1 1 2 3 * * * * * * * * * * * * * * * * * 4 5 TEXAS LOTTERY COMMISSION 6 MEETING 7 8 JANUARY 8, 2002 9 10 * * * * * * * * * * * * * * * * * 11 12 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 8TH of JANUARY, 20 2002, from 8:30 a.m. to 1:30 p.m., before Brenda J. 21 Wright, RPR, CSR in and for the State of Texas, 22 reported by machine shorthand, at the Offices of the 23 Texas Lottery Commission, 611 East Sixth Street, 24 Austin, Texas, whereupon the following proceedings 25 were had: WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 2 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. Walter H. Criner, Sr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Executive Director: Ms. Linda Cloud 9 Charitable Bingo Operations Director: 10 Mr. Billy Atkins 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 3 1 INDEX 2 3 Appearances...................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................... 4 6 Item Number 2.................................... 34 Item Number 3.................................... 84 7 Item Number 4.................................... 84 Item Number 5.................................... 87 8 Item Number 6.................................... 62 Item Number 7.................................... 89 9 Item Number 8.................................... 103 Item Number 9.................................... 121 10 Item Number 10................................... 124 Item Number 11................................... 4 11 Item Number 12................................... 56 Item Number 13................................... 125 12 Executive Session................................ 128 Item Number 15................................... 129 13 Item Number 16................................... 130 Item Number 17................................... 137 14 Item Number 18................................... 141 Item Number 19................................... 144 15 Item Number 20................................... 145 16 Reporter's Certificate........................... 146 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 4 1 JANUARY 8, 2002 2 3 CHAIRMAN CLOWE: Good morning. It is 4 8:30 and I would like to call the Texas Lottery 5 Commission meeting to order. My name is Tom Clowe. 6 Commissioner Whitaker and Commissioner Criner are 7 here. We have a complete commission and we're ready 8 to go forward with the agenda. 9 I would like to, in deference to those 10 who are here to make presentations, move immediately 11 to item number 11, which is, consideration of and 12 possible discussion and/or action, including proposal 13 of amendments, on 16 TAC 401.70 -- 307 rather, 14 relating to Pick 3 on-line game. 15 I think there are some individuals here 16 from the Gtech Corporation who would like to make a 17 presentation to us. 18 MS. CLOUD: Commissioners, I would like 19 for Robert Tirloni to come up and make some 20 introductions -- 21 CHAIRMAN CLOWE: Okay. Good. 22 MS. CLOUD: -- for Gtech. 23 CHAIRMAN CLOWE: Good morning, Robert. 24 MR. TIRLONI: Good morning. 25 Good morning, Commissioners. For the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 5 1 record, my name is Robert Tirloni. I am the on-line 2 product manager in the Lottery's marketing division. 3 Commissioners, in an effort to increase 4 sales and revenue to the State of Texas, we are 5 constantly analyzing our on-line game product mix and 6 looking for opportunities to enhance our existing 7 games, and when necessary, replace a game. Recent -- 8 recent examples of our efforts have been the Lotto 9 Texas matrix change in July of 2000 and the 10 replacement of the "Texas Million" game with our 11 newest on-line game, Texas Two Step, in May of 2001. 12 The decision to come before the 13 Commission with a recommendation for a game change is 14 one that is analyzed thoroughly by Lottery staff. As 15 the on-line product manager, I am kept abreast of game 16 enhancements and new game opportunities and 17 developments by the Lottery marketing division of 18 Gtech and by Gtech Texas management, as is our 19 Executive Director. Recommendations from Gtech are 20 discussed, and if possible, other states that have 21 implemented similar changes are contacted. 22 Any matrix changes or new game matrices 23 that are submitted by Gtech for possible 24 implementation in Texas are sent to Doctor Randall 25 Eubank, the Lottery's independent statistical WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 6 1 consultant. Doctor Eubank performs his analysis and 2 prepares a written response for the commission stating 3 his findings. In the past, numerous conference calls 4 have been conducted with Doctor Eubank and Gtech, both 5 participating, to discuss issues and to provide Doctor 6 Eubank with additional information he required to 7 complete his analysis. 8 When major game initiatives are being 9 considered, focus groups are held in different cities 10 around the state to gain input from our players and, 11 in some cases, our retailers. The staff takes into 12 careful consideration how an on-line game change will 13 affect our other products, and we always strive to 14 ensure that such a change complements the current 15 product mix that we already have in place. 16 This process which I just briefly 17 described is not a short one, and it can take up to 18 six months from the inception of an idea to me sitting 19 before you as I am today with the proposed 20 recommendation. 21 Today we are here to discuss the only 22 game in the Commission's entire portfolio which has 23 seen a sales increase every year since it was 24 introduced in October of 1993. And that game is the 25 Lottery's Pick 3 game. With that, Mr. John Cadigan, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 7 1 vice-president of Gtech Lottery Marketing, is here to 2 talk about our recommendation of implementing a Pick 3 3 day draw. And this day draw is in addition to our 4 existing Pick 3 night draw. 5 And after Mr. Cadigan's presentation, 6 I'll be happy to answer any questions that you may 7 have. 8 MR. KING: For the record, I'm Larry 9 King, the account general manager for Gtech Texas, and 10 we've got a short presentation today. If you have any 11 questions during the presentation, feel free to stop 12 us. 13 MR. CADIGAN: For the record, my name 14 is John Cadigan. I'm with Gtech Corporation. I'm 15 Vice-president of Lottery Marketing. I will make the 16 base presentation on the Pick 3 recommendation midday 17 draw, but I've also brought along some slides to -- 18 for your convenience, to inform you as to a couple of 19 hot issues in the industry, what other lotteries are 20 considering going forward. 21 Larry did tell me to lose the Boston 22 accent and to speak slowly. Perhaps that's the end of 23 the presentation. I'm not sure. 24 Okay. The subject is the midday draw. 25 What I would like to do here over the next several WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 8 1 minutes is talk about what it is, and I think Bob has 2 provided us that, where it's offered, what other -- 3 what other states have implemented this game 4 enhancement to the Pick 3 product, how is it performed 5 in those jurisdictions, and on that basis, what is the 6 projection, what can we expect if we move to a midday 7 draw here in Texas. 8 To set the table, perhaps, a review of 9 where lottery is offered in the United States and as a 10 segue into Pick 3. Lottery is offered just about in 11 most jurisdictions, states with Lottery in the lighter 12 blue here. There are ten states within the 13 continental United States that are currently not 14 offering lottery, although you'll probably see 15 activity in the next three to four years in Tennessee, 16 North Carolina, and Oklahoma. Hawaii is also 17 considering a lottery but has been doing so for many 18 years. 19 Within that family of lottery states, 20 the majority, the vast majority, offer the Pick 3 21 product. South Carolina just came up with a lottery 22 in the last few weeks, and they will be offering a 23 Pick 3 product at some point. 24 When you look at the Pick 3 product, 25 you see a marked difference in performance, basically, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 9 1 right down the United States on the Mississippi River. 2 And we divide that east versus west. And I'm going to 3 present this slide here. Again, performance of the 4 Pick 3 game from jurisdiction to jurisdiction on a per 5 capita basis. You use a per capita estimate or figure 6 here because you are comparing various populations to 7 various sales levels. So it's sort of a normalization 8 of the data. 9 And what you can see here in the 10 eastern half of the United States, literally right 11 down the Mississippi River, you see jurisdictions with 12 a Pick 3 product that really have high penetration or 13 per capita levels for the most part. And this is 14 predominantly, for the most part, true because when 15 on-line lottery started in this country in 1975, they 16 started with the Pick 3 product in the northeast 17 quadrant of the United States. So it was a base game 18 that has got tremendous popularity. 19 West of the Mississippi, you have less 20 penetration in terms of per capita performance, but 21 you can be proud of the Texas penetration of a 20 cent 22 per cap. And it is number one west of the 23 Mississippi. 24 Go ahead. 25 I have picked a sample of states here WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 10 1 that have gone to the midday draw as far back as 1993. 2 Actually, D.C. moved to a midday draw sometime in the 3 '80s, abandoned it, and went back to it in '92. And 4 what we're doing here is looking at per capita, weekly 5 per capita performance, 52 weeks pre-midday draw, 52 6 weeks post-midday draw. So for example, prior to 7 putting in the midday draw in the District of 8 Columbia, that lottery was generating with that 9 population of, then, 600,000 people, a per capita of 10 $2.55 per week. Post-midday draw on their Pick 3 11 game, that moved up to almost $3.00, for an 12 increase -- 52-week increase of 17 percent. 13 As you can see, Georgia -- I have 14 ranked these on percent lift, pre versus post. 15 Georgia, an outstanding penetration of $1.48 up to 16 1.66. New York and New Jersey just recently, last 17 month, moved to a midday draw and have experienced, 18 again, good moderate growth. This isn't an 19 enhancement that's going to take your Pick 3 sales 20 level up 50, 60 percent. You're offering this draw a 21 second time during the day. You're going to get 22 somewhere in here a percent similar to these. And 23 we'll get to that projection. 24 Those are the penetration measurements 25 for those jurisdictions and the percents increase we WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 11 1 saw. When it comes to this jurisdiction, it's a good 2 one to work with. I work with a lot of lotteries in 3 the world and certainly in the United States. You 4 should be proud as to how the organizations involved 5 here, the Commission, the Lottery, and others, have 6 moderately grown your business with this lottery, 7 starting back in May of 1992 with the launch of the 8 scratches or instant tickets. And this chart here 9 shows how we -- how you and your vendors have 10 implemented a good succession of game enhancements and 11 new games. 12 Lotto Texas came in, was enhanced with 13 Quick Pick. I didn't run Quick Pick all the way 14 across there. Obviously, it's still an enhancement 15 that's offered. Your Cash 5 -- your relaunch of Pick 16 3, Cash 5 increased -- increases to Cash 5, the cash 17 option on Lotto, your Texas Million game, the matrix 18 change, Texas Two Step. This is a very well-managed 19 game portfolio. Okay? 20 It's time -- when you look at this, 21 though, it's time to take a look at your Pick 3 22 product and say, I've got a product that's growing, as 23 you'll see here in a minute, what can we do with it 24 now. We haven't touched this product in some time. 25 Let's do an enhancement to it. And the obvious one is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 12 1 the midday draw. 2 This is the bit of sales that Bob 3 referenced here. This is the -- the -- since its 4 conception or introduction into the market, the trend 5 line of your Pick 3 product. This should perhaps 6 scare some of you, I would imagine, but it's a normal 7 trend line for a product introduction in our business. 8 You'll see this very precipitous fall from 9 introduction until it find its base, and then it takes 10 off one way or the other as the market accepts it. 11 This is a very good line in our 12 business today. This line has grown roughly five 13 percent per year over the last several years and it's 14 heading in the right direction. Your Pick 3 line is 15 the toughest one to get up or down. It's a good, 16 solid, well-accepted game by a group of players. They 17 love it. They stay with it. That's a good line. 18 When we looked at other jurisdictions 19 that have implemented this enhancement, we didn't have 20 a tremendous swing or variance, if I may, of one state 21 put it in and did 60 percent lift, one state put it in 22 and it lost sales by five percent. What we saw was a 23 real tight fit of performance. And that led us to 24 come forth here with a projection of ten to 15 25 percent. That is, if the Texas Lottery were to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 13 1 implement this midday draw, we feel that you could 2 expect a lift of ten to 15 percent. 3 Now, this chart here demonstrates a 4 lift on your annual sales of 15 percent. And the 5 reason we've got a 15 percent lift up here is, A, we 6 believe you can get there; and B, it includes the ten 7 percent for the midday draw, but five percent for your 8 natural growth, which you're experiencing already. So 9 I feel that that is a good projection, something that 10 you can expect to have happen when you move to a 11 midday draw. Again, it's not a 40, 50 percent. It's 12 not dramatic. But yet it's -- it's not something 13 that's going to generate for your efforts a two or 14 three percent lift in sales. 15 So what are the benefits of doing it? 16 Why are we doing it? The obvious one is the third 17 point here, the good causes, and we'll get to that in 18 a minute. But for retailers, what have we found in 19 other jurisdictions that have implemented a midday 20 draw? Retailers like it for the obvious reason; it 21 increases store traffic. They're trading on a product 22 that puts hands -- money in the hands of players who 23 are winning, it puts money in the hands of retailers, 24 and it generally increases traffic. And that's what 25 we've seen when we've researched this concept with WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 14 1 retailers in other states. 2 Players. One of the -- one of the 3 things that we anticipated originally when states 4 started to move to midday draws was, when a player is 5 playing his number all the time, why would he not play 6 it twice a day, in most of them, and therefore, why 7 wouldn't you get a lift in sales of 50 or 60 percent. 8 Well, we didn't do that. Just some players attached 9 to the midday draw, current players. However, what we 10 did see on the players' side of the aisle here is that 11 you had new players, a handful of new non-Pick 3 12 players coming into your base of Pick 3 play. 13 And the reason of that, as we've come 14 to realize, is that your shopping patterns are not the 15 same for everybody, including Pick 3 players. Okay? 16 So some people are in convenience stores at certain 17 times, new players, and will play and take advantage 18 of this game offering. 19 And the good causes is the obvious one, 20 the education. Here in the Texas system, it's a 21 proven, moderate, tasteful, if I may, revenue 22 increase. 23 I think that concludes the discussion 24 on the Pick 3 modification. I will move -- unless 25 there are some questions, I'll move into something, or WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 15 1 maybe we can have questions at the end. But I've got 2 another handful of slides on what is going on in the 3 business today. 4 The economy in the United States -- 5 I'll spend about five minutes on this and then we'll 6 get to some Q and A. 7 For the last 18 months, I don't have to 8 tell anybody here that Texas, or anywhere else in the 9 United State, for that matter, has slipped somewhat. 10 Certainly, the situation of 9-11 has led, in our 11 business, jurisdictions or states, state lotteries, 12 looking for new sources of revenue to fund state 13 projects. And multi-state is something that I think 14 you all know about. The two offerings or evidences of 15 it in this country consist of a Big Game and 16 Powerball. There are a couple of smaller multi-state 17 configurations, but these are the two of 18 noteworthiness. 19 CHAIRMAN CLOWE: Let me interrupt you 20 just a second, John. 21 Is this under the agenda properly? 22 MS. KIPLIN: I'm looking at the agenda, 23 and I didn't want to interrupt the conversation. In 24 my opinion, we can take it up, not under the item that 25 we're on now, but under item two, possible discussion WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 16 1 and/or action on lottery sales and trends. I think 2 what he's talking about are trends around this -- 3 around the country. 4 CHAIRMAN CLOWE: I agree. But we can 5 go forward. 6 MS. KIPLIN: Yes, you can. I was just 7 going to refrain from interrupting. 8 CHAIRMAN CLOWE: I wanted that stated 9 on the record because we did change subjects. And I 10 think this might be a good time to stop and see if 11 there are any questions from the Commission or others 12 in regard to the proposal concerning Pick 3, if you 13 don't mind. 14 MR. CADIGAN: Absolutely. Let's do 15 that. 16 CHAIRMAN CLOWE: Okay. Commissioners, 17 do you have any questions or comments? 18 COMMISSIONER WHITAKER: Yeah. What is 19 the reason for the split at the Mississippi, west and 20 east? 21 CHAIRMAN CLOWE: Can we have the lights 22 back on, please. 23 MR. CADIGAN: When the lotteries -- you 24 might want to bring that back up, that map of the 25 United States. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 17 1 Lotteries, real quickly, started here 2 in this -- in 1964 and moved on-line in 1975. 3 Lotteries -- the first on-line lottery in the United 4 States, May 1975, New Jersey, moved quickly to New 5 York, Massachusetts, right up in here, then to 6 Illinois and what have you. When these states started 7 their on-line lotteries, they started with a Pick 3 8 game for the most part. In fact, the very first 9 on-line ticket sold in the United States was in New 10 Jersey. It was a Pick 3 game. 11 What you had at that point was quite a 12 bit of acceptance of the Pick 3 game. It was the base 13 game. Lottery was new and players attached to it. 14 Over time, as Lotto games came in and cash games came 15 in and lotteries migrated across the United States, 16 Lotto was the product that came in initially. 17 Certainly, the scratcher products were offered, as you 18 did here in Texas, and then Lotto came in. Pick 3 was 19 considered a tertiary product by lotteries that 20 started later. 21 The Mississippi, it's -- it's kind of 22 a -- not conundrum or what have you, but it's -- it's 23 kind of an interesting demarcation on the performance. 24 It has got nothing to do with the river or anything 25 such as that, but it's just because of the historical WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 18 1 nature of the startup and product introduction. 2 COMMISSIONER WHITAKER: And the ten 3 percent increase, would that be net or gross? 4 MR. CADIGAN: That would be net. 5 COMMISSIONER WHITAKER: Okay. And 6 what -- what are the characteristics of those folks in 7 Texas that will typically buy Pick 3 as opposed to the 8 other products? 9 MR. CADIGAN: A Pick 3 player is 10 someone -- is someone who has a number -- favorite 11 number. Mine, for example, is 8783. I don't play 12 that number, but I look at the number every evening 13 when it comes out. It's a person who has a -- a 14 couple of favorite numbers who's not interested in 15 a -- a set of six numbers for a long odds Lotto game, 16 feels he or she may never win that product -- win that 17 game when offered, but is looking for a prize value 18 somewhere in the several hundred dollar range, 19 something that he or she can do on a daily basis. 20 Catch a number, see a number on a television show or 21 something, or something that catches their fancy, what 22 they play it for, again, a small prize value with 23 lesser odds. 24 This is not -- we're not talking about 25 a game here of odds of one in 20 million. We're WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 19 1 talking here odds of one in several hundred or one in 2 a thousand if you play it straight. So it's someone 3 who has a set of numbers who is kind of religious to 4 those numbers and is not interested in getting into a 5 game that's going to be very long odds with very 6 little chance of winning. 7 CHAIRMAN CLOWE: I don't think 8 Commissioner Whitaker has any of those numbers. I 9 know I don't. 10 For the record, you have made a couple 11 of references to the midday draw. I would like you to 12 state exactly what this proposal involves in changing 13 the draw times. 14 MR. CADIGAN: Would that be better 15 handled by Bob, I wonder. 