0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 COMMISSION MEETING ) 6 FOR THE TEXAS ) LOTTERY COMMISSION ) 7 8 9 10 COMMISSION MEETING 11 OCTOBER 5, 2017 12 10:00 a.m. 13 AT 14 TEXAS LOTTERY COMMISSION 15 611 East 6th Street Austin, Texas 78701 16 17 18 19 20 21 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: Doug Lowe Carmen Arrieta-Candelaria 4 Robert Rivera Peggy A. Heeg 5 GENERAL COUNSEL: Robert F. Biard 6 EXECUTIVE DIRECTOR: Gary Grief 7 CHARITABLE BINGO OPERATIONS 8 DIVISION DIRECTOR: Alfonso D. Royal III 9 LOTTERY OPERATIONS DIRECTOR: Michael Anger 10 ADMIN. DIVISION DIRECTOR: Michael R. Fernandez 11 ASST. GENERAL COUNSEL: Deanne Rienstra 12 ASST. GENERAL COUNSEL: Ryan S. Mindell 13 ASST. GENERAL COUNSEL: Stephen White 14 CONTROLLER: Katheryn J. Pyka 15 PRODUCTS & DRAWINGS MANAGER, LOTTERY OPERATIONS DIVISION: Robert Tirloni 16 McCONNELL JONES 17 LANIER & MURPHY, LLP: Darlene Brown 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS PAGE 2 I The Texas Lottery Commission will call the 3 meeting to order. Pledge of Allegiance to the U.S. and Texas 4 flags . . . . . . . . . . . . . . . . . . . . . . 9 5 II Report, possible discussion and/or action on Hurricane/Tropical Storm Harvey's impact on 6 agency activities. . . . . . . . . . . . . . . . 9 7 III Report, possible discussion and/or action, including amendment, on agency major and prime 8 contracts, including the contracts for Drawing Studio and Production Services, Security Officer 9 Services, Lottery Drawings CPA Services, and Security Management System and Monitoring 10 Services. . . . . . . . . . . . . . . . . . . . 13 11 IV Report, possible discussion and/or action on the Annual Contract Status Report and Supplemental 12 Status Report for all major and prime agency contracts . . . . . . . . . . . . . . . . . . . 14 13 V Report, possible discussion and/or action on 14 agency major contracts, including amendment, renewal or extension of the contracts for 15 instant ticket manufacturing and services . . . 15 16 VI Report, possible discussion and/or action on agency major contracts, including amendment, 17 renewal or extension of the Dallas Cowboys trademark license and promotional agreements 18 with Pro Silver Star, LTD and Frisco Management, LP . . . . . . . . . . . . . . . . 15 19 VII Consideration of and possible discussion and/or 20 action, including proposal, on amendments to 16 TAC 402.400 (General Licensing Provisions), 21 402.401 (Temporary License), 402.402 (Registry of Bingo Workers), 402.404 (License and Registry 22 Fees), 402.405 (Temporary Authorization), 402.407 (Unit Manager), 402.410 (Amendment 23 of a License - General Provisions), 402.411 (License Renewal), 402.413 (Military Service 24 Members, Military Veterans, and Military Spouses), 402.420 (Qualifications and 25 Requirements for Conductor's License), 402.422 0004 1 (Amendment to a Regular License to Conduct Charitable Bingo), 402.424 (Amendment of 2 a License by Electronic Mail, Telephone or Facsimile), and 402.603 (Bond or Other 3 Security) . . . . . . . . . . . . . . . . . . . 20 4 VIII Consideration of and possible discussion and/or action, including proposal, on amendments to 5 16 TAC 401.158 (Suspension or Revocation of License), 401.160 (Standard Penalty Chart), 6 401.301 (General Definitions), 401.302 (Instant Game Rules), 401.304 (On-Line Game Rules 7 (General)), 401.307 ("Pick 3" On-Line Game Rule), 401.308 ("Cash Five" On-Line Game), 8 401.312 ("Texas Two Step" On-Line Game), 401.316 ("Daily 4" On-Line Game Rule), 401.320 9 ("All or Nothing" On-Line Game Rule), 401.322 ("Texas Triple Chance" Lottery Game), 401.353 10 (Retailer Settlements, Financial Obligations, and Commissions), 401.361 (Required Purchases 11 of Lottery Tickets), 401.364 (Training), and 401.370 (Retailer's Financial Responsibility 12 for Lottery Tickets Received and Subsequently Stolen or Lost) . . . . . . . . . . . . . . . . 26 13 IX Consideration of and possible discussion and/or 14 action, including proposal, on amendments to 16 TAC 401.317 ("Powerball" On-Line Game 15 Rule) . . . . . . . . . . . . . . . . . . . . . 28 16 X Consideration of and possible discussion and/or action, including proposal, on amendments to 17 16 TAC 401.305 ("Lotto Texas" On-Line Game Rule) . . . . . . . . . . . . . . . . . . 31 18 XI Consideration of and possible discussion 19 and/or action, including adoption, on new 16 TAC 401.324 (Prize Winner Election To Remain 20 Anonymous) . . . . . . . . . . . . . . . . . . 37 21 XII Consideration of and possible discussion and/or action, including adoption, on amendments to 22 16 TAC 401.153 (Qualifications for License) . 38 23 XIII Consideration of and possible discussion and/or action, including adoption, on the repeal of 24 16 TAC 40l.323 ("Monopoly Millionaires' Club" Game Rule) . . . . . . . . . . . . . . . . . . 39 25 0005 1 XIV Consideration of and possible discussion and/or action, including adoption, on new 16 TAC 2 40l.207 (Written Answer; Default Proceedings) 40 3 XV Report, possible discussion and/or action on lottery sales and revenue, game performance, 4 new game opportunities, advertising, promotional activities, market research, trends, and 5 game contracts, agreements, and procedures . . 42 6 XVI Report, possible discussion and/or action on transfers to the State . . . . . . . . . . . . 52 7 XVII Report, possible discussion and/or action on 8 external and internal audits and/or reviews relating to the Texas Lottery Commission, 9 and/or on Internal Audit activities, including approval of the following: Internal Audit 10 Reports for Employee Time and Attendance, Second-Chance Drawing Processes, Active 11 Directory, Jackpot Estimation System, Scratch Ticket Working Paper Workflow System, and 12 Continuity of Operations Plan; Annual Internal Audit Report; and Fiscal Year 2018 Annual 13 Internal Audit Plan . . . . . . . . . . . . . . 53 14 XVIII Report, possible discussion and/or action on the Charitable Bingo Operations Division 15 quarterly financial data, including charitable distributions . . . . . . . . . . . . . . . . . 57 16 XIX Report by the Charitable Bingo Operations 17 Director and possible discussion and/or action on the Charitable Bingo Operations Division's 18 activities, including licensing, accounting and audit activities, pull-tab review, and special 19 projects . . . . . . . . . . . . . . . . . . . 78 20 XX Report by the Executive Director and possible discussion and/or action on the agency's 21 operational status, major contracts, agency procedures, awards, and FTE status . . . . . . 79 22 XXI Consideration of the status and possible 23 approval of orders in enforcement cases: . . . 79 24 Lottery NSF License Revocation Cases (Default) A. Docket No. 362-17-4662-Lufkin Truck Stop 25 B. Docket No. 362-17-4663 - Super Stop 0006 1 C. Docket No. 362-17-4922 - J and T Grocery D. Docket No. 362-17-4923 - Fast N Easy 2 Tidwell E. Docket No. 362-17-5121 - Jeffrey's Food 3 Mart F. Docket No. 362-17-5122 - Pret Manger 4 G. Docket No. 362-17-5123 - MAF Petroleum LLC 5 H. Docket No. 362-17-5693 - Stop N Get of Irving 6 I. Docket No. 362-17-5694 - Times Market Lottery Agreed Orders 7 J. Case No. 2016-1334 - Valero Corner Store #1301 and Big Diamond LLC 8 K. Case No. 2017-l146 - M & A L. Case No. 20l7-1214 - Timewise Food Store 9 #4001 Lottery Revocation 10 M. Docket No. 362-17-3249 - Mariposa Groceries 11 Bingo Agreed Orders (Cases N through R are related and involve the same 12 bingo accounting unit) N. Case No. 2016-1233 - Heart Of The Rock 13 Civitan Club, Inc. O. Case No. 2016-1235 - The Human Potential 14 Center P. Case No. 2016-1236 - Knights of Columbus 15 5967 Q. Case No. 2016-1237 - Holy Cross Catholic 16 Church R. Case No. 2016-1238 - Manor Volunteer Fire 17 Department S. Case No. 2017-437 - Berry Bingo 18 T. Docket No. 362-17-4521.B-Carpenter Land and Investment Company, Inc. 19 U. Docket No. 362-17-4522.B - Fort Worth Bingo, Inc. 20 Bingo License Revocation and/or Denial Cases (Default) 21 V. Docket No. 362-17-4109.B - Richard Gonzales (Bingo Worker) 22 W. Docket No. 362-17-4987.B - Elks IBPOE Temple 1401 Emma McGhee 23 X. Docket No. 362-17-4988.B - Elks IBPOE Lodge 1217 Felix Lister 24 XXII Public Comment . . . . . . . . . . . . . . . . XX 25 XXIII Commission may meet in Executive Session . . . 92 0007 1 A. To deliberate personnel matters, including the appointment, employment, evaluation, 2 reassignment, duties, discipline, or dismissal of the Executive Director and/or the 3 Charitable Bingo Operations Director pursuant to Section 551.074 of the Texas Government 4 Code. B. To deliberate the duties of the General 5 Counsel and/or the Human Resources Director pursuant to 551.074 of the Texas Government 6 Code. C. To receive legal advice regarding pending or 7 contemplated litigation or settlement offers, or other legal advice, pursuant to 8 551.071(1) and (2) of the Texas Government Code, including but not limited to legal 9 advice regarding the following items: Pending and potential litigation regarding Fun 10 5's Scratch Ticket Game #1592, including Travis Co. District Court Cause No. D-1-GN-14- 11 005114, Third District Court of Appeals Cause No. 03-16-00172-CV (Steele, et al. v. GTECH 12 Corp.); and Dallas Co. District Court Cause No. DC-14-14838, Fifth District Court of 13 Appeals Cause No. 05-15-01559-CV (Nettles v. GTECH Corp. and Texas Lottery Commission). 14 Julam Investments, Inc. v. Texas Lottery Commission (Travis Co. District Court Cause 15 No. D-1-GN-16-006124). State of Texas v. Equal Employment Opportunity 16 Commission, et al. Legal advice regarding Texas Government Code 17 Chapters 466 (State Lottery Act) and 467, the Bingo Enabling Act, the Open Meetings Act, the 18 Public Information Act, the Administrative Procedures Act, employment and personnel law, 19 procurement and contract law, evidentiary and procedural law, ethics laws, and general 20 government law. Legal advice regarding any item on this open 21 meeting agenda. 22 XXIV Return to open session for further deliberation and possible action on any matter posted for 23 discussion in Executive Session. Any matter posted for Executive Session also may be the 24 subject of discussion and/or action in open session prior to Executive Session . . . . . . 92 25 0008 1 XXV Adjournment . . . . . . . . . . . . . . . . . . 93 2 Reporter's Certificate . . . . . . . . . . . . . . . . . 94 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0009 1 P R O C E E D I N G S 2 AGENDA ITEM I 3 CHAIRMAN KRAUSE: Good morning. I'm Winston 4 Krause, the Chairman of the Lottery Commission, and I'm 5 calling this meeting to order. Today is October the 5th and 6 regardless of what the clock says, it is 10:00. 7 We have a full complement of our Commissioners 8 here today, so we have a quorum. 9 Now, here at the Lottery Commission we have 10 Commissioners that have special duties. We have the Bingo 11 Commissioner and we also have a new tradition that is now a 12 tradition, we have the Pledge Commissioner. And so if 13 Commissioner Arrieta-Candelaria would please lead us in a 14 pledge to the U.S. flag and the Texas flag. 15 (Pledges recited) 16 AGENDA ITEM II 17 CHAIRMAN KRAUSE: We are very economic with 18 our time here at this Commission and so we're going to just 19 get right into our first item, which is a report from Michael 20 Anger and Alfonso, our Bingo Director. 21 MR. ANGER: Good morning, Commissioners. For 22 the record, my name's Michael Anger, and I'm the Lottery 23 Operations Director. And as the Chairman indicated, we have 24 a brief report this morning for you from the Lottery 25 Operations side and the Bingo Operations side of the business 0010 1 with regard to the impact of Hurricane Harvey. 2 I have two items of update for you this 3 morning, the first being related to our retailers. Specific 4 to our retailers, the Agency has worked closely with our 5 retailer licensees to help minimize the impact to their 6 businesses related to Hurricane Harvey, consistent with the 7 Disaster Proclamation and efforts of the Governor's Office. 8 The Governor's Office declared 58 counties in 9 Texas as disaster-impacted counties and 57 of those had 10 retailers who were impacted during Hurricane Harvey. 11 To give you a little background on the 12 numbers, our retailer services team worked with approximately 13 350 of our licensed retailers that had direct issues 14 associated with Hurricane Harvey and were working through 15 recovery efforts at their businesses. Approximately 150 of 16 those retailers did temporarily close with the Agency and 75 17 of those retailers remain closed today. They have more 18 extensive damage and are going to have to do a lot more work 19 before they can get the activities of their business back up 20 and operating again. 21 Collectively, our retailer services area, in 22 coordination with IGT sales staff and technical support 23 staff, did a lot of work to work with the remaining retailers 24 who we have gotten back up and operating to help them out and 25 get them situated back with their businesses. There were 0011 1 pretty significant equipment losses and things like that that 2 IGT had to address with regard to replacement to get 3 retailers back up and operating and selling lottery products. 4 The area of update I have for you today is 5 with regard to our claim centers. Six of our 16 statewide 6 claim centers did have closures associated with Hurricane 7 Harvey, and those range from as little as two hours of 8 business operations all the way up to 11 days in the case of 9 Beaumont. The Beaumont Claim Center experienced the longest 10 closure period and that was largely related to significant 11 flooding in the area and then very slowly receding flood 12 waters in the area. 13 I am happy to report to you that all of our 14 offices are back up and operating. We experienced some minor 15 damage in the Victoria Claim Center. Those repairs were 16 taken care of by the landlord and all of that's situated. 17 On a more somber note, we did have two team 18 members that work in our claim centers who were directly 19 impacted in a significant way with regard to Hurricane 20 Harvey; one in Houston and one in the Beaumont Claim Center, 21 both of which had significant personal loss with regard to 22 their homes. The Agency staff coordinated and took up a 23 collection, we were able to collect a little over $1800 and 24 those monies are being provided to those two team members. 25 We're additionally working with those individuals to help 0012 1 them get the time that they need to address their personal 2 issues and the things that they need to get in order. 3 And that concludes my report. I'll turn 4 things over to Alfonso to give you an update with regard to 5 Bingo Operations. 6 MR. ROYAL: Thank you, Michael. 