1 1 2 3 4 5 6 * * * * * * * * * * * * * * * * * * * * * * * * * * 7 8 TEXAS LOTTERY COMMISSION 9 MEETING 10 11 AUGUST 20, 2002 12 13 * * * * * * * * * * * * * * * * * * * * * * * * * * 14 15 16 17 18 BE IT REMEMBERED that the TEXAS 19 LOTTERY COMMISSION meeting was held on the 20th 20 of August, 2002, from 8:30 a.m. to 1:35 p.m., 21 before Suzanne T. Lane, RPR, CSR in and for the 22 State of Texas, reported by machine shorthand, at 23 the Offices of the Texas Lottery Commission, 24 611 East Sixth Street, Austin, Texas, whereupon 25 the following proceedings were had: WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 2 1 APPEARANCES 2 3 Chairman: 4 Mr. C. Tom Clowe, Jr. 5 Commissioners: 6 Ms. Elizabeth D. Whitaker (not present) Mr. James A. Cox, Jr. 7 General Counsel: 8 Ms. Kimberly L. Kiplin 9 Executive Director: 10 Ms. Linda Cloud 11 Charitable Bingo Operations Director: 12 Mr. Billy Atkins 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 COMMISSIONER CLOWE: Good morning. 2 It's 8:30 a.m. It's August 20, 2002. I'm going to 3 call the meeting of the Texas Lottery Commission to 4 order. I'm Tom Clowe. Commissioner Jim Cox is 5 present. Commissioner Whitaker is absent. We have 6 a quorum and therefore are ready to take up the 7 business of the commission in this August meeting. 8 We have individuals who wish to 9 appear before the commission this morning. So 10 we'll take, out of order, Item No. 5 on the agenda 11 regarding possible discussion and/or action 12 regarding Scientific Games International, including 13 a presentation by these individuals on the 14 company's activities. 15 I have appearance forms from Jim 16 Kennedy, Ron Williams, Cliff Bickell, and Janine 17 Whitman -- or Whiteman, I believe it is. We're 18 happy to have you here, and we'll ask you to come 19 forward if you would, please. 20 And before you begin, I think that 21 in light of pending litigation, it would be well 22 for the general counsel to make a comment on the 23 record. 24 MS. KIPLIN: Commissioners, as you 25 know, we are in litigation with Scientific Games WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 4 1 and Pollard regarding a recent potential 2 procurement. And so I would caution the 3 commissioners, then, and the parties of Scientific 4 Games not to discuss today any of those issues that 5 are a part of the litigation. 6 COMMISSIONER CLOWE: Very good. 7 Thank you. 8 Good morning. 9 MR. BICKELL: Good morning. Thank 10 you, Chairman. It's a pleasure for Scientific 11 Games to be here again. 12 THE REPORTER: Sir, would you 13 identify yourself, please? 14 MR. BICKELL: Okay. I'm sorry. I'm 15 Cliff Bickell, president of printed products at 16 Scientific Games. And I'll introduce the rest of 17 us in just a minute. 18 Our purpose here is basically 19 threefold. One is to thank the Texas Lottery for 20 the opportunity to continue to do business. We 21 recently won the interim contract to supply instant 22 tickets as we have for the last three years, and we 23 appreciate that and are very proud to represent and 24 to supply products and information to the Texas 25 Lottery. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 5 1 Second, we'd like to just keep the 2 commission up to date on Scientific Games, how 3 we're doing, what we're doing, and just a little 4 brief overview of the industry in the United States 5 and instant tickets as well; and thirdly, to have 6 the chance to meet the new commissioner, Jim Cox. 7 Welcome to your new position. 8 This is Scientific Games. It 9 supplies the Texas Lottery with instant tickets, 10 and we are very proud to do so. 11 My name is Cliff Bickell. As I 12 stated, I am the president of the printed products 13 group of Scientific Games. With me -- or I 14 guess -- I've been in the industry for about seven 15 and a half years. Prior to that, I have experience 16 in the electronics industry in printing and in 17 consumer products. 18 Prior to my current position, I was 19 the chief financial officer of Scientific Games 20 prior to it being acquired by Auto-Tote about two 21 years ago. 22 To my right is Jim Kennedy. He's 23 vice president of North American sales and 24 marketing. Jim has 18 years, and as you will see, 25 of his people, I'm the junior one on this account. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 6 1 Jim has been in the industry, like I say, 18 years. 2 He has systems as well as instant 3 ticket experience, and has the reputation in the 4 industry as being one of the more knowledgable, 5 creative, and innovative people in the industry and 6 is well respected. And Scientific Games is very 7 pleased to have him working for us, and the 8 industry is benefitting from his information as 9 well. 10 Jim at one time was a regional 11 manager and worked on the Texas account. He knows 12 this business very well. In his dealings in the 13 lottery industry, he has been with the lotteries 14 and brought about 2,500 different games to market. 15 So that shows you some of his depth. 16 To the right is Janine Whiteman. 17 She is a regional manager. What that means to the 18 Texas Lottery is that it is her responsibility to 19 look out for the Scientific Games and Texas 20 business and how the relationship works, to 21 understand the needs of the lottery, and to see 22 that the resources of Scientific Games are brought 23 to the -- to meet the needs of the Texas Lottery 24 and to help them achieve their goals. 25 Lastly, to my right is Ron Williams. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 7 1 Ron lives in Austin. He supports the Texas Lottery 2 in their day-to-day needs, and again, it's to help 3 support the Texas Lottery's needs and is the 4 liaison between the two companies. 5 So that is the team here. We have 6 about 1,500 people within the lottery group of 7 Scientific Games, and many of them work to help 8 achieve the goals of the Lottery. 9 Scientific Games -- as an overview, 10 we are in a couple of businesses. The primary 11 business, about 60 percent to 65 percent of its 12 activities, are related to the lottery business. 13 So we provide instant tickets systems and 14 facilities management to the lottery industry. 15 We do not view ourselves as being 16 printers, assistance people, or as service people. 17 We believe we are in the lottery business, and we 18 bring the services as needed. We are the only 19 company in the world that provides all three 20 aspects of that, and we believe by having all of 21 those disciplines, all of those knowledges -- 22 knowledge, that it helps the -- you, the customer, 23 because we understand all aspects of your business. 24 We're also in another part of the 25 gaming world when we are in the racing pari-mutuel WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 8 1 business as well. We are a publicly traded 2 company. We are on NASDAQ. And last year, our 3 revenues were $440 million. 4 Just to help you visualize who we 5 are -- and many of you have seen this chart 6 before -- we have a holding company, and then we 7 have two basic businesses under that. We have the 8 Auto-Tote systems, which is the pari-mutuel, and 9 venue management side of things; and then we have 10 Scientific Games International, which is the 11 lottery systems, the facilities management, as well 12 as the printed products, including instant tickets, 13 as well as prepaid phone cards. Again, we look at 14 ourselves as being a lottery company that brings 15 the right services to the lottery industry and to 16 our specific customers. 17 Getting into the more specifics of 18 the overall -- or instant ticket capabilities, we 19 are a supplier and/or consultant to most of the 20 startups that have happened over the life of the 21 lottery since it began in 1973 when the 22 Massachusetts Lottery in the United States was 23 allowed to have a lottery. Scientific Games had 24 come up with a way to develop a secure lottery 25 ticket, and we were off and running with the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 9 1 lottery industry. And we probably helped in eight 2 of the ten first startups that happened in the 3 United States. 4 To give you a little bit of 5 background, I think there are 39 jurisdictions 6 within the United States -- 38 states and 7 Washington, DC -- that are allowed to have 8 lotteries. Twenty-seven of them are instant ticket 9 customers of Scientific Games. Seven of them are 10 systems or online customers of Scientific Games. 11 There is some overlap that we do some of both, and 12 we are dealing with -- I think it's 31. So if you 13 look at it the other way, of the 39, we don't deal 14 with 8 at this point in time, although we may have 15 dealt with some of them in the past. 16 We are an international company. 17 The last bullet there is that we have plants in the 18 United States, our largest. We have a plant in 19 England, as well as in Latin America, and we 20 service the French National Lottery, the UK 21 National Lottery, the Dutch, the Greek, and many 22 lotteries in all parts of the world. We have 23 customers in 60 countries. 24 Just briefly -- and then I'll move 25 on; we'll move it on to Jim -- Scientific Games was WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 10 1 bought out by Auto-Tote, like I said, two years 2 ago. It took on a lot of debt to do that and a lot 3 of goodwill. For the first year or so, it was 4 generating strong cash flow. We were making lots 5 of investments with that cash flow, but at the same 6 time, the interest and the goodwill caused us to 7 have a loss. This year, we're proud to report we 8 have been profitable in both of our first quarters, 9 and we continue to look forward to increased growth 10 as we improve our operations. 11 You might have heard we've had a 12 rather difficult stock market. At the time of our 13 transaction, the stock of Scientific Games -- or of 14 Auto-Tote at the time -- was in the two- to 15 three-dollar range. With our success over the last 16 couple of years, the stock price increase got into 17 the eight- or nine-dollar range. 18 We were going to prepare for a 19 secondary stock offering as the market continued to 20 get worse. We were able to sell $98 million worth 21 of equity, which will go to reduce the debt. And 22 at the time the transaction was done, it was a high 23 leverage company, and we were paying the 10 percent 24 plus. The proceeds will go to reduce our interest 25 expense by about $10 billion a year. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 11 1 I might add that when we did -- we 2 talked about the difficult market and such -- is 3 that when we did our secondary offering, very few, 4 if any, transactions were being done. And the day 5 we did ours is when WorldCom announced their 6 bankruptcy. So the market was not generous to us. 7 But I think it says something of the 8 fact that the company was able to pull off this 9 equity offering, and we're doing very well. And 10 overall, we appreciate your business. And that's a 11 little bit about Scientific Games in total. 12 Now, turning the mike over to 13 Jim Kennedy to talk a little bit about the instant 14 ticket industry and the lottery industry in total. 15 MR. KENNEDY: Thank you, Cliff. 16 Mr. Chairman, Commissioner, and 17 Ms. Cloud, I would just like to give you sort of an 18 overview of the sales and the dynamic industry that 19 we're in and Scientific Games' position in that. 20 I'll try to keep it brief. 21 For calendar 2001, the lottery 22 industry did approximately 17 billion in sales. 23 And to put that in perspective, for the instant 24 game, the record industry in 2001 did about 25 8 billion in sales -- I'm sorry, about 14 billion WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 12 1 in sales; and the box office at the movies did 2 about 8 billion. The instant game is a very, very 3 popular consumer product. 4 The way it breaks down for 5 Scientific Games versus the two other suppliers in 6 this industry, is we supply -- of that 16 billion, 7 roughly, we supply our customers approximately 8 13.2 billion of those sales. Now, the way that the 9 industry works is you have primary suppliers and 10 backup suppliers. We are the primary supplier in 11 the industry that generated approximately 12 11.3 billion of those sales. 2.9 billion of those 13 sales come from lotteries that we do no business 14 with. So the important part of that is that we 15 are -- we find ourselves in the very fortunate 16 position to be the major supplier to most of the 17 lotteries, the large lotteries, in the 18 United States. 19 In terms of performance of those 20 lotteries, if you'll look at the per capita 21 sales -- which, of course, is our industry's 22 measurement of performance -- taking total sales 23 and dividing into public population, you'll see 24 that Scientific Games customers enjoy very high per 25 capita sales in the industry: $1.60 for our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 13 1 primary suppliers, as opposed to 82 cents per 2 capita, per week, for those lotteries that we do 3 not service. 4 COMMISSIONER COX: Jim, excuse me 5 for a question. 6 MR. KENNEDY: Yes, sir. 7 COMMISSIONER CLOWE: When you 8 compute those per capita numbers, do you use every 9 man, woman, and child, or only -- 10 MR. KENNEDY: We use -- as a 11 standard measure, we use the total population of 12 the state. 13 In terms of growth, this is a very 14 dynamic industry. We've seen superb growth in 15 Texas here in the past year. You'll notice that 16 Scientific Games, again, enjoys relationships with 17 our customers that are high performance as well. 18 The states where we are the primary suppliers grew 19 at 10.10 percent last year; where the customers 20 that we are not involved with grew at 3.2 percent. 21 Again, back to the size of the 22 market and the market share, Scientific Games has 23 27 domestic customers, 21 where we supply the 24 primary -- we are the primary supplier, and there 25 are 12 lotteries that we do not supply. It's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 14 1 interesting to note that of the top 16 lotteries in 2 the country, as ranked by per capita sales, 3 Scientific Games supplies approximately 80 percent 4 of those sales. 5 The reason that is important to the 6 Texas Lottery, in particular, is because 7 Scientific Games is involved in high performance, 8 high demanding, I'd have to say, accounts; accounts 9 that require a great deal of logistical support and 10 expertise from us. And we are able to share that 11 experience with our customers. 12 It's a very small industry, and it 13 is a rapidly changing industry. It's not static at 14 all. And as you probably know from your own 15 experience, is that the instant game really is the 16 workhorse of the industry right now. 17 Just to put this in a little bit of 18 historical perspective, I wanted to put a chart up 19 that just simply shows you what has happened in the 20 almost 30 years that the instant product has been 21 in the marketplace. As Cliff mentioned, in 1973, 22 the first lottery instant ticket was introduced in 23 Massachusetts. We are looking at doing 24 approximately 18 billion in calendar 2002. 25 And if you look at that sales curve, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 15 1 you'll note that the growth has been phenomenal. 2 Just as a consumer product, the growth of the 3 instant game has been incredible. What's 4 particularly interesting, if you look at that sharp 5 curve from 1991 through 1997, and then again from 6 '99 to 2001, that does not include new startups. 7 There may be a few in there. But that comes from 8 good, solid consumer marketing, introduction of 9 instant games, and that that growth in the industry 10 really has driven the lottery growth, period, in 11 the last ten years. 12 And then finally, Ron will get into 13 some specifics about Texas, but I wanted to show 14 you, through FY '01, anyway, for Texas rank in per 15 capita sales relative to the rest of the lottery 16 industry in the United States, the Texas Lottery 17 has always had a great reputation for a well-run 18 organization. And it is again showing significant 19 growth. It is, as you can see, in the top ten of 20 sales in the country, and it looks like you're on 21 track to do over a 10 percent increase this year as 22 well. 23 So again, I would just simply like 24 to say we are delighted. We appreciate your 25 business. And we hope that if you have any WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 16 1 questions, you will be sure to ask them. But the 2 Texas is a first-class organization, and we're 3 proud to be a major supplier to the Texas Lottery. 4 With that, I'll turn it over to 5 Janine. 6 MS. WHITEMAN: Thank you. 7 One of the things I want to talk 8 about is the fact that -- our continuing efforts, 9 in-house, to improve our products and our services 10 to the states. Currently, we have a worldwide 11 capacity of over 18 billion tickets. About 16 and 12 a half million of that is in the United States. 13 What that means for Texas is, as 14 your schedule changes, we can respond quickly to 15 those needs. We can provide quick turnaround when 16 demand increases. And in fact, we have a couple of 17 games that we're ready to sign off on in the next 18 couple of weeks. So we'll actually have turnaround 19 in a two- to three-week time frame, rather than the 20 normal 40- to 45-day turnaround. We can respond 21 quickly because we have the capacity. 22 In addition to capacity, we're also 23 heavily investing in the technology of lottery 24 tickets to -- you know, to bring you improved 25 products. Some of the new things that we're WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 17 1 working on include electron beam drying for the UV 2 coatings, using different coating technologies. 3 We've been very -- working with the Texas security 4 folks to develop the new technologies specifically 5 for the Texas Lottery tickets. 6 All of this is an investment to 7 improve the instant lottery product. One of the 8 things that we're very conscientious about is 9 quality. And one of the efforts this year is to 10 build quality into the process instead of just into 11 the final inspection at the end. So we have gone 12 back and revamped many of our processes and our 13 technologies to build in quality. 14 We have new proofing technologies. 15 We've just implemented a new direct press -- or 16 direct-to-plate process, which is where instead of 17 having to go from the artwork to film to the 18 printing plate, we can now go direct from the art 19 to the plate, which takes a -- makes the image just 20 a little bit sharper and actually increases the 21 speed as well. 22 We've done upgrades to our lab with 23 procedures, with high tech imagers. One of the 24 things that Texas has just implemented is mark 25 detectors on the instant tickets to assist in the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 18 1 packaging line. So again, new inventions and 2 processes to increase quality and the Texas 3 product. 4 We're trying to take as much of the 5 human inspection out and build that in 6 automatically, and that includes the automatic -- 7 automated stackers and card insertions. One of the 8 problems in the past had been, if you're inserting 9 pack inserts, making sure that the right insert got 10 with the right card. That's why this is all now 11 completely automated. And the new card program -- 12 which is a corrective action request program -- to 13 make sure any issues that do come up are 14 investigated thoroughly, the core problem is 15 identified, and the solution is found. 16 In addition to the new technology, 17 we've also invested heavily in new products. We 18 have a group in Atlanta called the game generation 19 group. And their primary goal is to do two 20 things: one, come up with products sell and 21 products that solve lottery business problems. 