1 1 2 3 4 5 6 * * * * * * * * * * * * * * * * * * * * * * * * * * 7 8 TEXAS LOTTERY COMMISSION 9 MEETING 10 11 OCTOBER 23, 2002 12 13 * * * * * * * * * * * * * * * * * * * * * * * * * * 14 15 16 17 18 BE IT REMEMBERED that the TEXAS 19 LOTTERY COMMISSION meeting was held on the 23rd 20 of October, 2002, from 8:30 a.m. to 2:49 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 Mr. James A. Cox, Jr. 7 General Counsel: 8 Ms. Kimberly L. Kiplin 9 Acting Executive Director: 10 Mr. Gary Grief 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 is Wednesday, October 23, 2002. 3 My name is Tom Clowe. Commissioner Whitaker and 4 Commissioner Cox are here. We're ready to convene 5 this meeting of the Texas Lottery Commission, and I 6 will call it to order. 7 I'll ask everyone to please turn off 8 your cell phones or your pagers. I'd like not to 9 be interrupted during this meeting. If you need to 10 speak on a cell phone, please go outside this 11 meeting room. 12 We will now go to Item 2 on the 13 agenda, and I believe we're going to pass that 14 item, are we not, Mr. Grief? 15 MR. GRIEF: Yes, sir, please. 16 COMMISSIONER CLOWE: We're ready to 17 go, then, to Item No. 3, report, possible 18 discussion, and/or action on the sunset process 19 involving the agency, including the agency's 20 recommendations regarding the charitable 21 distribution, grandfathered lessor license, and/or 22 transferability of lessor license issues in the 23 sunset commission staff report. 24 Mr. Atkins, would you like to lead 25 us off on this? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 4 1 MR. ATKINS: Thank you, 2 Mr. Chairman, members. I e-mailed to each of you, 3 last week, the staff's recommendations regarding 4 Issue 4.1, relating to charitable distributions; 5 and Issue 5, dealing with commercial lessors. 6 And each of those recommendations 7 came with the staff recommendation, as well as the 8 other issues that we considered in arriving at our 9 recommendation. 10 Regarding Issue 4.1, the staff's 11 recommendation is the first proposal that was put 12 forward to you; that is, require 100 percent of all 13 net proceeds to be distributed for charitable 14 purposes, net proceeds being gross receipts minus 15 total prizes minus all authorized expenses. That 16 figure would also include any rental income that 17 the organizations might receive. 18 We believe, in order for this 19 recommendation to be successful, the staff, through 20 the rule-making process, would need to identify and 21 clarify what would be reasonable and necessary 22 expenses. Our recommendation would also allow for 23 the establishment of an operating account for 24 organizations to maintain, and it would set a cap 25 on the amount that this operating fund could be at. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 5 1 Additionally, we would use language 2 currently in the Bingo Enabling Act, which I would 3 ask Ms. Kiplin to ensure exists. It's my 4 understanding that -- I think that that language is 5 there. 6 But we would clarify charitable 7 activities that would be authorized under the Bingo 8 Enabling Act, as well as through the internal 9 revenue code, and we would establish sanctions for 10 organizations that failed to make a distribution or 11 maintain a positive cash flow. 12 I had mentioned, I think, at our 13 last meeting, that we have had the opportunity to 14 hold numerous meetings with industry 15 representatives. And there are some issues that 16 came up associated with those meetings that I don't 17 know that we have been able to achieve consensus 18 on. 19 First of all, I think that there is 20 probably still some concern among the industry with 21 the staff moving forward on the setting of any type 22 of cap or limit on authorized expenses. Again, I 23 think for our recommendation to be its most 24 effective, that that is an integral part of the 25 recommendation. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 6 1 Also, in regards to the transfer of 2 funds to the operating account, I think there is a 3 desire among some industry representatives that 4 there be much greater flexibility regarding the 5 transferability of funds between accounts than the 6 staff is able to recommend. 7 Currently, in order for funds to be 8 transferred between accounts, the organizations 9 have to get the authorization from the Charitable 10 Bingo Division. I think that the just 11 indiscriminate transferability of funds would lead 12 to some -- what I would call ghost numbers or some 13 figures that wouldn't accurately reflect what the 14 charitable distributions are going for. 15 Another issue deals with just 16 relying on the Internal Revenue Service's 17 definition of "charitable distribution," instead of 18 clarifying, through rule, what "charitable 19 distributions," under the Bingo Enabling Act, would 20 be. 21 Again, I don't know that the staff 22 can concur with that, in that I think there are 23 certain restrictions -- both through the 24 constitutional amendment authorizing charitable 25 bingo, as well as the Bingo Enabling Act itself -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 7 1 that limit what those funds can be used for. So I 2 don't think just relying on a third party's 3 definition would achieve the intent of the Bingo 4 Enabling Act. 5 And finally, there has been a 6 discussion about the ability of organizations to 7 share revenue within their halls; that is, to 8 essentially account for all of the funds in the 9 organization, account for all of the funds in the 10 hall as for one organization. 11 While the staff agrees that there 12 would be some definite benefit to that, we don't 13 feel that it is relative to the question at hand; 14 specifically, the charitable distribution question. 15 The concept of revenue sharing and 16 fundamentally changing the way that revenue funds 17 are accounted for, we think would be a major change 18 to the Bingo Enabling Act and the way bingo is 19 operated in the state of Texas. And while again, 20 we certainly agree that it merits consideration, we 21 just don't think it's appropriate to this 22 discussion today. 23 Do you want me to go through the 24 other proposals that we considered, or move on to 25 Issue 5 or... WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 8 1 COMMISSIONER CLOWE: Questions? 2 COMMISSIONER WHITAKER: I have some 3 questions. 4 Under your staff recommendation, 5 let's assume we have a charity, who, every single 6 year they have been in existence -- and let's 7 assume they've been operating for ten years -- they 8 have at least -- let's pick a number -- ten 9 dollars' positive cash flow that they give to 10 charity. 11 Under your recommendation, that 12 would be a complying charity. Is that right? 13 MR. ATKINS: Yes, ma'am. 14 COMMISSIONER WHITAKER: I notice, 15 under your Proposal No. 4, that you add in the idea 16 of a cap to what would be reasonable and necessary 17 expenses, and you incorporate the concept of there 18 needs to be some kind of proportionality between 19 the expenses and revenues for it to be reasonable 20 and necessary expenses. 21 Can you comment on why you are not 22 recommending Proposal No. 4? 23 MR. ATKINS: In our final 24 analysis, the two items that we looked at, 25 Commissioner Whitaker, were maximizing revenue and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 9 1 simplifying the process. And the mark against 2 Proposal 4 is that, in our opinion, by applying a 3 percentage of an expense or an expense credit, you 4 added a sense of complexity to the formula apart 5 from the stray prizes minus -- or I'm sorry, gross 6 minus prizes minus expenses. 7 That's the reason we went to that -- 8 with the proposal that we did; that we feel it's 9 much simpler. Again, we haven't done any type of 10 detailed analysis regarding the proportionality 11 between expenses and income. That's something that 12 could be done. 13 I know it's been suggested that we 14 could undertake such an activity, possibly with the 15 help of the comptroller's office, ask for input on 16 what they believe those figures should be. That 17 agency has some experience with issues like that. 18 When the charitable distribution 19 rule was first adopted by the comptroller's office, 20 in their justification for the rule, they stated 21 that they believed bingo expenses should be no more 22 than 65 percent. So they obviously, at -- you 23 know, I guess it was about 20 years ago or 19 years 24 ago when they first adopted that rule. 25 At that time, they obviously had WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 10 1 some sort of methodology that they went through in 2 identifying that percentage. So we could look to 3 them for their recommendations on any type of 4 proportionality between revenue and expenses. 5 COMMISSIONER WHITAKER: Okay. 6 COMMISSIONER COX: Billy, the -- 7 you-all have done a very thorough job of looking at 8 the alternatives, and I note that you've had a lot 9 of help, a lot of input, and we appreciate that. I 10 still have a few questions. 11 When we talk about "through rule," 12 we will identify what would be considered 13 reasonable and necessary expenses. That reads real 14 easy, but it sounds real hard. One of the 15 attractive features of the proposal that the Sunset 16 Advisory Commission staff made was that it would, 17 in effect, free you from auditing expenses because 18 it would place a distribution requirement on 19 gross -- adjusted gross revenue, rather than on net 20 income, if you will. It would put you in a flat 21 tax kind of situation, like gaming taxes are 22 normally assessed, rather than in an income tax 23 kind of situation, where you have to audit both 24 revenues and expenses. 25 My concern is that you're going to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 11 1 have a constant fight over what are reasonable and 2 necessary expenses, because I think every case is 3 going to be different. You're going to have 4 difficulty using a percentage, because a percentage 5 is not going to be applicable equally to fledgling 6 operations and mature operations. It's not going 7 to be applicable equally to high revenue operations 8 versus marginal operations. 9 And so I am concerned about those. 10 I don't have an answer. But I would like to have 11 seen -- I would like for something like Proposal 3 12 to have worked, with picking a number along that 13 left-hand side that made the most sense; that is, 14 not going with the 25 percent that Sunset 15 recommended, but rather, finding what percent would 16 make sense and trying to get you out of the expense 17 auditing business. 18 I recognize that that isn't what you 19 recommended, and we'll work with you as best we can 20 to take it down this road. But I ask that we try 21 to get all the help we can in writing that rule, 22 because I think it's going to be a real hard one to 23 write. 24 Secondly, as to the operating 25 capital, I heard you say that there has been some WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 12 1 discussion about transfers back and forth between 2 the charity's general fund, if you will, and that 3 operating fund. And I can understand why that 4 there would be that kind of need from time to time. 5 I see that operating account as 6 serving two purposes; one broad purpose, but I 7 think it can be broken into a couple of purposes. 8 One of those is to provide for adequate working 9 capital for the operation. And I expect, when you 10 say that it will be used for operating capital, 11 that you will plan to set up some kind of 12 requirements as to how much is needed in a 13 particular instance for the working capital. 14 I think it also probably is a buffer 15 against bad operations. You don't want, I think, 16 to put the money over in the general fund, and the 17 charity get expense, and then have a bad quarter 18 come up. So I think that we need to have some 19 flexibility, when we set that operating capital 20 requirement, to both require the charity to have an 21 adequate working capital and allow it to retain 22 some kind of buffer against bad future operations 23 so it doesn't have to go to the general fund and 24 find that the general fund has already granted all 25 the money and there is nothing to give back. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 13 1 Thirdly, as to the sanctions that 2 you would establish for failure to make a 3 distribution, do you have, at this time, a general 4 idea of how much slack you will cut the charities 5 in that area, whether you will give them a couple 6 of years, five years, one year; how unprofitable 7 they would have to be before you said -- gave up 8 hope on them? 9 How do -- have you thought about how 10 you will do that? 11 MR. ATKINS: Not really at this time 12 in any great detail. I mean, currently, under the 13 Bingo Enabling Act, we have what's called a 14 four-quarter average. If an organization doesn't 15 meet their charitable distribution in one quarter, 16 then we calculate their four-quarter average. And 17 if they have made the distribution, then they are 18 in compliance with the Act. So I don't think it's 19 unreasonable that there would be something similar 20 under this proposal. 21 COMMISSIONER COX: And I think, 22 again, as in all of these areas, we'll need to be 23 real careful when writing those rules that we get 24 plenty of input; perhaps start off lightly and move 25 from there, rather than start off with a very heavy WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 14 1 position and move backwards from it. 2 COMMISSIONER WHITAKER: Billy, what 3 if we blended the concepts of Proposal 3 -- which 4 is the sunset recommendation and what you're 5 recommending -- so that if a charity, say, was able 6 to distribute 25 percent, then that would be their 7 test? If they can meet it, then that's it; if they 8 don't meet it, then they're subject to the more 9 specific reasonable and necessary expenses 10 requirements -- 11 MR. ATKINS: I'm -- 12 COMMISSIONER WHITAKER: -- for 13 20 percent or something. 14 MR. ATKINS: I'm not sure I'm -- I'm 15 not sure I'm -- 16 COMMISSIONER WHITAKER: Well, part 17 of the problem is that reasonable and necessary, 18 the devil is in the details -- to use a phrase 19 that's become very current here -- and therefore 20 cumbersome. 21 So the beauty of the sunset 22 recommendation is that it's at least pretty simple 23 to administer, but is overly burdensome. So you 24 can get the benefits of the sunset recommendation 25 if a charity can at least meet "X" percentage. And WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 15 1 if they get at least that, then they've met it. If 2 they can't meet it, then they need to go through 3 the somewhat more complicated process of justifying 4 their expenses as reasonable and necessary. 5 How about that? Just a thought. 6 COMMISSIONER COX: I think that's a 7 good general structure. 8 COMMISSIONER WHITAKER: I'm not 9 saying I'd vote yes on that, but I just wanted to 10 throw that out for people's thoughts. Okay? 11 COMMISSIONER CLOWE: What's your 12 response to that, Billy? 