6 MS. PYKA: So I certainly feel good 7 about our target date. 8 CHAIRMAN COX: And, Director Sadberry, 9 there are other resources within the agency that 10 you're concerned about or do you think this is a 11 doable thing? 12 MR. SADBERRY: Chairman, I think it 13 should be recognized as a challenge. I believe it's 14 doable, from all I have heard and seen. I stay 15 somewhat involved and I also remove myself so that I 16 am not involved to an extent that I should not be, 17 based upon advice I receive from counsel. 18 But to the extent I am involved, I 19 believe it's necessary. And what we have seen is the 20 staff steps up in those circumstances. As you recall, 21 they stepped up in the rulemaking process when we made 22 the commitment that we would do so. And all staff -- 23 Legal, Audit, Controller, Bingo and others -- stepped 24 forward, and they are doing the same now. 25 So I'm confident that staff can do that 0017 1 because of the quality of the staff that Phil has put 2 together on this. And there are others who are not at 3 the table who were actively involved in it. 4 I might say, if I may, in addition, I 5 think the question was asked at the last meeting 6 whether I felt that there were other resources 7 available outside the agency, and I indicated that I 8 felt that there were sources that may still be 9 available for that purpose. 10 And of recent, Catherine and I have 11 discussed one of those -- and I confirmed yesterday, I 12 think, movement forward on that is occurring. And 13 Kathy and I discussed another and I understand that 14 movement forward on that is occurring. So we're 15 taking advantage of outside resources that may be 16 available also. And that's not the vendor sources. 17 Those would be state agency sources that might be 18 available to us. 19 Again, I think this is necessary work. 20 And our staff is of the commitment and the caliber 21 that they get the work done. And I have every 22 confidence that that will occur now, whatever the 23 requirements for that, and we'll be here to support 24 them and understand their needs and provide whatever 25 assistance, including financial resources, that may be 0018 1 called upon that are available to us. 2 CHAIRMAN COX: Now, Catherine, there's 3 one project that you're working on that still is of an 4 indeterminate scope. 5 MS. MELVIN: Yes, sir. 6 CHAIRMAN COX: And that is the look-back 7 on the various audits. Do you want to tell us a 8 little bit about where that stands. 9 MS. MELVIN: I sure can. Chairman, we 10 worked with the division in identifying all those 11 activities that have been conducted during a set 12 period of time, and I believe we chose those audits 13 that cover from the last quarter of -- 14 MR. SANDERSON: 2003. 15 MS. MELVIN: -- 2003 to current. And 16 that comprised, oh, I believe, 600-plus reports. And 17 their division delivered all those reports to us. The 18 internal Audit Division is sorting through all of 19 those to determine what action or what determination 20 should be made with each of those. And the goal is, 21 is to identify those that might require further 22 resources, whether outsourced or internal, to go back 23 to the working papers or conduct further work to 24 determine whether or not some action should be taken 25 related to the licensee. And when I say "action," 0019 1 it's some correction on our part, something perhaps we 2 asked the licensee to do that we may need to go back 3 and reconsider. 4 And so that is quite a large effort to 5 do. And we're anticipating taking approximately the 6 next two weeks to do that. After that period of time, 7 we'll have an assessment of all the audit reports. We 8 intend to sit down with Mr. Sanderson and Ms. Pyka to 9 discuss what type of resources should be brought in to 10 address those. 11 CHAIRMAN COX: Okay. Let's just assume 12 something -- maybe it's a worst-case assumption or 13 worse than worst case -- but let's say you find that 14 that's a big old job and we're going to have to get 15 outside resources and it's going to take until 16 December to finish that. 17 Phil, would that have any impact on 18 these things or is that an independent course? 19 MR. SANDERSON: In my mind, it's an 20 independent course. That's the one that's identified 21 as summer of 2007 up there, review of past audit 22 reports and decisions. And I think that stands alone 23 from everything else that's within the recommendation 24 of the Internal Audit Report. 25 CHAIRMAN COX: Okay. Now, at this time, 0020 1 we're not doing audits. Is that correct? 2 MR. SANDERSON: We have a few audits 3 that we're working on; you know, I would say high 4 profile type audits. There are a few audits that 5 we're working on. And that's one of my goals right 6 now, is to get the Audit staff -- they have received 7 their training, and we're looking at obtaining 8 TeamMate hopefully as a workpaper document repository. 9 And, like I said, we've got the risk base factors 10 identified, and we're going to start working with 11 those. And the written audit program has been 12 developed. I haven't gone over it with Ms. Pyka or 13 Ms. Melvin yet, but I believe -- my goal is to try to 14 start the auditors back on the audit track within the 15 next probably six weeks or so. 16 CHAIRMAN COX: Okay. Now, how are you 17 going to be able to do that with all of these rules 18 hanging out there that haven't been exposed or have 19 been exposed but not commented on or have been 20 commented on but not adopted? You know, I see this 21 process -- Ms. Joseph, help me with how long, best 22 case and best guess, the process of getting these 23 rules in place is going to take. 24 MS. JOSEPH: Generally from the time a 25 rule is actually published in the Texas Register, 0021 1 normally it would take at least 60 days to get it 2 finally adopted. 3 CHAIRMAN COX: So that would say that if 4 the best case occurred, we got all these exposed in 5 July, then best case, they're going to be ready -- 6 they're going to be approved in September. 7 Now, are you going to be able to do much 8 work before September, Phil, given that scenario? 9 MR. SANDERSON: Yes, sir, I believe so. 10 There are still certain requirements within the Bingo 11 Enabling Act, and the organizations are required to 12 keep certain documents. They may not have a specific 13 form or a name, which is what the rules are 14 identifying. And the audits that we're currently 15 performing right now are more limited in scope than 16 overarching of everything. They're targeting a 17 specific problem that's been identified. 18 CHAIRMAN COX: Okay. I think it's 19 important that if we have a limited menu to choose 20 from as to what we can audit, that we not just put 21 people to work doing limited audits but do a cost- 22 benefit analysis as to whether it makes sense to do 23 anything until we can do the full range of work. 24 MR. SANDERSON: Yes, sir, we'll 25 certainly look into that. 0022 1 CHAIRMAN COX: Why don't you take a look 2 at the various implications of this discussion about 3 implementation and getting back on track and see if 4 you can get back to us next time with some kind of a 5 calendar as to how you think that might look. 6 MR. SANDERSON: Okay. 7 CHAIRMAN COX: And, obviously, work with 8 Ms. Melvin on that, because all of these things are in 9 response to her audit report. 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN COX: Okay. 12 COMM. CLOWE: Mr. Chairman, I want to 13 delve into a different aspect of this plan, if I may. 14 CHAIRMAN COX: Yes, sir. 15 COMM. CLOWE: Phil, I share with the 16 Chairman an appreciation for the effort that's gone 17 into this and the improvement in the schedule. A 18 major portion of what you presented to us here this 19 morning appears to me to be mechanics. And at the 20 time that the Internal Audit Report was made, a large 21 part of my interest and concern was directed to how 22 did we get into this mess? 23 And I had numerous conversations with 24 then the Director of the Charitable Bingo Division 25 about the qualifications and the performance of 0023 1 leadership, because when you find yourself in a mess, 2 you wonder, you know, how did we get here and who led 3 us into this mess? 4 Upon the event of that individual's 5 resignation, those discussions became moot. And you 6 and I have not had those discussions, because you are 7 the Assistant Director acting in that capacity, and 8 there is an active search going on for a director. 9 Director Sadberry, the chair of the search committee, 10 has informed me that there are applicants that I 11 believe will be interviewed by the search committee 12 next week, and you are an internal candidate for that 13 position. 14 My concern and the thing I want to get 15 out in the open about this schedule -- and I want to 16 draw your attention to it; I want to draw Director 17 Sadberry's attention to it. 18 And I want to direct your attention, 19 Janine, to it, is that an evaluation needs to be made, 20 in my opinion, of the leadership in the division and 21 its qualifications and its past, present and future 22 potential for performance, as we go through the 23 mechanics of all of this, for the improvement of the 24 performance of the division. 25 And these are the discussions that I had 0024 1 with the director before that resignation took place. 2 To me, that's an important part of this whole process. 3 My view is that it hasn't been discussed, it hasn't 4 been brought up. And, as I say, I want to bring that 5 to the table, that Director Sadberry, as you lead 6 these interviews and you recommend to the 7 Commissioners whatever the result of that effort is, I 8 think the candidates need to understand that there is 9 an issue here of question on at least one 10 Commissioner's part -- I can't speak for the 11 Chairman -- about, you know, are these individuals who 12 are asking to be considered for this position strong 13 leaders that are going to evaluate the leadership in 14 the division and take hold of that issue and be 15 proactive about it? 16 Because I don't want us to complete 17 these plans that you've laid up here and then in a 18 year or a year and a half or two years, find ourselves 19 back in the soup again and having to rely on the 20 expertise of these individuals who have said they have 21 given extra time and effort to this project and are 22 producing good results. That's a very important part 23 of solving this whole problem in my mind. 24 And I would like a comment, I think 25 first from you, Director Sadberry, because I think 0025 1 you're leading the effort in this. 2 Phil, I don't want to put heavy response 3 on you because I understand your position, and I don't 4 think you're really ready to go forward with what I'm 5 asking for. 6 But I think it really falls to you, 7 Director Sadberry, to set the tone on this. 8 And then, Janine, you're a key player in 9 this process. And I think the Commission is going to 10 rely on you for an evaluation of leadership skills, 11 experience, the kind of strength that we want to 12 improve the performance of this division 13 And, Mr. Chairman, I would welcome your 14 comments. 15 CHAIRMAN COX: Those are very 16 appropriate remarks, Mr. Chairman. I spent a number 17 of years in my career as an auditor. And I know from 18 that experience that a good auditor can do good audits 19 without a system, but a weak auditor can't do good 20 audits with the best of systems. So I think this is a 21 key element. 22 But the real key element is, as Chairman 23 Clowe says, that we have a staff that is from top to 24 bottom qualified to implement these fine programs that 25 we're developing. 0026 1 Anything else? 2 COMM. CLOWE: I would like to hear from 3 Director Sadberry. 