7 Commissioners, bingo licensees and operations were not exempt 8 from the devastating effect that Hurricane Harvey had on our 9 great State. As the storm began making its way toward 10 landfall, scheduled bingo events were cancelled in some areas 11 and remain cancelled due to historic rainfall and flooding 12 that occurred. 13 The Division communicated its concern to the 14 -- and impact to the industry on August 29th, noting we stand 15 ready to assist as needed. There was one total loss of 16 facility that I'm aware of, and that is VFW 3904 in Rockport, 17 Texas, which was in Harvey's direct path. I am told they 18 will rebuild, but it will take some time as expected. 19 To date, there have been eight organizations 20 who have requested and received revised bingo licenses due to 21 the storm's effect on their operations. There may be other 22 challenges that arise this month as a quarterly financial 23 reporting deadline is October 25th, and we will continue to 24 work with the affected licensees on a case-by-case basis. 25 I want to thank Van Myers with Roy Bingo 0013 1 Supplies, Incorporated, and Glenn Goulet with Goodtime Action 2 Games who, through their local staff of distributors, could 3 report on the bingo hall impact along the coastal areas. 4 Gentlemen, thank you all for returning my phone call. 5 As it relates to assistance, the local coastal 6 community has benefitted through licensed bingo organizations 7 across the state who immediately went into action to gather 8 supplies and essentials to help with recovery efforts. I 9 want to thank Melodye Green with Jackpot Bingo and Bingo 10 Bills in the Dallas area, for sharing their stories on the 11 organizations' effort to assist with recovery efforts using 12 bingo-generated funds. 13 Commissioners, that concludes the bingo side 14 of the information for Harvey. 15 CHAIRMAN KRAUSE: Thank you, gentlemen. Any 16 questions or comments, fellow Commissioners? Mr. Michael 17 Fernandez, you've got the next four items, and you're welcome 18 to segue into each one as you care to. 19 AGENDA ITEM III 20 MR. FERNANDEZ: Thank you, Mr. Chairman. Good 21 morning, Mr. Chairman, Commissioners. For the record, my 22 name's Mike Fernandez, I'm the Director of Administration. 23 Item III in your notebook is a briefing item. It is to 24 advise the Commission of possible contract amendments that 25 may be required as a result of water damage sustained by the 0014 1 headquarters facility during the recent rains. This is a 2 contingency item and amendments will only be executed if 3 necessary in support of building remediation. 4 Commissioners have all confirmed independently 5 they have no financial interest in the subject contracts. 6 Any questions? 7 AGENDA ITEM IV 8 MR. FERNANDEZ: Item -- I'm segueing, Mr. 9 Chairman. 10 CHAIRMAN KRAUSE: Thank you. You did a great 11 job. 12 MR. FERNANDEZ: You're very welcome. Thank 13 you. Item Number IV in your notebook is also a briefing 14 item. 15 Texas Administrative Code 401.105 requires the 16 Agency -- that Agency contracts be presented to the 17 Commission annually for informational purposes. This 18 requirement was further expanded in Texas Government Code 19 2261.254 by including additional contract reporting 20 requirements regarding compliance with financial provisions, 21 performance issues, and sanctions or liquidated damages 22 assessed. 23 A report detailing Agency contracts was 24 included in your notebooks. If you have any questions, we'd 25 be happy to answer them. 0015 1 AGENDA ITEM V 2 MR. FERNANDEZ: Item Number V in your notebook 3 is also a briefing item and is to advise the Commission of 4 Staff's intent to amend our instant ticket and manufacturing 5 services contracts to add additional ticket sizes in pack 6 quantities. Commissioners were also previously polled and 7 independently confirmed they have no financial interest in 8 the noted manufacturers. 9 AGENDA ITEM VI 10 MR. FERNANDEZ: And lastly, Item Number VI in 11 your notebook is a briefing item and it is to advise the 12 Commission of Staff's intent to extend the trademark 13 licensing and promotional agreements with Pro Silver Star, 14 LTD, for a two year period, and also, extend the trademark 15 licensing and promotional agreement with Frisco Management, 16 LP, for a two year period. 17 Commissioners have independently confirmed 18 they do not have financial interest in either Pro Silver Star 19 or Frisco Management. 20 If you have any questions, I'd be happy to 21 answer them, Mr. Chairman. 22 CHAIRMAN KRAUSE: Commissioners? 23 COMMISSIONER LOWE: So, is this an appropriate 24 time to ask about our lease with this building and as far as 25 who's responsible for -- 0016 1 CHAIRMAN KRAUSE: Absolutely. He talked about 2 the damage, that involves the landlord, so let's talk about 3 it. 4 COMMISSIONER LOWE: So do we have lease 5 provisions, because we're having to spend money for water 6 repairs. We had loss -- I assume we had lost time or 7 something. 8 MR. FERNANDEZ: We have -- we do, 9 Commissioners. Yes and yes. Let me ask Ms. Erickson to join 10 me also, because she's really been the point person on this. 11 To answer your specific questions, we do have provisions in 12 our contract that allow us to -- I don't believe the terms is 13 to withhold -- but to forego -- 14 MS. ERICKSON: Reduce. 15 MR. FERNANDEZ: To reduce payment for 16 unoccupied space. Okay? If we so choose to exercise that. 17 What had occurred once we were advised by Staff of -- and 18 what happened is on the north side I think -- in our 19 briefings we discussed this briefly, but on the north side, 20 facing north on both of our buildings, we sustained 21 voluminous water damage, okay? And once we found out about 22 this, we notified the lessor, they immediately brought some 23 experts in to start pulling some of the ceiling tiles and 24 looking at that. 25 I believe it was around 11:00 that morning, we 0017 1 found that in one of the offices there was indication of 2 mold. And so when we heard that, we immediately moved all 3 our staff offices and all of the staff located in those 4 offices out of those offices. All right? And Ms. Erickson 5 then contacted her manage -- or her facilities team and they 6 engaged an air quality specialist who came in and did air 7 quality samples. Okay? 8 And I would -- we were happy to report then 9 and we called an all staff meeting to bring all the staff in 10 to advise them. But what we found or what the air quality 11 specialist doing the survey found was that there was no 12 abnormal numbers in terms of any air quality. 13 And what we attribute that to really, 14 Commissioner, was the fact that we have very good filters and 15 the landlord has been very good about changing the filters in 16 the system. But what they did is, as you know, they have to 17 file a protocol, I believe it's with Department of Health -- 18 it's with TCEQ, and they approve that protocol on how they're 19 going to remediate. And so they're following that protocol 20 right now. 21 They've started on the third floor. Now 22 they're also working down on the first floor in our Human 23 Resources area. They will also go over to our claim center 24 next, which we have moved folks out of that, and then they 25 will start going through the floors. 0018 1 The biggest issue I see -- or for us, and Toni 2 can add anything she'd like to, and I think the biggest issue 3 for us is our drawing studio. As you know, we're conducting 4 drawings there, you know, six days a week, and that's an 5 issue for us. So that will be the last area that we deal 6 with. They believe that that can be remediated over the 7 period of -- from like 1:00 in the morning on Sunday 'til 8 8:00 or 9:00 Monday morning. But right now, we want that 9 fully vetted before we open that up and start that process, 10 because we don't want to get into that and find that now all 11 of a sudden our draw team needs to relocate to our back-up 12 disaster recovery site. Okay? 13 So -- and that was the call for the noticing 14 up the contracts, right, because we don't know yet, because 15 those contracts will be impacted if we have to move for the 16 drawing CPA services, security services, those types of 17 things. 18 But right now, right now, we do have that 19 remedy, if you will, in the contract. But the landlord I 20 would say to you, has stepped up and has worked with us in 21 terms of our moves and bearing the cost of those kind of 22 things, so I think that they're doing everything they can to, 23 you know, to accommodate this. And they understand that, you 24 know, I think fairly well, what we're going through. 25 So to -- the other part of your question is 0019 1 about the lease. We do have that lease extension that we had 2 talked with the Board earlier about. It is in Ms. Erickson's 3 office and it is ready to go forward, but I don't know if 4 Toni spoke with them this morning, but we speak with them 5 everyday, but one of the issues that she's going to speak 6 with him this morning on the leasing side is that we're going 7 to hold that lease execution in abeyance until our December 8 meeting, to make sure that we're all comfortable, that 9 everything has gone in a manner that we feel appropriate, and 10 certainly, I know Toni and her team has, you know, their 11 number one concern is staff safety and well-being. 12 But one thing I had talked with Gary 13 throughout this -- when this opened up and one of the things 14 that I would tell you, and I've been in government a long 15 time, is that when we started moving the staff, and these 16 are, you know, that -- that's -- that affects a number of 17 directors, it affects a number of senior-level staff who are 18 very, very busy as you know, and I will say to you that not 19 at any time did we have any grousing or, you know, feelings 20 of ill will. These folks were very professional, they 21 understood it, they picked up and moved very quickly. And I 22 told Gary, I said, you know, I -- that may have been the 23 first time in my 50 years in government that I've seen that 24 many people displaced and do so so willingly. 25 So I hope that answers your questions. 0020 1 COMMISSIONER LOWE: It does, and I appreciate 2 the staff of Lottery -- the leadership to make sure that we 3 continue operations. I know we had a report about the 4 hurricane and I think that you guys are owed some applause 5 and some accolades for keeping this operation going in spite 6 of a big, huge problem. 7 MR. FERNANDEZ: Well, that's all your 8 divisions. They did a great job. Do you have anything to 9 add, Toni? 10 Any other questions? 11 COMMISSIONER LOWE: no, sir. 12 CHAIRMAN KRAUSE: Ryan Mindell. 13 AGENDA ITEM VII 14 MR. ROYAL: Chairman Krause and Commissioners, 15 before Ryan begins, the Agenda Item before you is related to 16 the proposed rule revisions necessary to align with recent 17 statutory changes that occurred in the 85th Texas 18 Legislature. Our Bingo 11-participant stakeholder workgroup 19 comprised of commercial lessors, manufacturers, distributors, 20 bookkeepers and charitable organizations, participated in the 21 rule review process and provided input on the proposed 22 changes that have been submitted for your consideration 23 today. I'd like to recognize Commissioner Lowe, the 24 designated Bingo Commissioner, for his participation in the 25 workgroup meetings as well as thank the workgroup 0021 1 participants for their participation and input into the 2 process as I look forward to our continued working 3 relationship to improve bingo operations for our licensed 4 charities. 5 Lastly, if the Commission votes to initiate 6 this formal rulemaking process, I want to emphasize there 7 will be additional opportunities through the public comment 8 period as well as a formal public hearing on the proposed 9 rules for industry stakeholders to provide further comments 10 on these rule proposals. 11 Commissioners, with this, I'll now turn it 12 over to Ryan to speak specifically on the rules. 13 MR. MINDELL: Thank you, Alfonso. Good 14 morning, Commissioners. My name is Ryan Mindell, I'm 15 Assistant General Counsel. 16 In your notebook as Item VII is a proposal for 17 a set of amendments to 13 bingo rules. As Alfonso stated, 18 the purpose of these amendments is to implement changes 19 required by newly passed legislation from our last regular 20 session. Specifically, it's HB 2578, SB 549, and SB 2065. 21 That legislation removed all references to bingo conductor 22 and bingo worker license fees in the Bingo Enabling Act. It 23 also allowed for a new refund process for the application 24 fees of lessors, manufacturers and distributors, and it 25 removed licensing requirements entirely for bingo unit 0022 1 managers. 2 So these proposed rule amendments implement 3 those statutory changes in the relevant bingo rules. The 4 amendments remove references to license fees for bingo 5 conductors, and they update and revise the license 6 application process for all licensees. 7 These amendments also make some non- 8 substantive conforming changes to the rules, but we are 9 trying to keep a very narrow focus and just implement the 10 legislation in these rules. It touched a lot of the bingo 11 rules because there was a lot of references throughout the 12 rules about the application process and about the fees, so 13 that's why there are so many rules there. 14 I'd also note as Alfonso stated, we have a 15 public hearing on the proposed amendments at 10:00 a.m. on 16 Wednesday, November 8th, 2017. 17 Staff recommends at this time that the 18 Commission initiate the rulemaking process by publishing the 19 proposal in the Texas Register, to receive comment for a 20 period of 30 days. 21 I'm happy to answer any questions about this 22 set of amendments. 23 CHAIRMAN KRAUSE: I'm going to invite the 24 Commissioners to have their comments and questions for you 25 and then we have testimony on this item. Commissioners? 0023 1 COMMISSIONER LOWE: I'll wait until I hear the 2 complaints. 3 CHAIRMAN KRAUSE: All right. Well, I don't 4 think you're going to hear one, because this affidavit says 5 that he is for, so let's hear from Mr. Steve Bresnen. 6 MR. BRESNEN: Thank you, Mr. Chairman and 7 Commissioners. My name is Steve Bresnen, and I'm here on 8 behalf of the Bingo Interest Group. And I'd like to think 9 this is compelling testimony for this set of rules. 10 My purpose in speaking today, in addition to 11 support the rules, is to thank the Agency, Commissioner Lowe, 12 Alfonso, Fritz Reinig, Nelda Trevino, for the way they worked 13 with us during the legislative session. 14 This is the first time in a long time that 15 we've gotten something done for charitable bingo that's going 16 to actually result in real, quantifiable money to the 17 charities. The elimination of the license fees for charities 18 is worth about $3.2-million a year to them. 19 The elimination of the prize fee on prizes $5 20 and under is probably worth another million dollars a year, 21 because a lot of those were paying those prize fees out of 22 their pockets instead of collecting them from the players. 