16 MR. TIRLONI: Basically, Commissioners, 17 our -- in the proposed rule, we're proposing to have a 18 day draw or a midday draw that would take place at 19 12:27 p.m. So terminals would come up at 6:00 a.m. 20 every morning. The retailers have until 12:15 to sell 21 for the Pick 3 day draw. That's when we would go to 22 draw break. We would have our drawing at 12:27, and 23 the Pick 3 game would come back up at 12:30. And 24 retailers would be able to sell the Pick 3 game again 25 until we go to draw break at 9:45 p.m., with the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 20 1 nighttime draw taking place at 9:59. 2 CHAIRMAN CLOWE: And that's a total, 3 then, of how many draws a week. 4 MR. TIRLONI: That would be 12 draws a 5 week, two draws per day Monday through Saturday, no 6 draws taking place on Sunday. 7 CHAIRMAN CLOWE: That's what I wanted 8 on the record. 9 MR. TIRLONI: And also for the record, 10 Bart Sanchez asked me to mention that the fiscal note 11 in the rule is based on a six percent increase in 12 sales. 13 MS. CLOUD: We always try to be as 14 conservative as we can be going into a new product. 15 So Gtech is -- has more history in how this game 16 performs on a midday draw. So hopefully -- we would 17 like to think that their projections would be correct, 18 but we would rather take the conservative approach. 19 CHAIRMAN CLOWE: Do you have any 20 reaction from the retailer group on this proposed 21 change? 22 MR. TIRLONI: We went -- we went out 23 and we spoke to retailers. We went to the cities of 24 Houston and San Antonio in September. We had kind of 25 a mini version of a retailer town hall meeting where WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 21 1 we invited high volume Pick 3 retailers and players. 2 And we discussed the introduction of a day draw with 3 our retailers. Most of them were very receptive to 4 the idea for the reasons that Mr. Cadigan stated. 5 They like the idea of increased traffic in their 6 stores. And also, as Mr. Cadigan stated, they brought 7 up the point that people go into retail locations at 8 different times of the day for different purposes. 9 Typically, right now, you see high Pick 3 sales in the 10 afternoons. People stop to buy their tickets for the 11 nighttime draw. But they felt they might -- that 12 might bring more players into the game that could 13 possibly be stopping in the morning at retail 14 locations, either for gas or for coffee on their way 15 to work. So we might attract a new player to the game 16 that -- that's not currently playing right now. So 17 they were very receptive to the idea. 18 CHAIRMAN CLOWE: And I understand the 19 historical data on per capita penetration speaks to 20 the players generally, but do you have anything 21 specifically from players in the way of reaction to 22 this point? 23 MR. TIRLONI: Most of the players that 24 were also at those meetings, again, were regular Pick 25 3 players, and they expressed an interest that they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 22 1 would -- some of them would play their numbers twice a 2 day. There were other players that said they would -- 3 they would stick with the nighttime draw. And then 4 there were players -- at that group, we also were -- 5 had Cash 5 players present, because we were talking 6 about some possible future modifications to our Cash 5 7 game. And some of those players expressed interest in 8 possibly starting to play Pick 3 with the introduction 9 of a day draw. 10 CHAIRMAN CLOWE: What is the down side 11 to this consideration? What problems have states that 12 have done this experienced? 13 MR. CADIGAN: I don't -- I can't recall 14 a problem of, again, noteworthiness as it relates to 15 the introduction of this product. No state has 16 introduced it and withdrawn it in its current format. 17 And this is a -- you know, when you -- when you offer 18 a product a second time, it may be perceived by some 19 as an increased move towards gaming or lottery 20 offering. All I can offer up in terms of evidence of 21 its acceptance by the lottery community is the number 22 of states that have put it on, A; and B, the fact that 23 none of them have ever, quite frankly, had a problem 24 with it, again, that -- that I know of. Maybe others 25 here can address that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 23 1 MR. TIRLONI: Commissioners, I've 2 spoken to all of the states that currently have a 3 midday draw. I've spoken with the product managers at 4 those states. Most recently, New Jersey, who is one 5 of the most recent states that has -- that has 6 introduced the day draw, they've received -- they 7 didn't have anything negative to say. They've had 8 very positive reaction from their players and from 9 their retailers, as has New York, who also just 10 recently introduced the day draw in their Pick 3 game. 11 CHAIRMAN CLOWE: And technically, there 12 is no problem with the equipment as far as starting 13 sales in the morning and then stopping the drawing and 14 having -- stopping sales, having the drawing, then 15 starting back up again. That's well within the 16 capacity of our system? 17 MR. TIRLONI: That's -- that's 18 basically just adding another draw break. And the 19 only game that it affects is Pick 3. So Pick 3 Monday 20 through Saturday, once we go to draw break at 12:15, 21 Pick 3 is the only game that would not be available 22 during that 12 to 15-minute time period while 23 they're -- while our -- they're preparing to actually 24 do the day draw. I mean, that's basically just adding 25 one other draw break into the -- into the day. It's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 24 1 no different from what we do for the evening or the 2 night draw. 3 CHAIRMAN CLOWE: The only thing that 4 comes to my mind as a negative, and you haven't 5 mentioned it so I'll go ahead and mention it, is that 6 doubling the number of draws, do players have any 7 problem keeping up with the tickets for 12 draws per 8 week? Do you have people come in and say, I have a 9 winner, and it's not for the correct period? 10 MR. TIRLONI: We've taken measures and 11 we've gone by what other states have done to make it 12 real clear on the actual ticket what draws that ticket 13 is for. All of that is in -- in very early stages, 14 but the -- what we've looked at is, when a player 15 purchases a ticket, they have practically three 16 options. They can buy for day draws only, they could 17 buy for night draws only, or they could buy for both. 18 They could play their numbers for the day draw and for 19 the night draw. And at the bottom of the ticket, not 20 only will it show the date range, but it will also 21 show the draw time range. 22 So, for example, if you go into a 23 retail store, if this game were in effect, on a Monday 24 morning and you purchased a Monday day, a Monday 25 night, and a Tuesday day, you would see that range on WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 25 1 the bottom of your ticket. It would have the Monday 2 date and it would state, day, and it would go through 3 the Tuesday date, and it would show the day. So I 4 think we've -- we're moving in the direction of making 5 sure that players, when they -- after they purchase 6 their ticket, it would be real clear which draws 7 they've purchased. 8 CHAIRMAN CLOWE: And that goes exactly 9 to my question. You're satisfied that -- and you're 10 going to identify those as Monday day, Monday night, 11 Tuesday day, in that manner, that there is sufficient 12 clarification to a player that that is exactly the 13 period that they have purchased that Pick 3 ticket 14 for? 15 MR. TIRLONI: Yes, sir. We're also 16 going to -- if and when this rule is adopted by the 17 Commission, we will produce "how to play" material for 18 the players. There will be retailer sell-in sheets 19 for the retailers. And the Gtech sales reps, of 20 course, will do their training, as they always do, 21 with the retailers to get them up and running with the 22 game. The easy part about this is that the actual 23 game itself and how you play the game doesn't change. 24 There is nothing about that that's changing. It's 25 just the addition of the draw. And we're trying to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 26 1 make that real clear when we also design our play 2 slips, having a separate box for -- that a player 3 would select if they were playing day draws only, a 4 separate box that they would select if they were 5 playing night draws only. 6 CHAIRMAN CLOWE: I think, Robert, that 7 you all did a great job on the Texas Two Step game. 8 And I think the explanations and the understanding by 9 the players is of critical importance to the success 10 of these games. And if the players understand the 11 game and they have an attraction to it, they'll play 12 it. If they don't understand it, I don't think 13 they'll play it. They'll walk away from it. So I 14 think that's very important. 15 MS. CLOUD: Commissioners, your Pick 3 16 players typically are very, very devoted to the Pick 3 17 game. They -- they may not even play some of our 18 other games. They concentrate on Pick 3. They know 19 how to play the game, they win, and they get -- they 20 stay in the game. And so from everything that we've 21 heard -- we've been talking about this for about six 22 months now in our town hall meetings. And from the 23 retailers that are in our town hall meetings that have 24 heavy Pick 3 players, they're very excited about 25 adding the midday draw. They think the players will WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 27 1 be real happy that they have another draw, another 2 opportunity to play that game. So we've -- we've not 3 received anything but positive response on making 4 this -- adding this to our mix. 5 CHAIRMAN CLOWE: And, John, I want to 6 go back to the area that Commissioner Whitaker, I 7 think, was pursuing with you about the numbers. My 8 perception from your explanation is that this game is 9 not driven by the amount of the jackpot as is, in my 10 mind, Texas Lotto. It is driven by numbers that 11 players have that have favorites and like the lower 12 odds, which you've already mentioned. So the logic of 13 having 12 draws a week and having the increased 14 participation that you're telling us applies to this 15 game with the reasons of number favorites being the 16 reason people play would not apply to Texas Lotto, for 17 example, if we wanted to double those draws to four a 18 week. 19 MR. CADIGAN: Absolutely. And that 20 would not be something to consider. 21 CHAIRMAN CLOWE: Okay. Fine. Or the 22 five choice game. 23 MR. CADIGAN: Right. No. 24 CHAIRMAN CLOWE: This is unique. What 25 you're proposing here and what you're talking to us WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 28 1 about here about is unique to Pick 3. 2 MR. CADIGAN: Absolutely. 3 CHAIRMAN CLOWE: If the question is 4 asked, well, are you going to double all the drawings 5 for all the games? 6 MR. CADIGAN: No. 7 CHAIRMAN CLOWE: The answer is no. 8 MR. CADIGAN: Right. 9 CHAIRMAN CLOWE: This is unique to this 10 game. 11 MR. TIRLONI: Yes, sir. 12 MS. CLOUD: I will add to this that 13 our -- in our planning stages, in looking at game 14 enhancements for Cash 5, we are looking at a daily 15 game for Cash 5. 16 CHAIRMAN CLOWE: I don't want to hear 17 that. 18 MS. CLOUD: Okay. Well, I don't want 19 to get away from here without adding that now so that 20 you won't be surprised when that proposal comes before 21 you. Cash 5 is a four day a week draw right now. 22 We're looking at making it a daily game. That is part 23 of the enhancements that we're all focusing in on. 24 MR. TIRLONI: But a -- but a 25 jackpot-driven game such as Lotto and Two Step are WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 29 1 suitable at two drawings a week, which is where we're 2 at with both of those games right now. 3 CHAIRMAN CLOWE: And that's pretty well 4 standard throughout the states and the countries that 5 have an on-line Lotto game. Is that correct? 6 MR. TIRLONI: Lotto games typically are 7 two times a week. Even your -- even your multi-state 8 games such as Big Game and Powerball are drawn two 9 times a week. So, yes, that -- that would be correct. 10 MR. CADIGAN: That holds not only here 11 in the United States but on a worldwide basis. 12 CHAIRMAN CLOWE: Any other questions? 13 COMMISSIONER WHITAKER: Yeah. Is the 14 increase of sales in Pick 3 at all likely to draw 15 sales away from another game? 16 MR. CADIGAN: No. 17 COMMISSIONER WHITAKER: And is that 18 because of the unique profile of the players? 19 MR. CADIGAN: Exactly. There will be 20 no sales transfer, if I may, from other games to this 21 particular game because of this recommendation. Not 22 experiencing -- not perceived to happen here. 23 CHAIRMAN CLOWE: Anything else on 24 Pick 3? 25 Commissioners, it's my sense we ought WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 30 1 to deal with this subject before we go on to the rest 2 of the presentation. 3 Nothing else has anything to do with 4 Pick 3 that you're going to talk about? 5 MR. CADIGAN: No. 6 CHAIRMAN CLOWE: What action do you 7 want -- 8 MS. KIPLIN: Well, Commissioners, I 9 would like to put some more information on the record. 10 There are -- there are other change to this rule that 11 are not the primary change to the rule, but I want to 12 make sure that we're clear on that. 13 The primary amendment, of course, is to 14 add the midday draw. There is also an amendment that 15 clarifies that a Pick 3 ticket cannot be cancelled if 16 during an on-line game promotion that Pick 3 ticket 17 purchase generates a free promotional ticket for any 18 of the Commission's on-line games. In other words, 19 you can't go up, buy your Pick 3 ticket, get the -- 20 get the promotional game, and go back and cancel that 21 Pick 3 ticket and keep that promotional game. 22 And then the other change is to 23 eliminate language that's actually inconsistent with 24 the law. And that had to do -- and this is new from 25 what is in your binder and I have -- I have provided WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 31 1 each one of you a new draft. There is existing 2 language in the rule that says, unclaimed prize money 3 goes to the prize reserve fund. That's inconsistent 4 with statute -- a statutory change that takes the 5 unclaimed prize money from the lottery and deposits it 6 to the credit of the Texas Department of Health 7 State-owned multi-categorical teaching hospital 8 account for the tertiary care facility account as 9 prescribed by the provisions of the State Lottery Act. 10 There is also a -- two numbers that 11 were juxtaposed on the fiscal note, and I want to make 12 sure that we bring that to your attention. And that 13 was for fiscal year '05. That number should be the 14 same as the number for fiscal year '03, '04, and '06. 15 So instead of how it reads on the -- on it -- and 16 we'll make this change, obviously, before we file it 17 with the Texas Register -- where it says 4.461 18 million, it should read 4.641 million. 19 Those are the principal changes with 20 this rule, proposed amendments. And with that, the 21 staff is asking that the Commission vote to propose 22 these proposed amendments for publication in the Texas 23 Register for the -- for the minimal 30-day public 24 comment period. 25 One other point I would like to make is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 32 1 that we have also -- staff would like to notice up a 2 rulemaking comment hearing. That's according to the 3 preamble, not just inviting written comment, but also 4 noticing up a hearing, which would be February 8th at 5 9:00 in the morning. And so we're wanting that to be 6 part of this rulemaking package. 7 I'll be happy to answer any questions 8 that I can on this rule, and I'm sure the staff that 9 is here will be happy to answer any questions on the 10 rule. 11 CHAIRMAN CLOWE: Are there any 12 questions? 13 COMMISSIONER CRINER: I just have one 14 and I think it's kind of simple. I understand why 15 there is a draw at night at 9:59, trying to make the 16 10:00 o'clock news, but the other time, the midday, is 17 at 12:27. Why 27? 18 MS. KIPLIN: I'm going to defer to 19 Mr. Tirloni on that. 20 MR. TIRLONI: We discussed this with 21 our communications division, who is overseeing the 22 actual on-line game drawings. 12:27, we felt, was 23 within the noon news half hour, and we felt that that 24 would be a good time for us to be able to have the 25 opportunity to have the Pick 3 day draw aired during WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 33 1 the -- during the noon news programming. 2 COMMISSIONER CRINER: I have one other 3 question. Does this require any change in terms of 4 staffing to do? 5 MS. CLOUD: It requires our draw team 6 to split out probably into two different shifts, so 7 that one takes care of the midday and the other takes 8 care of the evening draws. But no additional staff 9 will be required. 10 COMMISSIONER CRINER: That's a long 11 process. 12 MS. CLOUD: No. Actually, it 13 doesn't -- well, it does for the predraw. Yeah. It 14 takes about three hours. 15 COMMISSIONER CRINER: Because I watched 16 it one night and it took a long time. The draw was 17 like short. 18 CHAIRMAN CLOWE: If there are no 19 further questions from the Commission, is there anyone 20 else who wishes to speak on this proposal? Is there a 21 motion? 22 COMMISSIONER CRINER: So moved. 23 COMMISSIONER WHITAKER: Second. 24 CHAIRMAN CLOWE: Moved and seconded. 25 All in favor, please say aye. Opposed, no. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 34 1 The vote is three zero in favor. 2 Now, John, we'll be happy for you to go 3 forward with your presentation. And I believe that's 4 under agenda item two, report, possible discussion 5 and/or action on lottery sales and trends, including 6 instant ticket game plan and proposed game 7 modifications. 8 MR. CADIGAN: Okay. If we can darken 9 the room a bit. I think we've already shown this. 10 Just a handful of slides here. We're going to talk 11 about three things, one of which, again, is 12 multi-jurisdictional. This came into our business in 13 a big way in 1987 and it's becoming an increasing 14 force in our business today. Luckily, I would add my 15 own personal view here, Texas has been able to fend 16 off suitors when it comes to multi-jurisdictional 17 games. You see here in red the current configuration 18 of the Big Game. New York recently signed up to the 19 Big Game. They will commence sales of that game in 20 May. So you've got Massachusetts, New York, Michigan, 21 Illinois, Georgia, Virginia, and Maryland comprising 22 that game. 23 I will not go through all the Powerball 24 states. That's the game that came in under the name 25 of Lotto America in 1987, and it's the -- I think, the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 35 1 game that everything sees on the news. However, the 2 Big Game itself is a force to be reckoned with. 3 Two things here and then we'll get off 4 of this subject. This -- this force, these 5 multi-jurisdictional games, are going to really 6 generate some headlines over the next 18 months. With 7 New York joining the Big Game, with other states, not 8 the least of which is Ohio and Washington, 9 contemplating joining a configuration, you're going to 10 have population masses in this country within the Big 11 Game and in Powerball -- Powerball just signed up 12 Pennsylvania here -- that are going to create odds 13 somewhere in the vicinity of one in 130 million. And 14 for what it's worth, I'll project or predict that 15 you'll see a -- you'll see a jackpot in this country 16 somewhere in the vicinity of a half a billion dollars 17 at some point over the next 18 to 24 months. 18 The second point I would make here -- 19 again, so that's -- that's something you're going to 20 see in the business. When you do think of a 21 multi-jurisdictional game, you don't have to go to the 22 altar with either Powerball or the Big Game 23 configurations. There are three states here that have 24 withstood joining those configurations: California, 25 Texas, and Florida. Again, we're well away or far WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 36 1 away from joining into the discussion here about 2 multi-jurisdictional games with the Texas Lottery. 3 But what a fine configuration that would make of those 4 three states. 5 Any questions on the multi-state? 6 COMMISSIONER CRINER: Excuse me. On 7 the Big Game states, what state is that above 8 Illinois? 9 MR. CADIGAN: That would be Michigan. 10 Here you have Michigan -- 11 COMMISSIONER CRINER: No, Above 12 Michigan. I'm sorry. 13 MR. CADIGAN: The -- 14 COMMISSIONER CRINGER: It's way up 15 there at the top. Right there. 16 MR. CADIGAN: That would be what 17 Michigans what would call the UP, the upper peninsula. 18 But that's part of Michigan. 19 COMMISSIONER CRINER: Okay. I was 20 like, that's a new state, I think. 21 MR. CADIGAN: It is. It's southern 22 Ontario actually. But that's the UP. 23 COMMISSIONER CRINER: Is it separate 24 from the whole state, their program? 25 MR. CADIGAN: It is divided by water. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 37 1 Did you say -- what? 2 COMMISSIONER CRINER: No. I said, is 3 it governmentally separate from the state? 4 MR. CADIGAN: No. It's -- it's as much 5 of Michigan as Austin is of Texas. It's -- it's part 6 of the state. 7 COMMISSIONER CRINER: I guess you're 8 missing my point. The red is just at the top of that 9 part of Michigan. Why not the whole state of 10 Michigan? 