4 CHAIRMAN COX: Okay. 5 MR. SADBERRY: Commissioners, thank you 6 for those helpful suggestions. That is helpful to me, 7 and I had looked for guidance on this process in the 8 role that you anticipate in my stead and from the 9 search committee that has been assembled. 10 You are correct, confirmed as late as 11 yesterday and this morning, Janine and her staff, Lisa 12 Glenn, have been successful in making the arrangements 13 for the interviews. This has been a very well-run 14 process, I want you to know. I'm very pleased with 15 the way it's been conducted. To my knowledge, I've 16 not heard of any issues of how it's been handled. And 17 they have brought professionalism to the entire 18 process, and that's important, to give it credibility. 19 Also we have representative 20 participation on the committee which, as you know, is 21 very important to the ultimate results being 22 recognized. We have industry representation, 23 Commission representation and my role as presiding. 24 That is also I think very helpful to the process. 25 Now, in what you say, I can tell you -- 0027 1 and I have not considered it a specific literal 2 assignment or task, but I certainly do acknowledge and 3 will act as your pleasure is in any form of informal 4 indication from my perspective, of leadership 5 potential on internal as well as external candidates, 6 to the extent I'm aware of them and have personal 7 perception on which I can base statements to the 8 committee, recognizing they obviously have their own 9 ideas and their own data from which they can make 10 their own comments. 11 But from inside the agency, I believe 12 that my involvement in the bingo activities and 13 knowledge of their work and the leadership and the 14 staff -- and what I have deliberately done, as I say, 15 of trying to create the balance of being involved 16 enough to know but not being too involved as to 17 become -- injecting myself into their business and 18 management of issues, 19 But I think my perception -- and I did 20 have the same focus, Commissioner, of having been 21 involved with the prior bingo director and seeing and 22 discussing with him and others in that division 23 directly some of the issues they faced. And now 24 having involved bingo and the business aspects of the 25 agency so that I and the agency can learn more about 0028 1 Bingo and vice versa, so that Bingo can understand how 2 the agency operates with respect to the business of 3 the entire agency. I think that as well has gone very 4 well. 5 So all of these things combine to say 6 that I believe that I can be objective and hopefully 7 considered to be credible in making any comments the 8 committee may wish to consider, or the Commission, for 9 that matter, with regard to my observations of the 10 candidates and their performance or their credentials. 11 As you say, this, as I have seen it, is 12 one house with major and important divisions but they 13 work synergistically as one agency. I have sought to 14 emphasize that. And part of that is to work together 15 and understand each other's strengths and to build on 16 each other's opportunities for leadership and growth. 17 So I will act in that way. I appreciate 18 the fact that you have indicated that on the record so 19 that it could be understood, should I do so, why and 20 in what context that is occurring, and I will do that. 21 We look forward to next week. Again, I want to thank 22 Janine and Lisa and their staff members for putting 23 together this process, a lot of which I could not 24 attend to directly because of legislative requirements 25 and other things that required my attention. But I 0029 1 look forward to next week and look forward, if nothing 2 changes, to having some formal presentation for you at 3 the next Commission meeting. 4 COMM. CLOWE: I would like for you to 5 name the members on the search committee, if you 6 would. 7 MR. SADBERRY: Mr. Heinlein, who is 8 present with us this morning; Steve Bresnen, an 9 attorney who has appeared before you before; a member 10 of the Bingo Advisory Committee, Ms. Garcia; the 11 in-house person, Jan -- is she -- I want to see if 12 she's here -- Jan Pate are the members. I am a 13 member. I consider myself the presiding officer, and 14 that's the role in which I plan to serve. 15 I will tell you that the process was to 16 review the applications after they passed initial 17 screening and to rank by order of preference those 18 candidates among the total that would be recommended 19 for interview. 20 The decision was made to -- there were 21 four of the four, besides myself, who participated in 22 that. And several received unanimous recommendations; 23 several received three out of the four. And we are 24 interviewing that group which comprises eight 25 applicants. 0030 1 COMM. CLOWE: Mr. Chairman, I would like 2 to ask Phil, if you don't mind, if he has any comments 3 about my comment in regard to the dual role that he's 4 involved in now as the Assistant Director and then an 5 internal applicant. Are you comfortable with the 6 comments I made, Phil, or do you have any response in 7 that regard? 8 MR. SANDERSON: I am comfortable with 9 your comments and I respect the comments. It's areas 10 that I have been looking at, you know, personally. 11 And I think that as, you know, time progresses and 12 however the selection process works out, then I think 13 those are areas that should be addressed, yes, sir. 14 COMM. CLOWE: And I would like to 15 acknowledge the additional responsibility that you've 16 taken on in the role of leadership in this project and 17 the extra work that you've been called on to produce 18 and you are producing. 19 In your position of Assistant Director, 20 without any additional compensation during this time, 21 and the Commission made a conscious decision not to 22 name you as the Acting Director but to let you 23 function as the Assistant Director within the rules 24 and well qualified to take on that burden. You've 25 done it without any complaint. And everybody, in my 0031 1 opinion, in the division has stepped up and put their 2 shoulder to the wheel, so to speak, and the 3 Commissioners really appreciate that. 4 But our role in oversight is to make 5 certain that we get to the conclusion that is 6 successful and we cover all the bases. 7 MS. WOELK: And that's all in the 8 context of the posted agenda item about the whole work 9 of the audit. Right? 10 COMM. CLOWE: And if it were not, you 11 would say so? 12 MS. WOELK: Yes. 13 COMM. CLOWE: Never miss an opportunity 14 to make a full and complete record, which I think is 15 important, because we've had these conversations 16 one-on-one, and I want it on the record that it's a 17 Commission -- and the Chairman will tell me if he 18 disagrees -- feeling about this process. And we want 19 to correct what imperfections we've discovered and we 20 want to set in place an effort that will be the best 21 and the most accurate. 22 And, Chairman, what was your word on 23 these bingo audits? We wanted to be consistent and 24 fair. Was there a third item there? 25 CHAIRMAN COX: Catherine? 0032 1 MS. MELVIN: Open. 2 CHAIRMAN COX: Open. 3 COMM. CLOWE: Open, consistent and fair. 4 CHAIRMAN COX: An open and consistent 5 and fair regulatory experience. 6 COMM. CLOWE: And we just want to fix 7 this one time. You know, one time is enough on 8 something like this. Let's get it fixed right the 9 first time, and then let's not have to come back and 10 do it again. 11 CHAIRMAN COX: Absolutely. And fixed 12 right top to bottom means both systems and the right 13 folks. 14 MR. SANDERSON: Yes, sir. 15 CHAIRMAN COX: Anything else? 16 COMM. CLOWE: Thank you. 17 CHAIRMAN COX: Thank you very much. 18 Phil, that's an excellent report. And I will 19 acknowledge that I've received, from some surprising 20 sources, very favorable remarks on the work that you 21 and your staff are doing, and we appreciate it. 22 MR. SANDERSON: Thank you. And I would 23 like to thank my staff also. They're all doing a very 24 good job. 25 CHAIRMAN COX: Thank you. 0033 1 AGENDA ITEM NO. III 2 CHAIRMAN COX: Item No. III, 3 consideration of and possible discussion and/or action 4 on nominations and appointment and/or a nomination and 5 appointment procedure on the Bingo Advisory Committee. 6 Mr. Sanderson. 7 MR. SANDERSON: Good morning, 8 Commissioners. In your notebook is a draft procedure 9 for the nomination process of the Bingo Advisory 10 Committee, as well as the Bingo Advisory Committee 11 rule that's been adopted by the Commission and the 12 section of the Bingo Enabling Act that outlines the 13 statutory authorization of the Bingo Advisory 14 Committee. 15 I believe that Ms. Woelk is providing 16 you with the -- I guess it's called the Texas 17 Government Code on Advisory Committees. It's a 18 section of the Texas Government Code that outlines 19 state agency advisory committees. 20 Prior to this point in time, there has 21 not been a formal process for the procedure for the 22 nomination process. In the beginning it was primarily 23 the Bingo Director and the bingo representatives of 24 the Commission and the General Counsel reviewed the 25 nominations that they received and then make a 0034 1 recommendation to the Commission. 2 And sometime in 2001, the Chairman of 3 the BAC, Bill Neinast, came before the Commission and 4 expressed an interest of allowing the Bingo Advisory 5 Committee to comment on the nominees, to offer their 6 input, so to speak, on individuals or to make 7 recommendations to the Commission on individuals to 8 serve on the committee. 9 Around 2004 is when they actually had a 10 Bingo Advisory Committee subcommittee for reviewing 11 the nominations. And the most recent I believe two 12 nomination processes primarily involved the BAC 13 members that were on this subcommittee interviewing 14 the nominees and making a recommendation to the 15 Commissioners. 16 We have now come to look at developing a 17 formal process for this. And in looking at the way 18 that the process and the procedure has been handled 19 over the past, in your notebook is a procedure that 20 we've -- it's our procedure but it includes your 21 decision, so that's why we have the procedure in the 22 notebook for you to look at and offer any guidance on. 23 And primarily this would call for when 24 the nominations are called and received, that we would 25 send a copy of the nominations to the Commissioners, 0035 1 would send a copy of the nominations to the Bingo 2 Advisory Committee, nomination committee. However, 3 staff would make the final recommendations. And we 4 can offer input with the Bingo Advisory Committee by 5 taking the staff recommendations to the BAC and 6 discussing it in open meeting and then, after that 7 process, bring the names to the Commissioners, who can 8 take the recommendations of staff, the BAC or their 9 own personal recommendation as an appointment to the 10 BAC. 11 And with that, I will just see if you 12 have any questions on the procedure? 13 CHAIRMAN COX: Chairman Clowe? 14 COMM. CLOWE: Phil, I appreciate having 15 this procedure put before us. And my sense is that 16 what we're hoping to achieve here is to get the 17 broadest participation in this process possible. We 18 want the members of the BAC, through this nominating 19 procedure, to be involved and be participative, but we 20 want clearly the staff to come forward with the 21 recommendations. And the Commissioners are going to 22 be the ultimate decisionmakers. And I don't know who 23 originated this phrase, but I think it's apropos. We 24 want this procedure to be a resource and not a filter. 