00001 1 2 3 4 5 *************************************************** 6 TEXAS LOTTERY COMMISSION 7 MEETING 8 NOVEMBER 8, 2001 9 *************************************************** 10 11 12 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 8th of November, 20 2001, from 8:30 a.m. to 3:53 p.m. before Connie Jo 21 Ramirez, CSR in and for the State of Texas, reported 22 by machine shorthand, at the Offices of the Texas 23 Lottery Commission, 611 East Sixth Street, Austin, 24 Texas, whereupon the following proceedings were had: 25 00002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. Walter H. Criner, Sr. 6 7 General Counsel: Ms. Kimberly L. Kiplin 8 9 Executive Director: Ms. Linda Cloud 10 11 Marketing Director: Ms. Toni Smith 12 13 Charitable Bingo Operations Director: Mr. Billy Atkins 14 15 16 17 18 19 20 21 22 23 24 25 00003 1 INDEX 2 Appearances...................................... 2 3 4 AGENDA ITEMS 5 Item Number 1.................................... 4 Item Number 2................................... 12 6 Item Number 3................................... 59 Item Number 4................................... 60 7 Item Number 5................................... 65 Item Number 6................................... 66 8 Item Number 7..............................86 & 220 Item Number 8................................... 88 9 Item Number 9................................... 99 Item Number 10.................................. 98 10 Item Number 11................................. 106 Item Number 12................................. 112 11 Item Number 13................................. 216 Item Number 14................................. 219 12 Item Number 15................................. 220 Item Number 16................................. 222 13 Item Number 17................................. 223 Item Number 18................................. 235 14 Item Number 19................................. 238 Item Number 20................................. 240 15 Reporter's Certificate......................... 241 16 17 18 19 20 21 22 23 24 25 00004 1 CHAIRMAN CLOWE: Good morning, I'd 2 like to call this meeting of the Texas Lottery 3 Commission to order. It is 8:30 a.m., November the 4 8th, 2001. Commissioner Whitaker and Criner are 5 here. My name is Tom Clowe. We have a full 6 commission and are ready to go forward with our 7 agenda. 8 There are some appearance forms that 9 I have here and I would like to, as a courtesy, to 10 call on those individuals who have come to this 11 meeting and take their items on the agenda out of 12 order. 13 Who do we have here that would like 14 to make presentations this morning besides Mr. Ron 15 Williams? 16 MS. CLOUD: Commissioners, we have 17 our statistician, Randy Eubank, he's here to talk 18 about the rules -- 19 CHAIRMAN CLOWE: Right. 20 MS. CLOUD: -- and I don't know if 21 you want to take something other than that up first? 22 MS. KIPLIN: Commissioners, we also 23 have an attorney representing the respondent on the 24 case proceeding, Mr. Scott, who is in the audience. 25 CHAIRMAN CLOWE: All right. Say that 00005 1 last name again. 2 MS. KIPLIN: Mr. Scott. 3 CHAIRMAN CLOWE: Scott. Mr. 4 Williams, I have your appearance form, I don't have 5 the other two, would you come forward? What do you 6 wish to address the commission on, please, sir? 7 MS. CLOUD: We have -- I'm sorry, 8 Commissioners. We have asked -- Ron Williams is 9 with Scientific Games and this is in response to 10 Commissioner Criner's request on what is happening 11 in the industry worldwide with the tragic incident 12 of September the 11th. 13 CHAIRMAN CLOWE: And he has a power 14 point presentation? 15 MS. CLOUD: These are power point 16 presentations based on the information contained in 17 that response. 18 CHAIRMAN CLOWE: Very good. Is there 19 someone from G-Tech participating with him on that? 20 MS. CLOUD: G-Tech is not presenting 21 today. They do have information in your notebooks 22 but they're not -- Ron will be the one presenting 23 the information from a vendor. 24 CHAIRMAN CLOWE: Mr. Williams, I 25 think this is going to be a little more lengthy than 00006 1 maybe these other presentations, may I ask you to 2 stand by and take them first? 3 MR. WILLIAMS: That will be fine, 4 sure. 5 CHAIRMAN CLOWE: Mr. Scott, I've just 6 been handed your appearance form, may I ask you to 7 come forward and give us your comments? 8 MR. SCOTT: Yes, sir. My name is 9 David Scott, along with -- 10 CHAIRMAN CLOWE: Be seated. 11 MR. SCOTT: I'm here representing the 12 Heart of Texas Black Chamber of Commerce, myself as 13 well as the law firm of Gary Bledsoe, and what we 14 would like to do, Your Honor, recently hired and we 15 would like an extension of time in which we could 16 obtain any necessary and responsive documents to 17 better prepare or enhance the request for a 18 rehearing on this matter. 19 CHAIRMAN CLOWE: And I believe that 20 issue is in our notebook, is it not, Counsel? 21 MR. SCOTT: Yes, sir. 22 MS. KIPLING: Yes. 23 CHAIRMAN CLOWE: Make sure I get my 24 hands on it. Here it is. 25 MR. SCOTT: I've had opportunity to 00007 1 confer with staff, and as I understand it, they did 2 not object to our extension of time. 3 MS. WILCOX: That's correct, we're 4 not opposing that. 5 CHAIRMAN CLOWE: All right. Anything 6 further, Billy? 7 MR. ATKINS: No, sir. 8 MS. KIPLIN: Commissioners, I have an 9 order prepared for your action on the motion to 10 extend time for the agency to act on the motion for 11 rehearing for the additional 45 days for a total of 12 90 days. Without extending this motion for a 13 hearing, my calculation, and I think that was 14 consistent with Mr. Neuse out of your office, Mr. 15 Scott, that the motion for a hearing would be 16 overruled by operational law on November the 9th, 17 for lack of action. 18 CHAIRMAN CLOWE: Commissioners, do 19 you have any questions or comments? Is there a 20 motion so noted? 21 COMMISSIONER WHITAKER: Yes. 22 COMMISSIONER CRINER: So move. 23 COMMISSIONER WHITAKER: Seconded. 24 CHAIRMAN CLOWE: Moved and seconded. 25 All in favor say I. I. 00008 1 COMMISSIONER CRINER: I. 2 COMMISSIONER WHITAKER: I. 3 CHAIRMAN CLOWE: Opposed no. The 4 vote is three zero in favor. Mr. Scott, while 5 you're here and we're on the record, I want to 6 disclose to you that I am a resident of Waco, Texas, 7 and there have been numerous articles in the Waco 8 Tribune Herald which, as a resident of that city, I 9 have read, and I want to make you aware of that so 10 that if it causes you any concern, you can make an 11 objection to my taking an active part on this panel 12 and being a voting member of this commission in 13 regard to the issue that you've been employed to 14 work on. 15 It's not necessary, I think, for you 16 to respond at this point in time but I wanted to 17 make that advice to you and do it on the record and 18 give you time to think about whether or not do you 19 wish to raise an objection to my being on this 20 panel. 21 I would say to you that having read 22 the newspaper articles, I don't think that biases me 23 or puts me in any position that is either favorable 24 or unfavorable to your client but I do want to make 25 full disclosure to you as a resident of Waco that I 00009 1 read the paper most every morning. 2 MR. SCOTT: I do appreciate that, 3 sir, and not necessarily you directly but those 4 articles and other letters do cause me some concern 5 as to how they may play out in this proceeding here. 6 As I'm aware, after reading certain 7 documents, this audit did not just come about by way 8 of the normal standards. So, yes, I appreciate you 9 making that comment and I will take that up with my 10 other colleagues. 11 CHAIRMAN CLOWE: And, Counsel, would 12 you give Mr. Scott advice on how he should pursue 13 this matter if he chooses to do so? 14 MS. KIPLIN: Sure. What I would 15 appreciate as the general counsel for the commission 16 is that once you've had an opportunity to confer 17 with your client, you notify me and also send a copy 18 to the attorney for the division, Ms. Penny Wilcox, 19 who is to your left, of what your request is, 20 whether you would prefer that Mr. Chairman not 21 participate in the proceeding or if you have no 22 objection then. 23 MR. SCOTT: I will. Thank you. 24 MS. KIPLIN: Thank you. 25 CHAIRMAN CLOWE: Thank you, sir. 00010 1 MR. SCOTT: Thank you. 2 CHAIRMAN CLOWE: I have an appearance 3 form from Ms. Dawn Nettles. Ms. Nettles, do you 4 wish to come forward and address the commission at 5 this time? 6 MS. NETTLES: Are you going to cover 7 that subject matter now? 8 CHAIRMAN CLOWE: Well, what is your 9 subject matter? 10 MS. NETTLES: The proposed rules. 11 CHAIRMAN CLOWE: You want to testify 12 or give comments in regard to those? 13 MS. NETTLES: Yes, sir, I made 14 notations at the bottom of that form. 15 CHAIRMAN CLOWE: I believe we'll ask 16 you, if you don't mind, to stand by and cover that 17 agenda item next. 18 MS. NETTLES: No, that'll be great. 19 Fantastic. 20 MS. KIPLIN: Mr. Chairman, I will 21 tell you that if you receive comment today on the 22 Subchapter D game rules, I do not believe that if 23 that comment is new and it's pretty -- this is, you 24 know, go through the draft, the pages right now, it 25 will be difficult for me to go through and see 00011 1 whether that's a new comment. I don't believe you'd 2 be in a position of adopting this rule today because 3 the comment would have to be incorporated and the 4 agency would have to respond to that as part of the 5 preamble of the order that you would have to sign at 6 the time that you adopt. 7 I have been notified by the register 8 that this rule-making that's in Subchapter D of game 9 rules will expire unless the agency takes action on 10 November 12th, so it would not give us an 11 opportunity to notice up another commission meeting. 12 Lotto Texas doesn't fit that category 13 because those rules were published for public 14 comment on August 10th and so you're well within the 15 six-month time period before which a rule-making 16 would expire if the agency did take action. 17 CHAIRMAN CLOWE: Commissioners, do 18 you have any comment on that statement? 19 COMMISSIONER WHITAKER: Well, my 20 comment would be that I have a sense that perhaps 21 Ms. Nettles' comments and others will go to the 22 Lotto Texas rules and not necessarily Subchapter D 23 and we might want to make that distinction and that 24 might be an easy way to solve it because based on 25 Ms. Nettles' comments at last meeting, they all 00012 1 related to the other rule. 2 MS. KIPLIN: I think for just 3 purposes of a good record, I would want the 4 commenter to make that clearer, that preface to the 5 commenter's comments. 6 CHAIRMAN CLOWE: Very good, and we'll 7 deal with that then when we come to it. Mr. Eubank, 8 are you okay on time, we can call our agenda -- 9 DR. EUBANK: Yes, sir. 10 CHAIRMAN CLOWE: -- get to your 11 subject when we do? 12 DR. EUBANK: Yes, sir. 13 CHAIRMAN CLOWE: Very well, in that 14 regard then we'll go to agenda item number two: 15 Report, possible discussion and/or action on lottery 16 sales and trends, including agency plan to respond 17 to sales decline, if any such decline should occur. 18 Toni Smith. Good morning, Toni. 19 MS. SMITH: Good morning, 20 Commissioners, my name for the record is Toni Smith, 21 and I'm the marketing director of the Texas Lottery 22 Commission. 23 To first take a look at our current 24 sales, year-to-date sales for week ending November 25 the 3rd are $471,816,948, this is down 6.04 percent 00013 1 for the fiscal year '01 total sales of $502,148,009, 2 and as I've mentioned in the last commission 3 meetings, we are still a little behind because last 4 year's sales were reflected as higher Lotto Texas 5 jackpots. So we catch up each time but we're not 6 past that yet so it's a direct result of those 29 7 million and 60 million Lotto Texas jackpots that we 8 had in the first two weeks of fiscal year '01. 9 Fiscal year 2002 weekly sales average 10 is $47,181,694, which again reflects a 6 percent 11 decrease from the weekly average of last year of 12 $50,214,800. 13 So just take a look at year-to-date 14 comparisons by product: Instant tickets to date are 15 $291,821,514. They represent 61.85 percent of sales 16 versus fiscal year '01 year-to-date sales for 17 instant tickets was $288,793,285 representing 57.51 18 percent of sales at that time. So we have a 1.05 19 percent increase from last year. 20 Lotto Texas year-to-date is 21 $104,857,316, and currently represents 22.22 percent 22 of sales versus fiscal year '01 of $141,244,241, and 23 again that decline, there's like a 25 percent 24 difference, is a direct result of that 29 and 60 25 million dollar jackpot in the first two weeks of 00014 1 last year. 2 Take a look at something a little 3 more current comparing this week to last week for 4 week ending November 3rd, total sales were 5 $51,848,889, which is down 2.70 percent from the 6 previous week ending October the 27th where the 7 total sales were $53,289,274. And again the primary 8 factor is the decrease in Lotto Texas as the result 9 of jackpots that were four and six million 10 respectively. 11 I'd also like to make a comment on 12 fiscal year '02 State Fair sales figures -- 13 COMMISSIONER WHITAKER: Say that ten 14 times very quickly. 15 MS. SMITH: Our sales at the State 16 Fair this year were $264,446, so this was an 17 increase of 21 percent above the previous year's 18 sales of $217,531. Texas Two Step that was 19 introduced this past year, our new on-line game 20 outperformed Texas Million by 300 percent compared 21 to the sales of previous year. 22 The last weekend of the fair 23 generated the highest sales for closing weekend of 24 five years and our retailer, and the store name is 25 within paid out $116,000 worth of winning tickets on 00015 1 that -- on the site, and $112,656 were scratch-off 2 winners, so that's a fun and exciting event for our 3 players when they can play and win while they're 4 still right there at the State Fair. That's all I 5 have to report on current sales. 6 In response to Commissioner Criner's 7 request two meetings ago about the impact of the 8 events of September the 11th, I have put together 9 information in your packet regarding our marketing 10 objectives, which I'm prepared to do a power point 11 on but before we go to that, I'd like to introduce 12 Ron Wilcox from Scientific Games and he has a power 13 point presentation -- 14 MS. CLOUD: Ron Williams. 15 MS. SMITH: Ron Williams, I'm sorry, 16 Ron Williams from Scientific Games, regarding that 17 same subject. 18 CHAIRMAN CLOWE: Good morning, we're 19 glad you're here. 20 MR. WILLIAMS: Commissioners, for the 21 record, my name is Ron Williams, I am the Texas 22 Lottery's account manager for Scientific Games with 23 offices here in Austin, Texas, and just have a brief 24 power point presentation and you also have this 25 information in your packets. We've got two 00016 1 different sets of information. I'll talk about that 2 here in a moment. 3 During the September 19th lottery 4 commission meeting, it was requested that a study be 5 conducted to research the impact of the terrorist 6 attacks of September 11th and the sagging economy 7 effects that might have on the Texas Lottery itself. 8 Scientific Games had already begun 9 an industry-wide research project with that same 10 goal in mind and at your request we also looked 11 closely at sales from Texas Lottery and have 12 combined our findings in this morning's 13 presentation. 14 You should have in your packets the 15 sales data for lotteries from around the nation that 16 show both on-line and instant product sales from the 17 weeks before and after September 11th. 18 The data shows very clearly that 19 sales of both on-line and instant games were in fact 20 impacted during the week of September 11th when 21 sales for the 25 lotteries that are in this report 22 that you have in your packets were combined, instant 23 sales had been trending up roughly 7 percent prior 24 to September 11th, and in the week following 25 September 11th, instant sales were up only 2.4 00017 1 percent over last year. Instant sales rebounded 2 quickly nationally, however, and appeared to have 3 recovered fully within two weeks of the attacks. 4 On-line sales were affected more 5 directly during the week of September 11th. On-line 6 sales had been up over 6 percent over last year 7 prior to September 11th. The impact of the attack 8 will be seen as on-line sales for the week of 9 September 11 showed growth of only .2 percent. 10 On-line sales did in fact rebound to roughly 6 11 percent growth over last year in the two weeks 12 following the attacks. 13 The sales information in your packets 14 has been broken out for each of the 25 states 15 included in the report so you can view the impact on 16 a state-by-state basis should you wish. 17 We have prepared a short 18 presentation, which I'm about to give now that 19 speaks more specifically to the Texas Lottery 20 situation as regarding both the September 11th 21 attacks and its impact on sales and on the sagging 22 economy in general. And now I'll go into the 23 presentation here, as well. 24 This is supposed to work from here. 25 How the September 11th attacks impact Texas Lottery. 00018 1 I've got to aim and fire. And the methodology we 2 used, we must disclaim at the outset here that 3 taking a firm position on projecting lottery sales 4 during these uncertain times are at best risky; 5 however, using history data and economic variables 6 from periods when similar events have taken place 7 can provide a realistic blueprint for those 8 expectations. 9 The Gulf War, January 16th, 1991, is 10 one of the resources used for our forecast model. 11 Although the data may recognize some level of 12 impact from the Gulf War, it is inconclusive because 13 there are so many variables that have not been 14 evaluated that may have also contributed to the 15 performance of lottery products in FY 91. 16 The gross domestic product consumer 17 confidence index and the Dow industrial average have 18 also been used to evaluate the economy and its 19 relationship to lottery sales. 20 In addition, we have evaluated the 21 immediate impact of the terrorist attack on 22 September 11th by identifying three market 23 conditions that we believe are critical in efforts 24 to project lottery sales moving into the future, and 25 those are the sales impact the week of the terrorist 00019 1 attacks, the sales impact in the weeks following the 2 terrorist attacks, and the potential sales impact 3 during what we're terming as the recovery period. 4 For instant lottery products, the 5 week of September 11th reflects a significant and 6 noticeable drop in sales from 32 million, just over 7 32 million the week of September 4th, to just over 8 29 million for the week of September 11th, and 9 roughly the same sales figure in the following week. 10 For on-line sales, Texas Lottery was 11 enjoying some jackpot growth during the week of 12 September 11th, however, you can see that sales 13 increased from September, the week of September 4th 14 by only about $200,000.00, even though the jackpot 15 at that point was growing. 16 So even though you saw a very slight 17 increase in sales for the week of September 11th, 18 that graph should have been higher as the jackpot at 19 that point was growing. And then during the week of 20 September 18th, you see sales up over 20 million 21 dollars for that week. 22 CHAIRMAN CLOWE: What were the 23 jackpots during those two weeks, do you happen to 24 know? 25 MR. WILLIAMS: I think Toni probably 00020 1 has that information. 2 MS. SMITH: I didn't bring it. 3 MR. WILLIAMS: I did consider that 4 and then didn't bring it with me this morning but 5 they were -- I think they were in the 20 million 6 range at that point. 7 All product sales, again, you can see 8 that the week of September 11th showed a decrease of 9 nearly three million dollars and a rebound in the 10 following week. 11 So this impact that was seen by the 12 Texas Lottery as a direct result of the September 13 11th attacks, if you'll look at the 25 states that 14 we report in the other document that you've got in 15 your packets, pretty closely mirrors what most state 16 lotteries saw as an impact from the September 11th 17 attacks. 18 Now, in the weeks following the 19 September 11th attacks, instant product sales have, 20 and we chug as we go, you'll note here that the 21 instant product started to grow roughly two weeks 22 following the impact and has continued to trend 23 upward. 24 The latest week for which this 25 presentation has sales figures is the week of 00021 1 September 16th, and as Toni just completed in her 2 report, the instant product continues to trend 3 upward through its seasonal trends and that product, 4 we believe, has recovered after about two weeks 5 fully from the terrorist attacks. 6 And in on-line sales, again, we are 7 very jackpot driven, the industry as a whole was 8 back on roughly 6 percent growth over the same 9 period last year after about two weeks, and in 10 Texas, we noted very similar results. Did you get 11 the jackpot information? 12 MS. SMITH: They were 12 million on 13 Wednesday and 15 million on Saturday for the week 14 ending September the 15th. 15 MR. WILLIAMS: And it grew the 16 following week to -- 17 MS. SMITH: Nineteen and 23 Saturday. 18 MR. WILLIAMS: Okay, it was on its 19 way up to the 23 million dollar jackpot or a little 20 bit more, and you can see in the red graphs the 21 reflection of the jackpot's growth. 22 Now, all products sales for the Texas 23 Lottery, again, reflecting your Lotto Texas jackpot 24 and the rebound in instant lottery sales in the 25 weeks immediately following the September 11th 00022 1 attacks. 2 So in Texas, the terrorist attack 3 impact was felt for roughly two weeks in a direct 4 sense and we feel that with regard to this factor 5 we're pretty well back on track. And we've also 6 looked at a number of other economic indicators that 7 we'll get into here in just a moment. 8 Instant products, now what we're 9 looking at here is calendar year 2000 compared to 10 calendar year 2001. And you'll note that in the red 11 bar graph is this calendar year, the yellow bar 12 graph is last calendar year, and you'll see that in 13 the weeks prior to the terrorist attacks, we were, 14 in the instant product sales, ahead of last year, 15 the week of September 11th and the following week 16 behind last year and then back up ahead of last year 17 again. Just a year-to-year comparison there. 18 COMMISSIONER WHITAKER: The week of 19 October 2nd seems to have an unusually large jump 20 up, do you know what that's about? 21 MR. WILLIAMS: That was the 22 introduction of low volume five dollar games, was 23 that Cash Across Texas? Yeah, Stephanie is nodding, 24 so we made an introduction of one of the new five 25 dollar prize points which typically have a nice 00023 1 positive boost in their first week of sales and that 2 is where you see that at that point. 3 MS. CLOUD: And also, Commissioners, 4 October 1st was basically when our new plan really 5 went into place with all of our game roll out, the 6 supplemental games, as well as our, like Ron says, 7 new games that we're working into the plan now with 8 the lower volume of inventory so we can say that 9 that new plan on our instant pot roll-out with our 10 customizing our inventory with our retailers really 11 was effective October 1st. 12 MR. WILLIAMS: And with on-line 13 sales, of course the robust yellow graph from last 14 year represents the very large Lotto Texas jackpots 15 from last year that have been referred to. And, 16 again, you'll see that the on-line product sales for 17 the Texas Lottery have trended ahead of last year 18 since then. We would normally have seen a slightly 19 larger difference between calendar year 2000 and 20 2001 had it not been for the September 11th events. 21 All product sales, again, just 22 combining instant on-line sales, you can see the 23 results of those graphs as well. 24 Now, for what we call in the recovery 25 period, we've looked at a number of variables, and 00024 1 this goes more directly to the state of the economy 2 in general and levels of consumer confidence. 3 We've looked at items like the gross 4 domestic product, large state lotteries versus the 5 industry, the Dow industrial average, and the 6 consumer confidence index, and have compared those 7 to lottery ticket sales and trends to see if we 8 could find some correlation between what might be 9 happening economically and what's happening in the 10 lottery industry. 11 If you'll look at the gross domestic 12 product for the period from FY 89 through FY 93, 13 again we're using FY 91 as a bit of a benchmark. FY 14 91 did include the Gulf War period. We also had 15 some economic impact during that time frame that 16 came as close to correlating to what might be 17 happening now as we can find. 18 The GDP grew at a more modest rate 19 during FY 91 than it did in prior or subsequent 20 years so that's what that slide will represent. 21 Instant sales during FY 91, actually 22 had a decline industrywide during the same fiscal 23 year. FY 89, a 1.42 percent growth, FY 90's, almost 24 7 percent; FY 92, seven and a half, FY 93, 20.7 25 percent, and in FY 91, instant lottery ticket sales 00025 1 actually did decline during FY 91. 2 MS. CLOUD: Ron, you need to make a 3 point that Texas numbers are not in these graphs at 4 all because we didn't -- 5 MR. WILLIAMS: Yes, ma'am, thank you 6 for that. 7 MS. CLOUD: -- come into existence 8 until '92, they left us out of these graphs. 9 MR. WILLIAMS: In the industry and 10 even more specifically, the large state lottery 11 sales data that we've computed here, we did not 12 include any data from states that started about -- 13 during or after -- or during the period for which 14 we've prepared this presentation because it would 15 have a tendency to skew those numbers up, so in the 16 period that we're looking at that would include FY 17 91, Texas specific lottery sales are not included 18 for the historical data. 19 And, again, all lottery product sales 20 grew at a more modest rate during FY 91 than they 21 did in prior or subsequent years although FY 92 had 22 only a very modest growth during that period as 23 well. 24 So if you look at the GDP versus all 25 product lottery growth, again, the GDP growing at a 00026 1 3.01 percent and all lotteries growing at 1.76 2 percent during that same period, we found that there 3 may be some correlation between GDP and lottery 4 sales over that period historically. 5 Again, there are lots of factors 6 within the lottery industry that may have had an 7 impact on those variables as well but this does bear 8 mention today. 9 Larger state lottery sales, again, 10 these are states with over a billion dollars in 11 sales annually, seem to be affected slightly more 12 than smaller or medium size states during the same 13 periods. 14 You can see the percentages of growth 15 in large state lotteries during FY 89 through FY 93, 16 and in FY 91 and 92, large state lotteries actually 17 had sales declines compared to much of the rest of 18 the industry. 19 And we're looking at large state 20 versus the rest of the industry sales; large states 21 are the yellow graph on the bottom, and you'll 22 notice that between FY 89 and FY 93, large state 23 sales did have that very slight decline from FY 91 24 and FY 92, while the rest of the industry trended up 25 very slightly, but with that exception, you'll see 00027 1 very similar trends. 2 Now we also looked at the Dow 3 industrial average, and this was an interesting 4 chart that the box, the red box down in the lower 5 left-hand side will show you the Gulf War period 6 that was in FY 91, and we took a look at that period 7 and the trends in the Dow industrial average and 8 you'll note that the bars will represent points 9 gained or lost during any particular year and the 10 Dow industrial average actually gained 450 points in 11 FY 91 and lost in FY 90 and had a more modest growth 12 in FY 92, and you marry that to lottery industry 13 sales and you'll not that there actually doesn't 14 appear to be much of a correlation, because in FY 15 90, you saw the Dow slide and the 5.8 percent 16 increase in lottery ticket sales; in FY 91, a much 17 more substantial growth in the Dow industrial 18 average and a much more modest growth in lottery 19 ticket sales and you can see the other years 20 represented there as well. 21 COMMISSIONER WHITAKER: What, 22 explains, in your opinion, the difference between 23 '89 and then the big drop in '90, '91 and '92, in 24 lottery? I mean if you're saying that it's not 25 correlating with Dow industrial all that closely, 00028 1 nonetheless what would explain that drop? 2 MR. WILLIAMS: Well, in FY 91 and FY 3 92, there were a number of lottery start-ups around 4 the country and there was also a revolution, 5 especially in the instant product category where 6 lotteries started introducing what they call 7 multiple game strategies. 8 Prior to FY 91, lotteries were 9 introducing one or two or three games a year on the 10 instant product side and those lotteries at that 11 point were -- most of the existing lotteries at that 12 point were starting to mature and lottery ticket 13 sales at that point were sliding and that's where 14 the multiple game strategy concept actually started 15 to take off in FY 92, actually late FY 91, and then 16 beyond, and then there was a, just a proliferation, 17 the instant product sales blossomed all over the 18 country. And then there were also a lot of lottery 19 start-ups that were enjoyed around FY 89/FY 90. 20 But, again, to come full circle to 21 respond, Commissioner Whitaker, I think that the 22 lotteries that were in existence in FY 88/FY 89 were 23 starting to mature from the standpoint of instant 24 ticket sales, they were starting to see those ticket 25 sales slump and then were able to via multiple game 00029 1 strategy see that turnaround. 2 COMMISSIONER WHITAKER: So your view 3 is that the slump from '89 and '90 was naturally -- 4 the natural maturing of those lotteries based on 5 their instant game strategy at the time and that 6 that's what explains '90, '91, '92, but then the 7 switch to multiple games has allowed it to pick up 8 starting in ninety what, two? 9 MR. WILLIAMS: Yes. 10 COMMISSIONER WHITAKER: Okay. 11 MS. CLOUD: And in '94, started up 12 January 12th, 1988, so and then they waited six 13 months to bring Lotto Texas or lotto game on so they 14 were just really starting to blossom by that time. 15 That may have some help there in the '89 numbers, 16 too. 17 MR. WILLIAMS: And then another 18 indicator that we did look at and one that we feel 19 might be more of a correlation definitely then with 20 the Dow industrial average is the consumer 21 confidence index, and the consumer confidence index, 22 we pulled this chart from the conference board and 23 you'll note of course a pretty precipitous drop in 24 the consumer confidence index and in fact a more 25 recent polling of that index shows it even lower 00030 1 today than it was earlier this calendar year; in 2 fact, at a lower point than it's been, according to 3 one report that I'd heard on MPR recently which had 4 it at its lowest point in seven years. 5 And when we compared the consumer 6 confidence index with lottery ticket sales, this is 7 the graph that probably gives me a bit more of a 8 concern than some of the others. As the consumer 9 confidence index begins to drop, there may be a bit 10 more of a plateauing in the industrywide sales 11 trends. There is some similarity in the growth 12 there of those charts. 13 If you'll notice in 1998 to 1999, a 14 drop in the consumer confidence index, and between 15 1997 and 1999, a relative flattening of the line for 16 lottery industry average is now, between 2000 and 17 2001, we did see the consumer confidence index begin 18 to dip, however, instant, or all lottery products 19 industrywide continued to grow. 20 There may be, we feel, a bit of a lag 21 time between the consumer confidence index numbers 22 and lottery ticket sales but this does bear some 23 watching, in our estimation. 24 Now, with regard to overall findings 25 from all of this data that we've put together, there 00031 1 appears to be some correlation between the 2 performance to gross domestic product and lottery 3 sales. This may not be Gulf War related but a 4 correlation between the GDP and lottery sales in FY 5 91 is recognized in the data graphs from slides 6 18 and 21. 7 There also appears to be a 8 correlation between the performance of the consumer 9 confidence index in lottery sales. This too may not 10 be Gulf War related but a correlation between the 11 consumer confidence index and lottery sales is 12 recognized in the data graphs from slides 28 and 29. 13 There does not appear to be any 14 correlation between the Dow industrial average in 15 lottery sales. The Dow industrial average showed 16 substantial growth in calendar year 01, where 17 lottery sales showed only modest growth or no 18 growth at all in the larger states. 19 State lotteries with more than one 20 billion annually in sales may have been impacted by 21 the economic variables more than the industry as a 22 whole. Large states, which have decreased in sales 23 of 1.72 percent in FY 91 versus the industry, which 24 in the industry itself showed actually some growth 25 of 1.76 percent in FY 91. We're using the FY 91 00032 1 numbers again as our best benchmark at this point 2 and that was reflected in slides 22 through 24. 3 Note, the maturity of the largest in 4 lotteries may have also contributed to the major 5 growth, we've discussed that briefly, among other 6 things. 