0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 FRIDAY, MARCH 23, 2007 § 8 9 COMMISSION MEETING 10 FRIDAY, MARCH 23, 2007 11 12 BE IT REMEMBERED THAT on Friday, 13 the 23rd day of March 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 3:57 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER C. 18 TOM CLOWE, JR. The following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 SPECIAL COUNSEL: 6 Ms. Sarah Woelk 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on the 5 implementation of recommendations contained in the Internal Audit Report on bingo audit 6 services, including development of rules ...... 8 7 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action on 8 nominations and appointments and/or a nomination and appointment procedure on 9 the Bingo Advisory Committee .................. 33/53 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action on the 11 Bingo Advisory Committee work plan ............ 44 12 AGENDA ITEM NO. V - Report, possible discussion and/or action on 4th quarter 13 and calendar year 2006 bingo conductor information .................................. 62 14 AGENDA ITEM NO. VI - Report by the Charitable 15 Bingo Operations Director and possible discussion and/or action on the Charitable 16 Bingo Operations Division's activities ........ 73 17 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 18 proposal on new rule 16 TAC §401.316, relating to "Daily 4" on-line game rule ....... 74 19 AGENDA ITEM NO. VIII - Consideration of and 20 possible discussion and/or action, including proposal on new rule 16 TAC §401.307, 21 relating to "Pick 3" on-line game rule ........ 74 22 AGENDA ITEM NO. IX - Report, possible discussion and/or action on lottery sales 23 and revenue, game performance, new game opportunities, market research and trends ..... 79 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on the closing 4 of instant games, including procedures and/or proposal of amendments to 16 TAC 5 §401.302 relating to instant games rules ...... 95/256 6 AGENDA ITEM NO. XI - Report, possible discussion and/or action on transfers 7 to the State .................................. 209 8 AGENDA ITEM NO. XII - Report, possible discussion and/or action on the FY 2008-09 9 Legislative Appropriation Request ............. 211 10 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on the 11 80th Legislature .............................. 212 12 AGENDA ITEM NO. XIV - Consideration of and possible discussion and/or action on the 13 Lotto Texas procedures ........................ 235 14 AGENDA ITEM NO. XV - Report, possible discussion and/or action on the agency's 15 contracts ..................................... 221 16 AGENDA ITEM NO. XVI - Report and possible discussion and/or action on the agency's 17 HUB program and/or minority business participation, including the agency's 18 Mentor Protégé Program ........................ 218 19 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action on 20 external and internal audits and/or reviews relating to the Texas Lottery Commission 21 and/or the Internal Audit Department's activities, including status of 22 implementation of SAO recommendation on incomplete transactions ....................... 223 23 AGENDA ITEM NO. XVIII - Report, possible 24 discussion and/or action on the Mega Millions game and/or contract ................. 239 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XIX - Report, possible discussion and/or action on 4 GTECH Corporation ............................. 241 5 AGENDA ITEM NO. XX- Commission may meet in Executive Session: 6 A. To deliberate the duties and evaluation of the Executive Director 7 and/or Deputy Executive Director pursuant to Section 551.074 of the 8 Texas Government Code. B. To deliberate the duties and 9 evaluation of the Internal Audit Director pursuant to Section 10 551.074 of the Texas Government Code. C. To deliberate the duties, appointment 11 and/or employment of the Charitable Bingo Operations Director pursuant to 12 Section 551.074 of the Texas Government Code. 13 D. To deliberate the duties, appointment and/or employment of an Acting 14 Charitable Bingo Operations Director pursuant to Section 551.074 of the 15 Texas Government Code. E. To deliberate the duties of the 16 General Counsel pursuant to Section 551.074 of the Texas Government Code. 17 F. To receive legal advice regarding pending or contemplated litigation 18 pursuant to Section 551.071(1)(A) and/or to receive legal advice regarding 19 settlement offers pursuant to Section 551.071 (1(B) of the Texas Government 20 Code and/or to receive legal advice pursuant to Section 551.071(2) of the 21 Texas Government Code, including but not limited to: 22 Cynthia Suarez v. Texas Lottery Commission 23 Shelton Charles v. Texas Lottery and Gary Grief 24 Stephen Martin vs. Texas Lottery Commission 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 Patsy Henry v. Texas Lottery Commission 4 First State Bank of DeQueen et al. v. Texas Lottery 5 Commission Employment law, personnel law, 6 procurement and contract law, evidentiary and procedural 7 law, and general government law 8 Mega Millions game and/or contract ...................... 249 9 AGENDA ITEM NO. XXI - Return to open session 10 for further deliberation and possible action on any matter discussed in Executive Session... 251 11 AGENDA ITEM NO. XXII - Consideration of the 12 status and possible entry of orders in: A. Docket No. 362-07-1035 - Valdivia 13 Food Market B. Docket No. 362-07-1036 - Bob's Beer 14 & Wine #4 C. Docket No. 362-07-1038 - Carter's 15 Country Store D. Docket No. 362-07-1039 - 99-C World 16 & Discount Tobacco E. Docket No. 362-07-1115 - Handi Stop 17 Food Mart F. Docket No. 362-07-1439 - M.J. Food 18 G. Docket No. 362-07-1441 - Del Valle Food Mart 19 H. Docket No. 362-07-990123AM.B - In the Matter of the Removal of Certain 20 Respondents from the TexaS Lottery Commission's Registry of Approved 21 Bingo Workers: Daid B. Aguirre, Eric Arguijo, Amy D. Brackin, 22 Savannah L. Gomez, Ronald T. Jackson, Ryan A. Jorgensen, Jaron E. Loera, 23 Aaron Muschamp, Christopher D. Ochoa, Krissie A. Patrick, Michael A. 24 Ramirez, Ray Rylan, Laura L. Zlakovsky 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 I. Docket No. 362-07-990123PM.B - In the Matter of the Refusal to Add 4 Names of Certain Persons to the Texas Lottery Commission's Registry 5 of Approved Bingo Workers: Michael R. Aguero, Michael J. Anaya, Stevie 6 Barron, Ronald W. Carver, McClovia Farris, Kenny J. Gonzales, Bethany 7 J. Hayes, Jacob P. Hernandez, Stan R. Hoffman, Larry D. Lang, Jr., Tan 8 Minh Ly, Mary A. Machala, Emma Munoz, Lynn Ortiz, Melissa K. Reyes, 9 Teresa Whitehurst and Perry Wicks .... 244 10 AGENDA ITEM NO. XXIII - Report by the Executive Director and/or possible 11 discussion and/or action on the agency's operational status, activities relating to 12 the Charitable Bingo Operations Division, agency procedures, status of staff review 13 of agency practice concerning receipt of IRS Form 5754 (statement by person 14 receiving gambling winnings), and FTE status ........................................ 247 15 AGENDA ITEM NO. XXIV - Public Comment ......... 248 16 AGENDA ITEM NO. XXV - Adjournment ............. 258 17 18 REPORTER'S CERTIFICATE......................... 259 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 FRIDAY, MARCH 23, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9 o'clock. Today is March 23, 2007. Commissioner 7 Clowe is here. I'm Jim Cox. Let's call this meeting 8 of the Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 report, possible discussion and/or action on the 12 implementation of recommendations contained in the 13 Internal Audit Report on bingo audit services, 14 including development of rules. 15 Mr. Sanderson. 16 MR. SANDERSON: Good morning, 17 Commissioners. For the record, I'm Phil Sanderson, 18 Assistant Director of the Charitable Bingo Operations 19 Division. I would like to bring you up to date on the 20 implementation of the recommendations of the internal 21 audit as it related to the Audit Services Department. 22 First, Chairman Cox, you had asked that 23 I review the original target dates that were included 24 in the original management response to the 25 recommendations. I've taken the opportunity to meet 0009 1 with the bingo managers and discuss those timelines 2 and have prepared this slide to show you the revisions 3 to those target dates, as well as I'll also give you 4 an update as to where we are in the progress. 5 The first issue was regulatory objective 6 and approach. And the original target date for the 7 regulatory objective and approach was January 2007. 8 And as you remember, this regulatory objective was 9 developed and approved at the Commission meeting on 10 September 6, 2006. 11 The other recommendation out of Issue 1 12 was to develop risk-based factors for determining the 13 extent of the audit and review coverage of licensees. 14 We have worked on those risk-based factors, and we 15 anticipate having those in place by July of 2007. 16 CHAIRMAN COX: Okay. Now, do we have a 17 typo up there, Phil? You've revised it backward seven 18 months. Is that right? No. I'm sorry. You brought 19 it back. Okay. 20 MR. SANDERSON: From December 2007 to 21 July 2007. 22 CHAIRMAN COX: Thank you. 23 MR. SANDERSON: The second issue, 24 licensee experience, the recommendation was to adopt 25 processes to better ensure licensees a fair, 0010 1 consistent and open regulatory experience. The goal 2 of implementing this recommendation was to develop and 3 revise rules to help ensure licensees have a fair, 4 consistent and open regulatory experience. The 5 original target date was December of 2007, and we 6 revised that to July of 2007. 7 Currently we have one rule that's 8 proposed for public comment, permissible expenses, 9 which has a public hearing I believe scheduled for 10 March the 30th, and that addresses the terms 11 reasonable and necessary. 12 Additional rules being developed include 13 house rules and fair conduct of bingo rule, books and 14 records rule, general audit rule, dispute resolution 15 rule, corrective measures rule, as well as a final 16 audit report and an audit completion letter. The 17 recommendations to review past audit reports is 18 currently being performed, and we feel like that 19 review and any findings and/or recommendations should 20 be available sometime this summer. 21 The third issue is the audit methodology 22 and protocol. We've developed guidelines for the 23 minimum internal control standards and are currently 24 incorporating the minimum internal control 25 requirements into the house rules, the fair conduct of 0011 1 bingo rule and the books and records rule. The target 2 date for establishing the minimum internal control 3 standards has been revised from December 2007 to 4 May 2007. 5 The target date for the recommendation 6 to address the statutory charge and audit methodology 7 has been revised from May of 2008 to June of 2007. 8 Staff has currently drafted a written audit program 9 which is being modified as a result of information 10 that was obtained during the auditor training that was 11 conducted here on the yellow book standards two weeks 12 ago. 13 And the last recommendation was to adopt 14 the GAGAS and identify appropriate training for audit 15 staff. The Audit Department adopted GAGAS standards 16 in September of 2006, as well as developed an audit 17 charter. And the auditors completed their training 18 two weeks ago on the yellow book standards. 19 The last issue was the organizational 20 structure and responsibilities of the Audit Services 21 Department. The committee assigned to this 22 recommendation continues to meet. We have identified 23 the audit and non-audit activities and segregated 24 those activities. 25 We've completed draft job descriptions 0012 1 for the auditor positions as well as identified new 2 job descriptions for an inspector series which will 3 handle the non-audit activities previously performed 4 by the auditors. The committee is scheduled to meet 5 next week and review a draft of the recommendation. 6 The target date for this recommendation has been 7 revised from December 2007 to July 2007. 8 And that concludes my report on this 9 item. And I'm available to answer any questions you 10 may have. 11 CHAIRMAN COX: Wow! Phil, I've got to 12 ask, those are remarkable changes, and I'm very 13 pleased. Are you comfortable that you can meet them? 14 MR. SANDERSON: We have been meeting 15 with Ms. Melvin and her staff on the rules, revising 16 and drafting rules that we need to implement the 17 recommendations. A lot of it is time-consuming, but I 18 believe we're on track to have the rules ready for at 19 least proposal by July of 2007. 20 The other items -- and that's probably 21 the toughest item, will be the rules, because it 22 encompasses more than just the Bingo Division. You 23 have, you know, the Legal and other divisions that are 24 responsible for that. 25 And then the risk analysis I believe is 0013 1 complete. All we have to do is meet with Information 2 Resources staff to help develop program logic to 3 identify the accounts that we'll be auditing. 4 I feel like those dates are very doable 5 at this point in time, yes, sir. 6 CHAIRMAN COX: And did you discuss this 7 with Ms. Kiplin? And is she comfortable that she can 8 provide the legal staff to get all these rules 9 together? 10 MR. SANDERSON: I've not had the 11 opportunity to talk to Ms. Kiplin with these. But 12 Sandy Joseph has been in the meetings that we've been 13 discussing on the rules that we're currently working 14 on right now. 15 CHAIRMAN COX: Okay. Well, why don't we 16 gather up Ms. Joseph and Ms. Melvin. And who are the 17 other principal resources that will be working with 18 you on this, Phil? 19 MR. SANDERSON: Ms. Pyka and 20 Ms. Erickson is part of the restructure committee. 21 CHAIRMAN COX: Okay. Kathy, do you want 22 to come on up. 23 MS. PYKA: Certainly. 24 MR. SANDERSON: And Ed Rogers is also on 25 one of the committees. 0014 1 CHAIRMAN COX: Okay. Well, these seem 2 to be the principal resources. 3 Terry, you don't need to leave. Just 4 stay right there if you want to. 5 I would like for all of you to address 6 this schedule and whether you think that it will put 7 undue strain on your resources and, in general, 8 whether you think it serves us best to move it up this 9 much or should we give ourselves a little more time. 10 Do you want to start, Sandy? 11 MS. JOSEPH: Certainly. For the record, 12 I'm Sandy Joseph, Assistant General Counsel. 13 We have undertaken very ambitious 14 rulemaking activities. I believe that we can get 15 these rules ready for proposal by July, definitely. 16 We're working diligently and continue to do so, and we 17 can make it happen. 18 CHAIRMAN COX: Chairman Clowe, are you 19 planning to be here in July? 20 COMM. CLOWE: At the pleasure of the 21 Governor. 22 CHAIRMAN COX: Okay. So you're not 23 going to be in Argentina? 24 COMM. CLOWE: I will be in Argentina in 25 August, the Lord willing and the Governor willing. 0015 1 But I will be here in July. 2 CHAIRMAN COX: Okay. Catherine. 3 MS. MELVIN: For the record, my name is 4 Catherine Melvin, Director of the Internal Audit 5 Division. 6 I agree with Sandy's assessment also. 7 We are very supportive of the Bingo Division's efforts 8 here and especially their diligence in moving the 9 dates up. It's quite a bit of work. It has impacted 10 my division personally, since you asked that. It's 11 impacted our ability to go further on the performance 12 audit of the other functions in the Bingo Division. 13 But we balanced that, and we're certainly focused on 14 risk and priorities, and we believe that the 15 implementation of the recommendations and their 16 efforts in addressing those are priority for that 17 division now. And so we participate in those 18 discussions and offer our assistance. 19 CHAIRMAN COX: Kathy. 20 MS. PYKA: For the record, Kathy Pyka. 21 And my role has been involved with the 22 organization structure and responsibility group. And 23 I certainly believe that we are well on track to 24 complete our report here in the next couple of months 25 and certainly well before this July 2007 date. And I 0016 1 recognize that while our report will be complete, 2 there's additional steps that will need to occur 3 between the delivery of our report and final 4 implementation of this item. 5 CHAIRMAN COX: Okay. 6 MS. PYKA: So I certainly feel good 7 about our target date. 8 CHAIRMAN COX: And, Director Sadberry, 9 there are other resources within the agency that 10 you're concerned about or do you think this is a 11 doable thing? 12 MR. SADBERRY: Chairman, I think it 13 should be recognized as a challenge. I believe it's 14 doable, from all I have heard and seen. I stay 15 somewhat involved and I also remove myself so that I 16 am not involved to an extent that I should not be, 17 based upon advice I receive from counsel. 18 But to the extent I am involved, I 19 believe it's necessary. And what we have seen is the 20 staff steps up in those circumstances. As you recall, 21 they stepped up in the rulemaking process when we made 22 the commitment that we would do so. And all staff -- 23 Legal, Audit, Controller, Bingo and others -- stepped 24 forward, and they are doing the same now. 25 So I'm confident that staff can do that 0017 1 because of the quality of the staff that Phil has put 2 together on this. And there are others who are not at 3 the table who were actively involved in it. 4 I might say, if I may, in addition, I 5 think the question was asked at the last meeting 6 whether I felt that there were other resources 7 available outside the agency, and I indicated that I 8 felt that there were sources that may still be 9 available for that purpose. 10 And of recent, Catherine and I have 11 discussed one of those -- and I confirmed yesterday, I 12 think, movement forward on that is occurring. And 13 Kathy and I discussed another and I understand that 14 movement forward on that is occurring. So we're 15 taking advantage of outside resources that may be 16 available also. And that's not the vendor sources. 17 Those would be state agency sources that might be 18 available to us. 19 Again, I think this is necessary work. 20 And our staff is of the commitment and the caliber 21 that they get the work done. And I have every 22 confidence that that will occur now, whatever the 23 requirements for that, and we'll be here to support 24 them and understand their needs and provide whatever 25 assistance, including financial resources, that may be 0018 1 called upon that are available to us. 2 CHAIRMAN COX: Now, Catherine, there's 3 one project that you're working on that still is of an 4 indeterminate scope. 5 MS. MELVIN: Yes, sir. 6 CHAIRMAN COX: And that is the look-back 7 on the various audits. Do you want to tell us a 8 little bit about where that stands. 9 MS. MELVIN: I sure can. Chairman, we 10 worked with the division in identifying all those 11 activities that have been conducted during a set 12 period of time, and I believe we chose those audits 13 that cover from the last quarter of -- 14 MR. SANDERSON: 2003. 15 MS. MELVIN: -- 2003 to current. And 16 that comprised, oh, I believe, 600-plus reports. And 17 their division delivered all those reports to us. The 18 internal Audit Division is sorting through all of 19 those to determine what action or what determination 20 should be made with each of those. And the goal is, 21 is to identify those that might require further 22 resources, whether outsourced or internal, to go back 23 to the working papers or conduct further work to 24 determine whether or not some action should be taken 25 related to the licensee. And when I say "action," 0019 1 it's some correction on our part, something perhaps we 2 asked the licensee to do that we may need to go back 3 and reconsider. 4 And so that is quite a large effort to 5 do. And we're anticipating taking approximately the 6 next two weeks to do that. After that period of time, 7 we'll have an assessment of all the audit reports. We 8 intend to sit down with Mr. Sanderson and Ms. Pyka to 9 discuss what type of resources should be brought in to 10 address those. 11 CHAIRMAN COX: Okay. Let's just assume 12 something -- maybe it's a worst-case assumption or 13 worse than worst case -- but let's say you find that 14 that's a big old job and we're going to have to get 15 outside resources and it's going to take until 16 December to finish that. 17 Phil, would that have any impact on 18 these things or is that an independent course? 19 MR. SANDERSON: In my mind, it's an 20 independent course. That's the one that's identified 21 as summer of 2007 up there, review of past audit 22 reports and decisions. And I think that stands alone 23 from everything else that's within the recommendation 24 of the Internal Audit Report. 25 CHAIRMAN COX: Okay. Now, at this time, 0020 1 we're not doing audits. Is that correct? 2 MR. SANDERSON: We have a few audits 3 that we're working on; you know, I would say high 4 profile type audits. There are a few audits that 5 we're working on. And that's one of my goals right 6 now, is to get the Audit staff -- they have received 7 their training, and we're looking at obtaining 8 TeamMate hopefully as a workpaper document repository. 9 And, like I said, we've got the risk base factors 10 identified, and we're going to start working with 11 those. And the written audit program has been 12 developed. I haven't gone over it with Ms. Pyka or 13 Ms. Melvin yet, but I believe -- my goal is to try to 14 start the auditors back on the audit track within the 15 next probably six weeks or so. 16 CHAIRMAN COX: Okay. Now, how are you 17 going to be able to do that with all of these rules 18 hanging out there that haven't been exposed or have 19 been exposed but not commented on or have been 20 commented on but not adopted? You know, I see this 21 process -- Ms. Joseph, help me with how long, best 22 case and best guess, the process of getting these 23 rules in place is going to take. 24 MS. JOSEPH: Generally from the time a 25 rule is actually published in the Texas Register, 0021 1 normally it would take at least 60 days to get it 2 finally adopted. 3 CHAIRMAN COX: So that would say that if 4 the best case occurred, we got all these exposed in 5 July, then best case, they're going to be ready -- 6 they're going to be approved in September. 7 Now, are you going to be able to do much 8 work before September, Phil, given that scenario? 9 MR. SANDERSON: Yes, sir, I believe so. 10 There are still certain requirements within the Bingo 11 Enabling Act, and the organizations are required to 12 keep certain documents. They may not have a specific 13 form or a name, which is what the rules are 14 identifying. And the audits that we're currently 15 performing right now are more limited in scope than 16 overarching of everything. They're targeting a 17 specific problem that's been identified. 18 CHAIRMAN COX: Okay. I think it's 19 important that if we have a limited menu to choose 20 from as to what we can audit, that we not just put 21 people to work doing limited audits but do a cost- 22 benefit analysis as to whether it makes sense to do 23 anything until we can do the full range of work. 24 MR. SANDERSON: Yes, sir, we'll 25 certainly look into that. 0022 1 CHAIRMAN COX: Why don't you take a look 2 at the various implications of this discussion about 3 implementation and getting back on track and see if 4 you can get back to us next time with some kind of a 5 calendar as to how you think that might look. 6 MR. SANDERSON: Okay. 7 CHAIRMAN COX: And, obviously, work with 8 Ms. Melvin on that, because all of these things are in 9 response to her audit report. 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN COX: Okay. 12 COMM. CLOWE: Mr. Chairman, I want to 13 delve into a different aspect of this plan, if I may. 14 CHAIRMAN COX: Yes, sir. 15 COMM. CLOWE: Phil, I share with the 16 Chairman an appreciation for the effort that's gone 17 into this and the improvement in the schedule. A 18 major portion of what you presented to us here this 19 morning appears to me to be mechanics. And at the 20 time that the Internal Audit Report was made, a large 21 part of my interest and concern was directed to how 22 did we get into this mess? 23 And I had numerous conversations with 24 then the Director of the Charitable Bingo Division 25 about the qualifications and the performance of 0023 1 leadership, because when you find yourself in a mess, 2 you wonder, you know, how did we get here and who led 3 us into this mess? 4 Upon the event of that individual's 5 resignation, those discussions became moot. And you 6 and I have not had those discussions, because you are 7 the Assistant Director acting in that capacity, and 8 there is an active search going on for a director. 9 Director Sadberry, the chair of the search committee, 10 has informed me that there are applicants that I 11 believe will be interviewed by the search committee 12 next week, and you are an internal candidate for that 13 position. 14 My concern and the thing I want to get 15 out in the open about this schedule -- and I want to 16 draw your attention to it; I want to draw Director 17 Sadberry's attention to it. 18 And I want to direct your attention, 19 Janine, to it, is that an evaluation needs to be made, 20 in my opinion, of the leadership in the division and 21 its qualifications and its past, present and future 22 potential for performance, as we go through the 23 mechanics of all of this, for the improvement of the 24 performance of the division. 25 And these are the discussions that I had 0024 1 with the director before that resignation took place. 2 To me, that's an important part of this whole process. 3 My view is that it hasn't been discussed, it hasn't 4 been brought up. And, as I say, I want to bring that 5 to the table, that Director Sadberry, as you lead 6 these interviews and you recommend to the 7 Commissioners whatever the result of that effort is, I 8 think the candidates need to understand that there is 9 an issue here of question on at least one 10 Commissioner's part -- I can't speak for the 11 Chairman -- about, you know, are these individuals who 12 are asking to be considered for this position strong 13 leaders that are going to evaluate the leadership in 14 the division and take hold of that issue and be 15 proactive about it? 16 Because I don't want us to complete 17 these plans that you've laid up here and then in a 18 year or a year and a half or two years, find ourselves 19 back in the soup again and having to rely on the 20 expertise of these individuals who have said they have 21 given extra time and effort to this project and are 22 producing good results. That's a very important part 23 of solving this whole problem in my mind. 24 And I would like a comment, I think 25 first from you, Director Sadberry, because I think 0025 1 you're leading the effort in this. 2 Phil, I don't want to put heavy response 3 on you because I understand your position, and I don't 4 think you're really ready to go forward with what I'm 5 asking for. 6 But I think it really falls to you, 7 Director Sadberry, to set the tone on this. 8 And then, Janine, you're a key player in 9 this process. And I think the Commission is going to 10 rely on you for an evaluation of leadership skills, 11 experience, the kind of strength that we want to 12 improve the performance of this division 13 And, Mr. Chairman, I would welcome your 14 comments. 15 CHAIRMAN COX: Those are very 16 appropriate remarks, Mr. Chairman. I spent a number 17 of years in my career as an auditor. And I know from 18 that experience that a good auditor can do good audits 19 without a system, but a weak auditor can't do good 20 audits with the best of systems. So I think this is a 21 key element. 22 But the real key element is, as Chairman 23 Clowe says, that we have a staff that is from top to 24 bottom qualified to implement these fine programs that 25 we're developing. 0026 1 Anything else? 2 COMM. CLOWE: I would like to hear from 3 Director Sadberry. 4 CHAIRMAN COX: Okay. 5 MR. SADBERRY: Commissioners, thank you 6 for those helpful suggestions. That is helpful to me, 7 and I had looked for guidance on this process in the 8 role that you anticipate in my stead and from the 9 search committee that has been assembled. 10 You are correct, confirmed as late as 11 yesterday and this morning, Janine and her staff, Lisa 12 Glenn, have been successful in making the arrangements 13 for the interviews. This has been a very well-run 14 process, I want you to know. I'm very pleased with 15 the way it's been conducted. To my knowledge, I've 16 not heard of any issues of how it's been handled. And 17 they have brought professionalism to the entire 18 process, and that's important, to give it credibility. 19 Also we have representative 20 participation on the committee which, as you know, is 21 very important to the ultimate results being 22 recognized. We have industry representation, 23 Commission representation and my role as presiding. 24 That is also I think very helpful to the process. 25 Now, in what you say, I can tell you -- 0027 1 and I have not considered it a specific literal 2 assignment or task, but I certainly do acknowledge and 3 will act as your pleasure is in any form of informal 4 indication from my perspective, of leadership 5 potential on internal as well as external candidates, 6 to the extent I'm aware of them and have personal 7 perception on which I can base statements to the 8 committee, recognizing they obviously have their own 9 ideas and their own data from which they can make 10 their own comments. 11 But from inside the agency, I believe 12 that my involvement in the bingo activities and 13 knowledge of their work and the leadership and the 14 staff -- and what I have deliberately done, as I say, 15 of trying to create the balance of being involved 16 enough to know but not being too involved as to 17 become -- injecting myself into their business and 18 management of issues, 19 But I think my perception -- and I did 20 have the same focus, Commissioner, of having been 21 involved with the prior bingo director and seeing and 22 discussing with him and others in that division 23 directly some of the issues they faced. And now 24 having involved bingo and the business aspects of the 25 agency so that I and the agency can learn more about 0028 1 Bingo and vice versa, so that Bingo can understand how 2 the agency operates with respect to the business of 3 the entire agency. I think that as well has gone very 4 well. 5 So all of these things combine to say 6 that I believe that I can be objective and hopefully 7 considered to be credible in making any comments the 8 committee may wish to consider, or the Commission, for 9 that matter, with regard to my observations of the 10 candidates and their performance or their credentials. 11 As you say, this, as I have seen it, is 12 one house with major and important divisions but they 13 work synergistically as one agency. I have sought to 14 emphasize that. And part of that is to work together 15 and understand each other's strengths and to build on 16 each other's opportunities for leadership and growth. 17 So I will act in that way. I appreciate 18 the fact that you have indicated that on the record so 19 that it could be understood, should I do so, why and 20 in what context that is occurring, and I will do that. 21 We look forward to next week. Again, I want to thank 22 Janine and Lisa and their staff members for putting 23 together this process, a lot of which I could not 24 attend to directly because of legislative requirements 25 and other things that required my attention. But I 0029 1 look forward to next week and look forward, if nothing 2 changes, to having some formal presentation for you at 3 the next Commission meeting. 4 COMM. CLOWE: I would like for you to 5 name the members on the search committee, if you 6 would. 7 MR. SADBERRY: Mr. Heinlein, who is 8 present with us this morning; Steve Bresnen, an 9 attorney who has appeared before you before; a member 10 of the Bingo Advisory Committee, Ms. Garcia; the 11 in-house person, Jan -- is she -- I want to see if 12 she's here -- Jan Pate are the members. I am a 13 member. I consider myself the presiding officer, and 14 that's the role in which I plan to serve. 15 I will tell you that the process was to 16 review the applications after they passed initial 17 screening and to rank by order of preference those 18 candidates among the total that would be recommended 19 for interview. 20 The decision was made to -- there were 21 four of the four, besides myself, who participated in 22 that. And several received unanimous recommendations; 23 several received three out of the four. And we are 24 interviewing that group which comprises eight 25 applicants. 0030 1 COMM. CLOWE: Mr. Chairman, I would like 2 to ask Phil, if you don't mind, if he has any comments 3 about my comment in regard to the dual role that he's 4 involved in now as the Assistant Director and then an 5 internal applicant. Are you comfortable with the 6 comments I made, Phil, or do you have any response in 7 that regard? 8 MR. SANDERSON: I am comfortable with 9 your comments and I respect the comments. It's areas 10 that I have been looking at, you know, personally. 11 And I think that as, you know, time progresses and 12 however the selection process works out, then I think 13 those are areas that should be addressed, yes, sir. 14 COMM. CLOWE: And I would like to 15 acknowledge the additional responsibility that you've 16 taken on in the role of leadership in this project and 17 the extra work that you've been called on to produce 18 and you are producing. 19 In your position of Assistant Director, 20 without any additional compensation during this time, 21 and the Commission made a conscious decision not to 22 name you as the Acting Director but to let you 23 function as the Assistant Director within the rules 24 and well qualified to take on that burden. You've 25 done it without any complaint. And everybody, in my 0031 1 opinion, in the division has stepped up and put their 2 shoulder to the wheel, so to speak, and the 3 Commissioners really appreciate that. 4 But our role in oversight is to make 5 certain that we get to the conclusion that is 6 successful and we cover all the bases. 7 MS. WOELK: And that's all in the 8 context of the posted agenda item about the whole work 9 of the audit. Right? 10 COMM. CLOWE: And if it were not, you 11 would say so? 12 MS. WOELK: Yes. 13 COMM. CLOWE: Never miss an opportunity 14 to make a full and complete record, which I think is 15 important, because we've had these conversations 16 one-on-one, and I want it on the record that it's a 17 Commission -- and the Chairman will tell me if he 18 disagrees -- feeling about this process. And we want 19 to correct what imperfections we've discovered and we 20 want to set in place an effort that will be the best 21 and the most accurate. 22 And, Chairman, what was your word on 23 these bingo audits? We wanted to be consistent and 24 fair. Was there a third item there? 25 CHAIRMAN COX: Catherine? 0032 1 MS. MELVIN: Open. 2 CHAIRMAN COX: Open. 3 COMM. CLOWE: Open, consistent and fair. 4 CHAIRMAN COX: An open and consistent 5 and fair regulatory experience. 6 COMM. CLOWE: And we just want to fix 7 this one time. You know, one time is enough on 8 something like this. Let's get it fixed right the 9 first time, and then let's not have to come back and 10 do it again. 