25 MR. SANDERSON: Yes, sir. 0036 1 COMM. CLOWE: And I think that's a good 2 statement. And that's my sense, Mr. Chairman, of what 3 is our desire in this process. 4 CHAIRMAN COX: And I believe -- and I'm 5 going to ask Phil -- that was our intent when you 6 wrote these up, and I believe that's the way they're 7 written. 8 MR. SANDERSON: That's the way I believe 9 they're written, yes, sir. 10 CHAIRMAN COX: Okay. Now, Phil, we have 11 on the agenda several possibilities. One is looking 12 at this procedure. And I think that it does not 13 require formal action on our part to approve this. 14 This is within your authority to approve. You brought 15 it to us to review, because it does involve our 16 participation. Is that correct? 17 MR. SANDERSON: That is correct; yes, 18 sir. 19 CHAIRMAN COX: Okay. Now, the other 20 issue -- if you're ready to go on? 21 COMM. CLOWE: As it relates to this 22 agenda item? 23 CHAIRMAN COX: As it relates to this 24 agenda item. 25 CHAIRMAN CLOWE: Yes, sir. 0037 1 CHAIRMAN COX: -- is the selection of 2 members using this process. 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: Now, one of the things 5 that I think that would be appropriate, given that the 6 Bingo Advisory Committee has filled a stronger role in 7 the past few years than we're suggesting on an ongoing 8 basis is that you present this procedure to them and 9 explain it to them. 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN COX: And I think they're 12 meeting on May 2nd, if that's correct. 13 MR. SANDERSON: Tentatively scheduled 14 for May 2nd, yes, sir. 15 CHAIRMAN COX: Okay. Then the other 16 process we have is filling several openings on the 17 BAC. Is that correct? 18 MR. SANDERSON: Yes, sir. 19 CHAIRMAN COX: And you have -- how many 20 openings do you have right now, Phil? 21 MR. SANDERSON: Currently there are five 22 openings, two that actually became open last February 23 of 2006. And then there's three that became open on 24 February of 2007. However, one of those is the SSP 25 position, which we do not have a licensee for that 0038 1 category, so it will remain vacant. 2 CHAIRMAN COX: Okay. Now, remind me to 3 go back to that one. 4 MR. SANDERSON: Yes, sir. 5 CHAIRMAN COX: As to the other 6 positions, what I would like to see happen, if it 7 meets with the Bingo Commissioner's approval, is that 8 I would like for you to, with your staff, go through 9 those applications, identify any of those candidates 10 that you believe Chairman Clowe and I should 11 interview. 12 We've already both interviewed one of 13 those candidates, but there are other applicants for 14 that same position. Then based on your review and the 15 input you receive from the Commissioners, develop a 16 staff recommendation for who you would believe would 17 best fill these positions. Then I would like for you 18 to take that recommendation to the Bingo Advisory 19 Committee and tell them who you're recommending and 20 see if they have any input. 21 MR. SANDERSON: Okay. 22 CHAIRMAN COX: Then I would like for you 23 to bring your recommendations to this board in May for 24 approval. 25 MR. SANDERSON: Yes, sir. 0039 1 COMM. CLOWE: That's fine with me. 2 CHAIRMAN COX: Okay. Will that work? 3 MR. SANDERSON: Yes, sir, it will. 4 CHAIRMAN COX: Okay. Great. Thank you. 5 MR. SANDERSON: Did you want to go back 6 about the SSP? 7 CHAIRMAN COX: Yes, I did. Thank you 8 very much. 9 I had a message yesterday that Larry -- 10 help me -- from the Bingo Advisory Committee -- called 11 me and wanted to talk to me about possibly changing 12 that SSP position to another position because there's 13 currently no licensed SSP in the State of Texas. Do 14 you know anything about that? 15 MR. SANDERSON: Well, he is correct. 16 There is no licensed SSP in the State of Texas. 17 However, that position is statutorily required. 18 CHAIRMAN COX: So that's statutory? 19 MR. SANDERSON: So it's a change in the 20 statute. 21 CHAIRMAN COX: Okay. Would you get back 22 to Mr. Whittington and help him with that one? 23 MR. SANDERSON: I definitely will. 24 CHAIRMAN COX: Given that, you have 25 recently been working with Chairman Flores and 0040 1 representatives of the industry on a revision to the 2 Bingo Enabling Act. 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: Was attention addressed 5 to that statutory position, and were they informed 6 that there are no such folks? 7 MR. SANDERSON: Yes, sir. In fact, I 8 believe that the draft -- I'll look to Mr. Fenoglio to 9 confirm this, because I have not seen the amendments 10 to it. But the whole subchapter on the system service 11 provider is being removed, as well as the requirement 12 that that individual serve on the BAC. 13 CHAIRMAN COX: So that position will be 14 removed from the committee rather than being 15 redesignated in some other area? 16 MR. SANDERSON: Well, the position will 17 be removed as far as being required to be an SSP. We 18 still have -- by rule, we can change that to another 19 type position, charity, conductor or lessor, lessor 20 position. 21 CHAIRMAN COX: So that sounds like -- 22 and I'll ask Mr. Fenoglio in just a moment -- that 23 sounds as if we may be able to do by rule what 24 Mr. Whittington is asking us to do? 25 MR. SANDERSON: Only after the SSP 0041 1 requirement is removed from the statute. 2 CHAIRMAN COX: Thank you; thank you. 3 Mr. Fenoglio. 4 MR. FENOGLIO: Mr. Chairman, for the 5 record, my name is Stephen Fenoglio. And I have a 6 witness affirmation that I'll bring up. 7 We are, in the drafting of the bingo 8 amendments, are deleting that reference in the section 9 dealing with a member of the Bingo Advisory Committee 10 as well as the other provisions in the Bingo Enabling 11 Act dealing with the system service provider. Trying 12 to predict what the Legislature may or may not do is 13 sometimes difficult. But there's been no comment in 14 any way, other than eliminate those provisions from 15 everyone in the industry. 16 I do occasionally disagree with staff, 17 and I disagree with staff on this issue as it relates 18 to: You have to keep a seat open for the SSP. And 19 the reason is, it's a legislative impossibility. And 20 there's plenty of case law that I'll be happy to give 21 to counsel where the Legislature creates something 22 that is impossible to accomplish. 23 The agency has authority, if it so 24 chooses -- and the statutory creation in the Bingo 25 Enabling Act is nine members -- and it is a "shall." 0042 1 There must be an SSP, but you haven't had an SSP 2 member, system service provider, for I believe two and 3 a half years, something like that. 4 CHAIRMAN COX: Or longer. 5 MR. FENOGLIO: It may have been longer. 6 And so when an agency is confronted with a legislative 7 impossibility, I think the agency has authority, 8 discretionary authority, to -- there is a workaround. 9 And, again, I'll be happy to give that research to 10 Ms. Woelk at a later date. 11 But if the agency is of a mindset that 12 they would like to have a full complement of BAC 13 members, I think you have the authority to fill that 14 ninth seat. If later an SSP were to come forward, 15 then you would timely have to fill that seat with an 16 SSP. 17 I'll be happy to answer any questions. 18 CHAIRMAN COX: No, I think that's an 19 excellent point. And if the statute says, as you 20 said -- and I'm sure it does if you say it does -- 21 that we shall have nine members and we can't possibly 22 have nine members, because one of those designated 23 spots is non-existent, then it's an interesting 24 possibility that I would suggest we look at should the 25 statute not be revised as y'all have put it forward. 0043 1 MR. FENOGLIO: And, again, I think in 2 the interim, you can do that, because you've got two 3 different contradictions in the statute, one that says 4 you have to have nine members and one of those has to 5 be an SSP. And there has been no SSP member or 6 licensee. And there is no expectation, no reasonable 7 expectation anyone will be. And I will be happy to 8 get with staff on that. 9 CHAIRMAN COX: Good. Thank you, 10 Stephen. 11 MR. FENOGLIO: Thank you, Mr. Chairman. 12 MR. SANDERSON: And I may add one other 13 thing. The Bingo Advisory Committee rule is scheduled 14 to come up again for revisions, because of the 15 requirement that they be reappointed, I guess, for 16 another year, or the term extended. And we can look 17 at maybe getting with Mr. Fenoglio and Ms. Kiplin or 18 Ms. Woelk and see if we can put some language in the 19 rule that would allow for us to cover that position 20 with someone else. 21 MS. WOELK: Or Ms. Joseph. 22 MR. SANDERSON: Or Ms. Joseph. 23 CHAIRMAN COX: Okay. Good. 24 Anything else? 25 COMM. CLOWE: I think it's really 0044 1 important, Steve, that you give the General Counsel 2 that brief so that's there's good basis, if the 3 Commission chooses to entertain that option, give them 4 a good legal basis to stand on. 5 MR. FENOGLIO: Yes, sir. 6 CHAIRMAN COX: Anything else, Phil? 7 MR. SANDERSON: That's all I have, sir. 8 CHAIRMAN COX: Okay. SO that is Item 9 No. III. 10 AGENDA ITEM NO. IV 11 CHAIRMAN COX: Item No. IV, 12 consideration and possible discussion and/or action on 13 the Bingo Advisory Committee work plan. 14 MS. ROGERS: Good morning, 15 Commissioners. 16 CHAIRMAN COX: Kimberly, how are you? 17 MS. ROGERS: Just fine. For the record, 18 my name is Kimberly Rogers. Suzanne was unable to 19 make it today. 20 You should have in your book in front of 21 you a nice little chart that Phil has made in 22 reference to the 2006 BAC work plan and the 2007 BAC 23 work plan, which is just a draft ready for your 24 approval. 25 The only thing that has changed is, we 0045 1 ask that we can take out the create, implement a 2 caller-of-the-year program. And we would like to put 3 in "Review specific recommendations for positive 4 public awareness of charitable bingo." And that would 5 be -- things that would fall into that would be like 6 the PSAs and things of that nature. The bingo caller 7 of the year at this time we didn't feel was 8 imperative, important. It's important but not as 9 important as a lot of other things that we need to be 10 looking at. So that is the only change. 11 CHAIRMAN COX: If I remember, from 12 attending your meetings, that one had difficulty 13 because it required some funding that just wasn't 14 available. Is that correct? 15 MS. ROGERS: Yes, sir. It required a 16 lot of funding. You know, where would we hold this? 17 Where would we get everyone together? Texas is such a 18 large state that it would require a lot of manpower 19 and things of that nature. Not that we one day might 20 want to go back to it. It would be a lot of fun, but 21 sometimes right now in bingo a lot more things are 22 more critical than fun in that area. 23 CHAIRMAN COX: Okay. Chairman Clowe, 24 we've got a bit of a bifurcated process here. We're 25 going to receive the annual report of the Bingo 0046 1 Advisory Committee next meeting. 2 MS. ROGERS: Meeting, should be. 3 CHAIRMAN COX: And that's going to be 4 the report on how they did on this plan; and, yet, 5 we're being asked at this meeting to approve the plan 6 for next year, not knowing how the work came out on 7 the plan that we had this year. Are you comfortable 8 with that, or would you rather wait on this until 9 after we have received their report and then approve 10 the plan? I don't think it would affect their 11 schedule, because they don't meet again until May. 12 COMM. CLOWE: I would answer your 13 question with a question: Why is this presented now? 14 MR. SANDERSON: This has normally been 15 presented in the February-March time frame of each 16 year. That's the only reason I can think of why it 17 was presented this time. Now, the annual report that 18 they are preparing, I believe, is more on the annual 19 report that's required, that goes over the statistics 20 of the bingo industry as it relates to gross receipts, 21 distributions -- 22 MS. ROGERS: Yes. 23 MR. SANDERSON: -- net proceeds and how 24 the bingo activity. I don't think it's a report on 25 how they actually met or did not meet any of their 0047 1 work plan standards. 