7 The District of Columbia, this is 8 just to show you a little bit of the variation 9 between the numbers in the reported period. D.C. 10 had a 3 percent decline in sales during that FY 91 11 while the State of Colorado actually enjoyed a 32.6 12 percent increase during the same period. These two 13 states represented each end of the spectrum during 14 the reporting period. 15 Fourteen of 33 lotteries showed a 16 decline in FY 91 while 17 showed an increase in 17 sales. This is, and, again, to disclaim just a bit, 18 there is not one variable we can evaluate to 19 determine our success moving forward but by 20 combining all of the variables in the analysis, it 21 can give us a snapshot of what we can expect in 22 terms of sales growth. 23 And we do have some recommendations 24 that we've made to the commission. The first one is 25 to stay on track with the marketing strategy that we 00033 1 have adopted. Inconsistency with communication to 2 the consumer can elevate impact of sales in less 3 than confident economic conditions. 4 Constantly review game attributes 5 analyses and game sales to identify opportunities 6 within certain themes, prize points, etc., and react 7 quickly to bring the games to market. 8 Texas Two Step and the newly improved 9 Lotto Texas provided excellent cross-promotional 10 opportunities with the instant product and we've 11 actually taking advantage of some of that. 12 Continue with sampling and consumer 13 trial programs, such as attach cards, newspaper 14 inserts and coupons. Sampling of your products in 15 the community can only help with this point. 16 Now, what can the Texas Lottery 17 expect? Our forecast model, again, using FY 91 as a 18 base, the red again shows a 1.72 percent decline, 19 that number was brought forward from the decline 20 encountered by large states during FY 91, that's 21 where we pull that figure. 22 The other chart FY 02 high, and, 23 again, these are projections if you do nothing would 24 assume a 1.76 percent growth and that was the high 25 point during that period that was enjoyed by the 00034 1 rest of the industry. However, we do feel that if 2 you stick to the plan that you've implemented, watch 3 it closely and be prepared to react, as I believe 4 you are, you should be able to hit the goals that 5 you've established for all of your product lines. 6 And, again, just as a resource 7 reference here, we pulled numbers from La Fleur's, 8 their on sales data, stock charts dot com, 1988, at 9 that time, the economic report to the president and 10 conference board. And that concludes our 11 presentation for you today. 12 CHAIRMAN CLOWE: Commissioner 13 Criner, do you have any questions? 14 COMMISSIONER CRINER: Well, I asked 15 the question and you did a great job of answering 16 it. I think that was a very good presentation and 17 lets us know exactly what we should be looking for a 18 little bit better and I thank you. 19 MR. WILLIAMS: Thank you. 20 MS. CLOUD: Commissioners, I want to 21 point out one of the slides that Ron had on there 22 was projecting a decline in this year based on the 23 information from '91 if we did nothing. Well, we're 24 not doing nothing so we don't anticipate the decline 25 will be at that level. 00035 1 We're expecting our goal this year of 2 3.1 billion and we're going to push real hard to 3 meet that goal. We are -- have put a number of 4 things in place that have been a turnaround for us. 5 Toni has some presentation from the 6 marketing side, it's in your books as well if you 7 want to see that following Ron's presentation here 8 as to what we are doing with our marketing 9 objectives going forward. I think you know what 10 we're doing, we've talked about it a lot, but if you 11 want to take the time for her to show those slides, 12 we'll be glad to do that now. 13 CHAIRMAN CLOWE: Mr. Williams, I want 14 to thank you for this excellent presentation. I do 15 have a couple of questions. In regard to your 16 reference to fiscal year, is that the calendar year? 17 MR. WILLIAMS: Typically, of course 18 the Texas Lottery has a September 1 fiscal year, and 19 typically most state lotteries start on a July 1 20 fiscal year, and the fiscal year data that we were 21 using for the historical numbers is a typical 22 industry fiscal year which is the July 1, yes, sir. 23 CHAIRMAN CLOWE: All right, the July 24 1, not a calendar year or our fiscal year? 25 MR. WILLIAMS: No, sir. 00036 1 CHAIRMAN CLOWE: Our mix-up of 2 on-line games and instant tickets is 62 and 38 3 percent, is that typical of other states that have 4 on-line and instant ticket sales without Keno or Big 5 Game, Powerball-type games? 6 MR. WILLIAMS: It is my experience 7 and understanding that although there is a great 8 deal of variation in the industry, depending on 9 regional factors and lotteries approaches to 10 different types of games, but the instant product 11 here, I believe, enjoys a slightly larger market 12 share than it does industrywide. 13 CHAIRMAN CLOWE: It's always been an 14 interesting fact to me that the instant ticket sales 15 are as large percentage as they are and you just 16 said in other states they're even larger. 17 MR. WILLIAMS: Well, in some other 18 states, they can be; Massachusetts is the first that 19 pops to mind, that they've got -- they're in a world 20 all their own in Massachusetts lottery. But there 21 are some states that have a 60 to, you know, roughly 22 a two-thirds instant versus on-line sales, but, 23 again, I think that we are slightly ahead of the 24 curve industrywide with compared to instant versus 25 on-line sales. 00037 1 CHAIRMAN CLOWE: Can you explain to 2 us in your opinion why that is so? 3 MR. WILLIAMS: Well, one of the first 4 things that would pop up would be the fact that some 5 of the states that have a larger percentage of 6 on-line sales are playing multi-jurisdictional 7 games, like the Big Game, like Powerball, and have 8 numbers that they get from those games that can 9 bring the percentage for their on-line sales up 10 somewhat. And I think that when you get to the East 11 Coast games, the more mature lotteries on the 12 Eastern Seaboard have an even larger percentage of 13 their play in their big three games, their daily 14 games, that would lead toward a bit higher on-line 15 sales than we have here. 16 MS. SMITH: And in those states they 17 offer Keno or video lottery also that would boost 18 them upon the on-line sites. 19 CHAIRMAN CLOWE: Well, I guess the 20 answer I'm looking for is why are our instant ticket 21 sales 62 percent of our total sales, what drives 22 that in your opinion? 23 MR. WILLIAMS: Well, the fact that 24 Scientificy Games is your primary instant ticket -- 25 CHAIRMAN CLOWE: I'm sorry but you 00038 1 dropped your voice, it's on the record but I didn't 2 hear it. 3 MR. WILLIAMS: We -- it can -- 4 CHAIRMAN CLOWE: I'll accept that 5 answer. 6 MR. WILLIAMS: It seems to be a bit 7 more of a western states phenomenon and Toni can 8 probably jump in with this too but it seems that as 9 you are west of the Mississippi, instant products 10 are very popular and most of the states west of the 11 Mississippi have higher instant ticket sales than 12 they do on-line ticket sales. And the Texas Lottery 13 has done, over the years, a remarkably good job of 14 getting that product out to the consumer. 15 CHAIRMAN CLOWE: Since you brought it 16 up, how long have you had the contract? 17 MR. WILLIAMS: Nearly three years. 18 CHAIRMAN CLOWE: Three years. And my 19 perception, which I think is reenforced by the 20 presentation you made this morning, is that we seem 21 to see a increased interest in the instant tickets 22 as we introduce more variety and more attractiveness 23 to the games, thinking about the Christmas game 24 which was a great interest to the players and Trucks 25 for Bucks, is that the correct title of the game, 00039 1 and how many games do we have on the street now, 2 thirty some odd? 3 MR. WILLIAMS: Well, you can actually 4 fill orders for a great many more games than that; 5 however -- 6 MS. SMITH: We probably have close to 7 40 games available to our retailers but the average 8 number sold is probably around 19 or 20 games. 9 CHAIRMAN CLOWE: Nineteen or 20 out 10 of 30 some odd and see that, as a commissioner 11 looking at it, that came as a surprise to me that 12 there's that number of varieties of games and when I 13 go into a retailer's, I always look to see what 14 displays are there, and there are many, and as I 15 stand back and watch the players buy tickets, they 16 seem to have a personal choice that is widely 17 varied. 18 You answered Commissioner Whitaker's 19 question with the fact that in the history of 20 instant tickets had changed in '90 or '91 where 21 there had been a very few numbers of games and there 22 began to be a revitalization and a increase in the 23 variety of games and that created a resurgence in 24 this segment of the industry, and that seems to be 25 propelling the industry and Texans, and you are 00040 1 constantly redesigning these games, if I understand 2 what I've learned from the executive director and 3 other members of the staff, to create an attractive 4 mix of games that instant ticket players go to and 5 want to be involved in. 6 MR. WILLIAMS: Now, that's absolutely 7 correct and we are constantly working with Toni and 8 with Stephanie Gertz and the marketing staff of 9 Texas Lottery, Liz Janborg, and doing market 10 research and focus group studies to try to determine 11 what types of games are attractive to Texans all 12 over the state. 13 We've been -- I've seen a lot of 14 Texas in the time that I've lived here and I've 15 really enjoyed that, and we look very closely at the 16 play styles. How many different ways can you play 17 these games, the prize points, the one dollar 18 tickets, the two dollar tickets. We've got a three 19 dollar ticket coming out again next month, a five 20 dollars and even the very famous ten dollar Texas 21 jingle bucks ticket that was introduced last year 22 and then reintroduced just recently. 23 And a very important part of putting 24 these together is the prize structures themselves. 25 The monies and the way that the players can actually 00041 1 win the prizes that are included in those games and 2 that's one of the most important things that we work 3 with Stephanie and with Toni on is designing those 4 so that players are enjoying what they consider to 5 be good wins as often as they can for Texas lottery 6 games. 7 CHAIRMAN CLOWE: Well, that seems to 8 me to be the driving element in the instant ticket 9 side of it, whereas, from your information and it's 10 also my impression, particularly in Lotto Texas, the 11 jackpot drives that. 12 MR. WILLIAMS: Absolutely. 13 CHAIRMAN CLOWE: And it may be that 14 in Texas, the Lotto Texas, it drives the victory and 15 the Five Game and maybe to a certain extent, even 16 Texas Two Step, as we see those numbers get larger, 17 people seem to get more interested in the on-line 18 games. 19 Where are you for the future, is it 20 more of the same or do you see anything more 21 creative and more innovative in regard to this area 22 of sales development? 23 MR. WILLIAMS: We're constantly 24 working and looking toward the future. We've put 25 together some -- a group at Scientific Games to look 00042 1 at play action, at game design. 2 The approach that's currently taken 3 is simply redesigning the ticket, redesigning very 4 similar games everytime we come out with a new game. 5 Putting a new spin on an old face, as it were, 6 giving it some new graphics, giving it a bit of a 7 twist on the play action. 8 We've had some successes with 9 probability games in some other jurisdictions. It's 10 been a difficult ride but we still feel that there 11 is a real potential for those types of instant 12 lottery products in the industry but the multiple 13 game strategies that have driven the industry to 14 this point are coming close in some of the more 15 mature lotteries to topping themselves out, there's 16 a point at which more is not necessarily better and 17 I believe that the instant product strategy that 18 Linda and Toni have taken with introducing 19 supplemental games and having base games in the 20 product mix is a novel and excellent approach to 21 trying to get as much product out there as you can 22 without choking the environment with too much of it. 23 And we've seen some of that happen in 24 states like Illinois where they've actually started 25 to back off the number of game introductions they 00043 1 have in a given fiscal year for them because they 2 felt that they needed to moderate the number of 3 introductions that retailers saw every year. 4 CHAIRMAN CLOWE: I'd like to ask some 5 questions of you about advertising. I think this 6 agency is now spending 38 or 39 million dollars a 7 year in advertising. What percentage of that, Toni, 8 is devoted to instant tickets and what percentage to 9 on-line games? 10 MS. SMITH: Well, actually in our 11 plans for this year, for fiscal year 2002, we sort 12 of combined our efforts and our advertising campaign 13 is geared towards winner awareness and we're in the 14 process of working with interviews of real lottery 15 winners that we can put in those spots to show 16 winning experience and we have been very successful 17 in the past with that type of campaign but it was 18 geared strictly to Lotto Texas so the firm Cole and 19 Monroe is working with us on a campaign that 20 portrays the real impact of winning not only the 21 Lotto Texas game but on instant and Cash 5 and Pick 22 3 and Texas Two Step, so what you'll see in our 23 advertising for this year, we'll incorporate a 24 winner awareness program with sort of testimonials 25 or stories from real winners relative to all 00044 1 products so we really, this year our objective is 2 not to try to split that budget up by project but to 3 reenforce that message which is still very important 4 that there are real winners out there and you can 5 win something in all of our games. 6 CHAIRMAN CLOWE: And in the past, 7 from what I've seen, it has been more directed to 8 either really one of the on-line games or to the 9 instant games. 10 MS. SMITH: Yes, sir, and for example 11 last year because of the introduction of the new 12 Texas Two Step game, our focus on the on-line site 13 was partly to roll out that new game to the players. 14 MS. CLOUD: Commissioners, I want to 15 remind you, too, that budget was 40 million dollars 16 but this year it will be 34 million dollars so we 17 are working with much less in our advertising 18 budget this year. 19 CHAIRMAN CLOWE: Thank you for 20 pointing that out, I had forgotten it was reduced to 21 that extent. 22 What interface do you have with our 23 advertising agencies and what kind of communication 24 and cooperation is there as those, and I'm really 25 thinking about television and radio time that's 00045 1 purchased and those ads are put on the air, who 2 experienced that activity? 3 MS. SMITH: It originates with the 4 marketing staff, Brenda Flores, our marketing 5 manager, coordinates the meetings with the ad 6 agencies and we'll meet with them to review our 7 strategies for the year, like I said, this year it's 8 a winner awareness program, so we'll review the 9 strategies and make sure that we're all on the same 10 page and what our goals are to meet those goals 11 through that different types of campaigns. 12 So once we discuss the strategies and 13 they come back to us and present to Linda and Patsy 14 and myself, the communication is there, our product 15 managers, different concepts that could be used to 16 portray that particular idea or that campaign, and 17 once we've narrowed it down to the one that we like, 18 then they go back and come back with a script and we 19 review that, then they'll come back with story 20 boards that actually walk us through what that may 21 look like in a TV spot and we're involved all the 22 way through deciding the talent, the wardrobe, the 23 location of the TV shoot to ensure that -- let's say 24 that the shot that's supposed to be inside a 25 retailer, that the products that are there are 00046 1 something that, you know, are in line with what we 2 would see in a lotto -- licensed lottery retailer 3 and we review and approve the scripts. 4 And then once those things are 5 approved, then an estimate is approved for the 6 production on that same TV spot, then 7 representatives from the marketing department go to 8 the filming of that commercial to make sure that the 9 wardrobing that we chose is actually in fact what is 10 used and that the script is followed. 11 And then we will review what's called 12 a rough cut, which is a video of it, maybe without 13 the voice-over or without any music or without a 14 jingle, and then upon that approval, then the agency 15 moves forward and produces the spot and drops it 16 into the media that they've already purchased. 17 CHAIRMAN CLOWE: So you really don't 18 get much input from Scientific Games from what 19 you've described there? 20 MS. SMITH: Well, they are involved, 21 we do a quarterly planning meeting with our vendors, 22 the marketing managers meet with not only Scientific 23 Games but Pollard and G-Tech and Cole and Monroe and 24 the King Group, and in those meetings we discuss our 25 strategies. We did one a year -- for the whole year 00047 1 and then we meet every quarter and we do review 2 those concepts and kind of where we're going so 3 everybody knows so I think they have the opportunity 4 to give us feedback and we also meet on a weekly 5 basis every Tuesday so we're in constant 6 communication with all our vendors and I think they 7 have the opportunity to vocalize. 8 CHAIRMAN CLOWE: But Scientific Games 9 is really generating the variety of games and it's 10 your responsibility to come up with innovative and 11 creative thinking that changes the actual games on 12 the street. Is that not correct? 13 MR. WILLIAMS: Yes. 14 CHAIRMAN CLOWE: From what I've seen 15 in the industry in the visits I've made, the 16 creative artists are in the vendors' staff, not in 17 our staff? 18 MS. SMITH: We actually have the 19 capability to do that and we're looking at sharing 20 with Scientific Games, the creation and some of the 21 artwork on the tickets so that our graphic staff can 22 learn that process, it's a little different in 23 preparing artwork for the printing press to produce 24 scratch-off tickets but it is -- the majority of the 25 work comes from the vendor. 00048 1 MR. WILLIAMS: And we work in a teams 2 environment at Scientific Games with our team, the 3 team that handles the Texas Lottery is a team called 4 Team Equinox and we've got two of the finest artists 5 on staff designing new games, Ernest Deshiro and 6 Mike Meniche, on staff that do just an outstanding 7 job in putting together some of the graphics for the 8 games that we've had. 9 CHAIRMAN CLOWE: I'd like to tell 10 you, and I guess I'm sticking my neck out in saying 11 this, but from your presentation what I drew was, 12 you may get some correlation to some of these 13 indices, you may not get any correlation in some of 14 them, but generally, it's the mood of the public, 15 and that's hard to quantify, and the advertising and 16 the attractiveness of the games that really make a 17 difference. 18 MR. WILLIAMS: I couldn't have put it 19 better, that's exactly right, and I think that's one 20 of the reasons that Linda and Toni and all of us get 21 together and are constantly monitoring the current 22 plan, the current trends to try to determine whether 23 or not we need to make any adjustments, that's the 24 best way to respond to that. 25 CHAIRMAN CLOWE: Really keep your 00049 1 finger on the pulse of the playing public and see 2 what they want and gauge that. That's been very 3 helpful. 4 COMMISSIONER WHITAKER: I have a few 5 questions. 6 CHAIRMAN CLOWE: Ma'am? 7 COMMISSIONER WHITAKER: I have a few 8 questions. 9 CHAIRMAN CLOWE: Sure. 10 COMMISSIONER WHITAKER: Do you find 11 it significant that consumer confidence index was 12 down in 2001 but that lotto sales were not? 13 MR. WILLIAMS: We talked about that a 14 lot when we first pulled the chart up and it's our 15 sense that if there is going to be an impact from 16 the consumer confidence index or consumer confidence 17 in general, that it will be a bit of a lag probably 18 after the fact within the next year following those 19 drops. Again, there appears to be a correlation, we 20 can't say for sure whether or not we're actually 21 going to see what the slides or the data that we 22 reviewed indicated to us, but again, with the Texas 23 Lottery's revamped and new product strategies in 24 place now, we feel that the lottery can beat that 25 here if there are trends in that direction. 00050 1 COMMISSIONER WHITAKER: But if you 2 would watch that particularly closely? 3 MR. WILLIAMS: Absolutely. 4 COMMISSIONER WHITAKER: The other 5 thing is you talked about the impact of the lottery 6 both in terms of unauthorized sales, gambling or the 7 lottery that, excuse me, unauthorized sales over the 8 Internet and what impact that might be making and 9 also trends in the general industry about selling 10 over the Internet. 11 MR. WILLIAMS: I really don't have 12 any information that I could share with you that 13 would be intelligent today but I will be happy to go 14 to our folks and see if I can get some data on that 15 for you. 16 COMMISSIONER WHITAKER: If they have 17 studied it and have a good sense of it, I would like 18 to see that data. 19 MR. WILLIAMS: That would be great. 20 COMMISSIONER WHITAKER: And the other 21 thing is, do you see a trend on instant ticket sales 22 because people, for example, go to gas stations and 23 they don't as frequently go into the inner area of a 24 gas station and actually just buy their gas at the 25 pump? 00051 1 MR. WILLIAMS: Well, I haven't 2 actually seen the results of some of those surveys. 3 I know that G-Tech has done some here in Texas, in 4 fact, but I personally, in my experience in the 5 industry, had been very concerned when pay at the 6 pump started to proliferate as much as it did. 7 I was in charge of our operation in 8 Nebraska for five years and we did not encounter in 9 a lot of those locations, decrease in instant 10 lottery ticket sales that I had hoped -- that I had 11 feared that we would. And I think that a lot of 12 that has to do with the fact that the player base is 13 going to go get their ticket and they're going to go 14 play their lotto or their Texas Two Step, but the 15 concern for pay at the pump is one that is still out 16 there because that is still broad and there are 17 still more and more people that are paying at the 18 pump and not getting their opportunity at the 19 counter. 20 MS. SMITH: And I would like to tell 21 the commission that we meet on a monthly basis, 22 Linda and representatives of G-Tech and their sales 23 staff meet with a different corporate account, we 24 call those partnership meetings, in an effort to try 25 to find out how we can work with them and many of 00052 1 them are restrictive in the type from a sale we can 2 use and they too are battling the pay at the pump 3 issue to get people to come in and either buy things 4 from their soda fountains or snacks or drinks or 5 those type things so that's something that we are 6 always looking at different ways of how we can get 7 the player into the store to purchase those tickets. 8 COMMISSIONER WHITAKER: Are you 9 studying the issue of bringing sales out to the 10 pump? 11 MS. SMITH: The technology, I don't 12 think is totally there yet to actually sell at the 13 pump. There are video screens, I know Linda had 14 passed on some information that you had, there are 15 actually two companies that I'm aware of that can 16 actually sort of roll some advertising on a 17 miniscreen at the pump so that you can get that type 18 of exposure, maybe along with current weather or, 19 you know, sports news or just local news, and then a 20 reminder to buy your lottery tickets or that you can 21 actually run a commercial. 22 What I have found so far, I sent an 23 e-mail to the company that you had left us, Linda, 24 but we'd also met with another group last year in 25 that some of these entities are not statewide and 00053 1 that they are only working with certain corporate 2 accounts and it's a relatively expensive venture but 3 it is something that we are watching and I think 4 that down the road that technology eventually will 5 be everywhere, where you stand there and as you pump 6 your gas, you're seeing what the weather is going to 7 be or, you know, what the lotto Texas jackpot can be 8 but I think the technology is coming. 9 COMMISSIONER WHITAKER: But it's not 10 there now? 11 MS. SMITH: It's not there now. 12 MR. WILLIAMS: Industry vendors are 13 aware of it and are looking at that. It is a 14 challenge to try to get product at the pump. There 15 are a number of hurdles. One of the first one that 16 would come to mind would be age restriction. 17 COMMISSIONER WHITAKER: Would be 18 what, age? 19 MR. WILLIAMS: Age, yeah. 20 COMMISSIONER WHITAKER: Very good 21 presentation, I appreciate it. 22 CHAIRMAN CLOWE: My recollection, 23 Toni, is that our sales come more than 60 percent 24 from convenience with gas retailers. 25 MS. SMITH: It's a good chunk, yes, 00054 1 it is, and so it is something we're very in tune to 2 and constantly monitoring the sales staff. Larry 3 King is with us today, too, I'm sure he would be 4 happy to answer any questions relative to the 5 information, that G-Tech heading in my section with 6 regard to Commissioner Criner's request also. 7 CHAIRMAN CLOWE: Well, I just wanted 8 to make that point. And, Linda, my recollection 9 from my attendance in the national convention was 10 that that's exactly opposite to a number of the 11 large state lotteries where convenience with gas is 12 not as large a percentage as a retailer stores of 13 their sales. 14 MS. CLOUD: Convenient stores with 15 gas is a pretty high percentage, I think, 16 nationwide, although some of the states have a much 17 larger food chain, grocery -- like grocery stores 18 than we do, and we don't have a big base of grocery 19 chains here in Texas that are lottery retailers. 20 CHAIRMAN CLOWE: Mr. Eubank, do you 21 have anything to add, I know you're a statistical 22 guru but I want to give you an opportunity to 23 comment on this broad subject if you have any input 24 for us? 25 DR. EUBANK: I don't believe so. 00055 1 CHAIRMAN CLOWE: Smart man. Larry, 2 do you have anything you want to add on the record? 3 MR. KING: For the record, I'm Larry 4 King, I'm the account general manager for G-Tech. I 5 was trying to hide over in the corner. And I don't 6 want to come up here and sound like I agree with 7 everything that was said, that's too easy to do but 8 it was a great presentation. 9 I, for one, and we did provide some 10 information, am a firm believer that there are other 11 factors to consider. I know we didn't compare to 12 the gross national product or the consumer 13 confidence but I think if you drill down 14 independently within the states, you can usually 15 find an excuse or a reason why sales dropped or why 16 they increased, such as Texas sales last week. Why 17 did we go up 13 percent on instant tickets? We put 18 out a ten dollar game and it's the Christmas game, 19 it's very popular. 20 I think that in the early '90s, if we 21 want to look at the Gulf War, well, you can see that 22 California sales, I believe, during a 12-month 23 period dropped 33 percent, and I firmly believe we 24 were the vendor at the time and we still are, that 25 wasn't due to the Gulf War or due to the economy, it 00056 1 was due to a matrix change that they made 2 that happened to be the wrong matrix change. 3 At the same time, you could look at 4 other states like Florida, New Jersey and 5 Massachusetts, and their sales increased. So if 6 you'll look a little bit harder, you'll find a 7 reason, and typically it's a valid reason why sales 8 either increased or decreased but I'd like to look a 9 little bit closer to home. 10 If we look at Texas sales during the 11 mid-'90s and the late '90s, perhaps during one of 12 the best economies this country has ever seen, our 13 instant sales and sales overall were down and they 14 were down for a couple of years and that was due to, 15 you know, a factor of the prize pay-off being 16 reduced. 17 So other state lottery sales were up; 18 Texas were down in some of the best years of the 19 economy. And I think if you'll look today, I think 20 Texas is on the right track. 21 I think Ron and Toni hit it right on 22 the head that you've got to keep your eye on the 23 ball, and I could tell you that we'd be sitting here 24 today had we not made the matrix change July a year 25 ago, we'd probably be sitting here today saying the 00057 1 economy is hurting our sales because our lotto sales 2 were headed down a steady downward path but I think 3 by taking that action, we've at least got them in 4 the positive direction to the tune of around 20 5 percent increase, and that's a big number for Texas. 6 Same with the instant side. The 7 sales of instant tickets are on a steady increase. 8 I think players are getting the confidence back that 9 there are more prizes and more winners. I think 10 Toni is right on by promoting that there are a lot 11 of winners out there. 12 I think there are states right now 13 like Kentucky that just reported the best quarter 14 that it's ever had in the existence of the lottery 15 and it's simply due because of the Powerball 16 jackpot, they had a 295 ball jackpot that hit in 17 that year, so maybe the economy is bad but Kentucky 18 and other state sales were up due to other factors. 19 And I guess lastly, I would say that, 20 you know, the steps you're taking are the 21 appropriate steps. We meet on a regular basis, 22 we're constantly looking at all products. We did 23 replace Texas Million, those sales were headed 24 steadily down, with Texas Two Step, so that's the 25 right choice. We're looking at Pick 3 and Cash 5, 00058 1 we haven't made any decisions as to change those 2 games yet but I think by constantly doing that, 3 we're doing the right thing. 4 COMMISSIONER WHITAKER: Do you make 5 anything of consumer confidence going down and how 6 it might impact lottery sales? 7 MR. KING: I don't because, again, I 8 think that there are so many other factors that are 9 involved, such as the games that you're going to 10 introduce, the pay-outs of those games, the 11 advertising, the lotto jackpot at the time. I mean, 12 I haven't looked at that and I don't think our 13 company has looked at it in detail to say that 14 there's a correlation between the two. 15 COMMISSIONER WHITAKER: Okay. 16 MR. KING: You mentioned the play at 17 the pump, people not entering the convenient stores 18 like they used to, and I, for one, I don't fill up 19 my car unless I can, you know, put my credit card in 20 and hopefully don't have to go into the store, but 21 our company has been looking, and I'm sure other 22 companies in the business for the last few years are 23 trying to overcome that and it's sort of a 24 dual-edged sword. 25 The convenient stores want people in 00059 1 their stores but they have figured out that people 2 will pass by them if they don't have the credit card 3 pay at the pump. So we have tried to design what we 4 call play at the pump and we've had a long time 5 study for the last couple of years trying to come up 6 with a device that would, through radio hook up with 7 the terminal, but again we've got the age 8 restriction and you have obstacles, such as a bill 9 acceptor at the pump and if you can't have a bill 10 acceptor, most state lotteries don't allow lottery 11 play with credit cards, so you have that obstacle. 12 And then you have the obstacle of will it really -- 13 will the convenient store industry really accept it. 14 So we're exploring it and I'd be happy to update you 15 when we look a little further along. 16 CHAIRMAN CLOWE: Very interesting. 17 Thank you both very much. Toni -- 18 COMMISSIONER CRINER: I got what I 19 wanted. 20 CHAIRMAN CLOWE: Very good. 21 COMMISSIONER WHITAKER: Teach you to 22 ask, huh? 23 CHAIRMAN CLOWE: All right. Toni, I 24 think you may be involved in item number three: 25 Report, possible discussion and/or action on lottery 00060 1 advertising and promotions, including print media 2 criteria. 3 MS. SMITH: I really have nothing new 4 to report, Commissioner. 5 CHAIRMAN CLOWE: Linda, do you? 6 MS. CLOUD: No, sir, I don't. 7 CHAIRMAN CLOWE: Thank you, Toni. 8 MS. SMITH: You're welcome. 9 CHAIRMAN CLOWE: Next item is number 10 four: Consideration of and possible discussion 11 and/or action on the agency's operating budget for 12 fiscal year 2002. 13 COMMISSIONER CRINER: Good morning, 14 Gentlemen. 15 CHAIRMAN CLOWE: And lady. 16 MR. SANCHEZ: Good morning, 17 Commissioners. My name is Bart Sanchez, I'm the 18 director of financial administration. To my right 19 is Daniel Benjamin, he's our budget supervisor and 20 he'll be presenting the operating budget. The 21 operating budget was submitted to the governor's 22 office and the legislative budget board and to the 23 comptroller and other agencies on November 1st. 24 What we have presented here today is 25 that -- to -- for the commission to act on it and 00061 1 hopefully authorize it so that way we can -- there's 2 a new change in the operating budget where the 3 chairman of the commission has to sign and approve 4 the operating budget through a certificate, that's 5 been a change from other years. And it's far -- 6 it's similar to the legislative appropriations 7 request which is done every other year. 8 CHAIRMAN CLOWE: And that's why 9 you're bringing it to the commission as an action 10 item this morning? 11 MR. SANCHEZ: Yes, sir. 12 CHAIRMAN CLOWE: Are there any 13 questions, Commissioners? 