22 I'm going to show you just a couple 23 samples of that. One of these is our new, extended 24 play color mark marking system. And what this 25 allows the player to do is, on this bingo game, you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 19 1 scratch the play area, and then you can easily mark 2 which spots have been scratched with the red boxes 3 around. 4 And this is applicable to not only 5 the bingo-type play style, but other extended play 6 games as well. And it doesn't have to be square; 7 they can be round or other shapes, and they can be 8 any color, because it's actually the display 9 printing that is being shown. That's just one 10 example. 11 Another advancement is what we call 12 advanced imaging. And this is taking the 13 yours-beats-their-score play style to the next 14 level and actually building in the racing action 15 and/or the play action into the imaging. 16 I believe both of these new concepts 17 are planned or will be planned for the next Texas 18 focus groups. 19 One of the lottery problems that 20 we've worked to solve is what we call our retailer 21 ticket package. And I believe this is an issue 22 that also came up in the last town hall meeting 23 here in Texas, is when retailers are doing their 24 end-of-shift accounting, they have to look at the 25 pack ticket number to record. But sometimes, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 20 1 depending on how the tickets are in the dispensers, 2 that number may be hard to read and you have to 3 flip it upside down or turn it around. 4 So what we've been able to do is 5 image the ticket number both ways on the ticket so 6 that the retailer can easily see what the next 7 ticket available is, solving one of the big 8 retailer issues that are out there today. 9 Thank you. 10 MR. WILLIAMS: I get the fun part. 11 I just enjoyed our -- my family has just enjoyed 12 our third anniversary in Austin, Texas. We've 13 enjoyed living and working in Texas. The three 14 years that I've been involved with the Texas 15 Lottery account have been wonderful. They have 16 been very educational. The atmosphere here has 17 been dynamic and fluid at times. 18 And we have grown as a company as a 19 result of our relationship with the Texas Lottery. 20 We have specifically been able to be a part of a 21 team of your marketing staff, your administrative 22 staff, your other vendors, and Scientific Games 23 that has taken an ebb tide of fiscal '99 and shown 24 instant ticket growth every year since, and pretty 25 significant growth at that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 21 1 And we have also seen a dramatic 2 increase in the number of games that we've 3 delivered to you every year. And as of -- just a 4 few quick facts and figures for Texas itself -- as 5 of today, we have delivered 147 games to the Texas 6 Lottery over the past three years. That's 7 2.8 billion tickets worth over $5.2 billion in 8 street sales. 9 Forty-two games have been delivered 10 so far in calendar 2002 -- or excuse me. Forty-two 11 games were delivered for the entire year for the 12 calender year 2001. Forty-seven games have been 13 delivered so far this calendar year, with another 14 20 on tap to be delivered before the end of the 15 calendar year, to bring it up to about 67 games 16 delivered for the year, this year. 17 And we have been working with your 18 marketing staff to try to stay out in front of this 19 increase in game introductions, which is in no 20 small part a big reason that in accounting 21 year-to-date figures, you're up almost 20 percent 22 in sales over the same period past year. 23 And this chart, again, illustrates 24 the growth that we've seen since fiscal '99. 25 Fiscal '02 and, of course, '03 -- fiscal '02 is not WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 22 1 quite over yet, so there is a little bit of 2 projection there, but we should come very close to 3 2 billion. And in '03, even from your own 4 marketing department's projections, we should see 5 growth again. We feel that we might crack that 6 number for you in the next year. 7 And another illustration of the 8 growth that we've enjoyed in FY '99, instant sales 9 with over -- just over 1.4 billion; and projected 10 instant sales for this fiscal year, 1.93 billion. 11 And that's a 37.6 percent increase over fiscal '99. 12 And as Jim alluded to earlier, the 13 instant product is definitely the workhorse, not 14 only in industry, but specifically in Texas where 15 over 60 percent of the product sales, week in and 16 week out, come out of the instant scratch side. 17 And we're very happy to be a part of it. 18 Thanks very much. 19 MR. BICKELL: Thank you very much, 20 gentlemen. 21 COMMISSIONER CLOWE: I want to thank 22 you all on behalf of the commissioners. Three of 23 you are from Georgia and have come a long way to be 24 here with us. Ron is here in Austin, as he pointed 25 out. And we appreciate you coming this morning and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 23 1 telling us this story about your company. We feel 2 that the information that you've given us is 3 important. We're glad to hear about your financial 4 situation. You had a successful secondary 5 offering. 6 And one of the concerns that I've 7 had in my experience in this industry is that there 8 are fewer and fewer competitors, it seems, as time 9 goes on. It's been a trend in many industries -- 10 and in this one, it's evident -- towards 11 consolidation, acquisitions, and mergers. And 12 we're happy to see that your -- apparently, your 13 financial condition is sound and that you're moving 14 ahead. 15 And we like competition for our 16 product in this state, and we would like to see, as 17 these contracts come up, a number of qualified, 18 competitive bids that the staff can look at and 19 choose from. We are pleased with the performance, 20 based on what I get from the executive director, 21 and I think we have a good working relationship 22 with your company. 23 And I'm curious. Janine, how many 24 lines do you have in your plant in Georgia that 25 produce tickets for us? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 24 1 MS. WHITEMAN: We have three 2 presses. 3 COMMISSIONER CLOWE: Three presses. 4 So -- and do you run all of our 5 tickets on one press at a time, or do you use all 6 three of those? 7 MS. WHITEMAN: We're presently using 8 two out of the three presses for Texas tickets, 9 press one and three; the Revere press and the 10 flexographic press. 11 COMMISSIONER CLOWE: And how have we 12 been doing on quality in the last year? 13 MS. CLOUD: The quality has been 14 good. We've had a couple of games that we have had 15 some issues with that Scientific Games rectified 16 quickly. But that's a small percentage to the 17 number of games that were printed. 18 COMMISSIONER CLOWE: Well, as you 19 pointed out, Ron, our sales are over 60 percent of 20 the total in instant tickets, and it is a growing 21 part of our offering to the players in this state. 22 So this is a vital part of the operation of this 23 lottery. And we're hopeful that we'll continue to 24 see the kind of performance from you as our 25 selected vendor at this time. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 25 1 And one of the things, Mr. Bickell, 2 that I like to always say to a vendor -- and I'm 3 not selecting you or singling you out -- we don't 4 like surprises. We'd like to know when something 5 comes up that is an occurrence that affects the 6 Texas Lottery. 7 And it's the easiest thing in the 8 world to notify the executive director when 9 something occurs or something you discover that is 10 pertaining to this commission. We like to know 11 about it, and that's just part of being Texas. 12 We're different. And we like to know how our 13 vendors are doing and if there is anything that 14 affects us. 15 MR. BICKELL: Well, we try and keep 16 an open communication, and I think Linda and I, as 17 well as other members of the team, have good 18 relationships and continuous dialog. And we will 19 continue. 20 COMMISSIONER CLOWE: And your 21 presence here this morning and the information you 22 brought is a part of that relationship, and we are 23 appreciative of it. 24 MR. BICKELL: Thank you very much, 25 and thank you for letting us come. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 26 1 COMMISSIONER CLOWE: Thank all four 2 of you very much. 3 That concludes the presentation 4 under Item 4 by the Scientific Games International 5 group. We'll return now to the agenda, 6 Item No. 2: Report, possible discussion, and/or 7 action on lottery sales and trends. 8 Linda, I believe that's you and 9 Toni. 10 MS. SMITH: Good morning, 11 Commissioners. For the record, my name is 12 Toni Smith, marketing director of the Texas Lottery 13 Commission. 14 To look at year-to-date total sales 15 for week ending August 17, 2002, are currently at 16 2,859,232,665. This is up 4.38 percent from fiscal 17 year 2001 total sales to date of 2,739,252,738. 18 Our current weekly average for fiscal year 2002 to 19 date is 56,063,385. 20 And then just to take a look at 21 a couple of products year to date, the instant 22 product year to date for fiscal year '02 is at 23 1,862,495,025, representing 65.14 percent of sales. 24 This is up 12.29 percent over last year of fiscal 25 year 2001. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 27 1 Lotto Texas is currently at 2 573,045,975, representing 20.04 percent of sales, 3 and is down 15.94 percent over last year. 4 Cash 5 is at 116,350,691. It's also 5 down 16.64, but we hope that our recent changes to 6 that game will help us increase sales on Cash 5. 7 Pick 3 is at 227,058,929, and it is 8 up 13.51 percent. And we attribute somewhat of 9 that increase to our addition of the midday draw. 10 And the Texas Two Step is currently 11 at 80,282,045, and it represents 2.81 percent of 12 sales. 13 And then just to take a snapshot 14 look at last week, the week ending August 17, 2002, 15 total sales were 53,719,998. And this was down 16 5.59 percent from the previous week, and the 17 primary factor of that was for jackpots being hit. 18 The jackpots for week ending 8-17 were 4 million 19 and 6 million for Wednesday and Saturday, and then 20 the previous week, they were at 12 and 16 million 21 respectively. 22 And I've also attached some other 23 jackpot summary and game information for the other 24 online products for your review at a later time. 25 Or if you have any questions, I'd be happy to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 28 1 answer them. 2 COMMISSIONER CLOWE: Toni, are all 3 of the new terminals installed now? 4 MS. SMITH: I believe they are. 5 MS. CLOUD: Yes, they are. 6 MS. SMITH: Yes, sir, they are. 7 COMMISSIONER CLOWE: And are they 8 working properly, and have we had any problems with 9 those as we went through that installation? 10 MS. SMITH: I think the installation 11 wasn't smooth, where there might have been a couple 12 of glitches. But GTECH was very quick to respond 13 to those. 14 MS. CLOUD: Commissioners, I'd like 15 to report that we were in the process of conducting 16 a Cash 5 promotion, where the players had -- would 17 buy five tickets and get one free. We experienced 18 some technical problems with a few of the terminals 19 within the state; could not isolate the problem in 20 order to be able to fix it at the time. 21 And we did pull the promotion down. 22 This was Friday afternoon late. We plan -- after 23 GTECH writes software to correct this issue -- to 24 reintroduce the promotion at a later date. But we 25 did pull that promotion down, and it was because of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 29 1 technical problems that had to do with the 2 installation of terminals. But it did not -- it 3 was a very small number of terminals that were not 4 receiving the message from the host to create the 5 extra ticket for the five play. 6 COMMISSIONER CLOWE: So other than 7 that, the installation of the new terminals has 8 gone smoothly and -- 9 MS. CLOUD: Yes. 10 COMMISSIONER CLOWE: -- without any 11 problems? 12 MS. CLOUD: Yes. We have not had 13 conversion problems up until now, except for this 14 issue. 15 COMMISSIONER CLOWE: How many 16 instant ticket games do we have on the market 17 currently? 18 MS. SMITH: I know the last time I 19 checked those numbers, we were at -- I believe the 20 report I gave you, Linda, we were at -- there were 21 like 30-something that every one was available to 22 everyone; and as high as -- much higher, in the 23 60s, with regard to what some retailers may be 24 carrying but that are no longer in the warehouse. 25 MS. CLOUD: Our goal is to maintain WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 30 1 20 active games in our base retailers at all times, 2 current games. And then we have our supplemental 3 retailers, and I think some of those even have as 4 many as 80 games in their ticket dispensers. 5 MS. SMITH: And I can have an update 6 for you before you leave today. 7 COMMISSIONER CLOWE: Okay. Yeah. 8 I'd like to keep tabs on that. 9 How has the Harley game been 10 received? 11 MS. SMITH: It's done real well. We 12 have one more drawing to do, and we have purposely 13 not determined a date for that. We wanted to see 14 how sales were so that we obviously could maximize 15 the opportunity for people to participate. But it 16 was a very popular game, and I think it made a lot 17 of people happy. It was a fun game for people to 18 have a different type of non-cash prize. 19 MS. CLOUD: And still averaging 20 about 1.3 million a week in sales. 21 COMMISSIONER CLOWE: And what has 22 been the most popular game in this calendar year so 23 far? 24 MS. SMITH: Probably Weekly Grand 25 and Break the Bank, two of our core games, are WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 31 1 probably the most consistent as far as sales. As 2 far as high sales at one time, our $10 holiday 3 game -- you know, from the last Christmas 4 holiday -- did very well. The Harley game, we 5 introduced a $7 price point ticket that's done real 6 well. 7 So it seems that the higher price 8 points are doing very well, and we hope to take our 9 whole player base to that next level with that type 10 of game. 11 COMMISSIONER CLOWE: I'm trying to 12 understand and learn about the product change, 13 which seems to be important in the attractiveness 14 to the players. And the Scientific Games group 15 made a comment about the number of tickets that 16 they have introduced over a period of time and the 17 changing nature of the ticket face, the style of 18 play, the appearance of the game. And that seems 19 to be something that refreshes it and makes it 20 attractive to the player. 21 We have a base of instant ticket 22 players, it seems to me. But how well you market 23 that and make that an attractive thing to them can 24 influence the number of people who become players. 25 And I think we're seeing that currently, that our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 32 1 sales are up. I believe it's over 20 percent this 2 calendar year, and it's over 60 percent in total. 3 I'm trying to understand that and 4 how it relates to our online games. And we had the 5 GTECH group here at our last meeting, and they made 6 a presentation. And there was some discussion 7 about changing the games and making them 8 attractive. 9 I know Commissioner Cox has much 10 more experience than I do about this, but it seems 11 like this industry is market driven in a very 12 similar way to other products that are sold in 13 other industries. Am I correct or incorrect? 14 MS. SMITH: No, I would agree with 15 that, sir. 16 MS. CLOUD: Commissioners, looking 17 at the new year, which was almost winding down -- 18 the prior fiscal year that we're in right now -- 19 and moving forward, we just had a meeting this week 20 about -- with me about looking at what our games 21 are going to be and trying to beat our numbers for 22 this year. What are we going to do next year to do 23 this? 24 One of the things that I had 25 tentatively agreed on and the retailers are asking WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 33 1 for -- and it will be interesting to see how much 2 the players want it -- is a $20 Christmas game. 3 And the $20 game would have a minimum prize of $20. 4 I'm not going to agree to anything less than the 5 cost of the ticket for a prize, but it will -- 6 COMMISSIONER CLOWE: That's break 7 even, if I remember correctly. 8 MS. CLOUD: That's the break even. 9 COMMISSIONER CLOWE: That's not 10 winning. That's break the news. 11 MS. CLOUD: That's break even. But 12 we don't want anything less than break even. I 13 wouldn't want to fight that fight. 14 But we're talking about five 15 $1 million winners in that game. For a $20 ticket, 16 you're going to have to think about what are you 17 going to offer the players. And so we're going to 18 give this a shot. This will be our first $20 19 ticket. It will have the same payout as the $10 20 ticket, which is 70 percent. 21 So that's on the horizon. Our Bucks 22 and Trucks game is on the horizon. We're going to 23 do a Harley game next spring. And there was 24 something else. 25 MR. WILLIAMS: Regionalized games. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 34 1 MS. CLOUD: Oh, regionalized games. 2 We have a -- we in part focused -- I mean, in our 3 retailer town hall meetings, in some of our 4 locations, they want a Spanish ticket. They want 5 things that relate to their culture in those areas. 6 And we are looking at doing regionalized games as 7 well, as an experiment to see how well they do. 8 So these are new and exciting things 9 that we have not done on the instant ticket side 10 that we are looking at doing in order to try to 11 increase sales next year above what we've done this 12 year. 13 MS. SMITH: And Chairman Clowe, I'd 14 like to add that with regard to the online games, 15 there is a little bit of difference on the instant 16 product because there is such a quick turnover. 17 And we can quickly change what the players have. 18 On the online side, it takes a little bit longer to 19 do that. 20 And we had a very good meeting the 21 other day with Linda Cloud -- and Commissioner Cox 22 sat in with us with GTECH -- and talked about some 23 long-term plans for the online games. And I think 24 that the charge he had given us is to look at those 25 games and see if there are any other changes that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 35 1 we need to make and incorporate them into our plans 2 so that we can obviously have our online products 3 grow as quickly as they are on the instant side. 4 COMMISSIONER CLOWE: Well, that's 5 exactly the track that I hoped you'd say you're on, 6 because I don't think, frankly -- and it's not 7 intended as criticism, but I think this commission, 8 this agency, has ridden on a wave of popularity 9 from the outset and the acceptance of the lottery 10 operation by the players in this state and adjacent 11 states. 12 But I think there is a level of 13 maturity that this agency has reached and that now 14 is the time when marketing and determination of 15 what is attractive -- within the statutes and the 16 rules as set out by the legislature, we ought to be 17 determining everything that we can do to keep the 18 revenue coming from the players to the state, and 19 not be sitting back and saying, well, you know, we 20 just -- there's nothing else we can do. 21 MS. SMITH: Right. 