2 CHAIRMAN COX: Okay. Chairman Clowe 3 raises an excellent point, and that is that one of the 4 things that we're working toward here is a 5 determination, in I believe August, of whether we want 6 to continue the Bingo Advisory Committee. Is that 7 correct? 8 MR. SANDERSON: Yes, sir. 9 CHAIRMAN COX: And I'm wondering whether 10 approving a draft plan for a committee that we have 11 not yet decided to continue is an appropriate thing to 12 be doing? 13 MR. SANDERSON: We can definitely look 14 at the timeline of these activities and instead of -- 15 it's called an annual plan, but it may not have to be 16 a calendar year annual plan that. You know, we look 17 at their work plan being from, say, whenever the rule 18 is adopted to continuing the existence of the BAC, 19 then that would be used to make the determination for 20 the following year. 21 CHAIRMAN COX: Sandy, do you want to 22 come help us? You've heard all of this. Why don't 23 you just -- you sense the gist of the question here. 24 Why don't you give us your thoughts on it. 25 MS. JOSEPH: Well, I think you're on 0048 1 track with thinking that perhaps the time frame of the 2 work plan could be adjusted to make more sense, in 3 line with the tenure of the BAC committee itself; in 4 other words, more in line with what is normally the 5 August-to-August time frame. 6 I think perhaps one reason they're 7 thinking they need to do the 2000 work plan is because 8 it's 2000, so they need to perhaps have identified 9 what they are trying to do. And if that's not adopted 10 until August, well, you know, over half the year is 11 gone. But I think certainly we might look -- and it 12 would be within certainly the rules -- to adjust the 13 time period covered perhaps by the work plan. 14 CHAIRMAN COX: So we've got maybe three 15 periods involved here. We've got the calendar year. 16 We've got the year of the continuation, if you will, 17 the authorization year. And then you've got the term 18 years which end in February, the terms of the board 19 members? 20 MR. SANDERSON: Yes, sir. 21 CHAIRMAN COX: Now, the August and the 22 February, are those both statutory? 23 MS. JOSEPH: No. 24 CHAIRMAN COX: The terms, then, are by 25 our rule? 0049 1 MS. JOSEPH: And practice, yes. I don't 2 believe they're even in the rule. The rule -- 3 COMM. CLOWE: Mr. Chairman, I think we 4 voted a one-year extension. We put that deadline in 5 by our vote. 6 CHAIRMAN COX: Yes, sir. 7 MS. JOSEPH: Right. 8 CHAIRMAN COX: And I was asking Chairman 9 Clowe about the term of the members, which is a -- 10 you're talking on a February year. 11 COMM. CLOWE: Right. 12 CHAIRMAN COX: So we've got here in play 13 three years: A calendar year, a February-to-February 14 year and an August-to-August year. I wonder if it 15 makes any sense to say the calendar year is irrelevant 16 here and, since the August is statutory, moving the 17 terms to August-to-August and getting everything on 18 one basis? 19 MS. JOSEPH: August is not statutory. 20 It's by rule. 21 CHAIRMAN COX: Okay. Here is what we're 22 going to do, with your permission, Chairman Clowe: 23 Let's get together and figure out what is the best 24 calendar for all of this, and let's come back next 25 time with a recommendation on when the work plan -- 0050 1 what period the work plan should cover, when it should 2 be submitted, when a report on the accomplishments 3 related to last year's program work plan should be 4 submitted, when the nominations or the period for term 5 of service should be, so that we've got this thing 6 rationalized. 7 MR. SANDERSON: And I might add that at 8 one point in time, the continuation date for the BAC 9 was March of each year. And several years ago we 10 moved that to August to, I think, coincide with the 11 fiscal year. 12 CHAIRMAN COX: And that may -- 13 MR. SANDERSON: And that may be -- 14 CHAIRMAN COX: -- be a very good 15 reason -- 16 MR. SANDERSON: -- why all this has kind 17 of gone on. 18 CHAIRMAN COX: -- to look at how we 19 clean this up so that people are serving within a year 20 of authorization and the plan covers that same year. 21 Does that make sense to you, 22 Mr. Chairman? 23 COMM. CLOWE: Yes, it goes. 24 CHAIRMAN COX: Okay. 25 COMM. CLOWE: And I would like to make a 0051 1 comment, Mr. Chairman, about the substance of the 2 draft plan and the annual report. 3 Phil, you said that, if I heard you 4 correctly, that it has to do more with the statistics 5 of the bingo industry than the accomplishment of the 6 work plan. That doesn't seem right to me. It seems 7 like the work plan ought to be reported on, and the 8 Commissioners ought to be advised of what level of 9 achievement has been accomplished during the year. 10 In looking at the draft for 2007, it 11 seems highly duplicative of the 2006 plan. And the 12 question naturally comes to mind: Are we doing 13 anything? Are we making progress? Why is it being 14 carried forward almost verbatim year-to-year? 15 I don't ask for those answers right now, 16 but I think that is a part of asking approval for the 17 work plan for the next year that need to be answered. 18 MR. SANDERSON: Yes, sir. 19 CHAIRMAN COX: Anything else on that 20 one, Phil? 21 MR. SANDERSON: No, sir. 22 CHAIRMAN COX: And I think one of the 23 challenges you may face is setting up a calendar so 24 that they report on the work plan the work for the 25 year, before the next year's work plan is approved 0052 1 and, thus, always having a work plan in place. And 2 I'm sure that y'all will find a creative way to deal 3 with that situation. 4 MR. SANDERSON: Okay. 5 CHAIRMAN COX: Thank you very much, 6 Kimberly. Did you have anything else you wanted to 7 say? 8 MS. ROGERS: No, sir. But we will go 9 back and look at that -- 10 CHAIRMAN COX: Okay. Does all that make 11 sense to you, what we talked about there? 12 MS. ROGERS: -- on our end. 13 Yes, it does. It would be nice for the 14 dates to go together -- 15 CHAIRMAN COX: Good. 16 MS. ROGERS: -- instead of being so 17 separate. 18 CHAIRMAN COX: Okay. Thank you, 19 Kimberly. 20 MS. ROGERS: Thank you. 21 COMM. CLOWE: Could we ask Kimberly, 22 have you reviewed this draft nominating procedure? 23 And do you have a comment on it? 24 MS. ROGERS: I do. Do we have to go 25 back to Item II (sic) now? 0053 1 COMM. CLOWE: We can do that. 2 MS. ROGERS: We can do that? Awesome! 3 AGENDA ITEM NO. III (continued) 4 MS. ROGERS: My only recommendation or 5 opinion would be that there are a lot of individuals 6 out there in the bingo industry that can fill out a 7 piece of paper and say, "I want to serve on a board." 8 And I used to come to BAC meetings years ago when I 9 was first involved in bingo. There were a lot of 10 arguments, bickering. Nothing ever really -- it 11 didn't seem to go forward. 12 We seem to have, in my personal opinion, 13 a good BAC board at this time that works together, not 14 to say that there aren't a lot of individuals out 15 there that would really bring a lot of good ideas 16 forward to help out with things that are happening 17 now. 18 I would just hate to see the interview 19 portion go away, because there are some individuals 20 who don't know about the day-to-day in the bingo 21 industry, and they want to fill out a form and sit on 22 the BAC board. And that has happened -- and I know 23 this because I've done a lot of interviews. Myself, 24 Larry, Danny, all of us have done the interviews. 25 And there are people, when you call them 0054 1 up and ask what part they have taken, you know, in 2 bingo, they say, "Oh, I play once a week," you know, 3 but they may be on a charity's license, which in a 4 sense it's all about the charities, but it's also 5 about the day-to-day, what the customers want and that 6 aspect of it. 7 And I think the BAC board are people who 8 deal with it every day. We deal with bingo day-in/ 9 day-out. And sometimes we may shed a lot of light on 10 this individual, you know, how well they will sit on 11 the board. There will be individuals that I've called 12 up personally and said -- you know, they've told me 13 they don't get along with anybody on the board but 14 they want to be on there so they can bring their 15 opinions forward, which that's all well and good, but 16 that's what these meetings are for, too, and our BAC 17 meetings. You know, anyone is welcome to come and 18 bring their opinions, but you have to work together to 19 go forward. 20 So as long as the interview part of 21 it -- I'm perfectly happy to go and do whatever I can 22 to assist in the nominations. The procedure that's 23 been set in place now is how I was put on the board. 24 And, you know, I was interviewed by a BAC member, you 25 now. And I assumed that that person went to Billy at 0055 1 the time, who was the director. And, you know -- but 2 I would hate to see people -- well, it's not that it 3 would be bad, because you would still do the 4 interviews, which is, we all know, the final decision. 5 And no one has ever thought that we would say; "This 6 person is on the board; this person is not." Everyone 7 on the BAC knows that the Commissioners hold the final 8 decision, and that's what we want. 9 But I think that takes up a lot of the 10 time that y'all have, and y'all don't have a lot of 11 times sometimes to do just numerous interviews. So I 12 felt like we were maybe a filter to individuals that 13 best could serve on the board. And once again, it was 14 our own opinion. 15 Now, we have never -- at the time that I 16 have chaired the nomination committee, I have never 17 made a decision on my own. I have never said, "This 18 person should be nominated; this person should not" -- 19 or I should say recommended. I have always called up 20 anyone else who is on the committee with me, as they 21 have done. We've always been working two to three 22 people at a time. We've never had just one person 23 say, "This person should go forward; this person 24 should not." 25 And also, as Phil can back up, we've had 0056 1 people that have submitted their nominations and they 2 don't qualify. They don't actually even sit on a 3 license or the license has expired or, you know, 4 there's numerous things. As long as that type of 5 filtering is still done where we don't bombard 6 yourselves with 20 individuals, then I think that's 7 great. 8 And there have been time periods when we 9 haven't had any nominations. I know at the beginning 10 of last year, we went a long period where there was 11 not one nomination form that I saw. And that's not 12 good or bad. Unfortunately, there was no one out 13 there that wanted to step up to the plate. This is a 14 total volunteer -- I drove from San Antonio today. No 15 one pays my gas, and that's fine. I do it because I 16 love bingo, I'm involved with the charities, you know. 17 So that's my comment, my opinion. 18 COMM. CLOWE: I appreciate your comment. 19 And I want to respond to it, Kimberly. I agree that 20 we have a very good board now in the BAC, and that 21 credit goes to you and the other members of the board 22 for the effort and the time that you put into it. 23 I think it also should be fairly said 24 that Commissioner Cox, since he has come on this 25 board, and I have spent a lot of time trying to help 0057 1 the board acknowledge what its role is and be 2 performing in that role. When I came on this board, 3 there was a lack of understanding, I think, in the 4 BAC. And I'm not sure how clear the Commissioners had 5 made that. And, you know, we made that a high 6 priority. 