23 So $4-million a year plus year increase in the money that's 24 getting to the bottom line of the charities is a significant 25 win for charitable bingo. 0024 1 In doing that we took some money from the 2 local governments who, for a long time, have been 3 beneficiaries of the prize fee but don't really contribute 4 anything to the operation of charitable bingo directly. To 5 their very great credit, there were zero complaints from 6 cities and counties who will no longer receive a -- the small 7 portion of the money that they were deprived of in this. And 8 we used that money to fund the operation of the Charitable 9 Bingo Division and to make sure that that money was 10 appropriated to the Agency, that money was appropriated from 11 that would have gone to those local governments to the Agency 12 for enforcement of the bingo laws. 13 So we made sure that the Agency was made 14 whole, we helped to share the cost between the state and 15 local governments for the enforcement, and we contributed 16 mightily to the bottom lines of the charities in the state. 17 Also, I think probably for the first time, certainly in my 18 awareness, those people who had paid license fees for periods 19 that were going to go past September 1st of last month, 20 they're going to get a check from the State, a refund of 21 those -- that pro rata share of the license period that 22 extended after September 1st. 23 So it's a dream of somebody in my position to 24 be able to help the people you're trying to benefit actually 25 receive a check from the State of Texas. And that's going to 0025 1 be happening between now and the first of the year. 2 So I'm real excited. I want to say thanks to 3 Alfonso and everybody here for the way they worked with us. 4 I think we got a good Bill, one that kept y'all whole, made 5 the charities better off, and hope we can keep that going in 6 the future. 7 And just finally, I want to say that our -- 8 when I represent the Bingo Interest Group, we work very 9 closely with Texas Charity Advocates on this, to get this 10 done and we had the support of other people in bingo as well. 11 So it's really the way we ought to operate and I look forward 12 to working with you all again next session to see if we can 13 carve out some more money for the charities. And thank you 14 for your help. 15 CHAIRMAN KRAUSE: You bet. Thank you, Mr. 16 Bresnen. I'd like to point out a lot of times we don't have 17 the regulatory flexibility that, you know, maybe the public 18 thinks that we do and we are bound to follow those statutes. 19 And so, in addition to that, a lot of times our interests are 20 aligned because we do care about the charities a lot. And so 21 frequently what that means is that those concerns need to be 22 heard up at the legislature. And so we're willing to do what 23 we can here, but frequently it's the Legislature that has us 24 locked in to limited flexibility and that kind of thing. So 25 working together is important. 0026 1 Now I'm going to open it up to comment for the 2 other commissioners, especially by the Bingo Commissioner. 3 COMMISSIONER LOWE: Well, I appreciate your 4 comments, Steve. I think that the staff and Alfonso with the 5 rules have captured the spirit and intent of the legislative 6 changes and beyond that, I think that we're working together. 7 Of course, there's some other things that we can talk about 8 later that may cause some tension, but on these rules I think 9 we're in good shape. Thank you. 10 CHAIRMAN KRAUSE: I don't see any other 11 commissioners. And Ryan is the next one as well. 12 MR. MINDELL: Thank you, Commissioners. 13 CHAIRMAN KRAUSE: Oh, wait a minute. 14 MR. MINDELL: Okay. 15 CHAIRMAN KRAUSE: Yeah. Is there a motion to 16 publish the proposal? 17 COMMISSIONER HEEG: So moved. 18 CHAIRMAN KRAUSE: All in favor say aye. 19 (Chorus of "ayes") 20 CHAIRMAN KRAUSE: Passed. 21 MR. MINDELL: Thank you, Commissioners. 22 AGENDA ITEM VIII 23 MR. MINDELL: The next item, Item VIII in your 24 notebook, is mine as well. It's a proposal for amendments to 25 15 lottery rules, mostly focused on the lottery draw game 0027 1 rules. 2 The primary focus of these amendments is to 3 facilitate the potential future sale of what we call third- 4 party point of sale systems. These changes include updating 5 the definition of a lottery terminal, clarifying how quick 6 pick selections are made, and updating how tickets may be 7 printed. 8 These amendments also make multiple conforming 9 changes throughout the lottery rules. For instance, the 10 Commission has changed terminology from on-line and instant 11 games to draw and scratch games. These amendments make those 12 changes in the rules, as well as other changes to make the 13 lottery game rules more internally consistent and clear. 14 This also includes some rules updates that 15 were identified as needed during the most recent 16 comprehensive rule review. Staff recommends the Commission 17 initiate the rulemaking process by publishing the proposal in 18 the Texas Register to receive comment for a period of 30 19 days. 20 I'm happy to answer any questions about this 21 proposal as well. 22 CHAIRMAN KRAUSE: Commissioners? Alrighty. 23 Is there a motion to publish the proposal in the Texas 24 Register? 25 COMMISSIONER ARRIETA-CANDELARIA: So moved. 0028 1 CHAIRMAN KRAUSE: All in favor say aye. 2 (Chorus of "ayes") 3 CHAIRMAN KRAUSE: Approved. 4 CHAIRMAN KRAUSE: Ms. Rienstra. 5 AGENDA ITEM IX 6 MS. RIENSTRA: Good morning, Commissioners. 7 Deanne Rienstra, Assistant General Counsel. 8 In your notebook is our proposed amendments to 9 the Texas Powerball game rule, which is found at Texas 10 Administrative Code 401.317. At this time Robert Tirloni 11 will present the new feature MUSL is adding to this Powerball 12 game. 13 MR. TIRLONI: Thanks, Deanne. Good morning, 14 Commissioners. I think this is also going to encompass Item 15 X. 16 MS. RIENSTRA: Yes. 17 MR. TIRLONI: So Commissioners, I'm here to 18 talk to you about a potential Powerball and Lotto Texas game 19 change. So we'll start off by talking this morning about 20 Powerball. So MUSL has adopted changes to the Powerball game 21 rule that will introduce a new promotional bonus drawing 22 called Winner Take All. This new feature is going to go on 23 sale starting Sunday, April 15th, 2018, and the first Winner 24 Take All drawing will occur later that week on Thursday, 25 April 19th. So this is the next new national initiative. 0029 1 You might remember Mega Millions is changing 2 at the end of this month, it's changing to a $2 game, and 3 then this is the next progression for the Powerball game. 4 So nothing about the actual Powerball game 5 changes. The base game and the add-on multiplier feature, 6 Power Play, stay exactly the same. So when April 15th rolls 7 around, people will be able to continue playing just as they 8 have been playing. 9 I think the easiest way to think about the new 10 Winner Take All feature is in this manner; you get a set of 11 numbers that you play for a Powerball drawing, and if you're 12 purchasing the Winner Take All feature, those same numbers 13 are good for a second drawing or, the Winner Take All 14 drawing. And those drawings are going to be held on Mondays 15 and Thursdays. 16 So Powerball is Wednesdays and Saturdays, Mega 17 Millions is Tuesdays and Fridays, and so Powerball is kind of 18 expanding their footprint so to speak, and kind of staking 19 out Mondays and Thursdays as additional Powerball nights. 20 So how do you play. It's a $4 purchase. So 21 you -- again, you buy your $2 Powerball wager, you have to 22 play the add-on feature Power Play. That's an extra dollar. 23 And then you spend one more extra dollar on Winner Take All. 24 So in order to get into Winner Take All, you have to buy 25 Powerball and you have to buy Power Play. 0030 1 When you spend your dollar on Winner Take All, 2 $.50 of that dollar goes into a prize pool. So it's a 50 3 percent prize payout or 50 percent prize pool. So that money 4 is accumulating in a prize pool, and the goal is in every 5 Winner Take All drawing, all of that money gets paid out. 6 And I'll show you how that works in a second. 7 All the prizes are parimutuel and the money 8 rolls down. And I'm going to show you an example because I 9 think it's the easiest way to explain it. So let's just for 10 simplicity purposes say we have a Winner Take All drawing and 11 let's just say there's a million dollars in the prize pool 12 for that drawing. 13 If there's no winner at the first tier, the 14 money rolls down to the second tier. If there's no winner at 15 the second tier, let's say it rolls down to the third tier, 16 and let's say there's four winning tickets at that tier. All 17 four of those tickets split the million dollars. So each 18 would get $250,000. 19 So it's designed for -- it's designed so that 20 the money continues to roll down until you hit a prize tier 21 where there have been winning tickets sold, and then however 22 many tickets are sold at that tier, they equally split the 23 money in the pool. So hence the name Winner Take All. The 24 idea is to, you know, people play Powerball, people play 25 jackpot games, and those jackpots climb, people don't see 0031 1 those prizes won sometimes for a long period of time. This 2 kind of takes the opposite end of the spectrum and they're 3 paying out the money in every single drawing. 4 And just a note; the Powerball game has nine 5 prize tiers, but when they -- when Winner Take All gets 6 introduced, they're adding two more additional prize tiers. 7 And again, the goal is to -- in doing that is to ensure that 8 you eventually hit a prize tier where there's winning tickets 9 sold. 10 I will tell you the chances of the money 11 rolling down to levels like this are probably statistically 12 huge. The chances are that you're going to have winning 13 prize tickets somewhere up above, but they did this as a 14 precaution. 15 AGENDA ITEM X 16 MR. TIRLONI: So I mentioned this also 17 encompasses Item X I believe. Is it X? 18 MS. RIENSTRA: X, yeah. 19 MR. TIRLONI: Item X. Since Lotto Texas is 20 also drawn on Wednesdays and Saturdays, we thought it would 21 be a good idea to try to implement the Winner Take All 22 feature on our own in-state game. So it would work exactly 23 the same way as I just described it for Powerball, the only 24 difference is we would be doing our own Winner Take All 25 drawings here in Texas; we would be doing those drawings. 0032 1 And the price point is a little different, it's a $3 purchase 2 for Lotto, you have to buy the Lotto-base game for a dollar, 3 the Extra feature, which is an add-on feature, for a dollar, 4 and then again, your dollar for Winner Take All. So instead 5 of it being four, it's $3. 6 But again, it works the exact same way; the 7 money rolls down until you get to a prize tier where there's 8 winners, and all the winners at that tier would split those 9 funds. And we did something similar to what MUSL did with 10 Powerball, the base Lotto Texas game has four prize tiers, 11 and we added two additional tiers to ensure that the prize 12 money would be paid out in every drawing. 13 Again, statisticians have told us we should 14 never ever have to roll the money below the match three tier, 15 but again, as a precaution we added two more tiers so the 16 goal is to pay that money out in every single drawing. 17 Just a brief time line, we are asking you to 18 approve the publication of these rules in the Register today. 19 The rules will publish on the 20th of this month. The public 20 comment period ends in November on the 20th, and then we 21 would bring the rules back to you in December at your 22 December meeting, and ask you to consider those for adoption. 23 And then as I mentioned at the beginning, sales would start 24 in April on the 15th, with drawings beginning on April 19th. 25 That's the end of my PowerPoint. I don't know 0033 1 if Deanne has anything else to present. 2 MS. RIENSTRA: Just a couple more things. 3 With regard to Powerball, additional changes will also 4 conform the game to rule language that is consistent with 5 recent changes made by MUSL. Also, the rule -- there are 6 some amendments as described earlier by Ryan with regard to 7 facilitating ticket sales through Commission-approved point 8 of sale -- third party point of sale systems. 9 Staff recommends initiating rulemaking by 10 publishing the proposed amended game rule in the Texas 11 Register for a period of 30 days. 12 CHAIRMAN KRAUSE: Go ahead and make any 13 additional comments about X if you have any. 14 MS. RIENSTRA: Okay. Right there. 15 So as Robert described, Staff proposes to add 16 the Winner Take All feature to the Lotto Texas draw game. 17 Additional changes will also update the game rule language as 18 described by Ryan, to facilitate ticket sales through 19 Commission-approved third party point of sale systems. Staff 20 recommends initiating rulemaking by publishing the proposed 21 amended game rule in the Texas Register for a period of 30 22 days and for Lotto Texas, we will be holding a rule hearing 23 on November 8th. 24 CHAIRMAN KRAUSE: Commissioners. 25 COMMISSIONER ARRIETA-CANDELARIA: Thank you so 0034 1 much for the presentation. So my question goes back to the 2 education of the players because -- did you run numbers as 3 far as what you anticipate your sales to be? I'm thinking 4 about, Robert, when you asked, you know, when someone goes to 5 buy a ticket and they have to buy a dollar extra and then 6 they have to buy another dollar for the Winner Take All. 7 It would seem to me that that's almost like a 8 cumbersome purchase. You have to ask me twice whether I want 9 one and then, you know, basically two upgrades as opposed to 10 just one. So can you kind of give me a thought process 11 between -- behind what is the -- why you require either the 12 Extra or the Power Play before you get to the Winner Take 13 All? 14 MR. TIRLONI: The idea, Commissioner, is to 15 sell it as a package. We -- both MUSL and us in Texas, like 16 the idea of upselling those extra features, whether it be 17 Power Play or Extra, which is the name of the Lotto Texas -- 18 COMMISSIONER ARRIETA-CANDELARIA: Right. 19 MR. TIRLONI: -- feature. And we have good 20 participation in both of those add-on features. And so we 21 wanted to -- what we wanted to do was we didn't want to allow 22 people to just buy Lotto and buy Winner Take All and 23 basically skip over Extra and basically trade one for the 24 other. We wanted to sell it as a whole package. And that's 25 what Powerball is looking to do as well. 0035 1 From a retailer or a player standpoint, that's 2 how we're going to communicate the information. It is a 3 package purchase. You get your base game, you get your 4 multiplier feature, and then you also get to participate in 5 this extra drawing. 