14 COMMISSIONER WHITAKER: Anything in 15 the budget? 16 CHAIRMAN CLOWE: Yes. 17 COMMISSIONER WHITAKER: D-2 and D-3. 18 COMMISSIONER CRINER: D-2? 19 COMMISSIONER WHITAKER: D-2 and D-3. 20 I notice that the budgeted amount for advertising, 21 which is on D-3, goes down from 40 million to 34 22 million, is 34 million the maximum amount that we 23 would be allowed based on the pay-out that you have 24 chosen? 25 MS. CLOUD: Yes. 00062 1 COMMISSIONER WHITAKER: Then on D-2, 2 I notice that the promotions, let's see, yeah, 3 marketing raises your promotion budget goes from 4.8 4 to almost double, 8.2. My question is, in your 5 opinion, Ms. Cloud, is that treatment of promotional 6 dollars consistent with our obligation under our 7 legislative mandates? 8 MS. CLOUD: Commissioners, the -- 9 what you're looking at that 4.8 is what's been 10 expended. The budget actually was 8.2, 8.2 11 beginning of the year. In our appropriations act, 12 it was 9.2, so this -- and this amount has been 13 increased since this -- because we're still in our 14 audit process and bills are still coming in, so the 15 expended amount is higher now. Is that right, 16 Daniel? 17 MR. BENJAMIN: What we found out is 18 you've noticed a -- there was some expenditures that 19 have come through after year-end and we're investing 20 those right now just to make sure that they were put 21 in the appropriate appropriations year. 22 MS. CLOUD: So the actual budget was 23 the same as what you're seeing there for this year, 24 we just didn't spend as much. 25 MR. SANCHEZ: I guess in trying to 00063 1 respond to your question, the expenditures that are 2 budgeted and that have been expended for the 3 strategy marketing research promotion are only for 4 that strategy, they are not considered or 5 interpreted to be expenditures that would be 6 considered under the advertising strategy. 7 COMMISSIONER WHITAKER: And, Patsy, 8 you agree with that? 9 MS. HENRY: Yes. 10 COMMISSIONER WHITAKER: All right. 11 And you do too? 12 MS. CLOUD: Yes. And part of the 13 reason we didn't spend the budget for this past 14 year, Commissioners, was controversy we had with 15 coupons that were sent out, we decided not to do 16 couponing any more and that had been in the budget 17 and it was our large budget item. 18 CHAIRMAN CLOWE: And it does foot? 19 MR. BENJAMIN: That's correct. 20 COMMISSIONER WHITAKER: Whatever that 21 means. 22 CHAIRMAN CLOWE: Well, it didn't add 23 up when I looked at it and it adds up now. 24 MR. BENJAMIN: Well, I have to 25 correct that, it actually did, I just -- 00064 1 CHAIRMAN CLOWE: I know but you told 2 us. You told me about it. 3 MR. BENJAMIN: Better safe than 4 sorry. 5 CHAIRMAN CLOWE: I remember what you 6 said. 7 COMMISSIONER WHITAKER: I did have a 8 chance to visit with you, both of you, about the 9 budget before today and it seems to be in order, is 10 there anything of note that you'd like to -- either 11 of you would like to point out? 12 MR. SANCHEZ: See what -- well, the 13 cover letter basically but -- 14 MR. BENJAMIN: Yeah, we do have the 15 cover letter that we -- that I believe was there 16 when we pointed that out, part of the budget with 17 you previously, just on the cover letter, one of the 18 things of notice, the lottery operator, actually 19 operated the lottery goal, the budget there is 180.6 20 million and that is actually based on sales, 7 21 percent of sales, the sales were estimated to be 22 2.58 billion dollars, so that's a little bit lower 23 than with what the actual estimate was because of -- 24 and that had to do with the fact that we were given 25 the appropriations for the new studios and they 00065 1 reduced that accordingly, that's kind of one thing 2 of note. 3 So then we go into our -- where we do 4 additional appropriations for revenues that exceed 5 or sales that exceed that -- the figure. The figure 6 that they have given us is 2.603 billion dollars, so 7 there is a little bit of a gap that we have to make 8 up ourselves. So when they're saying that's even -- 9 the 7 percent or actually the percentage you get for 10 additional appropriations, it's based on 2.60 11 instead of the 2.58 that the appropriation was 12 budgeted on. 13 CHAIRMAN CLOWE: Any further 14 questions or comments? Is there a motion? 15 COMMISSIONER CRINER: So move. 16 COMMISSIONER WHITAKER: Seconded. 17 CHAIRMAN CLOWE: Move to second it, 18 all in favor say I. I. 19 COMMISSIONER CRINER: I. 20 COMMISSIONER WHITAKER: I. 21 CHAIRMAN CLOWE: Opposed no. The 22 vote is three zero in favor. Thank you. We're now 23 ready to go to item five: Status report, possible 24 discussion and/or action on the lottery operator 25 contract. 00066 1 MS. CLOUD: we are moving forward. 2 We have a team of people within the lottery that is 3 going to be in charge of oversight of the conversion 4 process and they are meeting, and outside of that, 5 there's nothing else to report on this particular 6 issue today. 7 CHAIRMAN CLOWE: Any questions? 8 Thank you, Linda. Report, possible discussion 9 and/or action on the agency's contract management 10 and compliance process, number six? 11 MS. CLOUD: Commissioners, Rob Kohler 12 will be making this presentation. 13 MR. KOHLER: Good morning, 14 Commissioners, Ms. Cloud. For the record, my name 15 is Rob Kohler and I am the contracts and special 16 projects manager for the Texas Lottery. 17 I will be briefing you this morning 18 on the contract administration program here at the 19 Texas Lottery. Though these functions have been 20 with this agency since day one, the contract and 21 special projects section itself is less than a year 22 old. 23 I'm very excited to get this 24 opportunity to share with you the dynamic contract 25 management challenges. This presentation will 00067 1 include both current programs and new initiatives 2 this section is exploring who will begin with the 3 broad overview, this will include a full chart 4 identifying both contract processes and possible new 5 initiatives. I will then discuss each component. 6 Feel free to interrupt me at any time. I will do a 7 pretty good job myself interrupting myself, there 8 will be maybe blank stares, but I'll be happy to 9 answer any questions. If there's no questions at 10 this time, I'll move forward. 11 Contract management overview. We are 12 currently administering 100 contracts at the agency, 13 this excludes letter agreements and contracts of 14 less than 5,000. Nine of the prime contracts have 15 been traditionally identified as prime or major 16 because of the important services they provide in 17 assisting us in performing our mission. They are 18 the lottery operator, instant ticket manufacturer, 19 instant ticket manufacturer back-up, advertising 20 services, minority advertising services, drawings 21 auditor, financial auditor, security auditor and 22 studio. 23 Total expenditures for FY 2001 were a 24 $149,217,720. Of that, $17,599,770 were spent on 25 hubs. 00068 1 COMMISSIONER CRINER: Excuse me, of 2 those nine primes -- 3 MR. KOHLER: Yes, sir? 4 COMMISSIONER CRINER: -- are any of 5 those hubs? 6 MR. KOHLER: Yes, sir, they are. The 7 minority advertising, the King Group is a hub, sir, 8 the drawing auditors and financial auditors are hubs 9 of our prime vendors. 10 This flow chart illustrates the 11 different components of the contract management 12 program. As I earlier mentioned, not all components 13 are fully developed or implemented for that matter, 14 but in the next couple of slides when we look at and 15 discuss these individual components, I hope to give 16 you a clearer picture of our process. 17 The first component is a notice of 18 contract action, it has been implemented though this 19 will be the first full year of its implementation. 20 The goal of this process is three-fold: It's to 21 review and determine whether future goods and 22 services are needed. Two, it's to assist minority 23 development services in achieving their mission. 24 And three is to initiate a timely implementation of 25 the appropriate procurement process. 00069 1 Participants in this process are the 2 administering division, minority development 3 services and contract management. 4 To give you an idea of how 5 procedurally the process works, by the 10th of each 6 month contracts are identified that will expire 7 within the time frames above. A notice of contract 8 action is forwarded to the division responsible for 9 administering the contract. This is of course 10 assuming determination of will provision has not 11 been triggered. 12 Notification of expiring contracts 13 are also sent to minority development services to 14 assist in the planning of the commission's good 15 faith strategies to include and utilize hub minority 16 businesses when the commission is seeking both 17 services and to provide goods. 18 The division director will determine 19 if the service or products are still needed and will 20 forward recommendations to the executive director 21 for rebid or new solicitation or to renew or extend 22 or to allow the contract to expire. The executive 23 director will review the recommendations. 24 The approved notice of contract 25 action is then returned back to the division 00070 1 director responsible for administering the 2 contract with the instructions to initiate the 3 procurement. A copy of this is also sent to 4 minority development services. 5 I consider the next component 6 procurement in nature. As I briefly touched on 7 earlier, they are really three things that can 8 happen prior to the expiration of a contract. 9 If the services are determined -- if 10 we determine that we still need the services, 11 there's a new solicitation or rebid, we can renew or 12 extend a current contract if the option is 13 available, recognizing the third, it can be argued 14 -- the third choice can be argued that it's not a 15 procurement process but I think it's logical to 16 group it in above two because the third choice 17 recognizes that a decision might be made that the 18 service is no longer needed or that the service 19 would be performed internally and the contract would 20 simply be left to expire. 21 The goal of this component is to 22 facilitate procurement processes that are sufficient 23 to ensure the best contractors are fairly and 24 objectively selected. Participants include the 25 administering division, purchasing, legal, minority 00071 1 development services, and the contract management. 2 Contract management, we provide the 3 depository of all original documents, we service a 4 liaison with participating entities and also serve 5 as a depository of contractual and potential 6 procurement issues. 7 In addition, we're in the process of 8 developing a contract risk assessment program with a 9 goal of minimizing risk to the agency while 10 promoting competition and all procurement documents. 11 The following areas will be included in this risk 12 assessment: Risk determination and background, 13 bonding and insurance requirements, liquidated 14 damages, records retention, hub business 15 subcontracting plan and a procurement time frame. 16 The contract close-out process is a 17 component of this contract management program that 18 has not been fully developed or implemented at this 19 time. In developing this component, the goal is to 20 create a formal process to evaluate and report or 21 provide information on past contractor performance. 22 Participants in developing this 23 contract close-out process might be the 24 administering division, minority development 25 services and contract management. To give you an 00072 1 idea of how procedurally this process might work, 2 contract management would send a contract close-out 3 packet to the administering division for completion 4 after a contract has expired, terminated, and/or 5 completed. 6 In developing this process, we are 7 looking at initiating several forms, including a 8 contract close-out checklist, a Texas Lottery 9 Commission vendor evaluation form, including the 10 business subcontracting plan. 11 Additionally we will be reviewing 12 other state agencies contract close-out processes, 13 as well as exploring possible participation in the 14 Texas building and procurement commissions of vendor 15 management program. The vendor performance and 16 debarment program. 17 The next component, the contract 18 maintenance process is by far the most challenging 19 and most dynamic aspect of our contract management 20 program. Because of our structure and with the 21 amount of services that are privatized, a tremendous 22 amount of our resources are dedicated to the 23 monitoring and maintenance of our contracts. 24 The goal of this process is to 25 provide contractor oversight and to hold contractors 00073 1 accountable to ensure that they consistently provide 2 quality goods and services and that the public funds 3 are spent effectively and efficiently. 4 Participants in this process include 5 the administering division, minority development 6 services and contract management. I think it's 7 important to note that both lottery operations, 8 marketing and information technology spend 9 significant employee time and resources in 10 monitoring the services being provided by our prime 11 vendors. 12 In addition, the development of 13 minority developing services monitoring of the 14 business subcontracting plans for vendor compliance 15 is also playing an important role to this 16 component. 17 Contract management's role in this 18 component include: The initiation of a contract 19 compliance checklist, conducting annual vendor 20 orientations and also conducting quarterly meetings 21 with division within the agency to share 22 information. 23 Also the section will establish and 24 maintain a contract database. We perform a biannual 25 review of vendors and membership lobbyists, conduct 00074 1 an annual recertification process. We also explore 2 new initiatives to participate in the Texas building 3 and procurement commissions vendor management 4 program. We also facilitate communication and 5 research between the entities and tracking of 6 day-to-day contractual and potential procurement 7 issues. 8 This next slide is attempt to 9 illustrate the enormity and perpetual 10 characteristics of the contract management program. 11 With the Texas Lottery Commission, it's truly a 12 24-hour/7 days a week, 365-day a year enterprise. 13 I hope this presentation has been 14 helpful and I will be happy to answer any questions 15 regarding the program. 16 COMMISSIONER CRINER: This is an 17 attempt to monitor and evaluate the performance of 18 our vendors? 19 MR. KOHLER: Yes, sir. 20 COMMISSIONER CRINER: When we go out 21 for a bid, will the data that you've collected be 22 part of the evaluation process? 23 MR. KOHLER: Yes, sir. If we're 24 doing our job whenever we do go out for a bid, we 25 should serve as a resource for the entities to 00075 1 provide them information. 2 COMMISSIONER CRINER: Okay, let me 3 make sure I'm understanding you. We have a bid out, 4 we have an existing vendor who's already providing 5 services, we have a brand new vendor coming in that 6 are bidding, the data that we have on the existing 7 vendor will help us to make a clear, concise 8 decision which vendor we want to choose, based on 9 what you provided? 10 MR. KOHLER: Yes, sir, I would think 11 that's accurate. 12 COMMISSIONER CRINER: All right. 13 CHAIRMAN CLOWE: Rob, tell us who is 14 in the contract management operation here? 15 MR. KOHLER: Sir, it's myself and 16 Lisa Martinez, is the contract compliance 17 coordinator. 18 MS. CLOUD: But you have employees, 19 as he said in his report, in each of the divisions 20 that has the responsibilities of monitoring and 21 reporting back to this group any issues they may 22 have with any of our contractor vendors. 23 CHAIRMAN CLOWE: But they're in the 24 division administration of the contract, aren't 25 they? 00076 1 MS. CLOUD: That is correct. 2 MR. KOHLER: Yes, sir. 3 CHAIRMAN CLOWE: Then you have the 4 minority development services and I assume that's 5 Robert Hall? 6 MR. KOHLER: Yes, sir. 7 CHAIRMAN CLOWE: And then yourself in 8 contract management? 9 MR. KOHLER: Yes, sir. 10 CHAIRMAN CLOWE: And you have one 11 person working with you now. Would you lead us to 12 believe that you're the primary oversight in this 13 activity? 14 MR. KOHLER: No, sir, I wouldn't. 15 That responsibility does go to the divisions and we 16 rely on the divisions who are on the ground 17 administering and monitoring these contracts, 18 Commissioner, so we rely a great deal on their 19 judgment and their interaction of monitoring and we 20 try to serve as a resource and depository of 21 information. 22 CHAIRMAN CLOWE: So your function 23 would be more informational than it would be 24 oversight as perhaps an auditor might be functional? 25 MR. KOHLER: That's correct, sir. 00077 1 CHAIRMAN CLOWE: And who do you 2 report to, Rob? 3 MR. KOHLER: I report to Executive 4 Director Linda Cloud. 5 CHAIRMAN CLOWE: You report to the 6 executive director directly? 7 MR. KOHLER: Yes, sir. 8 CHAIRMAN CLOWE: And how long have 9 you been with the commission? 10 MR. KOHLER: Sir, I started with the 11 commission in '92, in the very beginning. 12 CHAIRMAN CLOWE: In the beginning? 13 MR. KOHLER: Yes, sir. 14 CHAIRMAN CLOWE: And how long have 15 you been in this position? 16 MR. KOHLER: Around six months, 17 Chairman. 18 CHAIRMAN CLOWE: And is this a new 19 position then? 20 MR. KOHLER: Yes, sir, it is. 21 CHAIRMAN CLOWE: And, Linda, did you 22 form this function and put Rob in that job? 23 MS. CLOUD: Yes, sir. 24 CHAIRMAN CLOWE: Would you describe 25 why you did that and what the purpose of it was, in 00078 1 your mind. 2 MS. CLOUD: Well, we had the 3 compliance section or the compliance depository, if 4 you will, in legal, that was part of -- Lisa 5 Martinez was in the legal division serving in this 6 role and we decided we needed to have a more -- make 7 it a more important section of its own reporting to 8 me so that I have more direct contact with what's 9 going on with the major vendors. 10 Rob has a background of working in 11 various divisions that allowed him to be a good 12 candidate for this position. He has a real 13 familiarity with what all the vendors are doing so 14 it was -- he applied for the position and was the 15 chosen employee for that and it has -- they also are 16 special projects division as well as contracts 17 compliance but it's heightened the contract 18 compliance issues. They're making the directors 19 more aware of when contracts are expiring and 20 keeping the attention focused on our contracts 21 better than what we were having prior to this. 22 CHAIRMAN CLOWE: So in other words, 23 this is an attempt on your part to heighten the 24 oversight and the awareness and the informational 25 flow between divisions and yourself and the minority 00079 1 development effort to make certain that we approach 2 the letting of contracts, the operation of 3 contracts, the renewal of contracts and the 4 termination of contracts, in the most professional 5 manner possible? 6 MS. CLOUD: Absolutely. 7 CHAIRMAN CLOWE: And, Rob, are you an 8 attorney? 9 MR. KOHLER: No, sir, I'm not. 10 CHAIRMAN CLOWE: Is Lisa Martinez an 11 attorney? 12 MS. CLOUD: No. 13 CHAIRMAN CLOWE: Who do you rely on, 14 Rob, when you need legal advice in this work that 15 you're doing? 16 MR. KOHLER: General counsel. 17 CHAIRMAN CLOWE: Now, my recollection 18 is that you are a key member of the committee that 19 worked on the lottery operator contract; is that 20 correct? 21 MR. KOHLER: Yes, sir. 22 CHAIRMAN CLOWE: What was your role 23 in that activity? 24 MR. KOHLER: Bringing my experience, 25 the lottery business to the committee, I think that 00080 1 was probably the best -- I had on-the-ground 2 experience on both the state side and the vendor 3 side. 4 CHAIRMAN CLOWE: Did you have a 5 question or comment? 6 MS. CLOUD: No. 7 CHAIRMAN CLOWE: Do you feel that you 8 have adequate staff to oversight this function? I 9 think it is being painted as a very important 10 activity within the commission for the execution of 11 contracts, and with yourself and one other person, 12 what's your feeling about your resources and what's 13 available to you? 14 MR. KOHLER: Well, Commissioner, I 15 guess I'm fortunate, I have a person -- we both work 16 long hours so we're very confident, and as the 17 program develops, we may need more resources, 18 Chairman, but I believe for us to sit up on the 19 fourth floor and try to -- do monitor contracts is 20 very difficult, if not impossible, so that 21 responsibility is really on the division directors, 22 and where they're closer to the actual services that 23 are being performed. So I guess a long answer is, 24 at this time, I don't see a need for any additional 25 staff but as the program may develop, there might 00081 1 be. 2 CHAIRMAN CLOWE: I'd like for you to 3 keep that in mind, Linda, and my view is that this 4 function is somewhat similar to the internal 5 auditor. The responsibility, I understand, lies 6 with the division director and that person reports 7 to Linda and we certainly understand that chain of 8 responsibility, so to speak, but the way you 9 described your function as informational and keeping 10 tabs of all these contracts seems very important to 11 me, along with the internal auditor function, where 12 division directors and operating managers need the 13 kind of input and the kind of background of 14 information that you have that can help them do a 15 better job. It's a vital function. And these 16 contracts that this agency is administering, these 17 nine that you singled out for us to look at, are of 18 great amounts of dollars so we want to make certain 19 we do the best possible job we can with regard to 20 these and all others as well. 21 MR. KOHLER: I agree completely, 22 Chairman. 23 MS. CLOUD: Commissioners, we have, 24 and we didn't provide it for you today, I think your 25 notebook wouldn't have stood for any more paperwork 00082 1 but we do have a compliance checklist that the 2 individuals monitoring these vendors are responsible 3 for keeping and we will be glad to provide that to 4 you to show you how much we've required our 5 individuals in monitoring these contracts to do and 6 they meet quarterly so they come together to talk 7 about issues and Rob and Lisa are the depository for 8 those checklists so we have, I think, personally, we 9 have a very good oversight of our contractors. I 10 feel very comfortable with it. 11 CHAIRMAN CLOWE: Well, I think, if 12 may on behalf of the commission, say that we want to 13 oversight these contracts and we want to do the best 14 possible job that we can in the development of the 15 contracts and we need the kind of information and 16 experience and data that your function apparently is 17 the depository of and we want you to be relied on 18 and understand that you play an important part in 19 this process and that doesn't in any way set aside 20 the responsibility that Linda has or that the 21 division directors have. 22 MR. KOHLER: Yes, sir. 23 COMMISSIONER WHITAKER: Quick 24 question. Kim, are you satisfied that your staff is 25 included adequately in spotting and in addressing 00083 1 any legal questions that might arise in connection 2 with contract compliance? 3 MS. KIPLIN: I am and I'll answer 4 that in two ways: One, I think the division 5 directors have good judgment in terms of getting 6 ahold of us with regard to particular contracts and 7 provisions that they're monitoring within their 8 division and seeking legal advice on a particular 9 issue they may be having with that particular 10 contract. 11 And also we have a very close working 12 relationship with contract compliance with Rob and 13 also Lisa and I think they do as equally a good job 14 in terms of identifying issues that they feel they 15 need to seek legal advice. So with those two 16 primary focuses, of course issues come to the 17 executive directors attention and the deputy 18 director's attention and they also get with Legal. 19 I think it's a team effort and I think we do a 20 pretty good job overall. 21 I also to just put in a little bit 22 more on Commissioner Clowe's question, while Rob and 23 Lisa are not attorneys and they do know about 24 seeking legal advice, I think both of them are 25 working towards a contract management certification 00084 1 and so they're attending training and classwork 2 that's heightened and specialized for contract 3 management certification through the state 4 government. 5 COMMISSIONER WHITAKER: Okay. 6 COMMISSIONER CRINER: I'd like to -- 7 CHAIRMAN CLOWE: Yes, go ahead. 8 COMMISSIONER CRINER: -- want to ask 9 you about your involvement, are you part of the 10 evaluation team for -- with the purchasing -- 11 MR. KOHLER: No, sir, not 12 necessarily. It's -- they're -- they are appointed 13 by the executive director and I have been on part of 14 the evaluations, if I'm understanding your question 15 correctly, but not as a rule of thumb, we are not 16 involved in it. 17 MS. CLOUD: He is on the -- he has 18 been on the lottery operator contract and right now 19 I think presently you're on the instant ticket RFP 20 process that we're just starting, so depends on what 21 the contract is as to whether we pull them in but on 22 the larger ones, they would be a part of it. 23 MS. KIPLIN: Commissioner, if I could 24 add just a bit. With regard to the issue on vendor 25 performance history, the evaluation committee is 00085 1 appointed by the executive director and as a part of 2 that process, they can access that information so 3 that that information would be made available from 4 the depository that information is in the contract 5 compliance to the evaluation committee for their 6 evaluation. 7 MS. CLOUD: Would you have a -- 8 COMMISSIONER CRINER: I just think 9 it's -- if we're going to do this, I think that's a 10 very important part to keep it together and -- 11 MS. CLOUD: Okay. 12 COMMISSIONER CRINER: There's strong 13 communications between purchasing and contract 14 compliance. 15 MS. CLOUD: And I can have contract 16 compliance like we do right now, minority 17 development is a part of all of the RFP processes, 18 we could also include contract compliance as being 19 on the evaluation team if the Commissioners so 20 desire. 21 COMMISSIONER CRINER: I don't know 22 whether I desire that, I just think it's a good -- 23 the communication is strong. 24 MS. CLOUD: Okay, well, that I think 25 we have. They have -- they know -- we're not so 00086 1 big, our organization -- our management team is 2 small and they're all very much aware of the 3 contract compliance focus and I think the directors 4 are very conscious of having that resource. 5 CHAIRMAN CLOWE: Further in regard to 6 resources, I think on the large contracts, you 7 determined it would be advantageous to go outside 8 the commission and engage experts and you've done 9 that from time to time, have you not? 10 MS. CLOUD: Yes. I guess I'm -- are 11 you talking about from the legal counsel? 12 CHAIRMAN CLOWE: Yes. 13 MS. CLOUD: Yes, we have. 14 CHAIRMAN CLOWE: Anything further? 15 Thank you, Rob, I think there are no further 16 questions. 17 MR. KOHLER: Thank you. 18 CHAIRMAN CLOWE: Very good. Next 19 item is number seven: Consideration of and possible 20 discussion and/or action on the State Auditor's 21 Office and/or internal audit reports relating to the 22 Texas Lottery Commission and/or on the Internal 23 Audit Department's activities, including Internal 24 Audit Annual Report. Debra McLeod. 25 MS. McLEOD: Good morning, 00087 1 Commissioners. I think I appreciated it better when 2 it was a shorter title but I appreciate you reading 3 through all that. 4 We have management's responses for 5 the audits. We anticipated actually getting within 6 the week, the remaining audit of being licensing, we 7 do anticipate still receiving that by the end of 8 this month. We've commenced with our six follow-up 9 audits on the past audits that have been performed 10 by the Internal Audit Department. 11 We currently have in progress as well 12 Bingo compliance audit and a Bingo tracking audit, 13 we're working with management Nytee on being a 14 tracking audit. I also have two internal 15 investigations that I'm still working on. 16 From a labor resource standpoint, as 17 you know, the Internal Audit Department is comprised 18 of myself and one other auditor and now my auditor 19 has tended her resignation which is effective today, 20 I believe I e-mailed you earlier about this, so with 21 regards to activities with internal audit, that's 22 where we are today. 23 With external audits, the State 24 Auditor's Office is still here with the management 25 advisory services, they're still here in information 00088 1 technology division. And the only other audit that 2 I'm aware of is the comptroller audit with their 3 financial or their report has not been finalized. I 4 understand there has been a draft but it has not 5 been finalized. 6 The financial audit is going on. I 7 know Bart and his crew have been working most 8 expeditiously to meet a time period of November 9 20th. I feel comfortable we'll meet that time 10 frame so -- 11 CHAIRMAN CLOWE: Very good. Any 12 questions? 13 COMMISSIONER WHITAKER: No. 14 CHAIRMAN CLOWE: Thank you, Debra. 15 We're now ready to go to number eight: Report, 16 possible discussion and/or action on the drawing 17 studio and/or on lottery live drawings. 18 MS. CLOUD: Commissioners, I will ask 19 Keith to come up, if he's in the room, Keith Elkins 20 to talk about the live drawing information you 21 requested at the last meeting. 22 As far as the studio goes, we have 23 had our dedication, you might say, or grand opening 24 for our drawing studio with the general public. We 25 had a retailer selling tickets. We had a good 00089 1 number of players up and down Sixth Street that came 2 in to play the games, the spinning wheel, and some 3 of the other games and saw the actual studio from 4 the visitors viewing areas, so that was very 5 successful. 6 We have had a tour with our 7 legislative briefing so our staff people from 8 legislative offices, along with Representative 9 Heflin was able to tour the studio on the day that 10 they were here and we have also opened it up to the 11 media; however, I'm not sure, I'll let Keith answer 12 to that as to how many of the media came but we 13 tried to make the studio open to those that we can 14 in order for them to see it and know that it's here 15 and be able to participate in our drawings when they 16 can, and with that I'll turn it over to Keith. 17 MR. ELKINS: Good morning, Mr. 18 Chairman, good morning Commission staff and good 19 morning, Ms. Cloud, and for the record, my name is 20 Keith Elkins, I'm the communications director for 21 Texas Lottery. 22 As Linda said, we did have a very 23 successful media appreciation day, as well as the 24 player appreciation day. We had one TV station from 25 local area that did come by and did a story about 00090 1 our studio promoting the player appreciation day the 2 following Saturday. On that Saturday, we had close 3 to 400 people that individually came through. Many 4 of those individuals came through not only for free 5 gifts and a chance to spin the wheel for prizes but 6 to also look at the studio and find out how it 7 operates. 8 Members of my staff, along with 9 myself, gave a basic thumbnail tour of how it all 10 works. We had the lottery draw team on stand by to 11 address the specific questions. 12 A lot of the comments that I heard 13 personally from the individual players, members of 14 the public that came by was, number one, they had no 15 idea that we did this, and number two, they were 16 very impressed by all of the diligent work and the 17 amount of work that went into the 30-second drawing. 18 And we had several people that went out and bought 19 tickets and they did come back for the live drawing 20 itself, along with a rather large crowd outside the 21 window on that particular night, so it was very 22 successful. 23 As far as the Web site statistics on 24 the number of viewers, the document that I provided 25 for you from our Web site coordinator, David 00091 1 Glascow, and I will ask if I misspeak about any of 2 these statistics, that he will correct me. 3 What you're looking at are statistics 4 for the month of October, they are slightly down 5 about 11 percent from the previous month of 6 September. Just over 8,000 people went to the Web 7 site to look at the drawings either live or on 8 demand. I suspect, although I have no statistical 9 basis to correct this, I suspect that one of the 10 reasons that we may slightly be down is the jackpots 11 were a little lower for the month of October than 12 they were in the month of September. September, we 13 rolled consistently high to a 40 million dollar 14 jackpot just in the first of October and then we 15 dropped back down to slightly smaller. 16 While we were 11 percent down from 17 total views of the Web site for the month of 18 October, for the people that were going to live 19 streaming, to watch the drawing live as it happened, 20 the significant increase, I would point out, is that 21 that went up 334 percent from the previous month. 22 Again, I suspect that it's primarily 23 due, and you see the large peak there at the very 24 beginning of the month, we had a 40 million dollar 25 jackpot at that time. I think that that shows that 00092 1 we do have players that want to either see the 2 drawings live on TV. If they don't have that as an 3 opportunity, that they are going back and accessing 4 the Web site, albeit slightly. 