7 My memory is that there has just almost 8 been always a vacancy on the BAC. You know, we've 9 fairly rarely hit that nine number and held it. And 10 so to a certain extent, there is the issue of actual 11 qualifications. And if a person is nominated and 12 they're not qualified, then they can't serve. But 13 then there have been other cases where a person really 14 for some reason, I suppose, wasn't accepted by the 15 Commission. And I said earlier that my hope was that 16 we get a wide level of participation, and we would 17 have the opportunity to cast a wide net, so to speak, 18 for applicants. 19 But I do stick by my comment that I 20 don't want to, for one commissioner, see the process 21 as a filter. I really want to see it as a resource. 22 And I appreciate the comment that you made about the 23 BAC getting along and there's harmony and that's good. 24 But I've also been an advocate of positive 25 disagreement. 0058 1 MS. ROGERS: Sure. 2 COMM. CLOWE: And this board does not 3 choose its own members, and I don't want the BAC to 4 choose their members. I want this board to choose 5 them. 6 And we're one short now, just as you're 7 short on the BAC. And when the time comes, the 8 Governor will make the choice for this board, and 9 we'll make the choice for yours. But a little 10 dissension and a little difference of opinion and an 11 honest conflict in my opinion is good in almost every 12 organization -- 13 MS. ROGERS: Uh-huh. 14 COMM. CLOWE: -- the loyal opposition 15 that has a beneficial result. 16 So I just want to express that opinion, 17 which is hopefully giving us balance in this 18 discussion about the process. And so if this board 19 were to choose members of the BAC that maybe just 20 didn't come right in and sail along with the group, 21 that would be my answer as to what we were about. And 22 I would invite your comment to my comment. 23 MS. ROGERS: And I appreciate that. And 24 that's very true. That's how you get discussions. 25 You know, that's how you get -- you get difference of 0059 1 opinions. If we all had the same opinion, how boring 2 the world would be. You know, I agree with that. 3 There's members on the board where they have brought 4 things up to the table and I've disagreed with. You 5 know, I've gone on record saying, "I disagree with 6 doing that." I have no problem with that whatsoever, 7 and I don't think there's a member on the board that 8 has a problem with that. 9 And once again, let me state, we have 10 never assumed, we've never guessed that we have the 11 final decision, that we say this and that. But there 12 are individuals who throughout interviews say, "I want 13 to get on the board and I want to change this." Well, 14 you know, I have to go back and I have to explain to 15 them, just like it was explained to me -- and I had to 16 learn this process. I didn't know it, you know, just 17 coming into bingo -- there are certain things that you 18 can change, and there are certain things that take the 19 Legislature, and that's, you know, a lot harder. 20 And by all means, anyone who has a 21 discussion or if they disagree with me, that's fine. 22 We're still friends, and we'll discuss about it and 23 we'll go on down the road. What's best for bingo is 24 what needs to happen. So whatever I can do to assist 25 in this process, I'm here to assist. 0060 1 COMM. CLOWE: Great! 2 MS. ROGERS: And that's what we're here 3 for. 4 CHAIRMAN COX: By way of agreement with 5 everything that y'all have said, the statute is set up 6 such that there are representatives from the various 7 aspects of the industry. 8 MS. ROGERS: Yes, sir. 9 CHAIRMAN COX: And just to take two. 10 For example, the commercial lessor and the charity are 11 not exactly set out to be best friends, because they 12 are, if you will, in some way at least in a zero sum 13 game. They're spreading a fixed pot in one mix or 14 another. So they have some adversarial elements to 15 their relationship; and yet, the statute wanted them 16 both represented. 17 And I see this as a place for a healthy 18 interchange between those people. And personally, 19 when recently your committee suggested that one of the 20 candidates was not appropriate because of a conflict 21 of interest -- that is, some of the charities in his 22 halls were already on the board -- I saw that as an 23 opportunity for us to learn firsthand from people who 24 are in the same transaction, both sides of it. 25 So from my standpoint as an observer -- 0061 1 and, of course, this board is the ultimate beneficiary 2 of your work -- I saw that as a great opportunity to 3 hear something that I wouldn't hear if that situation 4 did not occur. 5 So I completely agree with Chairman 6 Clowe. A little bit of conflict or a little bit of 7 discussion about matters which people disagree, let's 8 say -- conflict is not necessarily a good thing. In 9 certain characteristics, if it comes to confrontation, 10 it's not a good thing. But if it's healthy conflict 11 where both sides of an issue are aired, then it's 12 helpful to us. 13 Kimberly, thank you again for your 14 service. We know you don't get paid. We know you 15 come up here from San Antonio a lot, and we appreciate 16 it very much. 17 MS. ROGERS: Thank you. And I would 18 make one more comment on what you just said. 19 CHAIRMAN COX: Sure. 20 MS. ROGERS: I agree yet disagree, only 21 in the first portion, and that is fine. Whomever that 22 y'all decide to put on the board, I will work with 23 them and we'll go forward. But your charity and your 24 lessor, they need to work together, because if we all 25 remember correctly, the charities are the only ones 0062 1 that hold the licenses to play bingo. And if your 2 charity is not profiting, then your commercial lessor 3 is not going to profit. And, in turn, one cannot 4 survive without the other. 5 CHAIRMAN COX: I totally agree with 6 that. 7 MS. ROGERS: Thank you. 8 CHAIRMAN COX: And one of the things 9 that we want to do is to try to understand both of 10 those roles and where they conflict and where they 11 could work together for the better of everyone. And 12 that's what I would hope will come out of having both 13 of them on the same panel. 14 MS. ROGERS: I agree with you. 15 CHAIRMAN COX: Okay. Great! 16 MS. ROGERS: Thank you. 17 CHAIRMAN COX: Thank you, Kimberly. 18 Phil, anything else on that one? 19 MR. SANDERSON: No, sir. 20 CHAIRMAN COX: Anything else? 21 COMM. CLOWE: No, thank you. 22 AGENDA ITEM NO. V 23 CHAIRMAN COX: Item No. V, report, 24 possible discussion and/or action on the fourth 25 quarter and calendar year 2006 bingo conductor 0063 1 information. 2 Ms. Shankle. 3 MS. SHANKLE: Good morning, 4 Commissioners. For the record, my name is Terry 5 Shankle. The presentation today covers bingo 6 statistics for the fourth quarter in calendar year 7 2006. 8 The total gross receipts for 2006 was 9 655 million -- I'm sorry -- $655.6 million and are at 10 the highest level since 2002. Last year's gross 11 receipts represent a 3 percent increase of our gross 12 receipts in 2005. Even though total gross receipts 13 increased, regular card sales continue to decline. 14 Pull-tab sales are growing at a lower rate than in 15 past years. 16 Net receipts totaled $165.7 million and 17 is the highest amount since 2000. However, the 18 increase in net receipts in 2006 is only 2 percent 19 over net receipts in 2005. 20 Since 2002, the average amount spent per 21 play has steadily increased, even though the number of 22 occasions and the number of conductors reporting has 23 declined each year. The average amount spent per 24 player for 2006 was $33.78, or $2.18 more than the 25 average spent in 2005. 0064 1 Overall, attendance has declined every 2 year since 1991. Last year 19.4 million people were 3 reported as playing bingo, a decrease of 500,000 4 people over 2005. Even with the continual decline in 5 attendance, there has been a 44 percent increase in 6 the amount spent per player since 2002. 7 The average number of players per 8 occasion in 2006 were 136, down an average of three 9 players per occasion, or 2.69 percent from 2005. 10 Total number of occasions has decreased 11 each year since 1995. The number of occasions for 12 2006 were 1,000 less than those held in 2005. 13 However, the good news is, the decline from 2005 to 14 2006 was less than any year since 2002, and the number 15 of occasions per conductor remains fairly constant, 16 averaging 100 to 103 per year. 17 The average number of conductors 18 reporting for 2006 was down 3.89 percent over the 19 same -- from 2005. 20 Fourth quarter 2006, total gross 21 receipts for the fourth quarter of 2006 were 22 $159.3 million. Gross receipts from the sales of 23 regular and electronic bingo were $98.3 million. 24 Prizes paid for regular and electronic bingo were 25 $75.5 million, or 76.8 percent of gross receipts. 0065 1 Gross receipts from pull-tabs totaled 2 $61 million. $44.1 million, or 72.3 percent of gross 3 were paid out in prizes. 4 Total gross receipts for this quarter 5 are approximately 1.1 percent greater than the same 6 quarter of 2005. Prizes paid increased 1.6 percent 7 for the same time period. 8 For the fourth quarter, cash 9 disbursements as a percentage of net receipts were: 10 23.7 were for callers, cashiers and ushers. 23 11 percent went to rent, 17.7 reported as charitable 12 distributions. 12.1 were for lease payments to a 13 distributor. 7.2 percent went for cost of goods sold. 14 7.1 were for janitorial service. 5.1 reported as 15 security, legal and/or accounting. And then 5 percent 16 were for miscellaneous expenses such as bingo 17 equipment, mortgage payments and advertising. 18 This pie chart is a graphical indication 19 of what percent each expense is as it relates to total 20 expenses. Prize payouts for charitable distributions 21 are not included. Salaries for janitorial, callers, 22 cashiers, ushers, security, legal and accounting 23 account for 43 percent of total expenses. Rent 24 payments are 27.7 percent, while cost of goods sold 25 were 23.1. 0066 1 Gross receipts by type for the fourth 2 quarter were: Regular card sales were $60.4 million, 3 or 37.9 percent of total gross. Pull-tabs sales were 4 $61 million, or 38.3 percent of gross. And electronic 5 card sales accounted for $37.9 million, or 6 23.8 percent of total gross. 7 The average number of players per 8 occasion decreased by one from the fourth quarter of 9 2005. This chart shows the comparison of net receipts 10 for the fourth quarter of years 2002 through 2006. As 11 you can see, net receipts for instant bingo have 12 increased by $9.9 million between 2002 and 2006, while 13 the net receipts for regular bingo has decreased 14 $8.2 million for the same time period, which means 15 that the overall net receipts have only increased 16 $1.7 million, while gross receipts increased 17 $21 million. 18 I would like to mention one other 19 statistic for 2006. Our licensed authorized 20 organizations reported distributing almost $32 million 21 to a charitable cause or deed. $32 million is three 22 times what is required by statute. 23 That concludes my report. Susan Beasley 24 with the Office of the Controller included in your 25 notebook additional information and spreadsheets for 0067 1 2006. I will be glad to answer any questions you may 2 have. 3 CHAIRMAN COX: Thank you, Terry. 