22 COMMISSIONER CLOWE: There is always 23 something, within the bounds that are correct, that 24 we ought to be looking to see what we can do. 25 MS. SMITH: We have -- with changes WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 36 1 we've already made with Pick 3 and Cash 5 and our 2 last Lotto Texas change -- are looking to see what 3 else we can do to those games, particularly Lotto 4 Texas. We might could still do something to help 5 that game. 6 And then we're also looking at other 7 games that could require possible legislative 8 changes but that -- you know, to make some good 9 estimates and some projections, and with GTECH's 10 help and the charts that they have been given, to 11 be able to bring to the table, to the commission 12 and to Linda Cloud, all kinds of opportunities that 13 we maybe have not touched yet, and if it were 14 possible that they could happen, that we could 15 implement in the future. 16 COMMISSIONER CLOWE: Very good. 17 MS. CLOUD: Commissioners, I 18 intended to say this when Scientific Games was at 19 the table, but I challenged the instant ticket 20 creditors now that we deal with to help us come up 21 with creative games that our players are going to 22 continue to be interested in playing. 23 And I have found, even in my own -- 24 staying real close to this game plan, that just 25 going through a catalog of games that have been WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 37 1 created for other states, some of those are not 2 working in this state, and some of those games have 3 died on us. And we don't want that to happen. 4 So we want to make sure that -- you 5 know, I'm even going through your catalogs now, 6 looking for different games. So we ask that you 7 really look at that; not just give us something 8 that's maybe canned, but come up with something 9 special just for us. And that is the charge from 10 me to you. 11 COMMISSIONER CLOWE: And Linda, I 12 know you're constantly communicating with other 13 agencies in other states to see what's been popular 14 and highly accepted by those states and what 15 they're doing to enhance their sales. 16 MS. CLOUD: Yes. And that's what 17 the $20 ticket comes from. Other states are using 18 the $20 ticket now quite heavily. 19 COMMISSIONER CLOWE: Very good. I 20 think that takes us to Item No. 3 on advertising 21 and promotion. 22 Do you have anything there, Toni? 23 MS. SMITH: Just to very briefly 24 show you some commercials I think that Phillip has 25 ready for us, to share with the commission that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 38 1 we're prepared to support the recent Cash 5 2 changes. 3 What you will see here is a spot 4 created by Fogarty Klein Monroe for the general 5 market, which is sort of an educational piece that 6 truly show the balls rolling right out of the 7 machine and the benefits of the changes; and then 8 what the King Group has prepared for the minority 9 market, both African-American and Hispanic, that 10 are much more minority driven but still carry 11 through the same message. 12 (Videotape shown.) 13 MS. SMITH: That was a 30-second and 14 then a couple of 15-second. 15 (Videotape shown.) 16 MS. SMITH: So those spots are 17 currently airing. And we think it's important to 18 have that type of advertising support as we make 19 these changes to the online games so that there is 20 an awareness out there with our players. 21 COMMISSIONER CLOWE: Very good. 22 Anything else? 23 Thank you, Toni. 24 MS. SMITH: Thank you, 25 Commissioners. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 39 1 COMMISSIONER CLOWE: Thank you, 2 Linda. 3 We're now ready to take up 4 Item No. 4 on our agenda: Report, possible 5 discussion, and/or action on Lotto Texas. 6 Linda, I believe you have this 7 subject. 8 MS. CLOUD: Yes, sir. And I'm going 9 to turn it over to Commissioner Cox and maybe have 10 GTECH come up to the table just in case there's 11 questions. I think there is some discussion that 12 we probably want to have. And Commissioner Clowe, 13 you need to ask some questions that you want to 14 have knowledge of. 15 Commissioner Cox did go through -- 16 along with staff -- a briefing with GTECH. And we 17 went very in depth into how projections are made 18 and had a whole day, really, to sit down and 19 discuss the different changes that are made in the 20 states and how it has affected the different 21 lotteries. 22 We are still working on -- GTECH has 23 committed to present us with a five-year plan, 24 which is, of course, what Sunset and what CCG has 25 recommended that we do with our marketing plan. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 40 1 But they have agreed to help us with a five-year 2 plan looking forward as to what we need to be doing 3 in order keep -- continue to increase sales. That 4 is going to take some time for them to put together 5 for us. There is other information that I think 6 Commissioner Cox asked GTECH to provide him. 7 And with that, I guess we'll just 8 open it up and let you take the lead. 9 COMMISSIONER CLOWE: All right. I'd 10 like to ask the gentlemen from GTECH to identify 11 themselves, if you will. And then after you do 12 that, maybe you'd like to give comments to the 13 commission and give us an opportunity to ask 14 questions additionally. 15 MR. CADIGAN: Thank you. 16 Good morning, Chairman Clowe, 17 Commissioner Cox, Director Cloud. My name is 18 John Cadigan. I am the vice president of lottery 19 marketing for GTECH Corporation. 20 MR. SADRI: Good morning, everyone. 21 My name is Amir Sadri. That's A-M-I-R, S-A-D-R-I. 22 I'm director of online games for GTECH. 23 MR. RIVERA: Good morning, 24 Commissioners, Ms. Cloud. My name is Ramon Rivera. 25 I'm the assistant general manager for GTECH in WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 41 1 Texas. 2 COMMISSIONER CLOWE: And we'll need 3 appearance forms from you, gentlemen, prior to your 4 departure, if you will. 5 MR. RIVERA: Yes, sir. 6 MR. CADIGAN: It's good to be back 7 here. It seems like I'm making every commission 8 meeting, and soon enough, I'll lose this Boston 9 accent, I'm told. 10 We had the fortune -- good fortune 11 of meeting with Commissioner Cox, I believe a week 12 and a half ago, to talk about a key word, the word 13 "planning." This lottery here in Texas is one of 14 the premier lotteries in the United States as it 15 gets to planning, a good 18-month planning cycle -- 16 both in the online and the instant, I might add. 17 The word "planning" was used quite 18 extensively in the almost full-day meeting we had 19 with Commissioner Cox. And it was touched upon 20 here this morning. What we are in the preparation 21 phase of, back in corporate and working with local 22 resources here, is coming up with two five-year 23 plans for the Texas Lottery Commission. That is 24 two plans. 25 The first plan will be -- under WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 42 1 current legislative conditions; not restrictions, 2 but conditions -- we will project for you what the 3 next five years looks like on online as well as 4 instant. The second, perhaps more fruitful effort, 5 will result in a five-year plan taking into account 6 if certain restrictions or conditions are lifted. 7 And I think you'll see a marked difference in what 8 the resulting numbers will be. 9 Chairman Clowe, you used a term this 10 morning about the industry being market driven -- I 11 can't agree with you more -- I noted in my notes 12 back at the -- while seated. The Texas Lottery 13 Commission has, since its inception, done a stellar 14 performance in sales generation. But as this 15 lottery matures and the market matures with it, the 16 products that we offer today will need continued, 17 more and more significant support to keep that 18 market interest present, as well as new products to 19 be introduced. 20 I'm going to take you perhaps a 21 little bit into the future here. And stop me along 22 the way if you have questions. But in the 23 development of that five-year plan, assuming that 24 restrictions are lifted, what we will see here -- 25 and this is not finalized yet -- but a Lotto change WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 43 1 to your -- a matrix change to your Lotto game. 2 Let's say the year one. I'm going 3 to assume we're in the year one presently. 4 Sometime out in the year two, we would see a 5 recommendation that the Texas Lottery Commission 6 join a multistate consortium to the big ones today; 7 of course our MegaMillions and the PowerBall 8 consortium. And this one is perhaps more 9 appropriate for you than the other. 10 In the year three, we would see, on 11 the online, an introduction of a QuickDraw Keno 12 game for the Texas players, a proven revenue 13 generator in the industry. 14 In the year four, we would see 15 perhaps no major product introduction, but a 16 continuation of support of what will be a premier 17 game for you at that time, Keno -- QuickDraw Keno. 18 And in the year five, perhaps the 19 introduction of video lottery in the State of Texas 20 at age-controlled environments in two scenarios, 21 one being at racetracks and the other being a wide 22 area of distribution in age-controlled 23 environments. 24 Again, that's the future if certain 25 restrictions or conditions are lifted. And there WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 44 1 is the other five-year plan, assuming that those 2 conditions aren't lifted. And there is growth in 3 that plan also. 4 But do you have any questions to 5 this point? 6 COMMISSIONER CLOWE: One of the 7 concerns I have is that we missed our projection on 8 the latest matrix change for Texas Lotto. And I 9 think I understand the reasons that were given for 10 that miss. But in my experience, a miss of 10 to 11 15 percent is substantial. It's not something that 12 in business, in general, that I'm comfortable with. 13 And I have a sensitivity, as one 14 commissioner, about changing games unless we see 15 that it's going to have a beneficial result and we 16 are confident that we're going to have success. 17 That's why I'm glad that you had this meeting. 18 And I think Commissioner Cox is our 19 storehouse of institutional knowledge. And I 20 know -- although I was not present for that 21 meeting, I feel certain he asked some very 22 knowledgable questions and helped you achieve some 23 direction about the work that you're doing. 24 My sensitivities go to doing the 25 right thing and doing it at the right time. We WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 45 1 operate within the confines of the statute and the 2 direction we have from the leadership, and we want 3 to be productive within that current set of 4 guidelines. If the legislature were to change our 5 guidelines, we'd want to understand what it is that 6 they would be wanting us to do and how we would set 7 about to do that. 8 As you know, in this state, this 9 agency -- no agency can lobby or can initiate 10 changes. But we can act as a resource, and we can 11 answer questions for legislators who are 12 contemplating changes. And we want to fulfill that 13 role in the best of our ability. Having the 14 information in hand and having plans that portray 15 correctly different alternatives that can be 16 viewed, I think, can be helpful to everyone. 17 And I do not feel very good about 18 having missed the projection on the change we made. 19 And maybe I'm overly sensitive about that; I just 20 think it missed by 10 or 15 percent. You know, 21 when I was a CEO, if I missed my projections by 22 that much, I think I'd be looking for a new job. 23 And I don't want to see that kind of 24 a miss again, although I do understand there are 25 good and valid reasons for what's happened. But I WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 46 1 just want us to be more precise, if that 2 preciseness is possible. 3 MR. CADIGAN: I can't agree with you 4 more. And there are people back in corporate, 5 north of my title, who were equally displeased by 6 the miss of the second-year projection -- 7 second-year actual sales on the Lotto game. As we 8 have documented here, the first-year projection was 9 within 1 or 2 percent -- or 3 percent, I believe. 10 And it was the second year that the projections 11 fell off significantly, and we're not pleased with 12 that at all. It's revenue not only for the 13 citizens of Texas, but also for GTECH. 14 So it's certainly our intention to 15 come in here and always present to the commission 16 the most accurate projections possible and, in 17 fact, to make them -- if we're going to err, it's 18 going to be on the conservative side. 19 I, for one, feel that that matrix 20 change, back two years ago, was perhaps a little 21 bit too conservative. It could have gone a little 22 bit higher. But that's behind us now. We're 23 looking forward, certainly within the confines of a 24 five-year plan. 25 We are on record here noting that an WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 47 1 additional matrix change, we feel, is required to 2 jump start that game. And our projections of in 3 excess of $700 million the first year out, after 4 the matrix change, we believe are valid. And we 5 look forward to the opportunity of working with you 6 on making that change. I understand. We are 7 extremely sensitive to your sensitivities of 8 accuracy on that. 9 There are multiple, multiple 10 variables that come in on the success of a Lotto 11 game, and it's not just the size of the matrix. 12 And that's what projectors of Lotto figures live 13 with. It's not just, again, the matrix; it's all 14 the other things that are going on in the 15 marketplace, not the least of which is, as you've 16 heard me say before, we're dealing with a large 17 arts game and the random selection of winning 18 numbers. It's quite an art with a little bit of 19 science. 20 COMMISSIONER CLOWE: Comments? 21 COMMISSIONER COX: The thing that I 22 think is obvious from the presentations that GTECH 23 made, Mr. Chairman, is that there are a couple of 24 factors playing in the decline in the Lotto Texas 25 sales. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 48 1 One of these is what John and his 2 folks refer to as "jackpot fatigue." And I guess a 3 comparison for that is the first time man landed on 4 the moon, most all of us were watching. And if man 5 were to land on the moon tomorrow, it probably 6 would capture a pretty small share. It's just not 7 as big a deal as it used to be. 8 And the other is that we have had 9 our jackpots hit this year earlier than 10 statistically predictable. The presentation that 11 GTECH made to us last week was quite extensive and 12 looked at matrix changes that have been made in 13 state lotteries throughout the country and what 14 happened. 15 And unfortunately, the information 16 does not provide a clear path. It seems that in a 17 case in which a state changes the matrix to -- with 18 the intent of increasing the jackpot levels, they 19 also muddy the water, if you will, with other 20 changes that may be perceivable positively. So 21 what I saw the other day was that you can change 22 the matrix to try to increase the size of the 23 jackpots, and sales may go up, and they may go 24 down. 25 So what I've asked John and his WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 49 1 folks to do is to look at each of those matrix 2 changes that they have documented. And let's look 3 at the softer evidence as to what kinds of things 4 were done with that to see if there are any 5 predictors there for whether it would do well or do 6 bad. And John and his folks are taking a look at 7 that as we speak. 8 The other thing that I've asked 9 GTECH to do -- and I've also asked our statistician 10 at A&M and the three resources that I have 11 personally to look at -- is what might there be in 12 the literature about this kind of thing. 13 Certainly, our customers have told us that they 14 want bigger jackpots. They vote with their 15 dollars. When that jackpot gets around 60 million 16 and up, that's when they start voting with their 17 dollars. So I think it's clear they want bigger 18 jackpots. 19 At the same time, there is certainly 20 a point where the odds would be so great that there 21 would never be a jackpot. And somewhere in between 22 that is obviously where we want to go, and we want 23 to go somewhere where we would have room to go 24 further at a later date as we experience further 25 jackpot fatigue. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 50 1 So I've asked these folks to see if 2 there is anything out there, as far as studies, as 3 to how far you can go. Linda and I talked 4 yesterday with our statistician at Texas A&M, and 5 his first indication was this is more psychology 6 than statistics. 7 And with that, I did a very brief 8 search. I looked on the Web yesterday for what 9 kinds of things might be out there, and it does 10 look like that if there is anything out there, it's 11 probably going to be pretty soft and fuzzy. 12 And it's probably going to tell us 13 that there are -- I'm going to risk getting a 14 little technical here, but I tend to think of 15 utility -- that is, value -- on an objective kind 16 of basis. What are the odds of flipping a coin 17 that it will come up heads? 18 But what the literature indicates is 19 that there is also a thing out there called 20 subjective utility, where people value things on an 21 other-than-totally-objective basis -- not 22 irrational, but on a subject basis -- perhaps 23 because they can't relate to the odds of 1 in 24 24 million. So they do it -- they process that 25 information in a different way. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 51 1 That, I think, is the status report 2 of where I believe we are. It's definitely a work 3 in progress at this point. I haven't seen concrete 4 recommendations, and I think at this point, it's 5 inappropriate to have them, because we're still 6 looking at the data. 7 COMMISSIONER CLOWE: Great. Well, 8 that's wonderful. I'm so glad to hear your 9 comments, and I couldn't agree with you more. And 10 I think that's the studied approach and the careful 11 approach that we want to have before any 12 recommendation is made to the commission and any 13 serious consideration by way of a vote might be 14 taken. 15 That is the kind of thing I'd like 16 to see applied to everything this agency does, 17 Linda. I think that's the way to do business. And 18 that way, when we go to our players and we offer 19 them a product, we will have a high level of 20 acceptance, we will have interest, and we will have 21 a return to the state that is increasing instead of 22 decreasing. 23 And I thank you, Commissioner Cox, 24 for your time and effort in that area. 25 And GTECH, this is the kind of thing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 52 1 that really has more to do with the future of the 2 success -- I appreciate the fact that the terminals 3 are in and they are installed. And that was done 4 timely; as a matter of fact, I think ahead of 5 schedule. And we're appreciative of that aspect of 6 your performance for us. 7 But this is the kind of strategic 8 planning that Commissioner Cox is addressing with 9 you that we must do more of to be successful. I 10 think we've had a high level of success to now, and 11 that has been fortunate. I won't call it lucky, 12 but it has been fortunate. 13 But now, as we've reached this 14 fatigue aspect that Commissioner Cox has referred 15 to -- and he is dead on on that, I think -- we must 16 be better planners, and we must position ourselves 17 in the market so that when we undertake a change, 18 we get a first-year positive result, a second-year 19 positive result, and then go right on down the 20 line. That's what I think the legislature wants to 21 see out of this agency. 22 MR. CADIGAN: We concur, certainly, 23 with that. 24 COMMISSIONER COX: Mr. Chairman, one 25 further point. We have also asked GTECH to work WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 53 1 with us on not just the Lotto Texas, but the other 2 drawing games to plan those changes as well. 3 COMMISSIONER CLOWE: Great. That's 4 wonderful. 