11 MR. CADIGAN: Okay. I can proudly say 12 I have a master's degree in geography, so I'm going to 13 go back to the classroom here a bit. I actually 14 taught geography a long time ago. 15 Here is the state of Michigan. Detroit 16 would be about there. This is Michigan here. And 17 it -- no. This state here? That is the state of 18 Wisconsin. 19 COMMISSIONER CRINER: Wisconsin. 20 Right. That's what I started out with. 21 MR. CADIGAN: Oh, I thought you said 22 Michigan, sir. 23 COMMISSIONER CRINER: No, I said 24 Wisconsin. 25 MR. CADIGAN: Okay. Well -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 38 1 COMMISSIONER CRINER. Excuse me. It 2 doesn't matter. That's a part of Michigan. So now 3 that's -- that was my confusion. Because it kind of 4 was over in front of Wisconsin. 5 MR. CADIGAN: That's Wisconsin there. 6 Minnesota. I apologize for that. I thought you 7 said -- 8 COMMISSIONER CRINER: No, that's all 9 right. I've only been to Kalamazoo, so I am actually 10 lost... 11 MR. CADIGAN: I knew my geography would 12 come in helpful. 13 COMMISSIONER WHITAKER: Let me ask you 14 some questions. Is there any -- any thought of 15 combining Powerball and Big Game? 16 MR. CADIGAN: No. 17 COMMISSIONER WHITAKER: Is there any 18 thought of somebody else coming in and splitting 19 those -- Big Game and Powerball states in a different 20 configuration? 21 MR. CADIGAN: No. 22 COMMISSIONER WHITAKER: Is there any 23 thought that these other states that don't have a 24 lottery will likely join or have a lottery soon and 25 join one of those conglomerations? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 39 1 MR. CADIGAN: Yes. There is a good 2 question. These states here, certainly in Oklahoma 3 and Arkansas, Tennessee, North Carolina, Wyoming, 4 North Dakota, they have population bases that are -- 5 maybe not in the case of Tennessee -- but they have 6 population bases that are rather limited in size. So 7 when they contemplate starting up an on-line lottery, 8 I think the general thinking in the industry is that 9 it would behoove them to join something that's going 10 to generate some sizable sales or jackpots out of the 11 prize. For Oklahoma, with its population, to come out 12 and start up its own lottery and its own Lotto game, 13 it's not going to generate the sales levels that are 14 going to draw a jackpot. So if and when Oklahoma, for 15 example -- we'll pick on them -- join, they probably 16 would join one of the two. And probably Lotto 17 America. I'm calling it Lotto America. Powerball. 18 Powerball -- most of the states in 19 Powerball, until Pennsylvania just stepped into it, 20 have demographies and population levels that are low 21 compared to other states. And that is actually the 22 reason why they came together in '87, six of them, 23 because they could not compete with the New Yorks, the 24 Massachusetts, the Illinois, the Michigans of the 25 world. And they brought their bases together and came WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 40 1 up with a -- with a larger jackpot game. So as these 2 new non-lottery states can -- the answer will be, they 3 will look to a multi-jurisdictional game. 4 COMMISSIONER WHITAKER: What is the 5 state of thinking in Florida and California about 6 pressure to join a multi-jurisdictional game? 7 MR. CADIGAN: What is the -- 8 COMMISSIONER WHITAKER: What is the 9 state of thinking in Florida and California about the 10 idea of joining a multi-jurisdictional game? 11 MR. CADIGAN: I think, as perhaps the 12 thinking here may be, we've got a great Lotto game as 13 it is. We will do that when we feel it's, you know, 14 in our best interests. So I think the specific answer 15 would be, it's nice, it's something we can go to, but 16 we're going to go to it when we want to. Florida has 17 a very successful game -- Lotto game. You here have a 18 very successful Lotto game that will generate, in the 19 next year or so, headline-type jackpots. I'm still 20 convinced of that. And California, again, a very 21 successful Lotto game. 22 COMMISSIONER WHITAKER: Do you all 23 do -- 24 MR. CADIGAN: Did I answer the 25 question? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 41 1 COMMISSIONER WHITAKER: Yeah. Do y'all 2 do estimates of the dollars that Texas Lottery loses 3 because of these other jurisdictional games -- 4 multi-jurisdictional games? 5 MR. CADIGAN: Yes. Yes. I believe the 6 last time I was here, Powerball was generating a 7 significant factor. I believe this week they have a 8 jackpot of around 50 million. You can hear the pitter 9 patter of little feet, our feet going across the 10 border here as that jackpot raises up. And we have 11 provided estimates. And you're talking about a 12 transfer of dollars out of Texas to Louisiana and to 13 New Mexico as these jackpots, in the case of your 14 borders, Powerball jackpots rise up. Conversely, I 15 mean, they come to you when you have a sizeable 16 jackpot. 17 COMMISSIONER WHITAKER: But have you 18 done specific numbers on that for, say, like last 19 year? 20 MR. KING: We have in the past. We've 21 done estimates. I don't think we've updated it 22 probably in the last several months. It may be time 23 and we would be happy to do that. 24 COMMISSIONER WHITAKER: I would be 25 interested to see that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 42 1 No more questions. 2 MR. CADIGAN: That's -- 3 CHAIRMAN CLOWE: John, before you leave 4 that subject. My recollection is, the Commission's 5 last read on the legislature's position on this was 6 that we would require legislative approval -- specific 7 legislative approval for the Commission to authorize 8 entry into the multi-jurisdictional games. Is that 9 correct or not? 10 MS. KIPLIN: I think somewhat it is. 11 There was a bill that was filed last session by a 12 member of the -- the House to authorize the Lottery to 13 have a multi-jurisdictional game. I think that in the 14 past, Gtech has sought an opinion with regard to that 15 matter, and the opinion that they sought indicated 16 that the approach would be to -- that the Lottery 17 needed specific authority. I've taken a look at it 18 myself and I think that the language in the Lottery 19 Act is broad enough on its own, but in the face of 20 other opinions and, of course, the bill being filed, 21 the more cautious approach would be to seek a 22 legislative change specific to that. 23 CHAIRMAN CLOWE: That's my 24 recollection, and I just want to make sure we were all 25 in the same place in that regard. That is my position WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 43 1 on it, that we need specific authorization. And I 2 wanted to make sure that, in looking at this 3 presentation, in my view, the option does not lie with 4 this Commission right now under the current statutes. 5 And if there is any difference of opinion that is 6 substantial or disagreement, I would like to hear 7 that. 8 MS. CLOUD: This is one of our policy 9 issues in our Sunset evaluation, Commissioners. 10 MR. KING: Mr. Chairman, we did take 11 that approach, as well, as you'll see with the next 12 few slides, that we did need approval from the 13 legislature. 14 CHAIRMAN CLOWE: Okay. 15 MR. KING: These were just ideas other 16 states were using. 17 MR. CADIGAN: Real quickly here. About 18 12 weeks ago, the State of Illinois, the Illinois 19 state lottery introduced a new game. It's the newest 20 concept to hit the U.S. industry, probably since 21 five-minute Keno came into Oregon in '89. The game is 22 called Extra, and it's attached to the current Pick 3 23 game in Illinois. And Extra is an extra option the 24 player can purchase for an additional dollar when he 25 plays Pick 3. And it involves the -- why don't we go WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 44 1 to a sample ticket. 2 Here is a ticket. If you can't see 3 that, we'll go to an additional ticket here in a 4 minute. But here is a Pick 3 pick ticket for the 5 evening draw in Illinois. The player says, I want to 6 play Extra, and he gives the retailer an extra dollar. 7 Okay? So now he has given the retailer two dollars. 8 His first dollar is for tonight's draw, and that -- he 9 has played here 3-5-6, if you can't see it. That 10 extra dollar, which is an option for him to do, the 11 system will come back and generate an additional 12 three-digit number. For those of you who can't see it 13 here, the number is 7-3-8. The system quick picks 14 that three digits. The player either quick picked his 15 own number or selected his own number up here. For 16 the additional dollar, out comes an additional 17 three-digit number. 18 The player then plays a game of Extra 19 instantly. So this is an instant option. If he 20 matches the seven to his first digit up here, any one 21 of these digits corresponding to their place, one, 22 two, or three -- okay -- with the number he has played 23 up top here, he wins a prize instantly right there. 24 And the prize is designated right under here. Let's 25 go to the next slide because I think this is a little WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 45 1 bit clearer for everybody to see. 2 This player here is playing Pick 3, and 3 he's playing 2-8-2. He wants to play the Extra 4 option, which is, again, an instant play feature. He 5 gives the retailer that extra dollar, and in this 6 case, he matched two to two. Okay? Right on the 7 ticket, it says, you win 50 dollars if he has matched 8 that. This is an instant play feature on an on-line 9 game. What happens in this case, he has got a number 10 here for tonight's drawing. He would hand the 11 retailer back the ticket, collect his 50 dollars, and 12 the retailer would hand him back a trailer ticket, or 13 what we call a second ticket, with just this number 14 here for the live draw that evening. 15 What we've done here with this concept 16 is provided on-line players with something instant 17 players have -- have had a hold on for years. And 18 that is, an instant gratification opportunity. This 19 is currently in play in Illinois the last 12 weeks on 20 their Pick 3, and incidentally, they have a Pick 4 21 game in Illinois. They also have a midday draw, as 22 you saw. And it has lifted sales between 15 and 20 23 percent. So -- and this is also applicable -- we 24 haven't instituted it yet, but you could do this 25 instant option on your Cash 5 game or a Lotto game. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 46 1 But right now, we went to the Pick 3 players and Pick 2 4 players, and they have taken to this in a grand way 3 in Illinois. 4 You're going to see a lot of lotteries 5 in the next year adopt this, certainly on their Pick 3 6 and Pick 4 games. 7 Questions? 8 CHAIRMAN CLOWE: What are the odds on 9 it? 10 MR. CADIGAN: The odds of winning a 11 prize down here would be one in four to one in eight, 12 depending on how you set the system. What you're 13 doing down here is treating this just like an instant 14 game. Okay? You're handing players back money of 15 odds of one in four, again, odds levels that the 16 instant guys have been able to use as opposed to the 17 on-line with our higher odds. And players are winning 18 and they're taking those winnings and they're 19 reinvesting either in product in the store, which 20 retailers like, or they're buying additional product. 21 CHAIRMAN CLOWE: So are the odds set, 22 then, on the amount of the prize? 23 MR. CADIGAN: The odds would be set to 24 the amount of the prize in terms of, you know, one in 25 four, you're going to -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 47 1 CHAIRMAN CLOWE: You've got one in four 2 for 50 dollars. Right? 3 MR. CADIGAN: Oh, I see what you're 4 getting at. I see what you're -- no. This will 5 change up. This could be -- on the next ticket, this 6 could be 100 dollars or what have you. 7 CHAIRMAN CLOWE: And the higher the 8 amount of the prize, the higher the odds. 9 MR. CADIGAN: Yes. Yes. 10 CHAIRMAN CLOWE: One in four to win 50 11 dollars is more attractive odds, it seems to me, than 12 any game we have on the -- 13 MR. CADIGAN: Well, again, I don't want 14 to mislead here. It's not one in four for 50. It 15 could be. That one in four -- that one in four -- 16 every -- let's say, theoretically, every fourth ticket 17 produces a winner. That every fourth ticket could 18 produce a 500 dollar winner. It could produce a 100 19 or a three-dollar winner. 20 CHAIRMAN CLOWE: So it's not set on the 21 amount -- 22 MR. CADIGAN: If I misunderstood you, 23 then -- yes. 24 COMMISSIONER WHITAKER: And if they 25 match more than one number, then it's a larger prize? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 48 1 MR. CADIGAN: Yes. Yes. You could -- 2 well, I think right there. This player matched two 3 numbers and would collect 50 dollars, the 20 and the 4 30. 5 Okay. The last thing of note here, and 6 if you -- if you -- which I know some of you do here, 7 obviously, watch this business and how it has grown 8 the last decade or so. Next slide. 9 Video gaming is an element within our 10 business that's considered kind of exotic and 11 something to look upon with certainly great respect. 12 But it's a -- it's a product that comes in and can 13 really generate large amounts of revenue. Go ahead. 14 Here is the current configuration of 15 video gaming in the United States. And the point is, 16 again, since the economy has slowed down and since the 17 events of 9-11, certainly in the case of New York, 18 you've seen states now turning to this product, 19 certainly in a -- in a sense more so than we've seen 20 in the last five or six years. 21 Currently, video lottery, that is, 22 video gaming controlled by lottery, exists in Oregon, 23 South Dakota, West Virginia, and Delaware and Rhode 24 Island. New York just passed legislation and will 25 have a video lottery offering to its lottery product WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 49 1 sometime this year. The state of Ohio and Kentucky 2 have likewise passed legislation. Video gaming, that 3 is, video gaming devices not controlled by the 4 lottery, exist right on your borders, actually, in New 5 Mexico, in tracts in Louisiana, in Montana. And I 6 think that's it. In Iowa, also, in tracts. 7 Video legislation is in some form of 8 process in the states in yellow. And then you have 9 other lottery, as you can see here. So, again, it's 10 something that's -- it's going to be talked about 11 quite a bit in the future, the next 18 months, 12 certainly, in the United States. Not something, in my 13 opinion -- this is my opinion -- that's appropriate 14 for this state to consider at this time. You have a 15 lot of product options to go to. 16 But, again, those are the three, what I 17 see when I look at the Lottery landscape in the United 18 States today, things that we're going to read an awful 19 lot about in the next few months. 20 Questions? 21 CHAIRMAN CLOWE: I think you need to 22 define what the offering is in video lottery and video 23 gaming so that we'll all understand what you're 24 talking about. 25 MR. CADIGAN: Video gaming or video WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 50 1 lottery would be a touch screen. They look like a 2 slot machine now. Okay? Touch screen and run poker 3 games, video poker. I can't think of the word, but 4 simulating real play. Okay. As opposed to a coin in. 5 Now, that's a bill-in accepter as opposed to -- as 6 opposed to a coin-in slot machine, which is what you 7 can find in video gaming devices. There isn't a 8 lottery in the United States -- I'm not sure about 9 Delaware -- but these lotteries here that are in red 10 offering video lottery do not offer coin-in mechanical 11 games. 12 CHAIRMAN CLOWE: And we certainly -- 13 MR. CADIGAN: I'm not an expert on 14 video. 15 CHAIRMAN CLOWE: We certainly don't 16 have legislation that enables that in this state. 17 MS. CLOUD: No. 18 MS. KIPLIN: We have -- we actually 19 have legislation that requires us to adopt rules 20 prohibiting video lottery. 21 CHAIRMAN CLOWE: Right. 22 MR. CADIGAN: And that's it. As I said 23 earlier to Mr. Chairman, I always look forward to 24 coming down here. It's a great lottery state. It's 25 the number one lottery state in the United States. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 51 1 And any chance I do get -- I could have had somebody 2 else come down here, but I took the opportunity and 3 look forward to coming back down and giving you an 4 update on other matters in the gaming industry. 5 CHAIRMAN CLOWE: You chose a good time 6 of year to come down here. 7 MR. CADIGAN: We need the snow up in 8 Boston, I'll tell you. 9 CHAIRMAN CLOWE: Thank you. 10 Commissioner Criner has asked in the 11 past, and he has been concerned that -- and I want to 12 call to mind, John, while you're here as a resource, 13 what has happened to the lottery since September the 14 11th. And you have a nationwide view, I know. We're 15 watching our situation here very closely in this 16 state. Could you give us an overview in the 17 contiguous 48 states? 18 MR. CADIGAN: Certainly -- take an 19 example of New York and New Jersey. They talked about 20 going to a midday draw. They knew that they would get 21 that lift in sales. And they sort of sat on that 22 option. A state like New York, again, on video, knew 23 it was there but sat on that option. A state like 24 Ohio, multi-state, sat on that option. From state to 25 state -- I might exclude Texas here. But just about WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 52 1 every state, every one of our customers -- and I know 2 there is gentlemen here from the other vendors -- just 3 about every one of our customers are coming to us now, 4 saying, remember we talked about this, we talked about 5 that, we need to do it now. They're looking to raise 6 revenues. 7 Because not just the events of 9-11, 8 but certainly as the economy slows down, the states 9 are looking to increase their -- their revenue stream. 10 So unquestionably, I would say, in the last eight 11 months, we've seen an increased demand from our 12 customers -- and I know the other vendors would say 13 the same thing -- looking for game options. What is 14 that game option I can put in that's going to, quite 15 frankly, keep me out of the headlines but raise some 16 revenue. That's it in a very straightforward 17 expression. 18 CHAIRMAN CLOWE: So I would say, we're 19 doing as well or better than the majority of your 20 clients? 21 MR. CADIGAN: Texas Lottery, depending 22 on how you look at it, I could make the argument, is 23 the number one lottery in the United States. You're 24 generating sales. I still think you have an awful lot 25 of, as you say down here, hoss left on your Lotto WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 53 1 game. That thing will kick up a major jackpot. And 2 your sales levels, you know, are quite to be admired 3 by other jurisdictions. 4 CHAIRMAN CLOWE: Thank you very much. 5 COMMISSIONER WHITAKER: Let me ask you 6 a question about Internet gambling. Have y'all done 7 any updates on the numbers of dollars that are being 8 pulled away, say, from the Texas lottery, other 9 lotteries, due to illegal Internet gambling? 10 MR. CADIGAN: No. Not that -- I'm not 11 the expert here on Internet gambling or gaming. Of 12 course, I believe in this country, it's illegal to 13 invest money, certainly through a lottery system, 14 playing lottery game. Lotteries don't do that, as you 15 know. But I would say, until you see Internet 16 wagering become a full option -- let's say that you 17 could get on a system on your Internet this morning 18 and play some game somewhere in the United States, 19 which you can't do now. A, we haven't done the 20 analysis in Texas; and, B, I don't think it would show 21 anything. 22 COMMISSIONER WHITAKER: I'm not talking 23 about legalized. I'm talking about illegal. 24 MR. KING: I don't have the answer, but 25 I did write it down. I think the last time we talked, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 54 1 maybe six, eight months ago, there were 900 to a 2 thousand websites where you could actually wager on. 3 But we do have a department that is dedicated, and I 4 can get you those figures, as well as the border 5 analysis, and include those. 6 COMMISSIONER WHITAKER: Thank you. 7 CHAIRMAN CLOWE: Thank you very much. 8 MR. CADIGAN: Okay. Thank you. 9 CHAIRMAN CLOWE: We are in item two, 10 and we'll just go right on with sales and the 11 marketing report. 12 COMMISSIONER WHITAKER: Liz Jambor is 13 sitting in today for Toni Smith, Commissioners. 14 MS. JAMBOR: Good morning, 15 Commissioners. For the record, my name is Liz Jambor. 16 And I would like to give the unaudited year-to-date 17 total sales for week ending January 5th, 2002. Total 18 FY '02 sales to date are 979,038,838 dollars. This is 19 down 5.58 percent from FY '01 total sales to date of 20 1,036,873,300. 21 FY '02 weekly sales average is 22 51,528,359 dollars. This is down 5.58 percent from 23 FY '01 sales average of 54,572,278. And each fiscal 24 year includes year-to-date sales with the first week 25 as a partial week. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 55 1 Based on 18 full weeks of sales, FY '02 2 weekly sales average is 53,871,556 dollars. This is 3 down 4.36 percent from FY '01 weekly sales average of 4 56,325,582. The primary reason for the difference in 5 FY '02 and FY '01 sales is related to Lotto Texas 6 jackpots in FY '01 ranging from 29 million to 60 7 million in the first two weeks with another FY '01 8 jackpot of 48 million in November of 2000. 