13 MR. ATKINS: My response to that is, 14 I'd like to have some time to be able to play with 15 some figures before I responded to it. You know, 16 as I mentioned, I think one of the criticisms that 17 you're going to hear regarding our proposal anyway 18 is that we're essentially doing what the sunset 19 staff recommendation is doing; just a different way 20 by limiting those expenses and what they can be, 21 where we're essentially saying, you know, this is a 22 certain percentage that you have to give out. 23 COMMISSIONER WHITAKER: Okay. I 24 assume we'll get comment from folks in the 25 audience. I'll look forward to that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 16 1 COMMISSIONER CLOWE: Billy, 2 following up on Commissioner Cox's comment about 3 the operating capital issue, you touched on, in 4 your initial comments, a mechanism that exists 5 today for transferability of funds into the 6 operating capital account. 7 MR. ATKINS: It actually requires 8 for organizations to transfer funds into their 9 bingo bank account from their general fund. They 10 have to apply to us for permission and demonstrate 11 the ability to be able to pay those funds back. 12 COMMISSIONER CLOWE: Okay. I'd like 13 for you to just talk about that a little bit so we 14 can understand that mechanism as it exists today. 15 And describe it so that we can understand how 16 cumbersome or time consuming that is and what 17 kind -- get in focus for us, if you will, what kind 18 of practice that is from a business person's 19 perspective. 20 MR. ATKINS: Okay. Since the 21 establishment of the Bingo Enabling Act, I think 22 there has been an intent in the Act to keep an 23 organization's bingo funds separate from their 24 general fund accounts. So consequently, 25 organizations that seek to transfer general fund WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 17 1 moneys into their bingo bank account apply to the 2 agency for essentially a loan from themselves. And 3 we have an application that they fill out that 4 demonstrates what they anticipate their expenses 5 are going to be and what they anticipate their 6 revenue is going to be, and a proposed payback 7 schedule of one year to pay that money back. 8 The vast majority of those loan 9 requests come from organizations that are starting 10 their bingo operations. That is, they need to put 11 money in their bingo account in order to start 12 their bingo games, purchase equipment and supplies, 13 award prizes, et cetera. 14 We do have some organizations who 15 have hit upon, you know, a bad patch, and their 16 revenues aren't what they expected or they may be 17 experiencing increased competition, and their bingo 18 bank account gets low. And so they will apply to 19 transfer a loan from their general fund to the 20 bingo bank account in order to prop up that bingo 21 operation. 22 I'm going to have to ask Phil some 23 questions. 24 Do you know about how many we get? 25 MS. KIPLIN: Can you come forward, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 18 1 please, so we can get you on the audio? 2 MR. SANDERSON: Phil Sanderson, 3 assistant director of charitable bingo operations. 4 On the original applications, of 5 course, like Billy said, those are primarily 6 start-up funds, so they have prizes to give away or 7 ensure they have money to give prizes away when 8 they start up operating and -- by their initial 9 inventory. 10 And for the most part, probably 11 about 75 percent of the organizations that are 12 applying for an original request, you know, a loan 13 or a transfer of funds, which is roughly 60 to 14 80 organizations a year -- for organizations that 15 are currently operating, those requests are 16 minimal. It's probably less than, you know, 40 a 17 year that request funds to be transferred. 18 Now, during our audits, we do find 19 some instances where organizations have transferred 20 funds without the prior approval. And we, of 21 course, sanction them or issue them a violation for 22 that. 23 The process alone -- if all the 24 paperwork is -- once they have the correct 25 paperwork, as far as the staff time to process the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 19 1 loan is, you know, less than an hour to two hours, 2 probably, to process the request. 3 COMMISSIONER CLOWE: Okay. That's 4 exactly what I wanted to know. Thank you. That's 5 very helpful to me. 6 MR. ATKINS: I think, Mr. Chairman, 7 a key statement that Phil said is, assuming what we 8 get is correct. 9 COMMISSIONER CLOWE: I understood 10 that. 11 MR. ATKINS: Okay. 12 COMMISSIONER CLOWE: Yeah. He made 13 that point very clear. 14 MS. KIPLIN: Commissioner, before 15 you move on to -- 16 COMMISSIONER CLOWE: I'm not ready 17 to move on. 18 MS. KIPLIN: Okay. Thank you. 19 COMMISSIONER CLOWE: Billy, in the 20 information that you gave us relative to the staff 21 recommendations, you have a total of undistributed 22 proceeds of almost $25 million. What's your 23 comment on that number in relation to total 24 charitable distributions? 25 MR. ATKINS: My first comment is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 20 1 that in a year with decreased gross receipts and 2 decreased charitable distributions and decreased 3 attendance, that's one figure, if I understand 4 correctly, that grew. So -- and it may be that it 5 grew because organizations are, you know, 6 anticipating when the time is coming so that 7 they're building up that amount. 8 But in other words, in -- I think 9 that that amount right there is part of a primary 10 reason that we would, through our proposal, want to 11 review and look at what organizations keep as 12 operating expenses and look at putting a cap on 13 that, moving some of those moneys out of that fund 14 and making some actual charitable distributions. 15 COMMISSIONER CLOWE: Well, I want to 16 put a red flag on that number because I think that 17 it indicates an issue that could be a concern -- 18 could be concerning on the part of the sunset staff 19 and the legislature at some point in time. To me, 20 that raises the issue of why is all this money 21 sitting there the way it is and not going on out. 22 And I'm going to be asking the folks 23 from the public to help us understand that from 24 their viewpoint, as well as your viewpoint, in the 25 questions that I have in my mind about that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 21 1 Then additionally, you made a 2 comment about the single unit revenue sharing. 3 That issue, you indicate, is one that you're not 4 opposed to in a generic sense but that you don't 5 see it as part of those issues which have come 6 under scrutiny at this point in time raised by the 7 sunset staff. 8 Do I understand your response on 9 that correctly? 10 MR. ATKINS: Yes, sir, that's 11 correct. 12 COMMISSIONER CLOWE: Anything to add 13 on that? 14 MR. ATKINS: Well, again, in my 15 opinion, the concept of revenue sharing -- that is, 16 all of the organizations in a hall, if you have up 17 to seven organizations essentially keeping one set 18 of books for their accounting purposes -- I see as 19 a fundamental change to the way we're conducting 20 and operating bingo in this state. 21 As it is now, each licensed 22 organization keeps their own set of books, and they 23 pay for their own expenses. So it's true that you 24 have, in one -- if you have one hall with seven 25 organizations, you can have workers in that hall WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 22 1 getting seven different paychecks, or you can have, 2 you know, several -- seven different checks going 3 in the utility bill, with each organization paying 4 their percentage of those expenses. 5 It's not so much a burden on us in 6 terms of having to audit the books, in that we 7 generally -- whenever we go to a hall and conduct 8 an audit, we will generally audit all of the 9 organizations in that hall. But from just an 10 overall simplification process -- both for the 11 organizations and, I think, probably ultimately for 12 us -- revenue sharing is probably something that 13 deserves further consideration. 14 But again, we don't see it being 15 tied to this particular issue. Some of the 16 discussion has been that the reason revenue sharing 17 would be tied to this issue is because you have 18 some organizations in a hall that play on a more 19 profitable night -- say, Saturday night -- as 20 opposed to organizations that play on a Monday 21 night, so that their receipts aren't as high. 22 Well, you know, you oftentimes hear 23 the argument that bingo is a business. Well, if 24 bingo is a business, some nights are going to be 25 more profitable than others, and that's decisions WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 23 1 that those organizations have to make. But -- so 2 in that sense, we don't see this issue being tied 3 to the issue of charitable distributions; we see it 4 being tied to one of operations. 5 COMMISSIONER CLOWE: And to your 6 knowledge, who makes that decision about which 7 charity plays on which day? 8 MR. ATKINS: Well, under the Act, it 9 should be each organization who is deciding their 10 own times. They may get together and, you know, 11 decide amongst themselves. And what many 12 organizations do is they will swap out times. 13 We'll get a number of amendments from a hall 14 saying, you know, take everybody that's playing on 15 Saturday and switch them with everybody that's 16 playing on Monday. So that's how some halls now 17 will even out those revenue streams. 18 We have heard testimony in previous 19 hearings that the lessors at the hall will make 20 recommendations to the organizations as to who 21 should play when and the games they should be 22 playing. 23 COMMISSIONER CLOWE: So it might be 24 a consensual decision, to some extent, or it might 25 be a directed decision to some extent? You'd have WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 24 1 to look at each individual operation to know what 2 the facts were there? 3 MR. ATKINS: Yes, sir. 4 COMMISSIONER CLOWE: Anything 5 further before we move on, Counsel? 6 MS. KIPLIN: Well, I just wanted to 7 talk about the -- and focus on the staff 8 recommendation and make sure that we're all 9 understanding that it's going to require some 10 statutory changes. And I think that's clear, but I 11 want to make sure that we have that discussion. 12 And changing the formula, I think, will obviously 13 require a statutory change with regard to allowing 14 money to be -- 15 COMMISSIONER CLOWE: Excuse me. 16 "Changing the formula," you mean going to unit 17 revenue sharing? 18 MS. KIPLIN: In terms of the 19 distribution of all funds less what's defined by 20 rule in terms of reasonable and necessary expenses, 21 I think that there are some issues with regard to 22 some of the language in the statute that I would 23 want to see clarified so that there is no 24 conflicting language or an argument that there is 25 some conflicting language with regard to that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 25 1 approach. 2 With regard to retaining money for 3 the operating capital, if we were to go to a 4 formula whereby all funds, less these reasonable 5 and necessary expenses, are to be distributed, then 6 I think we're going to have to identify those funds 7 that are going to be held back, so to speak, as 8 reasonable and necessary expenses for future use, 9 because I think that's what we're talking about in 10 terms of being able to pay rent and when there is a 11 rainy day and the sales didn't drive it and so 12 forth. 13 COMMISSIONER CLOWE: How do you see 14 those -- you say "identify." How do you see that 15 as a practical matter? 16 MS. KIPLIN: Well, I think it's 17 going to have to flow from the statute, so there 18 will need to be changes. And then I think the 19 reasonable and necessary expenses, by rule, will 20 define "hold back for operating costs" as part of 21 reasonable and necessary expenses. 22 That's what I'm envisioning. 23 Mr. Atkins and I have not had a chance to visit 24 with -- and on that, I see Mr. Bresnon shaking his 25 head no. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 26 1 So that's what I'm envisioning, and 2 I'd like to hear some more dialogue on that. 3 But I do see a need for change under 4 this scenario. I think there will be a need for a 5 statutory change to make it clear, because there is 6 language in here that I think will be conflicting 7 if we just decide we've got the current law, we can 8 just do rule making. I don't think it's that easy. 9 And you've heard some comment about the rule 10 making. 11 COMMISSIONER CLOWE: In regard to 12 that, it's my impression that -- Billy, you're 13 aware that some of your recommendations are going 14 to require the statutory changes. 15 MR. ATKINS: Yes, sir. 16 COMMISSIONER CLOWE: And I think, at 17 least in my mind, there is the mindset that this is 18 the time to do it. At sunset review is an 19 excellent time to examine the statute and ask for 20 those changes that we think would be better. 21 MR. ATKINS: We fully anticipate 22 this recommendation requiring statutory change. 23 COMMISSIONER CLOWE: That was my 24 assumption. 25 MS. KIPLIN: Okay. I just want to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 27 1 make sure we got it out there and it was clearly 2 expressed -- 3 COMMISSIONER CLOWE: And when is the 4 last time the statute was amended, if ever, since 5 it was passed 20 years ago? 6 MR. ATKINS: I'm sorry? 7 COMMISSIONER CLOWE: When is the 8 last time the statute was amended, if ever, since 9 it was passed 20 years ago? 10 FROM THE FLOOR: '97. 11 MR. ATKINS: '97. 12 COMMISSIONER CLOWE: '97? 13 MR. ATKINS: Yes, sir. 14 COMMISSIONER CLOWE: Okay. Well, 15 I'm not afraid of that aspect of it. As a matter 16 of fact, I would welcome that to improve the 17 statute, hopefully. 18 MS. KIPLIN: And let me follow up on 19 some questions that I heard Mr. Cox ask regarding 20 sanctions. I envision that at some point, there 21 will be -- and we've had discussion about this, on 22 the standard penalty charge, and there is a 23 recommendation that there will be a standard 24 penalty charge. 25 And I envision that this is just WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 28 1 going to be one of those particular potential 2 violations that there will be a standard penalty 3 charge in terms of first, second, and third 4 offenses, or however we sit down and we do that by 5 rule making. But I clearly think that can 6 accomplished by rule making. 7 The one item that I really wanted to 8 point out under issues, on that first sentence -- 9 where it says use of the basic formula which would 10 require every organization to make a distribution 11 at least annually, or show just cause as to why 12 they should continue to be licensed if they were 13 not maintaining a positive cash flow -- I don't 14 think the current language in the Bingo Enabling 15 Act envisions shifting the burden to a licensee to 16 prove just cause why they should keep their license 17 in this kind of particular situation. 18 I think under application, denials, 19 statutorily, there is a burden shift, but that -- 20 if what we're envisioning is imposing a sanction 21 under a standard penalty charge, and if somebody 22 doesn't want to agree to that sanction under that 23 scenario, I don't think the current language will 24 allow that shift of a burden. 25 COMMISSIONER CLOWE: I think that's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 29 1 right. 2 Do you agree with that, Billy? 