6 I do have sales -- you asked about sales 7 projections though. I have some numbers that Ms. Pyka worked 8 on. 9 For Powerball, they're looking at projected 10 sales of 14.4-million. That's Texas. With revenue of five 11 and a half million. And on Lotto, we're projecting sales of 12 5.3-million, with revenue of 2-million. And that's for a 13 fiscal year. 14 COMMISSIONER ARRIETA-CANDELARIA: And then our 15 point of sale systems are -- you know, will be modified so 16 that you can't skip over, you have to -- 17 MR. TIRLONI: Yes, they'll be -- 18 COMMISSIONER ARRIETA-CANDELARIA: They either 19 have one before you go get the other one. 20 MR. TIRLONI: Yes, ma'am. Yes, that'll be on 21 the retailers' terminals, there'll be a special button for 22 them to be able to make this transaction. 23 COMMISSIONER ARRIETA-CANDELARIA: Okay. 24 That's all. 25 CHAIRMAN KRAUSE: Yes, sir. 0036 1 COMMISSIONER LOWE: So the split is roughly -- 2 I think it's 60/40 or so; is that -- on the pot with the 3 lottery, between the players and the state? 4 MR. TIRLONI: Oh, on the -- I'm sorry. On the 5 Winner Take All? 6 COMMISSIONER LOWE: Winner Take All; I'm 7 sorry. 8 MR. TIRLONI: It's 50 percent. So 50 percent 9 goes to prizes, the other 50 percent gets split out 38 10 percent for revenue, five percent goes to the retailer 11 commission, and then the Agency's administrative is seven 12 percent. 13 COMMISSIONER LOWE: And then I think you 14 covered my question about the anticipated revenue. 15 MR. TIRLONI: Yes, sir. 16 COMMISSIONER LOWE: Have we -- other than with 17 the multi-state groups, have we done a winner take all game 18 in Texas before? 19 MR. TIRLONI: We have not done a winner take 20 all game. Now, we do have a Texas game called Cash 5 that is 21 a parimutuel game that works in very similar fashion. So at 22 the Cash 5 game, if nobody matches all five numbers, the 23 money rolls down to the Match 4 tier, and then that prize 24 increases accordingly. So not identical, but very similar. 25 COMMISSIONER LOWE: All right. 0037 1 MR. TIRLONI: Very similar. 2 COMMISSIONER LOWE: So there -- I guess my 3 question is that there is no expansion of gambling under the 4 context of our current statute, we're not getting outside of 5 what we're allowed to do with this game? 6 MR. TIRLONI: I believe that Winner Take All 7 is very similar to existing games that are in-market. 8 COMMISSIONER LOWE: All right. Thank you. 9 CHAIRMAN KRAUSE: Other Commissioners? 10 Alrighty. Well, I am looking for a proposal to publish the 11 proposed rules described at Items IX and X in the Texas 12 Register. Do I hear such a motion? 13 COMMISSIONER RIVERA: So move. 14 COMMISSIONER HEEG: Second. 15 CHAIRMAN KRAUSE: All in favor say aye. 16 (Chorus of "ayes") 17 CHAIRMAN KRAUSE: Approved. 18 MS. RIENSTRA: Thank you all. 19 MR. TIRLONI: Thank you. 20 AGENDA ITEM XI 21 MS. RIENSTRA: I have one more, which is Item 22 XI. Commissioners, you have been provided the proposed new 23 rule, Texas Administrative Code 324 -- it's 401.324, 24 regarding the prize winner election to remain anonymous. 25 This is submitted without changes and it was published in the 0038 1 Texas Register for a period of 30 days. We did not receive 2 any written comments. 3 At this time, Staff recommends the Commission 4 adopt this new rule. I'm happy to answer any questions. 5 CHAIRMAN KRAUSE: Commissioners? 6 COMMISSIONER LOWE: No. 7 CHAIRMAN KRAUSE: Motion? 8 COMMISSIONER ARRIETA-CANDELARIA: Move to 9 approve. 10 COMMISSIONER LOWE: Second. 11 CHAIRMAN KRAUSE: All in favor say aye. 12 (Chorus of "ayes") 13 CHAIRMAN KRAUSE: Approved. 14 MS. RIENSTRA: Thank you. 15 CHAIRMAN KRAUSE: We're going to hear from 16 Ryan Mindell again. 17 AGENDA ITEM XII 18 MR. MINDELL: Thank you, Commissioners. Ryan 19 Mindell, Assistant General Counsel again. In your notebook 20 as Item XII for your consideration is the adoption of 21 proposed amendments to 16 TAC 401.153, it's qualifications 22 for license, as published in the Texas Register on August 23 25th. As presented in the August meeting, the purpose of 24 this amendment was to add language required by HB 1555 25 concerning the licensing of certain locations licensed to 0039 1 sell alcoholic beverages. We received no comments during the 2 public comment period, and we recommend the Commission adopt 3 proposed rule amendments to 16 TAC 401.153. 4 I'm happy to answer any questions. 5 CHAIRMAN KRAUSE: Do you want to go ahead and 6 talk about XIII and we'll just do both? 7 MR. MINDELL: Sure thing. 8 AGENDA ITEM XIII 9 MR. MINDELL: The next item, Item 13, is mine 10 as well. This is the proposed repeal of 16 TAC 401.323, the 11 Monopoly Millionaires' Club Game Rule, as published in the 12 Texas Register on August 25th as well, and as presented in 13 the last meeting, the purpose of this repeal was to remove 14 references to the discontinued game that is no longer offered 15 by the Commission. 16 We also received no comments during the public 17 comment period and we recommend the Commission adopt the 18 proposed repeal to 401.323. 19 Happy to answer any questions about this as 20 well. 21 CHAIRMAN KRAUSE: Any questions on either of 22 those items, Commissioners? All right. Looking for a motion 23 to adopt the rules prescribed in XII and adopt the change to 24 repeal the rule in number XIII. 25 COMMISSIONER RIVERA: So moved. 0040 1 COMMISSIONER LOWE: Second. 2 CHAIRMAN KRAUSE: All in favor say aye. 3 (Chorus of "ayes") 4 CHAIRMAN KRAUSE: Approved. 5 MR. MINDELL: Thank you, Commissioners. 6 AGENDA ITEM XIV 7 MR. BIARD: Commissioners, I have Item XIV 8 today for Steve White who couldn't be with us. This is 9 another rule adoption. At the last meeting we brought to you 10 401.207. This is a proposal to describe the Commission's 11 default proceedings process. This is the process we worked 12 out with the State Office of Administrative Hearings earlier 13 this year so that in cases where the Respondent doesn't 14 appear, SOAH can handle that by default. And we've added to 15 that proposal a requirement that the Respondent submit an 16 answer to a notice of hearing telling us that they're going 17 to contest the allegations, basically letting us know we're 18 going to have a contested -- a litigated contested case. And 19 if they do not file an answer, we are -- intend to proceed by 20 default at SOAH. If the Respondent happens to show up 21 anyway, our intention is to ask for a continuance. And that 22 way we will only prepare for a fully litigated hearing if we 23 know that a Respondent is coming and we're going to have a 24 contested case. 25 And we recommend approval of this proposal. 0041 1 There were no comments filed. 2 CHAIRMAN KRAUSE: Comments? 3 COMMISSIONER HEEG: I had a question. If they 4 don't file a notice that they're going to contest, and they 5 show up, are we entitled to a continuance or are we asking 6 for one? 7 MR. BIARD: We're asking for a continuance. 8 It's up to the SOAH judge, but the SOAH judge looks to our 9 rules, so what we did is we put in our rules that we can -- 10 we consider that to be good cause to grant a continuance. 11 COMMISSIONER HEEG: Okay. Thank you. 12 CHAIRMAN KRAUSE: Any other questions? Need a 13 motion to begin the rulemaking process? 14 MR. BIARD: This is for adoption on this one. 15 CHAIRMAN KRAUSE: Oh, okay. To adopt. 16 COMMISSIONER HEEG: So moved. 17 COMMISSIONER ARRIETA-CANDELARIA: So moved. 18 CHAIRMAN KRAUSE: Okay. Second? 19 COMMISSIONER HEEG: Second. 20 CHAIRMAN KRAUSE: All in favor say aye. 21 (Chorus of "ayes") 22 CHAIRMAN KRAUSE: Approved. 23 MR. BIARD: Thank you, Commissioners. 24 CHAIRMAN KRAUSE: Ms. Pyka. 25 0042 1 AGENDA ITEM XV 2 MR. GRIEF: Mr. Chairman, if I could open up 3 this Item for Kathy and Robert. 4 CHAIRMAN KRAUSE: Absolutely. 5 MR. GRIEF: In just a moment, they're going to 6 take the Commission through a detailed review of our sales 7 and revenue for fiscal year 2017. And the substance of that 8 information was contained in the press release which you all 9 received last week. 10 I just wanted to add one comment and really an 11 amplification to preface their presentation this morning. 12 And that is the kind of success that you're going to hear 13 about today for our fiscal year last year, all of which 14 occurred without the help of any record breaking jackpots 15 during fiscal year 2017 and instead, on the back of record 16 breaking scratch ticket sales, that kind of success only 17 occurs with flawless execution, creative ingenuity, 18 innovative products, and great teamwork. Those are the 19 hallmarks of our organization and obviously, as you can tell, 20 I'm extremely proud of our Texas Lottery team, which includes 21 our trusted vendors and our almost 18,000 retailers located 22 across the state, for achieving, once again, for the seventh 23 consecutive year, record breaking sales for the Texas 24 Lottery. 25 And with that introduction, I'll turn it over 0043 1 to Kathy and Robert. 2 MS. PYKA: Thank you, Gary. For the record, 3 Kathy Pyka, Controller for the Commission, and with me is 4 Robert Tirloni, our Products Manager. 5 Commissioners, this morning we will be 6 presenting our final fiscal year 2017 revenue and sales data 7 for the Commission. We'll begin our presentation with 8 revenue highlights. The Commission completed the fiscal year 9 with $1,334,000,000 in accrued revenue transfers to the 10 state. This is the second highest revenue transfer in the 11 Texas Lottery history, only behind the record set last fiscal 12 year when Powerball reached the record $1.6-billion jackpot. 13 Fiscal year 2017 marks our 14th consecutive 14 year that we've transferred more than $1-billion to the 15 state's coffers in overall transfers. 16 So looking at that overall revenue transfer, 17 we transferred $1,313,000,000 to the Foundation School Fund. 18 That represented a $45.3-million decrease or 3.5 percent in 19 lottery contributions to public education in Texas, as 20 compared to last fiscal year. And this, too, was the second 21 largest revenue transfer in Foundation School Fund history. 22 So with that, our total revenue transfers to 23 the Foundation School Fund now exceed $21-billion in total 24 revenue, and then the other item that I wanted to highlight 25 is we transferred $16.2-million directly to the Texas 0044 1 Veteran's Commission from the sale of scratch off tickets, 2 dedicated to the fund for Veterans' assistance. And this is 3 the largest annual transfer to the Texas Veterans Fund since 4 the designated scratch off game began. 5 So another record that I'd like to highlight 6 is the value of prizes paid to players with more than $3.3- 7 billion won by our players. And this broke the previous 8 record that we set in fiscal year 2016. Our retailers were 9 paid more than $253-million in commission payments. This, 10 too, was another record in payments to our commission -- or 11 to our retailers. And then finally, we concluded the fiscal 12 year with an administrative expenditure rate of 4.6 percent, 13 which is the lowest administrative ex -- one of the lowest 14 administrative rates in the country. And that's calculated 15 as a percentage of total sales. 16 So now we'll move on to our sales data. So 17 for the second time in our history, our sales exceeded $5- 18 billion, coming in at $5,077,000,000, and that, as Gary 19 mentioned, surpassed the previous record set last fiscal year 20 by $10-million. So we ended the fiscal year with 21 $3,940,000,000 in scratch ticket sales as noted on the second 22 orange column, and this is a new sales record, marking the 23 best year of scratch off ticket sales since we began selling 24 tickets. And this reflects a sales increase of more than 25 $219-million above the $3,720,000,000 sales record that was 0045 1 set last year. 2 Draw sales concluded the year with 3 $1,140,000,000 in sales as noted on the second blue bar, and 4 this is a decrease of $209-million from fiscal year 2016. 5 And so, again, as Gary pointed out earlier, it's important to 6 note that even without that multi-state jackpot, we were 7 still able to beat the 2016 sales record with the sales 8 growth that we had from our scratch ticket product during 9 fiscal year 2017. 10 So with that, Robert will provide an overview 11 of sales -- oh, wait, I have one more slide. Sorry. 12 So this is an overview of sales that takes us 13 through the 26-year history of scratch and draw sales for the 14 Commission. So beginning with scratch ticket sales that are 15 noted on the orange bar, in the first year of operations we 16 had $591,000 of scratch ticket sales in fiscal year '92, and 17 then it provides an overview through the growth to the 18 $5,077,000,000 mark that we met last fiscal year. 19 So now with that, Robert will provide a detail 20 of sales by product. 21 MR. TIRLONI: Thanks, Kathy. Commissioners, 22 this is our comparison of '17 to '16 by product. I'll drop 23 down over to draw games as a whole. Those were down $209- 24 million. You can see the bulk of that is coming from the 25 jackpot category. And drilling down even further, you can 0046 1 see the bulk of that is coming from Powerball at $152-million 2 deficit. 3 I will make a note that we did have a jackpot 4 roll-up in August right at the end of our fiscal year on 5 Powerball, so we did get up to $700-million. That actually 6 did help us quite a bit. When we last met at the beginning 7 of August, this deficit was almost $219-million. So that 8 jackpot did help kind of bridge that gap a little bit. 9 Power Play was down almost 20-million, so it 10 also helped with the add-on feature. 11 But as a whole, 209-million down on draw due 12 to the record breaking scratch ticket sales, we had a surplus 13 of $219-million in '17 compared to '16. So we did net out 14 the year with 10-million growth, getting us to the 15 $5,077,000,000. 16 This is just a visual of the split between our 17 two product categories. So this represents the 5.08-billion 18 in sales for the year. Scratch makes up 78 percent of the 19 sales, with draw coming in at 22. This is not abnormal for 20 us. 21 Last year it was about a 73/27 split, but if 22 you remember, that's when we had the record breaking $1.6- 23 billion Powerball jackpot, so that boosted draw up, and 24 that's why it had a bigger percentage last year. But this is 25 a pretty typical split for us. As you all are aware, we're a 0047 1 very heavy instant state or scratch state. 