9 The unaudited year-to-date sales 10 comparison by product for week ending January 5th, 11 2002. For Instants, in FY '02, they were 633,701,913. 12 That represented 64.73 percent of sales. In FY '01, 13 Instant sales were 628,919,457, representing 60.66 14 percent of sales. This is -- shows an increase in 15 FY '02 of 0.76 percent. 16 Lotto Texas, in FY '02, sales are 17 196,999,809 dollars. That was -- represents 20.12 18 percent of sales. In FY '02, sales were 286,164,058 19 dollars, representing 25.86 percent, and this 20 represents a 26.54 percent deficit for '02. 21 Weekly sales for week ending January 22 5th, 2002. Total sales for January 5th, 2002 were 23 55,234,679. This is down 9.23 percent from the 24 previous week ending 12/29/01, with total sales of 25 $60,848,471.50. The primary factor for this decrease WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 56 1 was the decrease in Lotto Texas sales. Jackpots for 2 the week ending January 5th were six million and nine 3 million for Wednesday and Saturday. Jackpots for week 4 ending 12/29/01 were 36 and -- 36 million and four 5 million respectively. 6 And I'll be happy to answer any 7 questions you have about sales. 8 CHAIRMAN CLOWE: Thank you, Liz. 9 Any questions? 10 Thank you very much. 11 MS. JAMBOR: Thank you. 12 CHAIRMAN CLOWE: We'll now move on to 13 item 12, keeping in mind those who are here and 14 wishing to address the Commission on certain items. 15 That is, consideration of and possible discussion 16 and/or action, including withdrawal and proposal of 17 amendments, on 16 TAC 401.5 -- 353, relating to 18 retailer sales commission. 19 Mr. Rick Johnson is here. 20 And do you want to give us a preamble? 21 MS. KIPLIN: Thank you. Commissioners, 22 what you have in your notebook is a -- another 23 proposed amendment. And this is to propose amendments 24 for a one percent cashing bonus to be paid to lottery 25 retailers for the cashing of mid-tier prizes. As you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 57 1 know, you voted in a previous commission meeting to 2 propose amendments somewhat similar to this. That is 3 a live rulemaking. The staff would request your vote 4 to withdraw that rulemaking and publish this instead 5 and begin a new rulemaking comment. There has been a 6 revised fiscal note. There has also been further 7 staff review. 8 In particular, the one that's out 9 allows for the cashing of -- a one percent cashing 10 bonus of high-tier prizes. And in fact, by statute, 11 retailers can't cash high-tier prizes. So that would 12 have gone beyond our statutory authority. 13 I think it's -- also, to be real clear, 14 that this is in addition to the five percent 15 compensation that retailers already receive on selling 16 lottery game tickets. So with that, the staff 17 would -- would ask for two actions today. One is a 18 vote to withdraw the current proposed rulemaking and 19 to propose this rulemaking instead for public comment. 20 CHAIRMAN CLOWE: Linda, do you have any 21 comment at this time? 22 MS. CLOUD: Commissioners, this fiscal 23 note for this one percent cashing bonus would come out 24 of the Lottery's seven percent administrative funds in 25 the operation of the Lottery. This year, we have not WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 58 1 transferred this money yet, but we will be 2 transferring, in January, 19,918,943 dollars of our 3 unspent admin dollars. So the Lottery has been very 4 efficient in the operation of the games and -- and 5 hope to continue to be that efficient. And this is 6 just a step that we would like to take in order to 7 compensate our retailers for money they're spending 8 out of pocket to pay our prizes. And we think that 9 they are very deserving of this at this time. 10 CHAIRMAN CLOWE: Good. 11 Good morning, Rick. 12 MR. JOHNSON: Good morning. 13 CHAIRMAN CLOWE: Appreciate you being 14 here. Do you have comments for it us? 15 MR. JOHNSON: For the record, I'm Rick 16 Johnson, the president of the Texas Association of 17 Lottery Retailers. Really, I think Linda made a very 18 good case for us. We -- we support this action. This 19 is an issue that we have been working with Linda and 20 the Lottery staff virtually since the association was 21 formed as one of our -- one of our goals and 22 objectives was to get some type of compensation to the 23 retailers for cashing of winning tickets. 24 This is money that they -- they spend 25 out of their pockets that they get no compensation WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 59 1 for. It does cost them money to go to the bank and 2 get cash to pay these out. It costs them additional 3 monies in insurance premiums and this type of thing to 4 have additional cash on hand. And we feel like it 5 would make the retailers more of a partner in the 6 entire process and make them feel like that the 7 Lottery does -- does care about them and that, you 8 know, they're trying to make it a win-win situation 9 for everybody involved. 10 CHAIRMAN CLOWE: Any questions? 11 COMMISSIONER WHITAKER: Yes. By 12 mid-tier, what prizes are we talking about? 13 MS. CLOUD: 25 dollars to 599. That's 14 the highest the retailers can pay. And we have a 15 number of retailers around the state that are paying 16 every player every ticket they bring in to them as 17 prizes. We also have those retailers who refuse to 18 pay our players over 50 dollars because they're not 19 getting compensated. And it's an inconvenience for 20 the player then to have to go to another store to cash 21 in prizes maybe higher than 50 dollars. 22 COMMISSIONER WHITAKER: Is the one 23 percent basically designed to be profit to the 24 retailer, or what percentage is really offsetting 25 their costs? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 60 1 MS. CLOUD: Actually, the one 2 percent -- I don't consider the one percent as being a 3 profit for the retailer. I think it's only paying 4 them for the use of their money, maybe not even as 5 much as they would make on that money if they left it 6 in a savings account. But it compensates them for at 7 least the use of their cash and the labor time it 8 takes for those retailers to pay those prizes. 9 COMMISSIONER WHITAKER: And is there 10 any estimate that you've done as to how many more 11 retailers will cash mid-tier prizes if we do this? 12 MR. JOHNSON: I don't know, but I know 13 that Linda is right, that a lot of retailers will not 14 cash the tickets. Just as a personal experience, a 15 couple of years ago, me and three other guys were 16 driving down to the Valley to go on a fishing trip, 17 and one of them happened to have like a 120-something 18 dollar Scratch Off ticket. We stopped at four 19 different stores before one of them would cash it. 20 COMMISSIONER WHITAKER: Excuse me. 21 MS. CLOUD: It's just -- it's a way -- 22 and we are -- we are probably one of the few states 23 that does not pay a cashing bonus. Most states start 24 their games by paying a cashing. But this is nine 25 years into the games and this is -- we're not even WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 61 1 paying across the board. We're only paying the 2 mid-tier levels. We don't have the money to pay them 3 across the board because that would be closer to, if 4 I'm not mistaken, a 13 million dollar fiscal note, 5 which we could not afford. But we do want to show 6 them that we're trying to make an effort to at least 7 compensate them for the mid-tier prize. 8 CHAIRMAN CLOWE: Commissioners, I think 9 we've been asked for two votes. First, to withdraw 10 the current proposal. Is there a motion? 11 COMMISSIONER CRINER: So moved. 12 CHAIRMAN CLOWE: All in favor, please 13 say aye. Opposed, no. 14 The vote is three-zero in favor. 15 Next, to propose for consideration the 16 current rule, and is there a motion on that? 17 COMMISSIONER WHITAKER: So moved. 18 COMMISSIONER CRINER: Second. 19 CHAIRMAN CLOWE: Moved and seconded. 20 All in favor say aye, please. Opposed, no. 21 The vote is three-zero in favor. 22 I would like to say for the record that 23 as one commissioner, I am very much in favor of this 24 and am hopeful that it will be adopted and that these 25 monies will go to the retailers. I've attended a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 62 1 number of the town hall meetings, and the retailers 2 are in need of monetary assistance. We just recently 3 lost a very fine retailer in my hometown of Waco. He 4 had a number of complaints about the lottery and the 5 fact that it just wasn't worth fiddling with it. And 6 keeping the cash on hand to deal with the winners was 7 one of his objections. 8 This may not do everything that every 9 retailer wants, but it is a step, in my opinion, in 10 the right direction. And I, again, am in favor of 11 this. I would like to be on the record out front on 12 that. And, again, it comes from the Lottery's monies 13 and is not something that we have to go and ask 14 anybody for. We have the means to provide this to our 15 retailers. 16 MS. CLOUD: That's correct. 17 MR. JOHNSON: Thank you very much. I 18 do appreciate it. 19 MS. CLOUD: Thank you, Rick. 20 CHAIRMAN CLOWE: We also have a person 21 here, Mr. Steve Bresnen, who would like to give 22 comment on item number six. So we'll now go to that 23 item, report, possible discussion and/or action on the 24 Sunset process involving the agency. 25 Gary, are you ready to come forward on WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 63 1 that? Steve, we'll ask you to come up, too, if you 2 will, please. 3 MR. GRIEF: Good morning, 4 Commissioners. And for the record, my name is 5 Gary Grief. I'm the director of lottery operations 6 and also the project manager for our agency's Sunset 7 review process. 8 On December 11th, 2001, I accompanied 9 the executive director, the charitable bingo 10 operations director, and the governmental affairs 11 staff to the initial meeting of the Sunset Commission. 12 And at this initial meeting, the agency review 13 schedule was approved. Our agency has been scheduled 14 for review from March 2002 through August 2002. A 15 hearing in which public testimony will be received 16 regarding our agency has also been scheduled for the 17 week of September 23rd, 2002. 18 I had an opportunity to meet John 19 Hawkins, the Sunset staff member who will be the 20 project manager for our agency. Mr. Hawkins is 21 currently involved in a review of the Texas Higher 22 Education Coordinating Board. Based on information 23 that I received at the meeting, it appears that four 24 or five Sunset staff members will be assigned to our 25 review process. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 64 1 Following that meeting, I provided each 2 commissioner via e-mail with my meeting notes. And 3 under a separate cover memo dated December 12th, I 4 sent each of you hard copies of the approved agency 5 review schedule, the Sunset meeting schedule, and the 6 official Sunset member directory. And a copy of that 7 memo and those attachments are in your notebooks 8 today. 9 Commissioners, as I have said before, 10 we are ready for this review. Our information packets 11 are prepared regarding all of the policy issues that 12 were raised in the self-evaluation report, and our 13 Sunset database is ready to track any information 14 requests that may be made by the Sunset Commission 15 during the review process. 16 And that concludes my report this 17 morning. I would be happy to answer any questions 18 that you might have. 19 CHAIRMAN CLOWE: Any questions? 20 Steve, we're happy to have you here. 21 What do you have to tell us? 22 MR. BRESNEN: Thank you, Mr. Chairman. 23 I'll be very brief. I want to do this -- what I'm 24 about to say is a courtesy, but I would also like to 25 ask for maybe some specific action, not necessarily at WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 65 1 this -- at this meeting, but going forward. 2 I represent the bingo interest group. 3 My name is Steve Bresnen. My members are primarily 4 commercial lessors located around the state. My 5 interest is in bingo and not the lottery. 6 I believe that there are some important 7 issues that are percolating out there that relate to 8 bingo and probably some deficiencies in the statute. 9 And I would like to see a process invoked pretty soon 10 and pretty methodically that would maybe illuminate 11 those issues. And I think we could resolve some of 12 the elements of those issues outside the Sunset 13 process. And I think we would be doing a service both 14 to Sunset and to people like me who can help work 15 through those things in a methodical and mechanical 16 kind of fashion. 17 I've talked to Billy, and I think you 18 were at one meeting where I made this suggestion, 19 although in a different context, that there be some 20 sort of a stakeholder process, is what they're calling 21 it in other agencies, where you get some people in on 22 an informal basis, identify things that may need to be 23 addressed, see if you can address them at the agency 24 level, or at least go as far as you can. And I'm 25 thinking in some specific areas where some rulemaking, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 66 1 I think, would be in order. And then if -- you know, 2 if you can't find common ground or if that process 3 fails for whatever reason, then there may need to be 4 things that need to be addressed in a legislative 5 context. 6 My -- just as an example, I think the 7 statute is very vague on what constitutes a charitable 8 purpose. The -- this issue is cropping up in the 9 audit process, and then a charity gets confronted with 10 a -- a letter of denial for a renewal of their 11 license. They may -- many of them feel like these are 12 activities that they've been doing for years. It has 13 never been a problem before. Why is it a problem now? 14 And in some cases, I've heard of some examples that, 15 frankly, I think are pretty egregious and ought to be 16 stopped. And some others, I think, are common 17 everyday expenditures that charities incur, and they 18 ought to have a way of knowing that those are -- that 19 they're on solid ground and that they can do that. 20 As it's currently happening, as y'all 21 well know, there has always been a criticism of bingo 22 that the percentage of the total dollar that goes to 23 the charitable purpose is unsatisfactory. But what 24 happens -- I'm not down here for free today. And what 25 happens is, people like me have to come down here and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 67 1 engage in an administrative process. A lot of those 2 times -- a lot of times, those things get worked out, 3 but the expense, the time, the headache, the negative 4 feelings all get incurred. And I think those could be 5 headed off if we would focus systematically on some of 6 those issues. 7 What constitutes a charitable purpose 8 and what does -- what does "spent in Texas" mean, I 9 think, are two things that are good examples of issues 10 that we could illuminate in a methodical process and 11 not go address those off in the -- in the Sunset 12 process. So what I would like to see, I've given 13 Billy the name of another State agency and a person 14 who was responsible for a similar process out there 15 that I think we might be able to go to school on their 16 process a little bit. I'm hoping that we'll follow 17 through on that. 18 Just by way of -- I don't know if it's 19 a warning or whatever. I contacted last year -- I 20 know that there is a subcommittee of the Bingo 21 Advisory Committee that was established to look into 22 whether regulation of bingo ought to be moved 23 somewhere else. People in bingo are split about that. 24 I have been here just long enough now in the bingo 25 world to have seen an older administration's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 68 1 performance and the new -- relatively new 2 administration's performance. And, frankly, bingo is 3 functioning in a much, much better regulatory 4 environment than it ever has. 5 On the other hand, there are these 6 issues that need to be resolved. There -- there are 7 people who would like to see the regulation of bingo 8 moved to another agency. My group has not taken that 9 position. But I wrote a letter to one of the -- to 10 the person who I think is the chairman of that 11 subcommittee for the Bingo Advisory Committee to ask 12 for a similar kind of process that I'm asking for now, 13 and I've never heard anything back. So either I'm 14 going about it the wrong way or people are busy in 15 their day-to-day lives and aren't having the 16 opportunity to respond. 17 But given the schedule that this 18 gentleman has outlined, you can see that we're at an 19 opportune time now to invoke that sort of process, get 20 it working. We've had all up through the summer to 21 try to resolve some of these issues. I, for one, 22 would like to see us be able to go to the legislature 23 and say, y'all don't need to mess with that because 24 the agency has exercised its rulemaking discretion and 25 we -- we've resolved some of these things. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 69 1 So all I'm offering is my commitment to 2 participate. I'll drag people in here who have the 3 day-to-day expertise in bingo. I'll participate 4 myself. But one way or the other, we need to get some 5 kind of process going where can get some resolution on 6 these issues. 7 That's all I have to say and I really 8 appreciate the opportunity to say it, especially out 9 of order. 10 CHAIRMAN CLOWE: And we're happy to 11 have you here, Steve. My recollection was, you made 12 similar comments to the Bingo Advisory Committee. 13 MR. BRESNEN: Yes, sir. 14 CHAIRMAN CLOWE: Am I correct? 15 MR. BRESNEN: Yes, sir. 16 CHAIRMAN CLOWE: And I appreciate you 17 doing that at that time, as well. 18 MR. BRESNEN: Yes, sir. 19 CHAIRMAN CLOWE: Billy, could you give 20 us some feeling about what Steve has addressed in his 21 remarks to us? 22 MR. ATKINS: I would -- I would agree 23 generally with the comments that Steve has made, 24 particularly as it relates to the language in the Act 25 as it relates to charitable distributions. That WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 70 1 language is fairly broad. So the staff has been 2 working on some ways through rule that that could be 3 better defined. Steve has also talked about the -- 4 the stakeholder process. And as he said, he gave me 5 today the name of a contact at the other agency. 6 I don't think that it's just limited to 7 those two issues, i.e., charitable distributions and 8 what "spent in Texas" means. I don't -- I don't know 9 that we have as big a question as what "spent in 10 Texas" means as Steve does, but I think there are 11 other issues where the input of people in the industry 12 would be very beneficial. 13 MR. BRESNEN: I think a stakeholder 14 process could be used to identify those issues that 15 people are having out there. And I'm just using those 16 as examples. But let me just give you -- let me talk 17 about "spent in Texas" for a second. 18 If I'm going to make an otherwise valid 19 trip somewhere, and this is something that -- trips 20 have been an issue. If I make the expenditure through 21 a travel agency in Texas, have I spent it in Texas? 22 Whereas, if I make the expenditure directly with a 23 hotel in Podunk, have I not spent it in Texas? 24 It's -- it can be things as simple as that that are 25 really subject to -- I think, to saying, you know, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 71 1 we're yes on this and no on that. There may be some 2 things -- there may be -- I think there are some basic 3 functions that almost any charity would do that you 4 could say, if you spend your money for that purpose 5 and in carrying out the general activities of what 6 that charity is about, you're fine. There may be some 7 others that the agency needs to have discretion to 8 look at the whole ball of wax and say, no, that -- 9 that falls over here and not over here. 10 But I can tell you with certainty that 11 there are people out there doing things that are 12 people of goodwill that are not stealing and that are 13 not corrupting the purposes of these charities that 14 are uncertain about what they can do. And they need a 15 process to be able to get to terra firma, at least 16 where they can. And if it's not by rule, then there 17 needs to be some agency process whereby they can get 18 some advice that they can rely on. 19 COMMISSIONER WHITAKER: Billy, if I 20 understand Steve correctly, he has brought this to the 21 attention of the bingo advisory board and has not been 22 satisfied with the response he has gotten? 23 MR. BRESNEN: I'm not getting much 24 traction. I'm trying not to be real critical here 25 because -- and you don't -- two of y'all have never WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 72 1 even laid eyes on me, as far as I know. So I don't 2 come down here a whole lot, Mr. Chairman. You know 3 that. I do show up at the Bingo Advisory Committee 4 from time to time. So I'm just trying to hooch it 5 along a little bit and get a little traction on 6 this -- on this idea. 7 COMMISSIONER WHITAKER: So my question 8 is, where has the traction been? Why hasn't it 9 been -- what is your comment on his concerns about the 10 lack of traction? 11 MR. ATKINS: With the Bingo Advisory 12 Committee? 