11 CHAIRMAN COX: Absolutely. And fixed 12 right top to bottom means both systems and the right 13 folks. 14 MR. SANDERSON: Yes, sir. 15 CHAIRMAN COX: Anything else? 16 COMM. CLOWE: Thank you. 17 CHAIRMAN COX: Thank you very much. 18 Phil, that's an excellent report. And I will 19 acknowledge that I've received, from some surprising 20 sources, very favorable remarks on the work that you 21 and your staff are doing, and we appreciate it. 22 MR. SANDERSON: Thank you. And I would 23 like to thank my staff also. They're all doing a very 24 good job. 25 CHAIRMAN COX: Thank you. 0033 1 AGENDA ITEM NO. III 2 CHAIRMAN COX: Item No. III, 3 consideration of and possible discussion and/or action 4 on nominations and appointment and/or a nomination and 5 appointment procedure on the Bingo Advisory Committee. 6 Mr. Sanderson. 7 MR. SANDERSON: Good morning, 8 Commissioners. In your notebook is a draft procedure 9 for the nomination process of the Bingo Advisory 10 Committee, as well as the Bingo Advisory Committee 11 rule that's been adopted by the Commission and the 12 section of the Bingo Enabling Act that outlines the 13 statutory authorization of the Bingo Advisory 14 Committee. 15 I believe that Ms. Woelk is providing 16 you with the -- I guess it's called the Texas 17 Government Code on Advisory Committees. It's a 18 section of the Texas Government Code that outlines 19 state agency advisory committees. 20 Prior to this point in time, there has 21 not been a formal process for the procedure for the 22 nomination process. In the beginning it was primarily 23 the Bingo Director and the bingo representatives of 24 the Commission and the General Counsel reviewed the 25 nominations that they received and then make a 0034 1 recommendation to the Commission. 2 And sometime in 2001, the Chairman of 3 the BAC, Bill Neinast, came before the Commission and 4 expressed an interest of allowing the Bingo Advisory 5 Committee to comment on the nominees, to offer their 6 input, so to speak, on individuals or to make 7 recommendations to the Commission on individuals to 8 serve on the committee. 9 Around 2004 is when they actually had a 10 Bingo Advisory Committee subcommittee for reviewing 11 the nominations. And the most recent I believe two 12 nomination processes primarily involved the BAC 13 members that were on this subcommittee interviewing 14 the nominees and making a recommendation to the 15 Commissioners. 16 We have now come to look at developing a 17 formal process for this. And in looking at the way 18 that the process and the procedure has been handled 19 over the past, in your notebook is a procedure that 20 we've -- it's our procedure but it includes your 21 decision, so that's why we have the procedure in the 22 notebook for you to look at and offer any guidance on. 23 And primarily this would call for when 24 the nominations are called and received, that we would 25 send a copy of the nominations to the Commissioners, 0035 1 would send a copy of the nominations to the Bingo 2 Advisory Committee, nomination committee. However, 3 staff would make the final recommendations. And we 4 can offer input with the Bingo Advisory Committee by 5 taking the staff recommendations to the BAC and 6 discussing it in open meeting and then, after that 7 process, bring the names to the Commissioners, who can 8 take the recommendations of staff, the BAC or their 9 own personal recommendation as an appointment to the 10 BAC. 11 And with that, I will just see if you 12 have any questions on the procedure? 13 CHAIRMAN COX: Chairman Clowe? 14 COMM. CLOWE: Phil, I appreciate having 15 this procedure put before us. And my sense is that 16 what we're hoping to achieve here is to get the 17 broadest participation in this process possible. We 18 want the members of the BAC, through this nominating 19 procedure, to be involved and be participative, but we 20 want clearly the staff to come forward with the 21 recommendations. And the Commissioners are going to 22 be the ultimate decisionmakers. And I don't know who 23 originated this phrase, but I think it's apropos. We 24 want this procedure to be a resource and not a filter. 25 MR. SANDERSON: Yes, sir. 0036 1 COMM. CLOWE: And I think that's a good 2 statement. And that's my sense, Mr. Chairman, of what 3 is our desire in this process. 4 CHAIRMAN COX: And I believe -- and I'm 5 going to ask Phil -- that was our intent when you 6 wrote these up, and I believe that's the way they're 7 written. 8 MR. SANDERSON: That's the way I believe 9 they're written, yes, sir. 10 CHAIRMAN COX: Okay. Now, Phil, we have 11 on the agenda several possibilities. One is looking 12 at this procedure. And I think that it does not 13 require formal action on our part to approve this. 14 This is within your authority to approve. You brought 15 it to us to review, because it does involve our 16 participation. Is that correct? 17 MR. SANDERSON: That is correct; yes, 18 sir. 19 CHAIRMAN COX: Okay. Now, the other 20 issue -- if you're ready to go on? 21 COMM. CLOWE: As it relates to this 22 agenda item? 23 CHAIRMAN COX: As it relates to this 24 agenda item. 25 CHAIRMAN CLOWE: Yes, sir. 0037 1 CHAIRMAN COX: -- is the selection of 2 members using this process. 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: Now, one of the things 5 that I think that would be appropriate, given that the 6 Bingo Advisory Committee has filled a stronger role in 7 the past few years than we're suggesting on an ongoing 8 basis is that you present this procedure to them and 9 explain it to them. 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN COX: And I think they're 12 meeting on May 2nd, if that's correct. 13 MR. SANDERSON: Tentatively scheduled 14 for May 2nd, yes, sir. 15 CHAIRMAN COX: Okay. Then the other 16 process we have is filling several openings on the 17 BAC. Is that correct? 18 MR. SANDERSON: Yes, sir. 19 CHAIRMAN COX: And you have -- how many 20 openings do you have right now, Phil? 21 MR. SANDERSON: Currently there are five 22 openings, two that actually became open last February 23 of 2006. And then there's three that became open on 24 February of 2007. However, one of those is the SSP 25 position, which we do not have a licensee for that 0038 1 category, so it will remain vacant. 2 CHAIRMAN COX: Okay. Now, remind me to 3 go back to that one. 4 MR. SANDERSON: Yes, sir. 5 CHAIRMAN COX: As to the other 6 positions, what I would like to see happen, if it 7 meets with the Bingo Commissioner's approval, is that 8 I would like for you to, with your staff, go through 9 those applications, identify any of those candidates 10 that you believe Chairman Clowe and I should 11 interview. 12 We've already both interviewed one of 13 those candidates, but there are other applicants for 14 that same position. Then based on your review and the 15 input you receive from the Commissioners, develop a 16 staff recommendation for who you would believe would 17 best fill these positions. Then I would like for you 18 to take that recommendation to the Bingo Advisory 19 Committee and tell them who you're recommending and 20 see if they have any input. 21 MR. SANDERSON: Okay. 22 CHAIRMAN COX: Then I would like for you 23 to bring your recommendations to this board in May for 24 approval. 25 MR. SANDERSON: Yes, sir. 0039 1 COMM. CLOWE: That's fine with me. 2 CHAIRMAN COX: Okay. Will that work? 3 MR. SANDERSON: Yes, sir, it will. 4 CHAIRMAN COX: Okay. Great. Thank you. 5 MR. SANDERSON: Did you want to go back 6 about the SSP? 7 CHAIRMAN COX: Yes, I did. Thank you 8 very much. 9 I had a message yesterday that Larry -- 10 help me -- from the Bingo Advisory Committee -- called 11 me and wanted to talk to me about possibly changing 12 that SSP position to another position because there's 13 currently no licensed SSP in the State of Texas. Do 14 you know anything about that? 15 MR. SANDERSON: Well, he is correct. 16 There is no licensed SSP in the State of Texas. 17 However, that position is statutorily required. 18 CHAIRMAN COX: So that's statutory? 19 MR. SANDERSON: So it's a change in the 20 statute. 21 CHAIRMAN COX: Okay. Would you get back 22 to Mr. Whittington and help him with that one? 23 MR. SANDERSON: I definitely will. 24 CHAIRMAN COX: Given that, you have 25 recently been working with Chairman Flores and 0040 1 representatives of the industry on a revision to the 2 Bingo Enabling Act. 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: Was attention addressed 5 to that statutory position, and were they informed 6 that there are no such folks? 7 MR. SANDERSON: Yes, sir. In fact, I 8 believe that the draft -- I'll look to Mr. Fenoglio to 9 confirm this, because I have not seen the amendments 10 to it. But the whole subchapter on the system service 11 provider is being removed, as well as the requirement 12 that that individual serve on the BAC. 13 CHAIRMAN COX: So that position will be 14 removed from the committee rather than being 15 redesignated in some other area? 16 MR. SANDERSON: Well, the position will 17 be removed as far as being required to be an SSP. We 18 still have -- by rule, we can change that to another 19 type position, charity, conductor or lessor, lessor 20 position. 21 CHAIRMAN COX: So that sounds like -- 22 and I'll ask Mr. Fenoglio in just a moment -- that 23 sounds as if we may be able to do by rule what 24 Mr. Whittington is asking us to do? 25 MR. SANDERSON: Only after the SSP 0041 1 requirement is removed from the statute. 2 CHAIRMAN COX: Thank you; thank you. 3 Mr. Fenoglio. 4 MR. FENOGLIO: Mr. Chairman, for the 5 record, my name is Stephen Fenoglio. And I have a 6 witness affirmation that I'll bring up. 7 We are, in the drafting of the bingo 8 amendments, are deleting that reference in the section 9 dealing with a member of the Bingo Advisory Committee 10 as well as the other provisions in the Bingo Enabling 11 Act dealing with the system service provider. Trying 12 to predict what the Legislature may or may not do is 13 sometimes difficult. But there's been no comment in 14 any way, other than eliminate those provisions from 15 everyone in the industry. 16 I do occasionally disagree with staff, 17 and I disagree with staff on this issue as it relates 18 to: You have to keep a seat open for the SSP. And 19 the reason is, it's a legislative impossibility. And 20 there's plenty of case law that I'll be happy to give 21 to counsel where the Legislature creates something 22 that is impossible to accomplish. 23 The agency has authority, if it so 24 chooses -- and the statutory creation in the Bingo 25 Enabling Act is nine members -- and it is a "shall." 0042 1 There must be an SSP, but you haven't had an SSP 2 member, system service provider, for I believe two and 3 a half years, something like that. 4 CHAIRMAN COX: Or longer. 5 MR. FENOGLIO: It may have been longer. 6 And so when an agency is confronted with a legislative 7 impossibility, I think the agency has authority, 8 discretionary authority, to -- there is a workaround. 9 And, again, I'll be happy to give that research to 10 Ms. Woelk at a later date. 11 But if the agency is of a mindset that 12 they would like to have a full complement of BAC 13 members, I think you have the authority to fill that 14 ninth seat. If later an SSP were to come forward, 15 then you would timely have to fill that seat with an 16 SSP. 17 I'll be happy to answer any questions. 18 CHAIRMAN COX: No, I think that's an 19 excellent point. And if the statute says, as you 20 said -- and I'm sure it does if you say it does -- 21 that we shall have nine members and we can't possibly 22 have nine members, because one of those designated 23 spots is non-existent, then it's an interesting 24 possibility that I would suggest we look at should the 25 statute not be revised as y'all have put it forward. 0043 1 MR. FENOGLIO: And, again, I think in 2 the interim, you can do that, because you've got two 3 different contradictions in the statute, one that says 4 you have to have nine members and one of those has to 5 be an SSP. And there has been no SSP member or 6 licensee. And there is no expectation, no reasonable 7 expectation anyone will be. And I will be happy to 8 get with staff on that. 9 CHAIRMAN COX: Good. Thank you, 10 Stephen. 11 MR. FENOGLIO: Thank you, Mr. Chairman. 12 MR. SANDERSON: And I may add one other 13 thing. The Bingo Advisory Committee rule is scheduled 14 to come up again for revisions, because of the 15 requirement that they be reappointed, I guess, for 16 another year, or the term extended. And we can look 17 at maybe getting with Mr. Fenoglio and Ms. Kiplin or 18 Ms. Woelk and see if we can put some language in the 19 rule that would allow for us to cover that position 20 with someone else. 21 MS. WOELK: Or Ms. Joseph. 22 MR. SANDERSON: Or Ms. Joseph. 23 CHAIRMAN COX: Okay. Good. 24 Anything else? 25 COMM. CLOWE: I think it's really 0044 1 important, Steve, that you give the General Counsel 2 that brief so that's there's good basis, if the 3 Commission chooses to entertain that option, give them 4 a good legal basis to stand on. 5 MR. FENOGLIO: Yes, sir. 6 CHAIRMAN COX: Anything else, Phil? 7 MR. SANDERSON: That's all I have, sir. 8 CHAIRMAN COX: Okay. SO that is Item 9 No. III. 10 AGENDA ITEM NO. IV 11 CHAIRMAN COX: Item No. IV, 12 consideration and possible discussion and/or action on 13 the Bingo Advisory Committee work plan. 14 MS. ROGERS: Good morning, 15 Commissioners. 16 CHAIRMAN COX: Kimberly, how are you? 17 MS. ROGERS: Just fine. For the record, 18 my name is Kimberly Rogers. Suzanne was unable to 19 make it today. 20 You should have in your book in front of 21 you a nice little chart that Phil has made in 22 reference to the 2006 BAC work plan and the 2007 BAC 23 work plan, which is just a draft ready for your 24 approval. 25 The only thing that has changed is, we 0045 1 ask that we can take out the create, implement a 2 caller-of-the-year program. And we would like to put 3 in "Review specific recommendations for positive 4 public awareness of charitable bingo." And that would 5 be -- things that would fall into that would be like 6 the PSAs and things of that nature. The bingo caller 7 of the year at this time we didn't feel was 8 imperative, important. It's important but not as 9 important as a lot of other things that we need to be 10 looking at. So that is the only change. 11 CHAIRMAN COX: If I remember, from 12 attending your meetings, that one had difficulty 13 because it required some funding that just wasn't 14 available. Is that correct? 15 MS. ROGERS: Yes, sir. It required a 16 lot of funding. You know, where would we hold this? 17 Where would we get everyone together? Texas is such a 18 large state that it would require a lot of manpower 19 and things of that nature. Not that we one day might 20 want to go back to it. It would be a lot of fun, but 21 sometimes right now in bingo a lot more things are 22 more critical than fun in that area. 23 CHAIRMAN COX: Okay. Chairman Clowe, 24 we've got a bit of a bifurcated process here. We're 25 going to receive the annual report of the Bingo 0046 1 Advisory Committee next meeting. 2 MS. ROGERS: Meeting, should be. 3 CHAIRMAN COX: And that's going to be 4 the report on how they did on this plan; and, yet, 5 we're being asked at this meeting to approve the plan 6 for next year, not knowing how the work came out on 7 the plan that we had this year. Are you comfortable 8 with that, or would you rather wait on this until 9 after we have received their report and then approve 10 the plan? I don't think it would affect their 11 schedule, because they don't meet again until May. 12 COMM. CLOWE: I would answer your 13 question with a question: Why is this presented now? 14 MR. SANDERSON: This has normally been 15 presented in the February-March time frame of each 16 year. That's the only reason I can think of why it 17 was presented this time. Now, the annual report that 18 they are preparing, I believe, is more on the annual 19 report that's required, that goes over the statistics 20 of the bingo industry as it relates to gross receipts, 21 distributions -- 22 MS. ROGERS: Yes. 23 MR. SANDERSON: -- net proceeds and how 24 the bingo activity. I don't think it's a report on 25 how they actually met or did not meet any of their 0047 1 work plan standards. 2 CHAIRMAN COX: Okay. Chairman Clowe 3 raises an excellent point, and that is that one of the 4 things that we're working toward here is a 5 determination, in I believe August, of whether we want 6 to continue the Bingo Advisory Committee. Is that 7 correct? 8 MR. SANDERSON: Yes, sir. 9 CHAIRMAN COX: And I'm wondering whether 10 approving a draft plan for a committee that we have 11 not yet decided to continue is an appropriate thing to 12 be doing? 13 MR. SANDERSON: We can definitely look 14 at the timeline of these activities and instead of -- 15 it's called an annual plan, but it may not have to be 16 a calendar year annual plan that. You know, we look 17 at their work plan being from, say, whenever the rule 18 is adopted to continuing the existence of the BAC, 19 then that would be used to make the determination for 20 the following year. 21 CHAIRMAN COX: Sandy, do you want to 22 come help us? You've heard all of this. Why don't 23 you just -- you sense the gist of the question here. 24 Why don't you give us your thoughts on it. 25 MS. JOSEPH: Well, I think you're on 0048 1 track with thinking that perhaps the time frame of the 2 work plan could be adjusted to make more sense, in 3 line with the tenure of the BAC committee itself; in 4 other words, more in line with what is normally the 5 August-to-August time frame. 6 I think perhaps one reason they're 7 thinking they need to do the 2000 work plan is because 8 it's 2000, so they need to perhaps have identified 9 what they are trying to do. And if that's not adopted 10 until August, well, you know, over half the year is 11 gone. But I think certainly we might look -- and it 12 would be within certainly the rules -- to adjust the 13 time period covered perhaps by the work plan. 14 CHAIRMAN COX: So we've got maybe three 15 periods involved here. We've got the calendar year. 16 We've got the year of the continuation, if you will, 17 the authorization year. And then you've got the term 18 years which end in February, the terms of the board 19 members? 20 MR. SANDERSON: Yes, sir. 21 CHAIRMAN COX: Now, the August and the 22 February, are those both statutory? 23 MS. JOSEPH: No. 24 CHAIRMAN COX: The terms, then, are by 25 our rule? 0049 1 MS. JOSEPH: And practice, yes. I don't 2 believe they're even in the rule. The rule -- 3 COMM. CLOWE: Mr. Chairman, I think we 4 voted a one-year extension. We put that deadline in 5 by our vote. 6 CHAIRMAN COX: Yes, sir. 7 MS. JOSEPH: Right. 8 CHAIRMAN COX: And I was asking Chairman 9 Clowe about the term of the members, which is a -- 10 you're talking on a February year. 11 COMM. CLOWE: Right. 12 CHAIRMAN COX: So we've got here in play 13 three years: A calendar year, a February-to-February 14 year and an August-to-August year. I wonder if it 15 makes any sense to say the calendar year is irrelevant 16 here and, since the August is statutory, moving the 17 terms to August-to-August and getting everything on 18 one basis? 19 MS. JOSEPH: August is not statutory. 20 It's by rule. 21 CHAIRMAN COX: Okay. Here is what we're 22 going to do, with your permission, Chairman Clowe: 23 Let's get together and figure out what is the best 24 calendar for all of this, and let's come back next 25 time with a recommendation on when the work plan -- 0050 1 what period the work plan should cover, when it should 2 be submitted, when a report on the accomplishments 3 related to last year's program work plan should be 4 submitted, when the nominations or the period for term 5 of service should be, so that we've got this thing 6 rationalized. 7 MR. SANDERSON: And I might add that at 8 one point in time, the continuation date for the BAC 9 was March of each year. And several years ago we 10 moved that to August to, I think, coincide with the 11 fiscal year. 12 CHAIRMAN COX: And that may -- 13 MR. SANDERSON: And that may be -- 14 CHAIRMAN COX: -- be a very good 15 reason -- 16 MR. SANDERSON: -- why all this has kind 17 of gone on. 18 CHAIRMAN COX: -- to look at how we 19 clean this up so that people are serving within a year 20 of authorization and the plan covers that same year. 21 Does that make sense to you, 22 Mr. Chairman? 23 COMM. CLOWE: Yes, it goes. 24 CHAIRMAN COX: Okay. 25 COMM. CLOWE: And I would like to make a 0051 1 comment, Mr. Chairman, about the substance of the 2 draft plan and the annual report. 3 Phil, you said that, if I heard you 4 correctly, that it has to do more with the statistics 5 of the bingo industry than the accomplishment of the 6 work plan. That doesn't seem right to me. It seems 7 like the work plan ought to be reported on, and the 8 Commissioners ought to be advised of what level of 9 achievement has been accomplished during the year. 10 In looking at the draft for 2007, it 11 seems highly duplicative of the 2006 plan. And the 12 question naturally comes to mind: Are we doing 13 anything? Are we making progress? Why is it being 14 carried forward almost verbatim year-to-year? 15 I don't ask for those answers right now, 16 but I think that is a part of asking approval for the 17 work plan for the next year that need to be answered. 18 MR. SANDERSON: Yes, sir. 19 CHAIRMAN COX: Anything else on that 20 one, Phil? 21 MR. SANDERSON: No, sir. 22 CHAIRMAN COX: And I think one of the 23 challenges you may face is setting up a calendar so 24 that they report on the work plan the work for the 25 year, before the next year's work plan is approved 0052 1 and, thus, always having a work plan in place. And 2 I'm sure that y'all will find a creative way to deal 3 with that situation. 4 MR. SANDERSON: Okay. 5 CHAIRMAN COX: Thank you very much, 6 Kimberly. Did you have anything else you wanted to 7 say? 8 MS. ROGERS: No, sir. But we will go 9 back and look at that -- 10 CHAIRMAN COX: Okay. Does all that make 11 sense to you, what we talked about there? 12 MS. ROGERS: -- on our end. 13 Yes, it does. It would be nice for the 14 dates to go together -- 15 CHAIRMAN COX: Good. 16 MS. ROGERS: -- instead of being so 17 separate. 18 CHAIRMAN COX: Okay. Thank you, 19 Kimberly. 20 MS. ROGERS: Thank you. 21 COMM. CLOWE: Could we ask Kimberly, 22 have you reviewed this draft nominating procedure? 23 And do you have a comment on it? 24 MS. ROGERS: I do. Do we have to go 25 back to Item II (sic) now? 0053 1 COMM. CLOWE: We can do that. 2 MS. ROGERS: We can do that? Awesome! 3 AGENDA ITEM NO. III (continued) 4 MS. ROGERS: My only recommendation or 5 opinion would be that there are a lot of individuals 6 out there in the bingo industry that can fill out a 7 piece of paper and say, "I want to serve on a board." 8 And I used to come to BAC meetings years ago when I 9 was first involved in bingo. There were a lot of 10 arguments, bickering. Nothing ever really -- it 11 didn't seem to go forward. 12 We seem to have, in my personal opinion, 13 a good BAC board at this time that works together, not 14 to say that there aren't a lot of individuals out 15 there that would really bring a lot of good ideas 16 forward to help out with things that are happening 17 now. 18 I would just hate to see the interview 19 portion go away, because there are some individuals 20 who don't know about the day-to-day in the bingo 21 industry, and they want to fill out a form and sit on 22 the BAC board. And that has happened -- and I know 23 this because I've done a lot of interviews. Myself, 24 Larry, Danny, all of us have done the interviews. 25 And there are people, when you call them 0054 1 up and ask what part they have taken, you know, in 2 bingo, they say, "Oh, I play once a week," you know, 3 but they may be on a charity's license, which in a 4 sense it's all about the charities, but it's also 5 about the day-to-day, what the customers want and that 6 aspect of it. 7 And I think the BAC board are people who 8 deal with it every day. We deal with bingo day-in/ 9 day-out. And sometimes we may shed a lot of light on 10 this individual, you know, how well they will sit on 11 the board. There will be individuals that I've called 12 up personally and said -- you know, they've told me 13 they don't get along with anybody on the board but 14 they want to be on there so they can bring their 15 opinions forward, which that's all well and good, but 16 that's what these meetings are for, too, and our BAC 17 meetings. You know, anyone is welcome to come and 18 bring their opinions, but you have to work together to 19 go forward. 20 So as long as the interview part of 21 it -- I'm perfectly happy to go and do whatever I can 22 to assist in the nominations. The procedure that's 23 been set in place now is how I was put on the board. 24 And, you know, I was interviewed by a BAC member, you 25 now. And I assumed that that person went to Billy at 0055 1 the time, who was the director. And, you know -- but 2 I would hate to see people -- well, it's not that it 3 would be bad, because you would still do the 4 interviews, which is, we all know, the final decision. 5 And no one has ever thought that we would say; "This 6 person is on the board; this person is not." Everyone 7 on the BAC knows that the Commissioners hold the final 8 decision, and that's what we want. 9 But I think that takes up a lot of the 10 time that y'all have, and y'all don't have a lot of 11 times sometimes to do just numerous interviews. So I 12 felt like we were maybe a filter to individuals that 13 best could serve on the board. And once again, it was 14 our own opinion. 15 Now, we have never -- at the time that I 16 have chaired the nomination committee, I have never 17 made a decision on my own. I have never said, "This 18 person should be nominated; this person should not" -- 19 or I should say recommended. I have always called up 20 anyone else who is on the committee with me, as they 21 have done. We've always been working two to three 22 people at a time. We've never had just one person 23 say, "This person should go forward; this person 24 should not." 25 And also, as Phil can back up, we've had 0056 1 people that have submitted their nominations and they 2 don't qualify. They don't actually even sit on a 3 license or the license has expired or, you know, 4 there's numerous things. As long as that type of 5 filtering is still done where we don't bombard 6 yourselves with 20 individuals, then I think that's 7 great. 8 And there have been time periods when we 9 haven't had any nominations. I know at the beginning 10 of last year, we went a long period where there was 11 not one nomination form that I saw. And that's not 12 good or bad. Unfortunately, there was no one out 13 there that wanted to step up to the plate. This is a 14 total volunteer -- I drove from San Antonio today. No 15 one pays my gas, and that's fine. I do it because I 16 love bingo, I'm involved with the charities, you know. 17 So that's my comment, my opinion. 18 COMM. CLOWE: I appreciate your comment. 19 And I want to respond to it, Kimberly. I agree that 20 we have a very good board now in the BAC, and that 21 credit goes to you and the other members of the board 22 for the effort and the time that you put into it. 23 I think it also should be fairly said 24 that Commissioner Cox, since he has come on this 25 board, and I have spent a lot of time trying to help 0057 1 the board acknowledge what its role is and be 2 performing in that role. When I came on this board, 3 there was a lack of understanding, I think, in the 4 BAC. And I'm not sure how clear the Commissioners had 5 made that. And, you know, we made that a high 6 priority. 7 My memory is that there has just almost 8 been always a vacancy on the BAC. You know, we've 9 fairly rarely hit that nine number and held it. And 10 so to a certain extent, there is the issue of actual 11 qualifications. And if a person is nominated and 12 they're not qualified, then they can't serve. But 13 then there have been other cases where a person really 14 for some reason, I suppose, wasn't accepted by the 15 Commission. And I said earlier that my hope was that 16 we get a wide level of participation, and we would 17 have the opportunity to cast a wide net, so to speak, 18 for applicants. 19 But I do stick by my comment that I 20 don't want to, for one commissioner, see the process 21 as a filter. I really want to see it as a resource. 22 And I appreciate the comment that you made about the 23 BAC getting along and there's harmony and that's good. 24 But I've also been an advocate of positive 25 disagreement. 0058 1 MS. ROGERS: Sure. 2 COMM. CLOWE: And this board does not 3 choose its own members, and I don't want the BAC to 4 choose their members. I want this board to choose 5 them. 6 And we're one short now, just as you're 7 short on the BAC. And when the time comes, the 8 Governor will make the choice for this board, and 9 we'll make the choice for yours. But a little 10 dissension and a little difference of opinion and an 11 honest conflict in my opinion is good in almost every 12 organization -- 13 MS. ROGERS: Uh-huh. 14 COMM. CLOWE: -- the loyal opposition 15 that has a beneficial result. 16 So I just want to express that opinion, 17 which is hopefully giving us balance in this 18 discussion about the process. And so if this board 19 were to choose members of the BAC that maybe just 20 didn't come right in and sail along with the group, 21 that would be my answer as to what we were about. And 22 I would invite your comment to my comment. 23 MS. ROGERS: And I appreciate that. And 24 that's very true. That's how you get discussions. 25 You know, that's how you get -- you get difference of 0059 1 opinions. If we all had the same opinion, how boring 2 the world would be. You know, I agree with that. 3 There's members on the board where they have brought 4 things up to the table and I've disagreed with. You 5 know, I've gone on record saying, "I disagree with 6 doing that." I have no problem with that whatsoever, 7 and I don't think there's a member on the board that 8 has a problem with that. 9 And once again, let me state, we have 10 never assumed, we've never guessed that we have the 11 final decision, that we say this and that. But there 12 are individuals who throughout interviews say, "I want 13 to get on the board and I want to change this." Well, 14 you know, I have to go back and I have to explain to 15 them, just like it was explained to me -- and I had to 16 learn this process. I didn't know it, you know, just 17 coming into bingo -- there are certain things that you 18 can change, and there are certain things that take the 19 Legislature, and that's, you know, a lot harder. 20 And by all means, anyone who has a 21 discussion or if they disagree with me, that's fine. 22 We're still friends, and we'll discuss about it and 23 we'll go on down the road. What's best for bingo is 24 what needs to happen. So whatever I can do to assist 25 in this process, I'm here to assist. 0060 1 COMM. CLOWE: Great! 2 MS. ROGERS: And that's what we're here 3 for. 4 CHAIRMAN COX: By way of agreement with 5 everything that y'all have said, the statute is set up 6 such that there are representatives from the various 7 aspects of the industry. 8 MS. ROGERS: Yes, sir. 9 CHAIRMAN COX: And just to take two. 10 For example, the commercial lessor and the charity are 11 not exactly set out to be best friends, because they 12 are, if you will, in some way at least in a zero sum 13 game. They're spreading a fixed pot in one mix or 14 another. So they have some adversarial elements to 15 their relationship; and yet, the statute wanted them 16 both represented. 17 And I see this as a place for a healthy 18 interchange between those people. And personally, 19 when recently your committee suggested that one of the 20 candidates was not appropriate because of a conflict 21 of interest -- that is, some of the charities in his 22 halls were already on the board -- I saw that as an 23 opportunity for us to learn firsthand from people who 24 are in the same transaction, both sides of it. 25 So from my standpoint as an observer -- 0061 1 and, of course, this board is the ultimate beneficiary 2 of your work -- I saw that as a great opportunity to 3 hear something that I wouldn't hear if that situation 4 did not occur. 5 So I completely agree with Chairman 6 Clowe. A little bit of conflict or a little bit of 7 discussion about matters which people disagree, let's 8 say -- conflict is not necessarily a good thing. In 9 certain characteristics, if it comes to confrontation, 10 it's not a good thing. But if it's healthy conflict 11 where both sides of an issue are aired, then it's 12 helpful to us. 13 Kimberly, thank you again for your 14 service. We know you don't get paid. We know you 15 come up here from San Antonio a lot, and we appreciate 16 it very much. 17 MS. ROGERS: Thank you. And I would 18 make one more comment on what you just said. 19 CHAIRMAN COX: Sure. 20 MS. ROGERS: I agree yet disagree, only 21 in the first portion, and that is fine. Whomever that 22 y'all decide to put on the board, I will work with 23 them and we'll go forward. But your charity and your 24 lessor, they need to work together, because if we all 25 remember correctly, the charities are the only ones 0062 1 that hold the licenses to play bingo. And if your 2 charity is not profiting, then your commercial lessor 3 is not going to profit. And, in turn, one cannot 4 survive without the other. 5 CHAIRMAN COX: I totally agree with 6 that. 7 MS. ROGERS: Thank you. 8 CHAIRMAN COX: And one of the things 9 that we want to do is to try to understand both of 10 those roles and where they conflict and where they 11 could work together for the better of everyone. And 12 that's what I would hope will come out of having both 13 of them on the same panel. 14 MS. ROGERS: I agree with you. 15 CHAIRMAN COX: Okay. Great! 16 MS. ROGERS: Thank you. 17 CHAIRMAN COX: Thank you, Kimberly. 18 Phil, anything else on that one? 19 MR. SANDERSON: No, sir. 20 CHAIRMAN COX: Anything else? 21 COMM. CLOWE: No, thank you. 22 AGENDA ITEM NO. V 23 CHAIRMAN COX: Item No. V, report, 24 possible discussion and/or action on the fourth 25 quarter and calendar year 2006 bingo conductor 0063 1 information. 2 Ms. Shankle. 3 MS. SHANKLE: Good morning, 4 Commissioners. For the record, my name is Terry 5 Shankle. The presentation today covers bingo 6 statistics for the fourth quarter in calendar year 7 2006. 8 The total gross receipts for 2006 was 9 655 million -- I'm sorry -- $655.6 million and are at 10 the highest level since 2002. Last year's gross 11 receipts represent a 3 percent increase of our gross 12 receipts in 2005. Even though total gross receipts 13 increased, regular card sales continue to decline. 14 Pull-tab sales are growing at a lower rate than in 15 past years. 16 Net receipts totaled $165.7 million and 17 is the highest amount since 2000. However, the 18 increase in net receipts in 2006 is only 2 percent 19 over net receipts in 2005. 20 Since 2002, the average amount spent per 21 play has steadily increased, even though the number of 22 occasions and the number of conductors reporting has 23 declined each year. The average amount spent per 24 player for 2006 was $33.78, or $2.18 more than the 25 average spent in 2005. 0064 1 Overall, attendance has declined every 2 year since 1991. Last year 19.4 million people were 3 reported as playing bingo, a decrease of 500,000 4 people over 2005. Even with the continual decline in 5 attendance, there has been a 44 percent increase in 6 the amount spent per player since 2002. 