2 This next pie chart shows just draw games for 3 the year. So this pie chart represents $1.1-billion in draw 4 sales. I'll give you the top three; Powerball. Even without 5 record breaking jackpots, it was our best selling draw game. 6 Followed by one of our daily games, Pick 3, that came in at 7 255-million. And Mega Millions, even without super big 8 jackpots, that did come in third at 166, just under 167- 9 million. So those would be the top three for draw. 10 We do see Daily 4, I'll just make a note about 11 that. That game continues to grow. So that is a growing 12 product category, or I should say that is a growing product 13 in our draw game category. 14 This is basically the same pie chart, but it's 15 breaking down scratch for you by the different price points. 16 So this represents just under $4-billion in scratch ticket 17 sales. Again, I'll give you the top three. The $5 price 18 point continues to be our best selling price point. I will 19 note, it is down a little bit in terms of the percentage. 20 The 10 is our second-best seller, and that has 21 grown. So the 10 continues to be a growing price point for 22 us. So 5 is our best selling, 10 is our second best selling, 23 and 20 is our third best selling in terms of percentage, this 24 is remaining constant. 25 And again, this is a record breaking sales 0048 1 year, 3.94-billion for scratch. 2 The last slide to show you today is just our 3 top 15 scratch ticket games for the year. You'll see the 4 number one selling game for the year is a $20 game called 5 100X The Cash. That was part of a family or a suite of 6 multiplier games. Multiplier games do really well for us. 7 We usually put one out per year. A whole family like a one, 8 two, three, five, 10 and 20. And this was the $20 game in 9 that family. It sold just under $135-million. 10 Our Loteria category is very strong, very 11 popular. We have expanded that. It started at a three and 12 it is expanded to a five and also to a 10. This game, our 13 $200-million payout game, was a spotlight game. That's a $10 14 game where we print a very, very large print run. 15 The only other thing I'll note as you look at 16 this is our $50 game, $7,500,000 Ultimate Cash, Super Break 17 the Bank, Willy Wonka, and this Ultimate Millions games, we 18 would categorize those as innovations that we introduced last 19 year, whether that be a licensed property or a proprietary 20 printing process that our vendors have or some type of 21 specialized production method, those were innovations that we 22 first introduced. And Kathy has done an analysis and of that 23 almost 4-billion in sales, she has been able to attribute a 24 billion dollars in scratch ticket sales to new product 25 innovations. So those certainly helped us reach our record 0049 1 breaking numbers for this past year. 2 3 And that is the report for the fiscal year. 4 We're happy to answer questions. 5 CHAIRMAN KRAUSE: Commissioner, yes, 6 questions? 7 COMMISSIONER RIVERA: Excuse me. Great job 8 across the board. These numbers are great, again, because we 9 did not have that huge Powerball. So it is a true statement 10 that 2017, 2016, years completed are the two largest grossing 11 years to the state. 12 MS. PYKA: That is correct. 13 COMMISSIONER RIVERA: So we're at the pinnacle 14 of what this organization really has ever done. 15 What is the gross number? I know we had the 16 1.334-billion to the state. What's the gross for the year? 17 MS. PYKA: The gross is the -- when we look at 18 the overall revenue transfers, that is the gross value of 19 revenue transfer to the state. And of that, the amount that 20 went to the Foundation School Fund is the one billion three 21 hundred and thirteen -- 22 COMMISSIONER RIVERA: Right. Not the net; 23 what's the gross? 24 MS. PYKA: The gross is the sales value of 25 5,077,000,000. 0050 1 COMMISSIONER RIVERA: Okay. Perfect. Thank 2 you. 3 MS. PYKA: You're welcome. 4 COMMISSIONER LOWE: Can I have a question? 5 CHAIRMAN KRAUSE: Yes. 6 COMMISSIONER LOWE: So let me go back a little 7 bit in time as far as what's happened with the retailer 8 bonuses. So first of all, have you had any reaction from 9 retailers about that going away, anybody -- 10 MR. TIRLONI: I can answer that. We have had 11 some outreach from our corporate accounts inquiring about 12 that. They've received information about that. We do have 13 the retailer bonus program through this entire fiscal year, 14 so we have it through August of '18. We've already provided 15 the IGT sales force with talking points about that to let 16 retailers know that it is intact and we do have it. It does 17 end at the end of '18, though, so we've had some negative 18 reactions, some disappointment from the retailer community, 19 that once we complete this current fiscal year that program 20 will no longer be available. 21 COMMISSIONER LOWE: And so secondly, refresh 22 my recollection, if we're not going to be paying it, how much 23 more will we be able to transfer to the foundation as a 24 result of elimination of that? 25 MS. PYKA: The value of the appropriation is 0051 1 $4.2-million a year. So we will actually -- that was not 2 appropriated to us in the second year of the biennium and so 3 it obviously goes directly to revenue. 4 COMMISSIONER LOWE: Okay. That's all -- that 5 was my question. 6 COMMISSIONER LOWE: Alrighty. 7 COMMISSIONER HEEG: I had a question. 8 CHAIRMAN KRAUSE: Yes, ma'am. 9 COMMISSIONER HEEG: Great results and I think 10 it's attributable to the innovation and you guys 11 understanding the market and constantly coming up with new 12 products. 13 Did I understand correctly, though, that the 14 revenues went up and the commissions went up, but the 15 transfer to the state went down? 16 MS. PYKA: That is correct. 17 COMMISSIONER HEEG: Can you explain why that 18 is? 19 MS. PYKA: Most certainly. And so when you 20 look at the product mix of sales this past fiscal year, 21 Robert noted that we had a much higher value percent of sales 22 that were from scratch ticket products, which have a higher 23 prize payout than do our draw products. And so because we 24 had the large record setting jackpot in fiscal year '16, that 25 allowed for a greater revenue transfer in fiscal year 2016 as 0052 1 compared to '17. 2 COMMISSIONER HEEG: Thank you. 3 MS. PYKA: You're welcome. Other questions? 4 CHAIRMAN KRAUSE: I don't have -- 5 COMMISSIONER HEEG: Great job. 6 CHAIRMAN KRAUSE: You know, when Governor 7 Perry appointed me back in '09, he told me that the goal was 8 to run the best lottery possible and I'm convinced during the 9 last eight years that there's no doubt that we're running the 10 best lottery in the country and that's because we have 11 outstanding staff. And so, thank you very much. 12 In spite of some of the turbulence that we've 13 experienced from the Legislature in the last session, you 14 keep doing outstanding work and we all are very proud of you 15 for that. Thank you. 16 MR. TIRLONI: Thank you very much. 17 MS. PYKA: Thank you. 18 CHAIRMAN KRAUSE: You bet. 19 AGENDA ITEM XVI 20 MS. PYKA: So Mr. Chairman, the next item 21 under Item XVI is an update on revenue results for fiscal 22 year '17. We have covered it in the PowerPoint if you would 23 like to move forward to the next item. 24 CHAIRMAN KRAUSE: All right. Well, thank you 25 very much. 0053 1 MS. PYKA: Sure. 2 AGENDA ITEM XVII 3 CHAIRMAN KRAUSE: Darlene Brown. More good 4 news for us. 5 MS. BROWN: Good morning, Commissioners. I'm 6 Darlene Brown with the Internal Audit team. I have a lot of 7 items for you today, so I'll try to move through them 8 quickly. 9 The first one is our status report and we 10 finished up the fiscal year '17 audit plan and completed 11 every audit that was on the plan, and we actually came in 26 12 percent under budget. And that's due to the good processes 13 that the Agency has in place. It did not take us as long to 14 complete audits as what we had anticipated in our original 15 budget. 16 So I'm now going to move on to some action 17 items for review. I have six audit reports that I presented 18 over the past couple of weeks, mainly over the past days. 19 The first audit report that I have to present 20 to you is an employee time and leave report. We looked at 21 all the processes in place to monitor the way staff are 22 recording their time and make sure that they're not getting 23 paid for hours not earned or in their leave balances. 24 Happy to report there that we have given the 25 audit an effective internal control rating and best practices 0054 1 in the aspect of monitoring time. We did have two small 2 recommendations and that's clarification points in the 3 employee manual, to state that the employee is responsible 4 for accurate time entry and that the automated system that 5 the Agency has is their system of record so that staff do not 6 have to keep documents of their time and leave requests, 7 except for those that fall under special circumstances. 8 The second report is the crisis management 9 plan that the Agency has. And we looked at the statutory 10 requirements that are required to be included in the crisis 11 management plan and then we also laid that up against 12 national best practices. This Agency has gone above and 13 beyond the statutory requirements for the contents of their 14 plan and the fact that they -- each division also has a 15 component of that and is well documented, exceeded national 16 standards also. 17 And I must tell you that we've looked at our 18 other client crisis management plans and this one goes far 19 and above what we've seen at other agencies. So we gave that 20 one the audit fully compliant with statutory requirements. 21 The third one is the second chance drawing 22 process and we looked at the controls around reviewing, 23 making sure only eligible tickets are entered into the 24 drawing and then certification of the drawing process. Happy 25 to report there also that they have effective internal 0055 1 controls and we actually think that the processes that this 2 Agency has in place should be replicated by other states and 3 we're going to work with our internal audit group at the 4 NASPL to see what we can do about getting some of these 5 audits done to see how they can get the recommendations 6 incorporated in theirs. 7 Under the active directory audit and that is 8 where the -- how the Agency controls access to the network 9 and the information on the network, we -- they have effective 10 internal controls in that aspect also and they have best 11 practices in the way that they grant access to users. 12 If somebody needs or requests access to data 13 on the network, that the vision leader in charge of that 14 respective area has to authorize that. So that's a best 15 practice. 16 Scratch ticket working paper workflow system, 17 this is where the Agency designed a system internally to 18 electronically process and review those scratch tickets that 19 you've heard such great success on, and there's a lot of 20 components that go into those tickets that are required to be 21 accurate, and so there's an automated process now to make -- 22 capture all those approvals and retain that documentation. 23 So we gave those internal controls effective and best 24 practices processes, again, something that would be nice to 25 be replicated by other state lotteries. 0056 1 And then the last report is a jackpot 2 estimation system. Again, this is where the Agency last year 3 created an automated system, not automated electronic system, 4 to capture the review and the processing and the posting of 5 the jackpot estimations to make sure it's all accurate and 6 everybody's reviewed before they actually get publicized. We 7 gave that one best practice and effective internal controls. 8 So that's my six audit reports and I'll be 9 happy to answer any questions on those if you have any. 10 CHAIRMAN KRAUSE: Questions? I'd like to 11 point out that best practices are the highest finding that we 12 can receive from our internal auditor and so, not only have I 13 -- do I appreciate that, but I also want to recognize that we 14 have those best practices because of our great staff. You 15 know, we have outstanding staff. 16 In addition, I want to just remind my fellow 17 Commissioners that at the dawn of time when I, you know, 18 began serving, we had an internal audit function that was a 19 direct report to the Commission. And there was a whole staff 20 of employees and it didn't really work out that well. And 21 now what we've got is we have an external/internal auditor 22 that has brought experience, not only with our Agency, but 23 with other agencies, so that they can see what everybody else 24 is doing that they're working with. And I am really pleased 25 with what I heard just a few minutes ago about the fact that 0057 1 other agencies ought to be doing what our staff is doing. 2 And so therefore, more reason to be pleased with, you know, 3 what our Commission is doing. Thank you very much. 4 Any other questions/comments? 5 (Chorus of "nos") 6 MS. BROWN: Thank you. So I will need -- 7 CHAIRMAN KRAUSE: Oh, we have -- this is an 8 action item. 9 MS. BROWN: Uh-huh (affirmative). 10 CHAIRMAN KRAUSE: Okay. Let's approve these 11 great reports. Anybody want to make a motion? 12 COMMISSIONER LOWE: So moved. 13 COMMISSIONER RIVERA: Second. 14 CHAIRMAN KRAUSE: Approved. 15 MS. BROWN: Thank you. 16 CHAIRMAN KRAUSE: All in favor say aye. 17 (Chorus of "ayes") 18 CHAIRMAN KRAUSE: So anyway, I knew that was 19 coming. 20 AGENDA ITEM XVIII 21 MS. BROWN: The next one is also an action 22 item and that is the proposed annual internal audit plan for 23 fiscal '18. 24 We plan to do less audits this year, but they 25 are more strategic and will require a lot more hours per 0058 1 audit. We plan to do seven audits. 2 One is looking at the personal identification 3 information, how is the Agency handling all this confidential 4 information they have. 5 Another one, we're going to look at social 6 responsibility, where we're looking at not only the 7 responsible gaming program, but the agency's, how -- what are 8 they doing for community and what are you doing for your 9 staff. It's a big topic for especially the millennials, and 10 that helps you attract employees. 11 I want to also look at the bingo education 12 program and then the drawing equipment maintenance controls 13 and unclaimed prize processes and then the instant game 14 closing process, which is your scratch ticket. And then we 15 will look at the mail room processes to see how handling of 16 those tickets that are coming back in for claims are being 17 processed. 18 So if you're in agreement with the audit plan, 19 I would like to ask for approval on that. 20 COMMISSIONER ARRIETA-CANDELARIA: I have a 21 quick comment. 22 CHAIRMAN KRAUSE: Please. 23 COMMISSIONER ARRIETA-CANDELARIA: Darlene, 24 just a quick question or comment. So for this next year on 25 the hotline reports, could we just get a summary -- 0059 1 MS. BROWN: Sure. 2 COMMISSIONER ARRIETA-CANDELARIA: -- of that? 3 MS. BROWN: Sure. 4 COMMISSIONER ARRIETA-CANDELARIA: I'd like it 5 included in our packet whenever you report out. 6 MS. BROWN: Absolutely. 