13 COMMISSIONER WHITAKER: Well, with 14 these issues and with them being thought through 15 and -- 16 MR. ATKINS: Well -- well, one of them 17 is, you know, like he said, we've been talking about 18 it for quite some time, but I just today got the name 19 of the contact person. So that has been part of it. 20 Additionally, there are a lot of other rules that are 21 being developed within the division. So this is -- 22 this is just one of many. 23 COMMISSIONER WHITAKER: In your view, 24 will it be a process that we can engage in 25 satisfactorily before Sunset? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 73 1 MR. ATKINS: Oh, I -- yes. I think we 2 can. 3 MR. BRESNEN: Let me -- I realize I'm 4 under Sun -- under the Sunset deal, but there is a lot 5 of rules. This originally came up, Mr. Chairman, at a 6 Bingo Advisory Committee meeting where we were 7 discussing a rule, a proposed rule, and it turns out 8 that -- you know, I don't -- I think I filed some 9 fairly innocuous comments about those rules once they 10 finally percolated up past y'all. But if there is a 11 bunch of rules coming out there, let's get some people 12 involved ahead of time and talk about those things. I 13 can assure you that we'll have productive and creative 14 ideas about what those are. 15 I think there is -- there is a -- the 16 old -- under the old administration, things got sprung 17 on people and they had no participation or little 18 participation in advance. What I'm advocating is some 19 participation in advance so we can work through those 20 things and not end up in a legislative process where 21 everybody is -- there is a cacophony instead of a 22 harmony. And so I'm trying to sing tenor. If I can 23 get somebody to sing bass, soprano, and alto, we'll 24 get -- we'll get there. 25 MR. ATKINS: And Steve brings up a good WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 74 1 point. That -- that's the primary purpose of the 2 Bingo Advisory Committee, is to review these rules 3 prior to their publication and comment on them to the 4 Commission. So now Steve is talking about another 5 group, the stakeholders meeting, and so I think one of 6 the questions we have is where we fit that in with the 7 advisory committee. Because, I mean, we wouldn't want 8 to appear to undercut the advisory committee since 9 they are statutorily the group that's supposed to make 10 recommendations to you. 11 So that's one of the things that I 12 think we have to deal with is, you know, who -- who 13 gets -- I don't know if it's first shot or final say 14 or whatever before it comes to you. 15 MR. BRESNEN: Well, the -- my 16 familiarity in participating in this process was in -- 17 was out through MHMR, and I know this has happened in 18 a lot of other State agencies. But what they did was, 19 they -- they had some rules that they felt needed 20 review, and so they called in a stakeholders committee 21 and they -- it was a very informal process, and they 22 just had a flip chart and they went through, 23 identifying things that should be considered as they 24 went to revising that rule. That's that. 25 They have other advisory committees WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 75 1 that are formal in nature out there, and when they 2 start revising that rule, it's going to go through 3 those things. You know, more -- people have varying 4 views of -- on the effectiveness of the Bingo Advisory 5 Committee process. I've tried to invoke that process 6 by showing up in person and writing a letter. Now, 7 you know, I haven't tried to call any of y'all and ask 8 you to do that for me. I haven't asked any members of 9 the legislature to do that for me. But I'm telling 10 you that with those two techniques, I haven't gotten 11 much traction. 12 So whatever we can do to do that and to 13 do it in a little shorter time frame. I've had some 14 questions -- specific questions about expenditures 15 that it's taken me about two months to get a letter 16 back saying, we can't answer your question. And if I 17 do that, if I've got six questions between now and 18 next legislative session, then I'm off into the 19 legislative process. I'm trying not to do that, 20 desperately. 21 So anyway, that's all I've got to say. 22 I spent a lot more time -- 23 CHAIRMAN CLOWE: I have a strange sense 24 of dejavu. I've been on your side of this table more 25 often than I've been on my side. When I was operating WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 76 1 in a regulated environment, I can remember coming up 2 here and saying, I'll do what you tell me to do if you 3 just tell me what to do. So I -- you're striking a 4 chord with me like you did at the Bingo Advisory 5 Committee meeting. I think, Steve, that seeing it 6 from this side, and it's a little different view. 7 MR. BRESNEN: Yes, sir. 8 CHAIRMAN CLOWE: A State agency has to 9 move forward with caution and they have to answer some 10 questions that folks like you have after some 11 deliberation and some concern for everybody, not just 12 your clients, which is the reason you're here today. 13 And all of the people who have a stake -- and I like 14 that word stakeholder. And I think it goes in some 15 cases even beyond rules. It goes to policy. And 16 Billy is responsible, as I see it, for the policy, 17 which is the interpretation of the rules or 18 enforcement, if you will. And I always think about 19 that when I'm out there on the highway and I see a DPS 20 officer, you know. I know what the law is, but I've 21 wondered what the enforcement is on the highway. 22 MR. BRESNEN: Yes, sir. 23 CHAIRMAN CLOWE: But we want to clarify 24 and we want to respond to you as best we can. And, 25 Billy, I think the BAC is the vehicle on this, and if WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 77 1 it is a stakeholders meeting that is convened within 2 the purview of the BAC, that's where it ought to be. 3 That's a great group, it seems to me, to hand this 4 issue to. 5 Steve, I think you're entitled to 6 action. I think it would be more expeditious -- 7 although we would be happy to have anything go before 8 Sunset that any client of this Commission wants to go 9 before Sunset. That's a great forum for any issue. 10 It may be more expeditious if you could do it in a 11 stakeholders meeting and in that forum. 12 MR. BRESNEN: Yes, sir. And I'll do it 13 round or flat. I spent nearly five years helping run 14 the Comptroller's Office for Bullock. So I know how 15 agencies run. I'm very sensitive to that. I helped 16 make tax policy over there, so I understand that these 17 are issues are sometimes more complex than the 18 licensee thinks they are. That's why I'm trying to 19 get a process by which people will feel at least like 20 they had a participation in the outcome. 21 CHAIRMAN CLOWE: And I think the 22 Commissioners will tell you that we want you to have 23 an answer for your clients. We want your clients to 24 have an answer so they can take care of their business 25 and move forward. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 78 1 MR. BRESNEN: Yes, sir. I know you do 2 and I appreciate that. 3 CHAIRMAN CLOWE: We don't like letters 4 that come back two months after they're sent in 5 saying, I can't give you an answer. We like to be 6 much more definitive than that. 7 MR. BRESNEN: Yes, sir. 8 CHAIRMAN CLOWE: So, Billy, I'll ask 9 you to do what you can on this and to report back to 10 us at our next meeting and tell us what progress 11 you've made. And I appreciate your comments about 12 Billy's proactivity, Steve. I can -- in 13 administrations, I think you're talking about that as 14 opposed to the Governor's Office or this -- 15 MR. BRESNEN: No. I'm talking about 16 Billy's running of the agency. This is not the first 17 time I've said this in multiple forums. You know, 18 the -- unfortunately for regulators, it's the latest 19 gripe that the licensees have that's the one that's on 20 their mind. And some people don't have a big picture 21 point of view. I clearly do. So I don't mean to be 22 overly critical. I'm just trying to get some kind of 23 sequence so the people that I've got to report to will 24 know that there is a -- there is a -- there is a 25 tunnel, that they're going through it, and somewhere WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 79 1 there will either be light or they'll be told, you 2 know, we can't get there. 3 CHAIRMAN CLOWE: Sure. 4 COMMISSIONER WHITAKER: I would say 5 that although I appreciate there can be two sides to 6 both issues, I do very strongly believe that having a 7 process in place that would include your viewpoints 8 is -- is just a given and that, Billy, I know you'll 9 take that seriously. And I would like to hear next 10 time, as well. And also, Steve, if you feel that 11 you're not getting the traction you need, that you'll 12 let us know. 13 MR. BRESNEN: Okay. 14 COMMISSIONER WHITAKER: And if we don't 15 hear from you, we'll assume it's -- 16 MR. BRESNEN: I didn't intend to put it 17 in those terms down here today. I was just asking 18 for -- I think the timing is right for us to go 19 forward on a process that -- that gets there. 20 COMMISSIONER WHITAKER: But if I don't 21 hear from you, I'm going to assume that everything is 22 okay. 23 MR. BRESNEN: Well, that's a dangerous 24 thing. I appreciate it. 25 CHAIRMAN CLOWE: Just one other thing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 80 1 on the broader subject. You spoke about bingo 2 regulation under the purview of this Commission. 3 MR. BRESNEN: Yes, sir. 4 CHAIRMAN CLOWE: I don't want to get 5 into that as a yes or no or you do, you don't kind of 6 thing, but I would like to say that this Commission is 7 very attentive to the bingo industry and is concerned 8 about the manufacturers, the distributors, the 9 operators, and the players. And this Commission is 10 very happy to have bingo regulation here and intends 11 to pay attention to the industry and everybody who is 12 involved. And if you need any reassurance about our 13 focus, I will tell you that we've watched the bingo 14 industry, we've carefully -- Billy is a direct report 15 to the Commission. We communicate with him frequently 16 about the industry and where it is. And I would just 17 like to give you that reassurance that we're focused 18 on this. It's a smaller part than the Lottery is. 19 There is no question about that. 20 MR. BRESNEN: Sure. 21 CHAIRMAN CLOWE: But it's a very 22 important part of this Commission's responsibilities. 23 MR. BRESNEN: Well, we'll look for some 24 opportunities to get y'all individually some face time 25 with some of the people in bingo out there. I think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 81 1 you'll find it fun. It's an interesting group of 2 people. And that's -- we probably need to do a little 3 better -- better job of acquainting you with who -- 4 who does these things and the kind of good things that 5 come out of there. 6 Thanks a lot. I appreciate it. 7 CHAIRMAN CLOWE: The next meeting of 8 the Bingo Advisory Committee is February the 13th. 9 Isn't that right? 10 MR. ATKINS: That's correct. 11 MR. BRESNEN: It's not a Friday, I 12 hope. That wouldn't be a good day for me. 13 All right. Thanks. 14 CHAIRMAN CLOWE: Gary, you didn't have, 15 relatively speaking, a whole lot in that subject. 16 Anything further? 17 MR. GRIEF: No, sir. 18 CHAIRMAN CLOWE: You and your group 19 have done an excellent job, and I will tell you that 20 the Commission feels very confident about our entering 21 into this process. We're eager for it to begin and we 22 feel very good about your guidance in this area of 23 activity. 24 MR. GRIEF: I appreciate it. 25 COMMISSIONER WHITAKER: And let me ask WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 82 1 one question of Gary. When you say there is going to 2 be a Commission decision, what is that? 3 MR. GRIEF: That, as I understand it -- 4 and Kim or Linda or Billy, feel free to add to this. 5 That will be the decisions that are made once the 6 comments and recommendations come out from the Sunset 7 Commission staff that will be reviewing our agency. 8 We'll go in front of the Sunset Commission members and 9 they will make decisions based on those 10 recommendations. 11 COMMISSIONER WHITAKER: When is the 12 really hard review process being done? Is it going to 13 be before that decision? 14 MR. GRIEF: It will be that March 15 through August time period. 16 COMMISSIONER WHITAKER: Okay. So the 17 hard work is going to be done at that period of time. 18 And once the legislative session starts, relatively 19 little review is -- 20 MR. GRIEF: Well, let me retract the 21 hard work. I think the hard work will also come when 22 the drafting of the legislation comes along. 23 CHAIRMAN CLOWE: Beginning in 24 September. 25 MR. GRIEF: Hopefully that will be a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 83 1 joint effort with our staff and the members of the 2 Sunset Commission -- staff of the Sunset Commission, 3 to come up with agreed-upon legislation. 4 COMMISSIONER WHITAKER: And then during 5 the legislative session, what can we expect to happen? 6 MR. GRIEF: In visiting with other 7 State agencies, you can expect the unexpected. 8 COMMISSIONER WHITAKER: I was almost 9 going to say that. 10 But what -- what is -- what happens 11 during that period of time? 12 MR. GRIEF: I've visited with agencies 13 that legislation was drafted and passed relatively 14 early in the session with little or no comment and 15 questions. And I've visited with others that went 16 down to the very last hour of the legislative session 17 before they got their -- their legislation passed. So 18 it runs the gamut. 19 MS. KIPLIN: The primary purpose of the 20 legislation, as I understand it, is to continue the 21 business of the agency in some form or fashion. And 22 without the legislation, by existing law, that agency 23 will be abolished. 24 CHAIRMAN CLOWE: Very good. Thank you, 25 Gary. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 84 1 We're now ready to go to item three, 2 report, possible discussion and/or action on lottery 3 advertising and promotions, including advertising 4 procurements. 5 Liz was here earlier on item two. I 6 believe maybe she has left the room. Is there 7 anything further, Linda? 8 MS. CLOUD: I don't think there is 9 anything else to report on that, Commissioner. 10 CHAIRMAN CLOWE: We'll go to item four, 11 then, consideration of and possible discussion and/or 12 action on State Auditor's Office and/or internal audit 13 reports relating to the TLC and your activities, Debra 14 McLeod. Good morning, Debra. 15 MS. McLEOD: Good morning, 16 Commissioners. 17 There are five draft reports I would 18 like to have the Commission release today. They're 19 the game plan verification, advertising performance 20 measures, accounts receivable, the bingo license 21 criminal history and bingo debit card controls. I 22 have provided the Commission with a quarterly update 23 on the progress of all of our audits in fiscal 2002. 24 And of note, to date, we have made tremendous progress 25 in getting through all of the follow-up audits to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 85 1 internal audits that were done previously. Draft 2 reports have been provided to the Executive Director 3 on three of the six audits. I anticipate, by 4 mid-month, the Executive Director will receive the 5 final three reports. 6 We've also begun asking management to 7 pull documentation together to support their 8 implementation of all of the six State Auditors' 9 reports that have been done in the past few years. We 10 anticipate beginning the field work. Billy has 11 provided us all of the field work or all of the 12 documentation we need for the SAO bingo management 13 control report, and we're reviewing that right now. 14 From an administrative standpoint, my 15 posting closes for the senior audit position at the 16 end of January, and then we'll begin interviewing in 17 February. 18 The other administrative task we're 19 working on is revising the internal audit charter and 20 procedures. 21 I think at this point, that's about all 22 I have to say. I do have a note that the State 23 Auditor's Office had provided Ms. Cloud with draft 24 reports on their MOS for the information -- 25 information technology, which I understand is the last WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 86 1 division. Correct, Linda? 2 MS. CLOUD: Yes. 3 MS. McLEOD: And unfortunately today, 4 we still have not received a report from the 5 Comptroller's Office on their audit of accounts. So 6 that's still pending from the outside. 7 I think that's all I would like to 8 report at this time unless you have any questions. 9 CHAIRMAN CLOWE: Any questions? 10 Debra, I believe you're using some out 11 time -- outside contract assistance? 12 MS. McLEOD: I've gotten one temp in 13 that has been here since the end of November. He is 14 out for two weeks due to personal reasons. The other 15 temp that came in the beginning of December has 16 already left. She has taken a full-time job. I'm in 17 the process of rebidding for the remainder of that 18 temp time. 19 CHAIRMAN CLOWE: And you were getting 20 some really good help there at one time, I think. 21 MS. McLEOD: Yes, sir. And I continue 22 to. 23 CHAIRMAN CLOWE: Get back to that 24 situation. 25 MS. McLEOD: Yes, sir. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 87 1 CHAIRMAN CLOWE: And when does your 2 posting close? 3 MS. McLEOD: The end of this month. 4 CHAIRMAN CLOWE: So you should be able 5 to form your group and move forward with the selection 6 of that individual. 7 MS. McLEOD: Yes. I've contacted three 8 of the four people that I would like to have on the 9 evaluation team. And we've provided a screening 10 matrix to HR, as well as the interview questions. 11 My -- to my knowledge, as of last Friday, we've 12 received nine applicants. I expect that after the 13 holidays, we'll probably receive much more. 14 CHAIRMAN CLOWE: Good. Very good. 15 Fine. Thank you very much. 16 We're then ready to go to item number 17 five, report, possible discussion and/or action on the 18 Council on Competitive Government's activities 19 relating to evaluation and recommendations on the 20 Texas Lottery Commission. 21 Nelda Trevino. Good morning, Nelda. 22 MS. TREVINO: Good morning, 23 Commissioners. For the record, I'm Nelda Trevino, the 24 director of governmental affairs. 25 Today, a very brief report. The WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 88 1 Council staff did conclude their field work and issued 2 their draft report to us on December the 19th. 3 Included in that draft report were ten 4 recommendations. Council did hold a meeting on 5 December the 20th to discuss the draft report and 6 those recommendations and requested that our written 7 response be provided to them on December the 31st. A 8 copy of the Council's draft report and the December 9 31st written response are included in your commission 10 meeting notebooks. 11 We also provided the Council with 12 additional information that was requested at the 13 December 20th meeting. And today we provided you with 14 a copy of that document, which is dated January the 15 7th, 2002. The Council is scheduled to meet this 16 afternoon at 2:00 o'clock to discuss the report and 17 possibly take action on the recommendations. In 18 addition, they have set a meeting for this Friday at 19 9:00 a.m. in the event that the Council requires an 20 additional meeting. 21 And I'll be happy to answer any 22 questions you might have. 23 COMMISSIONER WHITAKER: What do you 24 anticipate will happen today? 25 MS. TREVINO: I think -- my feeling is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 89 1 that they would give either the agency some direction 2 in regards to those recommendations and direct the 3 agency to adopt and implement those recommendations, 4 or it could be that they want -- or they would just 5 deliberate those recommendations and then come back on 6 Friday and take some action on them. 7 CHAIRMAN CLOWE: Commissioners, it is 8 my intention to excuse myself from this meeting at 9 1:30 p.m. and ask Commissioner Whitaker to chair the 10 meeting, and ask that Linda Cloud and other members of 11 her staff be excused so that we can attend that 12 meeting in person. 13 COMMISSIONER WHITAKER: I won't excuse 14 Linda, but... 15 CHAIRMAN CLOWE: Well, we'll have -- 16 we'll have to work on that. Thank you, Nelda. 17 We're then ready to go to item number 18 seven, consideration of and possible discussion and/or 19 action on the agency's fiscal year 2001 Minority 20 Participation Report. 21 Robert Hall. Good morning, Robert. 22 MR. HALL: Good morning, Commissioners. 23 For the record, my name is Robert Hall, director of 24 minority development services. Commissioners, 25 minority development services requests your WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 90 1 consideration for approval of the Commission's fiscal 2 year 2001 annual minority participation report -- 3 excuse me -- minority business participation report. 4 In accordance with Section 466.107 of the State 5 Lottery Act, the fiscal year report includes required 6 information related to level of minority -- minority 7 business participation and retains -- as it pertains 8 to both the Commission's contracts and the licenses of 9 sales agents. We have also included charts and tables 10 that highlight each of these areas and includes 11 recommendations for improvement for minority business 12 opportunities for fiscal year 2002. 