3 MR. ATKINS: Yes, sir. 4 COMMISSIONER CLOWE: Okay. 5 MS. KIPLIN: And I will say that my 6 comments I'm putting out here are the first time 7 that Mr. Atkins has heard me talk on this, mainly 8 because there has been a logistics matter. And I 9 think we can work through this. 10 MR. ATKINS: And I guess also for 11 purposes of clarification, both on this issue and 12 our following recommendation, we fully envision 13 them requiring a statutory change and, potentially, 14 rule making. And we haven't been the devil in this 15 process and detailed every, you know, conceivable 16 area where that could be required. We've put 17 forward a broad recommendation, much along the 18 lines of what the sunset staff did. 19 COMMISSIONER CLOWE: Just so that I 20 understand what this change is we're talking about 21 in this proposal, in the past, in the audits where 22 contributions haven't been made, nothing happened 23 as a result of that? 24 MR. ATKINS: Not if it was in 25 compliance with the formula. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 30 1 COMMISSIONER CLOWE: And it has 2 been, generally, as we understood it and to the 3 best of the audit staff's ability. And what we're 4 talking about now is a discipline that would apply 5 that could put charities out of business. 6 MR. ATKINS: Yes, sir. 7 COMMISSIONER CLOWE: And I think 8 that's the issue that we needed some clarification 9 on at the sunset committee meeting, where 10 Representative Gallego was saying that he thought 11 that the division should deal with that problem. 12 And I think I responded that to my knowledge, on 13 advice of our general counsel, the division was not 14 in a position to deal with that under the current 15 statute. 16 We're talking about a different 17 situation now, where charities that don't meet a 18 requirement that this commission might recommend 19 and might be adopted by the sunset committee and 20 might be embodied in a statute, would go out of 21 business. 22 MR. ATKINS: That's correct. Under 23 the current formula that you're talking about, an 24 organization could be required to make, say, a 25 $100 distribution. Well, if they only made a $50 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 31 1 distribution, they're in violation of the Act. And 2 if it's uncovered, they're sanctioned under the 3 Act. 4 But that same organization -- 5 conceivably, their required distribution could be 6 zero. And if they make zero distribution, they're 7 in compliance with the Act. 8 COMMISSIONER CLOWE: I think, 9 perhaps for some folks that maybe are looking at 10 this for the first time, that's a point that needs 11 a good explanation. 12 Okay. Does that cover everything 13 on 4.1? 14 We're going to hear from members of 15 the industry and the public, Billy, but we'll ask 16 you to go ahead with the additional recommendations 17 you have. 18 MR. ATKINS: Thank you, 19 Mr. Chairman, Commissioners. 20 The next issue is Issue 5, 21 specifically Issue 5.1, relating to the repeal of 22 grandfathered commercial lessor licenses; and 23 Issue 5.2, the repeal of the transferability of 24 lessor licenses. There was testimony that you 25 received the -- I'm sorry, let me back up. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 32 1 I think generally, the reason for 2 the sunset staff's recommendation is their 3 perception that there is an intent among the 4 legislature that when they grandfather a license 5 that eventually that class of licensee will go 6 away. And staff believes that that's a policy 7 issue for the legislature to decide, and not one 8 that we're really adequately suited to address. 9 Again, what we put forward was the 10 issue of simplicity and eliminating complexity for 11 licensees. So given that assumption, it's the 12 staff's recommendation that the legislature 13 eliminate what's called the top-of-the-tier, 14 non-grandfathered commercial lessor. And what that 15 is, is you have an individual -- not necessarily 16 the property owner, but the individual with control 17 over a facility that leases to an organization, and 18 that organization in turn gets a lessor's license 19 and leases to other organizations. 20 We would recommend the elimination 21 of that. And what we believe that will result in 22 is more organizations entering into a current 23 licensing structure known as associations, where 24 two or more organizations will form an association 25 and they will serve as the commercial lessor. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 33 1 We think that it makes the 2 organizations more involved and more responsible. 3 It eliminates one level of licensee that we feel is 4 sometimes burdensome, particularly for small 5 communities where you don't have that many 6 locations to choose from in order to conduct a 7 bingo game. 8 What is required now is, you get the 9 top-of-the-tier organization license; say, a 10 church. They, in turn, lease to an organization to 11 conduct at their location. Well, that organization 12 now has to turn around and get a lessor's license, 13 even if they don't lease to another organization. 14 So we'd like to simplify that 15 structure, and where there is just a single 16 organization, allow them to be able to lease 17 directly from a lessor. If there are going to be 18 two or more organizations, we would like to see 19 them move into the association form of operation, 20 to be the lessor at that location and lease to 21 other organizations. 22 COMMISSIONER CLOWE: Any questions 23 on that? 24 COMMISSIONER WHITAKER: Under 25 current law, if a single charity went to a -- had a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 34 1 lessor's license and did not want to lease with any 2 other charities, what would happen? Would this 3 change that situation? 4 MR. ATKINS: If a single charity had 5 a lessor's license and they were playing at their 6 own location where they weren't leasing from 7 anyone? 8 COMMISSIONER WHITAKER: No. They're 9 playing at somebody else's location. 10 MR. ATKINS: Okay. And they're -- 11 that single organization is leasing from a lessor? 12 COMMISSIONER WHITAKER: Right. 13 MR. ATKINS: And they now -- that 14 single organization has to get a new lessor's 15 license, and they in turn lease to other 16 organizations? What -- 17 COMMISSIONER WHITAKER: Would this 18 change that situation? 19 MR. ATKINS: It would change the 20 current operation, in that, that single 21 organization that's serving as the conductor/lessor 22 would form an association with at least one other 23 organization conducting at that location, and they 24 would be the single lessor at that organization -- 25 at that location. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 35 1 COMMISSIONER WHITAKER: And that 2 would be true even if they didn't lease to anybody; 3 they just were playing bingo themselves? 4 MR. ATKINS: If they didn't lease 5 from anyone, then they would still lease from the 6 individual supplying the organization. It's only 7 when they form an association that they're not 8 required to get the lease above them. 9 COMMISSIONER CLOWE: And that's a 10 matter of $100 and a license? 11 MR. ATKINS: It can be as little as 12 $100. If they're not leasing to anybody, it would 13 be $100, yes, sir. 14 COMMISSIONER COX: Billy, the 15 initial issue here was repeal of the section of the 16 Bingo Enabling Act that allows a lessor's license 17 to be grandfathered and to repeal the 18 transferability of lessors' licenses. Tie in for 19 me how your proposal addresses that issue. 20 MR. ATKINS: It doesn't. The repeal 21 of the grandfathered lessor and the 22 transferability? 23 COMMISSIONER COX: Uh-huh. 24 MR. ATKINS: It doesn't. 25 COMMISSIONER CLOWE: A very incisive WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 36 1 question. 2 And I would ask you, then, have you 3 discussed this with the sunset staff, and do you 4 have their reaction? 5 MR. ATKINS: At the same time that I 6 forwarded the recommendations to you, I sent them 7 to Karen Latta, of the sunset staff. I have not 8 spoken to her since then, no, sir. 9 COMMISSIONER CLOWE: Okay. I don't 10 believe we have any more questions at this time on 11 this issue. 12 MR. ATKINS: I won't go far. 13 COMMISSIONER CLOWE: I'm going to 14 ask for public comment on these issues at this 15 time, and before I call on the first speaker, I 16 would like to read into the record those 17 individuals who are making an appearance and have 18 indicated they do not wish to testify: 19 Velva Markham, from DeSoto, Texas, 20 representing AMVETS, in support of the Bingo 21 Interest Group; E.J. Fogleman, AMVETS No. 83, in 22 support of the Bingo Interest Group; Maggie 23 Fogleman, from Lancaster, Texas, in support of the 24 Bingo Interest Group; Darlene Mashburn, from 25 Fort Worth, Texas, in support of the Bingo Interest WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 37 1 Group, Minnehaha Council 23; 2 Dolores Oelfke -- I believe that's 3 Fort Worth -- representing the Greater Fort Worth 4 Civic Leaders, supporting the Bingo Interest Group; 5 Charles Williams, Jr., from Fort Worth, Texas, 6 American Legion, for Items 3, 4A, and No. 5, I 7 believe it says here; Charles E. Hutchings, AMVETS, 8 Redmen, Items 4 and 5; 9 Pat Webb, from Seagoville, Texas, 10 representing AMVETS Dallas in interest to Items 4 11 and 5, the Bingo Interest Group; Donny Young, from 12 Crandall, Texas, representing AMVETS, supporting 13 the Bingo Interest Group; 14 I believe it's V.R. Rahm, Terrell, 15 Texas, Rowlett Needy Children's Fund, supporting 16 the Bingo Interest Group; William -- I believe this 17 is Smith, William T. Smith, representing himself 18 for the Bingo Interest Group; Mark McCafferty, from 19 Fort Worth, Texas, representing Redmen Tribe 34, 20 supporting the Bingo Interest Group 21 recommendations; 22 Lisa Alford, representing -- JWI, I 23 believe it is -- 1336, in regard to Items 4 and 5, 24 supporting the Bingo Interest Group; Renee Tucker, 25 representing JWI 1045, Items 4 and 5 and 3, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 38 1 supporting the Bingo Interest Group; 2 Michael Zimmerman, representing the Ethel Daniels 3 Foundation, Items 4 and 5, supporting the Bingo 4 Interest Group. 5 Is that everyone who has filed an 6 appearance form but does not wish to testify? 7 Very well. Then I'd like to call 8 on, in the order I received them, those individuals 9 who have indicated a desire to testify this 10 morning. 11 First, Mr. Steve Bresnon. 12 MR. BRESNON: Thank you, 13 Mr. Chairman and Commissioners. I'm Steve Bresnon, 14 on behalf of the Bingo Interest Group. I really 15 appreciate the amount of time and attention to 16 detail that you-all are putting into these issues. 17 I'd like to start by expressing, on 18 behalf of a lot of people, a little bit of 19 frustration; not with you-all, but with the process 20 a little bit. You are -- as my good friend 21 Don Bishop, who couldn't be here today, said, we've 22 started with a false presumption, and now we're 23 chasing it all over Texas. 24 Under the current law, charities 25 would be required to distribute -- dependent on WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 39 1 which set of numbers you're using -- somewhere 2 between 11 and $13 million a year. But the fact 3 is, they actually distributed either 33 and some 4 change or 34 and some change, which tells me that 5 they don't have the need to have -- to be lit up to 6 get this money distributed to charitable purposes. 7 On the other hand, Mr. Chairman, you 8 have pointed out something that -- a drum that I've 9 been beating for years, which is about the 10 undistributed proceeds that have accumulated in 11 these bingo accounts over a goodly period of time; 12 by the set of numbers the staff has given you, 13 24 million. I think we figured at one time, they 14 were as high as 28 million. 15 Last year, a bunch of people drew on 16 those undistributed proceeds to be able to make the 17 distributions that they did make. So having those 18 proceeds in a lean time in a bad year was a very 19 important thing, and I think that was over 20 $6 million that they were able to draw last year to 21 do that. 22 On the other hand, another set of 23 them increased those undistributed proceeds by 24 something over $7 million. My street sense tells 25 me that people have been getting penalized for WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 40 1 engaging in that conduct. For many years now, 2 people in bingo have not gotten full credit for the 3 amount of money that they have actually distributed 4 or actually received in net proceeds, and so it's 5 been a self-defeating exercise for that money to 6 mount up. 7 On the other hand, when 8 General Motors doesn't make a distribution to 9 dividends, it doesn't get penalized in the 10 marketplace when it holds onto some money and 11 builds a new plant and saves for a rainy day or 12 waits a while to figure out what to do. 13 And so there is a lot of frustration 14 on behalf of people in the bingo industry that 15 we're working hard to solve a problem that we don't 16 believe exists. The -- that $34 million -- I'm 17 going to revert to the sunset staff report's 18 numbers here, just so we're all on the same page. 19 The sunset staff said they had this 25 percent 20 growth. Well, if you run the numbers, that would 21 generate about 41 million and some change that 22 would have been distributed last year. 23 If you take the 34 million that they 24 say was distributed and you add the 7 million that 25 built in those accounts, you close the hole and you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 41 1 arrive at just about exactly the same place. And 2 people know that. They draw down this money when 3 they need it. If they give a kid a scholarship, 4 maybe they want to give that kid a scholarship and 5 be assured of being able to do it for four years so 6 they can get a degree. 7 So that money builds up in those 8 accounts. Could it have built up in the general 9 fund? It surely could. It could build up over in 10 the general fund. But my point is, it's not that 11 people have been engaging in devious or irrational 12 or scoundrelous [sic] behavior -- if "scoundrelous" 13 is a word. They've been conducting their affairs 14 in a reasonable fashion. 15 I want to move on to my 16 recommendations now, because, Mr. Chairman, you've 17 been fabulous to us. You've spent a lot of time in 18 these Bingo Advisory Committee meetings. 19 Commissioners, you-all have spent a lot of time on 20 bingo issues. We wouldn't be sitting here today if 21 previous commissions had paid this kind of 22 attention to people and their problems in the bingo 23 world. So we really, really appreciate that. 24 We've tried to organize our 25 testimony in a way that will be succinct and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 42 1 coherent around the several issues that I've handed 2 out to you. Mr. Chairman, I took your admonition 3 not to give you more than one page about anything, 4 except that I separated them out from Issue 4.1 and 5 4.2. And then the page here is an excerpt from the 6 existing statute, which will come into play on 7 Issue 4.2. 8 We have worked with the staff, at 9 the chairman's request, to look for workable 10 changes that could be made, with the understanding 11 that we're reluctant to be making changes because 12 things are working. The sunset staff, frankly, was 13 just off base. But nonetheless, we understand the 14 process. Most of the people have been involved in 15 this for a long time. 16 So we're inching forward here, 17 looking for ways to do things that may be helpful. 18 Surely the staff's recommendation on the 19 distribution would move money from the bingo 20 account into the general fund, and we would, all of 21 a sudden, get credit for it. That's the good part. 22 The bad part is the recommendation by the staff to 23 adopt rules on what are reasonable and necessary 24 expenses. 