7 COMMISSIONER ARRIETA-CANDELARIA: It would be 8 helpful for us to see like -- or at least for me, you know, 9 number of complaints that we got resolved, in the queue, 10 whatever. 11 MS. BROWN: Absolutely. I can tell you for 12 the three years that we've been monitoring there has not been 13 one complaint filed. 14 COMMISSIONER ARRIETA-CANDELARIA: Oh, that's 15 fantastic. 16 MS. BROWN: Uh-huh (affirmative). But I will 17 start including that on the status reports. 18 COMMISSIONER ARRIETA-CANDELARIA: Okay. 19 That'd be great. Thank you so much. 20 MS. BROWN: Uh-huh (affirmative). 21 CHAIRMAN KRAUSE: Any other questions or 22 comments? Do we have a motion to adopt the fiscal year 2018 23 annual internal plan? 24 COMMISSIONER RIVERA: So moved. 25 COMMISSIONER ARRIETA-CANDELARIA: Second. 0060 1 CHAIRMAN KRAUSE: All in favor say aye. 2 (Chorus of "ayes") 3 CHAIRMAN KRAUSE: Approved. 4 MS. BROWN: Thank you. 5 CHAIRMAN KRAUSE: Thank you, ma'am. 6 MS. BROWN: I have one more item for approval 7 and this is a statutory requirement. And it's the fiscal 8 year 2017 annual internal audit report. It's required by the 9 State of Texas Internal Auditing Act and then the SAO gives 10 guidance on what they want included in the report each year. 11 Everything has stayed the same from other 12 years, so it includes a summary of what we did in 2017 and 13 what we propose to do in 2018. 14 COMMISSIONER ARRIETA-CANDELARIA: I move to 15 approve. 16 CHAIRMAN KRAUSE: Do we have a motion? 17 COMMISSIONER ARRIETA-CANDELARIA: Move to 18 approve. 19 COMMISSIONER RIVERA: Second. 20 CHAIRMAN KRAUSE: All in favor say aye. 21 (Chorus of "ayes") 22 CHAIRMAN KRAUSE: Approved. 23 MS. BROWN: Thank you. 24 CHAIRMAN KRAUSE: We are down to our Bingo 25 Operations Division report. Alfonso Royal. 0061 1 MR. ROYAL: Thank you, Chairman. 2 CHAIRMAN KRAUSE: You're up. 3 MR. ROYAL: Commissioners, this is somewhat of 4 a new agenda item. As previously, the Bingo Division has 5 only brought forth for discussion financial data from the 6 annual report generally at the April meeting. We compiled 7 data from the submission of Texas Bingo reports from 8 licensees that is submitted quarterly, so I think it more 9 appropriate and transparent to report the data in the same 10 time frame. I've asked Desira Glenn, the Bingo Division's 11 Licensing and Accounting Services Manager, to highlight the 12 financial data in the report. Desira? 13 MS. GLENN: Thank you, Alfonso. Good morning, 14 Mr. Chairman and Commissioners. 15 This report compares the bingo operations of 16 licensed conductors in the areas of gross receipts, prizes 17 awarded to players, total expenses and charitable 18 distributions, for the first two quarters, that's January 19 through June, of calendar year 2017, to the same period for 20 2016 and 2015. The information in this report is as of 21 September 12th, 2017, and is unaudited. 22 Gross receipts for the first two quarters of 23 2017 was 395.5-million. This represents a .3 percent or 1.1- 24 million increase in comparison to 2016 and a 1.1 percent or a 25 4.4-million increase, compared to 2015. 0062 1 In the first two quarters of 2015, prizes 2 awarded was 295.3-million. There was a 2.4-million increase 3 for the same period in 2016, and an additional 900,000 4 increase for the same period in 2017, resulting in total 5 prizes awarded of 298.6-million for 2017. This represents a 6 .3 percent increase from 2016 and a 1.1 percent increase from 7 2015. 8 Total expenses for the first two quarters of 9 2017 was 77.7-million. This is a .9 percent or 686,000 10 increase in comparison to 2016 and a 1.8 percent or 1.4- 11 million increase in comparison to 2015. Total expenses can 12 be further delineated by rent, which was shown -- which as 13 shown on the slide was approximately 22.9-million in the 14 first two quarters of 2015, and increased 3.3 percent or 15 757,000 to 23.6 million in 2016, and then increased an 16 additional 1 percent or 229,000, for the first two quarters 17 of 2017, to approximately 23.9-million. 18 Other expenses total approximately 53.8- 19 million for quarters one and two of 2017. This is a .9 20 percent or 457,000 increase in comparison to 2016, and a .7 21 percent or 364,000 increase from 2015. Also, if you look at 22 2016, you will notice that there was a decrease in expenses 23 of approximately $93,000. 24 Included in this other expenses category are 25 bingo worker salaries, professional fees, advertising and 0063 1 promotions, and premise expense, which has varied from 2015 2 through 2017. Cost of goods sold which has remained steady 3 at approximately 17.5-million each year, and license fees, 4 which, although they have been statutorily eliminated 5 beginning September 1st, account for less than half of 1 6 percent of total expenses. 7 From the first two quarters of 2015 when 8 charitable distributions totaled approximately 15.8-million, 9 to the same period for 2017, where charitable distributions 10 total approximately 16.2-million, we see that nearly 485,000 11 more dollars went to various charitable purposes around Texas 12 in 2017 than in 2015. This is an increase of 3.1 percent. 13 Thank you. That concludes my report and I 14 turn it back to Alfonso. 15 MR. ROYAL: Commissioners, 2017 is trending up 16 thus far, and I look forward to the continued success of 17 bingo as a fundraiser, for the many Texas charities to help 18 them with the various submissions. As I look back on where 19 we have come from in some three years ago, instituting a 20 robust audit and game inspection program, as well as a 21 constant and steady focus on education, promoting voluntary 22 compliance, the industry has been responsive. So much so 23 that prizes awarded to players, gross receipts, have all 24 increased, cost of goods sold has decreased. Thank you 25 distributors and manufacturers. 0064 1 Expenses increased and in particular 2 charitable distribution's increased. A true measure of 3 successful bingo. 4 Lastly, rent paid to lessors also increased 5 some 13 percent. We still have some work to do, particularly 6 in the area of reasonable and necessary expenses, including 7 rent, but I'm extremely encouraged about the future of bingo 8 and where the results are so far. 9 Thank you, Commissioners. 10 CHAIRMAN KRAUSE: Questions, comments? 11 COMMISSIONER LOWE: So to back up just a bit, 12 Desira, the gross sales were 700-million or something? Tell 13 me the number again? 14 MS. GLENN: The gross receipts for the first 15 two quarters of 2017 was 395.9 million. 16 COMMISSIONER LOWE: The cost of goods sold was 17 tell me again? 18 MS. GLENN: The cost of goods sold I did not 19 provide a specific data, however, I did state that it remains 20 pretty consistent at approximately 17.5-million per year. 21 COMMISSIONER LOWE: So as a percentage of 22 sales, the distribution to charities, do you know what that 23 percentage is, 16 -- 24 MS. GLENN: That -- 25 COMMISSIONER ARRIETA-CANDELARIA: It's 4 -- 0065 1 I've heard 4 percent. 2 MS. GLENN: Yeah. 3 COMMISSIONER ARRIETA-CANDELARIA: I had the 4 same question. It says 4.02, 4.08, 4.1, '15, '16, '17. 5 COMMISSIONER LOWE: So 4 percent is going to 6 charities out of the gross receipts? Okay. Do you have a -- 7 do we divide it out based on the business models? So if we 8 have a -- a model like our VFWs or American Legions versus 9 the model, the business model, where you have an operator and 10 a lessor that basically handles everything? 11 MS. GLENN: If you're referring to our 12 charitable distributions? 13 COMMISSIONER LOWE: Yes. 14 MS. GLENN: So the required distribution is 15 set on a formula and as soon as we get in our calculated data 16 it's set on a formula. And once they meet their charitable 17 distribution requirement, you know, we're fine with those 18 numbers. However, historically, all of our organizations 19 tend, again, the majority of our organizations tend, to 20 distribute way more than their required minimum distribution. 21 So we go -- so every number above that is just what the 22 organization itself has brought in in revenue, minus their 23 expenses, their prize fees, and their retained operating 24 capital. Everything else goes out as charitable 25 distributions. However, we require a specific minimum 0066 1 charitable distribution based, again, on the calculation, on 2 the formula, however, anything they put out above that is not 3 as a requirement of us. 4 COMMISSIONER LOWE: So it is a floating 5 percentage or is it -- tell me what the percentage is. 6 MS. GLENN: It is. It -- I can't -- it's 7 completely based off of that specific organization's 8 operations and it's calculated by our system. So at a later 9 time I can provide the formula to you. 10 COMMISSIONER LOWE: So I don't know if this is 11 an appropriate time to bring this up or not, but tell me, 12 from as far as reporting, how we're going to deal with this 13 law that allows lessors and operators to essentially loan 14 money to a charity? Is that -- can we talk about that now? 15 MS. GLENN: I believe I'll turn that over to 16 you. 17 MR. ROYAL: Commissioner, that was a change in 18 part of what was in the enacted legislation that previously a 19 commercial lessor was a qualification so that you cannot give 20 them, award them a license, if they loaned money to or 21 extended credit to a licensed organizations. So that is no 22 longer a disqualifying factor for receipt of a license. 23 COMMISSIONER LOWE: And I understand to some 24 extent why the legislature would want to do something like 25 this, but I think it's going to present problems to us being 0067 1 able to get an accurate picture, financial picture, of the 2 charity, what's going on, because you -- unless you see a 3 balance sheet, you're not going to know how much somebody is 4 making because what happens is you just push -- you just push 5 those expenses over to a liability on the balance sheet, and 6 we don't ask for a balance sheet, we don't ask for how much 7 you owe the lessor. So we're not going to be able to get an 8 accurate picture of what's going on in these charities, 9 because you can manipulate the financial statements and not 10 catch it. So I think that we're going to have -- have to 11 have some rulemaking on this issue to convince -- so that we 12 know what's going on and we're not just dealing with 13 financial manipulation. 14 So anyway, thank you, Desira, and I appreciate 15 -- I know this -- that this -- I'm pushing this report thing 16 on you guys because I think it's important, even though we're 17 not as big as the lottery, but it's important to the people 18 that are involved in the Bingo Division to have these reports 19 and I do thank you and Alfonso for making this work and 20 making these presentations to us. 21 MS. GLENN: Yes, sir. 22 COMMISSIONER LOWE: Thank you. 23 COMMISSIONER ARRIETA-CANDELARIA: And I also 24 have a question. And thank you so much for the presentation. 25 I think I brought this issue up last time when you presented. 0068 1 So the charitable distributions, it's still in my opinion a 2 very small percentage when you look at the total sales. And 3 maybe I'm comparing that to the lottery distributions, but 4 only 4 percent of your sales goes to charitable distributions 5 and 75 percent goes to prizes awarded, it seems like the 6 intent is not for charity, the intent is for something else. 7 So I -- I'm assuming that that's not statutory because the 8 numbers are pretty consistent for the last three years, 9 right, so the expenses is -- are incredibly consistent for 10 these last three years. 11 So is there -- it's not in statute that says 12 we have to at least distribute a certain amount, is it? 13 MR. ROYAL: No, ma'am. It is not. 14 COMMISSIONER ARRIETA-CANDELARIA: So -- 15 MR. ROYAL: We are working toward and that's 16 through the, you know, the case by case basis, where we do 17 the audits, we focus in on those expenditures, because each 18 individual organization, each one of those charities, is 19 basically the -- bingo is their own business model. And so 20 how they operate, we look at in combined totality all of our, 21 you know, one -- over 1000 licensees, but there are some 22 operators who, if you look at their percentage of sales, it's 23 in the 40, 45 percent -- percentile, and then there is others 24 that are less than 1 percent. So overall, that averages how 25 we get to that almost 4 percent. 0069 1 Three years ago -- I know it's still a small 2 number; three years ago we were just over 3 percent, so there 3 has been some improvement. In 2014 there was a joint select 4 committee, senate and house members, who legislated to study 5 this issue and that was the whole basis for it, increasing 6 what can be done to increase that charitable distribution, 7 those monies that flowed to those charities. 8 COMMISSIONER ARRIETA-CANDELARIA: So do you 9 see with any of the legislative changes, do you see those 10 percentages increasing for the charities? 11 MR. ROYAL: I see the charities will not be, 12 you know, in particular there's no longer a license fee, so 13 as Mr. Bresnen spoke earlier, those are fees that no longer 14 they'll have to expend. But when you look at our highest 15 license class, it used to be at $3300 and those are for sales 16 in excess of $400,000. And on average, those organizations 17 had sales of $1.2-million. To say that $3000 is going to 18 significantly change your operations one is naive to think 19 so. 20 We have to look at those areas of expenses in 21 reasonable and necessariness. And it's also combined with 22 increasing attendance, increasing marketing, getting foot 23 traffic to the games, exciting the attractiveness of games 24 that are played in the various halls. So it's a combination. 25 I don't want to say that poking one particular area, expenses 0070 1 or marketing, but expenses are the largest component of that. 2 COMMISSIONER ARRIETA-CANDELARIA: Okay. I just 3 think it's considerable. So on the rent component, is it -- 4 this is for like a third party individual that has renting 5 out a gaming facility or bingo hall; is that what -- 6 MR. ROYAL: Commissioner, it varies. 7 COMMISSIONER ARRIETA-CANDELARIA: Something 8 they pay it back to themselves? 9 MR. ROYAL: There are commercial lessors who 10 have the hall themselves and they lease directly to licensed 11 organizations. There are some conductors who have 12 associations where two or more charities get together and 13 they become the lessor. 14 COMMISSIONER ARRIETA-CANDELARIA: Okay. 15 MR. ROYAL: And so those rental rates vary. 16 The agreements vary. 17 COMMISSIONER ARRIETA-CANDELARIA: I just think 18 it's significant, like 4 percent is -- 19 COMMISSIONER HEEG: Is there something -- just 20 so I understand, there are authorities, is there something we 21 could do if we wanted to, to have a minimum percentage of 22 revenues go to charity? Could we adopt a rule or is that 23 outside our authority? 