7 The average number of players per 8 occasion in 2006 were 136, down an average of three 9 players per occasion, or 2.69 percent from 2005. 10 Total number of occasions has decreased 11 each year since 1995. The number of occasions for 12 2006 were 1,000 less than those held in 2005. 13 However, the good news is, the decline from 2005 to 14 2006 was less than any year since 2002, and the number 15 of occasions per conductor remains fairly constant, 16 averaging 100 to 103 per year. 17 The average number of conductors 18 reporting for 2006 was down 3.89 percent over the 19 same -- from 2005. 20 Fourth quarter 2006, total gross 21 receipts for the fourth quarter of 2006 were 22 $159.3 million. Gross receipts from the sales of 23 regular and electronic bingo were $98.3 million. 24 Prizes paid for regular and electronic bingo were 25 $75.5 million, or 76.8 percent of gross receipts. 0065 1 Gross receipts from pull-tabs totaled 2 $61 million. $44.1 million, or 72.3 percent of gross 3 were paid out in prizes. 4 Total gross receipts for this quarter 5 are approximately 1.1 percent greater than the same 6 quarter of 2005. Prizes paid increased 1.6 percent 7 for the same time period. 8 For the fourth quarter, cash 9 disbursements as a percentage of net receipts were: 10 23.7 were for callers, cashiers and ushers. 23 11 percent went to rent, 17.7 reported as charitable 12 distributions. 12.1 were for lease payments to a 13 distributor. 7.2 percent went for cost of goods sold. 14 7.1 were for janitorial service. 5.1 reported as 15 security, legal and/or accounting. And then 5 percent 16 were for miscellaneous expenses such as bingo 17 equipment, mortgage payments and advertising. 18 This pie chart is a graphical indication 19 of what percent each expense is as it relates to total 20 expenses. Prize payouts for charitable distributions 21 are not included. Salaries for janitorial, callers, 22 cashiers, ushers, security, legal and accounting 23 account for 43 percent of total expenses. Rent 24 payments are 27.7 percent, while cost of goods sold 25 were 23.1. 0066 1 Gross receipts by type for the fourth 2 quarter were: Regular card sales were $60.4 million, 3 or 37.9 percent of total gross. Pull-tabs sales were 4 $61 million, or 38.3 percent of gross. And electronic 5 card sales accounted for $37.9 million, or 6 23.8 percent of total gross. 7 The average number of players per 8 occasion decreased by one from the fourth quarter of 9 2005. This chart shows the comparison of net receipts 10 for the fourth quarter of years 2002 through 2006. As 11 you can see, net receipts for instant bingo have 12 increased by $9.9 million between 2002 and 2006, while 13 the net receipts for regular bingo has decreased 14 $8.2 million for the same time period, which means 15 that the overall net receipts have only increased 16 $1.7 million, while gross receipts increased 17 $21 million. 18 I would like to mention one other 19 statistic for 2006. Our licensed authorized 20 organizations reported distributing almost $32 million 21 to a charitable cause or deed. $32 million is three 22 times what is required by statute. 23 That concludes my report. Susan Beasley 24 with the Office of the Controller included in your 25 notebook additional information and spreadsheets for 0067 1 2006. I will be glad to answer any questions you may 2 have. 3 CHAIRMAN COX: Thank you, Terry. 4 One of the things I noticed was that 5 while traditional bingo is declining and instant bingo 6 is increasing, that the return to the player was 7 greater in traditional bingo than it was in instant 8 bingo. So people are opting for the bet that returns 9 them the smaller amount. Help me. 10 MR. SANDERSON: Well, I think it -- I 11 understand your observation. But I think, in reality, 12 the organizations are giving away $2,500 in prizes, 13 which is the maximum that they can give away with 14 regular bingo. And they're only taking in X number of 15 dollars to pay out those prizes. 16 So even though they may be losing 17 attendance or losing players, the average -- over that 18 period of time, approximately the average decline has 19 been about $200 per occasion of what they take in 20 compared to what they give away. So they continue to 21 give away $2,500, but they're only taking in $3,000 or 22 $2,700 now, compared to several years ago. 23 CHAIRMAN COX: Okay. So it isn't a case 24 of their enriching the payout; it's a case of the 25 handle coming down rather than the prize payout amount 0068 1 going up? 2 MR. SANDERSON: Yes, sir. 3 CHAIRMAN COX: Okay. 4 MR. SANDERSON: With instant bingo, the 5 prize payout percentage is set with each deal. 6 CHAIRMAN COX: Okay. Now, if you look 7 at these numbers, you can say, "Gosh! The number of 8 operators is going down and the number of players is 9 going down; yet, revenues are going up and the revenue 10 per player is going up." So one thing you could say 11 here is, "Gosh! This thing is dying out." 12 The other you could say about the fewer 13 organizations is, it's consolidating like many 14 industries are, and often consolidation is considered 15 to be a good thing. It tends to create efficiency. 16 So that might say that if there are fewer players -- 17 even though there are fewer players, if they're 18 betting more and there are fewer organizations, maybe 19 there is greater efficiency and there is more money 20 going to charity, which is the whole intent of this. 21 Is there any observation to support that 22 any of this might be going on, as opposed to the bleak 23 picture that we hear depicted generally when you look 24 at these kinds of numbers? 25 MR. SANDERSON: Off the top of my head, 0069 1 I think I would answer that question with: The player 2 spend I think is going up, because theoretically we're 3 basing it off of gross receipts. And with instant 4 bingo taking over more of the market, there are a lot 5 of those winners that are one and $5.00 winners that 6 are played back. 7 And it goes back to, when you look at 8 the hold or the net receipts, that number seems to be 9 staying flat. You know, the chart that she showed 10 before, it's only gone up like $1.7 million over the 11 last six years. But gross receipts have gone up, you 12 know, 24 and $30 million over the last six years. 13 So the player spend, I think, based on 14 the gross, is increasing because of that playback in 15 the instant bingo. The regular bingo, you don't have 16 necessarily the individual playing back those winners, 17 because in most cases, they're winning $250 to $500, 18 and they go home with that money. 19 So I think that's where you're seeing 20 the increase in player spend. And the decrease in 21 players and the decrease in conductors are kind of 22 harmonizing themselves to that point. 23 CHAIRMAN COX: Mr. Heinlein, is there 24 anything you would like to add to that? 25 MR. HEINLEIN: For the record, I'm David 0070 1 Heinlein, and I keep the books for about 30 charities. 2 And I appreciate Phil's understanding of 3 what's happening, because he's absolutely correct. 4 One of the beautiful things about the event tickets 5 that we were able to begin using in the year 2002 is 6 that we have a guaranteed profit on them; whereas, the 7 money that comes in at the gate, we call it, we've 8 paying out $2,500, no matter what we take in. 9 And we have seen that margin be greatly 10 reduced in the last few years. To some extent, in 11 some cases it's an effort for the charity to actually 12 take in enough to pay the $2,500. So that will 13 distort these numbers that we're looking at. 14 But the event ticket, we have that 15 72.8 percent I think pay out. That's pretty common. 16 And it's a guaranteed profit. So we encourage our 17 staff to sell that product, because we tell them, you 18 know, "You can make a profit for the charity here." 19 You know, it's known; it's a given. 20 So we love that particular product, and 21 that's why you're going to continue to see it 22 increase. And I think that has made the industry a 23 lot healthier than it was a few years ago. And while 24 we may have fewer conductors, the individual charities 25 are beginning to receive more money. 0071 1 We lost a lot of charities back in 2000, 2 2001 and 2002, simply because they couldn't make the 3 distributions. Especially when it went into 4 electronic bingo, we lost a lot of charities right 5 away. The cost of the electronics did not offset. 6 The play was not sufficient, and so we couldn't meet 7 our 35 percent rule. And charities had to quit 8 because they couldn't make their distribution. 9 Now we're able to exceed that 10 distribution requirement three times, which also 11 proves that the charities are going to distribute all 12 the money that they can make. That's what we're in 13 business for, is to make money for the charities. And 14 we're doing a better job of that. With the 15 $32 million, that's an increase from a couple of years 16 ago, $29 million. 17 And I've seen my own charities be able 18 to become much more healthy, to the extent that we're 19 able to accumulate working capital so that we're 20 healthy; we're able to invest in interest-bearing 21 accounts, to profit even more by having operating 22 capital that we couldn't have a few years ago. 23 So I thank you, the staff and the 24 Commission, for giving us some products. And I hope 25 that that will continue, that we'll be innovative and 0072 1 creative in things that we can do within the law. 2 Thank you. 3 COMM. CLOWE: Thank you. 4 CHAIRMAN COX: Thank you very much, 5 Mr. Heinlein. And thank you for being here and for 6 serving on our search committee. We really appreciate 7 that. 8 MR. HEINLEIN: May I make a comment 9 about that? 10 CHAIRMAN COX: Please. 11 MR. HEINLEIN: I've very happy with the 12 way the search committee has been going, and I 13 appreciate -- Director Sadberry is chairing that. I 14 appreciate you selecting him for that. And it's been 15 a really good process of looking at the candidates and 16 to weigh in on formulating some questions for them 17 before we begin the interview. I thought that was an 18 outstanding recommendation. 19 And it gave us an opportunity to ask 20 questions as a group and then assimilate all those 21 questions in a package that we could all look at. And 22 so I think that is going to help us in the selection 23 process of giving you a recommendation that will be a 24 good recommendation. 25 CHAIRMAN COX: Excellent. Thank you for 0073 1 that. 2 COMM. CLOWE: Thank you for that. 3 CHAIRMAN COX: Sarah, you'll be sure he 4 fills out a -- 5 MS. WOELK: I had a -- 6 CHAIRMAN COX: Great! Anything else on 7 Item V? 8 Thank you very much, Terry, for that 9 good report. 10 AGENDA ITEM NO. VI 11 CHAIRMAN COX: Item VI, report by the 12 Charitable Bingo Operations Director and possible 13 discussion and/or action on the Charitable Bingo 14 Operation Division's activities. 15 Mr. Sanderson. 16 MR. SANDERSON: Commissioners, in your 17 notebook is the report of the activities of the Bingo 18 Division over the last month. You have the copy of 19 allocations memo, that allocations were released on 20 February the 28th of 2007 for the fourth quarter. 21 Although the fourth quarter for 2006 was down from the 22 previous quarter, or the third quarter, there was a 23 10 percent increase over the same quarter last year. 24 The BAC meeting is tentatively scheduled 25 for May the 2nd, as you mentioned earlier. Also our 0074 1 website has been updated to include 71 interactive 2 forms at this point in time. And the NAGRA 3 conference, the North American Gaming Regulators 4 conference, of which I am a co-chair of the Charitable 5 Gaming Committee, is scheduled to have their annual 6 conference in June in Kansas City. 7 And I would be glad to answer any other 8 questions you may have. 9 CHAIRMAN COX: No questions, Phil. 10 Thank you for your report. 11 And that concludes the bingo agenda 12 items. 13 Chairman Clowe, would you like to take a 14 short break? 15 COMM. CLOWE: Certainly. 16 CHAIRMAN COX: Okay. About 10 minutes, 17 and we'll see y'all back. 18 (Off the record: 10:24 a.m. to 10:38 19 a.m.) 20 CHAIRMAN COX: Let's come back to order, 21 please. 22 AGENDA ITEM NOS. VII AND VIII 23 CHAIRMAN COX: Item VII, consideration 24 of and possible discussion and/or action, including 25 proposal on new rule 16 TAC §401.316 relating to 0075 1 "Daily 4" on-line game rule. 2 Sarah. 3 MS. WOELK: Thank you. 4 CHAIRMAN COX: Do you want to do it from 5 there or -- 6 MS. WOELK: Well, I can move. Do you 7 like -- 8 CHAIRMAN COX: Your choice. 9 MS. WOELK: Okay. I'll join Robert. 10 (Laughter) 11 MR. SADBERRY: Leave me? 12 MS. WOELK: Yes, I'll leave you. 13 I think it might be useful to do Items 14 VII and VIII together -- 15 CHAIRMAN COX: Identify yourself. 16 MS. WOELK: I'm Sarah Woelk. I'm the 17 Special Counsel. 18 And VII and VIII work kind of as a 19 combo. 20 CHAIRMAN COX: So you would like to 21 combine VII and VIII. And our ultimate goal there is 22 to expose both these rules for comment? 23 MS. WOELK: Yes. 24 CHAIRMAN COX: Okay. 25 MS. WOELK: At the December Commission 0076 1 meeting, you proposed a new game rule called Daily 4 2 and a rule amending the Pick 3 game to add an add-on 3 feature, which was then called Lucky Sum. Those were 4 published in the Texas Register. We had a public 5 comment hearing. 6 We brought them to you for possible 7 adoption in February, with some helpful changes 8 suggested by Ms. Nettles but also with a change to the 9 name of the add-on feature, which was a part of both 10 games. It was Lucky Sum. We came with EZ Sum. You 11 didn't like that. So we were sent back, and we now 12 have the proposed rules redrafted with the name of the 13 add-on feature as Sum It Up. 14 So we are proposing for your 15 consideration that you consider proposing the new 16 Pick 4 rule for publication and an amended Pick 3 rule 17 with the add-on feature now called Sum It Up. There's 18 already a proposed repeal of the old Pick 3 rule still 19 out there to be adopted, if you should eventually 20 adopt these rules. 21 Robert, I think, has his PowerPoint 22 about the games and the game idea, if you want to see 23 it again. We've been through it a couple times. 24 COMM. CLOWE: I'm ready to make a 25 motion. 0077 1 CHAIRMAN COX: Yes, sir. Let me just 2 ask one question, if I could. Sarah, there was the 3 name change for the add-on feature. And wasn't there 4 a date that you changed? 5 MS. WOELK: There was just a mistake in 6 a date. We did fix that. And we carried forward to 7 these proposals the various suggestions that 8 Ms. Nettles had made, which were more practical 9 suggestions about laying out the prize tables. 10 And so, yes, everything that we brought 11 to you in February that we suggested you then include 12 in the adopted versions, we have carried forward to 13 these new proposed versions. So this new version 14 incorporates the new game name, the corrected date and 15 the suggestions that Ms. Nettles had made to us in her 16 comments to the proposed rules. So hopefully this is 17 the ideal package that we're now presenting. 18 CHAIRMAN COX: And I believe that 19 Ms. Nettles commented to you that she was pleased with 20 the rejection of the name EZ Sum because it was not 21 easy? 22 MS. WOELK: She had exactly your opinion 23 on that matter. She did comment to me that she didn't 24 like the name. She also commented that she 25 appreciated some of the changes we made at her 0078 1 suggestion. 2 CHAIRMAN COX: Good. 3 COMM. CLOWE: Move the adoption of the 4 staff recommendation. 5 CHAIRMAN COX: Second. 6 Any further discussion? 7 All in favor, say "Aye." 8 COMM. CLOWE: Aye. 9 CHAIRMAN COX: Aye. 10 Motion passes 2-0. 11 MS. WOELK: And there are memos for you 12 to sign off on in your notebook. 13 CHAIRMAN COX: Those were as to both 14 Items VII and VIII? 15 MS. WOELK: Yes. But there are two 16 separate items for you to sign off on in your 17 notebook. 18 CHAIRMAN COX: And you're going to bring 19 those to us -- 20 MS. WOELK: Yes. 21 CHAIRMAN COX: -- things to sign off on? 22 MS. WOELK: Well, you have them in your 23 notebook, but I can bring you my copy. 24 CHAIRMAN COX: You want it with holes 25 punched in it? 0079 1 MS. WOELK: I'll have Michelle bring 2 down copies that don't have holes punched. 3 CHAIRMAN COX: We're doing great here. 4 MS. WOELK: Okay. There you go. Thank 5 you. 6 AGENDA ITEM NO. IX 7 CHAIRMAN COX: Item IX, report, possible 8 discussion and/or action on lottery sales and revenue, 9 game performance, new game opportunities, market 10 research and trends. 11 Ms. Pyka and Mr. Tirloni. 12 MS. PYKA: Good morning, Commissioners. 13 My name is Kathy Pyka, Controller of the Lottery 14 Commission. And with me to my right is Robert 15 Tirloni, our Products Manager. 16 Our first chart that we have for you 17 this morning reflects our revenue and sales -- from 18 sales, the net revenue to the state through the work 19 ending March the 10th of 2007. Total sales for this 20 20-week period amounted to $1.97 billion, while 21 estimated net revenue to the state for this period was 22 $500.5 million. 23 Net revenue to the state reflects a 24 3 percent decrease as compared to the $516.3 million 25 figure for the same period in fiscal year 2006. And 0080 1 our prize expense as a percentage of sales reflects a 2 slight decrease, to 62.6 percent. 3 Our fiscal year 2007 sales do reflect a 4 $69.5 million decline from fiscal year 2006 sales. 5 The chart before you provides you detail by game. The 6 decline includes a 3 percent or $46.9 million decline 7 in instant ticket sales and then, looking at all of 8 our on-line products, reflects a 4.5 percent decline, 9 or $2.6 million in on-line games. 10 I'll give you a chance to look at that. 11 CHAIRMAN COX: Are you going to comment 12 further on that, Kathy? 13 MS. PYKA: I am. I'm going to comment 14 further on the Mega Millions game and the Megaplier 15 game. I have been focusing on that decline in each 16 monthly presentation to you. 17 And I would like to present the next 18 chart -- whoops! I have another chart somewhere. 19 MR. TIRLONI: Somewhere. 20 MS. PYKA: We maybe won't be presenting 21 the next chart. 22 MR. TIRLONI: Well, you might not. 23 MS. PYKA: That's okay. We'll talk 24 about it out loud, then. 25 Last month I shared with you that our 0081 1 Mega Millions and Megaplier game was $37.9 million 2 down from the previous fiscal year. And through a 3 28-week period, this decline has been reduced to 4 $25.1 million. We've had our recent large jackpot. 5 And the chart that I was going to show 6 you shows a side-by-side comparison of the first 28 7 weeks of fiscal year 2006 and the first 28 weeks in 8 fiscal year 2007. And we've been talking about those 9 jackpot levels. And in fiscal year 2006, we had three 10 large jackpots over $200 million -- one for 11 $250 million, another for $315 million, another for 12 $267 million. 13 And in fiscal year 2007, we've only had 14 really two large jackpots, the one for $163 million 15 and then our recent $370 million. So the chart that I 16 was going to show you, which we can bring back at 17 another time, simply shows we did gain some ground 18 this past month in Mega Millions as a result of that 19 $370 million jackpot. 20 CHAIRMAN COX: And if I remember right, 21 we were down over $30 million in Mega Millions last 22 month? 23 MS. PYKA: Yes, $37.9 million, almost 24 38. And that's been reduced down to -- if we 25 consolidate both the Mega Millions deficit or decline 0082 1 and the Megaplier decline, those two figures are 2 $25.1 million. 3 CHAIRMAN COX: So what did we make up? 4 MS. PYKA: $12.8 million. 5 CHAIRMAN COX: $12.8 million? 6 MS. PYKA: Yes. 7 CHAIRMAN COX: Okay. 8 MS. PYKA: And then our next chart that 9 we have for you includes our fiscal year 2007 sales by 10 game. 75.4 percent of sales, or $1.5 billion, was 11 from instant tickets, with 8.3 percent of sales, or 12 $164.3 million from Pick 3, followed by 6.2 percent of 13 sales and $121.2 million from Lotto Texas, followed by 14 5.2 percent of sales and 102.3 from Mega Millions. 15 And then this last chart provides just 16 simple graphical presentation of the games with the 17 percentage share. 18 MR. TIRLONI: Good morning, 19 Commissioners. For the record, my name is Robert 20 Tirloni. I am the Products Manager for the 21 Commission. 22 This next pie chart shows the graphical 23 representation of our year-to-date instant ticket 24 sales, broken out by price point. It reflects 25 $1.5 billion in sales, and it illustrates that the 0083 1 $5.00 price point is and continues to be our leading 2 price point, followed by the $2.00 price point and 3 then the $10 price point. And that has remained 4 consistent for quite some time now. 5 I also have an update for you on some of 6 the Mega Millions information that Kathy just 7 provided. The jackpot that was referred to for the 8 Tuesday, March 6th drawing, it was advertised at 9 $370 million. That is a U.S. record. The record 10 previous to that was held by Powerball, and it was 11 $365 million. 12 When all was said and done and all of 13 the sales were tallied from all of the 12 states, the 14 jackpot that was actually supported was $390 million, 15 so $20 million more than what was advertised. Our 16 total draw sales -- 17 CHAIRMAN COX: Robert? 18 MR. TIRLONI: Yes, sir? 19 CHAIRMAN COX: In the case of Mega 20 Millions, advertised is interesting, but you get what 21 you get, based on sales. Right? 22 MR. TIRLONI: That's correct. 23 CHAIRMAN COX: Whether it's higher or 24 lower? 25 MR. TIRLONI: That's correct -- well, 0084 1 no, not lower. They would guarantee what they 2 advertise. 3 CHAIRMAN COX: Okay. So what's 4 advertised is guaranteed? 5 MR. TIRLONI: Yes. 6 CHAIRMAN COX: In this case, sales 7 supported 390 versus the 370 that had been advertised. 8 That could support the inference that the estimators 9 are being conservative? 10 MR. TIRLONI: I think that that could be 11 part of it. But I think the bigger part of it is lack 12 of experience at a record-setting jackpot. 13 CHAIRMAN COX: Okay. It was just so big 14 that they underestimated, which is much better than 15 had they overestimated and we would have to cough up 16 money that wasn't supported by sales? 17 MR. TIRLONI: That's absolutely correct. 18 CHAIRMAN COX: Now, Director Sadberry, 19 you and Ms. Pyka I think participated in that 20 determination. How did y'all feel about the way they 21 worked on a jackpot at this level? 22 MS. PYKA: I thought that the process 23 worked quite well. We did a couple of extra calls on 24 this jackpot because the states realized that sales 25 were coming in at a faster rate than planned. We 0085 1 continued to have additional jackpot-setting calls in 2 order to increase the jackpot, before we actually 3 reached that day. And so -- I mean, I think all went 4 well. And, again, it was super difficult to estimate. 5 I think our state did a fantastic job estimating that 6 jackpot, and we've learned a lot from it. 7 CHAIRMAN COX: So it sounds like that 8 from the -- is that Wednesday and Saturday or Tuesday 9 and Friday? 10 MS. PYKA: Tuesday and Friday. 11 CHAIRMAN COX: Tuesday and Friday. And 12 it was won on a Friday, if I remember right. 13 MS. PYKA: Tuesday night. 14 CHAIRMAN COX: I had a 50 percent 15 chance. 16 (Laughter) 17 MS. PYKA: And so we did an extra 18 call -- 19 CHAIRMAN COX: So y'all were working 20 during the weekend to look at this? 21 MS. PYKA: We had an additional call 22 Friday before -- well, we had the call on Friday, and 23 then we had another call on Monday to revisit where 24 each state was with their sales estimate and then, of 25 course, had a call on Tuesday. 0086 1 MR. SADBERRY: Chairman, I would agree 2 with Kathy's comments. And I would like to say, if I 3 may -- it's a general statement -- I would agree with 4 you. This reflects a conservative approach, and 5 that's the approach that we believe to be the fiscally 6 prudent approach. And we expressed that, as I've 7 stated before, in meetings. 8 And I think -- and I'm not giving us 9 discredit necessarily -- but my observation is that 10 our approach is recognized as being a very reliable 11 approach. I've seen that, in writing, recognized by 12 the other directors and their staffs. 13 Also I attend sometimes the Finance 14 Committee portion of that session, who are not the 15 directors. And when I'm there, Kathy is on the 16 Finance Committee part of that function. Ben Navarro, 17 for example, covered it today since we were both here. 18 And it's a very integrated group and a very 19 professional approach to this and very accurate. 20 I would agree, though, at this level 21 it's difficult, and we would certainly want to err on 22 this side. 23 I also stated, you know -- and I'll talk 24 about this a little later in my report -- that I just 25 returned from the Mega Millions directors meeting in 0087 1 Detroit. And this was obviously, as you might 2 imagine, the subject of discussion. And there again, 3 I will comment more about this, but the role that the 4 Texas group plays I want to let you know is very 5 complimentary and highly recognized and regarded among 6 the other directors. 7 So my overall conclusion is (A), I'm 8 satisfied and appreciative of the process and the role 9 that we play in it, and I think it continues to become 10 a very professional and financially and fiscally sound 11 process. And I've had concerns about that in the 12 past, and my concerns are allayed significantly each 13 time that we experience this. 14 CHAIRMAN COX: That's a refreshing 15 report. 16 Okay, Robert. Why don't you go ahead 17 with Texas. 18 MR. TIRLONI: Yes, sir. Our draw sales 19 totaled almost $48 million. That's for Mega Millions 20 only, and that's starting from the $12 million initial 21 drawing in the roll cycle, all the way through the 22 actual drawing in which the jackpot tickets were sold. 23 And for Megaplier, I don't have it up there, but the 24 sales for Megaplier to do that in that period were 25 over $9.5 million as well. 0088 1 There were two winners for that drawing, 2 one in New Jersey and one in Georgia. Both jackpot 3 winners in those states chose cash value options, so 4 their payment was -- or their prize was $116.5 million 5 prior to taxes being withheld. 6 And we did have seven second tier 7 winners. If you remember, the second tier prize is 8 $250,000. Unfortunately, none of those winners 9 megaplied. The Megaplier number was 3, so those could 10 have been $750,000 prizes. 11 CHAIRMAN COX: And it seems to be our 12 experience that when the jackpot gets really big, that 13 instead of buying the Megaplier, they buy another Mega 14 ticket? 15 MR. TIRLONI: That's what we've 16 experienced in the past; that's true. 17 That is our report. I have been asked 18 to provide you with one undate, Commissioners. 19 Dr. Sizemore, our research coordinator, has completed 20 an analysis on weather and its impact on sales. He 21 was unavailable to be here today, but the plan is to 22 present that to you at the April Commission meeting. 23 I just wanted to let y'all know about that. 24 COMM. CLOWE: Kathy, you've given us 25 what amounts to a mid-year report, 26 weeks. And 0089 1 we're now falling behind prior year returns to the 2 state, contribution to the Foundation School Fund. 3 How do we stand against our budget in that regard? 4 MS. PYKA: Against our overall operating 5 budget? 6 COMM. CLOWE: Yes. 7 MS. PYKA: Our overall operating budget 8 is tracking, as we would expect. Sales are obviously 9 3 percent down, slightly over 3 percent down. We 10 will -- 11 COMM. CLOWE: Now, wait a minute. Is 12 that against our sales budget? 13 MS. PYKA: Against our sales fiscal year 14 2006. They are tracking ahead of the BRE, because the 15 BRE was quite conservative for fiscal year 2007. So 16 looking at it from the other angle of where we are 17 against net revenue to the state in comparison to BRE, 18 we're slightly ahead of that. 19 COMM. CLOWE: And the B-R-E stands for? 20 MS. PYKA: The biennial revenue 21 estimate. I apologize. 22 COMM. CLOWE: Does that come from the 23 Controller? 24 MS. PYKA: Yes, sir. 25 COMM. CLOWE: And how is it that that's 0090 1 more conservative than our forecast? 2 MS. PYKA: The BRE was published two 3 years ago for fiscal years 2006 and 2007. And I'm not 4 saying that our sales forecast is much different than 5 that, but we have been comparing our sales for '07 6 against where we were for fiscal year '06. So my 7 year-to-date comparison that I have been providing has 8 been against '06 sales. Very good sales for fiscal 9 year '07 still, but we are down from '06. 10 COMM. CLOWE: Well, I want to continue, 11 Mr. Chairman, to sound a note of concern and caution, 12 because I think what I'm seeing is something that I've 13 commented on in the past and I want to continue that 14 so that nobody can say they were surprised, in that 15 there is a sea change taking place here and we are 16 falling behind. 17 MS. PYKA: Correct. 18 COMM. CLOWE: Instant ticket sales are 19 down on a year-to-date basis. The on-line sales are 20 down, even with the world's record Mega Million 21 jackpot. And I would hope that Director Sadberry, in 22 his appearances before members of the Legislature and 23 you, Mr. Chairman, as you make your appearances, would 24 point out that we are suffering a general impact, I 25 think, from fatigue on our games, competition for the 0091 1 gaming dollar from outside sources and internal, 2 within the state, I think, in many cases, illegal 3 sources of opportunity for the gaming dollar. 4 And, Bobby -- I don't see you -- I hope 5 you'll read this record and point out to the media 6 what's going on so that this won't be something that 7 somebody discovers and then makes a report on and 8 says, "Oh, look what we found." I want it on the 9 record that we are aware and we are pointing out to 10 anyone that's interested that there is a decline under 11 the present statute and under the present rules of 12 return to the state from all of these activities. 13 And nobody wants to, I think, look at 14 that right now in a very concerned light. But I think 15 that's the role, Mr. Chairman, of the board, to say, 16 "Look what's going on here," and not let anybody be 17 surprised. And we appreciate the efforts of the 18 staff. We understand you're trying to work to abate 19 that trend and you've now asked us to approve for 20 publication new rules for a new game and for a change 21 to Pick 3. We've done that. We've looking at that as 22 an opportunity to increase the attractiveness of that 23 type of on-line activity. 24 But I see, as a business person, a trend 25 here that, you know, it's unmistakable. And my role, 0092 1 I think as a Commissioner -- and the Chairman I hope 2 agrees with me -- is to be farsighted and look ahead a 3 year or two or three and say, "The contribution is 4 going to drop below a billion dollars a year to the 5 Foundation School Fund. Does anybody want to be 6 advised of this and does anybody have any comment on 7 it? Now is the time to look at it." 8 MS. PYKA: In each appearance before 9 either the House Appropriations Committee or the 10 Senate Finance Committee, Mr. Sadberry, when called to 11 testify, has given the most current update on our 12 sales decline. And in each case, that has been over 13 3 percent in comparison to fiscal year 2006 sales. 14 And so each time we attend some form of a hearing, we 15 have our current data with us. 16 CHAIRMAN COX: And, Mr. Chairman, I 17 would add that I share your concern completely. When 18 we appeared before the Senate Finance Committee, there 19 were questions about not only this year's sales but 20 trends, and not only the Texas lottery but Lottery 21 nationwide. And while we provided them with the best 22 information that we had, we are gathering additional 23 information. And I believe we will see at the next 24 board meeting a much more comprehensive presentation 25 on just what is going on. 0093 1 One of the things that you will observe 2 is that our instant sales were up month of this year 3 over month of last year, through September. And every 4 month since October, they have been down this month 5 over the same month last year. And we have several 6 folks -- we have GTECH. We have Profs. Huff and 7 Jarrett. As they indicated, Dr. Sizemore and his 8 staff are all looking at these things. 9 And I think we are going to receive a 10 report on that at the next meeting, Kathy? 11 MS. PYKA: I'm aware that Dr. Sizemore 12 will be doing that. I'm nor sure of the status of 13 Professors Huff and Jarrett and will certainly follow 14 up on that after this meeting. 15 CHAIRMAN COX: Okay. And Prof. Huff 16 told me that they had a deadline that's now less than 17 two weeks out for the report that they're making. 18 Mr. Fernandez, do you have any comment 19 on that? 20 MR. FERNANDEZ: I believe that first 21 part will be in in April, will be next month. 22 CHAIRMAN COX: Okay. And then I know 23 we've requested information from GTECH as well. Gary, 24 when do you expect to hear back on that? 25 MR. GRIEF: I'll double check after the 0094 1 meeting. 2 CHAIRMAN COX: Okay. But it would be 3 great if that could be a comprehensive report of the 4 information we have from all sources on specifically 5 this decline in the on-line games, which have been up, 6 up, up, and now they're down -- I'm sorry. Not the 7 on-line games. 8 MR. TIRLONI: Instant games. 9 MS. PYKA: Instant games. 10 CHAIRMAN COX: I had a 50-50 chance on 11 that one. 12 COMM. CLOWE: You know, as I sit here 13 and listen to the discussion about bingo -- and I 14 think, Mr. Chairman, your observations are very astute 15 in that regard -- it certainly struck me that we're 16 experiencing the same thing in the lottery operation. 17 We have fewer people playing more dollars. Our market 18 is shrinking. We have seen an increase in the 19 minority ethnic origin groups, which is an issue that 20 anti-gaming people point out, fairly so. We are 21 respectful of that. 22 We are not pursuing that market. We are 23 not pinpointing that market, but that market is 24 growing. The statistics prove that up. And it is a 25 matter of record that there aren't as many people 0095 1 playing our games as there were years ago. 2 And as a business person and as a person 3 who measures the input to the Foundation School Fund, 4 you have to acknowledge that those are negative trends 5 and they are going to be impactful in the long run. 6 And I bring this up constantly because I don't want 7 anybody to be surprised. And again, the staff is 8 working diligently within the statute, within the 9 rules, to do what they can, but the trend is there. I 10 don't want the Commissioners to fail to observe what 11 we see. 12 CHAIRMAN COX: Thank you, Chairman 13 Clowe. 14 Anything further, Kathy or Robert? 15 MS. PYKA: No, sir. 16 MR. TIRLONI: No, sir. 17 CHAIRMAN COX: Okay. Thank you very 18 much. 19 MS. PYKA: Thank you. 20 AGENDA ITEM NO. X 21 CHAIRMAN COX: Let's see. Okay. Item 22 X, report, possible discussion and/or action on the 23 closing of instant games, including procedures and/or 24 proposal for amendments to 16 TAC §401.302 relating to 25 instant game rules. 0096 1 Ms. Rienstra, Mr. Tirloni and Mr. Grief. 2 MR. TIRLONI: Good morning, 3 Commissioners. Again for the record, my name is 4 Robert Tirloni. I am the Products Manager for the 5 Commission. And, as you noted, I'm being joined by 6 Deanne Rienstra, Assistant General Counsel, and Deputy 7 Executive Director, Gary Grief, this morning. 