5 I'm appreciative to all of you for 6 this discussion. It's the kind of thing that I 7 think we need to have in this commission in the 8 open sessions so that we discuss where we are and 9 what our thinking is, well before anything takes 10 the form of a substantive proposal. 11 MR. CADIGAN: Thank you. 12 COMMISSIONER CLOWE: Thank you all. 13 MR. SADRI: Thank you, Mr. Chairman. 14 COMMISSIONER CLOWE: Next is 15 Item No. 6: Report, possible discussion, and/or 16 action on recent restructuring and reorganization 17 of the agency. 18 Jim Richardson. 19 MS. CLOUD: Commissioners, at the 20 last commission meeting, we discussed our 21 reorganization based on our RIF, a program that 22 went through based on the recommendations made from 23 the MAS Group. And Jim has put together a 24 presentation to kind of lay this out for you so 25 that he can show you the actual savings to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 54 1 agency and to the state, and the benefits of having 2 gone through this exercise. 3 MR. RICHARDSON: Good morning, 4 Commissioners. For the record, my name is 5 Jim Richardson, and I am the human resources 6 director -- to clear out the formalities. 7 MS. KIPLIN: Commissioners, while 8 that's booting up, just for a housekeeping matter, 9 on the matter that you-all were talking about, 10 Lotto Texas, I also think it's appropriate that it 11 came up in the lottery sales and trends in terms of 12 planning and looking at sales. 13 MS. CLOUD: It's almost as slow as 14 my computer at home. 15 MR. RICHARDSON: I also wanted to 16 know what the inside of a computer looked like, and 17 here it is. 18 Now we're ready. 19 (Slides shown.) 20 MR. RICHARDSON: Before we get 21 started on the main portion of the program, 22 Commissioners, I do want to take a moment to 23 mention the task force that I have not, to date, 24 mentioned. 25 My primary concern throughout the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 55 1 program was to mention those employees who were 2 affected by the reduction in force and their 3 efforts to make this a successful program. But I 4 don't want to fail to mention the task force that 5 began this project quite some time ago and worked 6 very diligently and very hard to make this project 7 work. 8 And it was Gary Grief in lottery 9 operations; Toni Smith in marketing; Keith Elkins 10 in communications; myself. And we received legal 11 counsel from Diane Morris throughout most of the 12 project, and Kaye Schultz came on board later with 13 the project. 14 The divisions that were mainly 15 affected by the reduction in force, the primary 16 plan, was lottery operations, marketing, 17 communications, and executive. All of the 18 divisions were affected, but these were the primary 19 ones in the restructuring plan. 20 What we're looking at here is the 21 organizational chart for lottery operations in 22 April of 2002. The positions in red are the 23 positions that we identified whose functions were 24 not going to be used or were going to be added to 25 in the future and had to be reduced in force. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 56 1 These are the positions that we're going to be 2 talking about today. 3 I did not include the salaries of 4 all the other positions. It would just make the 5 numbers bigger. So we're only looking at those 6 positions that were restructured. 7 Retailer accounting at the time had 8 a manager, with the salary that you see; a program 9 administrator; eight accounts examiners; and an 10 ad tech, for a total of $456,657. Now, you'll 11 notice on all these slides with an asterisk, we are 12 including mid-points of the classification scale 13 for those positions that were vacant. 14 In licensing: a manager, a program 15 administrator, and 16.5 accounts examiners, for a 16 total $592,848. 17 In games compliance: a manager; 18 program specialists, there were seven of those; an 19 information specialist; and one ad tech, for a 20 total of $418,255. 21 In support services -- and again, 22 this is just the positions that were going to be 23 reduced or -- you know, from the support services 24 section. Status officer supervisor, six staff 25 officers, and one ad tech, for a total of $283,335. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 57 1 The grand total for the positions that were reduced 2 was $1,751,095. I'm not accustomed to dealing with 3 all these big numbers, so I don't... 4 In July of 2002, this is how lottery 5 operations was restructured. The positions that 6 you see in blue are the new positions. So as you 7 can see, we consolidated three of the sections into 8 one that became retailer services, and then support 9 services took on some of the functions of games 10 compliance and reconsolidated there as well. 11 The salaries now are manager; and 12 for program administrator, there are three program 13 administrators; accounts examiners were 27.5; and a 14 program specialist and an ad tech, for a total of 15 1.2 aught-6, aught-57. 16 Support services: a program 17 administrator; a staff officer, there's now eight; 18 and for administrative tech, the position has not 19 been filled yet, so we are looking at the 20 mid-points for that position -- for a total of 21 $356,959. The grand total now for lottery 22 operations is 1,563,016, for a cost savings of 23 $188,079. 24 The marketing division, the section 25 in red there is the one, again, that was reduced. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 58 1 I won't have a July 2000 because the only 2 difference basically in the marketing division 3 today is that customer service is no longer there. 4 Customer service positions was one 5 programmer administrator, four specialists, an 6 information specialist, and 3.5 ad techs, for a 7 total of $311,511. 8 Communications had one position that 9 was identified that was going to change in 10 function, such that we had to reduce that position. 11 That was the one manager's position. That position 12 at that time was $61,176. Communications has now 13 expanded their operations and added eight 14 additional employees to that division. The 15 manager's position has been elevated to a higher 16 responsibility. That position was posted, and the 17 employee was promoted from within the agency. 18 There are now -- there is now a 19 manager's position; a program administrator; a 20 winners' liaison came over from lottery operations 21 to communications; there are four information 22 specialists, and two of those are in the process of 23 being filled; a senior editor position that was 24 posted again yesterday; and a reception position, 25 for a total of $393,570 that was added to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 59 1 communications budget. The total cost in 2 communications incurred from April to July was 3 $332,394. 4 In exec, exec took on one new 5 position. The position in blue there, you'll see 6 the policies and procedures and special projects 7 coordinator. That position is costing $43,908. 8 The total direct cost of the 9 restructuring -- as you can see in the numbers 10 there, the total of savings is going to be 11 $123,228. 12 Now, there were some indirect costs 13 that we did not plan for. It was never our intent 14 to look at a position and say let's delete this 15 position because it's going to save us money or 16 let's hold this position because it's going to save 17 us money. 18 What we did, in October of 2001 -- 19 we believed at that time that we were going to 20 implement the program in January, so lottery 21 operations and the marketing division director said 22 what I want to do now is hold my vacant positions, 23 such that if -- when we had to do a reduction in 24 force, if we do do a reduction in force, that I 25 want more positions available for my employees to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 60 1 apply for. 2 And there are employees for those 3 positions. So we began to hold positions from 4 October through July. And the numbers that you're 5 going to see in just a few minutes, the position 6 may have been vacant for ten months, it may have 7 been vacant for three months. But during that time 8 period, we had to ask employees to delay their 9 vacations, to delay their workloads, to even work 10 some overtime. The employees all wanted to do that 11 to help out with this project. We'll also talk 12 about merit increases and then reallocation of 13 FTEs. 14 The vacant positions in lottery 15 operations that we held were four accounts 16 examiners, one ad tech, a program administrator, 17 and reimbursement officers. I believe there were 18 four reimbursement officers. The total savings for 19 the vacant positions we held was $266,621. 20 For the vacant positions in 21 marketing, there was a half-time ad tech, there was 22 one information specialist, a program assistant, a 23 graphics coordinator, and an advertising assistant, 24 for a total of $98,548. 25 Between April and July, several WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 61 1 employees within the agency received merit 2 increases. And these are annual increases -- or 3 these numbers calculate out to annual increases. I 4 felt it was unfair to say that in April, because an 5 employee got a merit increase and now their salary 6 has increased in July, that that was a by-product 7 of restructuring. It's not. They were going to 8 get that merit increase, regardless. So I would 9 also trim the $12,617 from our costs. 10 The other indirect savings for us 11 was the reallocation of FTEs. What this did for 12 the agency was it prevented us having to go to 13 anyone and ask for an increase in the FTE tab. It 14 made available to us FTEs that we would free up for 15 the IT division, the security division, financial 16 administration, bingo, internal audit, and also a 17 half-time position that I failed to list here in 18 human resources for employee relations. 19 The other thing that reallocation is 20 going to do is it's going to allow the commission 21 to operate more efficiently and more responsibly 22 through automation, oversight, and improvement in 23 skill sets, all with the same number of employees. 24 The bottom line for the total 25 restructuring cost savings: Direct costs, as you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 62 1 can see under "Direct Costs," the bottom line is 2 $501,074. 3 If I haven't answered any questions 4 that you may have with regard to that... 5 COMMISSIONER CLOWE: Jim, that's an 6 excellent presentation, very understandable and a 7 very positive result, and I want to thank you for 8 that. I know that you played a major part in this, 9 along with Linda and the members of the committee 10 that you identified for us. 11 My sense of this is that there was 12 this savings which you pointed out in a tangible 13 way. But in an intangible way, we have now the 14 most qualified people chosen for positions that the 15 commission needs in those divisions. 16 MR. RICHARDSON: Yes, sir. 17 COMMISSIONER CLOWE: So those folks 18 are doing the jobs that we need done here, and 19 they're the qualified people above all others to do 20 that work. 21 MR. RICHARDSON: Yes, sir. 22 COMMISSIONER CLOWE: I'd like to ask 23 you to make this presentation -- maybe in a little 24 bit shorter form, if that's possible -- a part of 25 future legislative briefings. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 63 1 MR. RICHARDSON: Sure. 2 COMMISSIONER CLOWE: There was some 3 interest expressed on the behalf of certain 4 individuals -- legislators and staff -- that we've 5 been visiting with about this effort when it came 6 out in the newspaper. And I think it would be good 7 to go back to them and let them know about this and 8 give them the results. 9 MR. RICHARDSON: Yes, sir. I 10 believe we can trim it down. 11 COMMISSIONER CLOWE: Okay. They 12 won't have the proprietary interest that 13 Commissioner Cox and I do, and Commissioner 14 Whitaker. But I think they need to hear it. 15 I'd like to now take a ten-minute 16 break before we begin on agenda Item 7, and that 17 will be our next item shortly. We'll recess for 18 ten minutes. 19 (Recess.) 20 COMMISSIONER CLOWE: We're back and 21 ready to take up Item 7 on the agenda: Report, 22 possible discussion, and/or action on calendar year 23 2002, second quarter bingo financial information 24 and statistics. 25 Billy Atkins. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 64 1 MR. ATKINS: Thank you, 2 Mr. Chairman. 3 Commissioners, as you know, figures 4 are reported to the Charitable Bingo Division on a 5 calendar quarter basis. The second quarter of 2002 6 ended June 30th, with reports being due to the 7 agency on July 15th. 8 What you have in your notebook is a 9 series of graphs and one spreadsheet that track 10 four key factors that we look at in the division 11 gross receipts, which, as you know, is all the 12 funds received from the sale of regular bingo 13 paper, electronic card-minding devices, and 14 pull-tabs; prizes awarded, which includes the 15 prizes awarded for both regular bingo and 16 pull-tabs; charitable distributions as reported by 17 the organizations; and then total attendance. 18 You will have two graphs for each 19 element. The first graph will show this current 20 quarter, the second quarter of 2002, and compare it 21 to the same quarter for the previous year. And 22 then the graph right behind it will show the 23 current quarter, as well as the first quarter of 24 the previous years and subsequent years. 25 In looking at the graphs, you will WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 65 1 be able to tell, for gross receipts, that comparing 2 the second quarter of 2002 to the same quarter of 3 2001, gross receipts are down almost $1.7 million, 4 or one and a quarter percent. 5 Looking at the next graph, you can 6 see that gross receipts are down from the first 7 quarter of 2002 by almost $6 million, or about 8 4.3 percent. And even if there is a decline, as we 9 have reported in the past, this decline from the 10 first quarter to the second quarter of 2002 is the 11 smallest decline between comparable quarters in 12 gross receipts since 2000. 13 Moving on to prizes awarded, 14 comparing the second quarter of 2001 to the second 15 quarter of 2002, you will see that prizes awarded 16 are down 1.6 million, or about 1.7 percent. Again, 17 this is the smallest decline, comparing quarters, 18 since 1991. 19 Now, an anomaly that we noted and 20 that we have not been able to identify yet is that 21 actually, prizes awarded for the second quarter of 22 2002 are up just slightly -- just over 200,000 -- 23 over the first quarter of 2002. And one 24 explanation for that could be simple data entry 25 error. We'll know more as we continue to review WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 66 1 those figures. 2 On charitable distributions, you'll 3 see that there was a decline from the same quarter 4 of 2001 to this quarter by just over half a million 5 dollars. That represents about 6.4 percent. 6 Again, keep in mind that charitable distributions 7 are based on a previous quarter's gross receipts, 8 so the second quarter for 2002 is up from the first 9 quarter by about $280,000. This trend is 10 consistent with previous time periods. 11 And finally, for attendance, you'll 12 see that comparing the second quarter of 2002 to 13 the first quarter of 2001, attendance is down about 14 113,000, or almost 2 percent. This is the smallest 15 decrease between quarters since 1998. And the 16 decrease from the first quarter of 2002 to the 17 second quarter of 2002 is approximately 327,000, or 18 just over 5.6 percent. 19 Finally, the spreadsheet that is 20 behind those graphs will show you the actual 21 figures by quarter for each year. And you will see 22 some consistencies among those figures. You will 23 see declines in regular bingo sales, and you will 24 see slight increases in electronic bingo. But you 25 will notice continued declines in distributions, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 67 1 attendance, et cetera. 2 We are scheduled to make our 3 allocations for the second quarter of 2002 by about 4 August 30th of this month. 5 And that is my report. 6 COMMISSIONER CLOWE: Billy, under 7 the discussion of this subject, what you have shown 8 us is a continuing -- with a very small 9 exception -- decline in revenue, attendance, and 10 charitable contributions over a period of time in 11 the bingo industry. And I think we're all 12 concerned about that. It's been a subject of 13 discussion in the Bingo Advisory Committee 14 meetings. You have a new committee formed now 15 that's just really getting started. I'm concerned 16 about this, and I'm sure Commissioner Cox and 17 Commissioner Whitaker are as well. 18 I would like to lay out a suggestion 19 and perhaps just leave it at that, and then have 20 some discussion about it on behalf of your division 21 with the BAC and then maybe with individual 22 commissioners, in that it might be beneficial to 23 have a joint meeting of the Lottery Commission and 24 the Bingo Advisory Committee and focus at least one 25 meeting a year on the needs of the bingo industry WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 68 1 in the State of Texas. 2 It would enable, I think, the 3 commissioners in a meeting to devote their thoughts 4 and preparation to understanding what the needs are 5 of the industry. It would give the BAC members an 6 opportunity to discuss industry issues with the 7 commissioners in an open forum. And at that time, 8 it might be possible, hopefully, for the commission 9 to give a program of work or a more studied plan of 10 work for the BAC in order for it to function 11 properly as an advisory group to the commission. 12 I think that relationship between 13 those individuals and the commission has been an 14 informal, unstructured one, to a certain extent. 15 And I'd like to see whatever help and assistance 16 the BAC can get from the commission that can go to 17 it, and also direction as well. 18 I think the BAC can be more positive 19 in its results if it gets that kind of support from 20 the commission. And as I say, I make these remarks 21 under the discussion part of this agenda, and I'd 22 just like to float that out there. I believe your 23 next BAC committee meeting is planned for 24 August 23rd. And as you know, I'll be out of town, 25 but I think maybe Commissioner Cox has been invited WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 69 1 and possibly can attend that meeting. 2 That's great. He has indicated that 3 he is going to attend that meeting. So he'll get 4 to personally meet the members and see that 5 committee in action. 6 And, you know, we need to do 7 something to support the industry, to the extent 8 the commission can, within the Bingo Enabling Act 9 requirements and what we can do. And I'd like to 10 see us analyze that and take a more studied 11 approach. Do you agree with that? 12 MR. ATKINS: Absolutely. 13 And this, Commissioners, is a 14 scheduled agenda item for this Friday's meeting, 15 this same report. 16 COMMISSIONER CLOWE: Great. Very 17 good. Anything else, Billy? 18 MR. ATKINS: Not under this item, 19 no, sir. 20 COMMISSIONER CLOWE: Thank you. 21 Item No. 8: Consideration of and 22 possible discussion and/or action on state 23 auditor's office and/or internal audit reports 24 relating to the Texas Lottery Commission and/or the 25 internal audit department's activities. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 70 1 Debra McLeod. 2 MS. McLEOD: Good morning, 3 Commissioner Clowe, Commissioner Cox. I would like 4 to introduce to you the newest members of what we 5 call the "A Team" down in audit. 