24 MR. ROYAL: I'm going to defer to Bob. 25 MR. BIARD: Under the Bingo Act, the 0071 1 Commission has the ability to determine what reasonable -- 2 what expenses are reasonable, and I think that's probably the 3 focus of this agency's authority. I mean, they can audit all 4 of these licensed entities and determine, for lessor rents, 5 what are reasonable. I'm talking about the charities, and 6 their expenses. 7 COMMISSIONER LOWE: And you know, I'd hesitate 8 to do that, because as Alfonso pointed out, there's these 9 different business models that are in place. Just for 10 example, I've got a dog named Hope, and the reason we call 11 her Hope is we hope she comes home. So anyway, the lady that 12 found her is the -- she runs the animal rescue or raises 13 money for animal rescue, and I said Brenda, how's it working 14 out with bingo, because they're one of the bingo -- they have 15 a bingo license there in Palestine, she said it's wonderful. 16 We don't hardly do anything and we get a check. I said, 17 well, do you know anything about, you know, what's going on? 18 No, we just get a check. 19 So you've got those kind of operations, they 20 just -- they're getting money, and then you've got the VFWs 21 and the American Legions that are operating themselves. So 22 I'm not sure we can just say -- maybe if we look at it over a 23 long period of time and do some studies, but I'm not -- at 24 this point in time, I'm not sure that's really an appropriate 25 thing. 0072 1 But I think we've got to deal with these 2 issues, because what's the ma -- what -- the maximum amount 3 of money the lessor can charge for a bingo occasion, for one 4 bingo occasion? 5 MR. ROYAL: $600. 6 COMMISSIONER LOWE: $600. That's pretty 7 steep, for one bingo occasion. I don't know if that's 8 happening as a practical matter on a wide scale basis, but 9 that's a lot of money for one bingo event. And that happens 10 -- what's the maximum amount of time you can have a -- for a 11 week, how many bingo occasions? 12 MR. ROYAL: Three occasions a week in an 13 organization. 14 COMMISSIONER LOWE: Three occasions a week, 15 $1800 a week. So I think we have -- and I know we've got 16 folks from the industry here that are -- that represent 17 various factions, but I think we're going to have to sit down 18 and say look, at some point in time somebody's going to say 19 -- figure this whole thing out and say what's going on, why 20 is the lottery such more an efficient model to raise money 21 for charity as opposed to bingo? It's a much more efficient 22 model. 23 Of course, the -- we own the lottery and we 24 regulate bingo, so there's a lot of difference. But I think 25 that, you know, and the thing about it is, like Brenda, she 0073 1 doesn't really know what's going on as far as -- I mean, and 2 she's a great person, but she's -- they're not involved in 3 the bingo operation. So the Charitable Bingo Division, we've 4 got to make sure that they're being treated fairly and that 5 even though they're getting this money, that they -- that 6 they're being -- getting a fair share. 7 MR. ROYAL: And Commissioner -- 8 COMMISSIONER LOWE: And so I want -- I 9 encourage -- we're going to work together with the industry 10 to figure this issue about the loans out and move this 11 forward, because we've gone about as far as we can now, I 12 think it's happened to the illegal gambling and we were kind 13 of -- we were kind of -- we didn't really get a good reaction 14 on our bill that you guys were pushing. So -- and I don't 15 know what we're going to do with illegal gambling, just -- 16 we're not making progress, but we can make progress on this 17 issue, so that we don't get a black eye from some media 18 report that looks and says well, there's -- the charities are 19 not being treated fairly. 20 Anyway, that was my two cents worth, Chairman. 21 Thank you. 22 CHAIRMAN KRAUSE: Great cents. Great cents. 23 I'll also like to point out that, you know, when you look at 24 the pie, you know, payouts to prize winners is important, 25 too. 0074 1 COMMISSIONER LOWE: Absolutely. 2 CHAIRMAN KRAUSE: That's a big one. Because 3 if they don't feel like they're getting paid, they don't show 4 up at the bingo hall. So anyway, it's a tension between all 5 the people who split up the pie. You know, our hearts are 6 always there with the charities, but we also care about the 7 customers as well. 8 MR. FENOGLIO: Mr. Chairman, I did not 9 register for this. I have filed a notice and I will either 10 amend it or file a new one. I think ther's some 11 misconceptions that need to be cleared up, five minutes or 12 less. 13 CHAIRMAN KRAUSE: We'll entertain your 14 testimony. 15 MR. FENOGLIO: Thank you. The first is, you 16 cannot compare lottery to bingo. Number one, you have no 17 sales employees selling lottery tickets, period. They're all 18 the employees of the retailer. In bingo, there are about 19 10,000 employees paid, so in addition to the scale, there's 20 no comparison of the model. And anyone who suggests that you 21 can look at lottery and make conclusions about bingo, is 22 naive or uninformed. 23 Second, on the return for bingo, if I have 24 $100 revenue, but I pay out 80, and this is true experience 25 in many halls, they're paying out $80 for every 100 they 0075 1 raise in prizes. It's not a good model. The statewide 2 average is almost 76 percent. Why would you look at -- and 3 by the way -- why would you look at the gross number as 4 opposed to what's held at the end of the day by the charity? 5 And in fact, your legislature told this Agency to start 6 reporting on net, not gross. And you'll notice that report 7 doesn't show what -- you can do the math and figure out what 8 the hold is. 9 By the way, every casino that's regulated, and 10 there are many publicly traded, you can look at their SEC 11 reports and you will never find what their gross revenue is, 12 period. They have a specific accounting rule that says they 13 report the hold. And if you think about it for a moment, if 14 you put $100 into a slot machine, some of us have played slot 15 machines, you, on the first dollar spin or $.50 spin, you'll 16 lose and you'll win and you'll lose, you'll win, you lose, 17 you win. They're set at about 94 percent, most of them. 18 If you run that math, 100 times 94 every time, 19 you'd show $1000 into that machine, but at the end of the day 20 you've only got $100. So casinos don't report, they know 21 it's a fiction to try to report the gross. So why don't you 22 look at a comparison of net; bingo, the net is, according to 23 these reports, 16.7 percent. Wow. 24 What publicly traded company gets a 16.7 25 percent return? And by that I mean, gross less the hold. 0076 1 Charities don't have that money to play with. And then look 2 at the return, the charitable distribution, off of that net, 3 it's 16.7 percent. That's a pretty damn good return. 4 No fortune 100 company has that. So it's a 5 lot more nuanced than you would think just generally looking 6 at numbers. 7 As far as the accounting issue, charities 8 report on a cash basis. That's what they report, as opposed 9 to accrual. And an accrual accounting I believe is far more 10 effective and accurate. So it would report known expenses 11 that you haven't paid yet. But charities are barred from 12 reporting on accrual basis. 13 Your comment about a balance sheet, no problem 14 if -- some charities I'm not sure would know how to prepare a 15 balance sheet, smaller charities, but the larger charities, 16 they can do that in QuickBooks. So I'd be happy to answer 17 any questions. Thank you, Mr. Chairman. 18 CHAIRMAN KRAUSE: Any questions for Mr. 19 Fenoglio? 20 COMMISSIONER HEEG: I have a question. I want 21 to ask a question that I asked earlier. Do you think, 22 assuming this Agency wanted to, that this Agency has the 23 authority to set a minimal charitable percentage off of 24 revenues? 25 MR. FENOGLIO: No, I do not. 0077 1 COMMISSIONER HEEG: Thank you. And I do want 2 to say I think it's not appropriate to compare public company 3 casinos to a charitable bingo operation. 4 MR. FENOGLIO: I don't disagree. But again, 5 they don't look at what's their gross, they look at what they 6 have to play with. Thank you. 7 CHAIRMAN KRAUSE: All right. That takes care 8 of that item. I guess the next item is Mr. Royal's as well. 9 MR. BRESNEN: Mr. Chairman, may I make a real 10 quick suggestion? I swear to God I'll be brief. 11 CHAIRMAN KRAUSE: Yeah, all right. 12 MR. BRESNEN: I've been dealing with this for 13 over 20 years; Steve Bresnen on behalf of the Bingo Interest 14 Group. I would strongly urge the Commission to put on the 15 agenda a workshop, an informative presentation, and let us 16 come in and talk to you about this issue. Because we have 17 addressed it with the Legislature time and again and we'd 18 like to come address it with you, and I'm afraid that it's 19 astonishing to me, as long as y'all have been here regulating 20 bingo, that you still don't have a good command of these 21 numbers. I don't mean that pejoratively at all. I think we 22 need to -- I think we need to sit down and devote a little 23 time to this, and I would strongly request that you do so. 24 Thank you. 25 CHAIRMAN KRAUSE: Mr. Royal. 0078 1 AGENDA ITEM XIX 2 MR. ROYAL: Thank you, Commissioners. 3 I just want to highlight one item in your 4 briefing books, the Bingo Division's annual audit plan and 5 risk assessment, which was prepared in consideration of House 6 Bill 2197 83rd Legislature, the Agency's Sunset Bill. 7 Regarding conductor compliance reviews, financial audits, our 8 goal is to audit the highest risk licensees within a four 9 year time frame and to conduct game inspections every three 10 years. The following risk factors were used to identify 11 organizations and locations to inspect: gross receipts, 12 expenses, net proceeds and charitable distributions, all as a 13 percentage of gross receipts. 14 Gross receipts reported at a playing location, 15 time elapsed since the last game inspection at a playing 16 location, and compliance history. The results of the risk 17 assessment and resource allocation revealed the projection of 18 135 audits and 100 game inspections for this fiscal year 19 which translate into a 6.8 percent coverage of all active 20 licensees, which is a decrease of 4.1 percent in comparison 21 to fiscal year '17. A 31.5 percent coverage of all active 22 licensees audited within the last five years. That's an 23 increase of almost 6 percent in comparison to last year and a 24 30 percent coverage of the 331 bingo locations. 25 Now those decreases are really related to the 0079 1 FTE shortages that we've had in the last few months in the 2 Bingo Division that we're working to fill and will have 3 filled this coming year. There will be some training 4 deficiencies that we'll have to make up, but all in all we'll 5 make the investment in staff and continue our program forward 6 with audits and inspections. 7 Commissioners, that concludes my report. 8 CHAIRMAN KRAUSE: Thank you, sir. We're going 9 to hear from Mr. Grief, and then we're going to take a short 10 break. 11 AGENDA ITEM XX 12 MR. GRIEF: Mr. Chairman, other than what's in 13 your notebook, I have nothing further to report. 14 CHAIRMAN KRAUSE: All right. We're going to 15 take a short break and we're going to come back and do our 16 enforcement part of the docket. It is 11:34, so we are 17 adjourned for about eight minutes. Ten minutes. 18 (Recess from 11:33 a.m. to 11:41 a.m.) 19 AGENDA ITEM XXI 20 CHAIRMAN KRAUSE: All right. It is 11:41 and 21 we didn't take all the time that we said we were going to, 22 proud of us, so we're back in session and we are going to 23 start with our enforcement, and so that's Item XXI, but we're 24 going to start with Case Item Number XXI-S. 25 MR. BIARD: Yes, Commissioners. For the 0080 1 record, I'm Bob Biard, General Counsel. Item S, Tab S, is 2 Berry Bingo in Fort Worth. 3 This is a case involving a commercial lessor 4 who collected deferred rent from the charities at his hall. 5 You considered this particular case at the last Commission 6 meeting. After the last meeting, Alfonso provided the audit 7 report in this case to you separately for your review and 8 copied Mr. Fenoglio who's the attorney for Berry Bingo. 9 In 2015, the lessor refunded $8800 in rent 10 checks to a bingo unit made up of charities, only to re- 11 invoice and collect the rent in a subsequent quarter. The 12 reason given for the refund was so the charities would appear 13 to have generated positive proceeds during that quarter 14 rather than negative proceeds which, as you know, is a 15 requirement under the Bingo Act. 16 The alleged violations are that the lessor 17 improperly extended credit to the organizations by refunding 18 the rent, then later collecting back rent, and that the rent 19 was charged on the basis of a percentage of receipts or net 20 proceeds. There was an agreed penalty in this case as a 21 settlement, and it was $500. 22 COMMISSIONER LOWE: So Alfonso, did you get 23 those copies made, the copies of the -- 24 MR. ROYAL: Commissioner, Item -- Tab S in 25 your briefing booklet includes the audit report as well as 0081 1 the communication that was sent to y'all. 2 COMMISSIONER LOWE: So help me out. There was 3 a recap that shows expenses versus the revenue, because it 4 was two quarters that they dealt with. Tell me where -- help 5 me out. 6 MR. ROYAL: Page two of the audit report. 7 COMMISSIONER LOWE: Page two of the audit 8 report. Okay. It's -- starts out Lake Worth Bingo Unit 9 Trust, it's got our logo; is that what you're talking about? 10 MR. ROYAL: Yes. 11 COMMISSIONER LOWE: And so they had gross 12 receipts -- net proceeds; is that -- am I looking at the 13 right one? 14 MR. ROYAL: Gross receipts -- all the way to 15 the right. Gross receipts of -- for the audited period of 16 $988,160. 17 COMMISSIONER LOWE: So almost a million 18 dollars in gross receipts. 19 MR. ROYAL: Net proceeds were 22,186. 20 COMMISSIONER LOWE: Out of almost a million 21 dollars. And yet the charity owes the lessor money. Had to 22 loan them the rent money essentially what happened, right? 23 MR. ROYAL: Correct. 24 COMMISSIONER LOWE: All right. So I can this 25 -- I think this kind of makes our point, the point you guys 0082 1 were making, is what's happening and so we'll go -- be faced 2 with the situation in the future we won't know that. We 3 won't know if they owe any money in our current way of 4 reporting things. So we've got to work -- because they're 5 cash basis. And so we wouldn't know, because you just -- you 6 just shove that in to something else. So this is why I think 7 we're going to have to work on this issue on this -- this 8 point to come to something, an agreement about what we're 9 going to -- what kind of transparency that we're going to 10 have to see to make sure that the charities are getting 11 treated fairly. 