13 We appreciate the feedback we received 14 from you, our Executive Director, our General Counsel, 15 our communications division, operations division, 16 financial division, and marketing division, which 17 assisted us in developing this report. After we 18 receive your approval and obtain Chairman Clowe's 19 signature for the report cover letter, we'll prepare 20 this report for distribution to the Governor, 21 Lieutenant Governor, Speaker, members of the House, 22 members -- excuse me -- Speaker of the House, the 23 Governor, Lieutenant Governor, and members of the 77th 24 legislative -- Legislature. 25 At Commissioner Criner's request, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 91 1 minority development services invited the Commission's 2 primary vendors to this meeting, some of which are in 3 the audience to answer any questions you may have 4 regarding their efforts -- regarding their efforts for 5 minority inclusion during fiscal year 2001. 6 At this time, I will begin -- I will be 7 happy to begin answering any questions that you may 8 have regarding the report. 9 CHAIRMAN CLOWE: Questions? 10 COMMISSIONER CRINER: Have you had an 11 opportunity to share your results with our vendors? I 12 know the department has been privy to the information, 13 but the vendors that we have? 14 MR. HALL: No, sir, we have not. We 15 have not released any information at this point. 16 COMMISSIONER CRINER: Are they aware 17 that we are tracking this performance level? 18 MR. HALL: Yes, sir. I think they are, 19 Commissioner Criner. We track on a monthly basis the 20 level of participation regarding any and all contract 21 vendors. And we also specifically track all contract 22 vendors that have contracts with us for more than one 23 hundred thousand dollars, which is provided to you 24 through our Executive Director's report on a monthly 25 basis. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 92 1 COMMISSIONER CRINER: Are they aware 2 that we're really serious about this? 3 MR. HALL: Yes, sir. I think they are. 4 Most of our primary vendors are aware that we're 5 serious about minority inclusion. We've also sent 6 letters to each of those vendors, requesting meetings 7 with them in the near future to talk about how we can 8 increase or improve our minority participation. 9 And one of those -- excuse me, 10 Commissioner Criner. But one of those efforts will 11 include the mentor protege effort, which we'll be 12 having an orientation meeting very soon. 13 COMMISSIONER CRINER: I noticed that in 14 the Council's competitive government request, they 15 asked about getting our minority participation 16 involved in that. I think it's item -- one of the 17 items in their recommendation. 18 MR. HALL: I'm not aware of that item, 19 sir. I'm sorry. 20 MS. CLOUD: I don't remember of Council 21 having any... 22 COMMISSIONER CRINER: Let me see if I 23 can read that backwards. 24 MS. CLOUD: They did -- on proposal 25 four -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 93 1 COMMISSIONER CRINER: Okay. 2 Recommendation number four, the Texas Lottery 3 Commission should pay for minority vendor recruiting 4 using general agency operation funds. 5 MS. CLOUD: And that is something that 6 legislatively we cannot -- 7 COMMISSIONER CRINER: I understand. 8 That's what you have -- you have to tell them. 9 MS. CLOUD: Right. 10 COMMISSIONER CRINER: When I read that, 11 I understood where it came from. But what I'm saying 12 is that there is an interest at that level of state 13 government, so we need to pay attention to that and 14 our vendors need to pay attention to that. And my 15 number one concern about this whole minority HUB 16 program is that it's very hard for us to do that when 17 we subcontract so much of our activity out. So 18 therefore, we need to be looking at our vendors that 19 we subcontract that out to to be our partners in 20 helping to achieve that objective. And if they're 21 not, then that should weigh heavy on their contracts. 22 MR. HALL: I understand. 23 COMMISSIONER CRINER: They're going to 24 squeeze us at the Capitol, so the squeeze has to go 25 all the way down. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 94 1 MR. HALL: Yes, sir. 2 COMMISSIONER WHITAKER: What are the 3 total dollars per year that we pay to Scientific 4 Games? 5 MR. HALL: Commissioner, I have -- 6 COMMISSIONER WHITAKER: Approximately. 7 Not a specific. 8 MR. HALL: One second. 9 I think it was somewhere around -- my 10 figures are not correct. I don't have it with me. 11 But I think it's somewhere around eight million 12 dollars last -- last fiscal year. 13 COMMISSIONER WHITAKER: And their 14 contributions to Texas HUBs is 200,000 dollars? 15 MR. HALL: Roughly. Yes, ma'am. 16 COMMISSIONER WHITAKER: And what 17 percentage is that? 18 MR. HALL: Commissioner, I would -- I 19 would have to gather that information and be happy to 20 come back with a response for you. 21 COMMISSIONER WHITAKER: Is there 22 anything we can do to increase their participation in 23 HUBs? It seems like a pretty low percentage. 24 MS. KIPLIN: Commissioners, one of the 25 issues that -- Mr. Hall, may I -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 95 1 MR. HALL: Yes, ma'am. Go ahead. 2 MS. KIPLIN: One of the issues that 3 existed for some time had to do with the 4 subcontracting on what was called the paper broker. 5 And this came up in -- actually, it was part of a 6 protest on a procurement. Scientific Games at that 7 point was -- was not using a HUB for its paper broker 8 and another vendor was. There was some issue about 9 that, whether that was disingenuous to use a broker 10 who actually obtained the paper from a nonHUB and then 11 counted -- the vendor counted all the dollars paid to 12 the HUB broker as HUB money, even though it 13 actually -- the paper was coming from a nonHUB 14 supplier. In other words, was it a pass through and 15 was it disingenuous. 16 We've -- we've attempted for some time 17 to get that -- get that question answered. As a 18 matter of fact, it was in the form of a request for an 19 Attorney General opinion. The Attorney General 20 opinion did come back that said that that particular 21 broker could be a HUB. The next question was, to what 22 extent do we count the dollars. Was it in the 23 retention, what got retained, or was it the total 24 amount paid. The AG told us that we needed to talk to 25 the General Services Commission about that. That was WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 96 1 a policy decision for them. 2 We wrestled with that. We did have a 3 meeting after it became the Building and Procurement 4 Commission with a Cindy Reed, who is one of their 5 deputy executive directors. And we did get an oral -- 6 oral response. I am still awaiting the written 7 response. But the oral response is that you would 8 count all that money to the HUB dollars. That was a 9 question that Scientific Games had and that's what 10 caused us to propose the request to the AG. It has 11 been a long -- a long time to get the result. 12 I think with that information, once we 13 get something in writing from them, then Scientific 14 Games will have that information in their hands to 15 look at who is supplying their paper and what broker 16 they use. And they may make different decisions based 17 on -- different business decisions based on the 18 information that we finally receive. 19 There was a concern, I will say, at the 20 Commission level during the procurement protest as to 21 how -- how genuine the practice of the other vendor 22 was in terms of using the HUB -- a HUB business who in 23 turn was a pass through. And we've finally come to 24 the end of the road in receiving an answer, and I'm 25 just waiting for that answer to be put in writing. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 97 1 Mr. Hall, is there anything -- 2 MR. HALL: Which at -- which at this 3 particular point in time, we can attest to the fact 4 that Scientific Games does report a paper vendor. And 5 if it's anywhere near the value that Ms. Kiplin is 6 talking about, it does -- it would be astronomical in 7 terms of increase if they are using a HUB minority 8 vendor. At this point in time, for fiscal year 2001, 9 the total expenditures that we received in terms of 10 subcontracting paper was less than 6,000 dollars. 11 COMMISSIONER CRINER: You did run the 12 HUB program over at GSC. Right? 13 MR. HALL: I was an employee there at 14 General Services Commission, yes, sir. 15 COMMISSIONER CRINER: So you pretty 16 much know what the rule is? 17 MR. HALL: Yes, sir. I believe so. 18 MS. CLOUD: Commissioners, I just want 19 to say that I couldn't be more pleased with Robert's 20 direction with this minority program. And he has done 21 a tremendous job on bringing these vendors to the 22 table and making them aware of the importance of this 23 program with the Lottery Commission. And he -- I 24 commend him for the steps he has taken in the short 25 term that he has been in this job, and I'm very WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 98 1 pleased with his performance. 2 MR. HALL: Thank you. 3 COMMISSIONER CRINER: If we can get our 4 mentor protege program working, we can get to be 5 number one. 6 MR. HALL: Commissioner Criner, we are 7 striving at -- as you've noticed in our last report we 8 gave you, in terms of total dollars spent last year, 9 in accordance with public rule, we spent over 17 10 million dollars with HUB vendors, which ranked us 11 around number six in terms of the top ten spending 12 agencies. We are looking forward to moving forward 13 and getting to be number one in terms of overall 14 utilization. Now, the State of Texas has several 15 different goals that they utilize. 16 COMMISSIONER CRINER: The one I want 17 you to think about is -- you know, I make all these 18 metaphors and stuff. But if you're not the lead dog, 19 the view never changes. 20 MR. HALL: Yes, sir. 21 COMMISSIONER CRINER: So right now, 22 we're not the lead dog, so we're -- the view is always 23 the same. 24 MR. HALL: We'll make every effort to 25 become, quote unquote, the lead dog. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 99 1 COMMISSIONER CRINER: Excuse me, 2 Commissioners. 3 MR. HALL: In reference to the mentor 4 protege, Commissioners, I want to also mention that 5 the General Services Commission, in accordance with 6 the last legislative session, Senate Bill 311, is 7 proposing rules regarding the mentor protege 8 initiative whereby any prime vendor in the future, 9 after the rules have been adopted, may submit as part 10 of their subcontracting -- business subcontracting 11 plan a protege, if they already have an existing 12 relationship, as part of their subcontracting effort. 13 Meaning, they will not have to go through the good 14 faith effort requirements of trying to obtain HUB 15 subcontractors for their subcontracting efforts. 16 So our initiative to implement a full 17 mentor protege program in place here with some of our 18 primary vendors that we have could also assist us with 19 improving our numbers and also in HUB and minority 20 inclusion. And we effectively provided the General 21 Services Commission -- excuse me -- Texas Building 22 Procurement Commission with comments regarding those 23 rules on December 31st. 24 COMMISSIONER CRINER: I've heard 25 several other agencies talk about the mentor protege WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 100 1 concept, and they all act like they're going to do it 2 tomorrow. And I just want us to be ahead of them. 3 MR. HALL: Yes, sir. We are 4 tentatively -- we've sent applications to selected 5 primary vendors at this particular date and time. 6 Actually, that happened before the end of the year. 7 And we are planning our orientation meeting on 8 February the 1st to invite HUB potential proteges, as 9 well as our primary vendors. And Gtech is one of 10 those and Scientific Games is also one of those. 11 COMMISSIONER CRINER: Thank you, sir. 12 MR. HALL: And Commissioner Whitaker, 13 in reference to your question, Scientific Games' total 14 expenditures for fiscal year 2001 total contract 15 dollars, according to the contract for 2001, was 16 roughly 7.3 million dollars. Their total HUB 17 utilization was 207,000 dollar over that amount, and a 18 percentage of 2.81 percent. 19 CHAIRMAN CLOWE: He's pretty tough, 20 isn't he? I would settle for number six right now and 21 improving. And I think you're showing a lot of hard 22 work, Robert. And I think he's happier with you than 23 he's really letting you know. But he wants you to do 24 better and the Commission shares in that. 25 MR. HALL: Thank you. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 101 1 CHAIRMAN CLOWE: Your report is 2 excellent and I'm very proud to have it go to the 3 Governor and the leadership of the legislature. 4 Would you introduce those folks that 5 are here at your invitation today? 6 MR. HALL: I'm not sure of all the 7 faces, Commissioner -- Chairman Clowe. 8 CHAIRMAN CLOWE: Well, maybe we could 9 ask them to stand up -- 10 MR. HALL: I'll be happy for them to 11 stand if they're in the room. I know some of them. 12 CHAIRMAN CLOWE: Sure. We would like 13 to know who has come. 14 MR. FOGARTY: I'm Bill Fogarty, the 15 president of Fogarty Klein Monroe, who is the 16 advertising and marketing firm that are subcontracting 17 with the Texas Lottery. Happy to be here. 18 CHAIRMAN CLOWE: Bill, thank you for 19 coming. 20 MR. WILLIAMS: I'm Rob Williams, the 21 account manager for Scientific Games. 22 CHAIRMAN CLOWE: Thank you, Robert. 23 MR. LANIER: I'm Odesius Lanier, one of 24 the partners in McConnell, Jones, Lanier & Murphy. 25 CHAIRMAN CLOWE: Thank you. Thank you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 102 1 both for being here. 2 MR. RIVERA: I'm Ramon Rivera, the 3 assistant account general manager for Gtech. 4 CHAIRMAN CLOWE: Thank you. 5 MR. DAVILA: I'm Dean Davila. I'm the 6 outside auditor, and my firm is Davila Shumate 7 (phonetic), and we're the on-line auditors. 8 CHAIRMAN CLOWE: You're there every -- 9 every night, aren't you? 10 MR. DAVILA: Yes, sir. 11 CHAIRMAN CLOWE: Okay. Good. Thank 12 you for being here. 13 MS. KING: I'm Delta King with King 14 Group Advertising Agency. And we're the prime 15 minority contractor. 16 CHAIRMAN CLOWE: Thank you. 17 MR. KING: I'm John King, president of 18 The King Group, and we're 100 percent HUB vendor 19 for -- 20 CHAIRMAN CLOWE: You're a familiar 21 face. Thanks. We're glad to have you here. 22 Anyone else? 23 Thank you all for being here. We 24 appreciate the services and the goods that you're 25 providing for this Commission. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 103 1 Anything further for Robert? 2 COMMISSIONER CRINER: Well, I would 3 just like to tell Robert, I think he's doing a good 4 job. 5 CHAIRMAN CLOWE: There is unanimity. 6 MS. KIPLIN: Commissioners, this is an 7 action item. You will need to make a motion to 8 approve the minority business participation report for 9 fiscal year '01. 10 COMMISSIONER CRINER: So moved. 11 COMMISSIONER WHITAKER: Seconded. 12 CHAIRMAN CLOWE: All in favor, please 13 say aye. Opposed, no. 14 The vote is three-zero in favor. 15 Thank you. 16 MR. HALL: Chairman Clowe, can I get 17 your signature? 18 CHAIRMAN CLOWE: We're now ready to go 19 to item number eight, report, possible discussion 20 and/or action on the agency's fiscal year 2001 21 financial audit report. 22 Good morning, Bart. 23 MR. SANCHEZ: Good morning, 24 Commissioners. For the record, my name is Bart 25 Sanchez. I'm the financial administration director WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 104 1 for the Texas Lottery. 2 Under Section 466.017 of the Government 3 Code, the Executive Director is to provide a certified 4 public accountant to audit -- to provide an 5 independent audit for the fiscal year 2001. The 6 certified public accountant is McConnell and Jones. 7 The certified public accountant is to 8 present an audit report 30 days after November 20th 9 that the Lottery is to present the annual financial 10 report. So this before you have the -- you received 11 the independent auditor's report. To my left are 12 representatives from the auditing firm, McConnell and 13 Jones. And I'll let them introduce themselves. 14 MR. EATON: Good morning, my name is 15 Eric Eaton. I'm the director of assurance services. 16 MR. LANIER: For the record, my name is 17 Odesius Lanier. And I am the partner in charge of the 18 consulting practice. 19 MR. SANCHEZ: I think what we'll do is 20 let Eric present the general overview, the auditor's 21 report and the financials, and then hopefully 22 entertain any questions that y'all may have. 23 MR. EATON: Thank you, Bart. 24 First off, I would like to say, I 25 appreciate the support and help we got from Linda, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 105 1 Bart, and Gary, and Robert, and the total commission 2 staff during the process of the audit. Wayne 3 McConnell, our managing partner, could not be here 4 today. He had another board meeting to attend. So I 5 apologize on his behalf for not being here. 6 If you want to open up the report, 7 starting out on page one, we have the independent 8 auditor's report. If you look down to paragraph 9 three, we give our opinion that the financial 10 statements present fairly in all material respects the 11 financial position and results of operations and cash 12 flows. And in layman's terms, it's a clean opinion, 13 an unqualified opinion, which is the best kind of 14 opinion we can get. 15 Going through the financial statements 16 themselves, on the balance sheet, I just wanted to 17 point out a couple of items. Your total assets run 18 one -- about 1.75 billion dollars. Most of that is in 19 terms of investments that account for and accumulate 20 to -- to pay out prizes. And that's 1.39 million -- 21 or billion. Going into the income statement, the 22 statement of revenues, expenses, and changes in fund 23 for the proprietary fund. You're looking at your 24 ticket sales for the year ending August 31st, 2001. 25 You have 2.8 billion dollars, which is an increase of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 106 1 approximately 175 million dollars from the prior year. 2 Some of the major expenses -- expense 3 items are, of course, lottery prizes at 1.6 billion. 4 We have printing and production, which is -- the 5 lottery tickets themselves is 15.7 million. And 6 salaries and wages is ten million. Other operating 7 expenses, which include retailer commissions of 141 8 million. Lottery operator fees of 88 million, 9 advertising of 39 million, bonuses paid to retailers 10 of five million. The others are nonoperating revenues 11 which are -- account for your investments and 12 activities that those investments come from and as far 13 as interest and dividends and other immaterial items 14 that are mentioned there. 15 On the footnotes, I would like to turn 16 to page -- page 16 which, of course, is -- deals with 17 the transfers to the multi-categorical teaching 18 hospital and the tertiary care facility, which are -- 19 and also, page 18 deals with the transfers to the 20 Foundation School Fund. Payments made to the 21 multi-categorical teaching hospital accounts for 4.4 22 million in the current year. Combine that with 35.5 23 million in the prior year, and it reaches the 24 statutory limit of 40 million dollars for the two-year 25 period. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 107 1 And also, new this year by statute is 2 unclaimed lottery prize winnings that are not limited 3 by statute on the multi-categorical teaching hospital, 4 goes to the tertiary care facility. And that amount 5 for the current year ending 8/31 was 34.4 million. 6 Page 17 -- or 18. I'm sorry. Shows 7 total transfers to the Foundation School Fund of 825 8 million dollars in the current year. 9 Going to the back of the report, we 10 have the auditor's report on compliance and internal 11 controls over the financial reporting based on our 12 audit of the financial statements. And in both 13 opinions for compliance with laws and regulations, 14 there was no instances of noncompliance found or 15 reported. And we do not have any matters of -- 16 involving internal controls over financial reporting 17 as far as operations that we considered a material 18 weakness. And none are reported here, as well, which 19 is also good for the Commission. And I want to 20 commend them for doing a good job. 21 COMMISSIONER CRINER: You're saying we 22 have no material weaknesses? 23 MR. EATON: That is correct. We do 24 want to point out, though, that we do feel that there 25 is an item that needed to be reported on. And that is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 108 1 on the financial accounting, their general ledger 2 accounting system which -- which finance is well aware 3 and executive management is aware, is outdated and 4 tends to cause a great deal of strife and cumbersome 5 procedures for the finance division. So if you want, 6 I can read this. 7 COMMISSIONER CRINER: What page -- what 8 page are you on? 9 MR. EATON: I'm sorry. Page 39. The 10 Commission maintains its general ledger accounting 11 system on a software application of -- called Ross. 12 This Ross is -- I'm not sure exactly how many years it 13 has been in existence. I think since the beginning. 14 It has been updated, but it is the original 15 application for the Commission on their general 16 ledger. But this Ross system does not support a 17 budget module or maintain expenditures and accounts 18 payables on accrual or encumbrance basis. It doesn't 19 produce comprehensive financial reports or accommodate 20 a closing period to record year-end adjustments and 21 accruals. 