8 Commissioners, staff is here this 9 morning to present information on the closing of 10 instant ticket games. We'll be providing some 11 historical information, some legal background and some 12 recommended procedural changes that would require 13 staff to initiate game closing processes when instant 14 games have zero top prize levels remaining. And we 15 also have a rule proposal for you to consider today. 16 Moving into the history and background, 17 instant games were typically left on the market for 18 sale until they were almost 100 percent sold. In 19 late 2003 -- 20 CHAIRMAN COX: Let's stop right there 21 for just a minute. 22 MR. TIRLONI: Okay. 23 CHAIRMAN COX: Gary, there's some 24 history behind why that was there. Would you like to 25 tell us about that? 0097 1 MR. GRIEF: Behind why games were -- 2 CHAIRMAN COX: Why we sold almost 3 100 percent. 4 MR. GRIEF: Agency history? 5 CHAIRMAN COX: Yes. 6 MR. GRIEF: Yes, sir. Our former 7 Executive Director, Linda Cloud, that was her policy. 8 She, as I understand it, had an experience when she 9 was with the Florida Lottery several years ago where 10 there was some public criticism made of calling games 11 before they were 100 percent sold and then in turn 12 shredding that unsold inventory. So that was the 13 practice here for many years while she was the 14 Executive Director. 15 CHAIRMAN COX: Okay. And we are going 16 to observe here that we went to a much more sound 17 procedure in 2003 and 2004. And I think one of the 18 things that demonstrates is that Ms. Cloud's reaction 19 to public outcry, because we were shredding tickets, 20 led us to reach a suboptimal policy as to when we 21 closed games. 22 MR. GRIEF: I will agree with that. 23 CHAIRMAN COX: Okay. Go ahead, Robert. 24 MR. TIRLONI: So in late 2003 or early 25 2004, we did make a change in our procedure on game 0098 1 closings. Staff developed an analysis that allowed 2 the identification of games that were slow sellers, 3 and that analysis and a procedure then allowed for the 4 closing of those slow selling games and allowed for 5 the replacement of hopefully a better selling game in 6 its place. 7 As I said, a procedure was developed. 8 It incorporated that analysis. And staff has 9 basically been following that same procedure ever 10 since that late 2003 time period, with very minor 11 modifications to improve some of the business 12 operations of that process. But there were no major 13 modifications since that time. 14 So in the game closing analysis -- and 15 this is a recap of some information I've shared with 16 you in the past, but it's been a while since we talked 17 about it -- there's some different factors that we 18 consider. And I basically like to refer to this 19 portion of the analysis as a mini-cost-benefit 20 analysis or a mini-CBA. 21 Staff looks at the cost to actually 22 print the game and the amount of prizes that have been 23 paid out in the game as of the date of the analysis, 24 what the sales of the game have been thus far and how 25 long the game has actually been available for sale, 0099 1 how long it's been in market. 2 And then there is a comparison that's 3 done with -- there is a comparison done with average 4 game sales for games with similar print quantities and 5 price points. So, for example, if we're looking at or 6 analyzing a $2.00 price point game that has a 7 6 million print quantity, when we're doing this 8 analysis, we're looking at the average game sales for 9 a $2.00 price point game, with 6 million print 10 quantity. We're wanting to ensure that we're doing an 11 apples-to-apples comparison as part of that analysis. 12 There are two different signature or two 13 different approvals required for game closings. If 14 the game is over 85 percent sold when the analysis is 15 completed, our instant product coordinator signs off 16 on that closing and then I sign off on that closing. 17 And the next available date, we initiate the game 18 closing process. 19 If it's a slow seller where it's below 20 85 percent but we're recommending closure, that 21 analysis receives additional scrutiny, you might say, 22 or additional review. And then those games are 23 reviewed by the Lottery Operations Director, Michael 24 Anger; by the Controller, Kathy Pyka; and then by the 25 Deputy Executive Director, Gary Grief. 0100 1 CHAIRMAN COX: And this analysis is done 2 how often? 3 MR. TIRLONI: Currently we're doing it 4 once a month. Part of our procedure change is to 5 change to at least once a month, depending on what 6 other processes we might put in place. 7 CHAIRMAN COX: Okay. So it is possible 8 under the current procedure, before we change it, that 9 a game should have been called for 30 days and wasn't 10 because it went over the line one day after the 11 cutoff? 12 MR. TIRLONI: That's absolutely correct. 13 CHAIRMAN COX: Okay. Now, let's add a 14 little bit to the history as we go through here, for 15 full understanding. 16 MR. TIRLONI: Yes. 17 CHAIRMAN COX: In our January meeting, 18 Prof. Busald appeared and pointed out to us that there 19 were games out there being sold where all of the 20 prizes in the top three prize categories had been 21 sold. Then in February of this year, a front page 22 article in a Saturday Houston Chronicle reported that 23 same thing, was read by members of the Legislature, 24 certainly among others, and there have been activities 25 within the Legislature to address this issue. 0101 1 Director Sadberry, would you like to add 2 anything to that very brief description? 3 MR. SADBERRY: Chairman, you're correct. 4 And I might add that comments were made attributed to 5 me and also by commissioners, at least One 6 Commissioner, concerning the soundness of the 7 procedure at that meeting. And those comments were 8 followed by Prof. Busald's data. 9 And what did not occur -- and I take 10 this upon myself -- is, we did not conduct a study of 11 that data to see a comparison of, for example, how the 12 procedure, which we believe to be sound even now, may 13 impact the actual results. And the actual result is 14 what has been reported in the media; that is, what 15 prizes may remain when the procedure has been applied. 16 And we also have, the current practice, 17 a 60-day window. So you might take your example of 29 18 days late in closing, and then you have 60 days to 19 pick it up and end it. And you might have a 60-day 20 certainly and possibly a larger than 60-day interval 21 at which the picture changes potentially. And I think 22 in actuality, it probably does as to what prizes are 23 remaining at the time. And as you may recall, I was 24 asked questions of that nature before the Senate 25 Finance Committee. 0102 1 We did not undertake that study and you 2 were not presented with that data in order to reflect 3 on it further. In addition, two observations 4 regarding the soundness of the procedures there, which 5 was the primary focus that we had addressed with 6 regard to reporting back to you on that issue. 7 CHAIRMAN COX: And I think I'll 8 elaborate on that at this point. That's an excellent 9 summary of the situation. 10 Chairman Clowe, as that meeting before 11 Prof. Busald pointed out that we had games out there 12 that had the top three prize tiers exhausted, I did 13 comment that I had reviewed the procedure and that it 14 was sound. My review, unfortunately, was limited to 15 what has been presented thus far, the factors that we 16 were looking at, primarily how sales are going. And I 17 wasn't looking at the fact that the frequency of 18 review was only once a month and that it was taking 60 19 days to call a game or to close a game after it had 20 been called. 21 So, in effect, we see a game under our 22 present procedure that needs to be called and it could 23 be 90 days before it is actually off the market. So 24 this is, I think, now providing the full context for 25 going forward on the staff's recommendation. 0103 1 Anything any of y'all want to add to 2 that? 3 COMM. CLOWE: I guess I would ask the 4 question, then, Mr. Chairman: Why didn't we get this 5 information then, so that your comments could have 6 been based on a fuller and more complete review 7 instead of what we got at the time? 8 CHAIRMAN COX: Well, I'm going to say 9 that what the staff did was respond to what I asked 10 for in my briefing and not what I wished I had asked 11 for, because it's one of those things where, when you 12 ask for a briefing on a subject, you have limited 13 knowledge of it or you wouldn't be asking for a 14 briefing. 15 And I didn't ask the right questions and 16 staff didn't say, "Wouldn't you like to also know 17 about how often we review and how long it takes GTECH 18 to get the game pulled once we call it?" So I think 19 it was a combination of I didn't ask the right 20 questions and folks didn't supplement the information 21 I was provided with additional information that would 22 have been helpful. 23 COMM. CLOWE: Well, my recollection of 24 that meeting is that you and I both commented that we 25 thought the procedure was fair, it was proper and it 0104 1 was well done. 2 CHAIRMAN COX: Yes, we did. 3 COMM. CLOWE: And so based on the 4 information we had, we made those comments and we 5 agreed that the procedure should stand. 6 CHAIRMAN COX: That's correct. 7 COMM. CLOWE: I'm concerned about the 8 fact that -- I'm pleased that you went into it 9 in-depth and you got the information that we're 10 looking at now. I'm concerned that we didn't get that 11 information and it wasn't forthcoming to put us then 12 where we are now. And I don't know that I can take 13 that any further in the comment except to express, you 14 know, thank goodness for your inquiry. 15 CHAIRMAN COX: Well, I think it was much 16 more than that. I think one of the things that we're 17 working toward -- and we have been working toward this 18 long before I came, under your leadership -- and that 19 is that the staff will help us anticipate these things 20 by sharing their institutional knowledge with us about 21 what kinds of things could come up. You know, this is 22 not a new issue. Director Sadberry and I were called 23 to discuss this with Chairman Flores. And the first 24 thing he said was, "This is not a new issue." 25 And Director Sadberry, while he was the 0105 1 Chairman of this Commission and served on this 2 Commission for a number of years, was away from four 3 years. And some of these things he doesn't know or 4 perhaps has forgotten. You and I -- I particularly -- 5 had some knowledge of this and yet really didn't have 6 a context of it. 7 I knew there had been a case out there, 8 but I hadn't really attached it to the total picture 9 which was actually painted for us the first time -- or 10 for me the first time -- by Professor Busald, which 11 was, "There can be games out there, particularly 12 toward the end of this 90-day period, right before 13 it's going to be pulled in, where they're playing 14 nothing like what they think they're playing for." 15 COMM. CLOWE: Thank you for that 16 explanation, sir. 17 CHAIRMAN COX: Okay. Robert. 18 MR. TIRLONI: Actually, Deanne is going 19 to take you through some legal background regarding 20 this issue. 21 MS. RIENSTRA: For the record, I'm 22 Deanne Rienstra, Assistant General Counsel. 23 The filing of lawsuits in California, 24 Washington and Colorado in early 2000 led to an agency 25 review of its practice of selling instant game tickets 0106 1 when all top prizes had been claimed. The Executive 2 Director, Linda Cloud, made the decision that the 3 agency would continue this practice. 4 The agency recognized that players 5 needed to be notified that instant games would 6 continue to be sold even if all top prizes had been 7 claimed and worked on developing language to be placed 8 on the website, the back of tickets, point-of-sale 9 stickers and advertising materials. This language was 10 drafted with the assistance of the Consumer Protection 11 Division of the Office of the Attorney General. 12 Notification was included on the agency's website and 13 point-of-sale advertising materials by the fall of 14 2000 and added to the back of its instant game tickets 15 by May 2002. 16 Another lawsuit was filed in Arizona in 17 May 2002. Eventually, two lawsuits were filed in 18 Texas. Sandy Surber versus GTECH was filed in county 19 court in Nueces County in March 2003. The Yolanda 20 Garza case was filed in JP court in Nueces County in 21 April 2004. The Texas Lottery Commission was never a 22 party to either lawsuit, although the agency requested 23 and received Attorney General representation in the 24 matter. 25 Beginning in April 2003, the Surber case 0107 1 was placed on the Commission's open meetings notice to 2 receive legal advice on this matter. The Garza case 3 was eventually dismissed by the Plaintiff. The Surber 4 case included both GTECH and Scientific Games as 5 defendants. Scientific games was dismissed by summary 6 judgment. GTECH settled the case with the plaintiffs. 7 GTECH agreed to made a good-faith effort to place 8 player notification stickers at the point of sale, 9 depending on retailer cooperation. 10 MR. TIRLONI: Commissioners, when we 11 last presented information about this in February 12 2006, David Sizemore covered some information 13 regarding a survey he did to some different states. 14 We have reached out again, through a different avenue 15 this time. We reached out to actual product managers 16 and product coordinators in other states, and we went 17 to those states that are typically comparable to 18 Texas. 19 So we have made contact with California, 20 Georgia, New York, Ohio, Illinois and Massachusetts. 21 And I have information for you on what they're doing. 22 California, as Deanne -- 23 COMM. CLOWE: Robert, let me just 24 interrupt you. 25 MR. TIRLONI: Yes, sir. 0108 1 COMM. CLOWE: I think in prior 2 presentations you've been asked what other states 3 did -- 4 MR. TIRLONI: Yes. 5 CHAIRMAN COX: -- and you gave us an 6 answer. Now, how is this answer different from prior 7 answers we've gotten? 8 MR. TIRLONI: It's not very different at 9 all. The last time -- and I actually have the slide 10 from February of 2006. I believe the research group 11 reached out to all the jurisdictions. I believe they 12 got answers from 27. And I believe 20 of the 27 said 13 that they closed games when there were zero top prizes 14 remaining and seven -- Texas was one of the seven -- 15 continued to sell those games. 16 Some of these states we did not get 17 responses from at that time. And that's why, instead 18 of going through the research route, we just made 19 direct contact with marketing or product management 20 staff. 21 COMM. CLOWE: That's my recollection, 22 that there was a large group that closed early and 23 there was a small group that closed late, and Texas 24 was in the small group that closed late. 25 MR. TIRLONI: That's correct. 0109 1 COMM. CLOWE: But this information now 2 to me looks new. It's more detailed. 3 MR. TIRLONI: I think the question that 4 was asked in February of 2006 was what those states 5 do. And this may be a little bit more detailed 6 because we got the information through a different 7 source at the lottery. But there's no states on here 8 that have changed their process or changed what they 9 do since we last reported on this. 10 MR. GRIEF: Let me add to that if I 11 could, Commissioner Clowe. 12 COMM. CLOWE: Yes. Take another whack 13 at it, Gary. 14 MR. GRIEF: I think the difference here 15 is, the original request was asking the states what do 16 you do? Now, in this exercise, Robert asked why do 17 you do what you do. 18 COMM. CLOWE: Okay. I think that's the 19 difference. 20 MR. GRIEF: Yes. 21 COMM. CLOWE: And you asked different 22 people? 23 MR. TIRLONI: That's correct. 24 COMM. CLOWE: And clarify that just a 25 little bit. Who did you ask before? And you asked 0110 1 the operating people this time. Who was it you asked 2 before? 3 MR. TIRLONI: I believe last time the 4 research group sent out an actual survey that was 5 either faxed or e-mailed to all the different 6 lotteries, all of the different U.S. jurisdictions. 7 And, you know, that's just like the way surveys come 8 in to our agency. Somebody looks at that, and those 9 are assigned to somebody to complete and fill out, 10 based on their knowledge or their experience within 11 the agency. 12 This time around -- 13 COMM. CLOWE: So another way to answer 14 that would be, you don't know who answered it the 15 first time? 16 MR. TIRLONI: I believe David Sizemore 17 probably has all of the information about who 18 completed those, but I don't know that it was 19 specifically product management people. This time I 20 can tell you that we went directly to marketing staff 21 in each jurisdiction. 22 COMM. CLOWE: And it sounds like to me 23 you feel better about this response. These people are 24 credible, and you feel like these are credible 25 responses. Is that correct? 0111 1 MR. TIRLONI: Yes. Part of the benefit 2 of being in the Mega Millions group is, we have formed 3 a -- I guess you could call it a working group. So 4 all of the Mega Millions states, at a directors 5 meeting some time ago, thought it would be beneficial 6 for marketing or product management staff in all of 7 those states to have a quarterly roundtable conference 8 call to talk about product issues or marketing issues. 9 So I guess the best way to describe it 10 is, we have been able to form a network of our peers 11 at other agencies or other lotteries, and that's what 12 we've utilized to get this information. 13 COMM. CLOWE: Okay. 14 MR. TIRLONI: So as Deanne mentioned, 15 California was involved in a lawsuit. The policy that 16 they have in place is, they actually initiate game 17 closing, not when there's zero top prizes remaining, 18 but they actually initiate the closing when there's 19 one top prize remaining, and they do that to be ultra 20 conservative, to ensure that they don't have any games 21 out there that have zero top prizes. 22 Georgia also initiated -- 23 CHAIRMAN COX: Robert, let me stop you. 24 MR. TIRLONI: Yes, sir. 25 CHAIRMAN COX: Based on what I've heard 0112 1 here in public comment, California's policy would be 2 strongly criticized were we to adopt that in Texas, 3 where we pulled down a game when a large top prize 4 remained? 5 MR. TIRLONI: That could be criticized, 6 yes. 7 COMM. CLOWE: Help me understand that, 8 Mr. Chairman. Who would be originating that 9 criticism? 10 CHAIRMAN COX: A person who believed 11 that we were trying to close games when they were most 12 profitable for us, rather than using other criterias. 13 Let's say that we had a game that has three million- 14 dollar prizes, and we closed it -- called its closing 15 while one remained and got it closed while one 16 remained, that would probably be a very profitable 17 game. 18 COMM. CLOWE: So that would be seen by a 19 player as a bait and switch kind of action? 20 CHAIRMAN COX: Yes, sir. 21 MR. TIRLONI: I will say, there are 22 times through the normal game-closing process where 23 there are games that we close that do have top prizes 24 remaining because, as we've also talked about, we have 25 no knowledge if that prize has -- you know, if those 0113 1 tickets have been stolen or if they've been returned 2 to our warehouse as part of a partial pack because of 3 a retailer going out of business or if they've burned 4 up in a fire. So, I mean, there's always the 5 possibility that you could close the game with the top 6 prize still out there, just because you have no 7 knowledge of where it is. 8 CHAIRMAN COX: And under our current 9 practices, because it isn't selling? 10 MR. TIRLONI: Correct. That's correct. 11 COMM. CLOWE: I think you've told us 12 before what you know is what's been claimed? 13 MR. TIRLONI: That's correct. 14 COMM. CLOWE: You don't know what hasn't 15 been claimed and, if it's not claimed, why it's not 16 claimed? 17 CHAIRMAN COX: That's the key right 18 there. 19 MR. TIRLONI: That's correct. We used 20 to use the terms "winning tickets remaining". And a 21 while back we got away from that because we felt that 22 that was inaccurate to communicate to the public that 23 a prize was remaining, just because it was not yet 24 claimed. 25 COMM. CLOWE: Okay. Mr. Chairman, 0114 1 that's a very good comment on that California policy. 2 Thank you for that. 3 CHAIRMAN COX: Yes, sir. 4 MR. TIRLONI: Georgia initiates game 5 closing when their -- or initiates their process where 6 there are zero top prizes remaining. And their 7 policy -- or they've stated their policy is believed 8 to be the right thing to do for the players. 9 New York -- 10 COMM. CLOWE: How fast is their closing 11 procedure? 12 MR. TIRLONI: I don't have the 13 specifics. But most of the states are similar to what 14 we do. There is a call period where staff is out 15 picking up tickets, sales staff is out picking up 16 tickets, returning those tickets. And then at a later 17 date, there is the actual close. And then most states 18 allow for a period of time so that validations can 19 take place on those tickets that players may still 20 have in had. 21 COMM. CLOWE: Are you saying that's 90 22 days? 23 MR. TIRLONI: It could be. I'm not sure 24 exactly what the Georgia policy is for call and close. 25 MR. GRIEF: I do know that's a GTECH 0115 1 state. And a very educated guess would tell me it's 2 probably very similar to our process. 3 COMM. CLOWE: Okay. 4 CHAIRMAN COX: So that would say not 5 only the 90 day but, for validation, another 180 days? 6 MR. GRIEF: Correct. 7 COMM. CLOWE: But the sales would stop 8 in 90 days? 9 CHAIRMAN COX: Theoretically. 10 COMM. CLOWE: Theoretically. And then 11 you've got the 180-day validation period. But sales 12 probably stop well within 90 days, theoretically. 13 CHAIRMAN COX: Theoretically. 14 MR. TIRLONI: Yes. During the end 15 validation period, sales have ceased. 16 New York has always stopped distribution 17 when there are zero top prizes remaining. There's 18 when they initiate their game closing. We have been 19 told that they have put a more aggressive policy in 20 place approximately two years ago. That includes 21 notification on the website; that includes messages to 22 retailers via their sales terminal. And we'll be 23 talking about some of our suggestions later in the 24 presentation. But they're quite similar, actually, to 25 some of the things that New York put in place. 0116 1 Ohio does -- 2 COMM. CLOWE: Robert, how does New York 3 know that there are no top prizes remaining? Define 4 that. 5 MR. TIRLONI: Well, I believe they get a 6 report -- GTECH can provide us with a report, and they 7 do provide us with a report currently that tells us 8 when a game has zero top prizes remaining. And it's 9 based on the validation files. 10 COMM. CLOWE: So what that means is, 11 they've been claimed? 12 MR. TIRLONI: Correct. They can tell us 13 that all the prizes in a -- all the top level prizes 14 in a game have been claimed. 15 COMM. CLOWE: And I think that's very 16 important. Let's all understand what you're saying 17 is, they know that they've been sold and claimed? 18 MR. TIRLONI: That's correct; that's 19 correct. 20 COMM. CLOWE: What happens if they get 21 burned up or if they get stolen or if they get lost? 22 MR. TIRLONI: You could have the 23 potential of having a report from GTECH show that 24 there is a prize unclaimed in that game, and it would 25 continue to show unclaimed and it would never show -- 0117 1 COMM. CLOWE: It wouldn't close? In New 2 York, it wouldn't close, would it? 3 MR. GRIEF: Until such time they decided 4 to close it for other reasons. 5 COMM. CLOWE: Okay. So there are other 6 criteria in New York? 7 MR. GRIEF: I'm sure there are. 8 COMM. CLOWE: Okay. Are you going to 9 talk about that to us? 10 MR. TIRLONI: I do not have information 11 about all the other criteria that all the other states 12 use. We're proposing that the criteria that we 13 currently have in place is sound in order to close 14 games based on sales and game performance, that the 15 existing procedure that we have in place will allow us 16 to continue to make sound business decisions about 17 game closings based on sales performance or game 18 performance in the market. 19 COMM. CLOWE: This information -- go 20 back to that other slide, please. Based on what we've 21 got up on the screen on Georgia and New York, you 22 know, there's one criteria, zero prizes, top prizes 23 remaining, because they're claimed. 24 CHAIRMAN COX: Well, let's ask that 25 question, if we may. Is that the only criterion in 0118 1 Georgia and California or do they have other criteria, 2 you're just addressing this one? 3 MR. TIRLONI: We're addressing how they 4 handle games that have zero top prizes or how they 5 address the situation of zero top prizes in a game, 6 when that comes up. When they get those reports from 7 the operator -- and California, Georgia and New York 8 are all GTECH states -- so when they've notified that 9 a game has zero top prizes, this information is to 10 communicate to you that they initiate their game 11 closings at that time. 12 CHAIRMAN COX: But my question -- and I 13 believe Chairman Clowe's question -- was: Do they 14 have other criteria as well? 15 COMM. CLOWE: That's exactly right. 16 MR. TIRLONI: They would have to for the 17 example that Commissioner Clowe presented. There 18 could be a situation where it would continue to show 19 that there was a prize or prizes left unclaimed for 20 packs that have been stolen or packs that have burned 21 in a fire or packs that have been returned. So they 22 have to have another mechanism to close games other 23 than zero top prizes. Otherwise, you could have games 24 that would be out there forever, practically. 25 COMM. CLOWE: Or until they're sold 0119 1 100 percent? 2 MR. TIRLONI: That's exactly right. 3 COMM. CLOWE: You know, if one of the 4 top prizes was the last ticket sold, under what you're 5 saying on this slide, you're telling us it stays open 6 until the last ticket is sold. And I think we've 7 asked you some questions and you've given us some more 8 information that's not on this slide. 9 MR. TIRLONI: I apologize for that not 10 being clearer. The question that we asked regarding 11 this information was, "Can you tell us how you handle 12 situations where there's zero top prizes." But you 13 are exactly correct. There could be situations where 14 that would never happen. 15 COMM. CLOWE: And that's judgment? 16 MR. TIRLONI: (Nods head) 17 COMM. CLOWE: Okay. We're gathering 18 information. 19 MR. TIRLONI: Ohio attempts to address 20 this issue in a different way. On games that are a 21 $5.00 price point and higher, due to the concern, or 22 due to their concerns over the California lawsuit, 23 they actually withhold one of the top prize tickets, 24 and they conduct what they call to be a top prize 25 drawing. So basically Ohio can say that there's 0120 1 always a top prize remaining in the game and they 2 award that price via a drawing. 3 COMM. CLOWE: And they've got it in 4 their hand and they say this drawing, it's going to go 5 in the sales. Is that what you're saying? 6 MR. TIRLONI: Yes. If the game is 7 designed with, let's, say, ten top prizes, there will 8 only be nine available to actually be won by buying 9 tickets and scratching off. Players then have to 10 submit their tickets to what we would typically call a 11 second chance drawing, but they call it a top prize 12 drawing. 13 MR. GRIEF: Their losing tickets. 14 MR. TIRLONI: Their non-winning 15 tickets -- that's correct -- in order to have a chance 16 to win that last top prize. 17 COMM. CLOWE: And when do they dump that 18 winning ticket in? Who makes the decision? 19 MR. GRIEF: Let me try to clear that up. 20 They don't. It's never in the mix to be bought by a 21 player. They hold back that one top prize. And then 22 once all the other top prizes are sold, then anybody 23 who buys a ticket can send in a loser, put it in a 24 bucket, spin it, and they pull it out: Now, all 25 right. Here is the last top prize. 0121 1 CHAIRMAN COX: So you've got to send it 2 in? 3 MR. GRIEF: Yes, sir, that's my 4 understanding. 5 CHAIRMAN COX: Put 39 cents on an 6 envelope, address it to Ohio lottery and send it in? 7 MR. GRIEF: Is that your understanding, 8 Robert? 9 MR. TIRLONI: Dale is just telling me, 10 because he spoke to them in more detail about this, 11 it's actually -- they actually gather a pool of people 12 that have won a high tier prize in the game, and those 13 people are the ones that are eligible to win that 14 actual top prize, that one remaining top prize ticket. 15 MR. GRIEF: Needless to say, we don't 16 recommend this to be a process that we use here in 17 Texas. 18 (Laughter) 19 CHAIRMAN COX: That's a relief. 20 COMM. CLOWE: A lot of selection that 21 takes place. 22 MR. TIRLONI: It's a very narrowing 23 process, so it's -- 24 COMM. CLOWE: I don't think Texans would 25 like that. 0122 1 MR. TIRLONI: We don't believe that to 2 be the case. 3 CHAIRMAN COX: I don't think that 4 addresses the concern that we're hearing here. 5 MR. TIRLONI: I don't believe that it 6 does either. 7 Illinois does initiate game-closing 8 process when zero top prizes remain. They stated this 9 was in an effort to eliminate the possibility of 10 lawsuits. 11 And Massachusetts has always had the 12 zero top prize policy. I do have to make a note about 13 Massachusetts, though. You know, Massachusetts only 14 has a $10 -- their highest price point is a $10 price 15 point. The issue with zero top prizes is typically in 16 your higher price point games because those have 17 higher top prizes and they have fewer of them. You 18 now, a $1.00 game could have a few hundred top prizes; 19 a $20 or $30 game could have three. So because of the 20 fact that their highest price point is $10, this is 21 typically not an issue for them. The other factor 22 that you have to take into consideration is some of 23 their print runs in Massachusetts, my understanding, 24 can be over 60 million tickets. 25 CHAIRMAN COX: And yet, still, they're 0123 1 calling it after all top prizes have been redeemed? 2 MR. TIRLONI: That's correct. 3 COMM. CLOWE: So, Robert, if we asked 4 you the same question we asked you about California 5 and Georgia and Illinois -- sorry. Whatever that 6 third state was. I've forgotten it. 7 MR. TIRLONI: California, Georgia and 8 New York -- 9 COMM. CLOWE: New York. 10 MR. TIRLONI: -- were on the previous 11 slide. 12 COMM. CLOWE: -- asked you that same 13 question about Illinois and Massachusetts regarding 14 other methodology to close a game, would the answer be 15 the same? 16 MR. TIRLONI: Yes, sir. They would have 17 to have another method to close the game. 18 COMM. CLOWE: Okay. 19 MR. TIRLONI: Commissioners, I thought 20 it would also just be useful to just give a brief 21 recap of the terminology that we use regarding game 22 closings. We're very familiar with it. But, of 23 course, we work with it on a much closer basis. 24 After the decision is made to close a 25 game and the necessary approvals are received, we 0124 1 actually call a game, and that's basically the trigger 2 for the process. And games are called right now once 3 a month, at the beginning of every month. 4 What this does is, it starts a 60-day 5 period in which the sales staff has to go out and pick 6 up tickets from retailers. At the end of that 60 -- 7 COMM. CLOWE: Robert -- 8 MR. TIRLONI: Yes, sir? 9 COMM. CLOWE: -- clarification. When a 10 game is called, are the retailers told not to sell any 11 more tickets, whether they have them in their 12 possession or not? 13 MR. TIRLONI: No, they're not told that. 14 COMM. CLOWE: What are they told? 15 MR. TIRLONI: The notification is that 16 the game is going to be closing and that the sales 17 staff is going to be coming out to pick up remaining 18 inventory. But they are permitted to continue to sell 19 that game once it's called. 20 CHAIRMAN COX: So if a retailer happens 21 to be on the beginning schedule of the sales rep's 22 route after the game is called, those tickets get 23 picked up there more quickly than if a retailer is on 24 the tail end of that scheduled route and they get 25 picked up later? 0125 1 MR. TIRLONI: Sure. That would be 2 correct. That would be a correct statement. 3 COMM. CLOWE: So there is possibly an 4 inequity in that process. Is that not correct? 5 MR. TIRLONI: I would say that that's 6 correct. It depends where the retailer is on that 7 sales rep's route. GTECH has district sales meetings 8 every other Friday. So in your example, Commissioner, 9 you know, the first stop the sales rep makes on Monday 10 morning, they would be picking up those tickets. The 11 last stop they make the following Friday, they're 12 picking up tickets. So, yes, that's definitely 13 correct. 14 MR. GRIEF: If the tickets are available 15 to be picked up. Many times they're not. It might 16 take another visit. They might be locked in a safe. 17 They might be in the trunk of a car. It's not always 18 as smooth as you might want to think it is. 19 COMM. CLOWE: Really? Might be in the 20 trunk of a car? 21 MR. GRIEF: Sure. I would be happy -- 22 Joe Lapinski from GTECH is here. He can tell you 23 about all different types of retail setups that might 24 exist out there. 25 COMM. CLOWE: Of course, the retailer 0126 1 buys them when he takes physical possession. So they 2 can put them in the trunk of a car, I guess, or they 3 an lock them in a closet or they can put them in a 4 display case, can't they? 5 MR. GRIEF: They don't actually pay for 6 them until the packs settle against their account. 7 COMM. CLOWE: But when they're 8 physically delivered -- 9 MR. GRIEF: They're not charged for them 10 at that point. 11 COMM. CLOWE: Okay. Take me to the 12 point where they are charged. 13 MR. GRIEF: That occurs -- Robert, you 14 can probably speak to the details better than I can on 15 that. 16 MR. TIRLONI: When the retailer -- and 17 I'll look to Joe to correct me if I use wrong 18 terminology, because this goes into the accounting 19 area -- but when the retailer receives the packs, the 20 packs are confirmed, and that lets us know that the 21 retailer has actually received the pack and the pack 22 is in their possession. 23 When they want to actually start putting 24 them out into the dispenser for sale, then those packs 25 are activated. If the retailer wishes, they can what 0127 1 we call auto-settle, where they can settle the pack 2 and then they would be charged for it immediately. 3 If they want to just start selling, they 4 can do that. And as tickets validate -- and I believe 5 it's 70 percent, 70 percent of the -- when 70 percent 6 of the low tier tickets in that pack have been 7 validated, then that pack settles. 8 The third option is, they don't auto- 9 settle, they don't hit the 70 percent of the low tier 10 validations. And so then the pack just settles 45 11 days after activation. So there's basically three 12 ways that they get charged for that pack. 13 COMM. CLOWE: So they get a grace 14 period, so to speak. They get three choices of a 15 grace period -- and they make the choice -- where they 16 can get income from the sales of those tickets, but 17 they're not charged. And I assume we figure that into 18 the cost of the game, and we're extending credit at a 19 charge that we're compensated for? 20 MR. GRIEF: We typically refer to it 21 that it's on consignment, those tickets are on 22 consignment. 23 COMM. CLOWE: On consignment. So surely 24 we've calculated a cost of that? 25 MR. GRIEF: Yes, sir, we have. 0128 1 COMM. CLOWE: And we know what that is. 2 Right? 