5 I will tell you that at the end of 6 September when we had our media appreciation day, 7 that was the first real time that we started 8 significantly talking about this feature being 9 available to the public, there was media coverage on 10 that, I suspect that that played into it as well. 11 But overall, I would say that it continues to be 12 successful and as we continue getting word out about 13 this service that we're providing to our players, I 14 suspect that this information will increase as well. 15 If you have any questions, I'll be 16 glad to answer them. 17 CHAIRMAN CLOWE: Keith, one of the 18 things we've talked about continuously, and 19 particularly in regard to the drawing studio was the 20 potential to increase interest in the television 21 stations of live coverage, and although I don't see 22 it on the agenda and I don't know if it's proper to 23 bring it up in conjunction with that, there was 24 consideration about moving the draw time from 9:59 25 to 10:14, can that be discussed in line with 00093 1 increased TV participation of the drawings? 2 MS. KIPLIN: I think it's broad 3 enough but yet sufficient enough notice to public 4 under item eight, as well as, pardon me, under item 5 11, which really has to do with Subchapter D rules 6 because one of the proposed amendments in the rules 7 is to be able to change the time of the draw break 8 to accommodate moving it in the evening to a 9 different time for the TV stations. 10 CHAIRMAN CLOWE: Thank you. One of 11 the things that I think I've heard consistently is 12 that we want more coverage of the live drawings and 13 we want that to go out over the television stations 14 around the state and the players want to see that 15 drawing and want to be aware of the results in a 16 timely fashion and the television stations broadcast 17 of that is the means to achieve that goal. You 18 haven't talked about that in your report and I think 19 the Commissioners would like to hear where you are 20 on that project. 21 MR. ELKINS: We have made the 22 recommendation to the executive director to change 23 the draw time and to also utilize a partnership, if 24 you will, with the TV stations to allow us to put a 25 hyperlink to their particular Web site, if they have 00094 1 one, on our Web site so that our players can go to 2 the TX Lottery.org Web site, click on an icon that 3 would say live stations or for live drawings, go to 4 a map of Texas and be able to click on their 5 individual area and find out who is carrying the 6 drawings live, that would be a subcomponent of the 7 recommendation that we've made to Ms. Cloud. 8 We are waiting on, as I understand 9 it, and counsel can correct me if this is incorrect, 10 for her to make a decision on the recommendation and 11 move forward with that, we have to first adopt the 12 rule change that would allow a change in the draw 13 break. 14 We do continue to do research, 15 however. We had a meeting with a group of TV 16 network executives and station owners from the group 17 Telemundo recently. Linda and I and some of the 18 marketing staff met with those representatives. We 19 discussed this very issue. They seemed very 20 interested in moving the draw time and reenforced 21 that there were some problems with the existing time 22 set-up because of networks programming standards 23 that are required, as well as the fact that they're 24 losing money if they show our drawing and the 25 viewers are happy with just the results. But that 00095 1 if we were to shift it to the 10:12, 10:14 time 2 frame, they would be more interested in possibly 3 carrying it live, especially if it was tied to the 4 opportunity to allow them to sponsor that with some 5 local advertising dollars and retain that revenue. 6 I might just add that yesterday I was 7 at a public speaking event fairly close to your 8 neighborhood, Mr. Chairman, in Hillsboro, speaking 9 to the Rotary Club there and I did raise this 10 question with several of the attendees asking them 11 if they watched the drawings live, had an 12 opportunity to -- the ones that had access to those 13 -- to that on TV stations in their area did seem to 14 enjoy watching the drawings live. 15 They all seemed to indicate that if 16 we did not provide this service, even if they didn't 17 watch it themselves, they would question what was 18 going on, and I think that that is consistent with 19 some statistical data that we are collecting through 20 the marketing division through our focus groups that 21 are -- that some of the questions that we're asking 22 people these days is: are you watching the drawings 23 live if they're available? And, if not, why not? 24 And if we just didn't provide the drawing service, 25 would it impact you? And I think that -- and we can 00096 1 provide this data to you. The overwhelming response 2 from the players seems to be that: Whether I'm 3 watching or whether I'm not watching, I'm more 4 interested if you were to decide you're not going to 5 provide the service, then I would really wonder what 6 was going on. 7 MS. CLOUD: Commissioners, I had the 8 opportunity to review some information from the 9 industry just yesterday, and I haven't even 10 discussed this with my staff and I'm sure when I say 11 this they'll all go straight up through the roof, 12 but Florida has just implemented a program 13 with their billboards where in the locale of where 14 the billboards are placed, they also identify the 15 television station that's carrying the drawing on 16 the billboard so that is giving publicity to the 17 stations locally but this is being done locally in 18 their local venue so, you know, that sounded like a 19 great idea to me to let the general public know what 20 stations are carrying the drawings. 21 MR. ELKINS: For the record, I would 22 endorse that idea as well. 23 MS. CLOUD: I bet you would. 24 CHAIRMAN CLOWE: Well, I think we -- 25 my view is, we need to have the drawings live, we 00097 1 need to make that available, that convinces, I 2 think, many members among the players and the 3 general public that there is a drawing function 4 going on here and it's honest and credible and done 5 correctly. 6 Beyond that, we've had so much of the 7 idea presented this morning by Toni Smith, that 8 advertising is so important and the interest that 9 the players have in the game is paramount, and to 10 me, the carrying of these drawings six nights a week 11 ought to be constantly on your horizon as a goal and 12 a means by which those people who want to watch can 13 watch and you're professional in that field and we 14 leave it to you with staff support and Linda's 15 encouragement to do the best job possible to see 16 that that word is spread throughout the state. 17 MR. ELKINS: Thank you, Mr. Chairman, 18 and I feel exactly the same way and that is one of 19 our high priorities in my division. I feel 20 confident that if we move forward on the 21 recommendations that we present it at the proper 22 time, that we can accomplish those goals as well. 23 CHAIRMAN CLOWE: Very good. Any 24 further questions? We're going to pause at this 25 point for a slight recess, and the time is 10:29 00098 1 a.m. We'll reconvene in ten minutes. 2 (Recess from 10:29 till 10:41) 3 CHAIRMAN CLOWE: I believe we're 4 ready to come back to work order now. The time is 5 the 10:41 a.m. The next item is number 10: Report, 6 possible discussion and/or action on the Sunset 7 process involving the agency. Is there any update 8 on that, Linda? 9 COMMISSIONER WHITAKER: You forgot 10 nine. 11 CHAIRMAN CLOWE: Oops. 12 MS. CLOUD: I'll have to refer to 13 Gary Grief on that one. 14 CHAIRMAN CLOWE: Gary, are you ready 15 to report to us on that? 16 MR. GRIEF: Yes, sir. Good morning, 17 for the record, my name is Gary Grief and I'm the 18 director of Lottery Operations and also the Sunset 19 Project Manager for the agency. I am in somewhat of 20 a holding pattern until the outside members have 21 been appointed. I am being briefed on a regular 22 basis by our executive director and by the director 23 of Charitable Bingo Division on some preliminary 24 meetings that are taking place with the appointed 25 members of the Sunset Division and I really have no 00099 1 new update for you today but I'll be happy to answer 2 any questions. 3 CHAIRMAN CLOWE: Any questions? I 4 believe there are none, thank you. Commissioner 5 Whitaker pointed out I inadvertently overlooked item 6 nine: Report, possible discussion and/or action on 7 the Council on Competitive Government's activities 8 relating to the evaluation and recommendations on 9 the Texas Lottery Commission's policies, practices 10 and procedures regarding public information, media 11 and lottery advertising. Good morning, Colin. 12 MR. HAZA: Good morning, Mr. 13 Chairman and Commissioners. I'm Colin Haza from the 14 Governmental Affairs staff and I'm sitting in this 15 morning on behalf of Nelda Trevino. 16 You have a copy of the CCG project 17 plan in your notebook. The CCG staff is currently 18 concluding its interview phase with the agency staff 19 and with our vendors. We are continuing to provide 20 the CCG staff with their requested information and 21 documentation. You'll note on the project plan that 22 they have open meeting dates still scheduled for 23 December 20th and January 8th. 24 We were recently advised that an 25 additional meeting date on January 11th has been 00100 1 reserved by the council in the event that they 2 determine that it might be necessary to have an 3 additional meeting other than that which appears in 4 your project plan. 5 That is all we have from our end of 6 it. Dan Contreras, the director of the council is 7 here with us today and Dan has indicated he'd be 8 available to answer any questions you may have of 9 him. 10 CHAIRMAN CLOWE: Thank you, Colin. 11 Are there any questions of Colin? 12 COMMISSIONER CRINER: I have one. 13 CHAIRMAN CLOWE: Yes, sir. 14 COMMISSIONER CRINER: Are they going 15 to do an exit kind of interview with us to give us a 16 concept of their thoughts and recommendations? 17 MR. HAZA: Dan may be the more 18 appropriate person to answer that, Mr. Commissioner. 19 CHAIRMAN CLOWE: Good morning, Dan, 20 we're happy you're here. 21 MR. CONTRERAS: Good morning, 22 Commissioners. My name is Dan Contreras, I'm the 23 director of the council on competitive government. 24 The answer to the question is the -- that's up to 25 the discretion of the council. The council members 00101 1 have indicated that they would like to reserve that 2 option until they are able to see our preliminary 3 recommendations. 4 COMMISSIONER WHITAKER: Which will 5 be? 6 MR. CONTRERAS: Presented to the 7 council December 10th. I will be providing a draft 8 copy to the council on December the 10th for the 9 December 20th meeting and hopefully before then, we 10 should know if we will also be distributing a copy 11 of the initial recommendations to the Lottery 12 Commission. 13 COMMISSIONER WHITAKER: Are you 14 getting the information you need and the cooperation 15 that you need? 16 MR. CONTRERAS: Yes, Commissioner. 17 We have approximately 14 binders as equally full as 18 the binders you have in front of you and -- 19 COMMISSIONER WHITAKER: Then my 20 condolences. 21 MR. CONTRERAS: -- for requested 22 information that has been given to us by the lottery 23 so we are receiving the information timely. 24 COMMISSIONER CRINER: I guess my 25 point is now that you've been here and everybody 00102 1 gave you everything you want, do we the 2 Commissioners find out what you think or are you 3 just going to run away and say thank you, see you 4 later? 5 MR. CONTRERAS: The report will 6 definitely be published, as to a briefing to the 7 commission members and to the Lottery Commission, 8 that's still to be determined by council members. 9 MS. CLOUD: And that's a big concern 10 for me, Commissioners, I certainly would like to 11 have an opportunity to see the report before it's 12 made public so that if there is anything that we 13 need to discuss further with council, then we would 14 have that opportunity to do so. 15 COMMISSIONER WHITAKER: And that 16 issue is within the discretion of the council? 17 MR. CONTRERAS: Correct. 18 COMMISSIONER WHITAKER: Subject to 19 your recommendation or? 20 MR. CONTRERAS: I would say yes, 21 subject to our recommendation, and at this time I 22 don't have a recommendation to the council members. 23 Now the timing and the dates of the 24 open meetings by the council is December 20th, would 25 definitely be a day to, if the council did not 00103 1 provide an advance copy before the 20th, that would 2 be the date that it would be made public and that 3 the Lottery Commission would also receive a copy of 4 this draft if they didn't receive it sooner. 5 And then on January the 8th would be 6 the day that the council would act on or approve any 7 recommendations that -- from feedback that they have 8 received either in the open meeting or through the 9 process between December 20th and the 8th. 10 The January 11th meeting is an 11 emergency fall-back meeting simply if we came back 12 on the 8th and were unable to get a consensus by the 13 council members to approve the plan or the report, 14 then we would have the January 11th meeting 15 scheduled. 16 COMMISSIONER CRINER: I guess I'm a 17 little gun-shy because, you know, we seem to get 18 shot at by everybody and without any idea of what 19 you want -- what your report is going to say, it 20 just kind of seems like, I don't know, all the terms 21 I think about right now are not acceptable for 22 public hearing, but it seems like if you come over 23 and you looked at us and think of what's going on, 24 there should be a step in your procedure that, just 25 a courtesy step, to let us know what your findings 00104 1 are and what your recommendations are, rather than 2 just, you know, going away then making them and we 3 have to dance -- we seem to dance a lot after the 4 fact around here. I don't know why so I'm 5 uncomfortable with that. 6 MR. CONTRERAS: I understand your 7 concern and I presented the scenario to the chair of 8 the council and asked if we would be providing an 9 advance copy and he requested that he hold off on 10 that determination until we're closer to the 11 December 20th date. 12 COMMISSIONER CRINER: I just wanted 13 to voice my level of uncomfort. 14 MR. CONTRERAS: I understand. 15 COMMISSIONER WHITAKER: But, Dan, as 16 you go through and get knowledgeable about things, 17 you are talking to management. 18 MR. CONTRERAS: To council members, 19 correct. 20 COMMISSIONER WHITAKER: Well, also to 21 management here at the lottery -- 22 MR. CONTRERAS: To management, 23 correct, yes. 24 COMMISSIONER WHITAKER: -- so that 25 there can be feedback and an opportunity to respond? 00105 1 MR. CONTRERAS: Yes. 2 COMMISSIONER WHITAKER: Okay. 3 MR. CONTRERAS: I mean, we haven't 4 given them an indication as to the direction of the 5 recommendations but we have continued to ask for 6 clarification on different portions of the review. 7 MS. CLOUD: We have no knowledge 8 whatsoever as to what the council is going to be 9 writing up or what the recommendations are going to 10 be. We have worked and talked with Dan as best we 11 can but he's very careful not to divulge what he's 12 thinking so -- 13 MR. CONTRERAS: I currently have a 14 lot of cards in my pocket right now. 15 MS. CLOUD: A lot of tickets. 16 COMMISSIONER WHITAKER: Come on, just 17 let us see one card. 18 MS. CLOUD: We would most certainly 19 hope that we would have the opportunity to, if not, 20 and I can't imagine that we wouldn't have an 21 opportunity to review the report before it goes 22 public, but at least at a public hearing that we 23 would be there in order and given the opportunity to 24 respond. I hope that that is the case. 25 CHAIRMAN CLOWE: Any further comments 00106 1 or questions? Thank you, Dan. Thank you, Colin. 2 MR. CONTRERAS: Thank you, 3 Mr. Chairman, Members. 4 CHAIRMAN CLOWE: Next I believe we're 5 ready for item 11: Consideration of and possible 6 discussion and/or action, including adoption on 7 amendments, repeal and/or new rules within 8 Subchapter D. Is it necessary to read the remainder 9 of this? 10 MS. KIPLIN: No, it's not, it's been 11 publicly noticed with the register. 12 CHAIRMAN CLOWE: Thank you, Kim. 13 MS. KIPLIN: Commissioners, what you 14 have in your packet is a draft rule-making that is 15 right for your consideration for adoption. This 16 rule-making was proposed for public comment back on 17 May 11th, 2001. We are fast approaching the 18 six-month expiration date that we'll -- we'll have 19 these rules aspired by operation law do not -- no 20 action is taken on them prior to five p.m. on 21 November, I think it was the 11th, it was the 11th, 22 it might have been the 12th, but this is the last 23 opportunity for commission meeting for your 24 consideration. 25 I do want to point out that the 00107 1 driving impetus behind this rule-making was really a 2 result of the agency's statutory required rule 3 review of the agency's rules, and the purpose of 4 that statutory required rule review was to identify 5 the rules that were obsolete and were to be repealed 6 and identify changes that should be made to the 7 rules to make those rules consistent with agency 8 practice, so I want to say that that's the driving 9 impetus behind this rule-making. 10 There have been other changes made to 11 the rule-making. One that we touched upon is the 12 draw rate, changing the draw rate times to allow the 13 flexibility to have live TV airings of the drawings. 14 And the other one was to increase the amount of 15 money that a player could claim at the claim centers 16 from 300,000 up to 999,999; six nine's there. 17 There was also a change that was made 18 from what was proposed in the text in May based on 19 comment received, and that had to do with the 20 proposed deletion of the requirement of the instant 21 ticket game report to be paraded at the end of each 22 game. And based on comment, the staff is 23 recommending not deleting that but to create one 24 comprehensive report for that purpose. Comment was 25 received in, and you had an opportunity to review 00108 1 the text, the summary of the comment, and the text 2 of the agency response to that comment, as well as 3 the comment itself. 4 There has been one change in the text 5 since you received it, and I'm going to pass this 6 out, if you don't mind because I think it will be 7 easier for you to capture it, and ask you to turn to 8 page 59. 9 Commissioners, on page 59, that is 10 text of a proposed new rule which would be rule 11 401.301 and the purpose of that rule was to take all 12 the definitions that were in the various game rules 13 within Subchapter D and put them in one 14 comprehensive place to the extent we could. 15 Now, with regard to the definition of 16 the word roll over, which you'll find is number 48, 17 we've had some opportunities to review that further 18 and we think that there is a better way of drafting 19 that to eliminate potential confusion, and the way 20 that it would be read is the part where it says "the 21 amount in a specific prize pool category," we are 22 now recommending that the words that appear on your 23 text, not the one as a result of, be replaced with 24 "resulting from" and -- 25 CHAIRMAN CLOWE: Say that again, 00109 1 please. 2 MS. KIPLIN: Yes. The phrase that 3 you see, and I'm sorry for this last -- that's part 4 of rule-making, not the one as a result of, that 5 phrase, deleting that and replacing it with two 6 words: Resulting from. 7 The purpose of that is to eliminate 8 any possible ambiguity and to make it clearer and it 9 has to do with paying the advertised jackpot either 10 the greater of the advertised or sales jackpot based 11 on sales, to make it clear that we're not focused on 12 the not one with regard to whatever it would be 13 advertised jackpot but it really is the fact that 14 there were no matching combinations, resulting from 15 no matching combinations, so that's really what 16 we're -- what our aim is there, and the staff does 17 recommend that you-all adopt this package today with 18 that change. That's the only change from the text 19 that you received in your document and we have an 20 order that I'm having this change made as well and 21 should you-all favorably consider the staff's 22 recommendation, we'll get that to you before the 23 close of business today for your signature. 24 COMMISSIONER WHITAKER: So, Kim, in 25 roll over, the definition of roll over, the 00110 1 reference to amount is the amount based on sales? 2 MS. KIPLIN: Yes, that is correct, 3 and that -- that's picked up, and this is -- really 4 requires going to the definition of prize pool 5 because that is clear that that's the sales amount, 6 it's the amount based on sales. It's not the amount 7 that's even the estimated jackpot. If you just 8 forget the notion of an advertised jackpot, which is 9 part of the Texas, Lotto Texas, it's not even the 10 estimated jackpot, it's actually what is based on 11 sales. 12 So at this point, if you have -- 13 there are several staff members who have devoted 14 considerable time in helping on this particular 15 rule-making and they're available, and that's Robert 16 Turloni and Bart Sanchez. And then with regard to 17 the rule review, it was a comprehensive effort by 18 many different divisions: Mike Peacock and Toni 19 Smith and Gary Grief and Chuck Wilson has 20 participated along with the two that I mentioned 21 before, I'm sure I'm leaving somebody out, I don't 22 mean to, just to let you know how much effort has 23 gone into these rule reviews and the resulting 24 rule-making packages, they're here and available to 25 answer any questions and as well as myself. 00111 1 CHAIRMAN CLOWE: Are there any 2 questions? 3 COMMISSIONER WHITAKER: I don't have 4 any questions on Subchapter D. I understand that we 5 are not at this point addressing the other set of 6 rules which are the changes to Lotto Texas; is that 7 right? 8 MS. KIPLIN: That is correct, that's 9 a separately noticed item. I'm focused on behalf of 10 the staff today in making the recommendation that 11 you adopt this rule-making package. It is right for 12 your consideration and there's been ample 13 opportunity for comment. There has been an open 14 comment period since May 11th since it was 15 published, we've had a comment hearing, as you know, 16 actually there were two notices but one because of 17 the timing, I really don't consider, but September 18 28th, there was a comment hearing and you have 19 received comment at your commission meeting prior to 20 today, so there's been ample opportunity, in my 21 view, for comments to be heard and received by the 22 commission and considered. 23 CHAIRMAN CLOWE: Are there further 24 questions or any comments? 25 COMMISSIONER WHITAKER: No. 00112 1 CHAIRMAN CLOWE: Is there a motion? 2 COMMISSIONER WHITAKER: So move. 3 COMMISSIONER CRINER: Second. 4 CHAIRMAN CLOWE: Moved and seconded. 5 All in favor please say I. I. 6 COMMISSIONER CRINER: I. 7 COMMISSIONER WHITAKER: I. 8 CHAIRMAN CLOWE: All opposed no. The 9 vote is three zero. 10 MS. KIPLIN: Commissioners, we'll 11 present you with an order consistent with your vote 12 to adopt this rule-making today and we will move 13 forward to file it with the Texas Register timely. 14 CHAIRMAN CLOWE: Now relative to 15 Commissioner Whitaker's comment, we are ready to 16 move to item 12: Consideration of and possible 17 discussion and/or action, including adoption, on 18 amendments to 16 TAC 401.305 and 401.312, Lotto 19 Texas and Texas Two Step game rules, respectively. 20 MS. KIPLIN: Commissioners, this item 21 is before you also for your consideration. The 22 rule-making -- these two rules were really part of 23 Subchapter D game rules at the time it was proposed 24 but there was a vote by you-all to withdraw that and 25 to republish because the changes were substantial 00113 1 enough that, in my view, required a republication 2 and provide an opportunity for the public to 3 comment. 4 They were published in the August 5 10th, 2001 register, the minimal 30-day public 6 comment period has passed. The commission has 7 received ample comment, sufficient comment on this 8 matter. 9 I will tell you that there are 10 members of the staff here that are, and our 11 independent statistician that are here to make a 12 presentation to you with regard to the questions 13 that you-all raised at the last commission meeting. 14 Also, it's my understanding that the 15 staff is recommending a different focus on this 16 rule-making today and it's to pay the greater of the 17 two amounts, that being the advertised jackpot 18 amount or the amount that's based on sales in taking 19 into consideration the appropriate applicable 20 interest rate factor. 21 Now, with that in mind, you-all -- 22 the text that you have in your notebook is different 23 than that proposal and the staff is really wanting 24 to make a presentation to you-all and have a healthy 25 exchange with you-all regarding the views of the 00114 1 staff, along with the independent statistician, and 2 looking to you-all for your deliberation and your 3 direction to the staff so that, you know, frankly I 4 can near describe in terms of drafting or reason 5 justification that would be consistent with the 6 direction that you-all want to take on this 7 rule-making. 8 COMMISSIONER WHITAKER: Kim, you are 9 not and the staff is not looking for a decision by 10 the commission today but rather us to hear the 11 presentations and to have deliberation? 12 MS. KIPLIN: That is correct, 13 Commissioner, because the draft agency, response 14 that was drafted by the staff, when you vote to 15 adopt the rule-making and you sign the order, it 16 becomes your response, it becomes your reasons for 17 why you want this rule-making to be adopted, or 18 whatever action you take, this rule-making is 19 adopted and I don't have that reason justification 20 in front of you-all and I'm looking, and I think 21 staff is looking for direction in terms of that 22 matter that has to be -- that is a required part of 23 the preamble that must be in the order that you sign 24 for us to comply with the statutory requirements of 25 the administrative procedure act. 00115 1 I do have a text that I'm hopeful 2 would help in terms of the presentation and I'll be 3 happy to distribute that to you. I will say it's a 4 working document, this is a draft document, and 5 there are portions of it that have not been changed 6 in light of the staff's focus and recommendation at 7 this time. 8 CHAIRMAN CLOWE: I believe then the 9 commission is ready to hear from staff. 10 MR. TURLONI: For the record, my name 11 is Robert Turloni, I am the on-line product manager 12 for the Texas Lottery. Good morning, Commissioners. 13 I'm pleased to have with me today Dr. Randy Eubank, 14 the lottery's independent statistical consultant, 15 and I wanted to provide the commission with a brief 16 history of Dr. Eubank's experience with the 17 commission and his credentials. 18 Dr. Eubank obtained his Ph.D. in 19 statistics from Texas A & M University in 1979. His 20 doctorate degree complemented two previous masters 21 degrees: One in statistics and one in agricultural 22 economics. 23 After teaching at Arizona State 24 University and Southern Methodist University, Dr. 25 Eubank returned to Texas A & M and has been a 00116 1 professor in the Department of Statistics since 2 1988. He is a member of A & M's faculty recruiting 3 committee, promotion and tenure committe, and is a 4 member of the American Statistical Association and 5 the Institute of Mathematical Statistics. 6 Dr. Eubank's consulting relationship 7 with the Texas Lottery dates back to 1992. Dr. 8 Eubank mainly works with the security and marketing 9 divisions of the lottery. For our security 10 division, Dr. Eubank analyzes data from each and 11 every of our on-line game drawings to verify that 12 the drawing machines and the ball sets that are used 13 are statistically providing satisfactory random 14 combinations. 15 On the marketing side, I personally 16 call on Dr. Eubank to analyze and scrutinize new 17 on-line game agencies or enhancements to our 18 existing on-line games. 19 Last spring, Dr. Eubank analyzed and 20 reviewed the Texas Two Step game matrix and we have 21 currently been reviewing preliminary information 22 regarding possible enhancements to our Pick 3 and/or 23 Cash 5 games. 24 After the last commission, our 25 executive director, Linda Cloud, asked me to contact 00117 1 Dr. Eubank and have him begin an analysis of our 2 Lotto Texas jackpot estimation process and our Lotto 3 Texas prize reserve funds. And Dr. Eubank is here 4 today to present his findings to the commission. 5 With that I'll turn it over to Dr. 6 Eubank and I'll be glad to remain and answer any 7 questions you may have at the end of his 8 presentation. 9 CHAIRMAN CLOWE: Dr. Eubank, we're 10 appreciative of you being here today and the work 11 you've done for the commission in the past. Thank 12 you again for coming. 13 DR. EUBANK: Thank you very much for 14 having me. For the record, my name is Randy Eubank. 15 I am a professor in the Department of Statistics at 16 Texas A & M University. 17 I want to talk a little bit about 18 sales projections and the prize reserve and I've got 19 some transparencies I'd like to show. All right, so 20 I'd like to give some statistical perspective on 21 some of the things that were talked about in the 22 last commission meeting, specifically with respect 23 to the prediction of sales and the prize reserve 24 fund. So feel -- usually when I'm teaching, I bend 25 over like this and that way the students have to 00118 1 sort of guess what I'm talking about. All right. 2 Okay, so feel free to stop me at any point and ask 3 questions. 4 MS. KIPLIN: Dr. Eubank, I'm sorry, 5 but we're not picking you up on our recording and 6 that's our official record so I hate to interrupt 7 you while they're trying to get you on the tape in 8 the back but it's actually the official record of 9 the agency. I'm sorry. 10 DR. EUBANK: Do you want me to like 11 entertain for a few moments, I do a good soft-shoe, 12 you know. 13 (Off the record) 14 CHAIRMAN CLOWE: Just for the record, 15 there's been a short interlude here of approximately 16 ten minutes, we had technical difficulties, and Dr. 17 Eubank was unable to be recorded for his 18 presentation. Those problems have been solved now 19 and Dr. Eubank is prepared to go forward. I'm sorry 20 for the delay. Thank you very much. 21 DR. EUBANK: Thanks everybody for 22 being so patient and waiting. 23 So as I said a minute ago, what I've 24 been asked to do today is to give some thoughts on 25 some of the issues that came up at the last 00119 1 commission meeting concerning projection of sales 2 and the level of the reserve fund for Lotto Texas 3 and so I want to talk about that a little bit today 4 and the first thing I want to talk about is the 5 projection process and before I get into the 6 specifics of Lotto Texas, let me just make a couple 7 of general comments about projections of random 8 things in general. 9 And the first thing I want to say is 10 that random events in general cannot be predicted 11 with absolute certainty, period, and of course we 12 all know that. For example, if we toss -- something 13 as simple as tossing a coin, we know that if we toss 14 a coin, we're going to get a head or a tail but we 15 don't know with absolute certainty what we're going 16 to get when we toss the coin. 17 And of course there's some things I'm 18 preaching to the choir here because what makes Lotto 19 Texas a going concern is the fact that players don't 20 know ahead of time what six numbers are going to 21 come up. If they knew what six numbers were going 22 to come up every time, then everybody would be a 23 winner and returns on your dollar would be a few 24 pennies and so on, okay, so we know, because of the 25 environment that we're in, that random events can't 00120 1 be predicted with absolute certainty, and given that 2 that's so, the best thing that we can expect is to 3 be able to make a decision with a known chance of 4 being wrong. 5 Now, for example, when I toss a coin, 6 if I decide that I'm going to bid on a head, then I 7 know I've got a 50 percent chance of being right and 8 a 50 percent chance of being wrong. 9 By the same token, when somebody 10 fills out their slip and picks their six numbers for 11 Lotto Texas, they know they've got about a one in 26 12 million chance of being right, okay, so they make 13 their decision and pay their dollars and decide from 14 there. 15 Now, with those two things as 16 background or those two statements is what I believe 17 to be fact, then I want to make another statement 18 here, and that's that the sales that occur for each 19 draw, Lotto Texas, or any of the on-line games as 20 far as that goes, are random events. Now if that's 21 true, and I believe it is and I'll convince you of 22 that, I think, in a moment, if you're not already 23 convinced. 24 If that's true, then if we follow the 25 two previous statements that I just made, then what 00121 1 this means is that we can't predict sales with 2 absolute certainty, and that the best we can do is 3 make some sort of a prediction with a known chance 4 of being wrong. Okay. 5 Now, sales are in fact random and 6 there's a lot of things which drive sales and 7 contribute to the randomness. 8 I've rigged those down into a couple 9 of factors, one of them I call micro factors, and 10 those are things which affect individual players; 11 each individual player. Random events that go on in 12 their lives. For example, somebody's driving to buy 13 their lotto ticket and they have a flat tire or they 14 run out of gas or they're sick that day, the baby is 15 sick and they have to go to the emergency room. 16 Individual things, that they go to the convenient 17 store to buy milk and buy a lotto ticket and they 18 didn't take enough money; just random events that 19 affect individual players. 