6 Joining me is Melinda Nay. She's 7 been with us for about six months. Melinda was a 8 graduate of UT in '93, and she passed the CPA exam 9 that fall. She currently brought to the position 10 15 years of state experience and 7 years of audit 11 experience. She's worked for the state auditor's 12 office, the railroad commission, the Texas 13 Department of Transportation, the Texas workforce 14 Commission, and various other public companies. 15 On my left is Kati George, our 16 newest member. Kati is also a graduate of UT. She 17 joined us the 5th of this month. She has completed 18 27 hours towards her MBA. She's got 18 years of 19 experience, 7 in audit and over 9 years in project 20 management experience. She has also worked for the 21 state auditor's office, the Texas Workforce 22 Commission, and various public companies. 23 We're very fortunate to have both of 24 these ladies on board. They bring on board a lot 25 of public consulting experience, which from this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 71 1 type of entrepreneurial environment, I think it's 2 going to be very, very helpful to both the lottery 3 and the bingo industry. 4 In my status report that I provided, 5 we have certain reports that will be coming to the 6 commissioners here very soon. We completed a 7 report on the management controls of the Bingo 8 Division, telecommunication purchases, and three 9 investigations. We still have two investigations 10 still in progress, and we're working with legal on 11 those. We also have three follow-up audits we've 12 been working on. I anticipate two or three more 13 reports coming out by at the end of this month. 14 The result of the productivity is 15 primarily due to this team, and people have hit the 16 ground running, and I greatly appreciate the effort 17 that they have given to me. There's been a lot of 18 overtime done, and that has been very worthwhile in 19 trying to get a lot of these projects done by our 20 fiscal year end. 21 The outside audits that are 22 available right now is the petty cash and travel 23 advance. They've provided a travel -- a draft 24 report from the state auditor's office. They just 25 started yesterday their field work on the audit of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 72 1 financial profiles. McConnell & Jones is doing 2 their annual financial audit. That's in progress 3 and -- as is Earnest & Young with the audit 4 controls over the GTECH system. 5 That's where we are to date. Any 6 questions that you might have with me or... 7 COMMISSIONER CLOWE: Very good. We 8 welcome you both, one more belatedly and the other 9 more recently, to the commission staff. We're 10 happy to have you and look forward to working with 11 you. 12 MS. McLEOD: Thank you very much. 13 COMMISSIONER CLOWE: Thank you. 14 Next, Item 9: Report, possible 15 discussion, and/or action on the sunset process 16 involving the agency. 17 Gary Grief. 18 MR. GRIEF: Good morning, 19 Commissioners. And for the record, my name is 20 Gary Grief, and I'm the director of lottery 21 operations for the Texas Lottery Commission and 22 also the project manager for our sunset review. 23 Since the last commission meeting, 24 we have continued to work with the sunset staff to 25 provide them final information and clarification WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 73 1 regarding the report and the recommendations that 2 they're making on our agency. 3 On Monday, August 12th, senior 4 agency management, along with Chairman Clowe, met 5 with the sunset review team and the executive 6 director of the Sunset Review Commission for an 7 exit conference, in which we discussed the review 8 process and also the areas of interest that the 9 Sunset Commission review team had found within our 10 agency. 11 In this meeting, we were able to 12 provide the sunset staff with feedback regarding 13 the review process, as well as clarification and 14 supplemental information in the areas of interest 15 that they will have in their final report. And I 16 believe that this meeting was both positive and 17 productive on both sides. 18 Since that exit conference, we have 19 continued to provide some clarification on issues 20 as those have been requested from the sunset staff. 21 We anticipate that the final sunset report is going 22 to be available to the public this Thursday or 23 Friday, August 22nd or 23rd. We're going to have 24 approximately two weeks from that date that the 25 final report is issued to prepare our official WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 74 1 agency response. 2 Internal meetings have already been 3 scheduled to develop our response, and I have had a 4 chance to brief Chairman Clowe on the calendar, and 5 I believe he may have a recommendation this morning 6 on a future commission meeting date that will 7 provide the commissioners with a chance to give 8 their approval to our agency response. 9 As a reminder, the sunset public 10 testimony hearing for our agency is scheduled for 11 either September 24th or the 25th. We will not 12 know the exact date until about two weeks out from 13 the meeting. And then the final hearing on our 14 agency is scheduled for either November 12th or 15 13th -- again, we won't know until about two weeks 16 out -- and that will be the decision hearing, in 17 which the Sunset Commission will make their formal 18 decisions and hand them down. 19 And that concludes my report this 20 morning. Karen Latta, the sunset project manager, 21 is in the audience this morning, and I know she 22 would be happy to answer any questions, as well as 23 I. 24 COMMISSIONER CLOWE: Gary, I want to 25 continue to thank you and your staff for the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 75 1 excellent job that you've done on this project and 2 say again publicly how much we appreciate the work 3 of the sunset staff. I think together, it's been a 4 real benefit to this agency. And I think this is 5 an exemplary situation where sunset is a very 6 positive experience, and we're going to benefit 7 from it. 8 In regard to your comments, we have 9 had discussions, Commissioner Cox, about the need 10 to set a meeting early on in September, wherein we 11 might have this report and response come before the 12 commission for its approval. And I think the last 13 date that the staff agreed on would be best is 14 September the 11th. Is that all right with you? 15 COMMISSIONER COX: I think it is. I 16 believe it is. 17 COMMISSIONER CLOWE: Well, then, 18 we'll just tentatively expect that to be the 19 meeting date. Of course, Commissioner Whitaker is 20 not present, so we have to check with her. 21 And I believe, Linda, that's 22 your responsibility. And you'll hear from 23 Commissioner Cox when he is able to consult 24 his calendar. And when we hear from 25 Commissioner Whitaker, we will tentatively then WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 76 1 set our next meeting for September 11th, 2 pending approval from the commissioners. 3 And that gives you plenty of time. 4 Is that right, Gary? 5 MR. GRIEF: Yes, sir. 6 COMMISSIONER CLOWE: Okay. Thank 7 you very much. 8 MR. GRIEF: Thank you. 9 COMMISSIONER CLOWE: Next 10 item, 10: Possible discussion, report, and/or 11 action on the agency's contract management and 12 compliance function. 13 Rob Kohler. Good morning, Rob. 14 MR. KOHLER: Good morning, Chairman. 15 Bear with us one moment, Chairman. 16 It might be better -- Phillip is 17 saying they're going to have to reboot it -- if you 18 wanted to go on to something else. 19 COMMISSIONER CLOWE: Okay. Do your 20 rebooting, and we'll go on to the next item, which 21 is No. 11: Consideration, possible discussion, 22 and/or action on the agency's fiscal year 2004 to 23 2005 legislative appropriation request. 24 Bart Sanchez. Good morning, Bart. 25 MR. SANCHEZ: Good morning, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 77 1 Mr. Chairman, Commissioner Cox. 2 COMMISSIONER CLOWE: Are you going 3 to have to reboot too? 4 MR. SANCHEZ: No. I don't 5 operate -- all I operate off is my notes. 6 Again, for the record, my name is 7 Bart Sanchez. I'm the financial administration 8 director. And to my left is Daniel Benjamin, our 9 budget manager. 10 COMMISSIONER CLOWE: Good morning, 11 Daniel. 12 MR. BENJAMIN: Good morning. 13 MR. SANCHEZ: We're here to formally 14 request your approval and consideration for the 15 legislative appropriations request for fiscal years 16 2004 and 2005. As you know, we had individual 17 briefings with you, first with Commissioner 18 Whitaker and then Commissioner Cox, and then, of 19 course, Chairman Clowe. 20 And I think we went over with you 21 the parameters that we had to work from and LAR 22 instructions that were provided by the Legislative 23 Budget Board and the governor's office budget and 24 planning office. And I guess, given those 25 parameters, we had to restrict -- limit our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 78 1 appropriations request to the sum of amounts 2 expended for fiscal year 2002 and what was budgeted 3 for 2003. And I think we've provided that. 4 And I guess within that methodology, 5 there have been some revisions. And like I 6 expressed to you, we had sent you updated 7 information. Those revisions were, of course, to 8 provide better quality information and updated 9 information. 10 I think we did our best trying to 11 get as updated information as we could; like, for 12 example, the budgeted information ending for 13 July 31st. Given that, we identified additional 14 unspent administrative funds that we can now 15 quantify in the amount of about six and a half 16 million. 17 So of course, when we change one 18 schedule, and given the way the structure -- it 19 changes other schedules. But the material amounts, 20 I think globally, we stayed with -- we were 21 consistent with methodology in the approach that we 22 had discussed in the individual briefings. 23 I think Daniel can go into -- if you 24 want to -- go over some of the changes. 25 MR. BENJAMIN: What I want to do is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 79 1 just touch on the different schedules that the 2 changes did occur on, just kind of touch on the 3 summary base request. There was a slight increase 4 in lottery operations for fiscal year '03, which is 5 just reflective of the higher sales and projected 6 increases in instant ticket costs. So that was one 7 of the increases there. 8 The next change was a change in '03 9 through '05. There was an increase in marketing 10 promotions due to the demographic study that we'll 11 be performing during those years. 12 Another item is that the advertising 13 budget remains flat. It will stay at the 14 34 million request. And that's based on that 15 5.5 -- actually, 58.5 percent prize payout. 16 The other increase would be in 17 security, and that was an increase in FY '03, which 18 will carry forward in '04 and in '05. And that is 19 reflective of the move of the broadcast studio, the 20 drawing function, down to security from central 21 administration; and then also the increase in costs 22 for the security audit, which occurs on the 23 odd-numbered years, odd-numbered fiscal years. 24 In bingo, one of the changes there 25 was the restatement of FY '01 and the FY '03 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 80 1 expenditures and estimated budget for those years 2 for the new strategies. The two new strategies 3 that were added were to bingo for '04 and '05. But 4 other than that, the strategies basically all 5 remained basically flat. There were no significant 6 changes in that area. 7 As Bart indicated, for our method of 8 finance, we made sure that we did not exceed the 9 '02, '03, base request cap that we were given for 10 '04 and '05. So we were within LAR instructions 11 there. 12 Also at this time, Bart indicated 13 that the unspent administration that we identified 14 at this time is about $6.8 million that we've 15 identified. So that is a significant change from 16 when we had our original numbers, but it's a good 17 item. It's a good amount. 18 Also, what we have in there is the 19 agency expects to return about $19 million in cost 20 savings for '02 and '03, based on the governor's 21 request. So that number is there as well. 22 As far as part of the allocation 23 table, we made a change on that. We went ahead and 24 submitted a separate schedule. The commission 25 believes that the bingo and lottery strategies are WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 81 1 equal and should not be allocated in total, but as 2 separate items. So we put that additional schedule 3 in. 4 Going to the rider section, we do 5 have a change to Rider 1, which is the capital 6 budget rider. We only have three requests for 7 capital budget items in this biennium. The amount 8 is dropped from about four million five to only 9 526,000 in '04, '05. That's about an 88 percent 10 decrease. We've done that. 11 The executive director and the 12 division directors, you know, are aware of the 13 current fiscal state of the Texas government, and 14 with that, really pushed back and took a good, hard 15 look at their projects to see what really was 16 necessary for this fiscal year, for this biennium. 17 As far as the next change, it would 18 be a change to Rider No. 4. That change there 19 reflects the decrease in the lottery operator 20 contract, but it also reflects a change to 21 1.5 percent to cover the instant ticket costs. 22 We've identified that those costs have really gone 23 up. Originally, that amount was .62 percent. 24 We've taken that up to 1.5 percent. 25 The next change was a change that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 82 1 was made to Rider 8. That was a change that would 2 permit travel within budget limitations to Canada 3 or Mexico and then would also permit travel by a 4 third party. And that would be allowed to other 5 destinations like -- like I said -- Canada and 6 North America. 7 There is another item, No. 10, 8 Rider No. 10. There is no change in that. The 9 only thing that we are waiting on -- and that will 10 occur later on -- is the numbers that we were 11 provided in that figure -- the figures that were 12 provided by that will be provided by the LBB. 13 Those are numbers that they provide that we have no 14 access to at this time. But when they go through 15 their hearings, they will have those numbers for 16 us. 17 The other item is -- do you... 18 MR. SANCHEZ: I guess the other 19 items that we had discussed was Rider 701 for the 20 contingency funding to complete the charitable 21 bingo system. It was estimated that we're going to 22 make the request of 700,000. And that's an 23 estimated number. That was the original needs 24 assessment amount provided back a couple of years 25 ago. That amount is subject to change if we have WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 83 1 more current information. 2 Rider 702 is contingency funding for 3 litigation on the charitable bingo system project. 4 And that's estimated, as of right now, at 75,000. 5 And that information was provided to us by the 6 attorney general's office. And as of right now, as 7 we had discussed before, is that we are not 8 requesting any exceptional items in this LAR. 9 I guess the other schedules, just to 10 briefly mention, was the indirect allocation for 11 bingo. That methodology has been changed since the 12 prior submission. And also, I think on the HUB 13 schedules, that was -- that is information that was 14 compiled by Robert Hall that I think you have 15 gathered. You've been presented monthly and other 16 strategic plan information. 17 Let me mention also, just for the 18 record, some of the items on the administrator 19 statement. I think we -- I think a detailed review 20 of the statement -- and you even brought up issues 21 and questions and comments for us to consider, and 22 I think we have done all that. 23 And then the administrator statement 24 is basically -- a lot of information was provided 25 already in the strategic plan and the sunset WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 84 1 informational report. The administrator statement 2 that we had, we had limitations on characters. So 3 it had to be very general, just really a briefing 4 to legislators of what's going on with the 5 agency's -- for example, significant changes in 6 policy and significant changes in provision of 7 service, which mainly which is the changes in our 8 lottery operator contract, which you can see them 9 already. 10 Also, one item, just to mention, we 11 had to include the request for a change upon -- 12 with your approval -- for the executive director's 13 exempt salary level. That's included in there. 14 And I think there are also -- we got information 15 from the charitable bingo director on information 16 on the charitable bingo system. Of course, you had 17 already approved, within the strategic plan, the 18 bingo structural changes. 19 So as we mentioned before, the LAR 20 is really just a combination of other reports that 21 we have previously submitted and more of a 22 financial plan, given the parameters that we have 23 to work from. 24 We're ready for any questions if you 25 have any. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 85 1 COMMISSIONER COX: I think they have 2 addressed very well the issues that we discussed 3 with Commissioner Whitaker. 4 COMMISSIONER CLOWE: And I 5 know you had a detailed briefing with him, 6 and I'm appreciative of the time and effort you 7 put into that. I'm not asking you what 8 Commissioner Whitaker said, but is it your 9 sense that you have answered all of 10 Commissioner Whitaker's questions? 11 MR. SANCHEZ: Yes. And it went 12 further, because at that time, we had proposed 13 20 or so capital projects, and now we're at three. 14 COMMISSIONER CLOWE: All right. 15 MR. SANCHEZ: And I'm sure she's 16 very comfortable with that and also the riders 17 we've limited out and are very concise as to what 18 we only need. 19 COMMISSIONER CLOWE: Very good. 20 Does this require a motion? 21 MS. KIPLIN: Yes, it does. 22 COMMISSIONER CLOWE: So moved. 23 COMMISSIONER COX: Second. 24 COMMISSIONER CLOWE: All in favor, 25 please say aye; opposed, no. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 86 1 The vote is 2-0 in favor. 2 MR. BENJAMIN: Chairman, I wanted to 3 add one other thing. I wanted to just express my 4 thanks to Rick Travis and to Mike Geeslin for their 5 assistance with this. They have been more than 6 helpful. They have been there to answer my 7 questions. I just wanted to put that on the record 8 as well. 9 MR. SANCHEZ: Rick Travis is from 10 the Legislative Budget Board office. Geeslin is 11 from the governor's office. 12 COMMISSIONER CLOWE: No surprise. 13 MS. KIPLIN: So the motion is to 14 approve LAR for fiscal years '04, '05, and that was 15 seconded and approved 2-0. 16 COMMISSIONER CLOWE: Thank you, 17 gentlemen. 18 MR. SANCHEZ: Thank you. 19 MR. BENJAMIN: Thank you. 20 MR. SANCHEZ: I'll present some 21 documents that they have to sign. 22 COMMISSIONER CLOWE: Next is 23 Item No. 12: Consideration of and possible 24 discussion and/or action on legislative matters 25 that may involve the agency from the 78th WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 87 1 Legislature. 2 Nelda Trevino. Good morning, Nelda. 3 MS. TREVINO: Good morning, 4 Commissioners. For the record, I'm Nelda Trevino, 5 the director for governmental affairs. I have a 6 very brief report for you today regarding 7 legislative matters. 8 The starting date for filing 9 legislative bills is November 11th, and the session 10 will begin on January 14, 2003. We would like to 11 prepare to serve as a resource on possible 12 legislative issues that we anticipate may arise 13 during the session. 