3 MR. GRIEF: And we've made that more 4 favorable to the retailers over time. 5 COMM. CLOWE: So that's an incentive? 6 MR. GRIEF: Yes, it is. It's a huge 7 incentive. 8 COMM. CLOWE: Sounds like getting to 9 drive a car for 45 days before you make a first 10 payment. 11 MR. GRIEF: It can be. 12 COMM. CLOWE: Now, let's go back to the 13 example of the retailer takes physical delivery and 14 then puts them in the trunk of a car and the car is 15 broken into and the tickets are stolen. Give us the 16 results of that. 17 MR. TIRLONI: I need somebody with more 18 of the accounting background that can address what 19 happens with those specific tickets. 20 MR. GRIEF: I think I'll ask Joe 21 Lapinski. Michael Anger and Ed Rogers are not in the 22 office today, but Joe can probably speak to that. 23 MR. LAPINSKI: For the record, I'm Joe 24 Lapinski, Account Deputy General Manager for GTECH. 25 Commissioners, for that specific 0129 1 instance, if they were stolen, I can't speak to how 2 that would be specifically handled. But to the issue 3 of how tickets are stored by retailers, you know, if 4 you have an owner of a store, they're liable for those 5 tickets. 6 If they're concerned about employees or 7 theft, they may view their home, their vehicle or a 8 safe or some other method of storage of tickets that 9 have not been activated as a safer means of keeping 10 those tickets, than keeping them under the counter or 11 in a safe in their store. And so that's how you would 12 get to that situation where those tickets may not be 13 present or, if they're in a safe, not available if the 14 manager or owner of the establishment is not there. 15 COMM. CLOWE: Okay. So what I think I'm 16 hearing you tell us is that when the tickets are 17 physically delivered to the retailer, they're 18 responsible for them. And you don't know exactly how 19 we collect, but we do collect if they're not accounted 20 for. Is that correct? 21 MR. LAPINSKI: Well, I mean, all the 22 tickets will eventually settle basically, unless 23 they're in a stolen state. So if they're reported as 24 stolen, then again we'll take those tickets, we'll put 25 them in a stolen status in the system. They can't be 0130 1 validated or cashed. 2 COMM. CLOWE: You have a procedure? 3 MR. LAPINSKI: They no longer have 4 value, and we have a procedure to deal with that. 5 COMM. CLOWE: I'm acquainted with that 6 procedure. 7 Okay. Thank you, sir. 8 I want to go back, if I may, 9 Mr. Chairman -- 10 CHAIRMAN COX: Of course. 11 COMM. CLOWE: -- to the issue of the 12 picking up of the tickets. Why don't we have a 13 uniform ending date instead of when the route person 14 makes their route physically picking up the tickets? 15 Why don't we put out a broadcast and close a game on a 16 certain day, maybe even at a certain time, and say you 17 cannot sell any more of these tickets, and end it 18 uniformly instead of by virtue of a happenstance 19 occurrence? 20 MR. TIRLONI: Commissioner, we do that. 21 That's the close date. That's the next step in the 22 process. The close date is the date that the game 23 actually closes, it officially ends and no sales 24 should take place after that date. That's the actual 25 close date. 0131 1 COMM. CLOWE: Okay. Now, you've 2 confused me. 3 Do you understand what he said? 4 CHAIRMAN COX: I understand what you're 5 saying, too. Why don't you go ahead with it. 6 COMM. CLOWE: Okay. Either the game is 7 closed on the date you broadcast and you say, "Don't 8 sell any more tickets," or it's closed when the 9 tickets are physically picked up. Which is it? 10 MR. TIRLONI: At the beginning of a 11 month, say at the beginning of March, we would say 12 these following games are going to end at the end of 13 April. This is their official close date. That close 14 date is 60 days out from the beginning of March. 15 COMM. CLOWE: And then we pick them up 16 during that 60 days? 17 MR. TIRLONI: That's correct. 18 COMM. CLOWE: So that's not the same 19 thing that I'm asking, Robert. I'm saying on the 20 first of the month when we're going to close a game, 21 before we pick up the tickets, to achieve uniformity, 22 why don't we say don't sell any more tickets after 23 today? 24 MR. GRIEF: I think, Commissioner, 25 because we've learned, until you pick those tickets 0132 1 up, you're not going to be able to stop sales. 2 COMM. CLOWE: Okay. 3 MR. GRIEF: You just can't do it. 4 COMM. CLOWE: Until you take them out of 5 their hands? 6 MR. GRIEF: Until you get them out of 7 the hands, you can't stop the sales. 8 CHAIRMAN COX: If we gave them -- we 9 give them 60 days. There are probably still cases 10 where we don't have all those tickets in hand? 11 MR. TIRLONI: That could be, yes. 12 CHAIRMAN COX: And it is possible -- 13 I'll let you comment on whether it's probable or the 14 actual case -- that people could be selling those 15 tickets even when a winner -- a buyer can't win even 16 if he has a winning ticket -- 17 MR. GRIEF: Very true. 18 CHAIRMAN COX: -- because it cannot 19 be -- 20 COMM. CLOWE: After the stop sales. 21 CHAIRMAN COX: But that would be after 22 not only the 90 days but after the 180 days? 23 MR. GRIEF: And I want to remind you, 24 Chairman, once a pack of tickets is settled against a 25 retailer's account and it's not in view for the GTECH 0133 1 sales rep to pick up, to us it's sold. 2 CHAIRMAN COX: We don't know. 3 COMM. CLOWE: We don't know when it 4 sold, do we? 5 MR. GRIEF: He could have sold them all 6 to himself. He could have brought them back in the 7 store three months later and set them on the counter 8 and had them for sale. Unless we have either our 9 staff or the GTECH staff physically in that store to 10 see the tickets there, you just -- you don't know. 11 It's a paper product It's not something like our 12 on-line product that we can shut down a terminal and 13 stop sales. 14 CHAIRMAN CLOWE: And does every one of 15 our retailers over -- what is it now, 16,500? 16 MR. GRIEF: About that. 17 MR. TIRLONI: Approximately, yes. 18 COMM. CLOWE: Does every one of our 19 retailers sell instant tickets? 20 MR. GRIEF: Correct. 21 MR. TIRLONI: Yes. 22 COMM. CLOWE: And how many games do you 23 have active on the street today? 24 MR. TIRLONI: Oh, there's probably -- 25 there's probably about 70 to 80 active games. Of 0134 1 course, not every retailer carries all of those, but 2 that's about what we have active. 3 CHAIRMAN COX: Gary, I would like for 4 you to say again what you just said about it's not 5 like one of our on-line games. 6 MR. GRIEF: If we decide for whatever 7 reason -- for example, let's use Pick 3. If we 8 decided that we no longer wanted to sell Pick 3 9 tickets, we could contact GTECH and work with them, 10 and we could flip a switch and shut down the sales of 11 Pick 3 tickets. 12 COMM. CLOWE: And you've done that? 13 MR. GRIEF: Had to do that before. And 14 it's physically impossible for any more tickets to be 15 sold. With the instant product, which is delivered by 16 UPS in most cases to our retailers, stored by the 17 retailer, on display by our retailer, if we just issue 18 an edict that says, "Stop selling these tickets," we 19 don't have much control of whether or not they really 20 are stopping the sale of those tickets. It's up to 21 each on our 16,500 retailers to make that decision, 22 until we can physically get to those locations, speak 23 with the retailer, check the inventory status that's 24 in our system, et cetera. 25 CHAIRMAN COX: So the information, 0135 1 "We're closing this game," goes out on the ISYS 2 terminal. Is that correct? 3 MR. TIRLONI: We notify GTECH that we're 4 closing the game. We send them documentation that 5 says, "These are the games that are closing" -- 6 CHAIRMAN COX: Okay. 7 MR. TIRLONI: -- it closes or it ends as 8 of this date. And so we've now officially called that 9 game. "You now have 60 days to go pick up all packs 10 for this game and return them to the warehouse." 11 MR. GRIEF: I would like to go back to 12 the terminology one more time. We call the game. And 13 from that point, 60 days, GTECH has 60 days to pick up 14 those games. And at the end of that 60 days, that's 15 when they can't sell tickets any more. 16 CHAIRMAN COX: That's the date I'm 17 focused on. Okay. On that date, how is the retailer 18 notified that this game is closed? 19 MR. GRIEF: Robert? 20 MR. TIRLONI: The retailer knows that 21 it's closed, based on the distribution of information. 22 That is a game-closing flier that we -- it's a piece 23 of point-of-sale that we distribute out to retailer 24 locations. 25 COMM. COX: So the answer is, he's 0136 1 notified by a flier? 2 MR. TIRLONI: That's correct. 3 CHAIRMAN COX: So what assurance, if 4 any, do we have that that flier was ever delivered, 5 was received by someone who is responsible enough to 6 have the authority and the ability to close the game 7 and that that person had any intention of complying 8 with it? 9 MR. TIRLONI: A lot of that is out of 10 our control. 11 CHAIRMAN COX: "Our," including GTECH? 12 MR. GRIEF: Yes. 13 MR. TIRLONI: I would say a lot of that 14 is out of our control in the retail environment. 15 CHAIRMAN COX: And so what we're dealing 16 with here is a product that, absent UPS and absent the 17 terminal that tells us when they're redeemed, could 18 have been sold a hundred years ago for all the 19 controls we have? It's just a product that doesn't 20 have on-line control, and it's subject to the same 21 problems that all products that don't have on-line 22 control are subject to? 23 MR. GRIEF: That's true. 24 MR. TIRLONI: That's true. 25 COMM. CLOWE: The only firm date we've 0137 1 got is the 180-day kill date. 2 CHAIRMAN COX: That's the one when they 3 can't redeem them anymore. And it's over then, 4 because we control that with the computer. Right? 5 MR. GRIEF: Over as far as claiming 6 prizes, yes. 7 CHAIRMAN COX: They could still be 8 selling them? 9 MR. GRIEF: If they had some inventory, 10 sure. 11 COMM. CLOWE: But that's the only date 12 that we have control over. 13 CHAIRMAN COX: Yes, sir, that's correct. 14 MR. TIRLONI: Because GTECH basically 15 shuts that off in the system, so there is no way 16 validations can take place after that period of time. 17 COMM. COX: But then an important thing 18 that Gary just said: They can still be selling them? 19 MR. TIRLONI: If they were to have them, 20 yes. 21 CHAIRMAN COX: A winner couldn't win -- 22 MR. TIRLONI: Correct. 23 CHAIRMAN COX: -- unless the guy decided 24 to pay it out of his pocket, because he knows he's 25 selling inventory that shouldn't have been sold? 0138 1 MR. GRIEF: That's right. But we do 2 know that those tickets have been accounted for in 3 some way. 4 COMM. COX: As either sold, present, 5 stolen -- 6 MR. GRIEF: Stolen. 7 CHAIRMAN COX: -- or who knows? 8 MR. GRIEF: Returned. I mean, they're 9 accounted in the system some way. Every ticket is 10 accounted in the system. 11 CHAIRMAN COX: Okay. 12 COMM. CLOWE: What is our history of 13 instant tickets turned in to claim a prize after the 14 180-day period? 15 MR. GRIEF: Commissioner, I couldn't 16 probably -- I don't think I could speak to that today. 17 I would be happy to look into that and get back with 18 you on that. 19 COMM. CLOWE: Okay. 20 MR. GRIEF: Are you asking a question, 21 how many times do we have people come to our claim 22 centers that have a ticket that's expired? I don't 23 know off the top of my head. And, just as a reminder, 24 the only players we normally see in the claim centers 25 are those who have won a prize of $600 or more. So I 0139 1 really couldn't speak to any of the tickets of the 2 one, five, $10 winners that are taken to a retailer 3 location and they're told, "That's past the" -- 4 COMM. CLOWE: Sure. Well, I guess I was 5 really thinking more about complaints that come to our 6 attention where people say they have a valid winner 7 and it's not being honored. 8 MR. GRIEF: I would be happy to look 9 into that, give you information on that. 10 CHAIRMAN COX: Your question would be 11 where they sold it after the validation date and they 12 bring it in, it's over $600, and we say, "Sorry." And 13 he says, "I bought it yesterday." 14 MR. GRIEF: Off the top of my head, I 15 will venture a pretty educated guess. It's very few, 16 because those games that we do close have either been 17 ones that have sold out practically or ones that have 18 not moved, that we've replaced with newer, fresher 19 inventory, because the sales had been lagging. So 20 it's not going to be very many. 21 COMM. CLOWE: Okay. Let's go back to 22 the line of questioning that we had, Robert, about all 23 of these 16,500 approximately dealers have as many as 24 70 games. And what's the average print on a game? 25 MR. TIRLONI: It would depend on the 0140 1 price point. 2 COMM. CLOWE: Right. Give us some 3 ranges or give us general answer. 4 MR. TIRLONI: A $1.00 game, we print 5 approximately 10 to 12 million tickets; a 2 million -- 6 $2.00, about 6 million, 6 to 10 million. But when you 7 get up to the higher price points like $10 or $20, $20 8 is typically a $3 million (sic) print. 30 is 9 typically a $3 million (sic) print. $50 that we're 10 coming out with is a $3 million (sic) print -- 11 3 million, not $3 million. A 3 million quantity 12 print. I'm sorry. 13 COMM. CLOWE: So I think, Mr. Chairman, 14 this discussion has pointed up that this is a very 15 challenging inventory control operation. 16 CHAIRMAN COX: Very challenging. 17 COMM. CLOWE: And getting the games out 18 timely, we haven't even discussed that, how the games 19 are delivered and when they go on sale and what that 20 procedure is. Our discussion has concentrated on the 21 closing aspect. And I think we're doing the best we 22 can. But it is a complicated procedure and it is one 23 that we need to constantly be reviewing to make 24 certain that it is fair and equitable and open. 25 CHAIRMAN COX: And consignment sales 0141 1 have typically been very difficult for the consignor 2 to properly recognize revenue, because he is one step 3 removed from the sales process and has to depend on 4 the consignee to report when his sales have been made. 5 And we're in that exact situation, where a consignor, 6 at the mercy of our consignees to tell us when the 7 sale of product has actually been made, even though 8 we've already recorded our revenue based on a 9 convention and based on charging them on the three 10 criteria that Robert talked about. 11 MR. GRIEF: But, Chairman, I would say 12 when you say "at the mercy," either 70 percent of the 13 low tier prizes have been claimed or 45 days goes by, 14 whichever happens first. They will be charged for 15 those tickets. 16 CHAIRMAN COX: Oh, yes. Now, I'm not 17 speaking of our revenue recognition process but of the 18 ultimate sale of the product that we consigned to 19 that. 20 MR. GRIEF: I see. 21 CHAIRMAN COX: And that's where the 22 problem comes in. Our process is fine. Our revenue 23 is fine. It's keeping the retailer and the customer 24 from -- the retailer from inappropriately selling the 25 product after we've either closed the game or even 0142 1 after validation dates, because we can't shoot them if 2 they don't bring the tickets back. 3 MR. GRIEF: Yes, sir. 4 COMM. CLOWE: We're not at the mercy -- 5 we control the revenue accounting system. We sweep 6 those accounts and we've got that money. We're right 7 on top of that. What we're focusing on is the closing 8 procedure, and that's what this whole discussion is 9 about. 10 And I assume you're going to make a 11 recommendation for a change? 12 MR. TIRLONI: Yes, sir. We'll get into 13 that right now. Commissioners, what we've shared with 14 you gives you hopefully the historical background and 15 some of the legal background related to game closings. 16 The current closing process that's in place has been 17 actually reviewed now for almost a year on a regular 18 basis, and it's included a review by Kathy Pyka and 19 her staff in the Controller's Office and by the 20 Executive Director. 21 We believe -- we continue to believe 22 that our current existing approved procedure allows us 23 to make sound financial and business decisions about 24 the closing of games based on sales performance and 25 the actual performance of the game. 0143 1 However, staff is aware of concerns from 2 the public and also from the Legislature that surfaced 3 and have recently intensified regarding our policy to 4 continue to sell games after all of the top level 5 prizes have been claimed. In our opinion, these 6 concerns continue to chip away at the perceived 7 integrity of our instant games, and we're concerned 8 that this may ultimately have a negative impact on the 9 revenue that we generate for the Foundation School 10 Fund. 11 Because of the staff concerns -- 12 COMM. CLOWE: And, Robert -- 13 MR. TIRLONI: Yes, sir? 14 COMM. CLOWE: -- let me understand what 15 you just said. You said you're concerned about the 16 continuing to sell the tickets after the top prizes 17 have been sold? 18 MR. TIRLONI: After the top prizes have 19 been claimed. 20 COMM. CLOWE: Okay. All right. I 21 didn't hear you correctly, and I'm glad you clarified 22 that. 23 MR. TIRLONI: Yes, sir. 24 COMM. CLOWE: And what you're saying now 25 is, whatever it is you're going to recommend, the 0144 1 criteria for whatever you're going to recommend still 2 rests on all top prizes being claimed? 3 MR. TIRLONI: Yes. We're going to 4 recommend additional criteria to what we already have 5 in place. We're not proposing to remove any or part 6 of the process that's already in place. 7 COMM. CLOWE: Thank you. 8 MR. TIRLONI: So we have submitted 9 recommended changes to the approved procedure to 10 executive management for their review and for their 11 consideration. As I said, the changes do not remove 12 any of the existing game close criteria. So we 13 believe that we will still have the appropriate 14 procedure in place to close games and remove slow- 15 selling games from retailer inventory. 16 The recommended changes add additional 17 criteria that would require staff to initiate game- 18 closing processes when all of the top level prizes in 19 a game have been claimed. And I can walk through the 20 slides that will illustrate the recommendation. 21 As I said, one of the recommended 22 changes is to expand the game close criteria so that 23 when a game no longer has any of the top prizes 24 remaining, because we have been told that they have 25 all been claimed, we will begin our game-closing 0145 1 process or our game-closing procedure. We will 2 receive a report every business day identifying those 3 games with zero top level prizes. 4 In order to provide notification to the 5 public, we will send out a terminal message to the 6 entire retail base. And that again, Chairman, you 7 made a comment about this earlier. We would do that 8 via the sales terminals in the locations. We have 9 messaging capability via those terminals. 10 We would notify the retailers that there 11 are zero top prizes remaining in that game. We would 12 ask the retailers -- and we've just had a conversation 13 about this as well -- we would ask them to cease 14 selling the game identified, as the game is going to 15 be closed. And that same day that we are notified 16 that there are zero top level prizes remaining, we 17 would actually place a graphic on the ticket artwork 18 on our website, and that graphic would basically note 19 that the game is going to be closing. 20 MR. GRIEF: Robert, if you could go back 21 to that slide. This goes directly to I think your 22 question, Chairman -- I can't remember who asked the 23 question -- how do we tell the retailers to stop 24 selling the tickets? This is how we're proposing to 25 do it for the future. 0146 1 CHAIRMAN COX: There will be a terminal 2 message? 3 MR. GRIEF: Correct. 4 Thank you, Robert, 5 MR. TIRLONI: Thank you. 6 We are also proposing an accelerated 7 game closing. We've talked about the 60-day period, 8 and this would address that. So every Friday, all 9 games that reach zero top prizes through that business 10 week will be scheduled for closing. So what that 11 means basically is that every Friday has the potential 12 to be a call date. 13 As I told you earlier, now we have a 14 call date once a month. It's at the beginning of 15 every month. But this will increase that so that you 16 have a game that hits zero top prizes, let's say on 17 Wednesday, we would send out that terminal message. 18 We would notify the retailers that this game has zero 19 top prizes. We would notify them that it's closing. 20 We would ask them to cease sales. We would put that 21 graphic on the website, all on Wednesday, let's say, 22 in my example. And then that Friday would serve as 23 the call date. And the call period would shrink from 24 60 days to 45 days. 25 And so we believe that the potential for 0147 1 a weekly call date instead of a once a month call date 2 and the 45-day versus the current 60-day pickup period 3 will help us to shorten or shrink the entire game- 4 closing process. 5 CHAIRMAN COX: Let's go back. 6 COMM. CLOWE: Yes. 7 CHAIRMAN COX: Do you want to take it, 8 or do you want me to? 9 COMM. CLOWE: Go ahead. 10 CHAIRMAN COX: Okay. Now, the reason I 11 have been told for this 60-day schedule was that GTECH 12 has to have multiple chances to pick up the tickets 13 from the retailers. Now, with minor exceptions, GTECH 14 is required to visit every retailer how often? 15 MR. TIRLONI: Most locations twice a 16 month. 17 CHAIRMAN COX: And "most" is almost all? 18 MR. TIRLONI: Almost all. That's 19 correct. 20 CHAIRMAN COX: So twice a month would 21 say that they get two chances if they get 30 days. 22 They get three chances if they get 45 days. And they 23 get four chances if they get 60 days? 24 MR. TIRLONI: Yes, sir, that's correct. 25 CHAIRMAN COX: Okay. So I would say two 0148 1 chances ought to be enough. I would argue one. I 2 would say that there should be some kind of way to 3 communicate with those people to say, "I'm coming out 4 at X hour on X day, and have them ready." 5 Now, I realize that we don't have a gun. 6 So I would say if you do that twice, you ought to have 7 the doggone things picked up, and it's time to close 8 the game. Now you-all help me with that. 9 MR. GRIEF: I would ask that GTECH come 10 forward to discuss that with you, Chairman. 11 CHAIRMAN COX: Okay. 12 MR. LAPINSKI: Hello again, Chairman. 13 The challenges for the reps today are, you know, 14 difficult with the 60-day period to collect those 15 tickets. And, you know, one of the challenges is, you 16 can't control the retailers' work schedule. You don't 17 have a lot of control over when they are in their 18 stores and when they choose to be there. So it's 19 difficult at best for each rep to coordinate with 120 20 retailers to be able to pick up these games. 21 What I can tell you is, you know, they 22 probably get a majority of the tickets picked up in 23 one to two cycles. The challenge is being able to 24 guarantee that all of those packs can be collected 25 from around the state. 0149 1 CHAIRMAN COX: Okay, Joe. So here is 2 where I am on that: Gary has already told us that 3 even after 60 days, you don't have them all. 4 MR. LAPINSKI: Yes. 5 CHAIRMAN COX: So what I'm after is, 6 what does the diminishing returns curve look like? 7 How many do we get the first time? How many do we get 8 the second? How many the third and how many the 9 fourth? And how do we make, then, our decision as to 10 where we want to draw this line, based on the real 11 world data that you provide us? 12 I'm prepared to assume, if Gary is, that 13 you're doing the best can be done. 14 MR. LAPINSKI: Uh-huh. 15 CHAIRMAN COX: Here is the data. And 16 then we need to look at that data and say, "Okay. We 17 would rather close the game after 30 days, having 18 69 percent in, than close the game after 45 and having 19 70, or some number like that. 20 Go ahead. 21 MR. LAPINSKI: We could definitely go 22 back and look at that data. I'm not familiar with 23 what those statistics are today or -- 24 CHAIRMAN COX: It's available? 25 MR. LAPINSKI: But I believe that's 0150 1 something we can go back and research and put that 2 data together. I think the risk that you run as you 3 close that timeline down and allow more packs to be 4 present in the field when you have that hard and fast 5 date is, each one of those packs, upon ultimate 6 return -- well, let me step back for a minute. Each 7 one of those packs, when you hit that final close 8 date, will automatically settle. 9 So, for example, today it's a 60-day 10 period. And then at 60 days, whether that pack has 11 been returned or not -- well, if it has been returned, 12 it settled at that point. If that pack is still in 13 the field and not been returned, it will automatically 14 settle against that retailer at 60 days. 15 CHAIRMAN COX: Okay. So here is what 16 I'm hearing -- and I've got a very superficial 17 knowledge of this -- but what I'm hearing is that if 18 you close the game, he's got an incentive, even if you 19 haven't picked it up, to set it aside, because you're 20 going to pay him dollar-for-dollar for those tickets 21 when you do pick it up? 22 MR. LAPINSKI: That's correct. 23 CHAIRMAN COX: So, Gary, what I think we 24 need to do here is look at the various cutoffs -- the 25 15 days, the 30 days, the 45 and the 60, and then say, 0151 1 "Okay. Now, once we close it, he can still" -- 2 illegally, if you will. I don't know whether it's 3 illegal, but it's certainly against GTECH's 4 instructions -- "continue to sell tickets." 5 But his best bet, to sell all those 6 unsold tickets, is to sell them back to GTECH next 7 time they're around, because he knows then he can sell 8 them all for face value and GTECH is going to pay him 9 for whatever. 10 So thinking of those things, why don't 11 we look at that 45-day period and then make our 12 decision as to when we think would be the most 13 appropriate time to close the game, all the while 14 asking GTECH to please try to find ways that you could 15 do it better so that we optimize this thing as opposed 16 to just drawing an arbitrary line? 17 MR. LAPINSKI: And, Chairman, I just 18 want to clarify a little bit. You know, if we were to 19 change that date to be a 45-day window, thus possibly 20 resulting in more packs being in the field than we see 21 today when those auto-settle, the way that 22 transaction -- when those tickets are finally picked 23 up from the retailer works, now it creates an 24 accounting transaction that credits that retailer for 25 the partial pack that remains. 0152 1 CHAIRMAN COX: Right. 2 MR. LAPINSKI: And so I think, you know, 3 that's the balance -- and I think you understand this 4 already -- but I think the balance here is, you know, 5 where do you want to draw that line and create -- and 6 what level of accounting issues are we willing to 7 accept -- and I think I'm speaking that "we" being 8 GTECH, lottery and the retailers -- by moving that 9 date up? 10 CHAIRMAN COX: And that's why I'm not 11 suggesting any particular date but, rather, a 12 process -- 13 MR. LAPINSKI: Yes, sir. 14 CHAIRMAN COX: -- to take a look at -- 15 you know, we could decide the call date and the close 16 date are the same. We let them know by terminal that 17 they're not to sell any more, and a large number of 18 them might stop and hold the partial packs and the 19 full packs for GTECH to pick up and credit them back 20 for. 21 So I ask you, Gary, to take a look at 22 those things and find out what's best for all 23 concerned here on that period. 24 MR. GRIEF: We'll do that, Chairman. 25 We'll be sure to include GTECH, our accounting staff 0153 1 as well as some retailers in that discussion as well. 2 CHAIRMAN COX: Good. 3 Mr. Chairman did you cover what you 4 wanted to? 5 COMM. CLOWE: I had just a couple other 6 things. I wanted to ask, how many calls a day do your 7 GTECH reps make on retailers? What's the average 8 schedule? 9 MR. LAPINSKI: The average territory, 10 Commissioner, is about 125 retailers per rep. So 12 11 to 13 retailers a day are visited. And, obviously, 12 you know, for someone who is in primarily innercity 13 Houston, they might visit up to 20 retailers in a day 14 because there's not a lot of drive time. The 15 gentleman that's driving outside of El Paso for a week 16 of his, you know, two-week cycle, he may visit in some 17 days just three or four. But on average, it's about 18 10 to 12 retailers a day. 19 COMM. CLOWE: But the density is in the 20 urban areas, and that's where a rep could reach base 21 with 20 retailers in a day? 22 MR. LAPINSKI: That's true. 23 COMM. CLOWE: Mr. Chairman, I think a 24 word should be said in appreciation of our retailers 25 at this point. The questioning and the answers have 0154 1 been about control. And, you know, I don't want 2 anyone to misconstrue some of the comments about, 3 "Well, we need to get this right where we know where 4 we are," and have any inference of negativism toward 5 our retailers. 6 They are our merchants. They have our 7 inventory in stock. They sell our product to the 8 people of Texas who are the players and the buyers of 9 these tickets, both the instant and on-line. And we 10 are appreciative of them stocking our product and 11 selling it and having it on their shelves. 12 And I for one -- and I think, 13 Mr. Chairman, I hope you feel the same way -- these 14 16,500 businesses are our retail outlets, and we don't 15 want anybody to take an inference of negativism 16 towards these individuals and their operations. 17 We're trying to understand the process 18 and to practice good business procedures and possibly 19 make a change in our procedures that will benefit the 20 players and not put any unreasonable demands on the 21 retailer, something that they can accommodate. 22 And I assume the bottom line, Ms. Pyka, 23 is that we're going to reduce the revenues to the 24 state in this action. Is that a correct assumption or 25 not? 0155 1 MS. PYKA: We recently -- 2 COMM. CLOWE: Better come up and get on 3 the mike. 4 CHAIRMAN COX: Let me say while she's 5 coming that I certainly join you in recognizing the 6 importance of the retailers and recognizing the fact 7 that many of them are independent business people. 8 And we independent business people don't run things 9 like big business does, and we can't. We're more 10 involved ourselves, and we use means that -- you know, 11 we don't have large warehouses with gates and guards, 12 and so we deal with things as best we can. 13 COMM. CLOWE: And, you know, I don't 14 lurk in convenience stores, but I go in and I 15 understand putting some tickets in the trunk of a car. 16 I don't want that question -- that line of questioning 17 to be construed as not understanding or negativism. 18 When you are a small business person, you handle it a 19 certain way. HEB carries our instant tickets. 20 Who is the biggest retailer of instant 21 tickets, Robert? 22 MR. TIRLONI: I want to say that our 23 biggest selling chain I believe is still Valero, which 24 owns and operates Diamond Shamrock. 25 COMM. CLOWE: Convenience store? 0156 1 MR. TIRLONI: Yes. It's the largest, 2 yes. 3 COMM. CLOWE: But this discussion has 4 been very instructive, and it's been helpful to the 5 Commissioners to try to make public policy. 6 And, Director Sadberry, I'm coming to 7 you ultimately to ask if this is our decision or your 8 decision, because part of the history that Robert gave 9 us was that the Executive Director made certain 10 decisions about closing games. My sense is, you're 11 coming to the Commissioners for a decision. I don't 12 want to circumvent the Executive Director. So that 13 question is out there looming ultimately, but let's 14 stay on track. 15 Chairman Cox and I are saying to our 16 retailers, "Thank you for stocking our product. Thank 17 you for working with us on this." We're dealing with 18 something -- an element of fairness to the players, 19 the people of the state. We don't want to cost the 20 retailers any money. 21 But it is going to cost the state money, 22 isn't it? 23 MS. PYKA: Where we're at on that is, 24 it's not possible to determine both the revenue impact 25 and the fiscal cost of closing and introducing games 0157 1 more frequently. We look at it as two components. 2 One, we believe there could be additional print costs 3 as a result of closing the games and still trying to 4 maintain the same level of games on the market. 5 But we don't know, by introducing games 6 more frequently, if there could be the potential for 7 increased sales from instant tickets by having a 8 different mix on the market. So we've not been able 9 to place a fiscal cost or revenue impact on this 10 potential revised procedure. 11 COMM. CLOWE: And I hear that as a 12 different answer than, Robert, you've given us in the 13 past where you said you made a certain run on a game 14 and you anticipated so many tickets being sold under 15 the present procedure, and if you closed them after 16 the top prizes were sold, there would be a loss in 17 revenue, you would have to recalculate the return. Am 18 I incorrect in that? 19 MR. TIRLONI: Well, I mean, I think that 20 we could have an example where we could close a game 21 because there's zero top prizes. And we've gone back 22 and looked, and there's cases where those games are 23 selling two or $3 million a week. The current 24 process, because it looks at sales in game performance 25 only, we would leave that game out, and that game 0158 1 would be available for sale. So I think there is a 2 cost. I think what Kathy is saying, it's difficult -- 3 MS. PYKA: We would have another game to 4 replace that game to generate the replacement sales if 5 we were closing games more frequently. And we have to 6 introduce games more frequently than we currently do 7 today. But our goal would be to continue having the 8 same market of games or the mix of games on the market 9 and have a replacement sales component for that game 10 taken down. 11 MS. TREVINO: What we would -- 12 MR. GRIEF: Let me add something. 13 COMM. CLOWE: Gary, I still think it's a 14 different answer. 15 MR. GRIEF: I want to talk about where 16 we are today. What we also can't quantify is any 17 sales we might be losing as a result of having games 18 out there that don't have any top prizes available for 19 sale. And any increased revenue we might see by 20 taking a different track and doing our best to ensure 21 to our players that all of our instant games that we 22 have out there for sale, we're making our best efforts 23 to tell them and let them know and ensure that there 24 are unclaimed top prizes in those games. So those are 25 two unknowns. 0159 1 COMM. CLOWE: Okay. 2 CHAIRMAN COX: So they may perceive a 3 greater value in our product if this rule is adopted? 4 MR. GRIEF: Right. 5 COMM. CLOWE: I see you turned that into 6 not being a different answer but a new answer. 7 MR. GRIEF: Yes, sir. I agree. 8 COMM. CLOWE: You know, I haven't heard 9 that before. That's the first time I've heard that. 10 MR. GRIEF: I'm sorry -- 11 COMM. CLOWE: What I've head in the past 12 is, "Well, we figure we're going to sell so many, and 13 that's what we predicate the return and the cost of 14 the run and everything on. And that's why we want to 15 keep the policy that we have now." So now I'm getting 16 a new answer. 17 MR. GRIEF: New information, yes, sir. 18 COMM. CLOWE: New information. One 19 more? 20 CHAIRMAN COX: Of course. 21 COMM. CLOWE: I want to go back to your 22 proposed procedural changes. In addition to what you 23 put up there, all of the judgmental criteria that you 24 say exists, which hasn't been on any slide, is still 25 going to continue? 