25 We're asking you not to make that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 43 1 commitment to do that by rule. And here is why. 2 There is not a shred of evidence that expenses are 3 a problem except in some case-by-case situations. 4 Commissioner Cox, I appreciated you 5 attending about a two-hour meeting. I think it may 6 have been longer. It may have been -- it probably 7 seemed longer than two hours. But we gave a lot of 8 discussion to the issue of expenses. And I think 9 it's fair to characterize that discussion as there 10 are some case-by-case problems, but in general, 11 there are not problems with expenses. 12 Expenses, for people who are law 13 abiding and well-intended, are what they are. 14 There is rent, and there is a market setting rent. 15 And for the most -- for the largest part, lessors 16 are setting rent based on the market and some 17 ability to pay. And you've heard that testimony 18 over and over. 19 I want you to understand one fact. 20 The sunset staff report says that lessors could 21 have charged an individual -- a grandfathered 22 lessor could charge $436,000 a year just for 23 renting a building. 24 I want you to know that if the 25 grandfathered lessors in this state did that, they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 44 1 would have collected $101 million in rent last 2 year. As it was, all lessors -- grandfathered and 3 non-grandfathered -- collected about $37 million in 4 rent. 5 So that tells me that while there 6 may be -- the law may allow people to overreach, on 7 the whole, they are not. So I would ask you not to 8 adopt a resolution to a situation that does not 9 exist. 10 Here's what actually happens on a 11 day-to-day basis. Your staff audits. They 12 provided to the sunset commission this notebook, 13 and it has in it a chart with many, many, many 14 violation codes in it. On the issue of reasonable 15 and necessary expenses, they have found about 16 53 violations, on average, in each of the last 17 three calendar years. 18 This is at a time in which they have 19 been stepping up the number of audits. That fell 20 from about -- I think it's 38 percent of all audits 21 in the first -- in '99, down to about 20 in 2001. 22 There's a lot of people out there. 23 There's a lot of checks been written, and a lot of 24 expenses. I know one of those, quote, violations, 25 was in a hall that I represent, where they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 45 1 inadvertently paid the distributor's invoice twice. 2 When that was discovered, they called the 3 distributor, and the distributor checked it out. 4 The distributor wrote them a refund check, and it 5 was solved. 6 So -- now, we also heard in our 7 meeting of somebody that charged 70 grand for a 8 janitorial service that should have cost about 9 10 grand. And what they did was, the staff took 10 action and they remedied that situation. They 11 prohibited the expenditure, and that charity's 12 situation was fixed. 13 I submit to you that you have the 14 ability, under current law, to regulate expenses 15 and keep them in the reasonable and necessary 16 range. So we would like to recommend -- as an 17 alternative to the one sentence in Mr. Atkins' 18 document that says, through rule, regulate these 19 expenses -- that you tell the legislature we have 20 the power to do it; we've been doing it; should we 21 determine on a statewide basis that there is a 22 problem, then we'll adopt rules to address that 23 problem. 24 The alternative to that is to get 25 you mired in a field that every other aspect of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 46 1 state government is getting away from. We don't 2 regulate trucking anymore. We don't say you can 3 have one rate for 100 pounds of feathers going from 4 Waco to Dallas, and a different rate for 100 pounds 5 of blue jeans going from Waco to Dallas. That was 6 absurd, I think, by just about everybody's 7 estimation. 8 We don't regulate phone rates; we 9 have competition. We don't regulate electricity. 10 But now we're going to have an elaborate regulatory 11 apparatus to come in and say we're going to 12 regulate your expenses. 13 In our discussions, we've talked 14 about everything from regulating the amount of 15 prizes that you can give out to how much you can 16 pay a hall worker. I guess we've talked about 17 janitorial, since we've had an example of it. 18 You're either going to get down to 19 that level of detail, or you're going to have a 20 percentage rule that takes us right back to the 21 sunset staff recommendation, which has been 22 demonstrated, when it cuts across all the different 23 permutations and combinations and situations that 24 people find themselves in, to have a devastating 25 and unintended effect. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 47 1 So I would ask you that if we're 2 going to go down the road with you to making a 3 change that goes in the direction of net proceeds 4 here, then to take us with you in a way that 5 doesn't insult us on the expense side and doesn't 6 bog the agency and the state down into making a lot 7 of inappropriate decisions. And frankly, you don't 8 have the internal capability to do that, in my 9 estimation. 10 So that would be number one on the 11 expense issue. Number two would be this issue that 12 Commissioner Cox was talking about, about the 13 transferability between accounts. If you set the 14 working capital amount with a high degree of 15 acuity, then you don't need transferability. I 16 don't think we have the ability to do that and 17 anticipate all circumstances. 18 So what we're saying is, set that 19 working capital amount, but allow people to move 20 money around. I, personally, am for a file-and-go 21 basis. I think we did that on an interim basis for 22 some trucking stuff at a point in time. 23 Let them file, let them say we're 24 moving this money. If the staff wants to come back 25 and look at it and determine whether there was a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 48 1 reasonable and necessary purpose behind that, we 2 have no problem with it. I think you're going to 3 hear some testimony that this is not a one-hour 4 process on these loans. It's a much more 5 cumbersome thing, and I don't think that that's -- 6 It's been represented as no big deal. And frankly, 7 I think it is a big deal. 8 The third thing that we would ask is 9 this revenue sharing idea. And I know -- 10 Mr. Chairman, I'm bending over backwards to respect 11 your admonition to keep this to Issue 4.1 and 12 Issue 5 -- or Issue 4 and Issue 5 in the sunset 13 staff report. This is integrally related to 14 Issue 4. 15 The sunset staff's main factual 16 premise for their conclusion was that 307 charities 17 were not required to make a distribution last year. 18 Well, we looked at that, and it turns out that 19 those -- that same group of charities also made 20 $641,000 worth of distributions, even though they 21 weren't required to. 22 A goodly number of those were not 23 required to because they were playing in times at 24 which it's tough to make a buck. Playing at that 25 time and keeping the business open and keeping WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 49 1 customers coming in benefits the charity who has 2 the Saturday night spot or whatever spot is the 3 optimal spot. 4 What you're going to hear in a 5 little while is that that moves around. You can be 6 on top one day in terms of having a good spot, but 7 you may not be the next day or the next month. 8 What we're asking is, number one, if you do the 9 revenue sharing, you're going to equalize that 10 revenue, and that guy on the bottom is going to 11 have a chance to make some money. When he's making 12 a charitable contribution to the operation of a 13 joint enterprise, he's going to get a chance to 14 benefit from it. 15 I know, Mr. Chairman, that there is 16 a concern about who makes that decision; will they 17 be forced into making it. Economics are forcing 18 people to make that decision today. Do lessors 19 have a role in that? Yes, sir, they certainly do. 20 A lessor organizes the hall. 21 I know that you may hear today that 22 some charities, when they come to -- they want to 23 play in a hall and they apply to play, they say 24 this is the way we do it; are you in agreement with 25 doing that. And they say yes. They have a chance WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 50 1 to go somewhere else. They elect to stay there and 2 participate as a unit. 3 Here is what's happening right now. 4 This is being done right now, except all this check 5 writing is occurring. What happens is, is they 6 file amendments once a month or twice a month or 7 however often is necessary, and they're sending an 8 amendment on their playing time down here to 9 Austin, and your staff processes it. And that's a 10 pretty quick and dirty process to do. 11 The problem with it is, is it's a 12 trap for violations. If you fill out the form 13 wrong, if you get the wrong charity in the right -- 14 wrong line, you've got a violation for playing 15 outside your licensed time. Your staff does have 16 to process those. 17 I think you're going to hear in a 18 minute that -- about situations where auditors come 19 out and they audit a couple of charities, and then 20 they go away. And they come back sometime later 21 and do one more, and then they come back. And it's 22 incredibly cumbersome. That's costing us money. 23 If we have more money, we've got more to 24 distribute. 25 Item 4 is about distributing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 51 1 money -- it's also increasing complexity, and 2 Item 4 is about producing simplicity. So I think 3 this is integral. This is important to Item 4, and 4 it's a way to do something for the charities. It's 5 a recommendation you can make for the charities at 6 a time when people feel like something is being 7 done to them unnecessarily if there's no problem. 8 That's item -- that's Issue 4. If 9 you would like me to stop -- that's Issue 4.1. I 10 can go on to the charitable -- to the IRS issue, or 11 I can stop and answer questions. 12 COMMISSIONER CLOWE: Let's see if 13 there are any questions. 14 MR. BRESNON: Yes, sir. 15 COMMISSIONER WHITAKER: Yes, there 16 are. 17 Steve -- 18 MR. BRESNON: Yes, ma'am. 19 COMMISSIONER WHITAKER: -- you say 20 that a lot of the charities that weren't required 21 to make distributions were ones that played on 22 Monday. How rigorous was your study? I mean, is 23 there something you can cite me to? 24 MR. BRESNON: It's anecdotal. I 25 think the staff will verify that there are people WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 52 1 who play -- charities that have -- conduct bingo in 2 the less than optimal times and that those people 3 either -- they either have a very low distribution 4 requirement or no distribution requirement. 5 Now, we haven't gone, you know, step 6 by step to identify those 307 with a hall. Some of 7 those 307 may play once a year, and they may give 8 out all the money and not be required to make a 9 distribution. There's multiple reasons. 10 But I'm representing to you, on the 11 basis of the halls that I represent, that there are 12 people out there that either will have no 13 distribution or will have a minor distribution to 14 make. 15 COMMISSIONER WHITAKER: The revenue 16 sharing idea, what would incentivize a charity that 17 gets the, quote, good days, to share their take 18 with those who have bingo on the bad days? 19 MR. BRESNON: Well, there are 20 several things. First of all, the folks that have 21 been involved in it at any time have seen the 22 pendulum swing. Like I said before, Saturday may 23 be a good day right now, but Wednesday may be, in 24 another month or two. 25 And you're going to have a gentleman WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 53 1 testify to that very fact. He knows -- he's from a 2 charity, a volunteer fire department. He's going 3 to tell you about that circumstance and how it 4 affected them. 5 So there's a -- it's rational 6 behavior. What will incentivize them is, is they 7 don't end up writing -- everybody doesn't end up 8 writing checks to the same worker. So they see 9 that their check writing costs and their account 10 maintenance costs, their inventory maintenance 11 costs, all of those things come down. So the 12 ability to have more money to distribute would 13 incentivize them. 14 Most of these folks understand that 15 the hall that they're in is a unit of people that 16 are depending on each other. So there is an 17 economic and a social reason for them to engage in 18 that. 19 COMMISSIONER WHITAKER: For the 20 revenue sharing, then, you're also talking about 21 expense sharing. Right? 22 MR. BRESNON: Yes, ma'am. We're 23 talking -- in essence, we're talking operating as a 24 unit, yes, ma'am. 25 COMMISSIONER WHITAKER: Like, all of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 54 1 them would be an association -- 2 MR. BRESNON: Yes, ma'am. 3 COMMISSIONER WHITAKER: -- in 4 essence? 5 MR. BRESNON: Yes, ma'am. 6 COMMISSIONER WHITAKER: Obviously, a 7 lot of what's driving this whole concern by the 8 sunset commission and by the legislature is the 9 numbers that show, for example, 119 charities that 10 had zero cash flow or negative cash flow, and the 11 concern that if the overall purpose of allowing 12 bingo by charities is for charitable distributions, 13 then at some point in time, you have to have 14 something other than the honor system to regulate 15 that that purpose is being fulfilled. 16 MR. BRESNON: Yes, ma'am. 17 COMMISSIONER WHITAKER: I hear you 18 saying that basically, the honor system works, and 19 so we should keep it in place. If the sunset 20 commission were not to accept it, nor the 21 legislature, what would be a test, short of an 22 honor system, that you think would satisfy that 23 overarching statutory concern? 24 MR. BRESNON: Let me just -- let me 25 back up for just a minute. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 55 1 I think the honor system works in 2 terms of expenses, in terms of moving your times 3 around. And I don't think there is a lot of -- you 4 know, of arm twisting and leverage being exercised 5 out there. 6 I think that the people that I 7 represent are uniformly of the opinion that if a 8 charity is not making money, doesn't have money to 9 distribute over some period of time -- I think we 10 used to think in terms of a year or so -- you shoot 11 them in the head. That's it. They're gone. Okay? 12 But on the other hand, you need to 13 remove these barriers that are keeping people who 14 are engaged in otherwise laudable conduct from 15 making money. We need to get those out of the way 16 and let them make some money. 17 COMMISSIONER WHITAKER: Okay. Let 18 me follow up on what you said. 19 MR. BRESNON: Yes, ma'am. 20 COMMISSIONER WHITAKER: So you're 21 saying that if they didn't make any money for 22 distributions, they should be terminated. 23 MR. BRESNON: Yes, ma'am. 24 COMMISSIONER WHITAKER: Would you 25 set a level above one dollar, and if so, what WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 56 1 should that level be? 2 MR. BRESNON: I think theoretically, 3 I would, but I have no idea, you know. I just 4 don't know -- 5 COMMISSIONER WHITAKER: Would you 6 help us think that through? 7 MR. BRESNON: But let me -- I'll 8 help you think it through next year. Let me -- I 9 mean, I'm just, you know, being facetious. 10 But let me go at it this way. If 11 I'm a small charity -- and I passed this out to the 12 sunset commissioners, and I wish I had it here 13 today, a little exhibit that demonstrates -- and 14 bear with me on my numbers, because I'm doing this 15 from memory. 