22 This causes a great deal of cumbersome 23 work for the finance department in closing the 24 year-end report. I believe this year, we actually 25 closed the general ledger, but now we're going to have WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 109 1 to go back and make prior year adjustments based on an 2 actual closing process, which takes into account the 3 accruals and reports from Gtech on year-end numbers. 4 We believe that -- I'll keep reading -- 5 the Commission's finance department records 6 expenditures on a cash basis throughout the year and 7 manually adjusts the general ledger accounts at end of 8 year for accruals. Internal management reports such 9 as budget to actual expenditure analysis include cash 10 expenditures and commitments but does not include 11 accruals. Annual financial statements for enterprize 12 funds are required to be presented on an accrual 13 basis. 14 In general, we're recommending that the 15 Commission consider the purchase of a new software 16 application for its finance and accounting department 17 and believe that the new software should provide the 18 department with the capability to maintain subsidiary 19 ledgers that are fully integrated with the general 20 ledger and streamline and standardize the year-end 21 closing process. And management's response is below 22 that, and they concur. And do you want me to 23 elaborate any on that? 24 COMMISSIONER WHITAKER: I thought we 25 had talked about this before. And -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 110 1 MR. SANCHEZ: We have talked about it, 2 Commissioners, and this is an item that has been -- 3 was addressed, I think, the last two legislative 4 sessions. As you know, in capital budgets, we have to 5 request for this type of expenditure. In the 6 legislative session, I think, in '97, there -- it was 7 approved, but there was a question of the monies. 8 When we encountered a decline in sales, of course, one 9 of the things you have to prioritize is what -- where 10 are you going to spend the money. So we deferred this 11 item at that time. 12 COMMISSIONER WHITAKER: Right. 13 MR. SANCHEZ: In this last legislative 14 session, we did get the request for approval and we'll 15 be moving forward in trying to get this expenditure. 16 MS. CLOUD: We're working right now on 17 coming -- getting a software package that will do what 18 we need it to do in our accounting department. We 19 have wasted time in going through a couple of 20 consultants that did not give us the return we needed 21 on the needs assessment, so now we are back to square 22 one. And we are working -- Bart has Daniel and one of 23 our IT people working together on trying to come up 24 with a financial package that will serve our needs. 25 We want something that is going to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 111 1 be -- incorporate everything we need in the way of 2 budgeting and purchasing along with the general ledger 3 and -- and the financial statements on a -- that will 4 print out for us on a regular basis. 5 COMMISSIONER WHITAKER: When do you 6 think we'll have that? 7 MR. SANCHEZ: I think our goal would be 8 to have this effective for the fiscal year end of 9 August 31st, 2001 -- 2002. 10 MS. CLOUD: Two. One is gone. 11 MR. SANCHEZ: For the fiscal year of -- 12 for the end of fiscal year '02. 13 COMMISSIONER WHITAKER: Which is? 14 MR. SANCHEZ: August 31st. 15 COMMISSIONER WHITAKER: That -- we are 16 now. Where are we? Does that work for you, Bart? 17 MS. CLOUD: This is a very expensive 18 process. This package -- or the quotes that we've 19 gotten so far have been anywhere from 800,000 to -- 20 MR. SANCHEZ: It could run from 800,000 21 to a million to a million two. And there was some 22 discussion between the State Comptroller that they 23 wanted agencies to go -- migrate towards PeopleSoft. 24 That's what the Comptroller was pushing towards, which 25 is a pretty expensive system, which I think it would WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 112 1 be far more than what we need. So in looking towards 2 that, we're trying to look to mid-tier systems, for 3 example, like the J.D. Edwards, other Epicore systems. 4 We're researching other systems that other lotteries 5 have and that Gtech is familiar with and also that 6 fits in with our Internal Control System, the ICS 7 system. 8 As you know, this -- with the Lottery, 9 it's not that very -- it's not easy to fit a system 10 that will interface with all of the other required 11 systems. So we're -- we're trying to do our homework. 12 Of course, we don't want to spend too much time of 13 being overkill and doing so much work and we're 14 missing the time. We do have the approval to spend 15 this capital expenditure by the end of fiscal year 16 '03. 17 COMMISSIONER WHITAKER: I just want to 18 make sure it's working with what you need and what the 19 outside accountants are telling us are -- is required. 20 MS. CLOUD: We are -- what we are 21 anticipating purchasing, the accountants will be very 22 happy with. 23 MR. EATON: And we would be more than 24 happy to help out or consult in any way on the 25 application of the integration of that software, as WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 113 1 well. 2 COMMISSIONER CRINER: Since that seems 3 to be my area of expertise for 41 years, 42 years, 4 have you involved the accounting industry, as they've 5 sneaked over into technology and started doing some 6 auditing and evaluation and consulting, to help 7 identify a software package that would fit? Since 8 you -- whatever consulting -- 9 MR. SANCHEZ: I think we have. We've 10 used Price Waterhouse Coopers. In doing the security 11 audit, they mentioned to us a lot of systems. I mean, 12 basically, they mentioned the same systems that we're 13 looking at. 14 COMMISSIONER CRINER: The Big Six seem 15 to have a technology arm over there. I never figured 16 out what they did by coming over there, but they count 17 beans. So I suggest that you interface with them and 18 get some really good advice on the accounting side. I 19 understand what you meant by PeopleSoft. But the -- 20 the agencies that they probably would be recommending 21 that to are not going to be counting the kind of 22 dollars that we're counting over here. So that's very 23 important. And then you've got a group here that is 24 recommending a change. They probably have some 25 opinions, too. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 114 1 MS. CLOUD: It was just unfortunate 2 that the dollars that we could defer at the time when 3 our budget was so short when our sales were down, it 4 was the financial package. So it -- it has been 5 postponed longer than it should have been. 6 MR. EATON: One other -- sorry. One 7 other item I wanted to bring to y'all's attention is 8 for the fiscal year ending August 31st, 2002, GAASB 34 9 standard is going to take into effect, which really is 10 going to change the reporting -- reporting functions 11 and reporting format of the financial statements for 12 the Texas Lottery Commission. I've talked with Bart 13 and Linda about that. We would be happy to present 14 what those changes and what our assistance could be on 15 those changes in -- at another time. 16 COMMISSIONER WHITAKER: Very quickly, 17 like in 20 words or less, what is the core essence of 18 it? 19 MR. EATON: The core essence is, it's 20 changing the fund accounting system and it's also 21 adding a management discussion analysis section. 22 Right now, we have governmental and proprietary and 23 fiduciary funds. It's going to be classifying into 24 major and nonmajor funds and also changing some of 25 your reporting structure on whether they are a full WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 115 1 accrual or a modified accrual. If it's a modified 2 accrual, it's going to be -- financial statements, 3 it's going to require a reconciliation to accrual 4 basis. So it's pretty comprehensive on the total 5 reporting package. 6 MR. SANCHEZ: We are aware of that and 7 we've been working with the Comptrollers, is 8 conducting training and they -- the State will also be 9 moving towards that. I think it has been a big, I 10 guess, issue with State accounting and City -- City 11 accounting because they're going to have to do the 12 fixed assets totally different. I don't think, in my 13 opinion, that the Lottery will, I guess, effect so 14 much change since the Lottery is an enterprise fund. 15 And that's the major dollars. We will have to do some 16 changes with bingo. 17 MR. EATON: Right. And that is 18 correct. Being an enterprise fund, some of the 19 changes that are in the statutes are not going to be 20 affected since y'all already are accounting for that 21 on an accrual basis. So those -- those take into 22 account. The bingo general fund will be affected. 23 MR. SANCHEZ: I think the biggest 24 change will be the management discussion analysis. 25 And that is supposedly similar to publicly held WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 116 1 companies that trade under the stock exchange. SEC 2 regulated, that management needs to discuss all the 3 variations and changes within what is happening in the 4 current year and in the future. 5 COMMISSIONER CRINER: Excuse me. It's 6 my understanding that you all have been auditing 7 lottery for a while. 8 MR. EATON: Yes. This was our second 9 year. 10 COMMISSIONER CRINER: So you have 11 knowledge of what we do from year to year. That's 12 good. 13 CHAIRMAN CLOWE: And although you have 14 given us a clean audit, were there any items that 15 showed a substantive difference from last year to this 16 year that you can comment on? 17 MR. EATON: Not really. There was a 18 change in the classification of cash at the -- at the 19 State Comptroller's Office. We reclassified it as an 20 investment now. And we restated the prior year 21 financials to conform to the new reporting standard. 22 And that's basically all I can think of from -- that 23 changed from the prior year. 24 MR. SANCHEZ: I think maybe another 25 change was a reference to GAASB 31 in the sense that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 117 1 the investments reflected more an increase in value as 2 compared to last year. I think I had to explain a 3 little bit more last year as to why there was a 4 decrease. 5 CHAIRMAN CLOWE: How long is our 6 contractual term with you? 7 MR. EATON: This was a new contract 8 year for us, so we have this year and we have two 9 option years. 10 CHAIRMAN CLOWE: Two option years. 11 MR. EATON: That's correct. 12 CHAIRMAN CLOWE: And are you gentlemen 13 from Houston or are you from Austin? 14 MR. EATON: We're from Houston. We 15 have a satellite office here in Austin. 16 CHAIRMAN CLOWE: And the audit team, 17 how is that made up? Of local people and people from 18 Houston? 19 MR. EATON: In the prior year -- 20 actually, we just started up our Austin satellite 21 office, so all of our assurance staff members are from 22 Houston and those who were working on the Lottery. 23 MR. LANIER: Let me -- let me comment 24 there for a second. We have decided, on our entree 25 into the Austin market, we came into the Austin market WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 118 1 as basically a consulting outfit, so most of our 2 assurance staff is retained in Houston. So in the 3 Austin area, we're going to make the entree as a 4 consulting firm first and then bring over the 5 assurance staff as opportunities arise for us to be 6 able to do that. But we clearly do quite a bit of 7 work inside the State of Texas and we do quite a bit 8 of work for Texas State government. And quite 9 frankly, quite a bit of it is on the consulting side 10 of the practice versus the audit side of the practice. 11 But we do have quite a presence on the assurance side 12 with the Texas Department of Insurance, Texas 13 Commission for the Blind, and some other -- and the 14 Lottery and some other agencies. 15 CHAIRMAN CLOWE: How many hours did you 16 put into this audit? 17 MR. EATON: We put approximately 600 -- 18 600 to 650 hours into this audit. 19 CHAIRMAN CLOWE: Well, I want to thank 20 you for the job that you've done and tell you that we 21 appreciate your work. When you get a clean audit like 22 this, there is not much sense in my mind in picking 23 around and looking for stuff. I want to make it very 24 clear to you that we respect Bart and his 25 professionalism and his staff and Linda, but we hold WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 119 1 you responsible. When you come to us with this audit 2 and present it to us like you have this morning and 3 give it a clean report as you have, we expect you to 4 have looked behind every rock and to make certain that 5 the audit that we are reporting to the leadership in 6 this state and the people in this state is what it's 7 supposed to be. 8 And, you know, I feel like auditing 9 firms have a lot of responsibility that sometimes they 10 escape. And I want you to know for one, I hold you 11 responsible for this audit. And it's nice to have a 12 clean audit, but we really expect in those 600 hours 13 that you audit this agency for you to look behind 14 every stone. 15 MR. LANIER: Mr. Chairman, we -- we 16 fully accept that responsibility. And let me make a 17 parenthetical statement to say that because of our 18 size and because of who we are, we don't have the 19 luxury of not looking behind every rock. That's -- 20 that's the difference in having a midsize local firm 21 that can do the work. Because we can't afford the hit 22 that a Big Five firm will take because of an error or 23 omission. So we have a tremendous amount of due 24 diligence in our efforts to make sure that we look 25 behind every rock. So we will definitely cover you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 120 1 and ourselves in that -- in that respect. 2 CHAIRMAN CLOWE: And I want you to 3 understand, I'm not singling you out. I say the same 4 thing to Gtech and Scientific Games. We expect you as 5 our vendor to do the job for this agency. 6 MR. EATON: And I do believe we are 7 thorough. And I hope -- I know that -- I think that 8 Bart feels that way, at least after the audit anyway. 9 CHAIRMAN CLOWE: I don't want him to be 10 comfortable when you come in. I don't mind him being 11 comfortable when you leave. But I want him to sweat 12 some while you're here. 13 COMMISSIONER CRINER: Is this my 14 opportunity to say that he really likes your work? 15 CHAIRMAN CLOWE: That's right. I'm 16 pretty buggy about financial documents. 17 MR. EATON: We appreciate it. Thank 18 you. 19 CHAIRMAN CLOWE: Thank you. 20 Any other questions or comments? 21 MS. KIPLIN: Commissioners, this is not 22 an action item. 23 CHAIRMAN CLOWE: Thank you. Appreciate 24 y'all coming from Houston. 25 We are now ready to go forward to item WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 121 1 number nine, consideration of and possible discussion 2 and/or action, including proposal, on new bingo audit 3 rules. 4 MS. KIPLIN: Commissioners, what you 5 have you in front of you are proposal of new rules. 6 These are bingo audit rules. In particular, it's 7 Section 16 Texas Administrative Code 402.590, 591, 8 592, 593, 594, 595, and 596 that you have in your 9 package, omitted the reference to 596, although that 10 rule is part of your package. The staff's action 11 request today is that you do propose these rules for 12 public comment. I'm going to turn it over to 13 Mr. Atkins and Mr. Gabrillo to talk about the 14 substantive parts of this proposed rulemaking. 15 MR. ATKINS: Thank you, Mr. Chairman. 16 With me today is Roy Gabrillo, G-a-b-r-i-l-l-o, who is 17 the senior audit supervisor of the audit section in 18 the Charitable Bingo Division. As Ms. Kiplin said, 19 you have the six draft rules for you that staff would 20 recommend you propose for publication in the Texas 21 Register. These rules were considered at the August 22 29th, 2001 Bingo Advisory Committee meeting. We 23 received a variety of comments during that meeting on 24 these proposed rules. And there were several helpful 25 recommendations as a result of that meeting that have WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 122 1 been incorporated in the drafts in front of you. 2 Generally, these rules set out the 3 types and purposes of audits conducted by the 4 division, as well as the general process followed in 5 connection with the audits. These rules allow 6 licensees to better be -- to be better informed and 7 have a clearer understanding of the Charitable Bingo 8 Operations Division's process and procedures in 9 connection with the audit process. We believe that 10 these rules will improve licensee compliance with the 11 Bingo Enabling Act and charitable bingo administrative 12 rules by providing them with additional information on 13 the operations of the division. 14 CHAIRMAN CLOWE: Anything to add, Roy? 15 MR. GABRILLO: For the record, I'm Roy 16 Gabrillo, senior audit manager, Charitable Bingo 17 Division. 18 No, sir. Nothing to add. 19 COMMISSIONER WHITAKER: Have these been 20 reviewed by anyone outside of our -- our agency? 21 MR. ATKINS: Just the members of the 22 Bingo Advisory Committee and then those members of the 23 public that were at that meeting. 24 COMMISSIONER WHITAKER: And have 25 included their comments or did they just accept it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 123 1 whole cloth? 2 MR. ATKINS: No, ma'am. There were 3 comments made that we subsequently incorporated 4 into -- into these drafts. 5 COMMISSIONER WHITAKER: Oh. 6 COMMISSIONER CRINER: What -- what 7 initiates an audit? What activity or what -- why 8 would you do an audit? 9 MR. ATKINS: There are a variety of 10 reasons that would cause us to conduct an audit. We 11 have a -- a risk assessment program that looks at all 12 licensees, and based on any number of factors that 13 that risk assessment identifies, an audit could be 14 recommended. An audit could be recommended, say, by 15 the security division in connection with an 16 investigation that they're doing. An audit could be 17 recommended as a follow-up to another action that the 18 audit division had undertaken, such as just a books 19 and records inspection or a game observation. 20 COMMISSIONER CRINER: The reason why I 21 ask is, I heard a comment from someone that said that 22 you just -- you just tended to show up and do an audit 23 for no unforeseen reason. I don't -- I didn't 24 understand the comment, so I wanted to make sure that 25 I understood the reason. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 124 1 CHAIRMAN CLOWE: I believe you need a 2 motion on this. 3 MS. KIPLIN: That's correct. We're 4 looking for a motion for you to propose these rules 5 for public comment. 6 CHAIRMAN CLOWE: And one motion can 7 cover all of them? 8 MS. KIPLIN: Yes. It's one rulemaking 9 packet. 10 COMMISSIONER WHITAKER: So moved. 11 CHAIRMAN CLOWE: Moved and seconded. 12 All in favor, please say aye. Opposed, no. 13 The vote is three-zero in favor. 14 Thank you, gentlemen. 15 We're now ready to go to item number 16 ten, consideration of and possible discussion and/or 17 action, including proposed repeal, on 16 TAC 402.572, 18 Temporary Capital Equipment Acquisition. 19 MS. KIPLIN: Commissioners, this is the 20 proposal of an existing rule in the charitable bingo 21 rules. The staff is looking for a vote today that you 22 propose this repeal for public comment. The purpose 23 of this rule was to allow the Bingo Division to 24 collect monies to fund the acquisition of a new 25 charitable bingo system. That was authority that they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 125 1 received in Rider 11, Texas Lottery Commission Bill 2 Pattern, General Appropriations Act, 76th Legislature 3 Regular Session. That authority was limited to that 4 period of time. Therefore, there is no further need 5 for this rule to continue, and that's why staff is 6 requesting your proposal to repeal that rule. 7 COMMISSIONER WHITAKER: So moved. 8 CHAIRMAN CLOWE: Seconded. 9 All in favor, say aye. Opposed, no. 10 The vote is three-zero in favor. 11 Thank you. We're now ready for item 12 number 13, consideration of and possible discussion 13 and/or action, including adoption, on 16 TAC 403.402, 14 relating to exemption from vehicle inscription 15 requirements. 16 MS. KIPLIN: Commissioners, this is 17 Mr. Bennett's rule. 18 MR. BENNETT: Good morning, 19 Commissioners. For the -- for the record my name is 20 Ridgley Bennett. I'm the deputy general counsel. 21 Agency staff recommends that the Commission adopt new 22 16 TAC Section 403.402, relating to the exemption from 23 vehicle inscription requirements without changes to 24 proposed text published in the October 5th, 2001 issue 25 of the Texas Register. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 126 1 By way of background, during the most 2 recent legislative session, the Texas Lottery 3 Commission received an exemption from the statute 4 requiring that the name of the agency be inscribed on 5 the side of its motor vehicles. The Commission's 6 exemption is limited to vehicles used exclusively for 7 surveillance purposes. The statute creating the 8 exemption requires that the Commission adopt a rule 9 specifying the purposes served by not inscribing the 10 vehicle with the name of the agency and the primary 11 use for the motor vehicle. The rule before you 12 satisfies this requirement. And as I mentioned 13 before, agency staff recommends that the rule be 14 adopted. 