0160 1 MR. GRIEF: I believe, Commissioner, 2 that was on the first slide that Robert put up. The 3 criteria that we currently use to close games, is that 4 what you're referring to? 5 COMM. CLOWE: Yes. Let's have it. 6 MR. GRIEF: Okay. 7 COMM. CLOWE: If it's up there, I would 8 like to see it. 9 MR. TIRLONI: I may have said that in my 10 talking points. I don't know that that's actually on 11 a slide that says that. 12 MR. GRIEF: The factors for 13 consideration. 14 COMM. CLOWE: You told us the factors 15 after we asked about them. 16 MR. GRIEF: That's the factors. 17 MR. TIRLONI: The procedure that talks 18 about game closing that is existing and that's 19 approved -- 20 COMM. CLOWE: Yes. 21 MR. TIRLONI: -- the criteria to review 22 and analyze a game that's out there to see if it's a 23 slow performer or if it needs to be closed, that 24 process remains the same. This is just adding -- 25 CHAIRMAN CLOWE: And that's exactly what 0161 1 I was wanting to see again, Robert. 2 MR. TIRLONI: Okay. 3 COMM. CLOWE: Thank you for putting it 4 back up there. 5 MR. TIRLONI: Okay. 6 COMM. CLOWE: All of those 7 considerations remain in effect with your new 8 proposal? 9 MR. TIRLONI: Absolutely, because in 10 your situation, you can have a game that has one top 11 prize that's unclaimed, and it could not be performing 12 very well. We would want another avenue to be able to 13 remove that game from retailer inventory. 14 COMM. CLOWE: I think that's an 15 important clarification because, you know, those 16 people who have been saying we want you to close the 17 games after all top prizes are claimed need to 18 understand that we may close a game and a top prize 19 has not been claimed for one or more of these reasons. 20 It's the very thing that you pointed out 21 in Ohio, that -- you know, that's a squirrely kind of 22 way to do it. But we're not going to be able to say 23 we'll close the game after every top prize is claimed, 24 because we may close it before. And we need to make 25 this known to those who are interested, if this is 0162 1 what we decide to do. 2 MR. TIRLONI: Basically at this point, 3 we're up to Deanne, who has a rule proposal. 4 COMM. CLOWE: All right. Now at this 5 point I think we need to hear from Director Sadberry 6 as to who makes this decision. 7 Are you okay with that, Mr. Chairman? 8 CHAIRMAN COX: Yes, sir. Exactly. 9 MR. SADBERRY: Commissioners -- 10 COMM. CLOWE: I'm not sure this is a 11 Commissioner's decision. That's the reason I bring it 12 up. 13 MR. SADBERRY: Commissioners -- and I 14 don't believe I have identified myself previously 15 today. For the record, Anthony Sadberry, Executive 16 Director. 17 I will answer that question, 18 Commissioners. And before I do so, I want to be 19 careful here to make sure the record is complete. And 20 I'm not absolutely certain, but I want to leave sort 21 of a space in here in case it needs to be 22 supplemented. That regards the handling of stolen 23 tickets and perhaps lost tickets or tickets destroyed 24 by fire. 25 And the reason I know a little bit about 0163 1 this is, I got directly involved in a customer 2 complaint that delved into these issues. We are 3 handicapped because Michael Anger, Ed Rogers and Kim 4 Kiplin, who I believe were involved in the that, are 5 not here. 6 But what I wanted to point out, my 7 information -- and I don't want to misquote her, but 8 from Ms. Pisana, who is the Security Director -- is 9 that we do have a procedure on that. And it may vary, 10 depending upon the circumstances of the loss. And 11 there may even be an opportunity for negotiations on 12 the settlement issue. 13 COMM. CLOWE: There is some forgiveness 14 in that? 15 MR. SADBERRY: Right. And I recall 16 having discussions with Michael Anger as to whether we 17 could harmonize the procedural rule or whatever 18 provisions that were on that. And I'm informed that 19 we -- well, I don't want to get into the details, but 20 I just wanted you to know there is a possibility of 21 some supplemental information on that, that I didn't 22 want the record to go -- 23 COMM. CLOWE: That's a good point, and 24 thank you for that information. 25 MR. SADBERRY: Now, on the issue you 0164 1 raise, the question you raise -- and I don't want to 2 get ahead of the presentation -- but you have two 3 possibilities here as I understand it and as I'm 4 advised, and that is to propose a rule on it or that 5 the -- that would be the Commission -- or the agency 6 adopt a procedure, both of which are before you today. 7 The procedure would need to be adopted. 8 And as I understand it, even though the one in your 9 notebook probably says Michael Anger, Lottery 10 Operations Director. Because it cuts across more than 11 one division, that makes it an Executive Director 12 procedure. And so that would need to change, if my 13 understanding is correct on that. 14 Then we have a directive on adopting 15 procedures that would be followed, which gets vetted 16 through several sources, through Mike Fernandez's job, 17 Peter Strouthes, and goes to the division directors 18 for comment, et cetera. Once that runs, then it can 19 be adopted, should the Executive Director agree to do 20 so. 21 And that process, while not 22 instantaneous, can be expedited if the need arises to 23 do that. If that is done -- and I, in consultation 24 with counsel, have not been made aware of any 25 impediment to the agency adopting the procedure over 0165 1 the signature of the Executive Director, without a 2 rule. 3 Now again, not to get ahead of the 4 presentation, but the rule would make certain aspects 5 of the procedure mandatory. Without the rule, it's 6 the discretion of the Executive Director, and that 7 discretion is to exercised as it would in any 8 instance, which means it can be done by the Executive 9 Director without a rule. 10 I am not aware -- and Deanne or others 11 might speak to this -- I'm not aware of where it may 12 be delineated as to who preferably should exercise 13 that discretion. And that's one of the things I have 14 tried to deal with here is getting the line drawn on 15 where certain responsibilities lie. And we've had 16 comments on that from various sources, and we should 17 do that. 18 Again in closing, procedure I believe -- 19 my own opinion -- is agency driven. The policy of 20 whether it should be mandatory that the absence of the 21 top tier prize should be a mandatory trigger for 22 closing a game, in my judgment is probably a policy of 23 the Commission. It doesn't have to be. And I don't 24 think those are mutually exclusive. 25 For example, if we want forward and 0166 1 adopted the procedure -- and I might point out -- I'm 2 sure Deanne is going to cover this -- the rule does 3 not speak to the 45, 60-day, 30-day issue. It only 4 speaks to the top tier prizes. And I believe there's 5 one other thing. There are some other things in the 6 rule, but I believe what you've talked about today, 7 notification of the public 8 If a procedure were adopted that 9 required that and you later came and said, "We don't 10 agree with that policy," then the Executive Director 11 should take the lead from that policy determination to 12 say, "Well, that procedure should be changed." 13 If we had a perceived need to act on 14 that element of the game-closing process to say, 15 "Well, we need to react because we've made 16 representations, we've had inquiries, and we've 17 indicated that if this is on the agenda, the staff 18 would makes certain recommendations. 19 And people may be looking to that to see 20 what action we took. I presume there could be a 21 number of things. You could direct me, under my 22 duties, to exercise judgment. Or you could even go, 23 in my judgment, give more an indication of where you 24 are thinking along those lines or you could not. 25 Subject to what Sarah might say, and 0167 1 Deanne, I believe the Executive Director would be 2 acting properly to address the procedure that's being 3 proposed to you, without a rule if you have not taken 4 a contrary position on a policy issue of whether that 5 should be the case. That's my judgment. 6 Clearly, that's a judgment call. And I 7 think any executive director should be mindful of and 8 sensitive to discussions on it, other criteria, 9 Legislature interest in it, public interest in it, as 10 to what's the most prudent are course. 11 So, you know, in my judgment, you 12 have -- you know, subject to Sarah and Deanne -- 13 virtually all options. And it may well be your 14 decision as to who should exercise that judgment. 15 There may be a policy decision as well on who should 16 made the call 17 MS. WOELK: Well, I'll jump in and just 18 clarify the current rule situation. There is a rule 19 that basically hands it off to the Executive Director. 20 The current rule says the Executive Director may 21 announce the termination date for a game. So there 22 was a rule decision at some point historically that 23 that was properly left in the hands of the Executive 24 Director. And I think the practice up until this 25 point has always been for that to be executed through 0168 1 a procedure. 2 MR. SADBERRY: Okay. 3 COMM. CLOWE: And that is codified by 4 the Commission. The Commissioners passed that rule. 5 MS. WOELK: Yes. It's a Commission 6 rule. 7 CHAIRMAN COX: Okay. Mr. Chairman, I 8 would propose at this point that we listen to what the 9 rule has proposed and then decide whether we think it 10 is for the greater public good that we adopt that rule 11 or whether we tell Director Sadberry to work within 12 the existing rule. 13 COMM. CLOWE: I agree with that. May I 14 ask a couple of questions for clarification? 15 CHAIRMAN COX: Of course. 16 COMM. CLOWE: You've got to read us the 17 rule. And your recommendation, I guess, is that it be 18 proposed for public comment? 19 MS. RIENSTRA: Correct. 20 COMM. CLOWE: Now, suppose we say we 21 want to vote on a policy directing the Executive 22 Director to do something about this. Does that have 23 to be published and put in the agenda? 24 MS. RIENSTRA: I'm going to defer to 25 Sarah on that question. 0169 1 MS. WOELK: No. I mean, as you know, 2 the line between what needs to be in a rule and what 3 is an internal agency decision is not entirely clear. 4 But it has been the practice sometimes to offer 5 direction to the Executive Director and make clear 6 your wishes -- 7 COMM. CLOWE: Would this not be a 8 policy, Sarah? 9 MS. WOELK: An actual -- well -- 10 COMM. CLOWE: The Commissioners would 11 adopt a motion that would say our policy is to close a 12 game after all the top prizes are claimed, plus the 13 thing that Robert has got on the judgmental issues 14 that he listed for us. Does that have to be on the 15 agenda? 16 MS. WOELK: You mean does it have to be 17 published for public comment? 18 COMM. CLOWE: Yes. 19 MS. WOELK: Well, certainly -- 20 COMM. CLOWE: No. Does it have to be on 21 the agenda for the meeting, or is it on the agenda 22 today under this subject? I'm trying to get an idea 23 of what are our options. 24 CHAIRMAN COX: Sure. 25 And, Sarah, one thing that I recall that 0170 1 may be similar to this was in the personnel 2 handbook -- 3 MS. WOELK: Yes. 4 CHAIRMAN COX: -- where we took the 5 first line or the chapter headings and we adopted them 6 as policy and left for Director Sadberry and his staff 7 to write the detailed procedures within those policy 8 statements. 9 MS. WOELK: Yes. As to the first 10 question, I think that this discussion of how you 11 proceed, what procedural processes is within the 12 posted agenda items I think is appropriate to discuss 13 this here. 14 There are various times that you have 15 voted to establish agency policy without doing it 16 through a rule, and there are times where there are 17 kinds of decisions you make that affect the rights of 18 third parties that have to be done by the complex rule 19 process. But there's a number of things you've done 20 where you just stated, "We want it on the record that 21 this is our policy." 22 You did that -- or you are about to do 23 that again, I think, with the Lotto Texas procedure, 24 that it's not being adopted as a rule but, for reasons 25 having to do with the audit, that you've decided to go 0171 1 on the record and state, "We give our blessing to this 2 procedure." 3 So there is -- and we've discussed this 4 before -- a very unclear legal line about what kind of 5 decisions have to be done by administrative procedure 6 rule. But certainly the Commission can help, can give 7 some direction to us without doing that through a 8 rule. It's more of a matter of the question of the 9 subject matter affecting third-party rights, are you 10 establishing third-party rights? And if that's the 11 case, then you need to do that through administrative 12 rule. 13 CHAIRMAN COX: So if we were to say that 14 by rule we will call each game as soon as we discern 15 that all the top prizes have been sold -- 16 COMM. CLOWE: Claimed. 17 CHAIRMAN COX: Claimed. Thank you. 18 That would give rise to third-party rights; whereas, 19 if Director Sadberry did it as a procedure, his 20 procedure would not give rise to third-party rights? 21 MS. WOELK: I'm saying that if it 22 affects third-party rights, then you only have one 23 choice. That's by administrative rule. But, clearly, 24 if you review our rules, of the agency's rules, the 25 question of what level you have to address third-party 0172 1 rights. Many agencies have rules that say, "We assign 2 this task to the Executive Director." And often -- 3 COMM. CLOWE: We have that rule now. 4 MS. WOELK: We have that rule now. So I 5 don't think there is anything that limits you in 6 approving things in manners other than by rule. There 7 are some types of things that have to be done by rule. 8 We have historically -- I'm not sure that you could 9 say there's a completely consistent line with this 10 agency or any other agency about what's been done by 11 administrative rule and what's been done by the 12 variety of other means that they worked -- 13 CHAIRMAN COX: And let me try again. 14 MS. WOELK: Okay. Sorry. 15 COMM. CLOWE: Help her out. 16 MS. WOELK: All right. 17 COMM. COX: If we say -- if we adopt a 18 rule that says that we will call games as soon as all 19 top prizes have been claimed, does that give a third 20 party more rights than if we delegated to the 21 Executive Director and he adopts a procedure that says 22 the exact same thing? 23 MS. WOELK: No. If either of those 24 processes is choosing not to go the administrative 25 code process, which if that's the process that is 0173 1 called upon when what you are doing affects third- 2 party rights, that legal concept doesn't fit really 3 neatly into what we do. It fits much more neatly into 4 what the PUC or a true regulatory agency does. 5 CHAIRMAN COX: And so from the 6 standpoint of third-party rights, it doesn't matter 7 whether we put it in a rule or whether we, by rule, 8 delegate it to Director Sadberry and he writes a 9 procedure? 10 MS. WOELK: As a matter of whether it 11 must be -- it's the kind of thing that must be 12 determined by an agency rule, that question -- 13 certainly for the past number of years, you have 14 treated this as something, the details of which did 15 not need to be set out in a rule. 16 If you choose to move forward, either by 17 procedure or by approval in a form other than rule by 18 the Commission, that would be consistent with your 19 past practice. I think that general administrative 20 law concept of what needs to be in a rule is a very, 21 very difficult concept to apply in our context because 22 you were not telling people what they can do on their 23 land or not telling people what limits there are on 24 practicing their profession. 25 We're offering them a product that they 0174 1 can take or leave. And so to some extent, any 2 decision you make that affects games affects third 3 parties in the sense that it limits the availability 4 or expands the availability of games or elements of 5 games. 6 But, clearly, whatever you do here 7 today, short of adopting a rule, is consistent with 8 what you've been doing for the past 10 years. So if 9 you adopt a rule, I would say that may be going beyond 10 what you're actually required to do, but you're also 11 free to do that. 12 I'm comfortable with you either 13 directing Commissioner Sadberry to continue under the 14 current direction and the current rule, with you 15 saying, "We would like to give more clear direction, 16 though, about how he exercises that discretion," or 17 "We're so concerned about this" -- the advantage -- 18 what the administrative procedure process gives the 19 world that other step stone is this very formalized 20 public comment proceeding. 21 So my advice would be, I don't think 22 you're required to do this by rule. But if you think 23 this is a topic that you have received inadequate 24 comment from the public on, the rule offers you a 25 means to formally seek that comment. 0175 1 CHAIRMAN COX: And that's very helpful 2 to me. 3 Commissioner, is that good to you? 4 COMM. CLOWE: Yes, it is. 5 CHAIRMAN COX: Let's go, then. 6 MS. RIENSTRA: Okay. My turn? For the 7 record again, Deanne Rienstra, Assistant General 8 Counsel. 9 Basically what we are proposing is 10 amendment to 16 Texas Administrative Code, §401.302 11 relating to instant game rules. The proposed 12 amendment clarifies agency practices and procedures to 13 be followed when closing an instant game. 14 In essence, what this does -- and I'll 15 read it to you under game closing, Part (j). "The 16 executive director or his/her designee shall determine 17 the closing date for an individual instant game in 18 accordance with an instant game closing procedure that 19 defines the criteria used to monitor Instant Ticket 20 sales performance and that identifies when instant 21 games should be closed." 22 Part (A): "The procedure must provide 23 for initiation of game closing processes when an 24 instant game no longer has any of the top level prizes 25 remaining." 0176 1 Part (B): "The procedure must provide 2 for a review of instant game inventory at least once a 3 month related to inventory sell through and sales 4 performance to identify instant games that need to be 5 closed." 6 Part (C): "The procedure must provide 7 that the agency will make every effort to notify the 8 public of instant game closing information." 9 And Part (2) will be "No tickets in an 10 instant game may be sold after the instant game 11 closing date." 12 CHAIRMAN COX: Let's go back to (A). 13 Would you read that again, please. 14 MS. RIENSTRA: Yes, sir. "The procedure 15 must provide for initiation of game closing processes 16 when an instant game no longer has any of the top 17 level prizes remaining." 18 CHAIRMAN COX: Okay. I think that's 19 ambiguous. I think "remaining" could be interpreted 20 as either unsold or unclaimed, and I think we need to 21 make Chairman Clowe's distinction very clear there, 22 that we're talking about unclaimed. 23 MS. RIENSTRA: Okay. 24 MS. WOELK: I agree. 25 CHAIRMAN COX: Was that it? 0177 1 MS. RIENSTRA: That's it. The staff 2 recommends that based on the discussion here today on 3 this issue, that the Commission approve the proposed 4 amendments by publishing the attached amendments in 5 the Texas Register in order to receive public comments 6 for a period of not less than 30 days. 7 I also note that the submission prepared 8 includes notice of a public hearing to be held on the 9 proposed amendments on April 20, 2007, at 10:00 a.m. 10 CHAIRMAN COX: Chairman Clowe? 11 COMM. CLOWE: So we can do this, and I 12 guess I've got a question at this point before we 13 consider doing this. You make the change that 14 Chairman Cox suggested -- and I concur in that 15 suggestion -- without republishing? 16 MS. RIENSTRA: We haven't published yet. 17 MS. WOELK: We would make it 18 immediately. 19 COMM. CLOWE: Beg pardon? 20 MS. WOELK: We would suggest that you 21 adopt or propose for publication with the suggested 22 change. 23 COMM. CLOWE: So it's in the agenda, but 24 it's not out there under a clock? 25 MS. WOELK: That's right. 0178 1 COMM. CLOWE: You don't have to go back 2 and given 10 days' notice, like you did for this 3 agenda, with the change that the Chairman suggested? 4 MS. WOELK: That is correct. You could 5 propose a rule today that properly used the word 6 "unclaimed" rather than "remaining." 7 COMM. CLOWE: And we would just change 8 that? 9 MS. WOELK: And we would just change 10 that. And you would clarify that in your motion. 11 MS. RIENSTRA: Would you look me to read 12 it again with -- 13 COMM. CLOWE: No, no, no, no. 14 (Laughter) 15 MS. RIENSTRA: Just that Part (A) with 16 the word "unclaimed" in it? 17 COMM. CLOWE: No, no, no, no, no. 18 MS. RIENSTRA: Okay. 19 COMM. CLOWE: Chairman Cox was very 20 clear. 21 MS. RIENSTRA: Okay. 22 COMM. CLOWE: I understood him exactly. 23 MR. GRIEF: Chairman, I would just offer 24 up the Commission's pleasure. Would you like to hear 25 from Ms. Trevino on any type of legislative activity 0179 1 that's surrounded this particular issue during the 2 current legislative session? Would that be helpful to 3 you in your deliberations? 4 CHAIRMAN COX: Thank you. Please. 5 We need a bigger table up here. 6 COMM. CLOWE: Or fewer issues. 7 (Laughter) 8 CHAIRMAN COX: Simpler problems. 9 MS. TREVINO: Good afternoon. For the 10 record, I'm Nelda Trevino, the Director of 11 Governmental Affairs. 12 And I guess, Commissioners, two matters 13 I would want to bring to your attention. One is, is 14 that there is a bill filed by Sen. Dan Patrick. 15 That's Senate Bill 1200 that speaks to the closing of 16 instant games. 17 And, secondly, during the agency's last 18 appearance before the Senate Finance Committee -- I 19 believe it was on March the 7th -- Chairman Steve 20 Ogden of the committee had some questions of Executive 21 Director Sadberry in regards to the agency's 22 procedures on the closing of instant games. Director 23 Sadberry responded to the questions. The agency also 24 submitted some written information to the committee, 25 provided various information regarding our current 0180 1 procedures and practices. 2 It's our understanding, based on Sen. 3 Ogden's comments -- I guess a couple of things. One, 4 the agency's budget has been left pending until the 5 committee receives some information on this matter. 6 And so as of this date, the committee has not acted on 7 the agency's budget. 8 And Sen. Ogden expressed at the time 9 that he was potentially considering putting some 10 language potentially into the appropriations bill in 11 the form of a rider that might address also how the 12 agency might -- how the agency would address the 13 closing of instant games. 14 So those two things are still out there 15 with Sen. Patrick's bill. Again, it's a bill that's 16 been filed. There has been no action taken on it. 17 And, as a result of the agency not having its budget 18 considered again by the Finance Committee, we don't 19 have any indication as of this date as to what action 20 they might take. 21 COMM. CLOWE: Well, I think I need some 22 more information. What does Sen. Patrick's bill 23 contain as far as closing procedures? 24 MS. TREVINO: Two things that his bill 25 specifically addresses, Commissioner Clowe, and that 0181 1 is -- in fact, I'll just read it verbatim to you, if I 2 could. It's a very short bill. 3 And it says, "The Commission shall adopt 4 rules governing instant games that" -- there's two 5 items. Item No. 1: "Close instant games after all 6 top prizes in the game have been claimed or, on an 7 earlier date, as determined by the Executive Director 8 and (2) provide procedures for the timely closing of 9 an instant game that end the sale of instant game 10 tickets beyond the 46th day after a game has been 11 closed." 12 And I believe that based on discussions 13 that Executive Director Sadberry and I had with Sen. 14 Patrick, and I believe also just based on the comments 15 that Chairman Ogden made at the Finance Committee, it 16 appears that the two primary concerns expressed were 17 what's in Sen. Patrick's bill: One, closing instant 18 games after top prizes have been claimed and, 19 secondly, the amount of time that retailers are 20 selling instant games -- that 60-day period that we've 21 been talking about. 22 COMM. CLOWE: So, Mr. Chairman, you 23 know, a bill is introduced by the senator. It has to 24 go through the procedure. And at the earliest, I 25 guess, if the Governor signed it if it was passed, it 0182 1 would be effective September the 1st, wouldn't it? 2 MS. TREVINO: That's correct. The 3 effective date of the bill is September 1st. 4 COMM. CLOWE: Okay. Then Sen. Ogden had 5 indicated -- Nelda has told us that he favors this 6 position. And I guess he's waiting to hear something. 7 Is that what you're saying? 8 MS. TREVINO: Yes, sir. We did indicate 9 in our letter that we submitted to the Finance 10 Committee on March the 7th, after the agency's 11 appearance, in addition to the information that we 12 provided in regards to our current practices, that 13 there was a Commission meeting scheduled for the 23rd 14 and that we would keep them advised as to any 15 Commission action that may take place as a result of 16 the discussions here today. 17 COMM. CLOWE: Okay. Then, Mr. Chairman, 18 if we go this route and we propose this rule, you 19 couldn't get action on this until June. If a motion 20 were made to adopt the verbiage in Sen. Patrick's 21 proposed law and it was adopted as policy under the 22 present rule, empowering the Executive Director -- 23 ready for a bigger job -- to take action under those 24 policy directions, it would be effective as soon as he 25 could implement it. I'm of a mind -- I like the 0183 1 language of Sen. Patrick's bill. I'm of a mind, 2 depending on your direction, to make that motion. 3 CHAIRMAN COX: Okay. Let's talk about 4 what we might do, then, with the proposed rule. Did 5 the rule track precisely the language in Sen. 6 Patrick's bill? 7 MS. RIENSTRA: No. I did not have 8 Sen. Patrick's bill. 9 CHAIRMAN COX: Okay. What if we made 10 the rules track precisely the language in Sen. 11 Patrick's bill that would include -- I think you said 12 something about unless earlier, by other criteria, 13 closing the game -- and would add the not later than 14 46 days, and we would adopt that as our policy, ask 15 Director Sadberry to incorporate it in a procedure as 16 soon as possible and expose it as a rule for public 17 comment? 18 COMM. CLOWE: Well, I think that would 19 be duplicative if -- 20 CHAIRMAN COX: Let me tell you why I 21 said that. Maybe it is. I'm saying that we could 22 adopt a policy immediately, but it isn't going to 23 have, I don't think, the impact on the public that a 24 rule would, because they get to comment on a rule. 25 And if there is something that happens -- somebody 0184 1 comes with a comment that makes it better, then it's 2 their rule and not just ours. And it's more formal. 3 And at the same time we, by adopting the policy, we 4 have immediately responded to the concerns of the 5 Senators. 6 COMM. CLOWE: That's an interesting and 7 very astute comment. I would just have to think about 8 that. We would adopt the policy, utilizing Sen. 9 Patrick's verbiage. That would be effective 10 immediately. 11 Right, Sarah? 12 MS. WOELK: Yes. 13 COMM. CLOWE: And we direct the 14 Executive Director to move in that direction. Then at 15 the same time, we propose a rule to formalize it and 16 invite public comment and go through this procedure? 17 CHAIRMAN COX: Yes, sir. 18 MR. GRIEF: The only suggestion I might 19 make along those lines -- I hope this is helpful -- we 20 intentionally in the proposed rule did not include the 21 45-day language in the interest of if we are able to 22 shotten that at sometime in the future or if we had 23 different -- something different in technology arises, 24 we wouldn't have to again go through the rulemaking. 25 CHAIRMAN COX: And I agree with you 0185 1 totally, Gary. But I think the rule -- the proposed 2 statute said "at least." That would leave us the 3 option -- the ability to shorten it. 4 MR. GRIEF: By the 46th day. 5 COMM. CLOWE: Yes. That covers your 6 point, doesn't it? 7 MR. GRIEF: Yes, sir. 8 COMM. CLOWE: Counselor, is there any 9 objection on your part to taking both actions? 10 MS. WOELK: No. 11 CHAIRMAN COX: Or, actually, all three: 12 Expose the rule, adopt the policy and direct the 13 Executive Director to write the procedure implementing 14 it. 15 COMM. CLOWE: Well, you got that in the 16 policy adoption, I think. 17 CHAIRMAN COX: Is it? Okay. 18 COMM. CLOWE: Yes. 19 CHAIRMAN COX: The policy is: This is 20 our policy. And the Executive Director -- 21 COMM. CLOWE: Good. And he's got a rule 22 enabling him to do it -- 23 CHAIRMAN COX: Okay. 24 COMM. CLOWE: -- implement the policy. 25 MS. WOELK: As a clarifier, are you 0186 1 suggesting adopting the rule as drafted or as actually 2 getting a new draft that tracks Sen. Patrick's bill? 3 CHAIRMAN COX: A new one that tracks the 4 language that Nelda read to us. 5 MS. WOELK: I think that could be done. 6 You would probably have to come back out after 7 executive session to -- you would want -- 8 COMM. CLOWE: Well, we could adopt the 9 policy now -- 10 MS. WOELK: Yes. 11 COMM. CLOWE: -- and then adopt the rule 12 for publication after executive session -- 13 MS. WOELK: Yes. 14 COMM. CLOWE: -- if that's the mind of 15 the Commission. 16 CHAIRMAN COX: Would you like to move? 17 COMM. CLOWE: Well, let's ask Executive 18 Director Sadberry what his reaction to that is. 19 MR. SADBERRY: I understand the concept. 20 And I think public comment is important for the reason 21 that there may be players who oppose the policy of 22 doing that, or the rule as proposed. Yet, we should 23 have sufficient data to indicate that there's a lot of 24 support for adopting the policy in order to justify 25 immediate adoption of the policy and the ED office 0187 1 going forward with the procedure. 2 I don't see any conflict there. I think 3 the only conflict would be if you either amended 4 significantly the rule or changed the policy, and that 5 would impact against the procedure. But there again, 6 there is a procedure in the directive on procedures 7 for changing procedures, which is pretty readily 8 available to be done. 9 So it speaks, in my judgment, of a 10 united voice. That's important. It says that the ED 11 will be supported by the Commission, as least as of 12 now, based upon the publication of the rule so there's 13 not any consideration of perhaps, you know, the ED has 14 gotten out there on something. So it's a new concept 15 that I'm thinking about, too. 16 COMM. CLOWE: We've never done this 17 before, have we? 18 MR. SADBERRY: You know, the only 19 advantage I -- there are two advantages I can see with 20 the rule is, again, it does speak of the Commission's 21 solid support for doing that, which means if you had a 22 change in ED or something like that, the Commission's 23 rule would, you know, survive that. And it does speak 24 with a united voice and it doesn't conflict, and it 25 gives the public a chance to comment. 0188 1 I think those are advantages. I'm 2 struggling with thinking of disadvantages potentially. 3 If you have public comment that oppose it, you may 4 have questions whether the procedure is supportable or 5 supported. And I don't know where that would put us 6 in terms of potential jeopardy or perception of the 7 public of some incongruity. 8 I think on balance, as I'm talking on my 9 way through this, I see value in proceeding in a dual 10 path, and I have no problem with doing it that way. 11 Legally, I don't know. 12 MS. WOELK: No. And Sandy, who is our 13 most experienced rulemaker, points out that anything 14 you put in a rule takes away certain flexibility. So 15 that's why a rule, it's nice to keep it at the high 16 level. And if you're absolutely sure you want a 17 60-day max or a 45-day max, then that's too late to 18 put in the rule if you want more of a test-the-waters 19 kind of situation where you could adjust as needed. 20 There is some concern about locking yourself in to the 21 details. And that's the question on the table, is 22 what basically parameters do you want to set that -- 23 MR. GRIEF: And that was my point in 24 making the comment about why we didn't have it in the 25 rule. 0189 1 MR. SADBERRY: And yet, you know, it's 2 going to be an unusual situation where an ED does not 3 follow direction of the policy of a commission. That 4 closes off the question of whether that may not go 5 forward as a rule. You have finality. 6 COMM. CLOWE: Okay. Well, my sense is 7 that the Commissioners are responsive to the staff 8 proposal and discussion, although I would like to 9 say -- I would like to cross this bridge one time. I 10 feel like we've crossed it three or four times. Let's 11 get this information in-depth like you've done this 12 time, as early as possible. 13 And, Mr. Chairman, if you're amenable, 14 I'm ready to make a motion. 15 CHAIRMAN COX: Yes, sir. 16 COMM. CLOWE: I move that the Commission 17 adopt a policy that would, in regard to instant games, 18 one, close the instant games after all top prizes in 19 the game have been claimed, or an earlier date, as 20 determined by the Executive Director; and, two, 21 provide procedures for the timely closing of an 22 instant game that end the sale of instant game tickets 23 beyond the 46th day after a game has been closed. 24 That would be my motion. 25 CHAIRMAN COX: And did you want to add 0190 1 that we would propose a similar rule? 2 COMM. CLOWE: No. I would like to do 3 that in a separate motion. 4 CHAIRMAN COX: Separately. Okay. If I 5 could ask for clarification on the first point, 6 Mr. Chairman, I believe it said close the game after 7 the last top prize was claimed? 8 COMM. CLOWE: My motion says close the 9 instant games after all top prizes in the game have 10 been claimed. 11 CHAIRMAN COX: Okay. Now, Gary, how do 12 we need to amend that to address the fact that all we 13 can do is call them after all top prizes have been 14 claimed, and we can't close them until after the 15 45-day period? 16 MR. GRIEF: Now we're talking semantics 17 here. 18 CHAIRMAN COX: Right. 19 MR. GRIEF: I would go with "call the 20 game" and then utilize the 45-day period as the close 21 date after that. 22 CHAIRMAN COX: Would you like, 23 Mr. Chairman, for them to work that language to 24 address that concept, and we'll come back to it? 25 COMM. CLOWE: I'll just amend the motion 0191 1 if you like. 2 CHAIRMAN COX: Okay. Good. 3 COMM. CLOWE: And that would be to 4 substitute in my motion the word "close," substitute 5 the word "call." 6 MR. GRIEF: Robert has also suggested 7 perhaps "initiate game closing procedures." 8 CHAIRMAN COX: I like that. 9 COMM. CLOWE: All right. Then I'll 10 change my motion to amend to "institute game closing 11 procedures for instant games after all top prizes," 12 et cetera, et cetera, et cetera. 13 CHAIRMAN COX: Second. 14 Is there any other discussion? 15 All in favor say "Aye." 16 COMM. CLOWE: Aye. 17 CHAIRMAN COX: Aye. 18 Motion passes 2-0. 19 COMM. CLOWE: Then, Mr. Chairman, I 20 would propose that the Commission publish for public 21 comment the proposed rules that would embody the 22 policy that the Commissioners have just adopted and 23 make certain that the stipulation that you pointed out 24 in your comments be incorporated into that rule. 25 CHAIRMAN COX: Second. 0192 1 Is there any further discussion? 