4 One of the things I noticed was that 5 while traditional bingo is declining and instant bingo 6 is increasing, that the return to the player was 7 greater in traditional bingo than it was in instant 8 bingo. So people are opting for the bet that returns 9 them the smaller amount. Help me. 10 MR. SANDERSON: Well, I think it -- I 11 understand your observation. But I think, in reality, 12 the organizations are giving away $2,500 in prizes, 13 which is the maximum that they can give away with 14 regular bingo. And they're only taking in X number of 15 dollars to pay out those prizes. 16 So even though they may be losing 17 attendance or losing players, the average -- over that 18 period of time, approximately the average decline has 19 been about $200 per occasion of what they take in 20 compared to what they give away. So they continue to 21 give away $2,500, but they're only taking in $3,000 or 22 $2,700 now, compared to several years ago. 23 CHAIRMAN COX: Okay. So it isn't a case 24 of their enriching the payout; it's a case of the 25 handle coming down rather than the prize payout amount 0068 1 going up? 2 MR. SANDERSON: Yes, sir. 3 CHAIRMAN COX: Okay. 4 MR. SANDERSON: With instant bingo, the 5 prize payout percentage is set with each deal. 6 CHAIRMAN COX: Okay. Now, if you look 7 at these numbers, you can say, "Gosh! The number of 8 operators is going down and the number of players is 9 going down; yet, revenues are going up and the revenue 10 per player is going up." So one thing you could say 11 here is, "Gosh! This thing is dying out." 12 The other you could say about the fewer 13 organizations is, it's consolidating like many 14 industries are, and often consolidation is considered 15 to be a good thing. It tends to create efficiency. 16 So that might say that if there are fewer players -- 17 even though there are fewer players, if they're 18 betting more and there are fewer organizations, maybe 19 there is greater efficiency and there is more money 20 going to charity, which is the whole intent of this. 21 Is there any observation to support that 22 any of this might be going on, as opposed to the bleak 23 picture that we hear depicted generally when you look 24 at these kinds of numbers? 25 MR. SANDERSON: Off the top of my head, 0069 1 I think I would answer that question with: The player 2 spend I think is going up, because theoretically we're 3 basing it off of gross receipts. And with instant 4 bingo taking over more of the market, there are a lot 5 of those winners that are one and $5.00 winners that 6 are played back. 7 And it goes back to, when you look at 8 the hold or the net receipts, that number seems to be 9 staying flat. You know, the chart that she showed 10 before, it's only gone up like $1.7 million over the 11 last six years. But gross receipts have gone up, you 12 know, 24 and $30 million over the last six years. 13 So the player spend, I think, based on 14 the gross, is increasing because of that playback in 15 the instant bingo. The regular bingo, you don't have 16 necessarily the individual playing back those winners, 17 because in most cases, they're winning $250 to $500, 18 and they go home with that money. 19 So I think that's where you're seeing 20 the increase in player spend. And the decrease in 21 players and the decrease in conductors are kind of 22 harmonizing themselves to that point. 23 CHAIRMAN COX: Mr. Heinlein, is there 24 anything you would like to add to that? 25 MR. HEINLEIN: For the record, I'm David 0070 1 Heinlein, and I keep the books for about 30 charities. 2 And I appreciate Phil's understanding of 3 what's happening, because he's absolutely correct. 4 One of the beautiful things about the event tickets 5 that we were able to begin using in the year 2002 is 6 that we have a guaranteed profit on them; whereas, the 7 money that comes in at the gate, we call it, we've 8 paying out $2,500, no matter what we take in. 9 And we have seen that margin be greatly 10 reduced in the last few years. To some extent, in 11 some cases it's an effort for the charity to actually 12 take in enough to pay the $2,500. So that will 13 distort these numbers that we're looking at. 14 But the event ticket, we have that 15 72.8 percent I think pay out. That's pretty common. 16 And it's a guaranteed profit. So we encourage our 17 staff to sell that product, because we tell them, you 18 know, "You can make a profit for the charity here." 19 You know, it's known; it's a given. 20 So we love that particular product, and 21 that's why you're going to continue to see it 22 increase. And I think that has made the industry a 23 lot healthier than it was a few years ago. And while 24 we may have fewer conductors, the individual charities 25 are beginning to receive more money. 0071 1 We lost a lot of charities back in 2000, 2 2001 and 2002, simply because they couldn't make the 3 distributions. Especially when it went into 4 electronic bingo, we lost a lot of charities right 5 away. The cost of the electronics did not offset. 6 The play was not sufficient, and so we couldn't meet 7 our 35 percent rule. And charities had to quit 8 because they couldn't make their distribution. 9 Now we're able to exceed that 10 distribution requirement three times, which also 11 proves that the charities are going to distribute all 12 the money that they can make. That's what we're in 13 business for, is to make money for the charities. And 14 we're doing a better job of that. With the 15 $32 million, that's an increase from a couple of years 16 ago, $29 million. 17 And I've seen my own charities be able 18 to become much more healthy, to the extent that we're 19 able to accumulate working capital so that we're 20 healthy; we're able to invest in interest-bearing 21 accounts, to profit even more by having operating 22 capital that we couldn't have a few years ago. 23 So I thank you, the staff and the 24 Commission, for giving us some products. And I hope 25 that that will continue, that we'll be innovative and 0072 1 creative in things that we can do within the law. 2 Thank you. 3 COMM. CLOWE: Thank you. 4 CHAIRMAN COX: Thank you very much, 5 Mr. Heinlein. And thank you for being here and for 6 serving on our search committee. We really appreciate 7 that. 8 MR. HEINLEIN: May I make a comment 9 about that? 10 CHAIRMAN COX: Please. 11 MR. HEINLEIN: I've very happy with the 12 way the search committee has been going, and I 13 appreciate -- Director Sadberry is chairing that. I 14 appreciate you selecting him for that. And it's been 15 a really good process of looking at the candidates and 16 to weigh in on formulating some questions for them 17 before we begin the interview. I thought that was an 18 outstanding recommendation. 19 And it gave us an opportunity to ask 20 questions as a group and then assimilate all those 21 questions in a package that we could all look at. And 22 so I think that is going to help us in the selection 23 process of giving you a recommendation that will be a 24 good recommendation. 25 CHAIRMAN COX: Excellent. Thank you for 0073 1 that. 2 COMM. CLOWE: Thank you for that. 3 CHAIRMAN COX: Sarah, you'll be sure he 4 fills out a -- 5 MS. WOELK: I had a -- 6 CHAIRMAN COX: Great! Anything else on 7 Item V? 8 Thank you very much, Terry, for that 9 good report. 10 AGENDA ITEM NO. VI 11 CHAIRMAN COX: Item VI, report by the 12 Charitable Bingo Operations Director and possible 13 discussion and/or action on the Charitable Bingo 14 Operation Division's activities. 15 Mr. Sanderson. 16 MR. SANDERSON: Commissioners, in your 17 notebook is the report of the activities of the Bingo 18 Division over the last month. You have the copy of 19 allocations memo, that allocations were released on 20 February the 28th of 2007 for the fourth quarter. 21 Although the fourth quarter for 2006 was down from the 22 previous quarter, or the third quarter, there was a 23 10 percent increase over the same quarter last year. 24 The BAC meeting is tentatively scheduled 25 for May the 2nd, as you mentioned earlier. Also our 0074 1 website has been updated to include 71 interactive 2 forms at this point in time. And the NAGRA 3 conference, the North American Gaming Regulators 4 conference, of which I am a co-chair of the Charitable 5 Gaming Committee, is scheduled to have their annual 6 conference in June in Kansas City. 7 And I would be glad to answer any other 8 questions you may have. 9 CHAIRMAN COX: No questions, Phil. 10 Thank you for your report. 11 And that concludes the bingo agenda 12 items. 13 Chairman Clowe, would you like to take a 14 short break? 15 COMM. CLOWE: Certainly. 16 CHAIRMAN COX: Okay. About 10 minutes, 17 and we'll see y'all back. 18 (Off the record: 10:24 a.m. to 10:38 19 a.m.) 20 CHAIRMAN COX: Let's come back to order, 21 please. 22 AGENDA ITEM NOS. VII AND VIII 23 CHAIRMAN COX: Item VII, consideration 24 of and possible discussion and/or action, including 25 proposal on new rule 16 TAC §401.316 relating to 0075 1 "Daily 4" on-line game rule. 2 Sarah. 3 MS. WOELK: Thank you. 4 CHAIRMAN COX: Do you want to do it from 5 there or -- 6 MS. WOELK: Well, I can move. Do you 7 like -- 8 CHAIRMAN COX: Your choice. 9 MS. WOELK: Okay. I'll join Robert. 10 (Laughter) 11 MR. SADBERRY: Leave me? 12 MS. WOELK: Yes, I'll leave you. 13 I think it might be useful to do Items 14 VII and VIII together -- 15 CHAIRMAN COX: Identify yourself. 16 MS. WOELK: I'm Sarah Woelk. I'm the 17 Special Counsel. 18 And VII and VIII work kind of as a 19 combo. 20 CHAIRMAN COX: So you would like to 21 combine VII and VIII. And our ultimate goal there is 22 to expose both these rules for comment? 23 MS. WOELK: Yes. 24 CHAIRMAN COX: Okay. 25 MS. WOELK: At the December Commission 0076 1 meeting, you proposed a new game rule called Daily 4 2 and a rule amending the Pick 3 game to add an add-on 3 feature, which was then called Lucky Sum. Those were 4 published in the Texas Register. We had a public 5 comment hearing. 6 We brought them to you for possible 7 adoption in February, with some helpful changes 8 suggested by Ms. Nettles but also with a change to the 9 name of the add-on feature, which was a part of both 10 games. It was Lucky Sum. We came with EZ Sum. You 11 didn't like that. So we were sent back, and we now 12 have the proposed rules redrafted with the name of the 13 add-on feature as Sum It Up. 14 So we are proposing for your 15 consideration that you consider proposing the new 16 Pick 4 rule for publication and an amended Pick 3 rule 17 with the add-on feature now called Sum It Up. There's 18 already a proposed repeal of the old Pick 3 rule still 19 out there to be adopted, if you should eventually 20 adopt these rules. 21 Robert, I think, has his PowerPoint 22 about the games and the game idea, if you want to see 23 it again. We've been through it a couple times. 24 COMM. CLOWE: I'm ready to make a 25 motion. 0077 1 CHAIRMAN COX: Yes, sir. Let me just 2 ask one question, if I could. Sarah, there was the 3 name change for the add-on feature. And wasn't there 4 a date that you changed? 5 MS. WOELK: There was just a mistake in 6 a date. We did fix that. And we carried forward to 7 these proposals the various suggestions that 8 Ms. Nettles had made, which were more practical 9 suggestions about laying out the prize tables. 10 And so, yes, everything that we brought 11 to you in February that we suggested you then include 12 in the adopted versions, we have carried forward to 13 these new proposed versions. So this new version 14 incorporates the new game name, the corrected date and 15 the suggestions that Ms. Nettles had made to us in her 16 comments to the proposed rules. So hopefully this is 17 the ideal package that we're now presenting. 