16 If I've got 75 seats in the back of 17 my veterans organization, which is primarily a bar, 18 and people come in to play on Saturday night; and I 19 fill up every seat and they spend 20 bucks a head, 20 I can give the absolute most favorable circumstance 21 on expenses, and I'm going to only end up with 22 350 bucks. 23 If I take a 500-seat hall and spend 24 the same $20 and fill it up on Saturday night, that 25 350 bucks may be 20 percent of my gross. If I take WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 57 1 a 500-seat hall and fill it up, I'm going to get a 2 smaller percentage of my gross, but it's going to 3 be three times my 350 bucks. And so I would ask 4 you, would you rather have -- get 10 percent of 5 1,000 or 5 percent of 50,000? 6 COMMISSIONER WHITAKER: Or the 7 greater of. 8 MR. BRESNON: Yes, ma'am. So it's 9 tough to say. I think the staff and I and 10 Steve Fenoglio and Bill Pewitt and Joe Garcia and 11 everybody -- and Steve Matamores and everybody who 12 has participated in this has gone over this ground, 13 you know, a lot; why is there commercialism in 14 charitable bingo. And at the risk of using an 15 unfortunate analogy, it's the same reason that 16 Willie Horton had for robbing banks: It's where 17 the money is. 18 71 percent of the charitable 19 distribution in the state was produced by Class J 20 charities. That means they had over 400,000 -- I 21 think over $400,000 a year in gross revenues. 22 Is that right -- 23 FROM THE FLOOR: I think so. 24 MR. BRESNON: -- Class J charities? 25 So 71 percent. Now, their -- the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 58 1 percentage that they're going to have after 2 everything is said and done is going to be a 3 smaller part of the gross than the Class A hall 4 that's probably -- what I described earlier. And 5 so you've got -- I don't know where "J" is in the 6 alphabet, but if that's eight, nine, or ten down 7 the road there, you've got eight, nine, or ten 8 combinations. 9 And now you're dragged into deciding 10 what's a reasonable percentage, dollar amount, or 11 whatever, amongst all those classes, and is that 12 right for The Valley as to Texarkana. And it's 13 just a -- it's a quagmire. And I will submit to 14 you, there is no reason to go there, because it 15 ain't broke. 16 COMMISSIONER WHITAKER: Okay. Let 17 me think about that. 18 MR. BRESNON: Yes, ma'am. 19 COMMISSIONER COX: Steve, you say 20 that expenses are not a problem. And I wanted to 21 just at this point ask Billy -- 22 Billy, do you agree with that? 23 MR. ATKINS: Given our current 24 structure and how things are -- no, I don't think 25 that we've seen expenses be a major issue for you. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 59 1 Like Steve says -- and I appreciate him 2 complimenting our training program -- apparently, 3 that's decreasing, and I think it's due in large 4 part to our training program and the ability to get 5 information out to organizations. 6 Under the current structure, no, I 7 can't say that expenses are any kind of a 8 dysfunction -- or any kind of a problem. Given any 9 type of proposed or future recommendation, I don't 10 know that I can make that same statement. 11 COMMISSIONER COX: Well, if expenses 12 are not now a problem, what would be the need for 13 your recommendation to -- through rule, identify 14 what would be considered reasonable and necessary 15 expenses? 16 I think that's what I hear you 17 objecting to, Steve. 18 MR. BRESNON: Yes, sir. And let me 19 back up -- let me characterize this right. 20 I don't think we're far apart here. 21 And this is a nuance. Let me put my government hat 22 on because that's -- I've been in government more 23 than I've been out here. You go up to the 24 legislature and tell them, through rule, we're 25 going to take care of these expenses. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 60 1 And next year, you're going to have 2 people looking at you, the adopted rules, to take 3 care of these expenses. And you're going to have 4 staff coming to you and saying we went up there and 5 told them we were going to do something about these 6 expenses. 7 And let me give you one more piece 8 of government information. In the Appropriations 9 Act, your performance standard is based on 10 maximizing the charitable distribution. So then 11 you can get -- your mindset can be, well, to meet 12 our performance standard -- actually, it's kind of 13 jumbled. It says to make sure that the games are 14 conducted fairly to maximize distributions. So 15 it's not sure, you know, which is the primary goal 16 there. 17 But the bottom line is, you can see, 18 from my point of view, in advising my clients, that 19 if you get into that mindset that we have to 20 maximize distribution, you come in and say, well, 21 expenses can't be more than 70 percent -- we're 22 right back to the sunset staff. 23 And if you don't take a bright-line, 24 across-the-board approach, then you get sucked into 25 more and more and more detail, which I don't think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 61 1 you have the internal capability to do, not to 2 mention that it's just not -- it's not necessary. 3 I'm suggesting that the way you're 4 going after expenses now works. And the nuance is, 5 don't make this commitment up there that you're 6 going to do that and then drag yourself into the 7 inevitable quagmire that follows. 8 Tell them we can do it, we have the 9 authority to do it, we do do it, and if there is a 10 statewide problem, we'll do it by rule. Frankly -- 11 and I think Kim would agree -- you have the 12 authority under current law to adopt rules about 13 expenses. We could leave -- if that's the sole 14 issue, we can all leave here today, and you don't 15 have to even talk to those guys up there anymore 16 because you could do that now. But nobody has 17 found it necessary. 18 In fact, there used to be rules 19 about expenses. I think it was -- 50 bucks was the 20 maximum you could pay a worker in a -- for a bingo 21 session. We don't have those anymore, and yet 22 we're not -- until today, we really haven't -- 23 there has been no calamity, there's been no -- are 24 there instances where somebody has probably paid 25 too much and they paid the -- you know, somebody's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 62 1 son too much? Yeah. But those are being 2 shepherded. They're known about, they're being 3 shepherded, they're being dealt with. 4 COMMISSIONER COX: Do you agree with 5 what he said? 6 MS. KIPLIN: I think there's a 7 provision that provides general rule making 8 authority to enforce and administer the Bingo 9 Enabling Act. My concern, as the lawyer for the 10 agency, is the picking and the choosing. And I 11 know that that's going on right now. And of 12 course, it's specific to a unique set of facts or a 13 set of circumstances when an auditor goes and 14 audits the books. 15 I'm not troubled by that, but I 16 would be troubled if there was a general policy 17 that was going to be applicable to a group of 18 licensees, because I think then, the Administrative 19 Procedure Act would require rule making. 20 And so I think if the bingo division 21 is going to continue to look at this in an 22 individual manner, that's fine. My preference 23 would be if it's something that's going to be 24 generally applicable in terms of policy, in terms 25 of setting discrete amounts within each one of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 63 1 these categories, then I would encourage rule 2 making to proceed. 3 COMMISSIONER COX: Thank you. 4 Yeah, Billy. 5 MR. ATKINS: I just wanted to say 6 one other thing. 7 I think part of the reason that -- 8 you know, Steve is talking about there not being an 9 issue with expenses, et cetera, et cetera, now. 10 The issue with expenses that we're talking about 11 deals only with this -- primarily with this 12 proposal that we're making. 13 Now, one thing to keep in mind is 14 that the current charitable distribution formula 15 limits expenses that can be deducted. So -- 16 MR. BRESNON: Well, let's -- can 17 we -- let's take that a little -- I appreciate you 18 bringing that up. That -- what that probably means 19 is the current rule is working, but it doesn't just 20 limit expenses. What it says is, you figure your 21 minimum requirement after you deduct out this 22 6 percent of gross, but after you've made your 23 minimum contribution, if you've got more money left 24 over, you can spend every nickel of it on expenses. 25 And the fact is, people are not. If WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 64 1 they were, you could never -- they were only 2 required to make 13 million last year, but they 3 made 33 million. So they're obviously not spending 4 it all on expenses. The 6 percent in there does 5 place a cap, but it's in conjunction with a minimum 6 distribution under this 35 percent rule. The rest 7 of it, if expenses were running amuck, there's no 8 way that people could have done that. 9 They only drew about 6 million out 10 of the undistributed proceeds category. So you 11 take 6, add to the 13, that's 19 -- excuse me. 12 There was $14 million more there that got 13 distributed, obviously beyond expenses. And if 14 people were out of control, they would have gone 15 out and spent that 14 million. Rent is a major 16 expense. Grandfathered lessors could have 17 collected 101 million. All lessors collected 37. 18 COMMISSIONER WHITAKER: Go ahead. 19 COMMISSIONER COX: Please. 20 COMMISSIONER WHITAKER: Two 21 scenarios. 22 MR. BRESNON: Yes, ma'am. 23 COMMISSIONER WHITAKER: What if you 24 took Billy's recommendation and said reasonable and 25 necessary expenses not to exceed the 6 percent WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 65 1 deduction -- that's one scenario -- and otherwise 2 keep it. Or the other would be to allow revenue 3 sharing and inter-fund transferability and then 4 have a gross receipts percentage, a minimum 5 percentage distribution. 6 MR. BRESNON: I don't know that 7 we've walked through that. A lot of where we've 8 come down to -- we're pretty close with the staff 9 even though we're reluctant, and a lot of what 10 we've come down is -- has been by running a bunch 11 of numbers and looking at it and trying to imagine 12 scenarios. 13 If you put the 6 percent -- you run 14 this formula and put the 6 percent in there -- see, 15 under the current rule when you run the formula, 16 you use the 6 percent, and then you distribute 17 35 percent of the remainder. 18 COMMISSIONER WHITAKER: Right. 19 MR. BRESNON: Your wiggle room is in 20 that part that's not governed under the formula, 21 and that enables you to respond to differences by 22 quarter, by Texarkana, by South Texas, by 23 everything. But once you take that 35 percent out 24 and say we're going to limit your expenses to 25 6 percent, you're -- in essence, you're saying that WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 66 1 you have to -- if prizes are 70 percent and 2 expenses are 6, you're basically saying, you know, 3 you've got a gross receipts approach of 24 percent. 4 COMMISSIONER WHITAKER: I guess what 5 I'm saying is -- I'm trying to address what you're 6 saying, is that a lot of people after the 6 percent 7 cap still have money to distribute. 8 MR. BRESNON: Yes, ma'am. 9 COMMISSIONER WHITAKER: And you say 10 that the reasonable and necessary expenses rule 11 works. So if we keep reasonable and necessary 12 expenses as the standard, impose the 6 percent as 13 the upper limit so that there is some kind of 14 bright-line test, maybe loosen up the operating 15 capital issue, put some additional buffer room in 16 there, would that work? Do you want to think about 17 that? 18 MR. BRESNON: I just -- I'll tell 19 you what, I'd hate to think about it alone. 20 COMMISSIONER WHITAKER: Okay. 21 MR. BRESNON: You know, I think 22 it's -- I think the reason I've tried to confine 23 myself to these -- I'm trying to -- let me just be 24 blunt. I'm trying to improve upon what the staff 25 has recommended, even though I don't subscribe to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 67 1 it. 2 COMMISSINER WHITAKER: Okay. 3 MR. BRESNON: And we're in a 4 process, and we're trying to be loyal to the 5 process and respect the invitation to participate 6 in it. And so I'm trying to dress it up with some 7 things that are substantive but they're 8 adjustments, so we might all be able to go forward 9 sort of hand in hand, although some of us will be 10 more reluctant to be holding hands than others. So 11 I just don't know. I'd have to, you know -- I've 12 got David Heinlein back here, and he's a lot 13 smarter about these numbers than I am. 14 COMMISSIONER WHITAKER: What about 15 the alternative, which I said let's assume you did 16 revenue sharing so you could have a pooling of 17 charities. 18 MR. BRESNON: Yes, ma'am. 19 COMMISSIONER WHITAKER: And then you 20 said -- because I understand one of your rationales 21 of that is it would increase the number of 22 charities who can and would be required to make a 23 distribution. Okay. So you have that as an 24 assumption. Would you then be open to some kind of 25 gross revenues required minimum distribution, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 68 1 whatever that percentage would be? 2 MR. BRESNON: I don't know. I'd 3 have to contact -- you know, I'd have to talk to my 4 members, and I suppose that the answer would be, 5 you know, it depends on what the number is, and 6 that number is going to be dependent on whether 7 you're a Class A or Class J charity. Just, you 8 know, a lot of factors. But maybe. I don't know. 9 I'm understanding that we don't have a lot of time 10 to go back to the well and figure that out. But 11 I'll keep working it as long and hard as I -- you 12 know, I need to. 13 COMMISSIONER CLOWE: Could I amplify 14 on the line of thinking that you started? 15 COMMISSIONER COX: Sure. 16 COMMISSIONER CLOWE: Steve, I 17 think -- let's step back to how did we get here. 18 And I think I hear you saying that the staff is 19 doing a pretty good job of identifying expenses 20 now, and to leave it alone. 21 MR. BRESNON: Yes, sir. 22 COMMISSIONER CLOWE: I understand 23 that. I've been there. The problem with that, in 24 this decision the commission is deliberating here 25 now, is that we have a new position that's been WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 69 1 offered by the sunset staff, and that is, we're 2 going to put some people out of business. 3 MR. BRESNON: Yes, sir. 4 COMMISSIONER CLOWE: That's clearly 5 the result of their proposition. And the staff's 6 proposition is let's make it a net proceeds 7 formula. But to get there, they're adding, as part 8 of that proposal, we'll more clearly define these 9 reasonable expenses and the operating account 10 issue. 11 And I think there is maybe some 12 apprehension on the part of your folks. You know, 13 this new definition frightens us, and we don't know 14 what the outcome of that is going to be. And 15 you're pointing out that it's incumbent on a 16 statutory change to make rules. 17 And I have to say I agree with your 18 comments about we don't want more government and 19 more definition; we want to get away from that as 20 much as we can. And you're comfortable with where 21 we are on that right now, insofar as the staff's 22 auditing of expenses themselves. 