2 COMM. CLOWE: No. 3 CHAIRMAN COX: All in favor say "Aye. 4 COMM. CLOWE: Aye. 5 CHAIRMAN COX: Aye. 6 Motion passes, 2-0. 7 MS. WOELK: Okay. Let me clarify what 8 you just proposed. The rule that Deanne provided to 9 you or a -- 10 COMM. CLOWE: The rule the Commissioners 11 just adopted -- the policy the Commissioners just 12 specified. 13 MS. WOELK: Very specifically, that be 14 the language of the proposed rule? 15 COMM. CLOWE: That's right. 16 CHAIRMAN COX: Yes. 17 COMM. CLOWE: Because that's what we 18 want the public and the Legislature and anybody else 19 to comment on. 20 MS. WOELK: That's right. 21 CHAIRMAN COX: Excellent. Anything 22 further on this point? 23 MS. WOELK: Let me clarify that that 24 motion includes the ability to work that into the 25 existing rule in a way that makes structural and 0193 1 grammatical sense? It will have to be sort of stuck 2 in. 3 CHAIRMAN COX: We would certainly want 4 structural and grammatical sense. 5 COMM. CLOWE: Good luck! 6 CHAIRMAN COX: Gary? 7 MR. GRIEF: We had one other item we 8 would like to bring to the Commission's attention, and 9 I'll let Robert lay that out. 10 CHAIRMAN COX: Okay. What I would like 11 to do is, that's kind of a discrete item, and I want 12 to introduce it with some remarks of my own. And so 13 what I would say is, let's take about a 10-minute 14 break at this time and then we'll take up the 15 remaining portion of Agenda Item X after the break. 16 Thank you y'all very much. 17 (Off the record: 1:01 p.m. to 1:13 18 p.m.) 19 CHAIRMAN COX: Let's come back on the 20 record. 21 Chairman Clowe, did you have something 22 you wanted to clarify? 23 COMM. CLOWE: Yes, sir. I would like to 24 make a motion to enable the staff, in the rule that we 25 asked them to propose for our consideration at the 0194 1 next Commission meeting, to have the leeway to include 2 provisions and language that would be appropriate, in 3 addition to incorporating the policies that we adopted 4 in the motion just prior to the motion which I'm 5 referring to. And if you're in agreement, I would so 6 move. 7 CHAIRMAN COX: So would that say that 8 we're going to propose a rule that tracked the policy 9 today or that we're going to wait and propose that 10 rule next month? 11 COMM. CLOWE: We would have them propose 12 a rule that would track the policy that we adopted 13 today, but the rule that they're going to propose 14 would not be limited to strictly the language that we 15 adopted in the policy. 16 CHAIRMAN COX: Okay. But we would still 17 publish that rule today? 18 COMM. CLOWE: Well, as soon as they can. 19 MS. WOELK: Okay. Let me clarify here. 20 I thought what you had done was actually recite 21 language that we would send over for publication. Now 22 I'm hearing you saying you were giving us directions 23 about drafting language to bring back next month or to 24 bring back later today to propose for publication. 25 COMM. CLOWE: No, no. I thought it was 0195 1 going to be after executive session today. 2 MS. WOELK: Okay. Well, that's clear. 3 COMM. CLOWE: What I am trying to do is 4 give them leeway to use verbiage that think will be 5 beneficial while they're embodying the policy that we 6 did vote on. 7 MS. WOELK: Okay. Then we're fine. I 8 don't think you need -- that clarifies the previous 9 motion, that that was a motion for us to move forward 10 in that direction, not a motion directing us to go 11 ahead and publish? 12 CHAIRMAN COX: Bring us back a motion 13 and a proposed rule that we can then read with another 14 motion and second, vote, et cetera. 15 Is that your motion? 16 COMM. CLOWE: That's my motion. 17 CHAIRMAN COX: Okay. The second 18 issue -- 19 COMM. CLOWE: Are you going to second 20 it? 21 CHAIRMAN COX: Oh, I thought -- do we 22 need to? 23 MS. WOELK: Well, you could vote on 24 it -- 25 CHAIRMAN COX: Sarah said we didn't need 0196 1 to. 2 MS. WOELK: I feel like I now understand 3 what your previous motion was, and I was 4 misunderstanding. 5 COMM. CLOWE: Oh, so you're not asking 6 for a vote? I withdraw my motion. 7 MS. WOELK: I'll take that as -- I think 8 we can call this legislative history on what you -- 9 COMM. CLOWE: See, that's what I told 10 you I thought. 11 MS. WOELK: I'm not very good at this. 12 CHAIRMAN COX: Okay. You're quite good, 13 Sarah. 14 COMM. CLOWE: Yes, you're doing fine. 15 Okay. Staff, are you comfortable? 16 Okay. 17 CHAIRMAN COX: Okay. The second part of 18 this has to do with player information. And presently 19 we have a couple of ways of letting players know what 20 prizes remain unclaimed. One of those is on our 21 website, and one of those is on bulletins posted in 22 the 17,000 retailers. 23 Now, we have received constant 24 criticism, if not constant regular criticism from 25 Mr. Nettles, that this information is always out of 0197 1 date. And I have been told that, yes, it is, because 2 there is a lag time between printing out the realtime 3 information and distributing it in hard copy to 17,000 4 locations. 5 And I accepted that without further 6 inquiry, until the hue and cry recently that the 7 information in the hands of the players is way too 8 old, and that exacerbates the problems that we're not 9 calling games when we learn that there are no top 10 prizes remaining. 11 So, Mr. Chairman, consistent with your 12 reservation of the right to meddle, I meddled. 13 COMM. CLOWE: Good. 14 CHAIRMAN COX: The first week in March, 15 I went to the Big 12 Conference tournament in Oklahoma 16 City and, in so doing, stopped at Gainesville, Texas, 17 at a convenience store/gas station and saw there 18 posted February 14th information about prizes 19 remaining unclaimed, information that was more than 20 two weeks old. And I naively thought if they go out 21 every two weeks, the information shouldn't be more 22 than two weeks old. And I reported that back to Gary 23 and to Michael Anger. 24 Then last week Cathy and I went to Big 25 Bend, and one of my stops was in Fort Stockton. And 0198 1 there again, on the 12th of March, I observed that the 2 posting was February 14th. So it's gotten a week 3 older, still out there. 4 On the way back from Big Bend, I stopped 5 in Marathon and there saw, refreshingly, information 6 dated February 28th, which by that point was only a 7 little over two weeks old, because it's now 8 March 17th. 9 And then I go back through Ozona, and I 10 find there posted information as of January 27th. So 11 it's all over the place. And I said, "Gary, Michael, 12 tell me what's going on here and what we can do to 13 make this better." 14 So, Gary, let's just lay that question 15 out there and you address it however you want to. 16 MR. GRIEF: All right. Well, I think it 17 might be helpful to first address the individual 18 locations that you visited. You did let us know about 19 those, Mr. Chairman, and we did look into each one of 20 those. I think -- I believe, Robert, do you have the 21 facts on those? It might be helpful for the group to 22 hear that. 23 CHAIRMAN COX: And I wasn't able to give 24 you the specific location at Gainesville, so that one 25 you probably can't respond to. 0199 1 MR. TIRLONI: The locations where you 2 found the February 14th flier, as you said, due to the 3 limitations in printing and getting that distributed, 4 unfortunately that was the current flier out at that 5 time. So the February 14th flier that you saw was the 6 current flier that should have been distributed. 7 CHAIRMAN COX: And that's, then, right 8 up not only through March 3rd but also through 9 March 12th? 10 MR. TIRLONI: Right -- I'm sorry. As of 11 February 10th. We had a sales period that ended on 12 Saturday -- 13 CHAIRMAN COX: Okay. So it was February 14 10th and February 24th -- 15 MR. TIRLONI: Yes. 16 CHAIRMAN COX: -- not 14th and 28th? 17 MR. TIRLONI: Yes, that's right. 18 CHAIRMAN COX: Thank you. 19 MR. TIRLONI: That's right, yes. The 20 sales period ended on Saturday, February 10. That 21 flier was -- or there was a flier created the 22 following week, the week of the 12th. It was printed 23 and shipped to GTECH. GTECH picked it up at their 24 district sales meeting on Friday the 23rd, and then 25 they distributed that flier for the next two-week 0200 1 period which ended March 9th. 2 CHAIRMAN COX: So it's two weeks old 3 before GTECH starts distributing it? 4 MR. TIRLONI: Yes. So we realize that 5 there are, you know, a great deal of limitations in 6 getting this information out to the districts. 7 Now, there was one location that you 8 went to in Ozona that had a January 27th flier. That 9 was, indeed, an old flier that should not have been in 10 that location. We have talked to Joe Lapinski and 11 Ramon Rivera about that, and they have talked to the 12 sales staff about that location and about the fliers 13 and that as new fliers are distributed, old fliers 14 should be removed from the locations. 15 But I guess in the big picture, we have 16 a bigger and better solution to the issue as a whole. 17 And -- 18 MR. GRIEF: But before we get to that 19 solution, just to kind of lay it out, we're talking 20 about here due to the fact that it has to be 21 printed -- the data has to be assembled, has to be 22 developed in our graphics department, printed, shipped 23 to GTECH. The sales reps have to come in on their 24 once every two-week meeting to pick those up at their 25 GTECH district office. And then over the next two 0201 1 weeks, they distribute those. By and large, the 2 information is going to be between three and four 3 weeks old that's out at the locations. 4 CHAIRMAN COX: Here we are in the 5 information age and the best we can do is three or 6 four weeks old so far. 7 MR. GRIEF: If the retailer chooses to 8 post it. 9 CHAIRMAN COX: If they choose to post it 10 at all. 11 MR. GRIEF: And if they post it and it's 12 not taken away by the first player that comes into the 13 location, for whatever reason, if they want to take it 14 with them. 15 CHAIRMAN COX: In Marathon, Texas, 16 nothing was posted. And I said to the clerk, "Do you 17 have the information on unclaimed prizes?" "Oh, it 18 must be here somewhere." They looked around and found 19 it, sure enough, and posted it. 20 MR. GRIEF: So we talked internally. 21 And, Mr. Chairman, you were involved in some of those 22 discussions about what we might be able to do to 23 improve that. And one of the ideas that we came up 24 with was to try to take some time off the printing 25 process. And GTECH acknowledged that they would be 0202 1 willing to take responsibility for having that 2 printed. And to make a long story short, we thought 3 we might be able to save about a week off that 4 process. 5 CHAIRMAN COX: So by not having it 6 printed here and then shipped out or, rather, sending 7 them the data and have it printed locally, you could 8 take a week off the process? 9 MR. GRIEF: Correct, which none of us 10 were satisfied with, even at that. 11 CHAIRMAN COX: Good. 12 MR. GRIEF: And, as you said, in this 13 day of the information age, surely there must be a 14 better way to do this. So we put our heads together. 15 And now I'll go back to Robert and have him lay out a 16 suggested approach that we have. 17 CHAIRMAN COX: And I think that you have 18 put your heads together quite sometime ago and were 19 working on this solution. Isn't that true? 20 MR. GRIEF: Yes. And we have refined 21 that over the last week. And I think we have even 22 made it better, hopefully. We'll let y'all be the 23 judge of that. 24 CHAIRMAN COX: Good. 25 MR. TIRLONI: So, Commissioners, what 0203 1 you have in front of you is a color printout of what a 2 terminal report would look like. And this is a top 3 prizes unclaimed report. This is a mock-up that was 4 done by GTECH's software. As you said, we've been 5 working with GTECH software on a report for some time 6 now. It was going to be released in May, but we've 7 made some changes, and this is basically the new 8 version of that report. 9 Basically what it shows, the flier that 10 we've been talking about has 36 games on it. 11 Basically this terminal report gives the information 12 on 36 games, and it gives the quantity of top prizes 13 that are unclaimed. It also directs players to the 14 website to get the thorough and complete listing, so 15 it directs them there. 16 The plan would be to completely scrap or 17 do away with the printed flier. We would do a 18 permanent piece of point of sale, or as permanent as 19 we can make it in the retail location, that would into 20 the play station that would direct players to this 21 report or to ask for this report. 22 And we're also looking at purchasing new 23 displays in the future that the retailer would be able 24 to display this report, and along with the regular 25 winning numbers reports that they print out at the 0204 1 counter. 2 MR. GRIEF: To supplement that 3 information, these reports would be on demand for the 4 retailer to print, upon request by the player. The 5 information would be one day old. It would be as of 6 the day before. 7 The retailer, if they wanted to in the 8 morning when they came in to open up their location, 9 they could print out 25 or 30 of these, put them on 10 the counter. We're getting some dispensers for 11 retailers to keep those in. Players come just come up 12 and pick them up, very similar to what you have 13 probably seen, our winning numbers reports at the 14 retailer location. That will eliminate the issue of 15 information not being timely, information not being 16 posted, if you will, and put it more in the hands of 17 our players who are seeking out that information. 18 I will tell you, this type of formatted 19 report is limited in that it does not contain the game 20 name; it contains the game number. It doesn't have a 21 graphic of the front of the ticket like our other 22 flier had. And it only focuses on the top prizes. I 23 believe our flier focused on the top three prize 24 levels. 25 But we believe this information is what 0205 1 the people who demand this information, this is what 2 they want to know. And so we hope that you'll agree 3 that this might be a big improvement for us. 4 CHAIRMAN COX: So we're offering them 5 less information but far better information as to what 6 we believe is the most relevant data about the game? 7 MR. GRIEF: Much better said than me; 8 yes, sir. 9 COMM. CLOWE: I see four games on this 10 list that have no top prizes unclaimed. 11 MR. TIRLONI: Commissioner, this is a 12 mock-up. None of these numbers are valid; none of the 13 game numbers are valid either. 14 COMM. CLOWE: You don't trust us. 15 (Laughter) 16 COMM. CLOWE: But on the example you 17 gave us, those four games would be closed under the 18 new policy just adopted by the Commission? 19 CHAIRMAN COX: Or called. 20 COMM. CLOWE: Called. 21 MR. GRIEF: Called. We would begin the 22 process. 23 COMM. CLOWE: You would have instituted 24 the game-closing procedure? 25 CHAIRMAN COX: There you go. 0206 1 MR. TIRLONI: That's correct. 2 MR. GRIEF: And I'll have to say, I'm 3 just happy to hear that you'll telling me you can read 4 it. 5 COMM. CLOWE: Do what? 6 (Laughter) 7 MR. GRIEF: I'm just happy to hear that 8 it's big enough, the font is big enough. 9 COMM. CLOWE: It was a struggle, I tell 10 you. 11 CHAIRMAN COX: Gary originally mocked it 12 up on his printer. I couldn't read that. 13 COMM. CLOWE: The "void" kind of throws 14 me a little bit. 15 CHAIRMAN COX: Would the "void" 16 appear -- 17 MR. TIRLONI: No, "void" will not. This 18 is done in GTECH's software lab where they're just 19 using void paper stock. No. When the retailer prints 20 it at their loca- -- retailers don't have void paper 21 stock. 22 COMM. CLOWE: Well, you've got to start 23 telling the players now that this is what they need to 24 ask for. 25 MR. TIRLONI: That would be correct; 0207 1 that would be correct. And, Commissioner, to your 2 comment about the ones that are on here with zero, we 3 would be getting notification of that in our 4 department, in my department, via a completely 5 different report at the start of business every day. 6 We wouldn't be relying on this terminal report to 7 notify us about the games that had zero top prizes. 8 COMM. CLOWE: And I understand that. I 9 was just commenting from a player's standpoint -- 10 MR. TIRLONI: Yes. 11 COMM. CLOWE: -- that they see four 12 games, there it is. 13 MR. TIRLONI: That's exactly right. 14 CHAIRMAN COX: What do you think about 15 this? 16 COMM. CLOWE: Let's try it. 17 CHAIRMAN COX: Okay. 18 MR. TIRLONI: Chairman, GTECH has agreed 19 to fast track this, and they have told us if we give 20 them feedback in the next day or so, you know, by the 21 beginning of next week, they can have this implemented 22 by April 27th. 23 CHAIRMAN COX: Excellent. And the 24 awareness campaign begun immediately so that folks 25 will know that it's coming? 0208 1 MR. TIRLONI: Yes, that's correct. 2 We'll start thinking about that. We can communicate 3 to retailers via their terminals that there's going to 4 be a new report that's coming out. We have capability 5 on our agency website. We have the Retailer Services 6 Center as part of our retailer website where we can 7 communicate to retailers. And we'll also begin 8 developing that point of sale that I talked about that 9 can be posted that directs players to this report. 10 CHAIRMAN COX: Okay. And it's all of 11 our dream, I'm sure, that in each retailer in 12 realtime, there would be all information about all 13 games that's on our website. I hope that will be our 14 goal. I recognize it may be way out there, but that's 15 where we would like to be, so that they have the most 16 complete information that we have at any moment in 17 time. 18 MR. TIRLONI: And our website now, 19 because we've realized for sometime that there is a 20 delay in the information that's at retail, the website 21 at any time shows as of the previous day the prizes 22 remaining or prizes not yet claimed, not only at the 23 top but it shows it at every prize level. 24 And I realize not everybody has access 25 to the Web, but it is there as another resource and it 0209 1 does give more information than just the top prize 2 tier. 3 COMM. COX: And I'm certain more people 4 have access to the Web than presently use it. And 5 your note down here, "For a complete listing, visit 6 www.txlottery.org," will help them become aware that 7 they can get better information there, and maybe that 8 utilization will increase. 9 MR. TIRLONI: Yes, sir, absolutely. 10 CHAIRMAN COX: Go to it. Thank you very 11 much. I think this is an excellent improvement. 12 MR. TIRLONI: Thank you. 13 COMM. CLOWE: Good meddling. But don't 14 grant divorces. 15 CHAIRMAN COX: It probably would have 16 happened anyway. Thank you very much. 17 MR. TIRLONI: Thank you. 18 AGENDA ITEM NO. XI 19 CHAIRMAN COX: Okay. Item XI, report, 20 possible discussion and/or action on transfers to the 21 State. 22 Ms. Pyka. 23 MS. PYKA: Thank you. Good afternoon, 24 Commissioners. For the record, my name is Kathy Pyka, 25 Controller of the Lottery Commission. 0210 1 Tab XI includes information on the 2 agency's financial status. The first report in your 3 notebook reflects transfers and allocations to the 4 Foundation School Fund and the allocation of unclaimed 5 prizes as of February 2007. 6 Total transfers to the state during this 7 period amounted to $507.8 million. This represents a 8 2.2 percent decline from the total amount transferred 9 in February of 2006. 10 The second page of your notebook 11 reflects the detailed information for the monthly 12 transfers. Of the $507.8 million transfer amount, 13 $476.7 million was the amount transferred to the 14 Foundation School Fund, with a balance of 15 $31.1 million transferred from unclaimed lottery 16 prizes. 17 The last document in your notebook 18 includes a report of lottery sales, expenditures and 19 transfers from fiscal year 1992 to date. Total cash 20 basis transfers to the Foundation School Fund through 21 February of this year is $476.7 million, with a 22 cumulative transfer to the Foundation School Fund of 23 $9.14 billion. 24 Commissioners, this concludes my 25 presentation. I would be happy to answer any 0211 1 questions. 2 CHAIRMAN COX: Thank you. 3 MS. PYKA: Thank you, Commissioners. 4 AGENDA ITEM NO. XII 5 CHAIRMAN COX: Okay. Item No. XII, 6 report, possible discussion and/or action on the 7 fiscal year 2008-2009 legislative appropriation 8 request. 9 Ms. Pyka. 10 MS. PYKA: Again for the record, Kathy 11 Pyla. 12 Commissioners, to date the Commission 13 has appeared before the House Appropriations Committee 14 and the Senate Finance Committee for budget markup 15 consideration. I've included the status of our budget 16 request and each unfunded item in your notebook as 17 Attachment A. 18 And what I have provided you is simply 19 what's been included in the House recommendation to 20 date and what has been included in the Senate 21 recommendation to date. And, of course, as stated 22 earlier today, all of our items on the Senate side 23 related to budget have been left pending. 24 And so this does complete the list of 25 everything that's in the committee substitute for 0212 1 House Bill 1. And we've got some items in the base 2 bill, and then we've got a couple of items that are 3 listed as items for future consideration that are 4 included in Article IX -- excuse me -- Article XI of 5 the bill. And those two items include the rider that 6 allows us to use sales from lottery for bingo and 7 direct expenses as well as our Executive Director 8 exempt position salary increase that's included in two 9 places in Article XI. 10 I would be happy to answer any 11 questions. 12 Thank you, Commissioners. 13 AGENDA ITEM NO. XIII 14 CHAIRMAN COX: Item XIII, report, 15 possible discussion and/or action on the 80th 16 Legislature. 17 Ms. Trevino. 18 MS. TREVINO: Good afternoon again, 19 Commissioners. For the record, I'm Nelda Trevino, the 20 Director of Governmental Affairs. 21 We've provided you today with an updated 22 legislative tracking report listing bills filed with 23 potential impact to the agency. We are currently 24 tracking 146 bills, and I would like to highlight the 25 bills filed since our last Commission meeting, with 0213 1 direct impact to either the lottery or to charitable 2 bingo. 3 These include House Bill 2160 by 4 Rep. Kino Flores relating to eliminating the 5 limitation on lottery advertising expenses based on 6 the lottery prize payout percentage. This bill is 7 scheduled to be considered by the House Licensing and 8 Administrative Procedures Committee next Tuesday, 9 March the 27th; 10 House Bill 2206 by Rep. Pat Haggerty, 11 and its Senate companion, Senate Bill 1110 by 12 Sen. John Carona relating to the use of the card- 13 minding device to play bingo; 14 House Bill 2265 by Rep. Pat Haggerty 15 relating to the prizes awarded in a progressive bingo 16 game; 17 House Bill 2535 by Rep. Norma Chavez 18 relating to the authority of federally recognized 19 Indian tribes along the Texas/Mexico border to engage 20 in bingo; 21 House Bill 2739 by Rep. Chente 22 Quintanilla relating to the sale of lottery tickets at 23 a location at which a person holds an alcoholic 24 beverage permit; 25 House Bill 3186 by Rep. Jose Menendez 0214 1 relating to the authorization and regulation of poker 2 gaming and the duties of the Texas Lottery Commission; 3 Three video lottery and/or casino gaming 4 related bills by Rep. Kino Flores, which include House 5 Bill 3326, House Bill 3335, House Bill 3351, and the 6 accompanying joint resolutions: HJR 98, HJR 99 and 7 HJR 100; 8 House Bill 3350 by Rep. Charlie Geren 9 relating to the payment of costs incurred in the 10 operation and administration of the Texas Lottery 11 Commission; 12 House Bill 3615 by Rep. Tony Goolsby 13 relating to the regulation, operation and taxation of 14 certain coin-operated machines; 15 House Bill 3914 by Rep. Tony Goolsby, 16 and its Senate companion, Senate Bill 1751 by 17 Sen. Royce West relating to the authority of the 18 Lottery Commission to establish an internet lottery 19 game; 20 House Bill 3973 by Rep. Dennis Bonnen 21 relating to authorizing a long-term concession 22 agreement for operation of the lottery and 23 establishing three trust funds to receive the revenue 24 resulting from the long-term concession agreement; 25 House Bill 3974 by Rep. Pat Haggerty 0215 1 relating to the structure and operations of the 2 Lottery Commission; 3 HJR 85 by Rep. Corbin Van Arsdale 4 relating to requiring a contract with an entity to 5 operate the state lottery, to be approved by majority 6 members of each house of the Legislature; 7 Senate Bill 1200 by Sen. Dan Patrick 8 relating to rules governing instant games by the 9 Lottery Commission; 10 Senate Bill 1256 by Sen. Kip Averitt 11 relating to the operation and regulation of charitable 12 bingo and the use of bingo proceeds. And this is the 13 Senate companion to House Bill 1156 by Rep. Kino 14 Flores that I have mentioned at our previous 15 Commission meetings and, based on our understanding, 16 should become the product of the bingo legislative 17 workgroup formed by Rep. Flores; 18 Senate Bill 1359 by Sen. Rodney Ellis 19 relating to the authorization and regulation of casino 20 gambling and the creation of the Texas Gaming 21 Commission; 22 Senate Bill 1478 by Sen. Kim Brimer 23 relating to authorizing certain non-profit 24 organizations to conduct charitable poker tournaments; 25 Senate Bill 1552 by Sen. Juan Hinojosa 0216 1 relating to allowing qualified organizations to 2 conduct raffles, using stored cards and video 3 displays; 4 Senate Bill 1721 by Sen. Ogden relating 5 to certain fiscal matters affecting governmental 6 entities. And this bill includes a provision amending 7 the State Lottery Act to remove the agency's 8 exemptions from contracting statutes. 9 With regard to the appropriations bill 10 for the 2008-2009 biennium, Kathy provided you with a 11 report on the differences between the status of the 12 agency's budget adopted by the House Appropriations 13 Committee and the Senate Finance Committee. 14 The House Appropriation Committee voted 15 their bill out of committee on March the 21st, and it 16 is anticipated the full House will consider the 17 appropriations bill next Thursday. 18 And, as I mentioned earlier, in a 19 response to questions asked by the agency during an 20 appearance before the Senate Finance Committee on 21 March the 7th relating to lottery instant games, we 22 did provide the committee members with a written 23 response with specific information regarding the 24 closing of instant games. And again, as I mentioned 25 earlier, the Finance Committee has yet to take action 0217 1 on the agency's budget. 2 As the process moves forward on the 3 appropriations bill, a conference committee comprised 4 of House and Senate members will eventually be formed 5 to resolve the differences between the House and the 6 Senate versions. 7 The House Licensing and Administrative 8 Procedures Committee held a hearing on February the 9 27th, and executive directors from agencies under the 10 committee's jurisdictions provided some brief remarks. 11 And Executive Director Sadberry was in attendance and 12 addressed the committee. 13 Additionally, there are several bills 14 specifically related to the agency that have been 15 considered by the House Licensing Committee and have 16 been voted favorably from the committee. And these 17 include House Bill 1670 by Rep. Charlie Geren relating 18 to the payment of a lottery prize awarded to a minor. 19 This is the bill that clarifies the definition of a 20 minor in the State Lottery Act; 21 And House Bill 1179 by Rep. Kino Flores 22 relating to procurements by the Texas Lottery 23 Commission. And this bill amends the Lottery Act to 24 remove the agency's exemptions from contracting 25 statutes and is consistent with one of the 0218 1 recommendations made by the State Auditor's office and 2 their procurement audit of the agency; 3 And, lastly, House Bill 1180, also by 4 Rep. Kino Flores, which changes the agency's sunset 5 date from 2009 to 2011 -- excuse me -- changes the 6 sunset date from 2011 to 2009, was set on the local 7 and consent calendar and considered by the full House 8 yesterday. However, the bill was withdrawn from the 9 local calendar, and it's anticipated that it will be 10 placed on the House regular state calendar. 11 And this concludes my report, and I'll 12 be happy to try to answer any questions. 13 CHAIRMAN COX: Thank you very much. 14 MS. TREVINO: You're welcome. 15 AGENDA ITEM NO. XVI 16 COMM. GEESLIN: Item No. XVI, report and 17 possible discussion and/or action on the agency's 18 Historically Underutilized Business Program and/or 19 minority business participation, including the 20 agency's Mentor Protégé Program. 21 Ms. Bertolacini. 22 MS. BERTOLACINI: Good afternoon, 23 Chairman and Commissioner. For the record, my name is 24 Joyce Bertolacini, and I am the coordinator of the 25 TLC's Historically Underutilized Business Program. 0219 1 A copy of the agency's February HUB 2 Minority Contracting Activity Report is included in 3 your notebooks today. This report reflects all fiscal 4 year 2007 expenditures paid from September 1, 2006 5 through February 28, 2007. Our total qualifying 6 expenditures as of February 28th were $79.6 million, 7 and our estimated HUB minority utilization was 8 approximately $20.7 million, which equates to 9 26.02 percent. 10 I also wanted to mention that the fiscal 11 year 2007 semi-annual statewide HUB report will be 12 issued by the Texas Building and Procurement 13 Commission on April the 15th. Following the release 14 of this report, I will be preparing summary 15 information regarding the agency's progress to present 16 to you at a future meeting so that you can see what 17 our progress has been for the first six months of the 18 fiscal year. 19 Regarding the agency's Mentor Protégé 20 Program, the following activities have taken place 21 since the last meeting: Our agency's website has been 22 updated to provide a link to the new Mentor Protégé 23 application form. An additional information will be 24 added to the Mentor Protégé page in the near future. 25 In fact, we were just trained in my division on how to 0220 1 do updates to the website, and so I'm anticipating 2 putting together a little bit more information to put 3 out there. 4 To date we have received three Mentor 5 applications. I'm still working on that. 6 (Crackling sound) 7 Someone needs be put their Blackberry 8 away or whatever it is. I don't know what that -- 9 MS. WOELK: I think that was my 10 Blackberry. 11 MS. BERTOLACINI: Sometimes it's the 12 phone, the cell phones that will do that. 13 And I'm currently compiling a list of 14 potential protégé companies to whom applications will 15 be distributed, in an effort to increase the pool of 16 potential protégés. And some of those will be from 17 our subcontractors that are being used by some of the 18 vendors that we have contracts with in the agency. 19 That's all I have, and I would be happy 20 to answer any questions that you might have. 21 COMM. CLOWE: Good. Keep up the work. 22 We want to continue to do a good job in this area. 23 MS. BERTOLACINI: Thank you very much. 24 CHAIRMAN COX: Thank you, Joyce. 25 0221 1 AGENDA ITEM NO. XV 2 CHAIRMAN COX: Item No. XV, report, 3 possible discussion and/or action on the agency's 4 contracts. 5 Mr. Jackson. 6 MR. JACKSON: Good afternoon, 7 Commissioners. For the record, my name is Tom 8 Jackson, Purchasing and Contracts Manager. 9 Commissioners, in your notebooks under 10 Tab No. XV is a report on prime contracts that has 11 been updated for your review. 12 I will be happy to answer any question 13 you might have. 14 COMM. COX: Is there any substantive 15 difference between DDB Dallas and Tracy Locke 16 Partnership? 17 MR. JACKSON: Tracy Locke is now the 18 name that goes on there. DDB Dallas no longer exists. 19 They were bought out by Tracy Locke. 20 CHAIRMAN COX: They were bought out by. 21 Now, I thought that DDB Dallas was a part of 22 OmniVision. Was that incorrect? 23 Okay. Mike, would you help me with 24 this, or actually whoever. 25 MR. FERNANDEZ: Good morning. My name 0222 1 is Mike Fernandez, and I'm the Director of 2 Administration. 3 And it's my understanding that both of 4 those companies were subsidiaries or run under 5 OmniCom. 6 MS. FICKE: OmniCom. Correct. 7 MR. FERNANDEZ: And it was also my 8 understanding, Mr. Chairman, that these groups shared 9 the same building in Dallas. And I think in an effort 10 to operate more efficiently, more cost effectively, 11 they put those two groups together. But the 12 principals that we deal with have not changed. I 13 think what they're now doing is sharing an accounting 14 system, is my understanding. 15 CHAIRMAN COX: And any contractual 16 matters are routine as far as amendments? 17 MR. FERNANDEZ: Nothing has changed at 18 all. The only change that we've seen is the name. 19 CHAIRMAN COX: Who is Tracy Locke? 20 MS. FICKE: This is Ashley Ficke. I'm 21 with Tracy Locke. There is a little bit of background 22 here. DDB Dallas was originally Tracy Locke and was 23 bought by the DDB network about 10 years ago. And so 24 there is a shift where we check their names, DDB 25 Dallas, as part of the DDB conglomerate. 0223 1 CHAIRMAN COX: DDB being the old Doyle 2 Dane Bernbach? 3 MS. FICKE: Correct; yes. 4 CHAIRMAN COX: Okay. 5 MS. FICKE: And what has happened was, 6 there continued to be a Tracy Locke, and then the 7 majority of the agency turned into DDB. What has 8 happened now is, we have remerged under the Tracy 9 Locke name. So it's not what I would consider a 10 buyout. It is just the two entities merging back 11 together, continuing to be under the OmniCom umbrella. 12 CHAIRMAN COX: It might be perceived as 13 a rebranding? 14 MS. FICKE: Correct. 15 CHAIRMAN COX: Thank you. 16 AGENDA ITEM NO. XVII 17 CHAIRMAN COX: Okay. Item XVII, 18 consideration of and possible discussion and/or action 19 on external and internal audits and/or reviews 20 relating to the Texas Lottery Commission and/or on the 21 Internal Audit Department's activities, including 22 status of implementation of SAO recommendations on 23 incomplete transactions. 24 Ms. Melvin and Mr. Grief. 25 MS. MELVIN: Good afternoon, 0224 1 Commissioners. Again, for the record, Catherine 2 Melvin, Director of the Internal Audit Division. 3 I have a brief item of update related to 4 a state auditor's report issued in July 2006, related 5 to Lotto Texas activities at the Texas Lottery 6 Commission. 7 At the request of Executive Director 8 Sadberry, I have recently invited the state auditor's 9 office to attend internal workgroup meetings 10 addressing a recommendation that the state auditors 11 made in the July 2006 report related to incomplete 12 on-line game ticket transactions which are recorded in 13 the lottery operator's central computer system. 14 As the agency's Internal Audit Director, 15 I also attend and participate in these internal 16 meetings. And the state auditor's office has 17 responded and has agreed to attend the next meeting 18 when that is scheduled. We believe the workgroup will 19 benefit from any input and participation in the 20 process the SAO should choose to have. 21 And if you have no questions for me at 22 this time, Mr. Grief will now provide some more 23 detailed information regarding management actions 24 taken thus far. 25 MR. GRIEF: Good afternoon, 0225 1 Commissioners. For the record, my name is Gary Grief, 2 Deputy Executive Director. 