14 In addition to those issues that may 15 be recommended by the Sunset Advisory Commission, 16 members of the legislature may request our 17 assistance on a variety of issues. Some of these 18 issues may be policy issues that we have already 19 been -- that we have already addressed in the 20 agency's strategic plan and also in the agency's 21 self-evaluation report that was submitted to the 22 Sunset Commission. 23 We want to prepare to serve as a 24 resource by doing the appropriate research on the 25 following subjects: revenue-enhancing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 88 1 opportunities for the Texas Lottery, such as a 2 multi-jurisdictional lottery game; Keno and video 3 lottery; revenue-enhancing opportunities for 4 charitable bingo, including progressive bingo 5 games; late bingo games and expanding or 6 restructuring pull-tab sales; establishing a 7 regulatory enforcement framework for Internet 8 gaming; enhancing enforcement authority for the 9 Charitable Bingo Division; establishing a minimum 10 level for the collection of bingo prize fees; the 11 public's right to information about lottery 12 winners; privacy rights for citizens who 13 voluntarily participate in a lottery player 14 database; and intellectual property rights. 15 Again, our intent is to prepare to 16 be a resource when we may be called upon by members 17 of the legislature. 18 This concludes my report, and I'll 19 be happy to answer any questions. 20 COMMISSIONER COX: Nelda, one of the 21 things that I ask that we particularly look at when 22 we look at the issues of -- that you have under 23 revenue-enhancing opportunities is what kind of 24 experience other states have had with 25 cannibalization of the basic products when those WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 89 1 things are introduced. 2 MS. TREVINO: Yes, sir, 3 Commissioner. And I believe, in the research and 4 the analysis that we'll be doing in regard to those 5 revenue-enhancing opportunities, we would certainly 6 be looking at other states and the experience that 7 those states had when they either introduced one of 8 these games and, like you said, the cannibalization 9 that might have occurred with their current product 10 mix. 11 COMMISSIONER COX: Well, one 12 discussion that I believe Linda and I have had is 13 what happens when these multi-jurisdictional games 14 come in. And Linda told me, if I remember right, 15 that some states are able to maintain their Lotto 16 and other games at their existing level, and others 17 just sort of abandon those games and let them 18 decline. And certainly, we would want to be in the 19 former category. And anything that you can uncover 20 in your research about how we might be able to do 21 that, and specifically what we would do to do those 22 things, I think would be very helpful. 23 MS. TREVINO: Absolutely. We will 24 do that. 25 COMMISSIONER CLOWE: Great. Thank WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 90 1 you, Nelda. 2 MS. TREVINO: Thank you. 3 COMMISSIONER CLOWE: Rob, are you 4 booted up now? 5 MR. KOHLER: I believe so, 6 Commissioner. 7 COMMISSIONER CLOWE: Okay. Let's go 8 back to your Item No. 10: Report, possible 9 discussion, and/or action on the agency's contract 10 management and compliance function. 11 MR. KOHLER: Good morning, 12 Commissioners, Chairman. For the record, my name 13 is Rob Kohler. I'm the contracts and special 14 projects manager here at the Texas Lottery. 15 A little over a year ago, I appeared 16 before the commission to talk about what at that 17 time was a newly formed section and talk about the 18 mission and the requirements that were being put 19 before us. 20 In complying with your request at 21 that time to keep you informed on the progress and 22 the status of our contract management program, I am 23 back this morning to respond and to answer any 24 questions and to go over what we've accomplished 25 and also talk about requirements moving forward. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 91 1 I'm going to give a brief overview of the contract 2 management program, as well as talk about the 3 contract management model and answer any questions 4 that you may have. 5 (Slides shown.) 6 MR. KOHLER: FY '02, we're 7 overseeing 117 service-oriented contracts. Of 8 these, 9 of the contracts are considered either 9 prime or major contracts. They include the lottery 10 operator, which is GTECH; the instant ticket 11 manufacturer, Scientific Games; the backup, 12 Pollard; advertising services, Fogarty Klein 13 Monroe; minority advertising services, the King 14 Group; the drawings auditor, Davila and Schaubhut; 15 financial auditor, McConnell & Jones; security 16 auditor and studio, which is MS Works. 17 With that said, we'll now go into 18 the -- really, the meat of it, which is actually 19 our contract management model that we are working 20 toward here at the Texas Lottery. We've been 21 operating under this model for a little over a 22 year, and the goal of the model is to initiate and 23 maintain an environment for a productive, not 24 cannibal, business relationship. 25 There are really three components to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 92 1 this model. The first is notice of contract action 2 or request for recommendation; the second is a 3 procurement component; and the third is contract 4 maintenance for a contract close-out process. 5 I will first discuss the first 6 component. This component has been fully 7 implemented, and we've just completed the full 8 fiscal year of this process. There are several 9 goals and objectives to this component. 10 The first is to provide a formal 11 process to review and determine whether future 12 goods and services are needed. The second is to 13 document justification and rationale that is used 14 to support decisions regarding the procurement of 15 goods and services. And the third is to initiate a 16 timely implementation of the appropriate 17 procurement process to maximize efficiency and 18 promote competition. And last is to assist 19 minority development services in achieving their 20 mission. 21 This document is generated from our 22 section as part of this component. It goes to the 23 administering division, depending on the type of 24 the contract. Just for example, if it's a major 25 contract, one year out it goes to the administering WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 93 1 division for them to make a recommendation on the 2 contract that determines if the services are still 3 needed. It is then returned to our section; 4 prepared for the executive director's review; and 5 then, based on her approval, it is returned back to 6 the administering division with instructions to 7 initiate the procurement process. 8 Looking forward with this component, 9 basically we want to migrate it to a paperless 10 environment, and along those lines, utilizing all 11 the information that we're gathering through this 12 process. For example, what we envision is 13 establishing a tracking database that will be out 14 on the network. And instead of this notification 15 going through the administering divisions through a 16 memo, very simply, it would be notified 17 electronically. The administering divisions would 18 then go onto the database, enter in their 19 information as far as the contracts, and it would 20 allow both user interface and a more fluid 21 reporting mechanism. 22 Additionally, we're exploring the 23 traditional opportunities to incorporate the 24 necessary procurement documents in the process. 25 So, for example, we send that notice to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 94 1 administering division; the administering division 2 sends it back to the executive director; the 3 executive director approves it and gives it back to 4 the administering division. The first step in 5 their process is to fill out a purchase request. 6 Well, that has to go back up to the executive 7 director for signature. 8 So one of the things that -- really, 9 the goal that we're looking at in this is killing 10 as many birds as we can with one stone at this and 11 perhaps incorporating those necessary steps in the 12 process into this one component. 13 Along those lines, we're continuing 14 to communicate the importance of formalizing this 15 decision-making process and documenting it for the 16 public, and in addition, working with -- continuing 17 to work with minority development services, and in 18 particular, working towards a forecast model. 19 The second component of procurement 20 process: When an administering division receives 21 the notice of contract's action for recommendation, 22 there are three processes that will result from 23 their decision. If the service -- the basic 24 question that's asked is, is the service still 25 needed. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 95 1 If the service is still needed, 2 there is really only two things that can happen: a 3 new solicitation or a renewal. Now, if the 4 services are no longer needed or if the services 5 are needed and they're going to be performed 6 internally, then very simply, the contract would be 7 left to expire and we would do a contract closeout. 8 The goal of these components is to 9 facilitate procurement processes that are 10 sufficient to ensure that the best contractors are 11 fairly and subjectively selected. Contract 12 management's role is not significantly involved in 13 this component; however, we serve as a repository 14 for all original documents, we serve as a liaison 15 with the participating entities, and we also serve 16 as a repository of contractural and potential 17 procurement issues. 18 We have continued to develop a 19 contract risk assessment program, with the goal of 20 minimizing risk to the agency while promoting the 21 competition in all procurement documents. The 22 following areas of the risk assessment include a 23 risk determination for background, analyzing bond 24 and insurance requirements, analyzing liquidated 25 damages and sanctions, establishing a procurement WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 96 1 time frame, reviewing records retention, as well as 2 the HUB business subcontracting plan. 3 Looking forward in this component, 4 we're looking to implement the contract risk 5 assessment program's recommendations, in 6 particular, the risk determination for backgrounds, 7 and additionally, the procurement time frames. 8 We also look forward to finalizing 9 contract risk assessment program recommendations on 10 bonding and insurance requirements and liquidated 11 damages and sanctions, with an eye on consistency. 12 Thirdly, we will work with financial 13 administration, continue to work with them in 14 addressing recent Legislative Budget Board 15 reporting requirements. This will entail enhancing 16 our tracking database, as well as communicating the 17 importance of once a contract is entered, we have 18 ten days to notify them. And it will really 19 require a lot of our manpower to address these new 20 requirements coming from the Legislative Budget 21 Board. 22 I'll now move to the last component, 23 which is the contract maintenance and close-out 24 process. And first, I'll talk about the contract 25 maintenance process itself. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 97 1 We have continued to push the 2 maintenance of contracts to the administering 3 divisions, and more specifically, to the staff 4 members that have that day-to-day responsibility of 5 receiving those services that are on the front 6 line. 7 The goal of this process is to 8 provide contractor and vendor oversight; secondly, 9 and more importantly, to hold contractors and 10 vendors accountable to ensure quality goods and 11 services are consistently provided and to ensure 12 public funds are efficiently and effectively spent. 13 Contract management's role includes 14 conducting quarterly contract compliance meetings, 15 as well as establish and maintenance of the 16 contract database. We research and compile 17 contract compliance checklists, conduct annual 18 vendor orientations, administer the annual 19 recertification process, and conduct biannual 20 reviews of vendors and membership lobbyists. 21 As well, we are exploring 22 participation in Texas Building Procurement 23 Commission's vendor management program. We 24 continue to track day-to-day contractural and 25 potential procurement issues and, to a large part, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 98 1 facilitate communication and research between the 2 participants. 3 Looking forward, as I mentioned, we 4 must continue to expand our contract database. We 5 are capturing additional information and expanding 6 the reporting requirements. Additionally, we'll 7 continue to expand and formalize our quarterly 8 compliance meetings. Commissioners, this is a 9 quarterly meeting that is held that has everyone at 10 the table that's involved in contracting with this 11 agency, from legal to purchasing to the 12 administering divisions. 13 At the very least, quarterly, we 14 should know, as an agency, the status of the 15 contracts that we are overseeing because that it is 16 the table that everybody sits around and reports 17 the good, the bad, the ugly; puts everyone on the 18 same page when we leave that meeting. 19 Thirdly is an issue that I'm excited 20 about is working with Robert Hall in minority 21 development services and combining the TLC annual 22 vendor orientation and the HUB forum. 23 And lastly is really where we can 24 make a real big difference, is providing additional 25 contract management tools to the administering WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 99 1 divisions. Beginning with a copy of the contract, 2 a person who is monitoring services at the front 3 lines should have a copy of the contract; should 4 know, without a doubt, what services are being 5 monitored. 6 Additionally, we will provide 7 additional, and expand on, written guidelines for 8 that staff that's monitoring those services so 9 there's no questions in their mind what they're to 10 do with the information that they receive. 11 Thirdly, we want to explore the idea 12 of providing contract monitoring and compliance 13 training for the staff here at the Lottery. 14 There's really not too many staff members at this 15 organization that aren't involved in contract 16 monitoring in one sense or the other. 17 And lastly is expand the contract 18 compliance checklist. And this is a checklist that 19 we've performed for all large, service-oriented 20 contracts. And our office reviews the documents, 21 pulls out the contractural provisions. And it's a 22 beginning for the administering division to work 23 off to monitor the contract. So we intend to 24 provide a complex checklist for every 25 service-oriented contract. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 100 1 The last process is a contract 2 close-out process. The goal of this is to create a 3 formal process to provide information on past 4 contractors' performance. Our role in this process 5 would be to send a contract close-out packet to the 6 administering division for completion after a 7 contract has expired, terminated, and/or completed. 8 This would simply be a close-out 9 checklist, including a vendor evaluation form 10 and -- as well as we're exploring the possibility 11 of participating in the Texas Building Procurement 12 Commission's vendor management program, where we 13 would enter that information after our review of 14 that particular vendor into their database. 15 Looking forward with this particular component 16 really comes down to formalizing and fully 17 implementing this contract close-out process. 18 A little over a year ago, I 19 introduced this model and represented that the 20 contract management program is a 24-hour, 21 7-days-a-week, 365-day event. And it truly is at 22 this organization. 23 Starting from the notice of contract 24 action for recommendation, ensuring that we had 25 sufficient time to do procurements to the actual WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 101 1 procurement processes to the contract maintenance, 2 and then back to the notice of contract action, it 3 really -- it represents the perpetual nature of 4 this enterprise. 5 I hope this presentation was 6 helpful, and I will be happy to answer any 7 questions that you may have. 8 COMMISSIONER COX: I have several 9 questions. 10 COMMISSIONER CLOWE: Good. 11 COMMISSIONER COX: Rob, as I 12 understand it, the model that you're using now -- 13 and I'll characterize one element of it that I 14 think is particularly appropriate -- is that your 15 group supports the line managers who have the 16 responsibility for managing the contracts. Is that 17 the way we've always done it here, or is that 18 relatively new? 19 MR. KOHLER: I don't know whether 20 it's officially the way that we've done it. I 21 think there has always been a tendency to push out 22 and to have folks that are actually doing the work, 23 make those -- give them the tools to make those 24 decisions. So I would say that maybe it wasn't as 25 formal as it is now. But we're really going to be WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 102 1 formalizing that process, is what that model does. 2 COMMISSIONER COX: So you look to 3 provide a resource to help that person do his or 4 her job as well as possible, but you don't do that 5 job for them? 6 MR. KOHLER: No, sir. And part of 7 the methodology is don't -- sitting on the fourth 8 floor in Austin, trying to make decisions about 9 what happens in the fields, we'd just be fooling 10 ourselves, so we wouldn't be a very effective unit. 11 COMMISSIONER COX: I think that's an 12 excellent approach. How many folks do you have 13 working with you on this? 14 MR. KOHLER: We -- I have two, sir. 15 COMMISSIONER COX: Is that enough? 16 MR. KOHLER: Yes, sir, it is. The 17 object is -- or at least the object that we're 18 working under is to make it a part-time job; you 19 know, fix things so it doesn't take our full time. 20 So I don't know whether that's the proper thing to 21 say, but that's -- we're staff sufficient, sir. 22 COMMISSIONER COX: If you had a 23 couple more people, would you be doing a lot better 24 job? 25 MR. KOHLER: Commissioner, I'd have WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 103 1 to put some thought in that and have real clear 2 goals and outline a model to see how I could use 3 that. But at this time, with the model and the 4 mission that we have in front of us, I think that 5 we're fine. 6 COMMISSIONER COX: Have you done any 7 monitoring, official or unofficial, with your 8 clients as to whether you're providing them the 9 level of service that they need? 10 MR. KOHLER: Well, we did get that 11 in a quarterly staff meeting, but that's a 12 formalized process in itself to convince -- or 13 getting folks involved -- like any organization, 14 new ideas, people really embrace them, and it 15 happens just like that. 16 (Laughter.) 17 MR. KOHLER: No, I'm being -- you 18 know, it's evolving. So we're bringing new ideas 19 to the table, and that environment in that 20 quarterly meeting is really where it should happen, 21 the folks saying that, you know, I don't like what 22 you're doing -- the paperless -- putting this whole 23 process of paperless is really a recommendation 24 that came from Gary Grief, who was right on the 25 line when he said, you know, we get too much paper. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 104 1 So, you know, it's not my challenge 2 or my staff's challenge to take that idea and, you 3 know, get it where it's not paperless. So... 4 COMMISSIONER COX: I would encourage 5 you to consider a periodic and formal request for 6 evaluation from your folks, maybe make up a 7 questionnaire for your clients and ask them to fill 8 that out and see what -- are you providing the 9 level of service that they want. 10 MR. KOHLER: Yes, sir. 11 COMMISSIONER COX: I have no reason 12 to believe that you're not, and I'm very impressed 13 with the program that you have. But I think 14 continuing to check with folks on a formal basis, 15 see if you're helping them in every way you could, 16 that would be a real good thing to do. 17 MR. KOHLER: Yes, sir, I will do 18 that. 19 COMMISSIONER COX: And I have one 20 more specific question, and that is, when we 21 exercise a renewal option, what kind of process do 22 we go through to ensure that the vendor is 23 providing satisfactory service before we exercise 24 an option to renew? 25 MR. KOHLER: The notice of contract WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 105 1 action, when it's sent to the administering 2 division, and that administering division 3 determines that the services are still needed, 4 should then look at who is performing the contract. 5 And at that time, our office 6 provides information to them on anything that has 7 been forwarded to us, which -- it goes down to if 8 you've got a contract that's being properly 9 monitored -- and good or bad, information is being 10 passed on, is being documented at that level but 11 also being processed up to us, which is the 12 repository of all that information -- when that 13 division director is making that decision, they're 14 to query our office, and we give them all the 15 information that we have. 16 And part of that process, they have 17 to put in writing the justification, you know, of 18 what were the -- what was the logic they used when 19 making the decision to renew the contract or not 20 renew the contract and go out for a new 21 solicitation. 22 COMMISSIONER COX: Rob, thank you 23 very much. 24 MR. KOHLER: Yes, sir, Commissioner. 25 COMMISSIONER CLOWE: Rob, do your WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 106 1 activities include the Bingo Division as well as 2 the lottery operation? 3 MR. KOHLER: Chairman, they do. 4 We just don't have that many contracts, 5 service-oriented contracts, in the bingo. So just 6 by the nature of that, it's not a large extent. I 7 guess it's not -- the proportions aren't the same. 8 COMMISSIONER CLOWE: What role do 9 you play in the RFP process as those committees are 10 formed up? 11 MR. KOHLER: It depends. In my 12 capacity as contract manager, it would really, 13 Chairman, be initiating with the contract 14 recommendation to the specific division director; 15 notifying them that you need to start the process. 16 Now, unless I'm selected to be on 17 one of the RFP committees, then I'll serve in that 18 capacity. But the second component of our model, 19 largely, to the large extent, is really the 20 administering division. And they have a 21 relationship with legal. And they're really who 22 are running the ball on that. I'm just -- our 23 model is really trying to say, you know, if you 24 don't start now, you don't have enough time to do a 25 fair and competitive solicitation. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 107 1 COMMISSIONER CLOWE: So you're not 2 in an oversight capacity as these committees are 3 formed and contracts are requested -- 4 MR. KOHLER: No, sir. 5 COMMISSIONER CLOWE: -- or bids are 6 requested? 7 MR. KOHLER: No, sir. 8 The last couple of RFPs, I believe, 9 is an agency we're moving towards, listing me in 10 the RFP as the point of contact. And I think it 11 was done on the advertising. So that's a 12 migration. That's something that we haven't done 13 before. It's always been the executive director, 14 and now I'm starting to be listed as that. 15 COMMISSIONER CLOWE: Well, it would 16 seem to me that you're a valuable resource as this 17 process is entered into and that the institutional 18 knowledge that you have from the administration of 19 contracts would be valuable to those people who are 20 on these committees and are drawing up these 21 requests. So that's a thought that you might 22 discuss in the future about a role that your 23 function might play. 24 How do you draw on legal advice when 25 you need it? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 108 1 MR. KOHLER: Through -- normally, 2 through a legal referral. Whenever I have a legal 3 question that comes up, then I'll do a legal 4 referral to the general counsel's office and -- 5 COMMISSIONER CLOWE: So when you say 6 "a legal referral," you go and you ask them? 7 MR. KOHLER: Well, most times, it's 8 a formal process, Chairman. And I think, because 9 of the contracts and the way it really is a 10 formal -- if there is truly a legal question, then 11 we'll submit a legal referral and then get a 12 response back from the legal department. 13 Is that fair? 14 COMMISSIONER CLOWE: I think there 15 ought to be a process in place so that when you 16 need it, if you need it, it's right there. And 17 I'll just leave that as a point made. 18 It seems to me that on lengthy, 19 ongoing contracts, the nature we have in some cases 20 with this agency, a quarterly review would be 21 adequate. It also seems to me that on project 22 contracts that have a lot going on from month to 23 month, a quarterly review would not be adequate. 24 I think you ought to reexamine that 25 aspect of your oversight because I think in some WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 109 1 contracts, it may be that you need to be looking at 2 what's going on more often than quarterly and 3 monthly maybe, because I see your role as one of 4 helping division directors when they need help if 5 they start to get in trouble with a contract. Is 6 that correct? 7 MR. KOHLER: Yes, sir, I think 8 that's a fair characterization. 9 COMMISSIONER CLOWE: You know, I 10 think that some of these contracts that are project 11 based, if things don't start to go well and they 12 don't go well for a month or two, that's the time 13 to get on it. 14 MR. KOHLER: Yes, sir. I agree. It 15 goes, to a larger part, of pushing it to the 16 administering division. But I think you are right 17 that we can -- that there should be more 18 involvement perhaps on the shorter project awarding 19 of contracts. 20 COMMISSIONER CLOWE: Yeah. Okay. 21 MS. CLOUD: Let me clarify just one 22 thing here. The monitoring of these contracts are 23 being done daily by the administering division and 24 the employees that have been assigned to that, as 25 being part of their job description. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 110 1 So getting -- reporting information 2 back to the compliance division is most important, 3 and that's what these quarterly meetings are for, 4 is to make sure that whatever has happened within 5 that period of time, it has been reported back. 6 And they sit in a room and they talk about issues 7 that have happened with a particular vendor's 8 contract in that time frame. 9 Am I not right on this, Rob? 10 MR. KOHLER: (Nodding head.) 11 MS. CLOUD: But I just want it to be 12 real clear. These contracts, especially the major 13 contracts -- and I agree with you that these 14 smaller ones, based on the experience that we've 15 recently had, need to be looked at a little bit 16 more carefully, maybe even more so than some of the 17 bigger ones. But that is being done on the large 18 contracts on a daily basis. 19 COMMISSIONER CLOWE: Well, I think 20 there are some contracts that you know on a daily 21 basis if there is not performance. But on other 22 contracts, where you are building something or you 23 are creating something -- for example, the contract 24 to let the remodeling for this auditorium -- it's 25 being monitored, but you have a completion date WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 111 1 which is out over a period of some months. 2 And that's a very simplistic 3 example. There are others, but that makes, I 4 think, my point, where I think that once a 5 quarter -- in this case, this project was finished, 6 if I recall correctly, right on time and under 7 budget. But if it were not that way and it were 8 running behind schedule and over budget, a 9 quarterly review would not have been adequate. 10 And I understand division directors 11 are responsible, but I perceive that Rob has an 12 oversight role, and he is helping people look for 13 trouble and make certain work is done as best 14 possible. 15 So I think in some cases, where you 16 have project-type contracts, where the contract is 17 to achieve a goal in a certain period of time for a 18 certain amount of money, that's where a shorter 19 view and review would be beneficial. 20 MS. CLOUD: I agree. 21 COMMISSIONER CLOWE: And I'm trying 22 to stir up trouble. I'm sticking my nose into 23 something where I want agitation. I call it 24 positive conflict. I want Rob coming around 25 saying, how are you are doing on this. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 112 1 And if it doesn't look like it's 2 doing well, that's the time before we get into, 3 well, you know, we didn't get it done on time, or 4 it's going to run over. 5 That's too late to do anything about 6 it. 7 MR. KOHLER: Yes, sir. 8 COMMISSIONER CLOWE: Okay. 9 MS. CLOUD: Okay. 10 COMMISSIONER COX: Mr. Chairman, in 11 that same spirit -- 12 COMMISSIONER CLOWE: Are you going 13 to stir up trouble? 14 COMMISSIONER COX: Yes, sir. 15 COMMISSIONER CLOWE: Good. 16 COMMISSIONER COX: Rob, the 17 situation with these contracts with renewal options 18 often evolves into a process of we exercise all 19 renewals unless there is some absolute, glaring 20 reason not to, because the process of rebidding 21 these things is too difficult. Are we in that kind 22 of situation? 23 MR. KOHLER: I think -- and the 24 executive director, we'd better not be. And I 25 don't want to paraphrase my boss, but I think part WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 113 1 of the formalization and her bringing this position 2 and this function to working directly for her has 3 addressed that that had better not be happening. 4 COMMISSIONER COX: So, Linda, you 5 don't believe that the process of rebidding 6 something is so burdensome that folks will just say 7 let's go along with the folks we've got because 8 it's too much trouble to change? 9 MS. CLOUD: No, sir. No, sir. We 10 have exercised the option to renew on contracts 11 that we've had real good success with, but we have 12 also terminated contracts after the first year 13 based on experience that we've had, and gone out 14 for bid. 15 COMMISSIONER COX: Okay. 16 MS. CLOUD: And I may be fixing to 17 terminate a contact and go out for bid again on 18 another one. So this is things that is a common 19 practice here, and that is one of the main reasons 20 for having this division under the executive 21 management, so that I can keep closer contact with 22 what is going on. 23 MS. KIPLIN: Commissioner Cox, also, 24 at the very beginning of the creation of the 25 Lottery Commission -- I think it was either the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 114 1 first or the second commission meeting after the 2 Lottery came out from the division of the 3 comptroller and created the commission -- the 4 commissioners then wanted more oversight over what 5 they considered to be the major contracts -- and 6 Rob alluded to the major, prime contracts, and 7 specifically with the issue of renewal -- and 8 wanted to be a part of that process and on deciding 9 whether to renew a contract or go out to bid. 10 And so those particular procurements 11 do come before the commission for you-all's 12 consideration. Of course, the executive director 13 makes the recommendation based on the staff input 14 and the information that she has. But those 15 particular contracts do come to you-all, and you 16 are actually the ones who make the decision whether 17 you want to renew or you want to go out to bid. 18 COMMISSIONER COX: Thank you, 19 Mr. Chairman. 20 COMMISSIONER CLOWE: Yeah, I think 21 that's a good explanation to have. And for 22 Commissioner Cox's benefit, what I'm seeing him and 23 his time on this board demonstrating is an interest 24 in detail and an involvement which I think is very 25 beneficial to the commission on behalf of the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 115 1 commissioner. That's certainly true for 2 Commissioner Whitaker as well. But that's the kind 3 of thing that we need to make certain that these 4 contracts meet muster and are what we want as we 5 get into them. 6 I think the matter of timing, Rob, 7 which you touched on, should be mentioned again now 8 involving Commissioner Cox's question about 9 contracts being too difficult to go back out for a 10 new bid and being renewed. 11 Time is a factor, and that is 12 something that in my time on this board I've heard 13 discussed more than once. You know, we're in a 14 time bind; we're in a period where we've got to do 15 some things. 16 One that comes to my mind is the 17 request for bids to -- I want to state this 18 correctly; help me -- audit the -- What phase of 19 the commission have we looked for an auditor for a 20 long, long time, an auditing firm to audit? 21 MS. CLOUD: There was a GTECH 22 contract auditor -- 23 COMMISSIONER CLOWE: Contractor. 24 MS. CLOUD: -- yeah -- looking at 25 the operator contract and giving an opinion. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 116 1 We had financial auditors that would 2 do that, but they wouldn't give us an opinion, and 3 that was not going to help us. 4 COMMISSIONER CLOWE: Yeah. And 5 these are the kinds of things, as we refine this 6 process and we strive to do a better job, I'd like 7 to see us not only improve the work product, but be 8 mindful of the timing of it and get out ahead of 9 the game so that we do it timely as well. 10 MR. KOHLER: Yes, sir. I agree 11 completely. 12 MS. CLOUD: That is the first stage 13 of Rob's program, and that was one thing that he 14 initiated immediately on getting this job and to 15 this role, was sending out a notification way ahead 16 of time, depending on the kind of contract. One 17 may be six months out, one may be a year. With a 18 lottery operator, it would have been two years, 19 so -- but he is doing that, and that does help 20 remind that director, okay, time is getting away 21 from you; here is what you've got left. 22 COMMISSIONER CLOWE: I think, Rob, 23 by Commissioner Cox's questions, he has 24 indicated -- and I support it -- a feeling of 25 support for your efforts in the job that you're WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 117 1 doing as to whether or not you have adequate staff. 2 We think this is important. 3 MR. KOHLER: Yes, sir. I appreciate 4 it. And I will look at the business model and the 5 goals, and if at any time I feel that I need more 6 staff, I will certainly bring it to my boss's 7 attention. 8 COMMISSIONER CLOWE: Because you're 9 being held responsible. Just so you'll understand 10 where that's coming from. 11 MR. KOHLER: Yes, sir. 12 COMMISSIONER CLOWE: Thank you, Rob. 13 MR. KOHLER: Thank you. 14 COMMISSIONER CLOWE: Then 15 Commissioner Cox, with your permission, I'd like 16 to, before we move to go into executive session, 17 ask for the reports covered under item No. 17 18 first: Report from the charitable bingo operations 19 director and possible discussions and/or action on 20 the charitable bingo operations division's 21 activities. 22 Billy. 23 MR. ATKINS: Commissioners, you 24 have, in my regular report, several new updates. 25 There is an advisory committee meeting scheduled WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 118 1 for the 23rd. Two of the items on there are rules 2 that will be on there for their second reading 3 dealing with bingo paper and the changes to the 4 advisory committee rule. So we hope to be able to 5 bring those rules to you at your next meeting for 6 publication. 7 As I mentioned earlier, quarterly 8 reports for the second quarter of 2002 were due on 9 Monday, July 15th. There is a summary memo 10 included in my report giving you details on that. 11 We also included an update on the status of 12 pull-tabs. You'll recall that recently, amendments 13 to the pull-tab rule where adopted in order to 14 allow for a variety of style of play. Those games 15 have been submitted and the initial art work 16 approved. We're now testing the deals -- actually 17 physically testing the deals and hope to be able to 18 approve some of those games shortly. 19 Since the last meeting, the division 20 has taken part in the VFW's annual officer training 21 program, and a summary of the survey that was 22 distributed to those members is included in your 23 notebook. 24 And I've also included a tentative 25 schedule for the upcoming NAGRA Conference, which WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 119 1 is scheduled for October 20th and 23th in 2 Milwaukee, Wisconsin. As you will recall, I am the 3 co-chair of the Charitable Gaming Committee. There 4 are a number of sessions relating to charitable 5 bingo: pull-tabs, best practices, best regulatory 6 practices, as well as two pretty intense sessions 7 on card-minding devices that are scheduled for that 8 upcoming session. And we would invite any of the 9 commissioners that were interested in attending to 10 join us. 11 Also, I wanted to let you know that 12 last week, I received a call from Kay Gaines, who 13 is the incoming president for NAGRA, and she said 14 that NAGRA was interested in holding their spring 15 2004 conference in San Antonio. So I said that I 16 would pass that message along to you at that 17 meeting. I told them that we would be happy to 18 have NAGRA back in Texas. 19 The last time they were here was 20 probably four or five years ago, and they held 21 their conference in Corpus Christi. And it seemed 22 like it was one of those events where everything 23 that could go wrong did go wrong. So I told them 24 that we would try and make sure that that didn't 25 happen again this time. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 120 1 So I did say one thing that would be 2 beneficial is, there is one person on my staff that 3 has some experience in conference planning. That 4 is Meagan Ahmad, who chaired the NASPL Conference 5 for the lottery. And the NAGRA Conference is 6 probably one one-hundredth the size. So I think it 7 will be much easier for her. 8 And that is the essence of my 9 report. If you have any questions... 10 COMMISSIONER CLOWE: Billy, do you 11 have any further comment other than that which is 12 written on the charitable bingo systems redesign 13 issue? 14 MS. KIPLIN: Commissioners, if I 15 could step in, that issue is in a dispute 16 resolution litigation proceeding over at the State 17 Office of Administrative Hearings. And we have 18 collectively provided advice both from the attorney 19 general's office and the general counsel's office 20 for Mr. Atkins to refrain making any more public 21 comments simply because we do not want to 22 disadvantage ourselves in the litigation's 23 strategic position. We will be happy to provide 24 legal advice to the commissioners in executive 25 session regarding that matter. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 121 1 COMMISSIONER CLOWE: Very good. 2 Thank you, Billy. 3 Next, we'll take Item 16: Report by 4 the executive director and/or possible discussion 5 and/or action on the agency's financial and 6 operational status, legislative briefings, HUB 7 and/or minority status, FTE status, and retailer 8 forums. 9 Linda Cloud, please. 10 MS. CLOUD: Commissioners, I'm happy 11 to say that on August 15th, the Lottery transferred 12 the $155,550,471 to the Foundation School Fund. 13 That is made up of 71,000,827 for our July revenue 14 generated. And of course, we project from the last 15 month of the year through the month of August, so 16 that amount was 76,000,978. 