23 MR. BRESNON: Yes, sir. 24 COMMISSIONER CLOWE: Well, we just 25 didn't wander off into this and find ourselves WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 70 1 thinking this would be a good idea, the definition 2 of expenses and the quantification of an operating 3 capital account. We got there as a result of the 4 recommendation the sunset staff made, trying to 5 come up with something we felt would be as good or 6 better. 7 MR. BRESNON: Yes, sir. 8 COMMISSIONER CLOWE: Am I correct in 9 my thinking on that? 10 MR. BRESNON: Yeah. But I just want 11 to remind you that I went to Lubbock one time when 12 the wind was blowing the wrong direction. Even 13 though I intended to go there, it smelled really 14 bad. 15 COMMISSIONER CLOWE: It smells like 16 money. I know. I've been to Lubbock. 17 MR. BRESNON: Yeah. And I'm just 18 suggesting that we probably should have stopped on 19 DeSales Street in Abilene, which as a fellow told 20 me once, is a very pleasant street. And I'm just 21 saying to just back up from that, because here's 22 the real nuance. You have the power, and we're not 23 suggesting that that power be withdrawn from you. 24 So if next year, after a legislative 25 session, and you start doing these formulas and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 71 1 somebody runs amuck, you have the power and you can 2 exercise it. I'm telling you, don't go down to the 3 legislature and tell them we're going down this 4 road and we're going to fix it. Because it's not a 5 sound governmental approach, and your future will 6 be bogged down greatly in trying to do that task. 7 COMMISSIONER CLOWE: Well, I don't 8 think we're saying that. I think the sunset 9 committee is saying that. They're saying make 10 25 percent distribution or these folks go out of 11 business. 12 MR. BRESNON: Well, the staff 13 members said that. 14 COMMISSIONER CLOWE: That's what I 15 meant to say. 16 MR. BRESNON: Yes, sir. 17 COMMISSIONER CLOWE: If I misspoke, 18 I'm sorry. 19 And so now the staff has come back 20 and said, well, you know, because the commission 21 didn't adopt that, the commission said they would 22 offer up an alternative. So now the staff is 23 trying to come up with a more workable solution 24 than that which the staff recommended. 25 MR. BRESNON: Yes, sir. And I think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 72 1 they're on the right track, but I submit to you, we 2 will end up at exactly the same place. This -- for 3 20 -- these issues have been discussed for 20 4 years. 5 COMMISSIONER CLOWE: Yeah. I 6 understand that. I just wanted to get a definition 7 on why we're talking about trying to define 8 expenses, when I think both you and Billy have 9 agreed that the process is acceptable the way it is 10 right now. 11 MR. BRESNON: Yes, sir. 12 COMMISSIONER CLOWE: Now, what 13 causes -- what -- pardon me. Let me start that 14 over again. 15 What keeps a lessor -- when a 16 disciplinary rule is established about 17 contributions to charities that has teeth in it, 18 and you start putting the charities out of 19 business, what keeps a lessor from just rotating 20 charities through the hall and making their money 21 and getting their operating account fat -- if 22 that's a good word, or pumped up -- and the 23 charities get ruled through because there are not 24 charitable contributions being made to them? 25 MR. BRESNON: Well, let me tell you, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 73 1 this is a -- that's not a new problem either. And 2 I think you will find a few bad actors that do that 3 now. I don't think there is anything under the 4 current situation or in any of these 5 recommendations that will keep churning from 6 occurring. You know, it happens with stockbrokers, 7 it will -- it can happen all over the place. 8 There is nothing that I'm aware 9 of -- and correct me if I'm wrong, but there is 10 nothing that would keep you from doing that now. 11 It would be a -- I don't think it would be a very 12 successful way to make a business, and so I don't 13 think people do it. 14 But we have -- we used to see some 15 instances of it, but I'm not aware -- you know, I 16 could name you a couple names that have been put 17 out of business. If I'm understanding what you're 18 saying -- 19 COMMISSIONER CLOWE: I'm not 20 agreeing with what you're saying. What I'm 21 seeing -- let me explain -- 22 MR. BRESNON: Yes, sir. 23 COMMISSIONER CLOWE: -- what I'm 24 seeing here. 25 I'm seeing a rule come out of this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 74 1 where if a charity doesn't get a specified 2 contribution as it may be defined, that their 3 operation is terminated. 4 MR. BRESNON: Yes, sir. 5 COMMISSIONER CLOWE: I don't see 6 that happening today under the current rule. 7 MR. BRESNON: Well, it does happen, 8 but it's -- if you're not required to make a 9 distribution, you're not -- 10 COMMISSIONER CLOWE: But you're not. 11 MR. BRESNON: -- in business. 12 That's right. On the other hand, 13 there are people who are required to make one and 14 who don't. 15 COMMISSIONER CLOWE: That's not who 16 I'm talking -- 17 MR. BRESNON: Yes, sir. 18 COMMISSIONER CLOWE: That's not who 19 I'm talking about. 20 MR. BRESNON: I understand. 21 COMMISSIONER CLOWE: But I can see 22 where the charities can suffer under the rules that 23 we're discussing. The lessors would be just fine. 24 They just keep running charities through. 25 MR. BRESNON: Well, Ed Branom is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 75 1 going to testify, and I think he can address why 2 that's not a very satisfactory business experience. 3 Number one, you've got to get them. Number two, 4 you've got to -- they have to be in existence for 5 three years so you can't just gin one up. 6 You've got to find the people that 7 want to put up with rules and regulations and they 8 want to pay the license fee. You've got to get the 9 people involved and get them understanding what 10 bingo is about, and they've got to go to this 11 mandatory training -- which, by the way, we helped 12 to pass in '97, and I'm glad to see it's helping. 13 So I understand that theoretically, 14 that might happen, and I submit to you that it 15 probably has in the last 20 years at some location. 16 But, you know, there is -- I don't think we can 17 remedy every evil through our approach. 18 COMMISSIONER CLOWE: But you don't 19 see it as a large and reoccurring problem? 20 MR. BRESNON: No, sir. 21 COMMISSIONER CLOWE: Do you agree 22 with that, Billy? 23 MR. ATKINS: It's been reduced 24 significantly. 25 COMMISSIONER CLOWE: Okay. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 76 1 I didn't mean to get in on your 2 subject. 3 COMMISSIONER COX: That's okay. 4 MR. BRESNON: We did a lot of things 5 in '97 and closed a lot of loopholes. You know, 6 one of the reasons that I'm really proud to be 7 sitting here right now is because the group of 8 lessors that are primarily who I represent have 9 been very reform minded down here, and, you know, 10 we don't -- while we don't think there is a 11 problem, we're still participating in the process 12 and trying to come up with something that's 13 workable and meets everybody's needs. They could 14 just be saying just say no and go get your votes. 15 And we're not doing that. 16 COMMISSIONER CLOWE: And I want to 17 say to you, on behalf, I think, of the commission 18 and the staff, we're not arguing with you. 19 MR. BRESNON: I know you're not. I 20 know you're not. 21 COMMISSIONER CLOWE: We're having an 22 open discussion on the record -- 23 MR. BRESNON: Yes, sir. 24 COMMISSIONER CLOWE: -- because 25 that's the way the law says we should do it. And WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 77 1 we really appreciate your input and those that are 2 going to follow. 3 MR. BRESNON: Yes, sir. 4 COMMISSIONER CLOWE: This is very 5 helpful. 6 MR. BRESNON: I'm just following up 7 on what Billy said, that that's been greatly 8 reduced. And I want my clients to get some credit 9 for having worked on that over the years. 10 COMMISSIONER CLOWE: Okay. 11 MR. BRESNON: Thanks. 12 COMMISSIONER COX: Steve, you had 13 some talk about deregulation of things. 14 MR. BRESNON: Yes, sir. 15 COMMISSIONER COX: Were you -- as I 16 understand it, we don't have the authority to 17 deregulate bingo. We are charged with regulating 18 bingo. Is that... 19 MR. BRESNON: Yes, sir. But in the 20 context of these sunset recommendations, I think 21 you can see opportunities where the statute can be 22 changed in a way that will have that effect. This 23 revenue sharing is one of them. 24 And by the way, I don't think you 25 have to rewrite the statute to do this. You could WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 78 1 have one overarching provision that says the 2 commission may authorize revenue sharing. We'll 3 define what that means, and then we'll address that 4 down the line by rule. 5 Because the staff has raised, and 6 we've thought of, a lot of things that need to be, 7 you know, addressed in that context. So I think 8 there are some areas where you can do some 9 deregulation by rule, but for present purposes, I 10 think we're talking about statutory changes. 11 COMMISSIONER COX: So you say an 12 extensive rewriting of the Bingo Enabling Act would 13 not be required, but some revision would be 14 required? 15 MR. BRESNON: You'd need one 16 overarching provision that would say 17 notwithstanding anything in the Bingo Enabling Act, 18 the commission can allow revenue sharing, and we'll 19 put a definition of revenue sharing in. And then, 20 when the session is over, we'll sit down and 21 address -- like one issue that came up, what if 22 somebody runs off with some of the money? Who is 23 liable? 24 There -- and there's a number of 25 other issues. What if somebody wants to pick up WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 79 1 and go to some other hall? You know, what about 2 their share? Some of that could be handled by what 3 I would describe as kind of partnership agreements. 4 But, you know, we've just got -- we've got all the 5 concepts to work with; we just need to turn the 6 people loose and let them engage in what seems to 7 me to be extremely rational behavior. 8 COMMISSIONER COX: Mr. Chairman, is 9 this revenue sharing idea something that we are 10 appropriately considering, or is that something 11 that's beyond where we are today? 12 COMMISSIONER CLOWE: Well, that's a 13 real good question. I don't think there is any 14 preclusion of us considering this. It is clearly, 15 I think, outside of 4.1 and 4.2 and 5.1, but I 16 don't think it's improper for Mr. Bresnon to have 17 brought it up and for us to consider it. I think 18 it's a deliberation that the commissioners can come 19 to a conclusion on as they choose. 20 Since we're on this subject, I'd 21 make a suggestion that maybe, if we're going to 22 discuss it, it ought not to be called "review 23 sharing," but "unit accounting" or some other term, 24 because -- I think Commissioner Whitaker asked the 25 question, well, are you talking about sharing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 80 1 expenses. And we certainly are. 2 MR. BRESNON: You bet. 3 COMMISSIONER CLOWE: So if you're -- 4 "revenue sharing" could be misleading from the 5 standpoint if you're talking about all of the 6 charities going into one pot for revenue and 7 expenses, and then a pro rata distribution. 8 MR. BRESNON: It sounds like 9 something from the Nixon administration when you 10 say "revenue sharing." So "unit accounting" works 11 for me. 12 COMMISSIONER CLOWE: It's what the 13 NFL does. 14 MR. BRESNON: That's right. That's 15 right. I hadn't thought about that. Thanks a lot. 16 I appreciate that. 17 COMMISSIONER COX: Billy, what do 18 you think about this unit accounting idea? 19 MR. ATKINS: You know, it's -- I 20 think there is a lot of potential to it. I don't 21 see it being central to this issue, and I'm not 22 going to agree with Steve that it's a simple little 23 fix. I think it's a major change to the way bingo 24 is operated and conducted in the state of Texas. 25 And, you know, I would hate for it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 81 1 to come about as a result of one line in the Bingo 2 Enabling Act, because, you know, another thing 3 Steve and I talk about all the time is unintended 4 consequences. And it doesn't -- you know, it would 5 not surprise me if there were all kinds of 6 unintended consequences that resulted from that. 7 But, you know, part of the problem 8 that we have and part of problem that the industry 9 has -- you know, we're talking about the 10 possibility of unit accounting; not requiring it, 11 but, you know, the possibility of it. So that 12 means we're going to have some halls that may 13 operate under a unit accounting; we may have some 14 halls that don't. 15 Steve talked about bingo being 16 different in Texarkana than it is in South Texas 17 and everything. Very hard to regulate according to 18 1,500 different standards if you're doing it -- you 19 know, if you're regulating for each individual 20 organization. 21 Our recommendation would be to have 22 one standard that applies to organizations. Again, 23 you know, we've talked with unit accounting, with 24 Steve. There have been other people that have 25 brought it to our attention. We've looked at it. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 82 1 We think there are some real positive benefits to 2 it. We don't see it being part of Issue 4. 3 COMMISSIONER CLOWE: Well, I'd like 4 to add that I don't think we're the gatekeeper on 5 this subject. I think this is part of the process, 6 and I think the sunset committee can ask about this 7 if it's brought to their attention, and I assume it 8 will be. And I think the legislature can ask about 9 it. 10 And so I think a discussion like 11 we've been having here today is very helpful, 12 because if the commissioners are in a position of 13 wanting to deliberate this and instructing the 14 staff, it arms them with a better response than if 15 we say, well, you know, we hadn't thought about 16 that. And that's -- I hate to give a response like 17 that if it can be avoided. 18 So that's why I'm very appreciative 19 of this discussion here this morning about this. 20 Although in fact, I had asked -- informally -- 21 Mr. Bresnon to stay on the issues that the 22 commission has indicated it would respond to the 23 sunset committee under the sunset staff 24 recommendations, I feel like this has been 25 worthwhile. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 83 1 I appreciate him not bringing a list 2 of items and saying, well, we want you to 3 deliberate these as well. I don't think we'd ever 4 get there if that were the case. 5 MR. BRESNON: Got you. 6 Shall I move on very quickly to 4.2? 7 COMMISSIONER CLOWE: I think we will 8 take a short break and give you a chance to take a 9 breath of air. And then I'd like to -- like I say, 10 we'll call Mr. Ed Branom after you. We'll take a 11 break and come right back. Thank you. 12 (Recess.) 13 COMMISSIONER CLOWE: Come back to 14 order. 15 Mr. Bresnon, I think we were ready 16 then to move on, on your agenda, to 4.2. 17 MR. BRESNON: Yes, sir. And I'll be 18 very brief about that issue, Mr. Chairman. 19 The sunset staff recommendation is 20 for you-all to clarify what constitutes charitable 21 purpose. For now, we've moved out of the bingo 22 account and what you can do with the bingo account 23 over to -- and how you have to operate within the 24 bingo account, over to the other side of the 25 ledger, over to the general fund. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 84 1 And after that money, after you have 2 net proceeds for bingo and it goes over into 3 your -- and it's going to be distributed, it has to 4 be then used for a charitable purpose. That can 5 basically be done by putting money in your general 6 fund or by writing a check to some other charity 7 that's going to use it for a charitable purpose. 8 Right now, you've got a statute that 9 I've -- is the third page in the document that I 10 gave you -- that's about five times longer than it 11 needs to be and contains all kinds of ambiguities. 12 And where the rubber meets the road on this is, the 13 staff comes out -- the bingo staff comes out to 14 audit, and they have to determine whether -- how 15 money that was expended in the general fund of the 16 charity, whether that constitutes a purpose that's 17 within this statute. 18 And we run into all kinds of 19 variable problems with that. And it's causing 20 people to spend money on lawyers and administrative 21 processes to go through the hoops to pay money back 22 to their accounts when they're found in violation 23 in times which I think are highly doubtful. 24 And we have a simple suggestion. In 25 order to be a charity playing bingo, you have to be WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 85 1 a nonprofit organization, which, under the Act, is 2 defined as being exempt under Section 501(a) of the 3 internal revenue code. And as a practical matter, 4 there is probably a half dozen, maybe, designations 5 where -- well, about a half a dozen designations 6 under 501 that really apply and come into play 7 here: fraternal organizations, veterans 8 organizations, religious organizations, I think 9 medical research. There are about 20 on the list, 10 but really, most of them fall under five or six 11 that apply to play bingo. 12 Those organizations know what they 13 can do, what kind of activities that they can 14 engage in, to maintain that tax exempt status. 15 That's their -- they started out as charities, and 16 they were charities for three years before they 17 ever got into bingo. That's the first thing they 18 learned. 19 So what we're suggesting is, not 20 that you-all, as an agency, be dragged into 21 clarifying a statute that's difficult to ferret out 22 what it means, but that you ask the legislature to 23 change the statute -- which we're going to do on 24 these other recommendations anyway -- and say if 25 it's consistent with the activities for which you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 86 1 have received your federal tax exemption, then it's 2 good enough for us. 3 There is no constitutional problem 4 with this. The constitution says the legislature 5 can pass laws, but the law has to provide that the 6 proceeds are used for charitable purposes. That 7 has not been defined in the constitution. The 8 legislature has the power to define terms that are 9 not defined in the constitution, within reason. 10 And so the legislature could do 11 that, and I think your recommendation to them to 12 be -- ought to be that they simplify the statute 13 and tie it to the charitable purposes under the 14 federal tax code. 15 COMMISSIONER WHITAKER: Would you 16 want any 501(c)(3) to be able to play bingo, or 17 just certain ones? 18 MR. BRESNON: No, this is not -- 19 what I'm talking about has nothing to do with 20 eligibility. 21 COMMISSIONER WHITAKER: I know -- 22 MR. BRESNON: Okay. 23 COMMISSIONER WHITAKER: -- but would 24 you limit who is eligible to be a charity within 25 the bingo statute to all of those folks who WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 87 1 qualified under 501(c)(3), or just some of them? 2 MR. BRESNON: I am not recommending 3 any change in who is eligible to conduct bingo. 4 What I'm talking about is what you do with your 5 bingo proceeds after you've earned them. 6 COMMISSIONER WHITAKER: And what are 7 the limitations, Billy, on who is eligible? 8 MR. ATKINS: On who is eligible? 9 It's limited to a church or other religious 10 society, a volunteer fire department, veterans 11 organizations, fraternal organizations, and 12 organizations supporting medical research or 13 treatment programs. 14 COMMISSIONER WHITAKER: Are you then 15 saying that they should be allowed to use their 16 money for the purpose for which they became a 17 nonprofit, or for overhead or adjunct expenses? 18 For example, if a fire department became a fire 19 department to put out fires, would you limit the 20 uses of it to putting out fires, or would you allow 21 it to be used for the building or things that 22 aren't directly related to their purpose? 23 MR. BRESNON: Well, that's where we 24 differ. 25 COMMISSIONER WHITAKER: I'm not WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 88 1 differing. I'm just -- 2 MR. BRESNON: No, I'm saying -- 3 COMMISSIONER WHITAKER: -- raising 4 the question. 5 MR. BRESNON: -- what you've 6 described is a divide that doesn't really exist on 7 the ground. 8 COMMISSIONER WHITAKER: Okay. 9 MR. BRESNON: The fire department -- 10 I happen to know this because I've worked closely 11 with some people that are involved in a volunteer 12 fire department, and my wife works with the Texas 13 State Association of Fire Fighters, so it's a good 14 example. And Mr. Van is going to -- he's from a 15 volunteer fire department, so it would be a real 16 good question to address to him too. 17 The building is the fire department. 18 It's part of it. It's where the trucks are parked 19 and maintained and all of that. And you could -- 20 what I'm saying is, if you can do that and 21 maintain -- if you can spend your money on that 22 building, the maintenance of the trucks, paying the 23 mechanic that maintains the trucks, and that 24 activity is allowable under your federal tax exempt 25 status, you're good to go for using your bingo WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 89 1 money for that purpose. 2 COMMISSIONER WHITAKER: Right. I 3 can see that, because the building is needed in 4 order to run a fire department. You can't have 5 trucks out on the street -- 6 MR. BRESNON: That's right. 7 COMMISSIONER WHITAKER: What about 8 something that's a little less indirect -- less 9 direct, such as a social function put on at the 10 town hall? 11 MR. BRESNON: If the activity is 12 inconsistent with your federal tax exempt status, 13 then it would be out of bounds. Let me give you an 14 example, one that I know is inconsistent. 15 COMMISSIONER WHITAKER: Okay. 16 MR. BRESNON: You cannot make a 17 gift -- a tax organization cannot give an officer 18 or a director proceeds -- tax exempt proceeds of 19 the organization that is given to them. You are 20 specifically prohibited from conferring a 21 benefit -- I think they say inuring to the benefit 22 of an officer or a director. On the other hand, if 23 that officer or director provided legal services, 24 for example, for the organization, those could be 25 paid. So it's nailed down that way. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 90 1 Let me just give you a practical 2 example where this comes up. The veterans 3 organizations go to conventions. You'll hear some 4 more about this in a minute. 5 The staff has taken the position 6 that convention expenses for these members of these 7 veterans organizations are not allowable 8 expenditures under the Bingo Enabling Act. Now, 9 what they do at those conventions is, in -- on the 10 statute, they're increasing their comprehension of 11 and devotion to the principles on which this nation 12 was founded and enhancing their loyalty to their 13 government. 14 That's why they participate in the 15 veterans groups. That's why they go to the Tomb of 16 the Unknown Soldier and place a wreath. And yet 17 we're splitting these hairs on -- as to whether 18 that's consistent with that. 19 And what I'm saying is, you have an 20 independent body of law to look at out there, and 21 the organizations know it. You can have a single 22 set of rules. And I believe that I can say with a 23 fair degree of certainty that those kinds of 24 expenses would be authorized under their tax 25 exemption. If they're not, they can't do it. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 91 1 COMMISSIONER WHITAKER: Well, let me 2 ask you this. Under the statute that you attached, 3 I know that earlier, in an earlier session, you 4 criticized the use of the words "an indefinite 5 number" -- 6 MR. BRESNON: Yes, ma'am. 7 COMMISSIONER WHITAKER: -- because 8 we don't know what that means. 9 MR. BRESNON: Right. 10 COMMISSIONER WHITAKER: If you were 11 to delete that and otherwise keep what you had, 12 your view would be that those expenses would be 13 covered, in which case your argument would be with 14 staff not applying the statute correctly. Right? 15 And so the remedy to that example would be us 16 addressing the interpretation of the statute, as 17 opposed to switching to a different standard. 18 MR. BRESNON: You can go at this by 19 rule if you want to, and I'm suggesting that the 20 legislature has provided with you a statute that 21 is -- that will keep you spinning all day long. 22 Yeah, you can take the words "indefinite number" 23 out, and that would clear up that problem. 24 Question: What is a benefit? Let's 25 say it says benefits needy or deserving persons in WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 92 1 this state by enhancing their opportunity. And 2 then you get dragged into -- do you-all really want 3 to be deciding whether it enhanced their 4 opportunity for religious advancement? 5 COMMISSIONER WHITAKER: I guess my 6 issue is, as a lawyer, I have a tremendous respect 7 for the tax code and how it generates reams and 8 ream and reams of books and regs and opinions and, 9 you know, arguments, and on and on and on. And I 10 don't see that as -- I see that as at least being 11 one set of problems, as opposed to two sets of 12 problems. But I don't see it as making life easy. 13 MR. BRESNON: One set of problems is 14 better than two. And the organizations -- my point 15 is this: These organizations understand, and they 16 know what they can do. And I think you're right. 17 The tax code does generate a lot of that, but I 18 don't think that we can say that it generates a 19 whole lot of it with respect to fairly small, old 20 organizations. 21 The Redmen organization that you've 22 heard about here has been around since the 1700s. 23 Every permutation of the tax code that's been in 24 existence, they have lived with. The VFW. 25 So I think you're simplifying WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 93 1 things. I think you're giving the staff a body of 2 law to look to. And if somebody is -- frankly, if 3 somebody is engaged in that bad conduct, they can 4 turn them over to the IRS, and I think they can 5 probably offload some of their enforcement 6 problems. 7 COMMISSIONER COX: Yes, I thought I 8 was having a discussion like this yesterday with 9 Ms. Kiplin. But I think -- I thought you said that 10 you had some constitutional concerns with this. 11 MS. KIPLIN: Well, and I'd like 12 to -- I appreciate that. There are a couple of 13 points I wanted to make, and if this is a good 14 time, I'd like to do that. Sorry. (Moving 15 microphone closer.) Let me repeat that. 16 I appreciate that, and I'd like to 17 make a couple of points. And one has to do with 18 the constitutional issue that's been brought up. 19 My concern is that under the amendment that 20 authorizes bingo, what it says is that the law must 21 also require that all proceeds from the games are 22 spent in Texas for charitable purposes of the 23 organizations. And I think we've been focusing on 24 charitable purpose. 25 And what Mr. Bresnon is suggesting WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 94 1 is look to the IRS for that. I don't know -- and I 2 saw that you provided a copy of Section 501. And 3 just looking at that, it looks pretty tedious and 4 laborious, and I would have to agree with 5 Commissioner Whitaker in her characterization. 6 But I don't know whether the IRS 7 statutes are broader in allowing organizations and 8 how they use their money than the limitation that I 9 believe is imposed by the constitutional amendment 10 with regard to making sure it's spent in Texas. I 11 think -- 12 COMMISSIONER WHITAKER: I think 13 they've added that, though. 14 MR. BRESNON: Not my issue. Spent 15 in Texas, that's not my point. It's charitable 16 purpose. It's the nature of the conduct, not where 17 the transaction occurs. 18 MS. KIPLIN: And so what I'm -- what 19 I would say is, I think if there was a 20 recommendation or if there was a move to making 21 that change in the statute where it's a reference 22 to the IRS statutes, I would want to make it 23 clearer with regard to the spending of the money in 24 Texas so that we're not in conflict with the 25 constitution. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 95 1 And, you know, I guess then the 2 issue is keeping up with the IRS statutes with all 3 the different advisory opinions that they might 4 issue and so forth with regard to what are 5 charitable purposes. 6 The second issue I'd like to touch 7 on -- if you don't mind indulging me -- is the 8 issue of the deregulation. And I did hear 9 Mr. Bresnon use that concept in suggesting that -- 10 just allow the industry to try to identify, I 11 guess, what those reasonable and necessary expenses 12 are and not have it be as a blanket rule. 13 And, you know, my real concern with 14 that is that -- at least in my view, is that 15 concept could be considered to be in conflict with 16 Section 2001.051; in particular, (b), that said the 17 commission has brought authority and shall exercise 18 strict control and close supervision over all bingo 19 conducted in this state so that bingo is fairly 20 conducted, and the proceeds derived from bingo are 21 used for an authorized purpose. 22 It appears as though those concepts 23 may be in conflict, and the legislature, in my 24 view, is saying this is an activity that requires 25 strict control and close supervision. And then the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 96 1 next part is the deregulation and how those two 2 concepts would fit. 3 So I would think that if there is a 4 move to going towards the latter, the deregulation, 5 that some of these issues -- and I know Mr. Bresnon 6 was talking, I think, in terms of more rate setting 7 on a global deal -- I would want there to be some 8 consideration of changing that statute so it 9 doesn't appear as though the agency's actions are 10 in conflict with the mandate that was provided by 11 the legislature. 12 MR. BRESNON: In deference to your 13 time, I'm not going to go through the -- a rigorous 14 analysis of that particular provision. 15 COMMISSIONER COX: Well, let me take 16 a further step on my question, Steve. 17 MR. BRESNON: Yes, sir. 18 COMMISSIONER COX: Where I was 19 trying to -- the idea I was exploring was the one 20 that I think you're presenting, and that is that if 21 the IRS says that this organization qualifies under 22 501(c), and that's the case, we've seen that 23 certificate for charitable purpose established and 24 settled. 25 But when I laid that before Kim, she WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 97 1 said, well, the problem we have is that the money 2 has to be spent in Texas. So if we have to audit 3 whether it's spent in Texas, I don't see how it's 4 any more trouble to audit whether it's spent for a 5 charitable purpose. They're kind of one and the 6 same. 7 MR. BRESNON: No, I'm not suggesting 8 that you wouldn't audit. I'm suggesting that the 9 definition of a charitable purpose would be not 10 only different than it is now, but ascertainable. 