18 CHAIRMAN COX: And I believe that 19 Ms. Nettles commented to you that she was pleased with 20 the rejection of the name EZ Sum because it was not 21 easy? 22 MS. WOELK: She had exactly your opinion 23 on that matter. She did comment to me that she didn't 24 like the name. She also commented that she 25 appreciated some of the changes we made at her 0078 1 suggestion. 2 CHAIRMAN COX: Good. 3 COMM. CLOWE: Move the adoption of the 4 staff recommendation. 5 CHAIRMAN COX: Second. 6 Any further discussion? 7 All in favor, say "Aye." 8 COMM. CLOWE: Aye. 9 CHAIRMAN COX: Aye. 10 Motion passes 2-0. 11 MS. WOELK: And there are memos for you 12 to sign off on in your notebook. 13 CHAIRMAN COX: Those were as to both 14 Items VII and VIII? 15 MS. WOELK: Yes. But there are two 16 separate items for you to sign off on in your 17 notebook. 18 CHAIRMAN COX: And you're going to bring 19 those to us -- 20 MS. WOELK: Yes. 21 CHAIRMAN COX: -- things to sign off on? 22 MS. WOELK: Well, you have them in your 23 notebook, but I can bring you my copy. 24 CHAIRMAN COX: You want it with holes 25 punched in it? 0079 1 MS. WOELK: I'll have Michelle bring 2 down copies that don't have holes punched. 3 CHAIRMAN COX: We're doing great here. 4 MS. WOELK: Okay. There you go. Thank 5 you. 6 AGENDA ITEM NO. IX 7 CHAIRMAN COX: Item IX, report, possible 8 discussion and/or action on lottery sales and revenue, 9 game performance, new game opportunities, market 10 research and trends. 11 Ms. Pyka and Mr. Tirloni. 12 MS. PYKA: Good morning, Commissioners. 13 My name is Kathy Pyka, Controller of the Lottery 14 Commission. And with me to my right is Robert 15 Tirloni, our Products Manager. 16 Our first chart that we have for you 17 this morning reflects our revenue and sales -- from 18 sales, the net revenue to the state through the work 19 ending March the 10th of 2007. Total sales for this 20 20-week period amounted to $1.97 billion, while 21 estimated net revenue to the state for this period was 22 $500.5 million. 23 Net revenue to the state reflects a 24 3 percent decrease as compared to the $516.3 million 25 figure for the same period in fiscal year 2006. And 0080 1 our prize expense as a percentage of sales reflects a 2 slight decrease, to 62.6 percent. 3 Our fiscal year 2007 sales do reflect a 4 $69.5 million decline from fiscal year 2006 sales. 5 The chart before you provides you detail by game. The 6 decline includes a 3 percent or $46.9 million decline 7 in instant ticket sales and then, looking at all of 8 our on-line products, reflects a 4.5 percent decline, 9 or $2.6 million in on-line games. 10 I'll give you a chance to look at that. 11 CHAIRMAN COX: Are you going to comment 12 further on that, Kathy? 13 MS. PYKA: I am. I'm going to comment 14 further on the Mega Millions game and the Megaplier 15 game. I have been focusing on that decline in each 16 monthly presentation to you. 17 And I would like to present the next 18 chart -- whoops! I have another chart somewhere. 19 MR. TIRLONI: Somewhere. 20 MS. PYKA: We maybe won't be presenting 21 the next chart. 22 MR. TIRLONI: Well, you might not. 23 MS. PYKA: That's okay. We'll talk 24 about it out loud, then. 25 Last month I shared with you that our 0081 1 Mega Millions and Megaplier game was $37.9 million 2 down from the previous fiscal year. And through a 3 28-week period, this decline has been reduced to 4 $25.1 million. We've had our recent large jackpot. 5 And the chart that I was going to show 6 you shows a side-by-side comparison of the first 28 7 weeks of fiscal year 2006 and the first 28 weeks in 8 fiscal year 2007. And we've been talking about those 9 jackpot levels. And in fiscal year 2006, we had three 10 large jackpots over $200 million -- one for 11 $250 million, another for $315 million, another for 12 $267 million. 13 And in fiscal year 2007, we've only had 14 really two large jackpots, the one for $163 million 15 and then our recent $370 million. So the chart that I 16 was going to show you, which we can bring back at 17 another time, simply shows we did gain some ground 18 this past month in Mega Millions as a result of that 19 $370 million jackpot. 20 CHAIRMAN COX: And if I remember right, 21 we were down over $30 million in Mega Millions last 22 month? 23 MS. PYKA: Yes, $37.9 million, almost 24 38. And that's been reduced down to -- if we 25 consolidate both the Mega Millions deficit or decline 0082 1 and the Megaplier decline, those two figures are 2 $25.1 million. 3 CHAIRMAN COX: So what did we make up? 4 MS. PYKA: $12.8 million. 5 CHAIRMAN COX: $12.8 million? 6 MS. PYKA: Yes. 7 CHAIRMAN COX: Okay. 8 MS. PYKA: And then our next chart that 9 we have for you includes our fiscal year 2007 sales by 10 game. 75.4 percent of sales, or $1.5 billion, was 11 from instant tickets, with 8.3 percent of sales, or 12 $164.3 million from Pick 3, followed by 6.2 percent of 13 sales and $121.2 million from Lotto Texas, followed by 14 5.2 percent of sales and 102.3 from Mega Millions. 15 And then this last chart provides just 16 simple graphical presentation of the games with the 17 percentage share. 18 MR. TIRLONI: Good morning, 19 Commissioners. For the record, my name is Robert 20 Tirloni. I am the Products Manager for the 21 Commission. 22 This next pie chart shows the graphical 23 representation of our year-to-date instant ticket 24 sales, broken out by price point. It reflects 25 $1.5 billion in sales, and it illustrates that the 0083 1 $5.00 price point is and continues to be our leading 2 price point, followed by the $2.00 price point and 3 then the $10 price point. And that has remained 4 consistent for quite some time now. 5 I also have an update for you on some of 6 the Mega Millions information that Kathy just 7 provided. The jackpot that was referred to for the 8 Tuesday, March 6th drawing, it was advertised at 9 $370 million. That is a U.S. record. The record 10 previous to that was held by Powerball, and it was 11 $365 million. 12 When all was said and done and all of 13 the sales were tallied from all of the 12 states, the 14 jackpot that was actually supported was $390 million, 15 so $20 million more than what was advertised. Our 16 total draw sales -- 17 CHAIRMAN COX: Robert? 18 MR. TIRLONI: Yes, sir? 19 CHAIRMAN COX: In the case of Mega 20 Millions, advertised is interesting, but you get what 21 you get, based on sales. Right? 22 MR. TIRLONI: That's correct. 23 CHAIRMAN COX: Whether it's higher or 24 lower? 25 MR. TIRLONI: That's correct -- well, 0084 1 no, not lower. They would guarantee what they 2 advertise. 3 CHAIRMAN COX: Okay. So what's 4 advertised is guaranteed? 5 MR. TIRLONI: Yes. 6 CHAIRMAN COX: In this case, sales 7 supported 390 versus the 370 that had been advertised. 8 That could support the inference that the estimators 9 are being conservative? 10 MR. TIRLONI: I think that that could be 11 part of it. But I think the bigger part of it is lack 12 of experience at a record-setting jackpot. 13 CHAIRMAN COX: Okay. It was just so big 14 that they underestimated, which is much better than 15 had they overestimated and we would have to cough up 16 money that wasn't supported by sales? 17 MR. TIRLONI: That's absolutely correct. 18 CHAIRMAN COX: Now, Director Sadberry, 19 you and Ms. Pyka I think participated in that 20 determination. How did y'all feel about the way they 21 worked on a jackpot at this level? 22 MS. PYKA: I thought that the process 23 worked quite well. We did a couple of extra calls on 24 this jackpot because the states realized that sales 25 were coming in at a faster rate than planned. We 0085 1 continued to have additional jackpot-setting calls in 2 order to increase the jackpot, before we actually 3 reached that day. And so -- I mean, I think all went 4 well. And, again, it was super difficult to estimate. 5 I think our state did a fantastic job estimating that 6 jackpot, and we've learned a lot from it. 7 CHAIRMAN COX: So it sounds like that 8 from the -- is that Wednesday and Saturday or Tuesday 9 and Friday? 10 MS. PYKA: Tuesday and Friday. 11 CHAIRMAN COX: Tuesday and Friday. And 12 it was won on a Friday, if I remember right. 13 MS. PYKA: Tuesday night. 14 CHAIRMAN COX: I had a 50 percent 15 chance. 16 (Laughter) 17 MS. PYKA: And so we did an extra 18 call -- 19 CHAIRMAN COX: So y'all were working 20 during the weekend to look at this? 21 MS. PYKA: We had an additional call 22 Friday before -- well, we had the call on Friday, and 23 then we had another call on Monday to revisit where 24 each state was with their sales estimate and then, of 25 course, had a call on Tuesday. 0086 1 MR. SADBERRY: Chairman, I would agree 2 with Kathy's comments. And I would like to say, if I 3 may -- it's a general statement -- I would agree with 4 you. This reflects a conservative approach, and 5 that's the approach that we believe to be the fiscally 6 prudent approach. And we expressed that, as I've 7 stated before, in meetings. 8 And I think -- and I'm not giving us 9 discredit necessarily -- but my observation is that 10 our approach is recognized as being a very reliable 11 approach. I've seen that, in writing, recognized by 12 the other directors and their staffs. 13 Also I attend sometimes the Finance 14 Committee portion of that session, who are not the 15 directors. And when I'm there, Kathy is on the 16 Finance Committee part of that function. Ben Navarro, 17 for example, covered it today since we were both here. 18 And it's a very integrated group and a very 19 professional approach to this and very accurate. 20 I would agree, though, at this level 21 it's difficult, and we would certainly want to err on 22 this side. 23 I also stated, you know -- and I'll talk 24 about this a little later in my report -- that I just 25 returned from the Mega Millions directors meeting in 0087 1 Detroit. And this was obviously, as you might 2 imagine, the subject of discussion. And there again, 3 I will comment more about this, but the role that the 4 Texas group plays I want to let you know is very 5 complimentary and highly recognized and regarded among 6 the other directors. 7 So my overall conclusion is (A), I'm 8 satisfied and appreciative of the process and the role 9 that we play in it, and I think it continues to become 10 a very professional and financially and fiscally sound 11 process. And I've had concerns about that in the 12 past, and my concerns are allayed significantly each 13 time that we experience this. 14 CHAIRMAN COX: That's a refreshing 15 report. 16 Okay, Robert. Why don't you go ahead 17 with Texas. 18 MR. TIRLONI: Yes, sir. Our draw sales 19 totaled almost $48 million. That's for Mega Millions 20 only, and that's starting from the $12 million initial 21 drawing in the roll cycle, all the way through the 22 actual drawing in which the jackpot tickets were sold. 23 And for Megaplier, I don't have it up there, but the 24 sales for Megaplier to do that in that period were 25 over $9.5 million as well. 0088 1 There were two winners for that drawing, 2 one in New Jersey and one in Georgia. Both jackpot 3 winners in those states chose cash value options, so 4 their payment was -- or their prize was $116.5 million 5 prior to taxes being withheld. 6 And we did have seven second tier 7 winners. If you remember, the second tier prize is 8 $250,000. Unfortunately, none of those winners 9 megaplied. The Megaplier number was 3, so those could 10 have been $750,000 prizes. 11 CHAIRMAN COX: And it seems to be our 12 experience that when the jackpot gets really big, that 13 instead of buying the Megaplier, they buy another Mega 14 ticket? 15 MR. TIRLONI: That's what we've 16 experienced in the past; that's true. 17 That is our report. I have been asked 18 to provide you with one undate, Commissioners. 