15 MS. KIPLIN: Commissioners, there were 16 no comments received on this rule. 17 CHAIRMAN CLOWE: Are there any 18 questions? 19 COMMISSIONER CRINER: Is this just the 20 investigative equipment? 21 MR. BENNETT: That's correct. For 22 surveillance purposes only. 23 COMMISSIONER WHITAKER: There is a typo 24 in the third paragraph. 25 MS. KIPLIN: Thank you. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 127 1 COMMISSIONER WHITAKER: "Is to" is 2 repeated twice. 3 MS. KIPLIN: Thank you. We will 4 correct that prior to filing it with the Texas 5 Register. We'll also correct that on the order. 6 COMMISSIONER WHITAKER: I move the 7 adoption. 8 CHAIRMAN CLOWE: Is there a second? 9 COMMISSIONER CRINER: Second. 10 CHAIRMAN CLOWE: Before we have the 11 vote. Joe, how many units are covered by this rule in 12 the Commission today? 13 MR. FRANCO: We just have one vehicle. 14 CHAIRMAN CLOWE: That's what I thought. 15 And it has been down in the garage every time I've 16 been here. 17 MR. FRANCO: We have used -- 18 MS. KIPLIN: Mr. Franco, I'm sorry. 19 Can I ask you to come forward and identify yourself 20 for the record. 21 MR. FRANCO: Yes. For the record, my 22 name is Joe Franco. I'm the acting director of 23 security. And, yes, you see it down there every time 24 you've come, I think. But it has been utilized 25 several times. We've used it in -- I think in the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 128 1 Waco area, your area, in the Dallas area, and we've 2 used it around here a couple of times. 3 MS. CLOUD: See. Since we don't have 4 to put our name on the side, you don't know it's 5 there. 6 CHAIRMAN CLOWE: My life is an open 7 book. 8 Very good, Joe. Thank you very much. 9 The motion has been made and seconded. 10 All in favor, please say aye. Opposed, no. 11 The vote is three-zero in favor. 12 MS. KIPLIN: Thank you, Commissioners. 13 We'll -- we'll clean up that order and bring it back 14 to you without the typo. Thank you for pointing it 15 out. 16 CHAIRMAN CLOWE: Commissioners, do you 17 have anything further before I move for executive 18 session? Anything from anyone else? 19 At this time, I move the Texas Lottery 20 Commission go into executive session to deliberate the 21 duties and evaluation of the Executive Director, 22 Internal Auditor, and Charitable Bingo Operations 23 Director, pursuant to Section 551.074 of the Texas 24 Government Code; to deliberate the duties of General 25 Counsel, Security Director, pursuant to Section WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 129 1 551.074 of the Texas Government Code; to receive legal 2 advice regarding pending or contemplated litigation 3 and/or to receive legal advice pursuant to Section 4 551.071(1)(A) or (B) of the Texas Government Code, 5 and/or to receive legal advice pursuant to Section 6 551.071(2) of the Texas Government Code, including but 7 not limited to: TPFV Group, Inc. versus Texas Lottery 8 Commission; Retired Sergeant Majors' Association, et 9 al, versus Texas Lottery Commission, et al; Loretta 10 Hawkins versus Texas Lottery Commission; contract 11 regarding the charitable bingo system; employment law, 12 personnel law, procurement and contract law, and 13 general government law. 14 Is there a second? 15 All in favor, say aye. 16 The vote is three-zero. 17 We are now going into executive 18 session. The time is 11:06 a.m. Today is January the 19 8th, 2002. 20 (EXECUTIVE SESSION) 21 CHAIRMAN CLOWE: The Texas Lottery 22 Commission is out of executive session. The time is 23 12:58 p.m. 24 Is there any action to be taken as a 25 result of executive session? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 130 1 MS. KIPLIN: Commissioner Clowe, I'm 2 sorry to stop you, but the official recording of the 3 agency is the tape recording. 4 COMMISSIONER CLOWE: And it's not on. 5 MS. KIPLIN: And we don't know if it's 6 on. 7 (OFF THE RECORD.) 8 CHAIRMAN CLOWE: The Texas Lottery 9 Commission is out of executive session. The time is 10 12:59 p.m. 11 Is there any action to be taken as a 12 result of executive session? 13 Being none, let's move on to the next 14 agenda item. That will be consideration of the status 15 and possible entry of orders in letters A through K. 16 Kim, would you help us with those? 17 MS. KIPLIN: Yes, Commissioner. I'm 18 happy to do that. I didn't know if you wanted to go 19 back to the item regarding SAO and internal audits 20 first. 21 CHAIRMAN CLOWE: I'm sorry. I 22 misspoke. I should have said letters A through L. 23 I am not aware that there is any action 24 required on the internal auditor. Is that what you're 25 talking about? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 131 1 COMMISSIONER WHITAKER: It was going to 2 be stated on the record by Debra. 3 CHAIRMAN CLOWE: Oh, that's right. 4 Yeah. Debra, would you come forward, please. 5 I think you wanted to inform us of your 6 intent to release audits. 7 MS. McLEOD: Yes, Chair -- Chairman 8 Clowe. I would like to inform the Commission that 9 effective today, we are going to release game plan 10 verification, advertising performance measures, 11 accounts receivable, the bingo license criminal 12 history, and the bingo debit card control, all 13 internal audit reports. 14 CHAIRMAN CLOWE: Thank you very much. 15 MS. McLEOD: Thank you very much. 16 CHAIRMAN CLOWE: Now, Kim, I think 17 we're ready to deal with these cases. 18 MS. KIPLIN: Commissioners, if I 19 could -- if I could take A through H, those are all 20 Lottery cases. And those are all recommendations for 21 revocation of license for either the licensee going 22 out of business or insufficient funds at the time that 23 the Lottery, so the accounting staff does recommend 24 that you adopt the State Office of Administrative 25 Hearing's administrative law judge's recommendation WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 132 1 and proposed -- proposal for decision, which contains 2 those findings and conclusions in each of those cases. 3 CHAIRMAN CLOWE: Are there any 4 questions? 5 COMMISSIONER WHITAKER: No. 6 CHAIRMAN CLOWE: Is there a motion? 7 COMMISSIONER CRINER: So moved. 8 COMMISSIONER WHITAKER: Second. 9 CHAIRMAN CLOWE: All in favor, please 10 say aye. Opposed, no. 11 The vote is three-zero, including the 12 recommend orders, letters A through H under docket -- 13 item number 16. 14 MS. KIPLIN: Commissioners, agenda item 15 16-I, which is Craig Aaron Majors Outlet No. 1, is a 16 Bingo case. That is a contested case proceeding in 17 which the administrative law judge did recommend that 18 the license of the bingo commercial lessor be revoked. 19 And it was for several violations of the Bingo 20 Enabling Act, and those are enumerated in proposed 21 findings of fact six through ten. Failure to file 22 quarterly reports, failure to remit gross rental tax. 23 He has not yet remitted the State tax penalties, And 24 as of November 27, 2001, still owed the State money. 25 So at this time, the staff would WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 133 1 recommend that you adopt the proposal for decision and 2 the recommendation in that order to revoke the license 3 to lease bingo premises held by this licensee. 4 COMMISSIONER WHITAKER: So moved. 5 COMMISSIONER CRINER: Second. 6 CHAIRMAN CLOWE: Moved and second. All 7 in favor, please say aye. Opposed, no. 8 The vote is three-zero in favor. 9 MS. KIPLIN: Commissioners, item J -- 10 16-J, the matter of Spillway Volunteer Fire 11 Department, is somewhat of an unusual case. This was 12 a -- a matter in which the Spillway Volunteer Fire 13 Department went to hearing for failure to timely renew 14 its license. This was really one of the cases that 15 was a fallout of T&T Interests litigation in which the 16 district court judge did say that if somebody is not 17 going to timely renew their license and they wanted to 18 request a hearing, we need to give them a hearing on 19 that issue. 20 We did in fact do that. The proposal 21 for decision did in fact indicate that they had not 22 timely renewed their bingo license. However, while 23 this case was pending and before the proposal for 24 decision had been issued, they did in fact file an 25 original application, and that application had been WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 134 1 granted. So it moots out this matter. And so the 2 staff has in fact prepared an order that would request 3 that you all dismiss this matter as moot since that -- 4 this license, the matter that went to hearing, that 5 license no longer exists. So there is no action to be 6 taken on a license that no longer exists. 7 COMMISSIONER CRINER: So this moots out 8 the old action but gives them a new license? 9 MS. KIPLIN: Yeah. Because they -- 10 what they did was, they didn't timely file. We won on 11 that. But before you all signed that order saying, 12 you're right, you don't get your license, they filed 13 an original application. The Bingo Division granted 14 that license after their review, of course, of the 15 requirements. And once they granted that original 16 license, it moots out this -- this application. 17 COMMISSIONER CRINER: And this actually 18 makes their new license real. 19 MS. KIPLIN: Well, their new license is 20 real anyway. You just don't have any jurisdiction to 21 take action against a license because the license 22 doesn't exist. The old license doesn't exist anymore, 23 so you have no power to take action. 24 CHAIRMAN CLOWE: So what is the order 25 we're signing? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 135 1 MS. KIPLIN: We're -- we're asking that 2 you dismiss the contested case proceeding because it's 3 moot. 4 CHAIRMAN CLOWE: So you need a motion 5 on this? 6 MS. KIPLIN: Well, the staff has 7 already filed a motion and there is no objection to 8 the motion. The staff -- 9 CHAIRMAN CLOWE: So this is just an 10 order. 11 MS. KIPLIN: It's an order. 12 CHAIRMAN CLOWE: It doesn't require a 13 vote. 14 MS. KIPLIN: You're going to vote on 15 all of them at the end. 16 CHAIRMAN CLOWE: Go ahead. 17 MS. KIPLIN: Is that right? Okay. 18 Then -- did they already vote? I'm sorry. Then I -- 19 I'm sorry. That's my mistake. Will you please vote 20 on that? 21 COMMISSIONER CRINER: So moved. 22 COMMISSIONER WHITAKER: Seconded. 23 CHAIRMAN CLOWE: We voted. 24 MS. KIPLIN: The other two -- well, I'm 25 wrong. I was thinking you were waiting until the end. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 136 1 I was just -- you did vote on all. 2 CHAIRMAN CLOWE: Okay. You've got K 3 and L to go on -- this is J? 4 COMMISSIONER CRINER: This is J. 5 MS. KIPLIN: Did you vote on J? 6 CHAIRMAN CLOWE: We have a motion and a 7 second. 8 All in favor, please say aye. Opposed, 9 no. 10 The vote is three-zero in favor. 11 MS. KIPLIN: Commissioners, the other 12 two matters are agreed orders with two -- two 13 manufacturers, BK Entertainment/Stuart SA, et al. And 14 then the other matter is Douglas Press, Inc. This 15 was -- these were situations where the -- there were 16 violations of the Bingo Enabling Act, but the staff 17 and the licensee were able to resolve their 18 differences. And the basis of the settlement 19 agreement and consent order are attached. The staff 20 does recommend in each of these cases that you do -- 21 you do sign the consent order. 22 CHAIRMAN CLOWE: Is there a motion? 23 COMMISSIONER CRINER: So moved. 24 COMMISSIONER WHITAKER: Second. 25 CHAIRMAN CLOWE: All in favor, please WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 137 1 say aye. Opposed, no. 2 The vote is three-zero. 3 COMMISSIONER CRINER: That's K and L. 4 Right? 5 MS. KIPLIN: Yes, sir. That's K and L. 6 On Douglas Press, I would like for you 7 to -- to mark -- it'll say 2001, and I would like for 8 you to mark it 2002. And we'll put that on the record 9 that you're -- you're the ones who marked it 2002. 10 The licensee on -- on the other one went ahead and 11 marked it themselves. I just don't want there to be 12 any indication that we're altering something untoward. 13 CHAIRMAN CLOWE: Okay. We are now to 14 item 17, report by the Executive Director and/or 15 possible discussion and/or action on financial -- the 16 agency's financial and operational status, legislative 17 briefings, HUB and/or minority status, FTE status, and 18 retailer forums. 19 Ms. Cloud. 20 MS. CLOUD: Sorry, Commissioners. I 21 didn't know we were back down here. 22 The transfer to the Foundation School 23 Fund on December 14th was 61,389,494 dollars, which 24 gives a total transfer from inception of 8,865,399,021 25 dollars. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 138 1 Robert doesn't have anything new. Do 2 you have anything new on your minority report to -- 3 MR. HALL: I sent it to them via mail. 4 MS. CLOUD: Okay. So nothing new to 5 report today unless you want to talk once again with 6 Robert on the HUB report. 7 The FTE status, we have 312 active 8 FTEs. We have 22 vacant positions. We have three in 9 the selections and acceptance pending. We have nine 10 in the recruiting, screening, and interviewing. And 11 we have ten vacant positions with no HR activity at 12 this time. We do -- 13 COMMISSIONER CRINER: There are -- 14 there is -- there is a major push in Houston to employ 15 some folks and it's happening this week. And there is 16 a job fair. 17 MS. CLOUD: In Houston? 18 COMMISSIONER CRINER: On Thursday. And 19 everybody that would like to, it's free, can come and 20 recruit. And it's the City's way of trying to help 21 all the folks -- the 4,000 folks who were laid off 22 from Enron. 23 MS. CLOUD: Oh, okay. 24 COMMISSIONER CRINER: So you may want 25 to take advantage of that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 139 1 MS. CLOUD: Okay. We'll see what we 2 can coordinate. 3 COMMISSIONER CRINER: You can contact 4 my office because they've got us dancing in that 5 parade, so either -- 6 MS. CLOUD: Get it coordinated with 7 Jim? 8 COMMISSIONER CRINER: Somebody can call 9 my office and they'll tell them where it is and how to 10 get in. 11 MS. CLOUD: Okay. On January 29th, 12 2002 will be our next town hall meeting. It will be 13 at the Adam's Mark Riverwalk Hotel in San Antonio. We 14 have for you to view today, in the essence of time, a 15 new videotape for our retailer town hall meetings, if 16 you wish to look at that. It's not but about five -- 17 five minutes, six minutes. We can show that to you 18 right now. 19 CHAIRMAN CLOWE: Let's see it. 20 MS. CLOUD: Okay. Philip and Glen have 21 been going all over the state and actually visiting 22 with our retailers. And this has been a -- it has 23 taken quite a while to produce this new tape, but I 24 think it's -- we needed to have a new tape to show at 25 our retailer town hall meetings. And this one is more WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 140 1 focused on the retailers themselves and some of the 2 things they're doing in order to promote our games. 3 (THE VIDEOTAPE WAS PLAYED) 4 MS. CLOUD: The last thing I have, 5 Commissioners, is a -- in your packets this week, I've 6 sent to you some news articles. These news articles 7 had to do with the fact that the South Carolina 8 lottery on-line games is not going to be able to come 9 up on time because the vendors haven't been able to 10 fulfill the contract by the due date that was 11 initially negotiated. 12 The vendor has requested for the 13 Lottery to waive the penalties. The Lottery has 14 denied to do that. And it may be as much as a 26 15 million dollar loss to the State if the contract is 16 not fulfilled by the date that it was due, which was 17 in March. It had already been extended on the on-line 18 games -- the instant tickets will start up this month, 19 but the on-line games was to start up in March. It 20 was initially supposed to start up the end of February 21 and it was moved a couple of weeks. And now it's 22 going to be moved to the 28th of May. And it has to 23 do with telecom lines and things that happen in 24 startup. 25 I'm only bringing this to your WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 141 1 attention because these are the kinds of things that 2 face this industry with the vendors that we have in 3 place and what can happen to a startup lottery or a 4 lottery that is going to be transitioned through a 5 conversion to a different vendor. And I just wanted 6 to keep you abreast of what is going on in the 7 industry so you have a comfort level that we are where 8 we are because of maybe only having one vendor bid on 9 this contract. 10 But for the time being, I think that 11 that is -- we're in good shape there. We know that 12 this particular vendor did sit in this room before 13 this Commission and say that they could do this job 14 for Texas now. And I don't think that's the case if 15 they can't do it in South Carolina. So I'm hoping 16 that by the time we go out for bid again, that there 17 will be competition. 18 CHAIRMAN CLOWE: Any questions or 19 comments? 20 Thank you, Linda. 21 Billy, we're to your report. What do 22 you have for us, please? 23 MR. ATKINS: Commissioners, we have one 24 vacancy in the Bingo Division, an Auditor III position 25 in the Odessa regional office. The position was WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 142 1 posted, and I believe as of end of business on Friday, 2 we've received seven applications. We have some 3 upcoming conferences at the end of the month. And I 4 have spoken in the past how we had hoped to provide 5 our operator training program in conjunction with 6 these statewide conferences. 7 And I'm happy to report that this year, 8 we're going to be able to do that. We're meeting with 9 both the Veterans of Foreign Wars and the American 10 Legion on the -- I believe it's the 24th and 25th of 11 this month. And they've both asked that we provide 12 the operator training program at that time. So we'll 13 be able to provide that to a lot of licensees at one 14 time. 15 I did want to draw your attention to 16 one of the news articles that I included in your 17 notebook. This kind of follows up, Commissioner 18 Whitaker, on your earlier question regarding Internet 19 gaming. We became aware of an individual who 20 identified themselves as being from Texas who is the 21 winner of a 10,000 dollar prize at an on-line bingo 22 game. That's essentially all the information we have. 23 We have the printout from that site in your notebook, 24 but it does show that there are people in Texas 25 playing those games. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 143 1 And then, finally, I handed this out to 2 you. This is our licensing activity for the month. 3 We didn't get to include it in your notebook before it 4 went out, but I did want to draw your attention. As 5 you'll see, we had a pretty significant spike around 6 the middle of the month, December 17th. And if you'll 7 look at the second chart, it will show you that that's 8 due to an increased number of temporaries. And that's 9 consistent with our usual pattern, organizations 10 filing for those applications for the holidays, those 11 special Christmas and New Year games. 12 And that's all I have. 13 CHAIRMAN CLOWE: Very good. 14 Any questions for Billy? 15 Commissioners, if it's possible, we 16 should attempt to set the meeting date for February. 17 I would like you to indicate when you might be 18 available for that meeting to set it. 19 Commissioner Whitaker, we'll show you 20 the honor. 21 COMMISSIONER WHITAKER: How about the 22 7th? 23 CHAIRMAN CLOWE: 7th? 24 COMMISSIONER CRINER: Can we do it the 25 day before? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 144 1 CHAIRMAN CLOWE: 6th? Okay. Going 2 once, twice. The next Commission meeting is set for 3 Wednesday, February the 6th. 4 MS. CLOUD: Commissioners, on -- is it 5 the 6th? Yes. 6 I'll be -- I will be in Atlanta at a 7 Smart Tech conference with the Lottery on the 6th. 8 COMMISSIONER WHITAKER: When are you 9 going to get back? When are you leaving and getting 10 back? 11 MS. CLOUD: I will leave -- I leave on 12 the 4th -- on Sunday the -- I think Sunday is the 13 4th -- 3rd. And I will be gone that entire week. 14 COMMISSIONER WHITAKER: Okay. How 15 about the 12th? 16 COMMISSIONER CRINER: You got it. 17 CHAIRMAN CLOWE: Everybody all right 18 with the 12th? 19 That will be the next Commission 20 meeting, Tuesday, February the 12th, 8:30 a.m., in 21 this place. 22 Is there anyone wishing to make public 23 comment to the Commission? 24 Seeing none, we stand adjourned at 25 one -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 JANUARY 8, 2002 145 1 MS. KIPLIN: I'm sorry to interrupt 2 you, but we got that order for her on the 3 typographical error, and I wanted to get that signed. 4 You all did vote to adopt the rule, but if we could 5 just have you sign it on the record before you 6 adjourn. 7 CHAIRMAN CLOWE: All right. Pass it 8 through, please. 9 Any other business? 10 We are adjourned at 1:24 p.m. 11 Thank you all very much. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 146 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 17TH day of 16 JANUARY, 2002. 17 18 19 20 BRENDA J. WRIGHT, RPR, 21 Texas CSR No. 1780 Expiration Date: 12-31-02 22 1609 Shoal Creek Boulevard, Suite 202 Austin, Texas 78701 23 (512) 474-4363 24 JOB NO. 020108BJW 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363