20 These sort of things cause 21 fluctuations, minute-to-minute, hour-to-hour, 22 day-to-day, in lotto sales. Now, they cannot be 23 controlled but they can be understood, and in 24 certain statistical ways, whether they can be 25 accounted for in the prediction process. 00122 1 Much harder to take into account are 2 what I would call macro factors. Macro factors 3 are things that affect random events as a rule that 4 affect all players simultaneously. Things like the 5 terrorist attack, for instance, or a cold front, a 6 ice storm coming down from Canada that's going to 7 hit Saturday morning at ten o'clock before the lotto 8 draw. 9 Even things like seasonal factors, 10 such as holidays and things of that nature, provide 11 examples of macro factors that can affect sales. 12 I'm going to talk about that more in just a minute. 13 Now, the macro factors are things 14 that are sort of hard to factor in when we're doing 15 the prediction process, and I'll talk -- like I 16 said, I'll talk more about that in just a minute but 17 I've got a specific example that I'll show you then. 18 Now, the problem then is one of 19 trying to predict in the presence of randomness and 20 how do we go about doing that? And the first thing 21 I think that has to be realized here is when you 22 talk about predicting is just because something is 23 random, random doesn't mean that anything can happen. 24 So for instance, in the case of 25 something like Lotto Texas, we know that if the 00123 1 jackpots are about four million dollars, that sales 2 will be roughly in the four million dollar level as 3 well. That's what past history tells us. We would 4 never anticipate that you would have sales of ten 5 million dollars for jackpots of four million dollar 6 level; that's just not going to happen. 7 So there are certain things that we 8 can exclude from consideration that we don't have to 9 actually think about and what a statistician wants 10 to do in a prediction process the first thing that a 11 statistician wants to do is to find a focal point 12 for the prediction or some sort of a trend or a 13 pattern that lets us focus or anchor our predictions 14 on that spot or that area. 15 Now, an example of that, let me just 16 show you one simple example, and this is data for 17 the 54 ball game. This is all the sales that we've 18 seen since the beginning of the 54 ball game up 19 until right before the four million dollar jackpot 20 on Halloween. So this is the sales that resulted 21 for the 54 ball game since its inception, since the 22 change of the matrix for jackpots that were at four 23 million dollars, okay, so this is the first one; 24 when was this, sometime in like, I guess, August of 25 2000, there was about 3.8 million and so on, this is 00124 1 sales in millions of dollars. 2 Now, there's a lot of stuff that's 3 going on here but most of these numbers are, you 4 know, around 3.9, 3.8, 4.2, and so on, and the first 5 thing that a person will try to do here is try and 6 figure out what sort of a pattern is, and some place 7 I can sort of focus my attention here and there's 8 lots of ways we can do this but one thing that pops 9 up is like just take the average of these numbers. 10 So the average sales out of these 22 numbers here is 11 3.99 million. 12 Now, that gives me a focus point or 13 someplace that I can begin to look, so I expect the 14 next time that there is a four million dollar 15 jackpot, that I'm going to see sales that are around 16 3.99 million, that's my guess, given the data that 17 I've seen. 18 But note that this doesn't really get 19 the job done because if I look at this 3.99 million, 20 I compare back to the numbers that I've got here, 21 this 3.99 million doesn't appear as any one of the 22 numbers that was actually seen so it does a pretty 23 poor job actually of predicting the things that 24 we've even seen and so I wouldn't expect the next 25 four million dollar jackpot to give me sales of 00125 1 exactly 3.99 million. 2 There's some sort of fluctuation 3 that's going to happen around there, we see that in 4 the data values as well, and that's the next step 5 from a statistician's point of view in the 6 prediction process to some way or another quantify 7 how much fluctuation or variation around this focal 8 point that I'm going to see. 9 Now, there's lots of different ways 10 to do that and the context of this specific example, 11 I'll use one for a common tool and it's something 12 called a standard deviation. 13 Now standard deviation is a number, a 14 numerical value that provides me with information 15 about how much I expect data values to fluctuate 16 about their mean or the average. How much they're 17 going to fluctuate around the average. 18 Now, there are formulas for this 19 thing. You can buy a calculator at H.E.B. and press 20 in the numbers the right way and hit the right 21 button and magically this number comes out the other 22 side. None of that really matters, I think today, 23 and instead I'd like to just sort of take this from 24 an intuitive point of view, it's something that, as 25 I said, you can get a calculator from H.E.B. that'll 00126 1 compute this thing but it's best if we can just sort 2 of try and understand it from an intuitive 3 standpoint and it's really in some sense described 4 by its name, standard deviation, so it's the typical 5 or common sort of deviation that I would expect to 6 see about the average. 7 Now, if I put this together with what 8 I just said, then what I -- for this particular data 9 set, the standard -- the average was 3.99, the 10 standard deviation was .34 million so what that 11 means to me is that, well, okay, I expect the next 12 sales at four million dollar jackpot that pops up to 13 be something on the order of about 3.99 million but 14 I wouldn't be surprised to see it fall below that 15 number by as much as .34 of the standard deviation, 16 or above this average by as much as .34 standard 17 deviation. Okay. 18 So that gives me an interval that 19 goes from 3.65 up to 4.33, and I think of this as 20 the next time I see sales at the four million dollar 21 jackpot level, I'm not going to be surprised to see 22 numbers that fluctuate anywhere inside here. 23 Now, what you can show is that under 24 certain conditions, under certain conditions, you 25 can do probability calculations here that tell me 00127 1 some of the properties of these things. I don't 2 think of this as a prediction interval and so the 3 interval that I just talked about, the one that went 4 from one standard deviation below the average of the 5 one standard deviation above the average, as a 6 prediction interval, this thing has the property, at 7 least in certain settings, of having about a 68 8 percent chance of catching the next sales value that 9 occurs, okay? 10 So this is something I can do, just 11 like a net that I'm going to try and catch the next 12 sales value with and it's got about a 68 percent 13 chance of doing that. So that would allow me to say 14 that I think sales is going to be in this interval 15 and I got a 68 percent chance of being wrong then a 16 32 percent chance of being right. I mean, 68 17 percent chance of being right and 32 percent chance 18 of being wrong. 19 Now, there's nothing special about 20 the 68 percent and if you want a higher probability 21 of catching what's going on, catching the next sales 22 value that occurs, you can do that and the way you 23 do it is to widen the interval a little bit but 24 there's no -- but that means there's no free lunch. 25 If you widen the interval, then that 00128 1 means that you've got a bigger stretch that sales 2 could fall in and so you lose precision by doing 3 that. But most people would do something with a 4 little bit higher probability of catching the truth. 5 Now, let me go back to this specific 6 example again, and what I did here was I took these 7 data values and I plotted this interval along a line 8 here and I also put in little X's here which 9 indicate the actual data value, so here, for 10 example, 4.67 is this number right here, all right, 11 so I've actually put the X's in. There are 22 X's 12 here which correspond to each one of the different 13 data values. 14 Now, if I'm working correctly, if the 15 interval is working correctly here, then there ought 16 to be about -- about a 68 percent of the data values 17 ought to fall in this interval, so how many data 18 values fell in here, and between the one standard 19 deviation below the average to one standard 20 deviation above the average; well there was 15 out 21 of 22, and that's .6818 and it's better to be lucky 22 than good. All right. 23 Now, then the next question is, how 24 is this going to work in terms of predicting a 25 future sales value and there's only been one that's 00129 1 happened at the four million dollar level since I 2 did this analysis and it was one from October 31st 3 and it was three-and-a-half million, okay, so that 4 was the one four million dollar jackpot we've had 5 since then, and notice that's just outside the 6 interval but that's Halloween, all right, so that's 7 an example of the macro factor that I was talking 8 about before. 9 This interval, it's just -- it's a 10 bunch of numbers; three numbers put together and 11 those numbers don't have any idea whether we got 12 operating procedures as normal or something unusual 13 is going on. 14 So just a blind use of this thing 15 would have said, well, this is what I expect and we 16 would've undershot -- we would substantially 17 overestimated what we would have in terms of sales. 18 So some form of input here is necessary and a blind 19 use of statistics is a good way to become bankrupt. 20 All right, well, let me carry on with 21 this example a little bit and do something more that 22 addresses some of the things concerning prediction. 23 And so what I'm going to do is take this data set 24 that we've been talking about and do a little 25 experiment with it so what I've done is I've taken 00130 1 this 22 numbers and here's the way I want to think 2 about this. 3 Let's say that you take these 22 4 numbers that we've had, these are the sales at the 5 four million dollar jackpot level for the 54 ball 6 Lotto Texas game. You take those and you put them 7 -- you write them down on a sheet of paper, four 8 sheets of paper, tear them up and put them in a hat, 9 okay, and you don't tell me what these numbers are, 10 I don't have any idea what they are but you'll let 11 me sample some out of this hat, and then I've got 12 from use my information that I've got to sampling to 13 predict the next one that you're going to draw; 14 that's the idea. 15 So I'm going to look at a couple of 16 different schemes here that have -- that provide a 17 little bit of insight into what sort of works and 18 what doesn't. 19 The first approach is the lazy 20 person's approach. I say, well, I don't want to 21 work too hard so I'm going to reach into the hat, 22 you shake the hat up and I reach and I pull one 23 ticket out and the ticket I get has the number 4.18 24 on it, so it's -- what is it, one of these guys 25 right here, all right, so that's the one that I 00131 1 pulled out of the hat and I'm going to use that one 2 to predict the next one that you draw. 3 Well, for all I know, I don't know 4 what's in the hat, for all I know you can put 4.18, 5 that number in there 22 times, okay? Because I 6 don't know what's in the hat, and so my guess is 7 that the next one you're going to draw is going to 8 be 4.18, okay, that's all the information I've got. 9 Now, then maybe I'll feel a little 10 more ambitious and so I say, well can I draw ten 11 times from the hat? So I put my 4.18 back in, you 12 shake the hat up and I draw out ten times. Well, 13 now I've got enough information to compute an 14 average but I can also compute a standard deviation. 15 A standard deviation is a measure of spread or 16 variability or fluctuation. Clearly I need at least 17 two numbers to be able to do that. Okay. 18 So now I can compute the average and 19 the standard deviation and I can construct this sort 20 of prediction interval that I've talked about 21 before. The prediction interval I get by taking the 22 sample average of my ten sales that I drew out of 23 the hat minus the standard deviation of 4.2 here and 24 average plus the standard deviation, so this is my 25 interval that I think things are going to fluctuate 00132 1 around in. 2 And how do I predict future things 3 we're going to draw out of the hat. Well, I say 4 that I think they're going to fall somewhere between 5 3.6 and 4.5, okay, that's my guess. And if things 6 are working right, I should have about a 68 percent 7 chance of being right. Well how does this work in 8 practicing that? 9 Well, to test that out, what I now 10 did is let's put all the numbers back in the hat and 11 we shake the hat up so now it's got 22 numbers in it 12 again and at random we pull a number out of the hat. 13 The first one that comes out, we do this 100 times, 14 the first one that comes out is 4.18, well, this 15 lucky here and my one sample approach was right, it 16 predicted it correctly, but notice that 4.18 is also 17 in my little prediction here, remember I used the 18 standard deviation again so both of these methods 19 predicted correctly. 20 The next number that comes out -- so 21 I put that 4.18 back in, shake the hat up again, 22 pull another number out. The next one that comes 23 out is 3.89. This one sample approach misses now 24 but 3.89 is certainly in my prediction, okay, so 25 this one wins again. And I keep on doing this, 00133 1 putting the numbers back and sampling again. And I 2 did it 100 times, just sort of for fun, and the one 3 sample approach was correct four times out of 100, 4 so that's a success rate of 4 percent, and my 5 approach, the second approach using ten samples was 6 correct 79 percent of the time, which is better than 7 expected, better than the 68 percent I would have 8 expected. 9 Now, there's a couple of things that 10 this tells us about prediction. First of all, if I 11 go back to this one sample thing here, this is like 12 my past history that I've got and it says that this 13 fails pretty poorly or it fails essentially as a 14 prediction process, and the punch line that comes 15 out of that is that it's really hard to predict when 16 you don't have very much information. 17 In contrast, if you have some past 18 history that you can use, like my ten samples here, 19 then you can do a reasonable job of prediction. 20 Now, you would probably say: Why 21 would I ever use one sample if I could use ten? It 22 always makes more sense to have more information, 23 and of course that's true. But in some situations, 24 you don't have control over how many samples you've 25 got. 00134 1 When the jackpot is 85 million, 2 that's uncharted territory and you don't have 3 information out there, okay? You can go back to the 4 previous years, to previous incarnations of the 5 lottery with 50 balls but what information do those 6 really tell you about what's going on right now? 7 That if the relationships I think between sales and 8 jackpots are fundamentally different than the 50 9 versus the 54 ball matrix. 10 Okay, so in certain cases where 11 there's not a lot of supporting evidence, supporting 12 information, it's very hard to predict and 13 statisticians can't make up data. If we've got data 14 we can do things with it but we can't make it up. 15 So there's some cases where predictions are 16 challenging no matter what sort of tools you've got 17 at your disposal. 18 All right, so with that as a 19 backdrop, I want to now talk about the real issue 20 here of predicting sales at different jackpots 21 instead of just the four million dollar jackpot and 22 to talk about this, I want to go back in time to 23 some data that I had from a long time ago, this is 24 back in the mid-'90s and it's a couple of years' 25 worth of data on the old 50 ball matrix game. 00135 1 And the reason for showing you this 2 is because the new game with 54 balls has only been 3 around for about a year and I've got a couple of 4 years worth of data here. 5 Now, I said a minute ago that I 6 believe the relationship between sales and jackpot 7 is fundamentally different for the 50 versus the 54 8 ball game, okay, but they have qualitative 9 similarities so they are quantitatively different 10 but they have qualitatively similar properties in 11 the sense that if I understand some of the qualities 12 and features here that I think you'll also 13 understand, the sorts of things that can be expected 14 in terms of the way the trends look, variability and 15 so on, you can't exactly quantify them in the case 16 of the 54 ball game, so this is data from the 17 mid-'90s, a couple of years worth of data on the old 18 50 ball game and what I'm tracking here is jackpot 19 versus sales. 20 So if we look at the little dots 21 here, if you'll look at the little dots here, for 22 example, what this is talking about right here, this 23 dot right here corresponds to the sales that you got 24 when the jackpot was 50 million, so this is sales of 25 something on the order of about 23 million. Make 00136 1 sense to everybody what I'm showing you? 2 Okay. All right, so if I look at 3 this plot, there's a couple of things that jump out. 4 First of all, there's a trend here that we can see, 5 and to help with that, let me do my version of a 6 high-track transparency. Close enough. 7 All right, now what I've done here is 8 I've overlaid a curve on top of here and the reason 9 for doing that is to draw your eye to what's 10 actually going on with sales as function of the 11 backdrop here. 12 Now what this curve is is an estimate 13 of something called the regression curve and a 14 regression curve is kind of a version of average. 15 In fact what it does is it tracks average. In this 16 particular case, it tracks average of sales as 17 jackpot changes. All right, and so from a 18 statistician's point of view, this is now my focal 19 point, okay, this is the thing that I want to base 20 my predictions around. 21 If you'll look at this, you see that 22 there's sort of two type of relationships here. In 23 here the relationship is roughly linear, which means 24 that a increase in jackpot of one million has a 25 proportional increase or the same proportional 00137 1 increase along this region here in terms of sales, 2 all right. 3 So once we get to the point over here 4 around the 30 million dollar range, then the growth 5 becomes much faster, the slope becomes variable here 6 and you get this sort of exponential growth that 7 everybody wants to get the jackpot up to because 8 this is where the sales get good. 9 The other thing that's important here 10 is that as the jackpot goes up, notice that the way 11 the points fall around the curve here gets wider, 12 okay, so the variability or the fluctuation around 13 this curve gets wider as the jackpot gets larger, 14 which means that two things happen here. Once you 15 get out here, you don't have very much information 16 because these big jackpots don't occur very often, 17 and secondly, there's more variablity so they're 18 harder to rig, even if I had a lot of information, 19 it would be hard to predict down here. 20 So back in here, I think life is 21 relatively good in the sense of being able to 22 predict fairly well here. Out here is much more 23 problematic. 24 Now, from a statistician's point of 25 view, this is a -- this would be sort of a naive 00138 1 statistical approach for prediction for me to say, 2 okay, here's my focal point and now I'm going to 3 come up with prediction intervals that go along with 4 this curve. Now that's not quite the way I think 5 that it needs to be done here because there's also a 6 time element involved here and the relationship here 7 is not static, I believe the relationship between 8 jackpot and sales actually changes in a fraction of 9 time. But that's the basic idea behind statistical 10 prediction. 11 And here is the current, the history 12 of the current game, the 54 ball matrix and so this 13 is the roughly a year's worth of history for that. 14 The scale gets a little bit distorted because you've 15 got this big bump up here at the 85 million jackpot 16 but I think you see some of the same -- certainly 17 the same trends here and I claim that there's some 18 indications here that the variability increases as a 19 functional jackpot, okay? 20 So I think the prediction problem is 21 in some sense roughly the same as it was for the 50 22 ball matrix but just with a little bit different 23 form for the relationship. 24 Okay, so that's kind of a rough idea 25 of what a statistician would probably do here for 00139 1 predictions. Let me now talk about what's actually 2 done, okay, what Robert Turloni and Bart Sanchez 3 actually do in terms of the prediction process 4 that's currently in effect. 5 All right, so now the way the 6 predictions work is that for a draw on a Wednesday, 7 you make your prediction the Friday before; and for 8 a draw on a Saturday, you make your prediction the 9 Wednesday before, okay? Because you have to set the 10 jackpot before the -- before you're actually -- 11 before you actually get past Wednesday for the 12 Saturday draw, and the same thing, you have to set 13 your jackpot up -- before the Saturday draw is over, 14 you have to set your jackpot for the Wednesday draw 15 immediately following anyway the Saturday draw. So 16 that means that you have to work on Fridays and 17 Wednesdays to predict the draw -- the next draw 18 coming up. 19 So, for example, let me show you a 20 specific -- a couple of specific examples, and so 21 this corresponds to a draw that was September 5th, 22 2001, the first one here. Now that's a Wednesday 23 and so the Friday before on August 31st, Bart and 24 Robert get together and the jackpot's currently 25 sitting at four million dollars. They figure if 00140 1 there's no hit, they'll probably roll up to six. 2 And then they go back and they look at past sales 3 data, on what the sales have been for comparable 4 jackpot levels, or six million dollar jackpots, or 5 something in that nature, and they use that 6 information to come up with an interval, a 7 prediction interval, in fact, that they think gives 8 sort of a worst case and best case scenario for 9 where sales might fall. 10 In this particular instance, they 11 said, okay, the jackpot we think is going to be 12 about six million and our past data indicates to us 13 that the sales could be somewhere between four and 14 4.2 million. All right. 15 Okay, now we're at the Wednesday, 16 9/5/2001 and we need to predict the jackpot for 17 9/8/2001. The jackpot is sitting at six million, 18 they think if there's no hit, it'll probably roll up 19 to nine, so they look at previous examples in their 20 past, in their data, the past history of sales 21 versus jackpot, and on the basis of that for 22 jackpots of nine million, or roughly of nine 23 million, they come up with a figure of between 4.5 24 and 4.7, the worst and best case scenario for sales 25 prediction. 00141 1 Now, in the first case here, back to 2 the prediction for the Wednesday, 9/5/2001, their 3 intervals from 4 to 4.2, the actual sales was 3.94, 4 so they were a little bit overly optimistic in what 5 sales would be. So the next level down for that 6 Saturday is four point -- their interval was 4.5 -- 7 4.7 million and what actually happened was 4.84 so 8 they were a little bit pessimistic in terms of 9 what was going to happen in sales and so on. And 10 here's a one here so I have to point out successes, 11 too. Now, here's 5.1 and 5.3 for a jackpot at 15 12 million and they were right in the pocket on that 13 one there, captured it correctly, okay? So that's 14 sort of what the a process is. 15 Now, it's very similar, and I should 16 say that Bart and Robert were the ones that actually 17 originated using these intervals, and this is a good 18 idea, this is what a statistician would do. That's 19 exactly the sort of thing I've been talking about 20 all along. 21 The difference between what they do 22 and what I as a statistician would do is that there 23 are no statistical tools per se that are being used 24 here to construct the interval so there is no 25 standard of deviation being used, it's an 00142 1 examination of data, there's certainly a processing 2 of data but there's not a black box that the numbers 3 are going in and coming out the other side. I'm not 4 necessarily in favor of black boxes only but there 5 is some processing of the data that can be done in 6 addition to what they do and I'll talk about that 7 more in a minute. 8 All right. Now, let me show you, you 9 know, part of the -- it doesn't matter how you do 10 something if you're successful and so -- and I think 11 that's kind of a lesson here in a way. 12 What I'm going to show you now has a 13 little bit to do with how successful Bart and Robert 14 have been in terms of the projection process and 15 what I'm going to show you corresponds to cases 16 where sales were less than seven million, so this is 17 for the 54 ball games, sales were less than seven 18 million and you'll see the reason for that in just a 19 minute to allow us to be able to see this. Now, I'm 20 going to apply here are their projection intervals. 21 Their projection intervals, the lower interval is 22 the blue guy, that's the blue line. The upper 23 interval that they choose is the green line and the 24 triangle is the sales that actually occurred. 25 All right. So if in a perfect world 00143 1 every one of those triangles would be inside -- 2 would be between the blue and the green line, when 3 the triangles are between the blue and the green 4 line, the world is a good place, and when it's not, 5 then they've missed, okay? 6 So you can see here that there's lots 7 of places here, here's where we were here, this is 8 the underestimate over here. You can see there's 9 lots of places where they catch them; they never 10 miss them by much but there's a lot of places where 11 they miss as well. 12 Now, let me show you what's happened 13 in general, and this is back to the -- this is the 14 entire history over all jackpots and now you'll see 15 why it's less than seven million because now I'm 16 using jackpots that go up to 54 million and the 17 scale gets so distorted here that you can no longer 18 really recognize these as intervals anymore. It 19 just looks like a green line on top of a red line, I 20 suppose, all right. 21 So now the best way to think about 22 this is to, in terms of evaluating the effectiveness 23 of the predictions, is just to look at how close the 24 dots are to this sort of multiple line or the lines, 25 okay? If the dots are right close to the line, then 00144 1 that means that Bart and Robert have come real 2 close; and if they're not, then that means that 3 they've missed. And if you look at this, you'll see 4 that the dots are pretty much always close to the 5 lines. Okay? 6 So my conclusion from this, is that 7 they've really done a pretty good job in terms of 8 their predictions and I want to qualify that just a 9 little bit. 10 So this last transparency, what this 11 guy shows, like I said, these are their intervals 12 but their scale has been distorted so much that you 13 can't really recognize them as intervals anymore 14 because the sales have gotten up so high because of 15 the 85 million jackpot. So instead if you just 16 think about this in terms of, well, as a focal 17 point, think of this again as a focal point for 18 where their predictions are going to lie. The dots 19 should be close to the focal points because the dots 20 here are the sales that actually resulted and this 21 line sort of where their predictions are and as long 22 as the dots are close to the line, that means 23 they've got their focal point just about right and 24 I think that's what you see there. The predictions 25 are hitting close to the target. 00145 1 The problem here, if you go back to 2 the transparency before this one here, which is 3 undoubtedly gone forever. Here we go. The problem 4 is if you go back to this transparency here is that 5 the intervals aren't quite wide enough. They're in 6 the right area, they're hitting -- their projections 7 are hitting the right area but the intervals for 8 their predictions aren't quite wide enough, that's 9 really the only problem and that can be fixed. 10 So my feeling -- and in fact if you 11 look at their success rate here, so how many times 12 did their intervals actually catch the thing that 13 they were trying to get the true level of sales and 14 they had about a 37 percent success rate and so 15 you can do a little bit better than that. 16 So how do actually improve on this? 17 Well, it may be hard to actually improve on what 18 they've done in terms of locating where sales are 19 going to fall. I think they've done a really good 20 job of that. It may be possible to do a little 21 better using this technique called regression, I 22 talked about a minute ago, and regression is sort of 23 a sophisticated averaging idea that allows you to 24 put together, for example, information about sales 25 from other jackpot levels rather than just the one 00146 1 that you're trying to predict at. 2 So, for example, Bart and Robert do 3 things like this. If they're -- if their sales -- 4 if their jackpot is going to be nine million, then 5 they wouldn't hesitate to look at what went on for a 6 ten million dollar jackpot or an eight million 7 dollar jackpot and regression is a technique that 8 processes information sort of a little bit more in a 9 quantitative way for doing that sort of thing. 10 And the other thing here is that to 11 use better intervals. Use intervals that are based 12 on things like standard deviations or quantitative 13 measures of variability. 14 So I think my overall opinion about 15 the process as it currently stands is that, first of 16 all, sales can't be predicted exactly, no matter 17 what, and the best that you can do is to come up 18 with a process that has a sort of a known margin for 19 error when you do the predicting. And the current 20 process that goes on right now works in many ways in 21 that it gets you right in where you want to be. 22 I think it can be improved a little 23 bit using some statistical techniques but I think 24 the thing that I'm recommending is a tune-up rather 25 than an overhaul so I think it's -- in many ways, 00147 1 it's commendable that it works as well as it does. 2 COMMISSIONER WHITAKER: Excuse me, is 3 is -- regression analysis is the process of using 4 all that historical data combined with standard 5 deviations? 6 DR. EUBANK: That's correct, that's 7 part of it, right. That's a good explanation for 8 it, then there's lots of different kinds of 9 regression. 10 COMMISSIONER WHITAKER: So what 11 you're talking about is what I just described? 12 DR. EUBANK: All kinds of regression 13 do that. It's just kind of a big name for a whole 14 lot of different types of techniques. 15 So there's hundreds of different ways 16 I can perform some kind of regression analysis on 17 this same type of data. It's just one -- it's a big 18 name for a big package of tools but that's what it 19 is. It uses historical data to try and figure out 20 what's going on in terms of the trend and then 21 figure out the variability or fluctuation around the 22 trend for prediction. 23 COMMISSIONER WHITAKER: Have you the 24 predictions that Bart and Robert made through a 25 regression line that you would have recommended? 00148 1 DR. EUBANK: No, I haven't. 2 COMMISSIONER WHITAKER: Okay. 3 DR. EUBANK: And the reason for that 4 is the kind of regression that I think is suitable 5 for this is not the standard point and click on your 6 stat package regression because there's a time 7 element here and I think the relationship between 8 jackpot and sales changes as a function of 9 time, okay? And I think that needs to be 10 incorporated in here and so the standard sort of 11 procedure, and I think it needs something a little 12 more sophisticated than the standard sort of things 13 you can get off the shelf. I probably should have 14 done that but I haven't. 15 There's a way I could've used this 16 sort of standard off-the-shelf packages to see how 17 that would have done. My guess is that it would 18 have probably done better in terms of catching the 19 true sales that came up but that the intervals would 20 have been much wider than they probably needed to 21 be. But it's no good to have -- if the jackpot is 22 going to be 20 million and you say that the sales 23 will be somewhere between 500,000 and two billion, 24 that's really no help to anybody, okay, so that's 25 part of the problem here. You want to be able to 00149 1 assess variability to the best that you can and 2 incorporate that into intervals that are tight 3 around the point that give you good precision for 4 your projection but also give you the confidence 5 that you're going to nail what you're after and I 6 think the standard off-the-shelf things probably 7 don't do the job here. 8 COMMISSIONER WHITAKER: Would it be 9 correct then to say that Bart and Robert use a 10 method of prediction that is probably better than 11 the number of regression analysis methods? 12 DR. EUBANK: Yes. 13 COMMISSIONER WHITAKER: But that you 14 would like to tune up what they do? 15 DR. EUBANK: Right, there's no 16 question about that, so there's naive things that 17 could have been done here that would have been 18 disastrous and there's folks out there that will, 19 hopefully not myself, but there's folks out there 20 that will do disastrous things. 