19 Dr. Sizemore, our research coordinator, has completed 20 an analysis on weather and its impact on sales. He 21 was unavailable to be here today, but the plan is to 22 present that to you at the April Commission meeting. 23 I just wanted to let y'all know about that. 24 COMM. CLOWE: Kathy, you've given us 25 what amounts to a mid-year report, 26 weeks. And 0089 1 we're now falling behind prior year returns to the 2 state, contribution to the Foundation School Fund. 3 How do we stand against our budget in that regard? 4 MS. PYKA: Against our overall operating 5 budget? 6 COMM. CLOWE: Yes. 7 MS. PYKA: Our overall operating budget 8 is tracking, as we would expect. Sales are obviously 9 3 percent down, slightly over 3 percent down. We 10 will -- 11 COMM. CLOWE: Now, wait a minute. Is 12 that against our sales budget? 13 MS. PYKA: Against our sales fiscal year 14 2006. They are tracking ahead of the BRE, because the 15 BRE was quite conservative for fiscal year 2007. So 16 looking at it from the other angle of where we are 17 against net revenue to the state in comparison to BRE, 18 we're slightly ahead of that. 19 COMM. CLOWE: And the B-R-E stands for? 20 MS. PYKA: The biennial revenue 21 estimate. I apologize. 22 COMM. CLOWE: Does that come from the 23 Controller? 24 MS. PYKA: Yes, sir. 25 COMM. CLOWE: And how is it that that's 0090 1 more conservative than our forecast? 2 MS. PYKA: The BRE was published two 3 years ago for fiscal years 2006 and 2007. And I'm not 4 saying that our sales forecast is much different than 5 that, but we have been comparing our sales for '07 6 against where we were for fiscal year '06. So my 7 year-to-date comparison that I have been providing has 8 been against '06 sales. Very good sales for fiscal 9 year '07 still, but we are down from '06. 10 COMM. CLOWE: Well, I want to continue, 11 Mr. Chairman, to sound a note of concern and caution, 12 because I think what I'm seeing is something that I've 13 commented on in the past and I want to continue that 14 so that nobody can say they were surprised, in that 15 there is a sea change taking place here and we are 16 falling behind. 17 MS. PYKA: Correct. 18 COMM. CLOWE: Instant ticket sales are 19 down on a year-to-date basis. The on-line sales are 20 down, even with the world's record Mega Million 21 jackpot. And I would hope that Director Sadberry, in 22 his appearances before members of the Legislature and 23 you, Mr. Chairman, as you make your appearances, would 24 point out that we are suffering a general impact, I 25 think, from fatigue on our games, competition for the 0091 1 gaming dollar from outside sources and internal, 2 within the state, I think, in many cases, illegal 3 sources of opportunity for the gaming dollar. 4 And, Bobby -- I don't see you -- I hope 5 you'll read this record and point out to the media 6 what's going on so that this won't be something that 7 somebody discovers and then makes a report on and 8 says, "Oh, look what we found." I want it on the 9 record that we are aware and we are pointing out to 10 anyone that's interested that there is a decline under 11 the present statute and under the present rules of 12 return to the state from all of these activities. 13 And nobody wants to, I think, look at 14 that right now in a very concerned light. But I think 15 that's the role, Mr. Chairman, of the board, to say, 16 "Look what's going on here," and not let anybody be 17 surprised. And we appreciate the efforts of the 18 staff. We understand you're trying to work to abate 19 that trend and you've now asked us to approve for 20 publication new rules for a new game and for a change 21 to Pick 3. We've done that. We've looking at that as 22 an opportunity to increase the attractiveness of that 23 type of on-line activity. 24 But I see, as a business person, a trend 25 here that, you know, it's unmistakable. And my role, 0092 1 I think as a Commissioner -- and the Chairman I hope 2 agrees with me -- is to be farsighted and look ahead a 3 year or two or three and say, "The contribution is 4 going to drop below a billion dollars a year to the 5 Foundation School Fund. Does anybody want to be 6 advised of this and does anybody have any comment on 7 it? Now is the time to look at it." 8 MS. PYKA: In each appearance before 9 either the House Appropriations Committee or the 10 Senate Finance Committee, Mr. Sadberry, when called to 11 testify, has given the most current update on our 12 sales decline. And in each case, that has been over 13 3 percent in comparison to fiscal year 2006 sales. 14 And so each time we attend some form of a hearing, we 15 have our current data with us. 16 CHAIRMAN COX: And, Mr. Chairman, I 17 would add that I share your concern completely. When 18 we appeared before the Senate Finance Committee, there 19 were questions about not only this year's sales but 20 trends, and not only the Texas lottery but Lottery 21 nationwide. And while we provided them with the best 22 information that we had, we are gathering additional 23 information. And I believe we will see at the next 24 board meeting a much more comprehensive presentation 25 on just what is going on. 0093 1 One of the things that you will observe 2 is that our instant sales were up month of this year 3 over month of last year, through September. And every 4 month since October, they have been down this month 5 over the same month last year. And we have several 6 folks -- we have GTECH. We have Profs. Huff and 7 Jarrett. As they indicated, Dr. Sizemore and his 8 staff are all looking at these things. 9 And I think we are going to receive a 10 report on that at the next meeting, Kathy? 11 MS. PYKA: I'm aware that Dr. Sizemore 12 will be doing that. I'm nor sure of the status of 13 Professors Huff and Jarrett and will certainly follow 14 up on that after this meeting. 15 CHAIRMAN COX: Okay. And Prof. Huff 16 told me that they had a deadline that's now less than 17 two weeks out for the report that they're making. 18 Mr. Fernandez, do you have any comment 19 on that? 20 MR. FERNANDEZ: I believe that first 21 part will be in in April, will be next month. 22 CHAIRMAN COX: Okay. And then I know 23 we've requested information from GTECH as well. Gary, 24 when do you expect to hear back on that? 25 MR. GRIEF: I'll double check after the 0094 1 meeting. 2 CHAIRMAN COX: Okay. But it would be 3 great if that could be a comprehensive report of the 4 information we have from all sources on specifically 5 this decline in the on-line games, which have been up, 6 up, up, and now they're down -- I'm sorry. Not the 7 on-line games. 8 MR. TIRLONI: Instant games. 9 MS. PYKA: Instant games. 10 CHAIRMAN COX: I had a 50-50 chance on 11 that one. 12 COMM. CLOWE: You know, as I sit here 13 and listen to the discussion about bingo -- and I 14 think, Mr. Chairman, your observations are very astute 15 in that regard -- it certainly struck me that we're 16 experiencing the same thing in the lottery operation. 17 We have fewer people playing more dollars. Our market 18 is shrinking. We have seen an increase in the 19 minority ethnic origin groups, which is an issue that 20 anti-gaming people point out, fairly so. We are 21 respectful of that. 22 We are not pursuing that market. We are 23 not pinpointing that market, but that market is 24 growing. The statistics prove that up. And it is a 25 matter of record that there aren't as many people 0095 1 playing our games as there were years ago. 2 And as a business person and as a person 3 who measures the input to the Foundation School Fund, 4 you have to acknowledge that those are negative trends 5 and they are going to be impactful in the long run. 6 And I bring this up constantly because I don't want 7 anybody to be surprised. And again, the staff is 8 working diligently within the statute, within the 9 rules, to do what they can, but the trend is there. I 10 don't want the Commissioners to fail to observe what 11 we see. 12 CHAIRMAN COX: Thank you, Chairman 13 Clowe. 14 Anything further, Kathy or Robert? 15 MS. PYKA: No, sir. 16 MR. TIRLONI: No, sir. 17 CHAIRMAN COX: Okay. Thank you very 18 much. 19 MS. PYKA: Thank you. 20 AGENDA ITEM NO. X 21 CHAIRMAN COX: Let's see. Okay. Item 22 X, report, possible discussion and/or action on the 23 closing of instant games, including procedures and/or 24 proposal for amendments to 16 TAC §401.302 relating to 25 instant game rules. 0096 1 Ms. Rienstra, Mr. Tirloni and Mr. Grief. 2 MR. TIRLONI: Good morning, 3 Commissioners. Again for the record, my name is 4 Robert Tirloni. I am the Products Manager for the 5 Commission. And, as you noted, I'm being joined by 6 Deanne Rienstra, Assistant General Counsel, and Deputy 7 Executive Director, Gary Grief, this morning. 8 Commissioners, staff is here this 9 morning to present information on the closing of 10 instant ticket games. We'll be providing some 11 historical information, some legal background and some 12 recommended procedural changes that would require 13 staff to initiate game closing processes when instant 14 games have zero top prize levels remaining. And we 15 also have a rule proposal for you to consider today. 16 Moving into the history and background, 17 instant games were typically left on the market for 18 sale until they were almost 100 percent sold. In 19 late 2003 -- 20 CHAIRMAN COX: Let's stop right there 21 for just a minute. 22 MR. TIRLONI: Okay. 23 CHAIRMAN COX: Gary, there's some 24 history behind why that was there. Would you like to 25 tell us about that? 0097 1 MR. GRIEF: Behind why games were -- 2 CHAIRMAN COX: Why we sold almost 3 100 percent. 4 MR. GRIEF: Agency history? 5 CHAIRMAN COX: Yes. 6 MR. GRIEF: Yes, sir. Our former 7 Executive Director, Linda Cloud, that was her policy. 8 She, as I understand it, had an experience when she 9 was with the Florida Lottery several years ago where 10 there was some public criticism made of calling games 11 before they were 100 percent sold and then in turn 12 shredding that unsold inventory. So that was the 13 practice here for many years while she was the 14 Executive Director. 15 CHAIRMAN COX: Okay. And we are going 16 to observe here that we went to a much more sound 17 procedure in 2003 and 2004. And I think one of the 18 things that demonstrates is that Ms. Cloud's reaction 19 to public outcry, because we were shredding tickets, 20 led us to reach a suboptimal policy as to when we 21 closed games. 22 MR. GRIEF: I will agree with that. 23 CHAIRMAN COX: Okay. Go ahead, Robert. 24 MR. TIRLONI: So in late 2003 or early 25 2004, we did make a change in our procedure on game 0098 1 closings. Staff developed an analysis that allowed 2 the identification of games that were slow sellers, 3 and that analysis and a procedure then allowed for the 4 closing of those slow selling games and allowed for 5 the replacement of hopefully a better selling game in 6 its place. 7 As I said, a procedure was developed. 8 It incorporated that analysis. And staff has 9 basically been following that same procedure ever 10 since that late 2003 time period, with very minor 11 modifications to improve some of the business 12 operations of that process. But there were no major 13 modifications since that time. 14 So in the game closing analysis -- and 15 this is a recap of some information I've shared with 16 you in the past, but it's been a while since we talked 17 about it -- there's some different factors that we 18 consider. And I basically like to refer to this 19 portion of the analysis as a mini-cost-benefit 20 analysis or a mini-CBA. 21 Staff looks at the cost to actually 22 print the game and the amount of prizes that have been 23 paid out in the game as of the date of the analysis, 24 what the sales of the game have been thus far and how 25 long the game has