17 We also returned in that transfer 18 6,000,744 that you heard previously from Bart that 19 was unspent administrative funds that we knew we 20 could transfer at this time. That, along with the 21 40 million that we transferred this year to the 22 multi-categorical teaching hospital and 23,000,433 23 to the tertiary care facility, brings us to a grand 24 total of 933,133,923 for the year so far. 25 There may be an additional WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 122 1 20 million that we could transfer of unclaimed 2 prize money, and that is not usually transferred by 3 schedule from the comptroller until September, if 4 I'm not mistaken, but we requested that unclaimed 5 prize money to be transferred in this year so that 6 we can count it as returned to the state in this 7 fiscal year. 8 COMMISSIONER CLOWE: What was our 9 projection? 10 MS. CLOUD: Our projection -- our 11 comptroller's projection was 775, the BRE. And 12 we've exceed that by over 200 million. 13 COMMISSIONER CLOWE: And what was 14 our internal projection? 15 MS. CLOUD: Our internal projection, 16 I think, was 860 -- Bart, you'd better come up. 17 These numbers are not coming off the top of my head 18 too good. I think it was in the neighborhood of 19 what we transferred last year. 20 MR. SANCHEZ: It was about 21 860 million, I think, as I said last commission 22 meeting. Of course, I'm trying to be conservative. 23 MS. CLOUD: I'm still holding out 24 for the billion-dollar mark, so -- but we've only 25 got two more weeks to go, and if Lotto doesn't WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 123 1 continue to roll, we may not make it. 2 COMMISSIONER CLOWE: Very good. 3 MS. CLOUD: Okay. 4 Robert Hall, would you like to come 5 up and make your HUB report, please. 6 COMMISSIONER CLOWE: Good morning, 7 Robert. 8 MR. HALL: Good morning, 9 Mr. Chairman. Good morning, Commissioners. 10 For the record, my name is 11 Robert Hall. I'm the director of minority 12 development services. 13 I just want to update you on four 14 items regarding minority HUB or minority 15 participation. The first is, our spending 16 continues to increase. We spent roughly 17 130 million -- excuse me, over $139 million here 18 at the Lottery. We spent, with HUB, the 19 minority-owned firms, over $60 million, and 20 our current percentage right now is about 21 11.77 percent. 22 In addition to that, I want to 23 report to you that we and the Lottery Commission 24 and the executive director have been asked to 25 participate on a committee to discuss components of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 124 1 developing a model HUB program with key legislators 2 such as Representative Dukes and also Senator West. 3 Also, in addition to that, there is 4 a hearing on this Friday, which we've been invited 5 to share in, which will start at approximately 6 3:00 p.m. and end about 4:30. 7 And the last item for you, as 8 previously requested, we are planning for you in 9 your hearing -- hopefully in the month of 10 October -- three items in which you asked for a 11 report on the mentor/protege program; also 12 information on the HUB expenditures, which should 13 be reported in the month of September to the Texas 14 Building Procurement Commission; and then lastly, 15 our monitoring role as it relates to the HUB 16 subcontractor plan. 17 And I'll be happy to answer any 18 questions that you may have. 19 COMMISSIONER COX: I don't have a 20 question on this report, Mr. Chairman, but I do 21 have a question. 22 COMMISSIONER CLOWE: Yes, sir. 23 COMMISSIONER COX: Robert, Linda 24 told me last week that as to a procurement that I 25 have an interest, the most qualified vendors did WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 125 1 not complete a certain section of the proposal and 2 thus were disqualified, and we seem to be left with 3 a vendor that may or may not be qualified but did 4 fill out that questionnaire. 5 Linda, did I state that about right? 6 MS. CLOUD: Yes, sir. 7 COMMISSIONER COX: Are these 8 questions -- I know that we don't have any quotas 9 in this state -- 10 MR. HALL: No, sir, we don't. 11 COMMISSIONER COX: -- we have a 12 requirement for good-faith effort. 13 Are these forms just so burdensome 14 that big companies refuse to fill them out? Or 15 what are we looking at here when multinational 16 organizations just don't fill out the forms? 17 MR. HALL: Well, I think that one 18 thing that we here at the Lottery have done -- and 19 I want to say I feel just as bad about vendors 20 being rejected along the process -- we are trying 21 to educate our vendors as much as possible. 22 With every procurement over 23 $100,000, the law and the rule requires that an 24 agency determine the profitability of a 25 subcontractor. And when we do that, we include it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 126 1 on the business subcontractor plan. And when that 2 is done, all vendors, including HUB vendors, have 3 to respond according to good-faith effort as 4 identified within the HUB rules. 5 There are specific requirements that 6 each vendor -- and the language says "shall comply 7 with," in order to be considered responsive. If 8 the vendor doesn't comply with all six of the 9 requirements that are identified in the rule -- it 10 does five but doesn't comply with just one -- his 11 proposal can be rejected. 12 Now, upon arriving here at the 13 Lottery, there were things -- there were questions 14 about should we have strict compliance according to 15 the rule or should we have methodology whereby we 16 can determine a good-faith effort as an agency, and 17 then we can make that assessment. After conferring 18 back with the Texas Building Procurement 19 Commission, they referred it to us by indicating 20 that the rule is strict complying. And we have 21 since that time been complying with the strict 22 comply methodology. 23 So if a vendor doesn't advertise, 24 per se, as according to the rule for HUB 25 subcontracting opportunities, and they comply with WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 127 1 every aspect of soliciting, notifying, and other 2 departments have been negotiating with HUB vendors 3 to bring to the table and submit a plan, that 4 proposal would be rejected. 5 Now, as part of our process, as 6 according to the rule, we do ask for clarification 7 in the event we may miss something. And we ask the 8 vendor to clarify, in fact, that they advertise or 9 other requirements that they may have missed. And 10 in that response, if they confirm that they did not 11 comply with all the requirements, then our 12 compliance basically has been to reject them. And 13 that is the determination by the rule as set forth 14 in the law as well, Senate Bill 178. 15 COMMISSIONER COX: So if you have an 16 organization that has -- for as long as there have 17 been affirmative action programs -- an affirmative 18 action program that does not in any way 19 discriminate in its hiring -- 20 MR. HALL: Yes, sir. 21 COMMISSIONER COX: -- but yet 22 confines its activities to those people that it has 23 on its staff because of training and experience 24 requirements that it must control to control the 25 quality of its professional work, thus placing it, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 128 1 as a matter of policy, unable to subcontract, but 2 having had an affirmative action program and 3 reached out in its own recruiting of its own staff, 4 that firm could be disqualified from serving us? 5 MR. HALL: No, sir. In accordance 6 with the rule, there's two provisions. The first 7 provision is set forth to say that when you plan to 8 subcontract, if a vendor can perform the work -- 9 they cannot perform the work with its own 10 resources, meaning employees or other resources to 11 them, they intend to subcontract, they specify 12 that. And then they must comply with the 13 good-faith methodology. 14 COMMISSIONER COX: Okay. So they 15 don't -- 16 MR. HALL: If it says -- 17 COMMISSIONER COX: If I could, 18 Robert -- 19 MR. HALL: Yes, sir. 20 COMMISSIONER COX: -- they don't 21 have to subcontract. 22 They are not disqualified if they 23 say, we just don't as a matter of policy? 24 MR. HALL: They don't have to 25 subcontract if they can perform the entire contract WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 129 1 with their own resources and own employees. 2 COMMISSIONER COX: Okay. 3 MR. HALL: And that is outlined in 4 the subcontracting plan. And we've had vendors, 5 for example MS Works -- I'm sorry, that's not 6 correct -- other vendors that have indicated they 7 have not -- they would not subcontract any portions 8 of their work. A good example is ADT, which has 9 performed our security, our contract. And they 10 have had all the resources internal, even 11 subsidiaries that could perform the function of 12 that contract. They have put that into a plan -- 13 MS. CLOUD: But that, too, is a form 14 they have to have complete within the RFP project. 15 They have to -- if they are not going to 16 subcontract, they have to state -- 17 MR. HALL: Yes, ma'am. 18 MS. CLOUD: -- that in the RFP so 19 that we know they have a good-faith effort; they 20 have gone through that portion of the RFP and they 21 are saying they are not going to be subbing. 22 COMMISSIONER COX: So they have to 23 fill out the form, they just say we don't plan to, 24 and that doesn't disqualify them? 25 MR. HALL: It doesn't disqualify WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 130 1 them at all. In addition to that, a vendor that 2 says -- one of these things that we're doing as 3 part of our process is -- two things: If you're 4 planning to subcontract or not, we have means for 5 the vendors to discuss what they're going to intend 6 in the plan, which goes into reporting and 7 monitoring roles, which NVS is involved in. 8 And they report on a monthly basis, 9 but nothing has changed in regard to their plan 10 saying they're not subcontracting in accordance 11 with the plan or they are continuing to 12 subcontract. And then we receive a report of the 13 subcontracting activity. 14 COMMISSIONER COX: Thank you. 15 COMMISSIONER CLOWE: Thank you, 16 Robert. 17 MR. HALL: Thank you. 18 MS. CLOUD: Commissioners, on the 19 FTE totals, we have 306 active FTEs; we have three 20 newly filled positions; we have two positions that 21 are in the selection/acceptance pending; we have 22 19 positions in the recruiting, screening, and 23 interviewing; and five that are of no activity at 24 this time. 25 I would like to also bring to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 131 1 commissioners' attention today that we have lost 2 two of our very good -- or not lost them yet; Abbie 3 is not gone yet -- but Chuck Wilson resigned. He 4 has gone with another firm. He had 9 years' and 5 11 months' service with the Texas Lottery. And as 6 you know, he was our systems administrator. He 7 worked basically at GTECH on system testing and 8 software testing. He filled in for us as -- in the 9 interim -- IT director position until we hired 10 Mike Hernandez. He did not choose to apply for 11 that position this time around. But he has -- he 12 is gone, and we will miss him. He has been a real 13 good employee. 14 We had a little -- IT put on a 15 little going-away function for him Friday 16 afternoon. And Chuck was one of our employees who 17 had guts enough to put on the Scratchman costume 18 when we would have employees' functions. And he 19 did a really good job playing Scratchman, and he 20 enjoyed that. And they -- IT blew up a photograph 21 of him in his Scratchman costume and put it on a 22 plaque and gave it to him. And I told him that was 23 his most important job at the Lottery Commission. 24 But we will miss Chuck. 25 Abbie Pina, who has been our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 132 1 winners' liaison, is retiring. She has 33 years' 2 service with the State of Texas. And there is a 3 retirement -- Keith, you might want to come up. 4 What date is -- 5 MR. ELKINS: It's tomorrow at 1:00. 6 MS. CLOUD: At 1:00. Okay. 7 Abbie has said that she has got a 8 lot of people that have contacted her and plan to 9 be here for her retirement, some of our winners who 10 she has made a lot of friends with and some of the 11 legislators, and I think she said the mayor, so -- 12 possibly. So we have dignitaries here for Abbie's 13 retirement party tomorrow. But you're welcome as 14 well to come to that. And good luck to Abbie, 15 because 33 years is a long time. 16 COMMISSIONER CLOWE: And we're 17 appreciative of both of those individuals' service, 18 as well as many others. That's great longevity to 19 have. Has Abbie been here since the inception of 20 the Lottery? 21 MS. CLOUD: Yes, she has. 22 And Commissioners, our next town 23 hall meeting is here in Austin. It will be on the 24 27th, August 27th, at the Doubletree on IH-35 25 North. It starts -- the registration starts at WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 133 1 3:00, the actual meeting starts at 4:00, and we'll 2 go to 7:00. 3 COMMISSIONER CLOWE: What attendance 4 are you anticipating, Linda? 5 MS. CLOUD: In Austin, we usually 6 have about 80 retailers show up. I think that's 7 what Ramon is indicating, the reservations. 8 COMMISSIONER CLOWE: I think you've 9 been having really good turnout, haven't you? 10 MS. CLOUD: Yes, we have. 11 COMMISSIONER CLOWE: I think those 12 are really excellent sessions. 13 And Commission Cox, when you can, 14 it's very educational to see the retailers come in 15 and how they interact with Linda and staff. These 16 are the people, of course, who sell our tickets. 17 And I have attended a number these, and I think 18 it's very educational and, you know, you get to 19 hear what they have to say. Sometimes they're very 20 candid, and that makes it even more beneficial. 21 MS. CLOUD: Well, I think Sci Games 22 surprised me today when they were talking about 23 having put the game and pack number and ticket 24 number on the side of the ticket where the retailer 25 could visualize it once he gets it in his dispenser WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 134 1 so that he doesn't have to take the pack out to do 2 his checkouts every day. He can see the number. 3 That was a recent town hall meeting, 4 and the retailer was, you know, very concerned that 5 this is a major problem for them, laborwise. And 6 he just, you know, thought there was something 7 somebody could about it. Well, they -- I will have 8 to see if that satisfies the need. But apparently, 9 that came out of our town hall meeting. 10 COMMISSIONER CLOWE: Very good. 11 MS. CLOUD: And that's my report. 12 COMMISSIONER CLOWE: Any questions? 13 COMMISSIONER COX: No, sir. 14 COMMISSIONER CLOWE: Thank you, 15 Linda. 16 Is there anyone wishing to make 17 public comment to the commission at this time? 18 Seeing none, then I'd like to move 19 to Item 15: Consideration of status and possible 20 entry of orders in cases letter A through letter M. 21 Kim, would you help us with this? 22 MS. KIPLIN: Yes, I'd be happy to. 23 Commissioners, what you have in your 24 notebook are copies of proposals for decision and 25 proposal letters and the items that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 135 1 Commissioner Clowe just mentioned. All but the 2 first are lottery cases. All of those cases, the 3 administrative law judge in those proceedings is 4 recommending revocation of the lottery retailer's 5 license for failure to have sufficient funds on 6 hand in the account at the time that the lottery 7 swept for the moneys owed to the state. 8 The first one is a bingo case, VFW 9 Post 1837 Auxiliary. In this matter, the 10 administrative law judge is also recommending 11 revocation of the license for failure to file -- 12 timely file quarterly reports and for failure to 13 pay moneys owed to the state in the form of prize 14 fees and now, at this point, penalty and interest. 15 With that, staff recommends that the 16 commission adopt the administrative law judge's 17 proposal for a decision in each of these cases and 18 sign the orders in each of these cases for revoking 19 the licenses as noticed on the open meetings. 20 COMMISSIONER CLOWE: I move the 21 adoption of the recommended order in the contested 22 dockets letters A through M as recommended by the 23 staff. 24 COMMISSIONER COX: Second. 25 COMMISSIONER CLOWE: All in favor, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 136 1 please say aye; opposed no. 2 The vote is 2-0 in favor. 3 We'll take time now to sign those 4 records. When we complete this task, I'm going to 5 move we go into executive session. I think that 6 concludes all of the business the commission has on 7 the public docket. 8 At this time, I move the Texas 9 Lottery Commission go into executive session to 10 deliberate the duties and evaluation of the 11 executive director, internal auditor, and 12 charitable bingo operations director pursuant to 13 Section 551.074 of the Texas Government code; to 14 deliberate the duties of the general counsel and 15 security director pursuant to Section 551.074 of 16 the Texas Government Code; to receive legal advice 17 regarding pending or contemplated litigation and/or 18 to receive legal advice pursuant to Section 19 551.071 (1) (A) or (B) of the Texas Government Code 20 and/or to receive legal advice pursuant to 21 Section 551.071 (2) of the Texas Government Code, 22 including but not limited to: 23 TPFV Group, Inc., v. Texas Lottery 24 Commission; 25 Retired Sergeant Majors' Association WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 137 1 et al. v. Texas Lottery Commission et al.; 2 Loretta Hawkins v. Texas Lottery 3 Commission; 4 States of Minnesota et al. v. NIGC 5 et al.; 6 Scientific Games and Pollard 7 Banknote v. Texas Lottery Commission and Linda 8 Cloud, Executive Director; 9 Ideas, Inc. and Associates in 10 Implants v. Texas Lottery and Linda Cloud; 11 TXTV v. Texas Lottery Commission; 12 Ieric and Chris Rogers v. Texas 13 Lottery Commission and Executive Director; 14 King v. Texas Lottery Commission; 15 Contract regarding the charitable 16 bingo system; employment law, personnel law, 17 procurement and contract law, and general 18 government law. 19 Is there a second? 20 COMMISSIONER COX: Yes, sir. 21 Second. 22 COMMISSIONER CLOWE: All in favor, 23 say aye. 24 The vote is 2-0 in favor. 25 The Texas Lottery Commission will go WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 138 1 into executive session. The time is 10:37 -- 2 sorry, 11:37 a.m. Today is August 20, 2002. 3 (Executive Session.) 4 COMMISSIONER CLOWE: The Texas 5 Lottery Commission is out of executive session. 6 The time is 1:35 p.m. Is there any action to be 7 taken as a result of the executive session? 8 If not, let's move back to the 9 public agenda. I believe we have completed it. We 10 are now to adjournment. If there is no further 11 business, this commission is adjourned. 12 Thank you. 13 (Proceedings adjourned.) 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 139 1 C E R T I F I C A T E 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 I, SUZANNE T. LANE, a Certified 6 Shorthand Reporter in and for the State of Texas, 7 do hereby certify that the above-captioned matter 8 came on for hearing before the TEXAS LOTTERY 9 COMMISSION as hereinafter set out, that I did, in 10 shorthand, report said proceedings and that the 11 above and foregoing pages contain a full, true, and 12 correct computer-aided transcription of my 13 shorthand notes taken on said occasion. 14 WITNESS my hand and seal of office on 15 this, the day of , 2002. 16 17 18 19 Suzanne T. Lane, CSR, RPR Texas CSR No. 6992 20 Expiration Date: 12/31/03 1609 Shoal Creek Boulevard 21 Suite 202 Austin, Texas 78701 22 (512) 474-4363 23 JOB NO. 020820STL 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363