21 So I think what they're doing is in 22 some sense a little bit more subjective but they've 23 got a lot of knowledge about the data and what's 24 actually going on and they use that and they use it 25 in a very effective way. And you can't take -- 00150 1 there's no amount of statistics that can make up for 2 knowledge about the process that you're trying to 3 predict, okay? That's just like the Halloween 4 thing, which is a very naive example, but the 5 Halloween example, unless you've got a knowledgeable 6 person that's doing this, if they're just sitting 7 there and looking at intervals, and they wouldn't 8 think anything about it and they could miss really 9 by a large amount. 10 So the other thing that I was going 11 to talk about for a few minutes is the prize reserve 12 fund so let me talk about that for just a few 13 minutes and what I'm going to -- the first plot I'm 14 going to show you is this the history of the prize 15 reserve over an entire course -- prize reserve on 16 the Lotto Texas over the entire course of the game 17 starting back in November of '92, and I've done this 18 -- I've plotted this from the circles here, our 19 prize reserve level in millions and I've plotted 20 this in number of drawings. 21 Now, every hundred draws or so is 22 about a year so right here is where everything 23 began, this is November of '95, November of '97 24 here, and Ms. Cloud came onboard somewhere roughly 25 in here, I think. Is that correct? And you can see 00151 1 that the prize reserve has climbed up a big old hill 2 at one point in time, got very large, up to 40 3 million, and then there was precipitous drops and 4 that trend now has put us over here to where the 54 5 ball game starts and you can see that there's not 6 much going on here anymore. Okay, there's a lot of 7 pattern back in here but over here there's not much 8 that's going on. 9 And I'm going to show you, I'm going 10 to take this little chunk right here and I'm going 11 to pull it out and I'm gong to show you a picture of 12 this stat alone. This is sort of a quick study in 13 how wide statistics I suppose. So now this looks 14 very dramatic, okay, when I take this little chunk 15 out here and I change the scale, it looks very 16 dramatic. But if you look back at what this is, 17 again this is just this little segment right here, 18 you see that really in terms of the past history of 19 the prize reserve fund, there's very little that's 20 going on here anymore. 21 And in fact, what this looks like to 22 me, this looks like a random process that's just 23 kind of meandering around somewhere about the 24 center, somewhere maybe around about nine million or 25 so. It goes up a little while, it goes down a 00152 1 little while, and it just sort of meanders around, 2 which is roughly a way of saying I think that it's 3 kind of in equilibrium. It reaches a point where it 4 has no force that's moving it one way or the other. 5 Now, another thing that I'll show you 6 is this has -- this is related in fact to the 7 question of what should the prize reserve fund be 8 used for, what sort of jackpot should it be used 9 for. 10 And this is the entire history of the 11 prize reserve again for the whole course of Lotto 12 Texas, and what I plotted here is change in the 13 reserve fund, that's what the dots are, change in 14 millions of dollars of the reserve fund, a function 15 of jackpot, of jackpot level. 16 So negative numbers here means that 17 the reserve is decreased which could be from a lot 18 of things but one possibility is that the projection 19 was -- had sales too high. That's one possibility, 20 but other things that can cause that the three of 21 six category also causes decreases or increases. 22 And positive numbers means that the reserve fund was 23 credited a certain amount due to possibly 24 underprediction of sales. 25 Lots of negatives here and you see 00153 1 there's been some big negatives, that's a relatively 2 large jackpot. Now, current history. Here's the 54 3 ball game, a lot less activity here and the misses 4 are -- and the pluses and minuses here are much 5 smaller than they were in the past for at least this 6 small segment of history. 7 Now, notice that there are positive 8 and negative increments even for larger jackpots, 9 not just all back at the four million dollar level. 10 And here are two sort of interesting factors that 11 came up here. This was for when we first changed to 12 the 54 ball matrix, there was some money carried 13 over and there wasn't much information that was 14 going on here but I think this is actually more 15 interesting. 16 Here's a big hit to the reserve fund, 17 or a relatively big hit for the modern times of 18 about a million and the reason that happened was 19 because the annuity factor dropped precipitously, 20 okay? And so what happens is that for -- this is 21 what I would call a macro factor. You can't predict 22 this. You can't know it's going to happen. But at 23 the higher jackpots, things like this can have a 24 bigger impact because in terms of what it takes to 25 fund this, there's portianality to size of jackpot 00154 1 so there's some serious things that can happen up in 2 here. 3 And I would also say that prediction, 4 as I said a minute ago, when you get to the higher 5 jackpots things get more problematic in terms of 6 prediction and that's where you're most likely to 7 make your errors and your errors can be magnified 8 because of the big jackpot. 9 COMMISSIONER WHITAKER: A couple of 10 questions. The annuity factor, we're trying to 11 predict within half a week interval, correct? 12 DR. EUBANK: Right. 13 COMMISSIONER WHITAKER: And, Bart, do 14 you remember when it dropped that way, when it 15 happened? In other words, when it says annuity 16 factor dropped from 1.86 to 1.78? 17 MR. SANCHEZ: To 1.78. 18 DR. EUBANK: Not right offhand. 19 MS. CLOUD: When the annuity drops 20 like that, when we make the prediction say on 21 Wednesday for Saturday night draw -- 22 COMMISSIONER WHITAKER: Right. 23 MS. CLOUD: -- when the annuity -- we 24 have the rate at the time we make the prediction 25 of what have it is that day but by Saturday, if it 00155 1 drops like this, then our estimate is not what that 2 annuity will help drop because it's changed on us 3 and that's why there's no way -- you don't have any 4 -- your prediction's out the window then because 5 you're not going to hit it as close. 6 COMMISSIONER WHITAKER: Okay. The 7 other question is everytime there's a drawing, the 8 reserve fund is supplemented by that 1.1 percent 9 factor; is that correct? 10 DR. EUBANK: That's correct. 11 COMMISSIONER WHITAKER: Why doesn't 12 that then show on the graph as climbing, climbing, 13 climbing, until there's a jackpot award? 14 DR. EUBANK: Because I've got this 15 plotted as a function of jackpot and not time. 16 COMMISSIONER WHITAKER: I see, okay. 17 DR. EUBANK: Yeah. So like -- so I 18 did it as time a minute ago and you can see -- you 19 can actually see that because you see it go up and 20 down. But now what I'm doing is I'm looking as a 21 function of jackpot with the goal being to show that 22 there are pluses and minuses that can occur at all 23 jackpot levels in terms of what the effect on the 24 reserve cannot be isolated only to the four or six 25 million dollar jackpots and it can be affected 00156 1 everywhere and there can be some big hits in some of 2 the higher jackpots. 3 COMMISSIONER WHITAKER: Okay, now, 4 let's assume we had a rule that was the greater of 5 advertised or actual based on sales -- 6 DR. EUBANK: Yes, ma'am, yes, ma'am. 7 COMMISSIONER WHITAKER: -- you would 8 never have then those amounts that are over zero, 9 correct? 10 DR. EUBANK: There would be some 11 input from the three of six category but there would 12 be none from the six of six, that's correct. 13 COMMISSIONER WHITAKER: Okay. Have 14 you done an analysis of how that rule, if adopted, 15 would affect the stability of that prize reserve? 16 DR. EUBANK: It would be hard to 17 know, okay, without actually doing and monitoring 18 it, I -- without past any information on it, I 19 couldn't know ahead of time exactly what it's going 20 to do. 21 MS. CLOUD: Well, I want to interject 22 here, what you're saying is what we're doing, so 23 what Randy has up there is exactly -- 24 DR. EUBANK: That's true. 25 MS. CLOUD: -- what we're doing. The 00157 1 greater of the two, we pay -- when the jackpot, I 2 mean, when we underestimate the jackpot and the 3 sales draw at a higher amount, we're paying the 4 higher amount. 5 COMMISSIONER WHITAKER: If that's 6 true, then why are you getting dots above zero? 7 DR. EUBANK: Well, some of this is 8 from the three of six, but I don't know -- I don't 9 know the explanation for this. How long has the 10 paying what you -- how long has that been in effect? 11 MS. CLOUD: Since the -- well, we've 12 had -- we've had a couple of situations where before 13 my time, it didn't happen but since I've been in 14 here, we've been paying what the advertised jackpot 15 is and if the sales came in higher, we've been 16 paying the higher jackpots. Bart, do you want to -- 17 MR. SANCHEZ: From April of 2000 on 18 forward to today, we've been paying under that -- 19 DR. EUBANK: I don't know the answer 20 to your question. I'd have to go back and look at 21 the prize reserve data to figure out how that 22 actually happens but I understand what you're 23 asking. 24 COMMISSIONER WHITAKER: Well then you 25 -- could you do that? 00158 1 DR. EUBANK: Sure. 2 COMMISSIONER WHITAKER: Okay. 3 DR. EUBANK: All right. 4 CHAIRMAN CLOWE: Well, just on that 5 issue before you go forward -- 6 DR. EUBANK: Certainly. 7 CHAIRMAN CLOWE: -- if that is the 8 correct answer, it seems to me you never, since we 9 started doing that at the beginning with the 54 ball 10 matrix, we never would have added anything to the 11 prize -- reserve prize fund. 12 COMMISSIONER WHITAKER: Yes, you 13 would because every time there's a draw, you 14 automatically take 1.1 percent and add that -- 15 MR. TURLONI: That's right, that's 16 right. 17 CHAIRMAN CLOWE: Is that correct? 18 MS. CLOUD: That is correct. 19 DR. EUBANK: Well then that explains 20 it, right, because this is a jackpot of 85 million 21 and you've got like a 1.1 percent of the 85 million 22 jackpot. 23 CHAIRMAN CLOWE: That's the way you 24 get it? 25 MR. TURLONI: At the 1.1 percent of 00159 1 the sales for that 85 million dollar jackpot. 2 DR. EUBANK: That's correct. Good, 3 thank you, so I'm off the hook then. 4 CHAIRMAN CLOWE: But that's the only 5 way to get an increase? 6 MR. TURLONI: That's correct because 7 if we're paying based on what sales drive, then the 8 only way to increase the prizes on the fund balance 9 is based on that 1.1 percent of sales, that's what 10 you're contributing to the prize reserve fund per 11 every draw. 12 COMMISSIONER WHITAKER: And that 13 amount of money is in the prize reserve fund and is 14 utilized only for prizes? 15 MS. CLOUD: For Lotto Texas. 16 COMMISSIONER WHITAKER: For Lotto 17 Texas; is that correct? 18 MS. CLOUD: That's correct. 19 MR. TURLONI: Yes, ma'am, that is 20 correct. 21 MS. CLOUD: And that is exactly what 22 the prize reserve is there for is to use when it's 23 needed for prizes in the game. That's why you have 24 a reserve. 25 DR. EUBANK: Okay, let me briefly 00160 1 just summarize the things that I wanted to say about 2 the prize reserve. I think that it's stabilized, 3 and as Linda pointed out, the current process that's 4 being used is what I had my pictures for so they are 5 applicable to this statement about what's going to 6 happen if you pay the greater of the two things, the 7 difference between sales or jackpots, they are 8 applicable then. 9 I think that there's caution that has 10 to be used here in the sense that the biggest hits 11 or they're more likely, in my opinion, to come from 12 the big jackpots, that that's where you're likely to 13 have the most effect. 14 And I think the point to be gained 15 from that is I think there's some question as to 16 whether or not the reserve should be able to be used 17 for all the different jackpot levels and I believe 18 that's probably true, it should be. And I don't see 19 any indication, I think there was some comments 20 there might be some tactics for artificially 21 enhancing the reserve fund, I don't see anything 22 like that. There is no direction of this, if there 23 was a artificial enhancement going on, we would see 24 some sort of a steady increase or decrease in the 25 reserve and I don't see any of that. 00161 1 Now, this is -- I want to go back to 2 something because -- 3 COMMISSIONER WHITAKER: Before you 4 get off of the reserve fund, excuse me -- 5 DR. EUBANK: Sure. 6 COMMISSIONER WHITAKER: Is it a good 7 idea, in your opinion, to have a prize reserve fund? 8 DR. EUBANK: Yes, for the way the 9 game is configured right now, I think you've got to 10 have one, absolutely. 11 COMMISSIONER WHITAKER: And do you 12 have any thoughts about the level at which it's 13 fixed? 14 DR. EUBANK: It's hard to know and I 15 think I may have a better understanding of that when 16 I -- after I've thought about the sales projections 17 a little bit more. 18 COMMISSIONER WHITAKER: Would you do 19 that, please? 20 DR. EUBANK: Absolutely, I'll be glad 21 to do that but I think it's -- these two things I 22 really think are, they sort of work hand-in-hand in 23 terms of how well you predict and what's going to 24 happen for the prize reserve fund and so I think 25 until sort of one of the issues has been addressed, 00162 1 it's kind of hard to know what to do with the other 2 one. 3 The three of six thing is pretty easy 4 to figure out what to do there because you can 5 pretty much -- that's something that you can get a 6 pretty good idea as to how much fluctuation you 7 expect from that within sort of what, not 8 necessarily even from past data but -- because 9 that's a fixed prize, it's not so hard, I think, to 10 analyze, but the case of the jackpot itself is more 11 difficult and I'm not sure exactly what's needed to 12 take care of that. 13 Commissioner Whitaker asked me a 14 question before we started and I wanted to go back 15 and address the question that she had asked me and 16 this had to do with what would transpire if you 17 reduced the initial jackpot from four to two 18 million, is that sort of -- 19 COMMISSIONER WHITAKER: Well, what 20 would happen if the starting jackpot were not say 21 four but were based on actual sales? 22 DR. EUBANK: Okay, all right. Well 23 let me answer this in a -- I'll answer this as best 24 I can and I think that the answer is, that that's 25 not necessarily a very good idea and the idea is 00163 1 something like this, and I'm not sure if I can show 2 it very good on this transparency, but let's suppose 3 that we had a starting jackpot of two million 4 instead of four. 5 All right. Well, life would be 6 really good if what happened was -- so here's four 7 right about here, and I don't know, two is somewhere 8 around in here, I'm not sure exactly where. But 9 life would be great if everything just went sort of 10 static at that point, like if sales stayed at 11 exactly the same level they did for four million 12 dollar jackpots but they don't, okay? 13 What's going to happen is this 14 relationship is roughly sort of linear in here and 15 there's going to be a drop, the trend here is 16 roughly linear, it's got a slope of about .33, and 17 what that means is that if you drop the jackpot by 18 two million, you're going to see something on the 19 order of about a $700,000 drop in sales, okay, so 20 you won't get -- sales won't remain at the four 21 million dollar level instead they're going to drop 22 about 700,000. 23 Now, if you then figure out what it's 24 going to take in terms of sales, now your sales are 25 somewhat on the order of about 3.2 million. And 00164 1 then what's it going to take to fund a two million 2 dollar jackpot? Well, if you do the calculations, 3 you need given all the prize pool allocation and 55 4 percent of the sales and so on, annuity factor of 5 somewhere on the order of about 1.7 to be able to 6 do that. And currently the annuity factor, there 7 was one the other day like one and a half, Robert 8 said. 9 MR. TURLONI: Friday it was one and a 10 half; yesterday's estimate was 1.68. 11 DR. EUBANK: So the punch line then, 12 and I think we can expect lower annuity factors for 13 quite a while the interest rates are low. So the 14 punch line is that you're still going to be in 15 deficit spending at the two million dollar level. 16 Now, as long as you don't get a hit, then it doesn't 17 really matter but you're not freeing yourself from 18 having to support the lower jackpots and the overall 19 effect then is that you start at two million. 20 Let's suppose you roll up, so now 21 you're at four and you're right where you were 22 before and you're just going to take that much 23 longer to get up to where the prize level or the 24 jackpot level gets high enough to really generate a 25 lot of sales. 00165 1 So my feeling is that that's probably 2 not going to be effective and there's -- that's from 3 a statistical point of view in terms of looking at 4 this relationship but there's also other factors as 5 well because I think what I described is really a 6 best case scenario because it could be that dropping 7 back to two million dollars makes a fundamental 8 change in the way players perceive the game and it's 9 at -- I don't know how to quantify something like 10 that until it's actually happened so there could be 11 -- it could be much worse than what I said in terms 12 of the degradation of sales. 13 It seems like the process that's here 14 now, even if you have to support the four million 15 dollar jackpots a little bit is working and because 16 you changed the matrix, it's much harder -- you 17 don't tend to get as many hits now as before -- the 18 jackpots tends to roll more often so I think it's, 19 in some way it's not an issue that is going to be as 20 much of a problem as it has probably in the past. 21 COMMISSIONER WHITAKER: In other 22 words, you endorse, based on statistical theory, the 23 idea of starting off at a predetermined jackpot 24 amount such as four million dollars -- 25 DR. EUBANK: Right. 00166 1 COMMISSIONER WHITAKER: -- even if it 2 is predicted that the actual sales amount for that 3 drawing will be less than enough to support that? 4 DR. EUBANK: Right and I think -- 5 COMMISSIONER WHITAKER: Is that 6 correct? 7 DR. EUBANK: That's correct, yeah, 8 because I think if you drop -- what you've got now 9 is working and if you change it, it's unclear what 10 you're going to get. But even if you drop back, 11 it's unclear to me that you're actually going to be 12 -- what sort of projections you come up with, it's 13 unclear to me still that you're going to be able to 14 free yourself from having to do some sort of a 15 deficit funding of some type. It would certainly be 16 less than it would be at the four million dollar 17 level if there's a hit but you don't -- you still 18 have to go through four million dollars to get to 19 six, to nine, to 12, and so on and so I don't think 20 that dropping back somewhat a two million initial 21 jackpot or a one million dollar jackpot, or whatever 22 sales will actually support, I don't know that that 23 necessarily is going to solve the problem, okay. 24 I'm not sure that it's that serious 25 a problem anyway because I think -- I've looked back 00167 1 at some of the data, I thought about this actually 2 too late to be of much use but I did look a little 3 bit before I came over yesterday and I don't think 4 there's been that many hits at the four million 5 dollar level to -- 6 MR. TURLONI: We've had two hits at 7 the four million level since we've made that matrix 8 change in July of 2000. 9 DR. EUBANK: And that's what that 10 matrix change is supposed to do anyway, so you 11 shouldn't see, you know, on the average, you 12 shouldn't see a winner until you've had about 26 13 million tickets bought and that takes you beyond, 14 what, probably nine, 12, something into about the 20 15 million dollar jackpot range. So that's all I had 16 to say, I'll be glad to answer questions you may 17 have. 18 MS. CLOUD: Commissioners, so you 19 know, it's going to be -- it's my recommendation and 20 I've instructed Randy to build this model for us for 21 the regression program that he thinks will assist us 22 in coming up with our estimated jackpots going 23 forward. 24 COMMISSIONER WHITAKER: Are we going 25 to have that analysis by Dr. Eubank before you want 00168 1 us to vote on a rule change, are we going to have 2 the benefit of it? 3 MS. CLOUD: The information you've 4 asked him to provide you today? 5 COMMISSIONER WHITAKER: Yes, and also 6 his model? 7 MS. CLOUD: The model will not be 8 ready before we're asking you to make this decision. 9 He says it's going to take, what, a couple of 10 months, Randy? 11 DR. EUBANK: That's right. I want to 12 sleep between now and then, okay? 13 COMMISSIONER WHITAKER: To build the 14 model? 15 MR. TURLONI: Commissioners, Dr. 16 Eubank also has suggested that after he builds his 17 model, he'd like to run that simultaneously in 18 conjunction with the existing estimation process 19 that we use almost to do a check and balance system. 20 DR. EUBANK: I think that this is, 21 it's actually an addition to a tool bag instead of 22 replacing what's currently being done. I think that 23 -- you can never just replace actually looking at 24 the data with a black box, you've got to actually 25 look at the data and Bart and Robert already do that 00169 1 and they already in some ways do this interval-type 2 thing so this is really sort of an enhancement of 3 what they already do, that's what I want to try and 4 do rather than actually, you know, a complete 5 reworking of the process. 6 COMMISSIONER WHITAKER: Do you have 7 any comments about the practice of advertising an 8 amount rounded to a whole million dollars. Do you 9 have any thoughts on that? 10 DR. EUBANK: No, I don't. 11 COMMISSIONER WHITAKER: Okay. 12 CHAIRMAN CLOWE: May we have lights, 13 please. Thank you, Dr. Eubank, that was very 14 informative and brought to mind some of the things I 15 took in statistics in the University of Texas many, 16 many years ago. 17 DR. EUBANK: We use the same ones 18 over at A & M. 19 CHAIRMAN CLOWE: I might have made a 20 better grade over there. Robert, Bart, do you have 21 anything to add at this point? 22 MR. TURLONI: Just that we'll 23 continue to work with Dr. Eubank per Linda's 24 direction to develop that model and work with him 25 and provide him with any data or any information he 00170 1 needs and we can give you an update at the next 2 commission meeting as to how that process is going 3 along and in your weekly packets, if you so wish. 4 CHAIRMAN CLOWE: We do. 5 MR. TURLONI: Okay. 6 COMMISSIONER WHITAKER: I have some 7 questions. 8 CHAIRMAN CLOWE: Yes, ma'am. 9 COMMISSIONER WHITAKER: This is 10 addressed to Linda, Robert and Bart. The prize 11 reserve fund, if we were to continue the practice or 12 embody explicitly in writing in the rule, the 13 practice of the greater of the advertised for actual 14 prize pool, do you have an opinion as to the 15 adequacy of our prize reserve fund? 16 MS. CLOUD: Well, I think we've been 17 doing that for three, four years now and the prize 18 reserve is stable. I don't think we have seen that 19 it is depleted down to an amount of money that we 20 were real concerned about. It has been pretty 21 stable, as you saw in Randy's graphs, it's holding 22 at a pretty level amount, which is around eight 23 million dollars right now, I think isn't that right, 24 Bart? 25 MR. TURLONI: Right, the current 00171 1 reserve balance as of yesterday before the Lotto 2 drawing was about 8.8 million. 3 MR. SANCHEZ: Yeah, my opinion within 4 the last fiscal year, the prize reserve has been 5 maintained at an adequate level, which is around 6 seven million, and I think, in my opinion, if you 7 look at the probability of getting hit four million 8 levels and I think back in the fiscal year 2000, we 9 got hit four in a row, that came out to the use of 10 the prize reserve of about 3.2 million, so the odds 11 of getting hit again within that same sequence 12 would, I guess, estimate that seven to eight million 13 is an adequate amount. 14 COMMISSIONER WHITAKER: Linda, are 15 you recommending that we consider a rule that would 16 explicitly endorse the greater of the advertised or 17 actual? 18 MS. CLOUD: Yes. 19 COMMISSIONER WHITAKER: And can you 20 articulate for us why you think that's a good 21 approach? 22 MS. CLOUD: Commissioners, the 23 comments that came in based on the way we had 24 originally proposed the rule and where we would pay 25 the advertized jackpot and anything over the 00172 1 advertised would be rolled into the prize pool, it 2 was misinterpreted once again of our intent for the 3 projections that we plan to make and how close we 4 plan to monitor the jackpot levels and it was not 5 meant -- that particular projection proposal was not 6 meant to increase the prize pool in any way, so 7 rather than have that perception from anybody, we 8 just -- we have been practicing paying the average 9 size jackpot and anything that sales drives above 10 that for the prize pool and it hasn't negatively 11 impacted the prize reserve and I am in favor of 12 changing the original proposal to paying the 13 advertised and anything above that sales would drive 14 in. And I think we all three have done a lot of 15 research and a lot of talking about this since the 16 rule-making started, and with the help of Dr. 17 Eubank, getting our estimations as close as we could 18 get them to the advertised jackpot will reenforce 19 that we don't hit the prize pool. 20 COMMISSIONER WHITAKER: Is that 21 correct, Bart and Robert -- 22 MR. TURLONI: Yes. 23 COMMISSIONER WHITAKER: -- that you 24 endorse that same idea? 25 MR. SANCHEZ: Yes, I support that 00173 1 concept. 2 COMMISSIONER WHITAKER: For any 3 reason, additional reasons? 4 MR. SANCHEZ: No. I think it makes 5 better use of the reserve and also puts less burden 6 on the estimation and lets the game, if sales go 7 beyond the estimation, whatever good numbers you may 8 have, the player is able to reap the benefit. 9 COMMISSIONER WHITAKER: As I 10 understand it, though, at the lower jackpot levels, 11 say the four million, even the next one, perhaps 12 even the next one, it would be your intention to 13 advertise a fixed amount that based on probability 14 theory would likely be more than the actual sales 15 amount? 16 MS. CLOUD: At the four and the six, 17 I think you'll see the last week was a good example 18 where the interest rate dropped on us so drastically 19 that we did not go to the nine million dollar level, 20 we went to eight because of that. As long as we 21 have that kind of knowledge on where the nine 22 million dollar level is concerned, we would probably 23 try to get as close as we could get to what sales is 24 dropping. 25 COMMISSIONER WHITAKER: Would you 00174 1 articulate, any of the three of you, why you think 2 that is a sound business practice? 3 MS. CLOUD: Well, I believe it's a 4 sound business practice because of the time it takes 5 to grow the jackpots and the sales that it takes to 6 grow those jackpots, you're not benefitting the game 7 by starting off so low and taking so long to build 8 the jackpot to get to a level where your player 9 interest come -- your players really come into the 10 game. To me, it's a business decision based on the 11 odds of getting hit at those levels versus the 12 amount of sales that you're going to generate. 13 MR. SANCHEZ: I guess knowing that 14 you have the use of the prize reserves, I would 15 support keeping the starting jackpot at four million 16 and going to the six million dollar level. 17 COMMISSIONER WHITAKER: And why is 18 that a good business policy, in your opinion? 19 MR. SANCHEZ: Well, in the sense of 20 I think Dr. Eubank explained it out there, it's 21 going to take far more to build the jackpot when you 22 go down to three or two and you don't know what 23 sales are going to decline. It's also going to be a 24 perception of your questioning the confidence of the 25 game. 00175 1 COMMISSIONER WHITAKER: What do you 2 mean by that? 3 MR. SANCHEZ: Well, the confidence of 4 -- well by anything you have already put out there 5 for, you're now reducing it. So I think perception 6 is going to raise some questions. And I agree with 7 Dr. Eubank, you can maintain that that sales level 8 up to four million dollar jackpot are going to be -- 9 stay the same, I doubt that very much. 10 COMMISSIONER WHITAKER: Okay, Robert? 11 MR. TURLONI: I would agree. I 12 believe that four million dollars is a appropriate 13 starting jackpot for Texas, and I believe four to 14 six is also an appropriate second roll. I think 15 after that, we need to do what we've been doing, we 16 need to continue to analyze where the interest rate 17 factor is, analyze what's in our reserve fund and 18 make an appropriate determination on what the next 19 roll will be, and I think last week that was 20 evidence of that decision-making. We saw that the 21 interest rate factor had dropped and it wasn't 22 appropriate for us to roll to nine because if there 23 had been a winner, we would have taken a pretty 24 large hit out of the reserve to have to pay that 25 nine million dollar jackpot. 00176 1 COMMISSIONER WHITAKER: And then, 2 finally, the practice of advertising an amount 3 rounding to a million dollar increment, why do we do 4 that and why does that make sense? 5 MR. TURLONI: We have no capability 6 really on our outdoor billboards to be able to 7 advertise a 10.5 million dollar jackpot. From my 8 knowledge, all the other states also advertise their 9 lotto game jackpot in whole million dollar figures. 10 I think that's what our players have been accustomed 11 to for nine years now. I think we should, it's my 12 opinion, that we should continue that practice of 13 rolling or if we need to bump the jackpot because of 14 sales, bump it or roll it in whole million dollar 15 increments. 16 MS. CLOUD: That is an industry 17 standard. I don't know of any lottery, that I can 18 think of, there may be some of the smaller ones that 19 advertise less than a million at the time but the 20 industry standard really always has been you roll 21 the lotto in one million increments. 22 COMMISSIONER WHITAKER: And any of 23 the three of you again. Is the industry accustomed 24 to have a prize reserve fund? 25 MS. CLOUD: Yes. 00177 1 COMMISSIONER WHITAKER: And is it 2 industry standard to start at a preset jackpot 3 amount that may or may not be the same as what is 4 justified by actual sales? 5 MS. CLOUD: I don't know that you 6 would call that an industry standard. I think 7 lotteries have to base that on their own individual 8 experiences within their state. Some of the smaller 9 states would not -- probably not set the jackpot 10 higher than what sales are going to drop for a 11 starting jackpot, you've got some states with very 12 small jackpots -- 13 COMMISSIONER WHITAKER: Is that 14 standard for the larger states? 15 MS. CLOUD: Yes. 16 MR. TURLONI: From information I've 17 received, that is true. 18 COMMISSIONER WHITAKER: Okay. No 19 more questions. 20 CHAIRMAN CLOWE: Commissioner Criner? 21 COMMISSIONER CRINER: No. 22 CHAIRMAN CLOWE: My understanding is 23 that it's your recommendation as quantified on the 24 draft that Kim has given us that the jackpot be the 25 higher of the advertised or actual sales amount? 00178 1 MS. CLOUD: Yes. 2 CHAIRMAN CLOWE: Never if sales were 3 less than the advertised, that that be paid? 4 MS. CLOUD: No. 5 CHAIRMAN CLOWE: Bart, have you ever 6 looked into, because you're having to buy an annuity 7 four days after you set the jackpot, the advertised 8 jackpot, have you ever looked into buying an option 9 on that annuity when you set the jackpot or be like 10 a put? 11 MR. SANCHEZ: No, I think that 12 question was raised by Commissioner Whitaker and we 13 need to probably find out with the treasury whether 14 that's an available option for us. To my 15 recollection, that has never been an option for the 16 agency to whether -- 17 CHAIRMAN CLOWE: For the record, she 18 and I have not discussed that. 19 COMMISSIONER WHITAKER: I didn't use 20 those words either. 21 CHAIRMAN CLOWE: Well, it's something 22 I think that you ought to look into because the way 23 it is now in dealing with the vulgarities of the 24 market, and that can go for you or against it, you 25 can level that out, it might be worth the option 00179 1 cost that you'd have to pay and what we're looking 2 for here is stability. 3 DR. EUBANK: Excuse me, but I think 4 that's particularly true with the bigger jackpots. 5 CHAIRMAN CLOWE: Absolutely. Now, 6 Dr. Eubank, it was my understanding at my last 7 reading that you were doing all of this work for the 8 Texas Lottery Commission pro bono, is that still the 9 case or are we in fact paying you? 10 DR. EUBANK: Yes, sir, you are. 11 CHAIRMAN CLOWE: I hoped we were and 12 I wanted to make sure that we are. 13 DR. EUBANK: Well I just like 14 everybody so well over here, you know, I just come 15 over and visit whenever I -- 16 CHAIRMAN CLOWE: Well, we appreciate 17 the work you've done and we do want to compensate 18 you and I'm glad to hear we do have a contract with 19 you. 20 MS. CLOUD: We do have a contract. 21 CHAIRMAN CLOWE: Okay, that's good. 22 Commissioners, any other questions or comments of 23 these individuals? If you gentlemen will remain 24 seated, we have a public witness who would like to 25 testify, Ms. Dawn Nettles, and I think that it would 00180 1 be helpful to us if you would remain there and Ms. 2 Nettles will give her commentary and we may have 3 some discussion regarding various viewpoints. 