3 In the report that Cat noted, the SAO 4 had a finding related to the oversight and monitoring 5 of incomplete on-line game transactions which are 6 recorded in the lottery operator's central computer 7 system. The SAO identified three recommendations 8 related to this finding. I would like to update you 9 on these recommendations and the status of our 10 management responses. 11 The first recommendation that the SAO 12 had was for the agency to develop and enforce a formal 13 agreement with the lottery operator that described the 14 lottery operator's responsibilities regarding these 15 transactions, along with potential sanctions regarding 16 incomplete transactions. 17 All work has being completed related to 18 that recommendation. An amendment to the lottery 19 operator contract, which was Amendment No. 8, was 20 executed on September 6, 2006, and that amendment 21 describes the lottery operator's responsibilities 22 regarding those transactions and describes the 23 associated sanctions for lottery operator errors 24 associated with monitoring or reporting on those 25 transactions. 0226 1 The second recommendation that the SAO 2 had for the agency was to develop and implement 3 policies and procedures for monitoring incompleted 4 transactions. That included, one, obtaining 5 information from the lottery operator that identified 6 number combinations associated with incomplete 7 transactions; and, two, verified whether those 8 incomplete transactions were associated with winning 9 number combinations. 10 CHAIRMAN COX: Gary? 11 MR. GRIEF: Yes, sir. 12 CHAIRMAN COX: Chairman Clowe, do you 13 have a background on what an incompleted transaction 14 is? 15 COMM. CLOWE: I believe I do. 16 CHAIRMAN COX: Okay. 17 Thank you. 18 MR. GRIEF: All work has been completed 19 regarding this particular recommendation as well. As 20 of June 29, 2006, procedures were implemented, 21 policies were established and necessary software 22 changes were made to, one, require the lottery 23 operator to provide information on number combinations 24 associated with incomplete transactions and, two, 25 require agency staff to review those numbers 0227 1 combinations to identify possible winner combinations. 2 And then the third and last 3 recommendation from the SAO related to this finding 4 was for the agency to develop and implement a formal 5 policy to address situations in which the number 6 combinations on incomplete transactions were winning 7 numbers for high tier or jackpot prizes. 8 The SAO recommended that any such policy 9 that we were to develop would, one, identify the 10 agency personnel to be notified; two, explain what 11 happens to the prize money, including instances in 12 which another winner with a ticket has been 13 identified; and, three, describe what the agency will 14 then report to the public. 15 We have not yet completed our work on 16 this particular recommendation. Our research and 17 analysis in developing a formal policy for the 18 handling of these transactions has brought to light 19 additional information that has impacted our ability 20 to formulate an effective policy. 21 Our work is ongoing. This has resulted 22 in the agency revising its completion timeline related 23 to this effort on more than one occasion. And our 24 current target date for completion is now September 1, 25 2007. 0228 1 I want to highlight for the Commission 2 that an update on this item was provided via letter to 3 Chairman Ogden and members of the Senate Finance 4 Committee back in October of 2006. Also our revised 5 target completion dates, along with a status report, 6 are being documented and communicated on a monthly 7 basis to Chairman Flores and the members of the House 8 Licensing and Procedures Committee via the monthly 9 tracking spreadsheets that we routinely provide them 10 on all audits. 11 I also want to update you on a few 12 recent activities on this matter. On February 13, 13 2007, Chairman Cox and Executive Director Sadberry met 14 with GTECH president and CEO, Bruce Turner, and Ramon 15 Rivera, Account General Manager for GTECH Texas, and 16 emphasized to Mr. Turner the importance of this issue 17 to the Commission, calling for GTECH's continued 18 oversight and attention at the highest levels as the 19 agency continues to evaluate this matter 20 On march 6th of this year, the internal 21 workgroup met with GTECH technical personnel to 22 evaluate system capabilities that might impact policy 23 decisions related to these transactions. These 24 discussions are ongoing, as all options are still 25 being considered and evaluated. 0229 1 And as Cat previously mentioned, on 2 March 9th, at the request of Executive Director 3 Sadberry, Cat invited the SAO to attend the internal 4 workgroup meetings, and the SAO has agreed. We 5 believe the workgroup will benefit from any input the 6 SAO may wish to provide in those meetings. 7 I want to assure the Commission that 8 staff, along with our other available resources, are 9 working diligently on this matter. As Cat previously 10 mentioned, the internal workgroup has representation 11 from Lottery Operations, the Office of the Controller, 12 Legal Services, as well as Cat's own participation 13 from Internal Audit. 14 That brings you up to date on the 15 matter. We will be bringing this item back to you at 16 a future Commission meeting for your consideration. I 17 would be happy to try and answer any questions that 18 you might have, and I know that GTECH personnel are in 19 attendance this afternoon, and they're available if 20 you have any questions for them. 21 CHAIRMAN COX: Catherine, do you have 22 any feeling at all that there are any rough edges with 23 the SAO over this delay? 24 MS. MELVIN: No, I have not. I spoke 25 with our contact manager, Mr. Michael Apperley, and I 0230 1 believe he was the project manager on that specific 2 audit also, and he did not indicate any -- or he did 3 not express any specific concern to me. I did discuss 4 with him that we have -- the agency has revised the 5 implementation date. He was very amenable to sending 6 a staff member or attending himself the next meeting 7 of the group and, in fact, intended to come today. 8 CHAIRMAN COX: Okay. This is a problem 9 that can't be solved. This is a problem that can be 10 mitigated and disclosed. So what we're working toward 11 right now is -- Gary, are we still working on 12 mitigation or are we just getting down to what will be 13 disclosed? 14 MR. GRIEF: We're still working on 15 mitigation. 16 CHAIRMAN COX: Okay. And do you 17 anticipate that anything significant will come between 18 now and October when we report back to the SAO on 19 further mitigating and reducing this risk? 20 MR. GRIEF: Chairman, I just don't know 21 yet. It's too early to tell. 22 CHAIRMAN COX: Okay. 23 Well, Mr. Chairman, as Gary indicated, 24 Director Sadberry and I met with the CEO of GTECH and 25 emphasized to him the importance of this. And he 0231 1 assured us that he would have his top resources 2 working on it. So I guess we're doing everything we 3 can. 4 COMM. CLOWE: I think so. 5 CHAIRMAN COX: Director Sadberry, would 6 you agree that we're doing everything we can? 7 MR. SADBERRY: I would, Chairman. And 8 if I may add, Mr. Turner had agreed to appear before 9 the Commission this week at the original scheduled 10 date of Wednesday -- I think that's March 21st -- and 11 the meeting was rescheduled at my request, because of 12 other commitments, and he could not -- he had a 13 conflict on that. But he has committed to be present 14 at the April meeting, and we look forward to that. 15 I would concur with Catherine Melvin 16 that I asked for this report so that you would be 17 updated and the record would reflect what we are 18 doing, particularly in light of the fact that I have 19 been asked directly by the Senate Finance Committee in 20 open session, as well as we've responded by letter. 21 And we anticipate amending that letter. So it's a 22 matter, obviously, of interest to the Legislature. 23 This is a -- you're correct, Chairman. 24 This is a challenging problem. And it in my mind 25 tracks in both the direction of technology as well as 0232 1 policy. And particularly, as you've heard, disclosure 2 to the public, which is important of what we want to 3 do. And I know a legal referral has been issued that 4 I believe to be helpful to the group. 5 I want to compliment this group for its 6 work, and I want you to know they've been diligent. 7 I've attended a number of these meetings and heard 8 directly some of the challenges. And I think it also 9 reflects, as Cat mentioned, the ongoing relationship 10 that we have with the Auditor's office. 11 We are virtually complete -- I don't 12 want to overstate the record -- but if not absolutely 13 complete, virtually substantially complete with all 14 pending items and all of the various audit phases. 15 And, as you know, that's what was going on when I got 16 here. 17 And the combined and collection efforts 18 of Cat's office, Gary and Kathy -- and not to leave 19 anybody out, you know, the legal staff and everyone 20 else -- we I believe have a good rapport. And the 21 Auditor's office not only understands, in my mind, the 22 challenge we have on this but they're willing to 23 participate to help us address it. And I think that's 24 the highest form of recognition of our good faith; and 25 diligent efforts of all the audit implementation and 0233 1 the relationship and rapport that we've developed with 2 the Auditor's office. 3 So I compliment staff in that regard. 4 And I agree and assure you the original date was made 5 in good faith and we intended to keep it. We are now 6 significantly beyond that, which any time that occurs, 7 I'm going to want to make sure you understand that and 8 that you not be caught by surprise or that we not be 9 caught by surprise or having no comment on the record 10 about it. I am convinced that we will move forward 11 and we will get to the bottom of it one way or another 12 and get some resolution, the best we can get under the 13 circumstances. 14 CHAIRMAN COX: I may be confusing one 15 report with another, but I believe that I'm still 16 receiving reports on the implementation of the State 17 Auditor's recommendations that go on to page-after- 18 page-after-page. I wonder if we might now at this 19 point abridge that to only open items? 20 MR. SADBERRY: Certainly could. I can't 21 see there being a problem with that because we have 22 been so consistent. And they go out monthly. We made 23 that commitment to the Licensing Committee, and that 24 has been kept. So they have a pretty good idea. 25 For example, just to use an example, the 0234 1 ombudsman position, and that was implemented a year 2 ago, and everybody knows that. So I'm sure we would 3 not lose the effectiveness of the report. In fact, it 4 might help, in reading the report, to have an abridged 5 version that doesn't leave out any important 6 information but does help the reader use it in a 7 meaningful way. 8 And we can look into that, Gary. Sheila 9 has been very helpful. 10 CHAIRMAN COX: Something that thick 11 causes one to say, "Now, why am I reading this?" And 12 all they're really going to glean is what they've 13 already learned, which is that there's only one item 14 left. 15 MR. SADBERRY: Well, I believe there's 16 bolded language that helps the reader. But still 17 there is a lot of repetition in the language itself. 18 You know, I'll confer with Gary to make sure we're not 19 losing -- Kathy -- make sure we're not losing any 20 effectiveness. Or, you know, we may have a new member 21 of the committee who hasn't seen it, and we don't want 22 to take a chance that we will disadvantage that 23 member. 24 CHAIRMAN COX: Anything else on that? 25 COMM. CLOWE: Thank you. 0235 1 CHAIRMAN COX: Okay. I would like to 2 acknowledge that Scott Gunn, the Regional Vice 3 President of GTECH responsible for this area, came to 4 this meeting today to address if we had any questions 5 for him, this agenda item and the agenda item on 6 closing games. And I want to thank Scott for being 7 here. 8 And, Scott, do you have anything you 9 would like to say? 10 MR. GUNN: No, sir, Mr. Chairman, unless 11 you have some questions. 12 CHAIRMAN COX: Thank you very much. 13 MS. WOELK: Chairman, did you mean to 14 skip Item XIV? It's the Lotto Texas procedures. 15 CHAIRMAN COX: Yes. 16 MS. WOELK: Okay. 17 CHAIRMAN COX: No, I didn't. I also 18 skipped Item XV, but Chairman Clowe reminded me of 19 that one. And thank you for reminding me of Item XIV. 20 AGENDA ITEM NO. XIV 21 CHAIRMAN COX: Item XIV, consideration 22 of and possible discussion and/or action on the Lotto 23 Texas procedures. 24 Ms. Pyka. 25 MS. PYKA: Thank you, Mr. Chairman. For 0236 1 the record, Kathy Pyka, Controller. 2 Commissioners, last month you approved 3 the following procedures related to Lotto Texas: 4 Procedure OC-JE-002, Lotto Texas jackpot estimation; 5 Procedure OC-WP-003, Lotto Texas jackpot payment and 6 investment; and Procedure OC-WP-001, processing prize 7 payment. 8 As noted in our meeting last month, 9 audit report on Lotto Texas activities performed by 10 the State Auditor's office included a recommendation 11 that procedures affecting Lotto Texas players be 12 presented in a public Commission meeting for approval 13 The report also included a 14 recommendation that upon approval of the procedures, 15 the procedures be made available to the public by 16 posting them both on our website and in the Texas 17 Register. 18 In accordance with the audit report 19 recommendations, the Lotto Texas procedures, the three 20 I've identified, were placed on the Commission website 21 on February 22, 2007. The procedures were removed 22 from the Commission's website on February 28, 2007, 23 upon determination that information contained within 24 the procedures is confidential by law, because it goes 25 to the security of the lottery. 0237 1 It is recommended that the original 2 procedures that were presented to you and approved on 3 February 21, 2007, be made available to the public by 4 publishing a redacted version of the approved 5 procedures in the Texas Register and on our website. 6 The redacted information is the information that is 7 confidential by law. 8 This information will not be made 9 available to the public. This will allow our agency 10 staff to utilize the unredacted version of the 11 procedures in their daily tasks, while providing the 12 public a redacted version that excludes the 13 information confidential by law. 14 I have reached out to the Lotto Texas 15 audit manager with the State Auditor's office, Michael 16 Apperley, to update him on the publication of the 17 redacted version of the procedures. Michael was 18 supportive of using a redacted version of the 19 procedures and asked that we include a statement on 20 our website explaining why certain portions of the 21 procedure are redacted. And I would propose that we 22 do include a statement explaining that. 23 This includes my presentation. I would 24 be happy to answer any questions. 25 CHAIRMAN COX: What action would you 0238 1 like from us, Kathy? 2 MS. PYKA: I would like approval from 3 the Commission to publish the redacted versions of the 4 three Lotto Texas procedures on our website and in the 5 Texas Register. 6 CHAIRMAN COX: So moved. 7 COMM. CLOWE: Seconded. 8 MS. PYKA: Thank you, Commissioners. 9 CHAIRMAN COX: Is there any further 10 discussion? 11 All in favor, say "Aye." 12 COMM. CLOWE: Aye. 13 CHAIRMAN COX: Aye. 14 Motion passes 2-0. 15 MS. PYKA: Thank you. 16 CHAIRMAN COX: Okay. Sarah, if I read 17 correctly, we are now on Item XIX? 18 MS. WOELK: Did we do XVIII, Mega 19 Millions? 20 CHAIRMAN COX: No. I checked it off 21 because I was going to call it when you told me to 22 call XIV. 23 MS. WOELK: Okay. 24 25 0239 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Okay. XVIII. Item 3 XVIII, report, possible discussion and/or action on 4 the Mega Millions game and/or contract. 5 Director Sadberry. 6 MR. SADBERRY: Commissioners, Anthony 7 Sadberry, Executive Director. 8 I attended the Mega Millions directors 9 meeting in Detroit, which convened in an informal 10 session Tuesday evening, carried over to a formal 11 session Wednesday. 12 You might recall included among certain 13 proposals that Prof. Busald had made to the Commission 14 and the Commission and staff had made recommendations, 15 and the Commission had responded to those, was a 16 proposal that we take to the Mega Millions directors, 17 the concept of advertising the cash value option on 18 their website. 19 Staff, at my request, assembled 20 documentation on that, and we made that presentation. 21 And the directors approved the resolution to do so 22 unanimously. So that will be taken care of, and I'm 23 sure at some point staff will communicate to Prof. 24 Busald in that regard. 25 Very generally, additional items related 0240 1 to the potential venture in one form or another with 2 the Powerball and MUSL group and the Mega Millions 3 group, sales initiatives, and the participation of the 4 directors at a spring meeting in Annapolis, Maryland 5 to address all these issues again, including the 6 possibility of a national game, either by the Mega 7 Millions directors separately -- or the Mega Millions 8 states separately -- or in combination with the MUSL 9 group. 10 And those items on the table now will 11 tell you my sense of it is that, you know, there is no 12 particular push about it. I think the concept is stay 13 with us, just now looking at the practicalities 14 involved in this, so I view that as a significant step 15 forward. 16 If I may, I will sort of update the 17 record. You might recall about a year ago, a little 18 less than a year ago, I attended my first Mega 19 Millions meeting, and we had certain issues that had 20 been vetted previously by Gary and others regarding 21 the entireties clause and other positions, Texas' 22 entitlement to participate in more than one multi- 23 state game, et cetera. 24 And as had been the case prior to my 25 attendance, I received a certain reception that I 0241 1 reported to you on at that meeting. In my estimation, 2 the meeting that recently occurred was the exact 3 opposite in the terms of protocol and synergism that 4 existed among the directors as we went about 5 conducting business. That is what I had hoped for. 6 We've achieved that level of conducting business. 7 I go back to your bingo discussion about 8 the advisory committee. We didn't all agree on every 9 issue, but the healthy disagreement was done in a very 10 professional manner. And I was very pleased with 11 that, and I'm taking that to be an indication on a 12 going-forward basis of what we can expect in terms of 13 our participation in this game. 14 So overall, I believe it was a very 15 productive trip, particularly in regard to the 16 adoption of our recommended proposal on the cash value 17 option. 18 CHAIRMAN COX: Thank you, Director 19 Sadberry. 20 AGENDA ITEM NO. XIX 21 CHAIRMAN COX: Item XIX, report, 22 possible discussion and/or action on GTECH 23 Corporation. 24 Director Sadberry. 25 MR. SADBERRY: Commissioners, you have 0242 1 in your notebook points which I will read for the 2 record. They are brief. I will give you a brief 3 update on the most recent activity involving GTECH 4 consultants. 5 In their March report, GTECH reported 6 the employment of two new consultant firms. Both 7 firms were retained to provide services in Vienna. In 8 analyzing the March report, it was found that two 9 previously listed consultant firms had been omitted 10 from the March report. 11 A follow-up inquiry was made to GTECH 12 asking the reason for the omissions and why there had 13 been no explanation provided in the report. GTECH 14 replied that one of the two omitted firm's contract 15 had expired and the second firm's contract had been 16 terminated. GTECH explained that because one contract 17 was an expiration and not a termination, they had not 18 included the change in their report. They have agreed 19 to include all future contract expirations in the 20 monthly consultant reports. 21 Regarding the failure to report the 22 terminated contract, GTECH conceded it was an 23 oversight on their part. They apologized for the 24 oversight and said they would take steps to ensure 25 that it does not occur in the future. 0243 1 The steps implemented by GTECH to 2 prevent future oversights or to require both the 3 Global Business Development Department and their 4 Public Affairs Department to report all new government 5 relations contracts and all terminated or expired 6 governmental relations contracts to their Legal 7 Department. The new procedure creates a redundant 8 reporting system to ensure all changes in the status 9 of GTECH government consultants will be reported in 10 the monthly report provided to the Texas Lottery 11 Commission. 12 And I'll add, Commissioners, that at 13 your direction earlier, we have continued to maintain 14 what I refer to as the GTECH protocol committee, 15 participated in by the Department of Public Safety, 16 the Attorney General's office and our staff, 17 Enforcement Directive. And we recently held a meeting 18 which all persons attended, which I believe continues 19 to be a very productive exercise. And we continue to 20 keep that group updated on any information that we 21 feel to be important. 22 And as you've heard in a number of other 23 reports, questions that were asked by members of the 24 Legislature and various meetings that we've attended, 25 those have included questions in general about GTECH. 0244 1 And staff has assisted greatly in our being able to 2 respond to those questions. 3 CHAIRMAN COX: Thank you, Director 4 Sadberry. 5 Now, Sarah, Bill Deane was here and now 6 he isn't. 7 MS. WOELK: He has been notified to 8 return. 9 CHAIRMAN COX: Okay. Until such time as 10 he does, why don't we go ahead and complete the rest 11 of the agenda, if that's okay with you, and then a lot 12 of people can go work. 13 AGENDA ITEM NO. XXII 14 CHAIRMAN COX: Okay. Item No. XXII. 15 Sarah, are you ready to deal with -- or Kristen? Who 16 is going to deal with the cases? 17 MS. WOELK: Kristen. 18 MS. MITCHELL: Good afternoon, 19 Commissioners. I have the orders for entry for each 20 of these cases. 21 CHAIRMAN COX: If you would identify 22 yourself, Kristen. 23 MS. MITCHELL: My name is Kristen 24 Mitchell, Enforcement attorney for the Lottery 25 Commission. 0245 1 I would like to take up Items A through 2 G first of all. In each of these seven case, the 3 lottery retailer failed to have sufficient funds in 4 their account. Staff is recommending you adopt the 5 proposal for a decision issued in each of these cases 6 and that you revoke each of the licenses in Items A 7 through G. 8 COMM. CLOWE: Move the adoption of the 9 staff recommendation. 10 CHAIRMAN COX: Second. 11 Any further discussion? 12 All in favor, say "Aye." 13 COMM. CLOWE: Aye. 14 CHAIRMAN COX: Aye. 15 Motion passes 2-0. 16 MS. MITCHELL: And now I would like to 17 take up Items H and I. These are mass docket cases. 18 All of the 13 individuals named under Item H are 19 currently on the registry of approved bingo workers. 20 Each of these individuals has a disqualifying 21 conviction. And the ALJ has entered a proposal for a 22 decision, making findings and conclusions that these 23 individuals are not qualified to remain on the 24 registry. 25 COMM. CLOWE: Move the adoption of the 0246 1 staff recommendation. 2 MS. MITCHELL: Okay. Thank you. 3 CHAIRMAN COX: Second. 4 MS. MITCHELL: Each of these orders, we 5 are recommending the removal of the individuals from 6 the registry. 7 On Item I, these are similar cases, 8 except it concerns individuals seeking to be placed on 9 the registry. They've applied; however, they each 10 have disqualifying convictions. And the ALJ has 11 issued a proposal for a decision recommending that 12 they not be placed on the registry. And staff is 13 recommending the adoption of the orders that would 14 allow the denial of their applications. 15 COMM. CLOWE: Move the adoption of the 16 staff's recommendation. 17 CHAIRMAN COX: Second. 18 Motion has been made and seconded. Is 19 there any further discussion? 20 All in favor, say "Aye." 21 COMM. CLOWE: Aye. 22 CHAIRMAN COX: Aye. 23 Motion passes 2-0. 24 MS. MITCHELL: This concluded the 25 presentation of these orders. Thank you. 0247 1 CHAIRMAN COX: Thank you. 2 AGENDA ITEM NO. XXIII 3 CHAIRMAN COX: And while we're signing 4 those orders, Item XXIII, report by the Executive 5 Director and/or possible discussion and/or action on 6 the agency's operational status, activities relating 7 to the Charitable Bingo Operations Division, agency 8 procedures, status of staff review of agency practice 9 concerning receipt of IRS Form 5754, that being a 10 statement by a person receiving gambling winnings, and 11 FTE status. 12 Director Sadberry. 13 MR. SADBERRY: Chairman, a number of 14 these items have already received comment. I'll just 15 say for the record that in your books, you have 16 written reports which my oral report will not change. 17 I refer you to those. 18 And I will just, for the record, 19 indicate by separate category they include GTECH. And 20 Bruce Turner was already mentioned. 21 The IRS Form 5754, which has been the 22 subject of some legislative inquiry, and staff is 23 looking at that issue for a recommendation to my 24 office. 25 The group purchase or pooling 0248 1 arrangement, which was the subject of questions at one 2 of the Senate Finance Committee hearings, which we 3 responded to by letter indicating staff would look at; 4 that and make a recommendation to my office, which is 5 being done. 6 And, finally, the FTE status report. 7 That concludes my report, Commissioners. 8 I would be happy to answer any questions. 9 CHAIRMAN COX: All right. Thank you, 10 Director Sadberry. 11 Sarah, have we completed the agenda but 12 for the executive session? 13 MS. WOELK: Yes -- well, did you ask for 14 public comment, general public comment? 15 CHAIRMAN COX: Thank you. 16 AGENDA ITEM NO. XXIV 17 CHAIRMAN COX: Okay. Item XXIV, public 18 comment. Is there anyone wishing to make public 19 comment? 20 Okay. Sarah, you don't have any witness 21 affirmation forms? 22 MS. WOELK: No. 23 CHAIRMAN COX: Okay. There is no public 24 comment. 25 COMM. CLOWE: Okay, Sarah, I know you 0249 1 gave it to me. 2 CHAIRMAN COX: Are you ready to go into 3 executive session? 4 COMM. CLOWE: Yes, sir. 5 AGENDA ITEM NO. XX 6 CHAIRMAN COX: At this time, I move the 7 Texas Lottery Commission go into executive session: 8 A. To deliberate the duties and 9 evaluation of the Executive Director, Deputy Executive 10 Director and Internal Audit Director, deliberate the 11 duties, appointment and/or employment of the 12 Charitable Bingo Operations Director, deliberate the 13 duties, appointment and/or employment of an Acting 14 Charitable Bingo Operations Director, and to 15 deliberate the duties of the General Counsel, pursuant 16 to Section 551.074 of the Texas Government Code, to 17 receive legal advice regarding pending or contemplated 18 litigation pursuant to Section 551.071(1)(A) and/or to 19 receive legal advice regarding settlement offers 20 pursuant to Section 551.071(1)(B) of the Texas 21 Government Code and/or to receive legal advice 22 pursuant to Section 551.071(2) of the Texas Government 23 Code, including but not limited to: 24 Cynthia Suarez versus Texas Lottery 25 Commission 0250 1 Shelton Charles versus Texas Lottery 2 Commission and Gary Grief 3 Stephen Martin versus Texas Lottery 4 Commission 5 Patsy Henry versus Texas Lottery 6 Commission 7 First State Bank of DeQueen, et al. 8 versus Texas Lottery Commission 9 Employment law, personnel law, 10 procurement and contract law, 11 evidentiary and procedural law and 12 general government law 13 Mega Millions game and/or contract. 14 Is there a second? 15 COMM. CLOWE: Second. 16 CHAIRMAN COX: All in favor say "Aye." 17 COMM. CLOWE: Aye. 18 CHAIRMAN COX: Aye. The vote is 2-0. 19 The Texas Lottery Commission will go into executive 20 session. The time is 2:19 p.m. Today is March 23, 21 2007. 22 (Off the record: 2:19 p.m. to 3:50 23 p.m.) 24 25 0251 1 AGENDA ITEM NO. XXI 2 CHAIRMAN COX: The Texas Lottery is out 3 of executive session. The time is 3:50 p.m. 4 Is there any action to be taken as a 5 result of executive session? 6 Mr. Deane? 7 MR. DEANE: Yes. 8 CHAIRMAN COX: You have a matter that 9 you would like to present to this Commission? 10 MR. DEANE: I do, sir. 11 Chairman, the -- 12 CHAIRMAN COX: Would you identify 13 yourself, please, sir. 14 MR. DEANE: I'm sorry? 15 CHAIRMAN COX: Would you identify 16 yourself. 17 MR. DEANE: Oh, I'm sorry. It's William 18 T. Deane. I'm an Assistant Attorney General. 19 The case that we're here on today is the 20 Patsy Henry versus Texas Lottery Commission case. We 21 have been to a mediation in that case. And, as a 22 result of that mediation, we're going to be -- the 23 Attorney General's office is making a recommendation 24 of settlement. 25 This case involves an employee, a former 0252 1 employee of the Commission who worked here from 2 November 22 of 1999 through November 30th of 2001, as 3 the Deputy beneath Linda Cloud when Linda Cloud was 4 here. And she has filed a lawsuit for whistle-blower 5 and gender discrimination. 6 And, as a result of the mediation, we 7 are recommending a settlement of that case on terms of 8 $35,000 cash and a neutral letter of recommendation 9 for her, based on her work performance. And at this 10 time, the Attorney General's office is requesting that 11 settlement from the Commission. 12 COMM. CLOWE: Let's see, Mr. Deane, if 13 we have this correct. This is in regard to a lawsuit 14 filed by Ms. Patsy Henry? 15 MR. DEANE: That's correct, sir. 16 COMM. CLOWE: And she was an employee 17 here from the years 1999 through 2000? 18 MR. DEANE: 2001. 19 COMM. CLOWE: 2001? 20 MR. DEANE: Yes, sir. 21 COMM. CLOWE: And during that time, she 22 served in the capacity of Deputy Executive Director? 23 MR. DEANE: That's correct. 24 COMM. CLOWE: Now, did she hold that 25 office during that entire time that she was here? 0253 1 MR. DEANE: That was my understanding, 2 yes, sir. 3 COMM. CLOWE: And the lawsuit that 4 Ms. Henry filed against the agency was as a whistle- 5 blower and for gender discrimination. Is that 6 correct? 7 MR. DEANE: That's correct. 8 COMM. CLOWE: And you're recommending a 9 settlement of $35,000? 10 MR. DEANE: Yes, sir. 11 COMM. CLOWE: Now, does that include 12 lawyers' fees and all expenses that the Commission 13 would pay out? 14 MR. DEANE: Yes, sir. In fact, all 15 costs of court would be paid by each side. So 16 basically the Plaintiffs would pay all of their costs 17 in the case. Yes, sir, that's correct. 18 COMM. CLOWE: Now, is that a settlement 19 of both of these actions or -- 20 MR. DEANE: Yes, sir, it is. Actually, 21 the whistle-blower case got appealed. We won a 22 summary judgment on that. And the other side appealed 23 that, and the Court of Appeals affirmed it. So that 24 was a matter of law that there was no whistle-blower 25 liability of the Commission. So that is basically off 0254 1 the table and out of the case. 2 COMM. CLOWE: All right. And you 3 mentioned letters. What's the story on those? 4 MR. DEAN: Yes, sir. She just wanted a 5 letter from the Commission showing that she 6 contributed to the Commission during the two years 7 that she was here. She had a good record of 8 employment up until the end, in the time period that 9 she worked with Linda Cloud. And so she just wanted a 10 letter reflecting her performance and her 11 contributions to the Commission during that time 12 period. 13 And that's not unusual in settlements of 14 lawsuits. We get what we call a neutral letter. It's 15 not a strong letter of recommendation but a neutral 16 letter of recommendation, if the file supports it. 17 And in this case, it does, so it would be justified. 18 COMM. CLOWE: Mr. Chairman, I was on 19 this board during the time of Ms. Henry's employment 20 and I know her. I've had legal advice from Mr. Deane. 21 And my sense is that this proposed settlement by the 22 Attorney General is a fair and reasonable proposal. 23 And I see no reason, if you would be satisfied, based 24 on the information that he's given us here, and his 25 legal advice, to not go forward with this settlement. 0255 1 So I would be prepared to, at your pleasure, make that 2 motion. 3 CHAIRMAN COX: All right. 4 COMM. CLOWE: I move that we accept the 5 Attorney General's recommendation for settlement of 6 this lawsuit, this action. 7 CHAIRMAN COX: Second. 8 Mr. Deane, is that motion going to be 9 satisfactory? 10 MR. DEANE: Yes, sir. 11 CHAIRMAN COX: Okay. Any further 12 discussion? 13 COMM. CLOWE: No, sir. 14 CHAIRMAN COX: All in favor, say "Aye." 15 COMM. CLOWE: Aye. 16 CHAIRMAN COX: Aye. 17 Motion passes 2-0. 18 Thank you very much, Mr. Deane. 19 MR. DEANE: Yes, sir. Thank you. 20 COMM. CLOWE: And if you have those 21 letters -- 22 MS. WOELK: Did we lose Jennifer? 23 COMM. CLOWE: -- I think we ought to 24 sign them while we're in session. 25 Is there any further action to be taken 0256 1 as a result of executive session? 2 There is not. 3 AGENDA ITEM NO. X (continued) 4 CHAIRMAN COX: We have the letters to 5 sign. 6 And, Sarah, hopefully also we have the 7 form of the policy motion that Chairman Clowe made and 8 the rule motion that Chairman Clowe made. 9 MS. WOELK: Deanne, did you bring copies 10 down for them? 11 MS. RIENSTRA: I only brought that one 12 for you to look at. 13 MS. WOELK: Okay. Then I will hand it 14 to . . . 15 I think Deanne has redrafted the rule to 16 incorporate -- to make the language more closely match 17 the language in Sen. Patrick's bill and add the few 18 details that -- 19 MS. RIENSTRA: Correct. 20 CHAIRMAN COX: Where? 21 MS. RIENSTRA: Specifically in Parts (A) 22 and (B). 23 CHAIRMAN COX: Okay. How do we deal 24 with this? Are you going to read the changes? How 25 are we going to get them on the record, Deanne? 0257 1 MS. RIENSTRA: I can read them out loud 2 for you, the changes. From what I presented earlier, 3 I removed Parts (A), (B) and (C) and replaced them 4 with the following: 5 Part (A): "The procedure shall provide 6 for the timely closing of an instant game after all 7 top level prizes in the game have been claimed or on 8 an earlier date, as determined by the Executive 9 Director." 10 And (B): "The procedure shall provide 11 for ending ticket sales in an instant game no later 12 than the 46th day after game closing procedures have 13 been initiated." 14 CHAIRMAN COX: Is that the spirit of 15 your motion? 16 COMM. CLOWE: Yes, sir, it is. 17 CHAIRMAN COX: Okay. Do we need to do 18 anything further? 19 MS. WOELK: I think it would be helpful 20 if you just went ahead and made a motion to propose 21 this draft for publication. 22 COMM. CLOWE: Publish this for comment? 23 MS. WOELK: Yes. 24 COMM. CLOWE: So move. 25 CHAIRMAN COX: Second. 0258 1 Is there any further discussion? 2 COMM. CLOWE: No, sir. 3 CHAIRMAN COX: All in favor, say "Aye." 4 COMM. CLOWE: Aye. 5 CHAIRMAN COX: Aye. 6 Motion passes 2-0. 7 MS. RIENSTRA: Thank you. 8 CHAIRMAN COX: And the policy is as 9 Chairman Clowe read it when he initially made his 10 motion. 11 MS. WOELK: Yes. I think that's clear 12 in the record. 13 AGENDA ITEM NO. XXV 14 CHAIRMAN COX: Okay. Is there any 15 further business to come before the Commission? 16 Meeting is adjourned. 17 Thank you, sir. 18 COMM. CLOWE: Thank you, sir. 19 (Meeting adjourned: 3:57 p.m.) 20 21 22 23 24 25 0259 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 6th day of April 2007. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25