12 But as far as the -- as far as this sanction, 13 this sanction is what we agreed with the -- what our 14 agreement is, what our policy is, as far as where we are with 15 $500 -- oh, it's $500, right? 16 MR. ROYAL: It's $500 to the commercial 17 lessor. This is the maximum assessment that can be done for 18 this first time violation. 19 COMMISSIONER LOWE: And so that's our -- 20 that's where we are under the rules. But I don't want to 21 have -- and with my -- and what my concern is, I don't want 22 to punish the charities, because we could issue a sanction 23 against the charities for not making enough money when the 24 control of the finances are in the hands of the lessor. And 25 I'm afraid if somebody -- if the charity complained, what 0083 1 would happen is if you're going to complain, we're going to 2 kick you out of the hall and find somebody else who will play 3 with us. And I don't want that to happen under the -- under 4 this new law. 5 So anyway, I'm -- I'd move that we adopt the 6 recommendation of the Director. Did you want to say 7 something? 8 COMMISSIONER ARRIETA-CANDELARIA: I did want 9 to say something, but if you were to look at the financials 10 here, I mean, it's pretty evident that there's no rent paid 11 for these two quarters. So had somebody been reviewing that, 12 they would have said oh, look, there's two quarters and they 13 didn't pay. Now, they might have paid for two of the 14 quarters in the second quarter because it's grossly higher, 15 50 percent higher, than the first quarter, so to your point, 16 is that I think that we also need to be reviewing these, but 17 I mean, what, there's 350 retailers or 350 operators; is that 18 how many operators we have? 19 MR. ROYAL: Correct, Commissioner, but -- 20 COMMISSIONER ARRIETA-CANDELARIA: So -- 21 MR. ROYAL: -- that is no excuse and I thank 22 you for that, because that is something that on the last -- 23 my tenure as Director, that we are doing. Previously we 24 checked the box and said we received the quarterly report. 25 COMMISSIONER ARRIETA-CANDELARIA: Okay. And 0084 1 now we're checking -- 2 MR. ROYAL: When I came on board, we are 3 reviewing that responsibility in Ms. Glenn's team and they're 4 doing a fantastic job of that. That's why we have the 5 approach that we have right now with negative net proceeds. 6 COMMISSIONER ARRIETA-CANDELARIA: So right 7 here on the net proceeds, out of a million dollars, the 8 distribution which I'm assuming that's a distribution to the 9 charity; is that correct? 10 MR. ROYAL: That is correct. 11 COMMISSIONER ARRIETA-CANDELARIA: So in this 12 particular case, it's 2.2 percent distribution to the 13 charity; is that correct? 14 MR. ROYAL: $16,799 was distributed to the 15 charity. 16 COMMISSIONER ARRIETA-CANDELARIA: Oh, okay. 17 And so it's even less; 1.7 percent went to the charity; is 18 that correct? 19 MR. ROYAL: Right. The percentage -- the 20 distribution as a percentage of gross, yes. And the expenses 21 as a percentage of gross were 22.7 percent. 22 COMMISSIONER ARRIETA-CANDELARIA: Okay. Yeah, 23 which -- but if you -- I see -- I think the point was made 24 earlier if you look at the net proceeds, but that's after 25 everything has been deducted. So it's 75 percent of the net 0085 1 proceeds which again, I -- I don't know how you can look at 2 net proceeds and say that that's the right number to look at. 3 Okay. 4 COMMISSIONER LOWE: So once again, I'm -- 5 COMMISSIONER ARRIETA-CANDELARIA: I'll second. 6 COMMISSIONER LOWE: -- my motion is to adopt 7 the recommendation -- 8 CHAIRMAN KRAUSE: All right. Since this is an 9 agreement between the Agency and the lessor, then -- the 10 charity, I don't think we have any questions about it. All 11 right. So all in favor of adopting the recommendation of 12 staff to accept this agreed settlement, say aye. 13 (Chorus of "ayes") 14 CHAIRMAN KRAUSE: Adopted. Thank you. 15 MR. BIARD: Thank you, Commissioners. I'll -- 16 CHAIRMAN KRAUSE: Back up to A and -- 17 MR. BIARD: Sure. I'll try to speed through 18 these the best I can. We do have 24 items today, however, I 19 can group some of these together. 20 Tabs A through I are the non-sufficient 21 lottery retailer license revocation cases that were presented 22 to SOAH on the grounds the licensee failed to have sufficient 23 funds in their bank account to cover electronic fund 24 transfers to the Lottery Commission's account. In each case 25 the licensee failed to appear, the Judge remanded the case to 0086 1 the Commission to handle as a default matter, and your 2 notebook contains a single order to revoke each of the nine 3 licenses. 4 Tabs J through L are lottery agreed orders. 5 Tab J is Valero Corner Store in Austin and the San Antonio 6 based entity that owns it and a number of other Valero 7 stores. 8 In this case, a customer scanned their ticket 9 and got a message to go to the lottery claim center to claim 10 the prize, which usually means the prize was $600 or more. 11 The customer asked the clerk if he could identify the value 12 of the prize, the clerk was not able to do so, but offered 13 the player $5 for the ticket. It turned out the prize was 14 $1,978. 15 The store video showed the clerk telling the 16 customer six times that the ticket was a $5 winner, there was 17 some dispute or contention that the, you know, English was 18 not the clerk's first language, however, there was an 19 agreement here with the Respondent to a 10-day suspension at 20 the Austin store and an agreement that this clerk wouldn't 21 handle lottery products at any of the stores that the owner 22 owns, but not at just the Austin store, but all the other 23 stores that Big Diamond, LLC owns. 24 Tab K is M & A in Pearland in Brazoria County. 25 In this case the claimant at the Houston claim center 0087 1 submitted a Daily 4 draw game ticket that had one name 2 written on the front and a different name written on the 3 back. The claimant said the store owner had written her name 4 incorrectly on the front of the ticket and that led to an 5 investigation as to why that had occurred. It turned out 6 that the clerk at the store occasionally took orders over the 7 telephone, which is a violation, so the licensee here agreed 8 to a 10-day suspension. 9 Tab L is for Timewise Food Store #4001 in 10 Willis, which is in Montgomery County. In this case, the 11 player complained that the scratch ticket they purchased had 12 already had the latex over the bar code scratched off. The 13 clerk who sold the ticket admitted to scratching tickets to 14 find winners and was fired. The licensee agreed to a 10-day 15 suspension. 16 Tab M is a lottery revocation case that went 17 to hearing for Mariposa Groceries in San Antonio. In this 18 case, the licensee store had insufficient funds in their 19 account four times within one year, which is grounds for 20 revocation. They asked for a hearing. The Judge prepared 21 the proposal in your notebooks recommending revocation. 22 The case really surrounded the -- the events 23 of the fourth non-sufficient funds sweep, the licensee 24 claimed the account had sufficient funds on the day the 25 Commission told them there would be a sweep, but due to a 0088 1 bank holiday on that day, the sweep actually occurred one day 2 later when there were not sufficient funds in the account. 3 However, by law, a retailer holds lottery ticket proceeds in 4 trust until the Commission sweeps them. So even if the sweep 5 was on a day later than was originally indicated, there 6 should have been sufficient funds because they're not to be 7 used for other purposes. 8 The Judge and the Commission staff recommends 9 revocation. The licensee did not file exceptions to this 10 recommendation. 11 Tabs N through U are bingo agreed orders. 12 Cases N and R are related and involve the same bingo 13 accounting unit, the Manor Volunteer Fire Department unit, 14 the charities are Heart of the Rock Civitan Club, the Human 15 Potential Center, Knights of Columbus 5967, Holy Cross 16 Catholic Church, and the Manor Volunteer Fire Department. 17 In these cases, the organizations had negative 18 net proceeds of $7,112 for the second quarter of 2015 through 19 the first quarter of 2016. They requested a waiver of the 20 net proceeds requirement, which the Bingo Director denied. 21 However, the parties have now agreed to a settlement which 22 requires each of the organizations to demonstrate positive 23 net proceeds for the third and fourth quarters of 2017, 24 otherwise, their licenses to conduct bingo will be revoked. 25 These five orders are similar to ones you've 0089 1 seen at previous Commission meetings. 2 Tab S is Berry Bingo which you already 3 considered and voted on. 4 Tabs T and U are like Tab S, commercial lessor 5 rent cases and are both settlements. Tab T is for Carpenter 6 Land and Investment Company, Inc., in Fort Worth. In this 7 case, the lessor deferred $18,000 in rent for November 2014 8 that was not collected until April 2016 and the same amount 9 that was due in September 2015 was not collected until May 10 2016. 11 As of October 2016, the unit still owed 12 outstanding rent of $183,300. 13 Tab U is for Fort Worth Bingo, Incorporated. 14 In this case, the lessor deferred $18,000 in rent for 15 September 2014 that was not collected until April 2016, and 16 $9,000 that was due in September 2015 that was not collected 17 until April 2016. 18 As of October 2016, this unit still owed 19 outstanding rent of $218,100. 20 In both of these cases, the agreed penalty is 21 $500 with an additional requirement that going forward, the 22 lessor must collect rent within 90 days from the first day of 23 the month following the month when the bingo occasion 24 occurred. Rent not paid within that period will be forgiven. 25 Finally, Tabs V through X are default bingo 0090 1 revocation cases where the Respondent did not appear at the 2 scheduled hearing. 3 Tab V is for Bingo Worker Richard Gonzales. 4 In this case, the Bingo Worker did not wear the required 5 identification card while on duty on two bingo occasions in 6 January 2017. The default order removes him from the bingo 7 registry of approved workers. 8 And Tabs W and X involve the same bingo unit, 9 two charities in that unit, the Elks Temple 1401 Emma McGhee 10 and the Elks Lodge 1217 Felix Lister. 11 In these cases, the bingo unit had negative 12 net proceeds of $7,038 for the first quarter of 2016 through 13 the fourth quarter of 2016. The organizations did not 14 request a waiver. The Bingo Act requires a hearing before 15 revoking the license, so each of these matters was set for 16 hearing. Neither organization appeared at the hearing. And 17 the default order in these cases revokes the bingo licenses 18 of these two organizations. 19 That concludes my presentation and you may 20 take the orders up in a single vote if you'd like. And we're 21 happy to answer any questions. 22 CHAIRMAN KRAUSE: We will. So I invite my 23 Commissioners to ask questions, make comments, on any of Tabs 24 A through R and T through X. 25 COMMISSIONER LOWE: I've said my peace here. 0091 1 I think everybody's tired of hearing from me. 2 CHAIRMAN KRAUSE: We would never say that out 3 loud. 4 MR. ROYAL: Chairman Krause. 5 COMMISSIONER LOWE: Thanks. 6 MR. ROYAL: Chairman Krause, Commissioners, I 7 just wanted to add two items on Items T and U, subsequent to 8 those audit reports, the Division did receive rent 9 forgiveness letters from the commercial lessor. 10 In the case of Carpenter it was in the amount 11 of $160,000 of rent forgiven and in Item U, Fort Worth Bingo, 12 $181,000 in rent forgiveness. 13 CHAIRMAN KRAUSE: Well, so does that change 14 the staff's recommendation? 15 MR. ROYAL: No. No, sir, it does not. I just 16 wanted to clarify that information for the record. 17 CHAIRMAN KRAUSE: Thank you. We appreciate 18 when lessors are kind to charities. 19 So I'm looking for a motion to adopt staff 20 recommendations on Tabs A through R and T through X. 21 COMMISSIONER RIVERA: Move for approval. 22 COMMISSIONER ARRIETA-CANDELARIA: Second. 23 CHAIRMAN KRAUSE: All in favor say aye. 24 (Chorus of "ayes") 25 CHAIRMAN KRAUSE: So approved. 0092 1 MR. BIARD: Thank you, Commissioners. I have 2 orders for your signature. 3 CHAIRMAN KRAUSE: So at this time I move, as I 4 get to do at this time, that the Texas Lottery Commission go 5 into Executive Session to deliberate personnel matters and to 6 receive legal advice, as posted in our notice. Is there a 7 second? 8 COMMISSIONER LOWE: Second. 9 CHAIRMAN KRAUSE: We are in Executive Session. 10 MR. BIARD: The time is 11:58. 11 (Off record from 11:58 a.m. to 12:34 p.m.) 12 CHAIRMAN KRAUSE: The Texas Lottery Commission 13 is out of Executive Session at 12:34. Is there action to be 14 taken as a result of Executive Session? And there is. So -- 15 COMMISSIONER HEEG: Yes, I -- Commissioner 16 Krause, I move that the Commission request that the Governor 17 and the Legislative Budget Board approve the setting of a 18 salary for the Executive Director position at the Texas 19 Lottery in an amount up to $227,038 pursuant to Section 3.04, 20 Article 9, of the General Appropriations Act, to be paid 21 utilizing general revenue dedicated-lottery account number 22 5025 funding. 23 COMMISSIONER ARRIETA-CANDELARIA: Second. 24 CHAIRMAN KRAUSE: All in favor say aye. 25 (Chorus of "ayes") 0093 1 CHAIRMAN KRAUSE: It's unanimous. And -- 2 COMMISSIONER LOWE: Move to adjourn? 3 CHAIRMAN KRAUSE: -- I'm -- on my own motion 4 I'm going to move that we adjourn. I'm looking for a second. 5 COMMISSIONER LOWE: Second. 6 CHAIRMAN KRAUSE: All in favor say aye. 7 (Chorus of "ayes") 8 CHAIRMAN KRAUSE: We're adjourned. 9 (Adjourned and concluded at 12:35 p.m.) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0094 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF HARRIS ) 4 5 I, Kimberly C. McCright, Certified Vendor and 6 Notary in and for the State of Texas, do hereby certify that 7 the above-mentioned matter occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings of such were 9 reported by me or under my supervision, later reduced to 10 typewritten form under my supervision and control and that 11 the foregoing pages are a full, true and correct 12 transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set my hand and 14 seal this 13th day of October, 2017. 15 16 /s/ Kimberly C. McCright Kimberly C. McCright 17 Certified Vendor and Notary Public 18 Verbatim Reporting & Transcription, LLC 1322 Space Park Drive, Suite C165 19 Houston, Texas 77058 281.724.8600 20 21 22 23 24 25