4 Welcome Ms. Nettles, we're glad to 5 have you here. 6 MS. NETTLES: Good morning, good 7 afternoon now. For the record, my name is Dawn 8 Nettles and I am the publisher of the Lotto Report 9 and the owner of the Web site www.lottoreport.com. 10 First let me say thank you for allowing me to 11 comment again. I have acquired some new information 12 that I feel is vital information that I wanted to 13 make sure you Commissioners were aware of. 14 The Dallas Morning News George Kippel 15 wrote a story a couple of weeks about the G-Tech 16 contract. When I read that story, I realized that I 17 had failed to go back and to look at the original 18 rule that Lotto Texas came out with. And so I 19 obtained a copy from the comptroller's office and I 20 reviewed that rule and how it was worded and how it 21 was stated. 22 Mr. Sharp, John Sharp, who is the 23 person who oversaw, as I understand, this rule 24 writing, Kimberly would know because she was here 25 back then. No? Anyway, I want to share with you, 00181 1 Commissioners, how the original rule was written. 2 Mr. Sharp said that this rule was 3 written so that it would ensure the upmost integrity 4 for the State of Texas. After I read it, I agreed 5 that this rule left nothing to doubt as to where the 6 funds were going or anything else. 7 So pertaining to what we're 8 discussing here, everything that we have here, I 9 would like to share with you Commissioners the very 10 important parts that I think you-all need to hear. 11 Prizes for lotto that says the prize 12 amount, the amounts for each drawing paid to the 13 lotto player who selects the matching combinations 14 of numbers will vary due to a paramutual calculation 15 with the exception of the fourth prize which is 16 guaranteed three dollars. 17 I'm not going to read you the whole 18 thing, it comes on down and it says: The prize 19 amounts are based on total amounts and the prize 20 category for that Lotto Texas drawing distributed 21 equally over the number of matching combinations in 22 each prize category. 23 For the prize pool, it says the prize 24 pool lotto of Texas shall be a minimum of 50 25 percent. Then it cuts over and you get to the six 00182 1 of six win, the five of six, the four of six and the 2 three of six win, and it's very emphatic. It says: 3 The direct prize category contribution shall be 64 4 percent of the prize pool for the drawing. 5 I think this is item number two, the 6 indirect prize category contribution which may be 7 increased by the lottery director will include the 8 roll-over from any previous drawing. Now that's for 9 the six of six. The second prize, the prize amount 10 shall be calculated by dividing the prize category 11 contributions by the number of shares for the prize 12 category. A share is the matching combination in 13 one play of any five of the six numbers drawn in any 14 order. 15 The total prize category contribution 16 will include the following: The direct prize 17 category contribution shall be 5 percent of the 18 prize pool for the drawing. 19 The indirect prize category 20 contribution which may be increased by the lottery 21 director will include the roll-over from the 22 previous drawing. 23 The third prize: The amount shall be 24 calculated by dividing the prize category 25 contributions by the number of shares for the prize 00183 1 category. A share is the matching combination in 2 one play of any four of the six numbers drawn in any 3 order. 4 The total prize category contribution 5 will include the following: One, the direct prize 6 category contributions shall be 18 percent of the 7 prize pool. Two, the indirect prize category 8 contribution which may be increased by the lottery 9 director will include the roll-over from the 10 previous drawing. The fourth prize -- I'm just 11 going to cut down to the amount. One, the direct 12 prize category contribution shall be 11 percent of 13 the prize pool for the drawing. The indirect prize 14 category as determined by the lotto -- lottery 15 director, I'm sorry. 16 Then it goes into the prize reserve 17 fund and it says: The lotto Texas prize reserve is 18 2 percent of the prize pool, which means that that's 19 by 50 percent. 20 COMMISSIONER WHITAKER: Say that one 21 more time, of the 50 percent? 22 MS. NETTLES: No, I just told you 23 that it was up to 50 percent because it gets 24 confusing when you say 2 percent, then 1 percent; 25 people don't always realize that the 2 percent is 00184 1 referring to the prize pool and that 1 percent is 2 of total sales. But anyway, it says the lotto Texas 3 prize reserve fund may be increased or decreased by 4 any amount allocated to the prize pool and not paid 5 to the winner. For example, rounding down prizes 6 not claimed within 180-day claim period and 7 roll-over amounts from the fourth prize. 8 When you read this rule, you see that 9 it's very clear -- I haven't read it all to you. 10 When you read this rule, you see that it's very 11 clear that each prize category is separate. The 12 monies are separate. It even states in here that 13 the reserve fund is only to be used to carry over 14 the three of six prizes. 15 This rule makes it very clear how 16 much money the winners are supposed to receive. 17 There's no way anybody's going to go bankrupt 18 because it's a commission only basis. And there's 19 no question as to how much a six of six winner is 20 supposed to get. He's supposed to get 64 percent of 21 the prize pool. Now this was the original rule. 22 So after I pulled the original rule, 23 I went back to see how it got changed so I came up 24 here yesterday and I went through the transcripts 25 and I have here the transcripts from when the first 00185 1 time that this was done, the first time that the 2 rule change was made, and I think that this is 3 probably the most important part of it. 4 On August the 28th, 1996, in the 5 Commissioners meeting, Ms. Kiplin, when it came to 6 the item on the agenda, she -- for the proposed 7 rule, she said -- I'm not going to read all of it 8 but I'm going to read parts of it -- the primary 9 purpose of proposing amendments to this rule are to 10 allow a cash value option of election on the jackpot 11 prize by the player at the time the player purchases 12 the lotto ticket. There are other changes that are 13 occurring in the rule, it is primarily to clean the 14 rule up and make it consistent with agency practice. 15 This rule has not undergone any amendment since it 16 was adopted by the comptroller of public accounts 17 and we felt like there were certain things that 18 needed to be changed and to ensure that it was 19 consistent with our agency practice. 20 The transcript goes on and the 21 Commissioners get into detail about the cash value 22 option. Marking the ticket, the play slips, and 23 that sort of thing. 24 At no point has any Commissioner 25 picked up the word change that actually occurred in 00186 1 the rule on the six of six prize, the change from 2 "shall be 64 percent" to "may be 64 percent." It 3 was never mentioned, it was never discussed, it was 4 totally overlooked. That's how the wording that 5 appears in the rule that was effective in 1996 6 occurred; it happened here but it was never 7 discussed. Nobody ever picked up on that John 8 Sharp, the comptroller's office said we were going 9 to pay 50 percent to the players and this is how 10 that 50 percent is going to be divided and the 11 people are to get it, the reserve fund is only there 12 for the three of six prizes and the six of six 13 winner shall receive 64 percent, okay? 14 So they get into comments about the 15 -- one of the Commissioners, Commissioner Morin and 16 in one of his talks, he says: Could we not also 17 estimate the estimated cash value? And Ms. Lanars, 18 Marla Lanars was there, she started to answer him, 19 she stutters like I'm doing right now, and she said, 20 her end comment is, which would be very, very 21 dangerous. I mean no one would really understand 22 that either. It's best -- so I think that as long 23 as we send the message out that it's approximately 24 50 percent of whatever they see up there on the 25 billboard, then it will be easier for people to 00187 1 grasp that. 2 She never once says, when they're 3 talking about the cash value, that the original rule 4 was the six to six winner when he won, he won 64 5 percent of the prize pool. There's no room for 6 error, there's no room for doubt, there's no room 7 for anybody to overpay or underpay anybody if 8 they're getting a set percentage of sales, and 9 that's what we've been pushing for, or what I've 10 been pushing for. 11 Then when it came time to adopt the 12 rule, which occurred, I have the transcript from 13 that one. On October 17th, the Commissioners come 14 back and -- 15 CHAIRMAN CLOWE: What year was that, 16 please? 17 MS. NETTLES: '96. In '96, when it 18 comes back to this agenda item, Ms. Meyers, Harriet 19 Meyers was concerned about not making the -- oh, the 20 other thing in that rule change that was never 21 addressed in August of '96, is also when the 22 commission changed the years to pay from 20 to 25 23 years. 24 When this rule was put before the 25 Commissioners to put up -- to post with the Texas 00188 1 Register, it was never told that we were also 2 increasing from 20 to 25 years, okay? Not publicly 3 anyway, not in the transcript on that item agenda. 4 But, anyway, so then they come back 5 and their concern is about not making the election 6 on the 20 to 25 year payment or I'm sorry, the cash 7 value option. Their concern is what happens if a 8 person doesn't mark the play slip that they want the 9 cash value option or the annual pay and they've put 10 it in the rule and since it says the executive 11 director shall in his or her sole discretion 12 establish the implementation of the date of the cash 13 value. 14 This is where they're saying that 15 there are things that -- I didn't mark it. Kimberly 16 is talking and at one point she says: There are a 17 bunch of things that are not legal but practical and 18 logistical issues that have to be considered before 19 this rule will be, will be implemented. For 20 example, swapping out play slips at how many 21 locations; 15,000, she says. So she -- so her 22 answer is: So we put in the rule and since it says 23 the executive director shall in his or her sole 24 discretion establish the implementation of this date 25 of the cash value, we anticipate, later down, she 00189 1 says, we anticipate it will be sometime in February 2 so we do have a target date but we needed a little 3 bit of latitude and that's why that's in that 4 change. 5 And then she says also that they 6 receive no comments on this subject. But they 7 really did, maybe not officially or properly, but I 8 personally commented on it and I took a bunch of 9 phone calls from people that were irritated over the 10 increase from 20 to 25 years. I personally didn't 11 understand it at that time and it didn't -- but I 12 did discuss it with the commission but probably not 13 Kimberly. 14 Anyway, the rule was adopted because 15 there was no comment. It had the changes in there 16 that Mr. Sharp, our lawmakers saw to it that it was 17 very clear on how much money the winners were 18 supposed to get. And yet it was changed in this 19 rule of '96, and when it was published, it came out 20 with they may pay it. 21 It was also decided back in this time 22 that really and truly they were going to start 23 paying the amount they advertised rather than the 24 amount that was in the pool and they began that in 25 February of '97. 00190 1 They had also been paying with this 2 rule in effect, the original rule in effect, the 3 commission had already been overpaying the six of 4 six winners various different amounts. 5 So I'm here because there should not 6 be any predictions. The lottery is not supposed to 7 be predicting anything. It's supposed to be when we 8 win, we win a percentage of sales. 9 And when the Commissioners in this 10 meeting, if you-all would read this transcript, the 11 Commissioners kept asking about the value, the cash 12 value, they were so confused over that and they -- 13 and no one ever said: Commissioners, the rule says 14 we're supposed to give the six of six winner 64 15 percent. They never clearly explained to the 16 Commissioners that the lotto was a division of 17 monies, you take that dollar, 50 percent goes to the 18 players and that that 50 percent is not supposed to 19 be divided. 20 So I want you-all to know that those 21 rule changes got made and the transcripts are here 22 and those verbage changes were never discussed. 23 Nobody ever picked up on it and I really think that 24 that's wrong. 25 In the last meeting, Robert or 00191 1 someone, I forget, they stated that California, New 2 York, were also paying the amount advertised. New 3 York has just passed their rule, it was effective 4 September, I believe it was September 9th, where it 5 was finally written into the rule. I believe they 6 had been paying the amount advertised just like 7 Texas did back in '97. 8 The rule changes, the original rule 9 changes says that they shall receive a minimum of, 10 and that the executive director may increase the 11 payment, but nowhere does that rule say that they 12 may decrease the amount paid to the six of six 13 winners, yet that was done. 14 When we talk about predictions again 15 on how to predict these pots and this reserve fund, 16 the reserve fund was originally intended because it 17 was a set prize. Florida does not have -- so 18 Florida pays a percentage to the three of six 19 winners. They don't have a set figure. So there's 20 no need for a reserve fund. If you pay the 21 allocated amount divided by the winners, you don't 22 even need a reserve fund. 23 For Texas, I have the numbers and I 24 have calculated them, and as of last month, there 25 was -- if paid according to the rule, of course, by 00192 1 going by the rule, taking the allocated amount 2 versus the actual amount paid, there should be 113 3 million in reserve. And you can take the prizes and 4 figure it all out. It has never been needed for the 5 three of six. There's excess taken in that 1 6 percent back then or 1.1 percent today. Since they 7 added the four balls, they haven't needed anything. 8 Since September of '96, the 9 commission has overpaid winners by over 59 million 10 dollars and when I say overpaid, what I mean is paid 11 more than the amount in the prize pool. Okay. 12 COMMISSIONER WHITAKER: You don't 13 like that idea? 14 MS. NETTLES: Overpaying them? Well, 15 it makes me wonder where you get the money. If it's 16 supposed to be divided into shares, how can you 17 overpay? I can't overpay 59 million dollars on my 18 account, can you? 19 COMMISSIONER WHITAKER: So you don't 20 like that idea? 21 MS. NETTLES: I don't know where the 22 money came from. I'd like to know how you got it, 23 since this is the rule, this is how the winners are 24 supposed to be paid, where did that 59 million come 25 from? 00193 1 COMMISSIONER WHITAKER: Have you 2 determined that? Have you done an analysis of that? 3 MS. NETTLES: Yes. 4 COMMISSIONER WHITAKER: Where does it 5 come from? 6 MS. NETTLES: Bart told me that it 7 came from reserve and that's -- in fact the day he 8 told me that, he says, Dawn, I said that they're 9 overpaid by 212 million dollars just since they've 10 added the four balls and I said, and Bart, since 11 '96, they've overpaid by 59 million, I said where'd 12 you get the money? And Bart says: Dawn, have you 13 calculated the total reserve fund? And I said no. 14 And he says, well, I think if you will, you'll see 15 that it is carried forward all the way through. So 16 I did and that's when I realized that there was 17 supposed to be -- that it should have 113 million. 18 If everything was paid by the rules, there should be 19 113 million in the reserve fund so -- but that's 20 from inception. The 59 million was just since 21 September of '96. 22 The reserve funds, when I read the 23 rules and in all the conversations I've had with 24 this Commission, and you can ask anybody who calls 25 customer service and they inquire about the 1 00194 1 percent for reserve, they're always told that money 2 is used only for the three of six prizes, that's 3 what it's there for, is to fund the three of six. 4 If we don't have enough money allocated from sales, 5 then the monies are used for the three of six 6 prizes. 7 COMMISSIONER WHITAKER: Who do you 8 say says that? 9 MS. NETTLES: Customer service has 10 told me that for years, as well as Steve Levine, 11 everyone has always, every time that's come up for 12 the reserve fund, they've always said it's been used 13 for the three of six prizes. Plus, that's what's in 14 the rule. That's the way it was designed. The 15 three of six was only -- that's the only way the 16 reserve fund was to be increased or decreased was 17 from funds not needed for three of six or used to 18 pay three of six. 19 COMMISSIONER WHITAKER: May I look at 20 your copy of that a little bit just while you're 21 talking? 22 MS. NETTLES: You bet, and it's a 23 real bad copy and I apologize for that, I didn't 24 know I was going to need it today or I would have 25 brought a good copy. 00195 1 And I feel compelled to, when we were 2 talking about the low sales for Halloween, October 3 31st, I noticed that it was the lowest sales in the 4 history of the lotto but because I figured that 5 Halloween was going to enter into the play, I went 6 back to all Halloween drawings and there hasn't been 7 any Halloween drawings for sales or less or under 8 what they should have been so I found that real 9 interesting. 10 With regard to lowering the jackpot 11 to two million, and these are comments that I came 12 up with as I was listening to everybody talk. With 13 regard to lowering the -- starting jackpot at two 14 million, I have an opinion on that too. 15 When Lotto Texas started, it started 16 out at two million. The money that you have in 17 sales right now are your core players that play no 18 matter what, no matter how much the jackpot is. 19 They're not going to change except you've lost a lot 20 of players when you added the four balls. 21 We sat here a year ago and the whole 22 purpose was to get your sales up so that you could 23 keep this four million. Well, you can keep the four 24 million if you want to but that's bad business. How 25 can you -- you're going to have to lower it because 00196 1 the sales are going to continue to decline. 2 So my opinion differs from theirs on 3 the two million. I don't believe it's going to 4 affect your sales at all. I think you're going to 5 have the same thing that you have right now and the 6 only way that you're going to get your sales back up 7 is to rebuild the integrity of this commission, 8 which has suffered a lot lately. 9 I suppose that's all I have to say. 10 I would like for you-all to look at the original 11 rule and I want you to see that it was spelled out 12 clearly by Mr. Sharp on what was to be done and that 13 the monies were to be divided and it was spelled out 14 and it wasn't supposed to be deviated from, and look 15 at how it changed in '96. Look at the testimony on 16 how the commissioners didn't even understand the 17 lottery. It's clear that they don't understand that 18 there's not four million to be had, that they take 19 the money and invest it and if that's how they 20 arrive at it, that's the only prediction, and the 21 estimated jackpots were supposed to be based on how 22 much money you had and how much money it would give 23 a return of. 24 I ask this Commission to please go 25 back to that original rule and spell out precisely 00197 1 what the winners are going to get and do away with 2 the reserve fund and just set all the prizes 3 paramutual. 4 The rule before you still says it's a 5 paramutual game. All your literature says that. 6 There is nothing paramutual about a set designated 7 prize, like Texas Two Step. And yet your billboards 8 still are -- your advertising still says estimated 9 200,000. It's not estimated, it's set. They're 10 going to pay 200,000. 11 So anyway, I wanted to bring the 12 original rule. 13 MS. CLOUD: Commissioners, I just 14 want to say one thing about -- 15 CHAIRMAN CLOWE: Just a minute. 16 Commissioners -- are you open for questions, Ms. 17 Nettles? 18 MS. NETTLES: Sure. 19 CHAIRMAN CLOWE: Commissioners, do 20 you have any questions of Ms. Nettles? 21 COMMISSIONER WHITAKER: Just a 22 couple. Ms. Nettles, do you mind if I make a copy 23 of this rule? 24 MS. NETTLES: No, not at all. I 25 apologize for its condition. 00198 1 COMMISSIONER WHITAKER: And in the 2 original rule that you have here, there is a prize 3 reserve amount; is that correct? 4 MS. NETTLES: I'm sorry, I was 5 looking for something here that I can't find, would 6 you say that question for me again? 7 COMMISSIONER WHITAKER: In other 8 words, this document you gave me which you say is 9 the original rule does have a prize reserve amount 10 in it, correct? 11 MS. NETTLES: Yes but -- 12 COMMISSIONER WHITAKER: And it 13 provides for two -- it's calculated as 2 percent of 14 total sales? 15 MS. NETTLES: Of 50 percent of sales 16 of the prize pool, yes. And I'm sorry, that's not 17 the whole rule, I only brought in the pages I was 18 going to read from. 19 COMMISSIONER WHITAKER: If you were 20 to add up, you were talking about, for example, the 21 amount, you read us each prize category and said 64 22 percent for prize one, 5 percent for prize two, 18 23 percent for prize three, and then the fourth prize 24 category talks about 11 percent, which is the direct 25 prize contribution; is that correct? 00199 1 MS. NETTLES: Uh-huh, you have to 2 take the 2 percent reserve to make it equal 100 3 percent. 4 COMMISSIONER WHITAKER: Okay, so if 5 you add those four figures, it comes to 98 percent? 6 MS. NETTLES: That's correct. 7 COMMISSIONER WHITAKER: So if there 8 were a payment of the amounts specified for each 9 prize category, you would still have an additional 2 10 percent that would go into the prize reserve fund; 11 is that correct? 12 MS. NETTLES: Well, no, ma'am. In 13 the first place, these figures that you're looking 14 at are the old numbers, they're not the current 15 numbers in use now. 16 COMMISSIONER WHITAKER: But the 17 current numbers or the numbers that would be 18 proposed would still add up to 98 percent; is that 19 correct? 20 MS. NETTLES: That's correct and I 21 think that's wrong because the rule says that you 22 shall return 50 or 55 percent to the players. 23 You're not returning that amount. The law says you 24 have to pay it back but it's not going to the 25 players because equals 98 percent of the prize pool. 00200 1 COMMISSIONER WHITAKER: Well, my 2 question was, my question was -- 3 MS. NETTLES: Okay. 4 COMMISSIONER WHITAKER: -- whether 5 in the rule that you presented to us which you say 6 is the original rule, that if you add up those 7 percentages that you mentioned to us, those 8 percentages would come to 98 percent? 9 MS. NETTLES: That is absolutely 10 right. 11 COMMISSIONER WHITAKER: Then you 12 would get to 100 by allocating 2 percent of that to 13 the prize reserve fund; is that correct? 14 MS. NETTLES: Two percent is withheld 15 and put in reserve to cover the three of six prizes, 16 which is what that rule tells you. 17 COMMISSIONER WHITAKER: Well, all I'm 18 asking now is not that question, the question I'm 19 asking you is if you take the 98 percent and then 20 add the 2 percent which is to be allocated to the 21 prize reserve fund, that is how you come up with 100 22 percent? 23 MS. NETTLES: Yes. 24 COMMISSIONER WHITAKER: Okay. 25 Thanks. 00201 1 MS. NETTLES: And if you would like 2 to have the rest of that rule, I have it in the car. 3 Those are just three pages that just spelled out the 4 amounts paid, I -- 5 COMMISSIONER WHITAKER: I just wanted 6 to have a copy of what you took out and thought was 7 important. Thank you. 8 CHAIRMAN CLOWE: Ms. Nettles, 9 comments have been wide ranging and varied and it 10 may be that you're going to need time to give the 11 commissioners responses to the comments that you've 12 made but I want to give staff an opportunity at this 13 meeting if you are prepared to respond to some of 14 the comments that she made that you would like to 15 comment on. And Linda, we'll start with you. 16 MS. CLOUD: I just want to make one 17 clarification on what Ms. Nettles said about the 18 Florida lottery. They use their unclaimed prize 19 money as a -- for a reserve account, so they do 20 supplement their jackpots from the unclaimed prize 21 money. They don't have a specific prize reserve 22 like we do but we don't have unclaimed prize money. 23 MS. NETTLES: Okay, and I'm glad you 24 said that because where it says that the player 25 shall receive 50 percent of sales, the law was very 00202 1 emphatic on that. I failed to mention today about 2 the unclaimed prize money. Were those beyond -- 3 are those just equal 98 percent of the prize pool 4 and you're keeping 2 percent and putting it in a 5 reserve to supposedly cover the three of six prizes, 6 okay. Doesn't even begin to count all the money of 7 prizes that are never claimed that you have as well. 8 So my contention is that the 9 commission has never returned 50 percent or 55 10 percent of sales since inception. You had two 11 anniversary years and the reason for those 12 anniversary years was to explain to the people why 13 -- where the money was on the unclaimed lotto 14 ticket, I believe it was a 30 million dollar jackpot 15 or a 20 million dollar jackpot, it was a lotto 16 ticket purchased in Louisville that the winner never 17 claimed. He washed his ticket in the washer so he 18 had no proof that he won the lottery. So the people 19 were asking the commission, where is that 20 million 20 dollars -- or how much was that pot, do you 21 remember? 22 MR. SANCHEZ: No, I don't. 23 MS. NETTLES: And I don't recall 24 either, I just know that that's why they did the 25 anniversary draws. 00203 1 MS. CLOUD: That's not correct. 2 MS. NETTLES: That's not correct? 3 CHAIRMAN CLOWE: Just a minute. 4 And did you agree with Ms. Cloud in her statement 5 about the Florida lottery? 6 MS. NETTLES: I don't know if they 7 have a reserve or not, I just know that they pay the 8 three of six prizes a percentage, I mean they don't 9 have a set prize. 10 CHAIRMAN CLOWE: Okay. 11 MR. TURLONI: Commissioner Clowe, I 12 have spoken with the Florida lottery on more than 13 one occasion about their reserve fund, Linda is 14 correct, the Florida lottery does not have a reserve 15 fund. They do have access to unclaimed prize money, 16 which the Texas Lottery does not, and that is how 17 they supplement their lotto jackpot -- their lotto 18 game in Florida if sales do not cover the jackpot 19 amount that they advertise on their billboards. 20 CHAIRMAN CLOWE: I thought she was 21 responding to your statement that they didn't and 22 that's why she made the comment, that's why I ask 23 you if you were agreeing with her? 24 MS. NETTLES: And I'm only 25 responding, I was only commenting that Florida on 00204 1 the three of six does not have a set prize. Texas 2 has a set prize. You play three or five dollars. 3 In Florida, they do not have a set prize. They pay 4 the allocated amount and divide the percentage, as I 5 understand it, I mean Linda's from Florida, she 6 knows, but I think it's great if Florida is giving 7 back the unclaimed prize money because Texas needs 8 to, too. 9 CHAIRMAN CLOWE: Well, I think the 10 reason she made that comment was that I believe I 11 heard you make a definitive statement about Florida 12 and I think she was responding to that. 13 MS. NETTLES: Okay, well, perhaps I 14 did. 15 CHAIRMAN CLOWE: Do you have any 16 further comments? 17 MS. CLOUD: No, not at this time, 18 Commissioners. 19 CHAIRMAN CLOWE: Okay, Kim? 20 MS. KIPLIN: Well, Commissioners, 21 yeah, I've obviously been here since '93, I guess I 22 wasn't here when Comptroller Sharp adopted that 23 rule, this rule has gone through two changes since 24 that time period. 25 What's before you for recommendation 00205 1 for amendment is the current form of rule and that's 2 where my views or attention is directed and I guess 3 what's before you is receiving our comment and 4 deliberating about where you want to set your policy 5 in terms of the Lotto Texas rule. I really don't 6 have any further comment than that. I'm trying to 7 -- what I glean from Ms. Nettles' comment is that 8 you should go back to the original rule, at least 9 with regard to the mandatory nature of the direct 10 prizing of the rules. 11 MS. NETTLES: All categories for 12 prizes. 13 MS. KIPLIN: Pardon me, the only one 14 right now that's discretionary as far as I know is 15 the jackpot prize. The others are still, I think 16 they're mandatory so the comment I think goes to the 17 heart of the jackpot prize category but what's 18 before you are two revisions since the rule-making 19 that Ms. Nettles was discussing. 20 CHAIRMAN CLOWE: I think we 21 understand. I think we further understand that we 22 can pretty much do anything that we feel is correct. 23 Did you have a question? 24 COMMISSIONER WHITAKER: No. 25 CHAIRMAN CLOWE: Bart, you've made 00206 1 your comments about the proposal but do you have any 2 comments now about Ms. Nettles' comments, any 3 response? 4 MR. SANCHEZ: Well, I think in a 5 telephone conversation with Ms. Nettles that she was 6 asking me about the use of the prize reserve going 7 back years '96 or so, and I came in in '98, and all 8 I can tell is by the accounting records, that the 9 prize reserve was used during those years and we 10 could add up, that would be the only amount, that 11 would be the only source that monies would be 12 available to pay in excess of prize fund, and that's 13 an audited number every year, it's in the financial 14 statement. The only change has been in 2000 where 15 it was a reclassification from the liability count 16 to a restrictive fund equity. Other than that, 17 auditors have reviewed and audited every year. 18 CHAIRMAN CLOWE: Thank you. Robert, 19 do you have any response? 20 MR. TURLONI: I just have one 21 response to Ms. Nettles' comments about there's no 22 need for us to predict the next jackpot. 23 Commissioners, if we ever have a -- 24 if there's adverse weather in an area and it affects 25 one of our lotto billboards, we receive a great many 00207 1 calls from players that either go in to our claim 2 centers or they'll call our 1-800 number to tell us 3 that those lotto billboards are possibly incorrect. 4 I think those billboards, and our 5 prediction of what the next jackpot amount is, is 6 instrumental for not only this lottery but any 7 lottery to advertise what that next jackpot is. In 8 order for us to generate and drive sales and 9 therefore return revenue to the state, we have to 10 have a projection of what our or prediction of what 11 our next jackpot amount will be if there's not a six 12 of six ticket sold, and I think that's very 13 important for us to have and it's very important for 14 this lottery to be able to continue to do that and 15 to advertise that amount to our players because 16 those boards are a part of a lot of our players' 17 morning routine, after a drawing when they drive -- 18 when they're driving into work during their morning 19 commute and they do receive a lot of attention and 20 that's a very important avenue for us to communicate 21 that jackpot amount or that next jackpot to our 22 players, and that was all that I wanted to comment 23 on. 24 MS. NETTLES: May I just say that, 25 yes, he's correct, you have to have that billboard 00208 1 up there and you have to make -- I'm saying that you 2 need to have an estimated amount, yes, but the 3 estimated amount needs to be based on what sales, 4 what the percentage allocated to the six of six win 5 will generate. 6 I also feel very strongly, and other 7 states do this too, I forget which ones but make it 8 very clear that it's four million over 26 years. Or 9 20 million. They make it real clear. 10 People in Texas believe that when 11 they win the lotto and it's 20 million dollars, they 12 believe that they get in their car and they drive 13 here and you have 20 million dollars to give them 14 and you don't. You have a percentage of sales, 15 which you're supposed to invest that gives a return 16 of the amount -- the estimated amount that you 17 advertise and that's the way that it's supposed to 18 be. 19 Now this commission has been paying, 20 not always, but for a general rule, they have been 21 paying the amount advertised since early '97, or 22 actually since '96. I've got wins in here going 23 back to '96 where they overpaid the winners but they 24 didn't pay the amount advertised, you know? So -- 25 but he is right and I did not ever mean to say -- 00209 1 what I'm saying is you don't need to make 2 predictions for what they were talking about on 3 trying to estimate all this stuff. 4 MS. CLOUD: Commissioners, I do have 5 one other thing I'd like to comment on, one of Ms. 6 Nettles' comments. She was referring to a winner, 7 our only -- we've only had one so far and we've got 8 another one very close, Lotto Texas unclaimed 9 jackpot, and this was from Flower Mound and it was 10 in the amount of 12 million dollars. We never ever 11 use unclaimed prize money as a lotto prize reserve 12 money. The unclaimed prize money does not go in 13 reserve, so I want to clear that up. 14 That jackpot was unclaimed, it would 15 have been cashed out and the cash value of the 16 jackpot, the net present value was returned to this 17 state as unclaimed prize money. 18 MS. NETTLES: Except your Web site 19 states that they were returning the -- and they told 20 me that they were returning the unclaimed -- that 21 was the way of returning the unclaimed prize money 22 at the time, that was when you built to 10 million, 23 20 million, 30, 40 million dollars. 24 MS. CLOUD: Well, that was before my 25 time, I'm afraid that would not have been my comment 00210 1 if that's what you were told. 2 MS. NETTLES: Okay, well that is what 3 I was told. 4 CHAIRMAN CLOWE: I want to thank you, 5 Ms. Nettles, for giving us this testimony and this 6 is the purpose of rule-making and we are open to 7 your comments and appreciate you taking the time to 8 be here and the work you've done on this. 9 I'd like to ask the staff to respond 10 to Ms. Nettles' comments in as much detail as 11 possible for the Commissioners' benefit and allow us 12 your view of the facts and the statements that she 13 has made as a part of this rule-making process. 14 Commissioners, do you have any 15 further direction or questions? Is there any other 16 testimony or any other comment to be made in regard 17 to this rule-making? 18 Kim, what is the schedule as we now 19 stand as this rule is before the commission? 20 MS. KIPLIN: Well, I think at this 21 point, the staff is looking for direction from the 22 commission in terms of approach with regard to 23 payment of the jackpot prize and the staff's 24 recommendation is on the table of paying the greater 25 of the two amounts so that would be helpful in terms 00211 1 of trying to draft a document for the next 2 commission meeting. 3 CHAIRMAN CLOWE: For the next meeting 4 and then that would be appropriate for a vote on the 5 commission to publish the rule for further comment; 6 is that correct? 7 MS. KIPLIN: Well, be appropriate to 8 adopt. 9 CHAIRMAN CLOWE: But isn't the 10 comment substantive enough today that it has to be 11 republished and the change substantive enough? 12 MS. KIPLIN: Well, let me preface it 13 by saying that it's always the commission's 14 prerogative if you want to republish, you can. I 15 have taken a look at that issue and I will tell you 16 that I think that there is sufficient comment on the 17 table that the changes that are being recommended by 18 the staff go to the heart of responding to that 19 comment, and while it may be substantive, it does 20 not -- the change will not affect a different 21 category people who otherwise have been provided 22 notice, which is the -- really the threshold premise 23 under the only case that I'm aware of which is the 24 Detloff versus State Board of Insurance case, but I 25 will say that it is the commission's prerogative to, 00212 1 as policy or direction, to direct the staff to 2 republish to receive public comment. 3 CHAIRMAN CLOWE: What is the time 4 frame that we're operating in, Kim? 5 MS. KIPLIN: The rule was proposed 6 for public comment in August, if you go to six 7 months, it would be February. It'd be February 8 10th. 9 CHAIRMAN CLOWE: So we have plenty of 10 time. Commissioners, do you want to express a 11 pleasure at this point in time or do you want to 12 study it more and have staff response and take it up 13 again at the next commission meeting, what's your 14 pleasure? 15 COMMISSIONER WHITAKER: If it's 16 republished, then we would be able to rule on it 17 when? 18 MS. KIPLIN: Well. First I would 19 need a withdrawal of the ruling and a republication 20 because you can't have two on the same rule 21 simultaneous at the register. I could get it into 22 the register within I imagine the next week or two. 23 I'm talking off the top of my head because I don't 24 -- there are publication deadlines and the dates 25 aren't in front of me, but assuming it goes in 00213 1 November, by say mid to late November, I think that 2 the 30-day minimal public comment period would run 3 correspondingly in December. 4 COMMISSIONER WHITAKER: And therefore 5 we could look at it in December? 6 MS. KIPLIN: Probably late December 7 or January. 8 COMMISSIONER WHITAKER: Well, my 9 preference would be to publish. 10 CHAIRMAN CLOWE: That means we get to 11 meet on Christmas Day, Christmas Eve day? 12 COMMISSIONER WHITAKER: No, with the 13 determination by the commission occur in January. 14 CHAIRMAN CLOWE: Then Commissioner 15 Whitaker, assuming then that the other Commissioners 16 would agree with your thought to republish, would 17 you care to give direction on what to republish, 18 what rule? 19 COMMISSIONER WHITAKER: Well, I would 20 try to articulate specifically what I'm hearing -- 21 CHAIRMAN CLOWE: I don't want to hang 22 you out there, just if you want someone else, fine. 23 COMMISSIONER WHITAKER: No, no, no, 24 I've heard that Bart and Robert and Linda all have a 25 consensus view about what they think would be -- 00214 1 what they would recommend and that would be words to 2 the effect of the greater of the advertised or the 3 actual sales which is different than what was 4 published. 5 CHAIRMAN CLOWE: Whichever is 6 greater? 7 COMMISSIONER WHITAKER: Whichever is 8 greater and that that would be what is published. 9 CHAIRMAN CLOWE: I'm of the -- 10 MS. CLOUD: Lotto Texas and Texas Two 11 Step. 12 CHAIRMAN CLOWE: I'm of the sense to 13 agree with Commissioner Whitaker, Commissioner 14 Criner, do you want to express your feelings? 15 COMMISSIONER CRINER: Same. 16 CHAIRMAN CLOWE: I think that that's 17 the desire of the commission to republish. 18 MS. KIPLIN: Commissioners, if I 19 might also add this rule also incorporated clean-up 20 language because it was originally, if you'll 21 remember, a part of Subchapter D game rules and it 22 was part of that ongoing agency rule review so I 23 understand, and I hear that the driving impetus 24 behind it is to go to a different direction with 25 regard to the jackpot payment amount but I would 00215 1 also like to incorporate those same proposed 2 amendments that have been in the rule before and 3 frankly I don't think they're subject to comment. 4 CHAIRMAN CLOWE: I think we're in 5 agreement with that. 6 MS. KIPLIN: Okay. 7 CHAIRMAN CLOWE: Thank you all very 8 much. 9 MS. KIPLIN: So what I'm hearing is, 10 unless I'm mistaken, is a need to have a vote to 11 withdraw the current rule-making and then a vote to 12 propose for public comment consistent with your 13 deliberations a new rule-making on Lotto Texas? 14 CHAIRMAN CLOWE: You want motions on 15 both of those? 16 MS. KIPLIN: Yes, I need action on 17 those. 18 COMMISSIONER WHITAKER: So move. 19 COMMISSIONER CRINER: Second it. 20 CHAIRMAN CLOWE: All in favor -- now 21 this is in regard to withdrawing the current 22 proposed rules? 23 MS. KIPLIN: Yes, yes. 24 CHAIRMAN CLOWE: All in favor say I. 25 I. 00216 1 COMMISSIONER CRINER: I. 2 COMMISSIONER WHITAKER: I. 3 CHAIRMAN CLOWE: Opposed no. The 4 vote is three zero. Is there a motion? 5 COMMISSIONER WHITAKER: Yes, I would 6 move as to the second item, how did you word it? 7 MS. KIPLIN: Well, we would want to 8 propose the amendments to Lotto Texas and Texas Two 9 Step for public comment, publication of the Texas -- 10 COMMISSIONER WHITAKER: So move. 11 CHAIRMAN CLOWE: Is there a second? 12 COMMISSIONER CRINER: Seconded. 13 CHAIRMAN CLOWE: All in favor say I. 14 I. 15 COMMISSIONER WHITAKER: I. 16 COMMISSIONER CRINER: I. 17 CHAIRMAN CLOWE: Opposed no. The 18 vote is three zero. And then I'll remind you that 19 we would like a written response as closely as 20 possibly tracking Ms. Nettles' comments from staff 21 relative to the concerns that she's expressed as 22 soon as possible. 23 We're now ready to move to item 13: 24 Consideration of and possible discussion and/or 25 action, including proposal on new rules 16 TAC 00217 1 402.580 and 402.581 and 402.582, relating to Bingo 2 reports, interest on delinquent tax and waiver and 3 settlement of monies due. 4 MS. KIPLIN: Commissioners, turn over 5 the substantive portions to Mr. Atkins and Ms. 6 Shankle. These are three new proposed rules and 7 accurately depict what you indicated when you laid 8 out the item for consideration. 9 What the staff is wanting is a 10 recommendations and recommends and wants from the 11 commission is that you vote to propose each of these 12 rules in the Texas Register, publish in the Texas 13 Register for the minimal 30-day public comment 14 period. And by the way, I know this is not on this 15 item but I also have that order on the Subchapter D 16 game rules ready and I'd like to -- 17 CHAIRMAN CLOWE: I didn't think we 18 had received that. Let's just hold off on that 19 until we deal with this issue. Billy, do you-all 20 have anything to add to the commission's 21 consideration of these rules other than what Kim has 22 said? 23 MR. ATKINS: We're prepared if the 24 commission likes to discuss each of the rules, what 25 it contains, how we got to this point. I would like 00218 1 for the commission to know that these rules have 2 been considered by the Bingo Advisory Committee at 3 their meeting in August. 4 The three rules before you today 5 received no questions or comments from the members 6 of the public. There is one comment that was made 7 by the BAC on draft rule 402.580, that the staff 8 concurred with and has incorporated into the rule 9 that you have before you now. There -- I do want 10 the commission to be aware that there were some what 11 I will describe as technical changes that were made 12 to the rules after the fact, after the advisory 13 committee meeting. 14 The rules as they appear before you 15 now have been provided to the Bingo Advisory 16 Committee through an e-mail that I sent November 1st 17 identifying each of the corrections, asking them to 18 get in touch with me if they had any comments on 19 those and I've received no comments back from the 20 advisory committee. 21 CHAIRMAN CLOWE: Are there questions? 22 Is there a motion? 23 COMMISSIONER CRINER: So move. 24 COMMISSIONER WHITAKER: Second. 25 CHAIRMAN CLOWE: All in favor please 00219 1 say I. I. 2 COMMISSIONER CRINER: I. 3 COMMISSIONER WHITAKER: I. 4 CHAIRMAN CLOWE: Opposed no. 5 The vote is three zero in favor. 6 MR. ATKINS: Thank you, 7 Commissioners. 8 CHAIRMAN CLOWE: We are now ready to 9 go into executive session unless anyone has anything 10 further to comment on to the commission in this part 11 of the public session. 12 At this time I move the Texas Lottery 13 Commission go into executive session to deliberate 14 the duties and evaluation of the executive 15 director, Internal Auditor and Chairitable Bingo 16 Operations Director pursuant to Section 551.084 of 17 the Texas Government Code, to deliberate the duties 18 of the General Counsel and Security Director, 19 pursuant to Section 551.074 of the Texas Government 20 Code. To receive legal advice regarding pending or 21 contemplated litigation and/or to receive legal 22 advice pursuant to Section 551.071, (1) (A) or (B) 23 of the Texas Government Code and/or to receive legal 24 advice pursuant to Section 551.071 (2) of the Texas 25 Government Code, including but not limited to: TPFV 00220 1 Group, Inc. versus Texas Lottery Commission, Retired 2 Sergeant Majors' Association, et al., versus Texas 3 Lottery Commission, et al., contract regarding the 4 Charitable Bingo system, employment law, personnel 5 law, procurement and contract law and general 6 government law. Is there a second motion? 7 COMMISSIONER WHITAKER: Second. 8 CHAIRMAN CLOWE: All in favor say I. 9 I 10 COMMISSIONER WHITAKER: I. 11 COMMISSIONER CRINER: I. 12 CHAIRMAN CLOWE: The vote is three 13 zero. The Texas Lottery Commission will go into 14 executive session. The time is 1:17 p.m. Today is 15 November the 8th, 2001. 16 (Executive Session from 1:17 until 3:23) 17 CHAIRMAN CLOWE: The Texas Lottery 18 Commission is now out of executive session. The 19 time is 3:23 p.m. Is there any action to be taken 20 as a result of the executive session? If not, let's 21 move back to item Number 7. I believe Debra McLeod 22 has an issue to present to the commission. 23 MS. McLEOD: Thank you, 24 Commissioners. Every year the internal departments 25 are required to put together an internal audit 00221 1 annual report. I've prepared the report and have 2 reviewed it by executive management and the 3 Commissioners and I would like an action item to go 4 ahead and release this to the external agencies that 5 are waiting for it, being the legislative budget 6 board, the state auditor's office, the governor's 7 office, the budget and planning, and one other 8 agency, I'm sorry, Sunset Commission. 9 CHAIRMAN CLOWE: Does that require a 10 motion? 11 MS. KIPLIN: Yes, it does, and I 12 think your motion would be that you're approving the 13 internal audit annual report to be distributed to 14 those folks that are required to have it distributed 15 to. 16 COMMISSIONER WHITAKER: So noted. 17 COMMISSIONER CRINER: Seconded. 18 CHAIRMAN CLOWE: All in favor please 19 say I. I. 20 COMMISSIONER CRINER: I. 21 COMMISSIONER WHITAKER: I. 22 CHAIRMAN CLOWE: Opposed no. The 23 vote is three zero in favor. Thank you, Debra. 24 MS. McLEOD: Thank you. 25 CHAIRMAN CLOWE: We're now to item 00222 1 number 16: Consideration of the various orders. 2 Kim, will you help us on that item? 3 MS. KIPLIN: Yes, sir, be glad to. 4 Commissioners, what you have in your package today, 5 and I'm going to keep this to dockets, they're 6 listed A through L, A through L, those are all 7 lottery cases, Commissioners. They were all 8 recommendations from the administrative law judge in 9 the state office of administrative hearings to 10 revoke those licenses. All of them are because of 11 an insufficient funds issue with that retailer. 12 Staff recommends that you vote to 13 adopt the administrative law judge's proposal for 14 decision in proposed order in each of those cases. 15 The reason of course they didn't include L, pardon 16 me, M is because you took care of that matter 17 earlier stating the time and date as to the the -- 18 COMMISSIONER WHITAKER: So move. 19 COMMISSIONER CRINER: Seconded. 20 CHAIRMAN CLOWE: All in favor say I. 21 I. 22 COMMISSIONER WHITAKER: I. 23 COMMISSIONER CRINER: I. 24 CHAIRMAN CLOWE: Opposed no. The 25 vote is three zero. 00223 1 MS. KIPLIN: Commissioners, also if I 2 might forward to you the order adopting the rule on 3 Subchapter D game rule, I have flagged for you with 4 a blue flag, the language that you have voted to 5 adopt with that change so that you can see that for 6 easy reference, if you'd like. You've already voted 7 on this, this is just for my record. 8 CHAIRMAN CLOWE: Linda, we'll take a 9 minute to sign these orders and then we'll take up 10 your report. 11 MS. CLOUD: Okay. 12 CHAIRMAN CLOWE: Now, Linda, I 13 believe we're ready for item number 17: Report of 14 the executive director. 15 MS. CLOUD: Commissioners, on October 16 15th, we transferred to the foundation school fund 17 $59,034,356, that gives us a total transfer to the 18 state since inception of $8,865,399,021, and as part 19 of my executive report I would like for Colin to 20 come up and brief you on our last legislative 21 briefing and the involvement they have with the 22 program that's going on with the comptroller's 23 offices tomorrow. 24 MR. COLIN: Thank you, Mr. Chairman 25 and Commissioners, once again I'm Colin Haza from 00224 1 the Governmental Affairs staff pinchhitting for 2 Nelda Trevino. 3 On October 24th, we held a 4 legislative briefing here in this room. We've been 5 doing this for the past two intersessions. We 6 invited representatives of about 50 different 7 offices of house members, senators, various 8 oversight agencies and members of the executive 9 branch. We had 14 offices in attendance. We were 10 honored to have Chairman Tommy Heflin join us in 11 person for the meeting and we were also similarly 12 honored to have Chairman Tom Clowe join us for the 13 meeting. This afforded Linda, Billy and Nelda an 14 opportunity to provide an update to everyone present 15 on legislative issues and other issues of importance 16 facing the agency, to kind of give them a little bit 17 of a sense of where we've been since the close of 18 the legislative session and where we're likely to be 19 headed. 20 It's our intention to continue to 21 have these as we've done in the past on about every 22 three or four month basis. Our next one is 23 tentatively scheduled for sometime in February. 24 At the conclusion of the briefing, we 25 distributed a survey and asked that it be completed 00225 1 anonymously if they wish. We had about a 50 percent 2 survey completion response and all who completed the 3 survey had indicated that they were pleased with the 4 presentation. I'll be happy to -- oh, I guess you 5 wanted -- 6 MS. CLOUD: Go ahead and explain what 7 the -- 8 MR. HAZA: -- give a little bit of an 9 update. This is the tenth year, I believe, that the 10 office of the comptroller public accounts has held 11 what they call an idea fair and they have invited 12 the lottery to participate and essentially, you 13 know, man a table or a little exhibit and do a 14 presentation to as many of their employees as choose 15 to visit our booth. They have about a thousand 16 employees in the complex and we were told that we 17 could expect somewhere between four and 500 or more 18 employees to visit us, so during the executive 19 session break, Melissa and I did a quick change in 20 clothes and went over and unloaded and set up and 21 got our table ready and we'll be over there 22 virtually all day tomorrow doing that. But we have 23 various information on the different games, 24 information on the Charitable Bingo within the 25 state, and you know, we'll be prepared to answer 00226 1 whatever questions that they may have, so we're 2 looking forward to that tomorrow, and be happy to 3 answer any other questions you may have. 4 CHAIRMAN CLOWE: Just urge you to 5 continue those executive briefings, legislative 6 briefings, I think they're very beneficial to the 7 various members of the legislature and also the 8 leadership really help a lot. 9 MR. HAZA: It's our intention to do 10 so. 11 CHAIRMAN CLOWE: Great. 12 MS. CLOUD: Commissioners, next we 13 have the hub report and I'm going to ask Robert, 14 this is an important report for him and he's going 15 to come up and make a presentation. 16 MR. HALL: Good afternoon, 17 Commissioners. For the record my name is Robert 18 Hall, Director of Minority Development Services. I 19 want to share with you, first of all, if you've had 20 a chance to review those, I've sent you several 21 items by mail and also we included copies of those 22 same items in your packet today for discussion if 23 you have any items you would like to discuss, but 24 let me first give you an overview of what you have. 25 The first item is a copy of our 00227 1 participation report for the current fiscal year FY 2 02. As it will indicate, October hub and total 3 utilization of this particular point in time, as of 4 October 26th is 10.14 percent, in total utilization. 5 I want to share with you this report 6 is a new format that we're submitting to you on a 7 monthly basis. It still has the same criteria as 8 before in terms of minority and hub businesses and 9 also businesses but it also will highlight for you 10 from this point on to track every business that we 11 currently have a contract with over the excess 12 amount of $100,000 and what was our rationale for 13 doing that is because we currently in accordance 14 with the hub rules, 4.0 -- excuse me, 403.301 in 15 reference 111.14, we're required to track the 16 business contracting plan and minority building 17 services taking on that talk of tracking every 18 business that is awarded a contract over $100,000, 19 and so we're tracking that and so every contract 20 that exceeds that amount eventually we will be 21 tracking that participation in terms of hub or 22 nonhub participation, and we'll be keeping you 23 apprised of that. 24 The second item that we have before 25 you this afternoon is a copy or a draft format of 00228 1 the mentor protege initiative which is required by 2 the hub rules and we've put before you a draft, 3 we're expecting to receive any comment you may have 4 that will make it more viable in terms of having the 5 best program in the State of Texas or within -- 6 before this commission. 7 The third item as requested before is 8 we try to work with our executive director in 9 implementing some new requirements or new 10 initiatives that will be important to having a model 11 hub program and we identify seven different areas 12 that we would like your consideration on for 13 implementing to have that model hub program to be 14 exemplified in terms of what the legislators will 15 call a model hub program. 16 COMMISSIONER WHITAKER: And that is 17 behind what? 18 MR. HALL: It is directly behind the 19 mentor protege document. 20 COMMISSIONER WHITAKER: Behind this? 21 MR. HALL: Yes, ma'am. And the last 22 item which was sent to you for your review is a 23 memorandum which highlights the summary of four 24 different reports in terms of our hub/minority 25 utilization that was reported by the general 00229 1 services commission in the statewide hub report. 2 And in that report, I feel there was one area we 3 wanted to tell you about which is kind of exciting 4 for us is that the lottery in report number four of 5 the top ten spending agencies, we rank number six in 6 overall spending and -- excuse me, rank number six 7 in terms of overall hub utilization which was 8 equated to 11.79 percent. 9 COMMISSIONER WHITAKER: Say that 10 again. 11 MR. HALL: We rank six in terms of 12 total hub utilization out of ten -- of the top ten 13 spending agencies. 14 COMMISSIONER WHITAKER: Okay. Did 15 you expect us to be higher or -- 16 MR. HALL: Well, in terms of the 17 total contracts that we manage, we only have, 18 compared to some of the other agencies, like Texas 19 Department of Transportation, our agency managed a 20 total budget of about 149 million and people like 21 the Texas Department of Transportation have over a 22 three billion dollar budget and we're compared to 23 some of the larger agencies, and so with our 24 expected budget, we are compatible in terms of the 25 utilization so what I'm trying to point out to you 00230 1 is that we're doing a pretty good job in terms of 2 hub participation which is equated to 11.79 percent. 3 COMMISSIONER WHITAKER: I mean, 4 comparatively with those numbers, aren't we way 5 ahead? 6 MS. CLOUD: We're ahead of where 7 we've been in the past, this is -- we are improving 8 as we go. 9 COMMISSIONER WHITAKER: That's 10 excellent. 11 CHAIRMAN CLOWE: I think we're doing 12 very well. 13 MR. HALL: So with that I know that 14 the information that I sent you was quite lengthy 15 and I'll be happy to address any questions or 16 concerns that you may have. 17 MS. CLOUD: I want to add something 18 to Robert's report. I received a phone call 19 Thursday of last week, actually Tuesday of this 20 week, lost my days here, from Senator Vandebuyl 21 and of course I was not available at the exact time 22 she called so I called her back within about ten 23 minutes and she called to comment on her 24 appreciation of having seen an ad that we had placed 25 in Hispanic Business Magazine, full page ad on our 00231 1 recruitment for minority participation in our 2 procurement process and she called to say that she 3 was very pleased to see that. That she was very -- 4 she wanted to tell us that we were one of the few 5 agencies that were doing what the legislature wanted 6 us to do and that she just wanted to call and say 7 thank you for doing that so that was a very nice 8 surprise. 9 COMMISSIONER WHITAKER: Very good, 10 very good. 11 MS. CLOUD: That's a credit to 12 Robert, I told him that his outreach program, that 13 he was really working hard to make that happen and 14 we're seeing a lot of results from that. 15 CHAIRMAN CLOWE: And, Robert, I hope 16 you heard about Linda and I and Billy calling on 17 Billy, Linda and I calling on Pete Gallegos in 18 reference to the Sunset committee and he questioned 19 us extensively about our hub participation and 20 minority activity that is going on here, and as 21 Commissioner Whitaker said, we were very proud to 22 show the record and the results of everyone's effort 23 here with your leadership, I want you to know that 24 that's good progress that's been monitored by the 25 legislature and we want to continue to do that good 00232 1 job. 2 MR. HALL: Yes, sir, thank you, we 3 want to continue to do a good job as well and 4 hopefully we'll continue making progress. 5 COMMISSIONER CRINER: Everybody's 6 patting you on the back, I can't come up and say 7 anything else, Robert, so congratulations, good job, 8 move forward, and you and I talked about a lot of 9 this earlier so good, keep it going. 10 MR. HALL: No problem. 11 COMMISSIONER CRINER: And I still 12 want to emphasize the fact I'd really like to see 13 the lottery be out front on this mentor protege 14 program, we've got to move up from number six to 15 number one. 16 MR. HALL: Yes, sir, and I want to 17 share with you, I know you didn't have a chance to 18 give any feedback just yet but we implemented some 19 recommendations based on the previous meeting and if 20 you have anything specifically now that I've 21 mentioned the protege program that you'd like for us 22 to look at, we'll be happy to do so. 23 COMMISSIONER CRINER: I shared this 24 with the other commissioners. Mentor protege is 25 something that came out of that, what do they call 00233 1 themselves, the Texas Building and Procurement? 2 MR. HALL: Building procurement, yes, 3 sir. 4 COMMISSIONER CRINER: I thought it 5 was ours so I want us to be the best at doing it 6 because I thought it was ours. 7 MR. HALL: It is ours by adoption of 8 the rules and basically when we adopted the rules, 9 we committed to having our own hub program and so 10 that's what the rules dictated this time so the 11 mentor protege program is ours by adoption and it is 12 ours to implement and make sure it happens and we'll 13 do that. And of course we would like to extend an 14 invitation to you, all of you, we look forward to 15 having our first orientation meeting sometime in the 16 next 30 days and we'll send you a letter indicating 17 that, we would like to invite you to it. 18 COMMISSIONER CRINER: Great. 19 CHAIRMAN CLOWE: Thank you, Robert. 20 MR. HALL: Thank you, have a good 21 evening. 22 MS. CLOUD: Commissioners, next is 23 the FTE report, we have 316 active FTEs, we have 19 24 vacant positions, five of those are in the 25 selection, acceptance pending, seven in the 00234 1 recruiting screening interviewing and seven in the 2 vacant positions with no present HR activity. 3 There are no lottery conferences to 4 report about today and the retailer at townhall 5 meetings will not take place now until the first of 6 the year, November, December usually are very big 7 months for our retailers and so we chose not to have 8 townhall meetings in those months with the holidays. 9 Our next meeting will be January 10 29th, 2002, in San Antonio. 11 Commissioners, the last meeting you 12 requested to see some actually videotape from an 13 actual drawing. Keith is prepared to show you that 14 if you want to see that today, he has set it up to 15 show you or we can, since we've had such a long 16 agenda, we can postpone this till the next meeting, 17 it's your choice. It's only five minutes. Okay, 18 Keith. 19 While he's doing that, I want to 20 mention to you, Jim wanted me to point out to you 21 that our turnover rate is better than what it has 22 been in the past. 23 Our turnover rate in 1999 was 18.70 24 percent. Statewide average was 17.58. This year, 25 2001, it's 15.14 percent compared to the state's 00235 1 turnover rate of 17.59 so that's -- we're doing a 2 little better even in that respect. 3 MR. ELKINS: Commissioners, what 4 you're going to see is a couple of the actual 5 drawings and then there's going to be some of the 6 video Lotto Texas, the day of the player 7 appreciation so you'll see what the players saw. 8 (Video played) 9 MS. CLOUD: And that concludes my 10 report. 11 CHAIRMAN CLOWE: Thank you, Linda. 12 We're down to item 18, the report of Billy Atkins, 13 the Charitable Bingo Operations director. 14 MR. ATKINS: Commissioners, the third 15 quarter for 2001 reports were due on October 15th, 16 we received those and nonfinal report printed out 17 October 25th, a copy of Terry Shankle's memo is 18 attached to my report. 19 Also, we are planning on mailing out 20 nomination forms to the Bingo Advisory Committee in 21 mid-December of this year. Those forms will be due 22 back on February 28th of 2002. And included, I 23 believe, is the fourth page in the documents of my 24 report is a copy of that format that we used in the 25 past. If any of you have any questions or 00236 1 suggestions on ways that we can improve that, we'd 2 be happy to have that. 3 I'd like to talk real briefly about 4 the Bingo operator program. As you know, Charitable 5 Bingo administrative rule 550 requires that 6 organizations have one of their operators trained by 7 September 1st of this year. That gave the 8 organizations about a two-year grace period in order 9 to get someone trained. 10 As of this date, there are 11 approximately 70 organizations that haven't sent 12 someone to the training program so we have -- we are 13 preparing to send show compliance letters to those 14 organizations, hopefully we'll be able to get them 15 to send someone or bring them into compliance. 16 I'd like to give you real quickly 17 what I think are two statistics that show the 18 benefit that we've seen from the operator training 19 program. That program started in fiscal year 2001 20 and one of the performance measures that we track is 21 the number of audits that we conduct with 22 violations. 23 In fiscal year 2000, that number was 24 81.9 percent. In fiscal year 2001, it went down to 25 66.7 percent. We think that's a demonstration of 00237 1 some of the benefit from the operator training 2 program. 3 Also, I'd call your attention to one 4 of the news articles that was included in my report, 5 it's dated October 18th of this year and it's from 6 the Del Rio publication and it references an 7 operator for a Bingo organization for the Boys and 8 Girls Club of Del Rio who pled guilty to I believe 9 approximately seven counts of theft from that 10 organization. 11 And the way it came about is an 12 officer of the organization attended one of our 13 operator training programs, based on information 14 that she received from that training program, she 15 went back, looked, started to look at their books 16 and records, noticed some discrepancies. Our 17 auditors as well as the investigators worked with 18 the organization as well as local law enforcement 19 and prosecutors and as the article says that 20 individual pled guilty and is being required to make 21 restitution to the organization. 22 So we think that very clearly 23 demonstrates the positive aspects of that program 24 and that's all I have at this time. 25 CHAIRMAN CLOWE: Very good, Billy. 00238 1 Thank you very much. Is there anyone wishing to 2 make public comment to the commission? 3 The commission now will attempt to 4 set its date for its December meeting. As we 5 announced at our last meeting, it would be our 6 practice, it was necessary to change the meeting 7 date on this month, not by much just a little, and 8 we're going to keep trying to facilitate for the 9 public and the staff, for everyone interested, a 10 known date ahead of time. Commissioners, what is 11 your pleasure? 12 COMMISSIONER WHITAKER: Earlier 13 rather than later. The closer you get to the 25th, 14 the more conflicts there are. How about the 6th? 15 CHAIRMAN CLOWE: I will be unable to 16 meet the 6th. 17 COMMISSIONER CRINER: How about the 18 4th? 19 CHAIRMAN CLOWE: I'm okay on the 4th. 20 COMMISSIONER WHITAKER: Okay. 21 COMMISSIONER CRINER: The 5th? 22 CHAIRMAN CLOWE: Sir? 23 COMMISSIONER CRINER: The 5th? 24 CHAIRMAN CLOWE: Sir? 25 COMMISSIONER CRINER: I said the 5th? 00239 1 CHAIRMAN CLOWE: Oh, I'm out of 2 pocket on the 5th. I can do it Monday, the 3rd, or 3 Tuesday, the 4th. 4 COMMISSIONER CRINER: Tuesday, the 5 4th. 6 CHAIRMAN CLOWE: Tuesday, the 4th; 7 Going, going. 8 COMMISSIONER WHITAKER: Going once, 9 going twice. 10 MR. ATKINS: Commissioner Clowe, just 11 so you know, I show that Nelda has set up a meeting 12 for you, Linda and I for Tuesday, December 4th, on 13 the Sunset Committee at four p.m. 14 CHAIRMAN CLOWE: I think we ought to 15 try to change that. 16 MS. CLOUD: If we get out of here in 17 time, we can make it. 18 CHAIRMAN CLOWE: I think it's 19 important this commission set its date. We'll 20 advise that office of our situation and try to work 21 it in a flexible way, if not, we may need to 22 reschedule. So the next commission notice will be 23 published, Kim, for a meeting on Tuesday, December 24 the 4th. 25 MS. KIPLIN: Yes, sir, I have it. 00240 1 CHAIRMAN CLOWE: Is there anything 2 other to come before the commission at this time? 3 Hearing no comments, we are adjourned at 3:53 p.m. 4 Thank you-all very much. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 00241 1 *************************************************** 2 REPORTER'S CERTIFICATE TEXAS LOTTERY COMMISSION MEETING 3 November 8, 2001 4 *************************************************** 5 THE STATE OF TEXAS ) ) 6 COUNTY OF TRAVIS ) 7 8 I hereby certify that the foregoing contains a 9 true and correct transcript of all portions of 10 proceedings in the Texas Lottery Commission meeting 11 held November 8, 2001; that the foregoing Pages 1 12 through 240 represent a true and correct transcript 13 of the evidence given upon said hearing, and I 14 further certify that I am not of kin or counsel to 15 the parties in the case; am not in the regular 16 employ of counsel for any of said parties; nor am I 17 in anywise interested in the result of said case. 18 19 This, the 13th day of November 2001. 20 21 22 ______________________________________ CONNIE JO RAMIREZ, Texas CSR #2484 23 Expiration Date: 12/31/01 1609 Shoal Creek Boulevard, Suite 202 24 Austin, Texas 78701 (512) 474-4363 25