11 This statute doesn't give you any guidance on that, 12 but the law -- and the body of law that gives us 13 the tax exempt practice at the federal level does 14 give you an ascertainable basis upon which to 15 determine, for example, whether a veterans 16 organization can pay for convention expenses. 17 COMMISSIONER COX: And I guess the 18 only thing that I would say there is that the 19 question seems to be, by the constitution, twofold. 20 One, is it charitable; and two, is it spent in 21 Texas. 22 MR. BRESNON: Yes, sir. 23 COMMISSIONER COX: And while we 24 might be able to accept what you're saying, for a 25 charitable purpose it still doesn't get us over the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 98 1 Texas hurdle. 2 MR. BRESNON: I think it's a 3 different question, and you will have to decide. 4 Let me -- I'll give you -- let me give you a 5 concrete example of that. 6 A veterans organization wants to 7 spend its money to go to a -- to take a trip to lay 8 a tomb at the -- a wreath at the Tomb of the 9 Unknown Soldier in Arlington, Virginia. So in my 10 view, the ability to pay travel expenses for a 11 purpose that is consistent with their tax exemption 12 is legitimate, and I think it falls under the 13 current statute. The staff doesn't. 14 Now, whether they can pay for a 15 hotel in Arlington, Virginia under the 16 constitution, that's a different issue, and maybe 17 they can't. I say "maybe," because if I book the 18 hotel through a travel agent in Dallas, now we're 19 off into that deal. But I'm not here advocating a 20 change in the constitution. 21 COMMISSIONER COX: Maybe if you fly 22 American Airlines rather than Delta. 23 MR. BRESNON: Yes, sir. And that's 24 exactly it. And frankly, we have gotten into those 25 issues. We -- although none of us can -- we may WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 99 1 have gotten into it through no fault of anybody, 2 you know, we thought -- there was an organization 3 that thought at one time that they could not 4 contribute their money to their state organization, 5 which in turn contributed to the National 6 Alzheimers Organization. 7 So they went and got letters and 8 showed that National Alzheimers spent a whole lot 9 more money in Texas than was contributed from this 10 origination. My view was, if you're going to trace 11 money, trace it all the way. And so we get into 12 those. But that's a constitutional problem, and 13 that's the reason I didn't bring it up. 14 It's the nature of the activity. If 15 you're giving out scholarships, can you pay for the 16 office or the person that has licked the stamps, 17 put them on the envelope, and sent them to all the 18 school counselors to get names of kids who need 19 scholarships. That's -- I'm making that example 20 up. 21 COMMISSIONER COX: Thank you. 22 MR. BRESNON: Yes, sir. 23 COMMISSIONER CLOWE: Billy, my 24 recollection is that you didn't make a 25 recommendation on behalf of the staff on this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 100 1 issue. 2 MR. ATKINS: I believe what I said 3 is that the staff didn't know how comfortable they 4 were, having to look to and enforce a third party's 5 recommendations and requirements, such as the IRS, 6 you know. And in looking at the information that 7 Steve handed out, you know, and the definition of a 8 501(c)(3) organization, I don't see it being any 9 more telling than what's currently in the Bingo 10 Enabling Act. 11 MR. BRESNON: People all over the 12 country are complying with this law all day, every 13 day. So, you know, it's out there. I just gave 14 you this list to show you what kinds of 15 organizations are exempt under the statute. 16 Well, and then I guess maybe I've 17 got a question about the last -- I'm looking at the 18 Issue 4.1, staff recommendation -- and I thought 19 maybe this was just on the wrong page -- but it 20 says also clarify what would constitute a proper 21 use of proceeds for a charitable activity, using 22 the guidelines already established by the IRS, 23 et cetera. 24 COMMISSIONER CLOWE: Where are you, 25 Steve? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 101 1 MR. BRESNON: I'm on the staff 2 recommendation for 4.1. The last sentence has a 3 reference to the IRS, and maybe I don't understand 4 that. 5 MR. ATKINS: And I think that we 6 used the term "guidelines," and not necessarily 7 "statute." Now, if Steve is looking past 501(c) to 8 the rules, et cetera, that the IRS has adopted that 9 govern each of the items here -- let's use, for 10 example, scholarship -- there are numerous 11 requirements that the IRS places on scholarships 12 and what constitutes authorized scholarships under 13 this. 14 If we're starting to go that deep, 15 then, you know, that's where the staff is looking 16 at trying to narrow -- where we can -- IRS 17 guidelines. 18 MR. BRESNON: Well, I'm confused, 19 but we don't need to straighten out my confusion, I 20 guess. You say I'm not seeing what the distinction 21 is. I mean, if we're going to look to them, let's 22 look to them. 23 COMMISSIONER CLOWE: Well, that's 24 kind of where I am. I interpreted this sentence as 25 relating more to the distribution of proceeds. But WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 102 1 I see that you're saying it can go either way. 2 MR. ATKINS: The use of proceeds, 3 the authorized use of proceeds, yes, sir. 4 COMMISSIONER CLOWE: Okay. So you 5 feel like you did make a recommendation? 6 MR. ATKINS: (Nodding head.) 7 COMMISSIONER CLOWE: Okay. 8 MR. BRESNON: Okay. Well, briefly, 9 on Issue 5, we can live with the staff 10 recommendation on Issue 5. 11 COMMISSIONER CLOWE: Any more 12 questions for Mr. Bresnon before he leaves the 13 podium? 14 MR. BRESNON: Thank you. I really 15 appreciate it. I think the rest if them will go a 16 lot quicker if folks have specific things and a 17 little less of overarching to talk about. Once 18 again, thanks a lot for the time you-all spent on 19 this. 20 COMMISSIONER CLOWE: Thank you. 21 COMMISSIONER COX: Thank you. 22 COMMISSIONER CLOWE: Mr. Branom had 23 to leave the city, and he has asked that 24 Mr. Bill Pewitt testify in his place. 25 MR. PEWITT: My name is Bill Pewitt. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 103 1 I'm the executive director of the Texas Charitable 2 Bingo Association, and I would echo the comments 3 made by Mr. Bresnon. We've been working with his 4 group and with the lottery commission staff, bingo 5 division staff, on these issues. 6 One thing that I wanted to bring 7 up -- and I know Mr. Branom would have, were he 8 able to be here -- is going back to the issue of 9 4.1 and the concept of the shared revenue. We 10 believe that it speaks directly to 4.1 and that the 11 reason for the genesis of 4.1 was a concern by some 12 at the sunset commission staff that there were 13 charities not being able to make a charitable 14 distribution, those 300 or so that weren't required 15 to and the 80 or 90 that actually didn't. 16 If you implement a -- the 17 possibility for a shared system, that, in our 18 opinion, would eliminate some of those who did not 19 make a distribution. So we want to make sure that 20 that's where we're coming from on our analysis of 21 that. 22 We would again echo the sentiments 23 of Steve, and look forward to keeping working with 24 the staff, the sunset staff, as we move through the 25 process. So that is what I have. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 104 1 COMMISSIONER CLOWE: Thank you, sir. 2 Any questions? 3 Thank you very much. 4 Next, I have Mr. David Heinlein. 5 Good morning. 6 MR. HEINLEIN: Good morning. 7 COMMISSIONER CLOWE: Good morning. 8 MR. HEINLEIN: I'm David Heinlein, 9 of Jetta Management. I'm the accountant for over 10 40 charitable bingo conductors, and it's those 11 charitable bingo conductors that are of interest to 12 me in what happens to them. 13 We're seeing something today that's 14 a long ways away from where we were September 24th. 15 We're real glad to see that, as we were concerned 16 that we had -- a lot of our charities -- in fact, 17 nearly all of them would be out of business under 18 the recommendation that had been made by the sunset 19 staff. 20 I read the staff recommendation 21 here. I misunderstood it, actually. I thought it 22 was a sunset staff recommendation, and so I said -- 23 but I skipped over it, the first part, in my 24 analysis of doing some work to maybe address some 25 of the financial issues. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 105 1 So I did prepare for you -- and I 2 can give this to you -- some comments that I've 3 made on Proposals 1 through 4. Perhaps chairman -- 4 Commissioner Whitaker was interested in some of 5 those comments. So I think we'll go ahead and pass 6 those out if that's all right with you. 7 COMMISSIONER CLOWE: Sure. 8 MR. HEINLEIN: It's kind of like the 9 preacher who is preparing some testimony, and when 10 you get derailed, you don't know which way to get 11 back in and start over, you know. So maybe it will 12 help me to at least look at some of these proposals 13 as I start to consider this. And by the way, I 14 have been in constant touch with Mr. Fenoglio and 15 Mr. Bresnon and Bill Pewitt on these issues as I've 16 been encouraged by their efforts. 17 And I heard that Commissioner Cox 18 was present, and I was just elated that Billy and 19 the staff and, you know, Ms. Kiplin and all of you 20 have been working so hard on all this. So it's 21 encouraging for me to know that it appears that 22 we're certainly headed in an approach that's going 23 to be beneficial to the whole industry. And 24 that's, I think, where everybody wants to go. 25 No one is wanting to throw rocks at WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 106 1 anybody. We want to get to a decision that will 2 keep bingo in place. And not only just in place; 3 I'm hoping for some legislative things that will 4 happen down the road that are going to make it even 5 possible to make a profit in bingo, because we've 6 certainly seen a terrible decline over the last 7 years. 8 Under your Proposal No. 1 that was 9 submitted, it just looks at the current formula, 10 which it appears that what we've been looking at is 11 having to do something to change that. Of course, 12 if it's not broke, why fix it? 13 And while I might not agree with the 14 current formula, it's certainly -- when I first saw 15 it, when I first got into it, I thought, what in 16 the world is this? This makes absolutely no sense. 17 It even makes less sense when you start changing 18 the way that we conduct business and increase our 19 gross while maybe even reducing the net percentage 20 of revenue that's left. It becomes even more out 21 of line. 22 By that, I mean that when you start 23 taking the 6 percent of gross over your allowed 24 expenses, if that gross has gone up, the prize 25 payouts have gone also up and the net is less, it's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 107 1 going to be more skewed. 2 But nonetheless, on Proposal No. 1, 3 what I'm seeing here is -- what's already been 4 identified here is that the charities were required 5 that are looked at here -- this is 1,392 6 charities -- I'm assuming that what we've done is 7 gleaned, out of these 1,900 reports, those that 8 were most certainly common to conducting bingo 9 throughout the year, and have eliminated maybe 10 those that conducted one session for that year on a 11 temporary license or something like that. I don't 12 know if that's accurate, but it does appear that 13 we've got 1,392 charities, which gives us a more 14 reasonable number to look at. 15 Those numbers that were provided by 16 staff, I put at the top of each of those pages, and 17 so those are the numbers that we're looking that; 18 and then those numbers we're looking at in 19 undistributed proceeds, an amount of $24,957,000. 20 And then this has already -- as has 21 already been stated, the required distribution was 22 only 12,976,000, but we actually distributed 23 33,038,000, which is very significant. The actual 24 charitable distribution exceeded the minimum 25 required distribution by $20 million. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 108 1 So doesn't this suggest the actual 2 distribution will be what the charities can 3 reasonably afford to distribute out of that bingo 4 account? And so it should also say that they are 5 maximizing revenues in the charity based on actual 6 revenue available, without a mandate. 7 We also have working capital left in 8 those accounts. No one has mentioned any numbers 9 on that, except that I see, by looking at this 10 average per organization, that that amounts to 11 $17,929 per organization. That's interesting. 12 One of the things I advocate in my 13 speeches that I make to charities -- I'll get a 14 group of charities together and we talk to them, 15 and I recommend to them -- charities don't always 16 follow advice, but I recommend to them that we 17 start with a baseline of $15,000 in a bingo 18 account, after we've paid all bills, as a minimum 19 working capital number. 20 And then if it goes up over $50,000, 21 then I think they have to do other things with the 22 money -- take it back into, you know, the general 23 fund and start using it for charitable activities. 24 And they always don't take that advice either. 25 I have some charities that have WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 109 1 exceeded even the $100,000 in their bank accounts, 2 and then I'd have to write them a letter and say do 3 you realize that you've got that in an institution 4 that is no longer insured? I say, you are in 5 excess of what's been insured -- and ask them to do 6 something else with it. 7 But that's not the norm. I mean, we 8 have a few like that. So I believe that if you 9 wanted to identify what that number ought to be, 10 I'm looking at a number of somewhere between 11 $15,000 and $50,000 as a workable number in the 12 undistributed proceeds as needed for working 13 capital. I really think $15,000 is about the 14 minimum that should be left in that account, if 15 possible. 16 Now, as the bingo climate has 17 deteriorated over the last couple of years, there 18 have been many of the charities that have, in fact, 19 had to draw from that minimum and no longer even 20 have the $15,000 in those accounts because it's 21 just -- they've had to, you know, draw from that 22 money to pay their expenses and to make their 23 required charitable distribution. 24 Under Proposal No. 2, there is a 25 little different spin on the current formula, and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 110 1 that's to eliminate that zero distribution, which 2 the recommended formula would, in fact, do that by 3 saying that we would distribute based on the 4 current formula or a minimum of at least 5 1 percent -- and that should say "adjusted gross 6 receipts" there. 7 MR. ATKINS: No, it says "gross 8 receipts." 9 MR. HEINLEIN: Okay. 10 -- or a minimum of not less than 11 1 percent of gross receipts. 12 Well, that would certainly have the 13 effect of giving you a minimum distribution that 14 would be required to meet that staff 15 recommendation, the sunset staff recommendation 16 to -- that there were over 300 charities that made 17 zero distribution. And we want to eliminate that 18 situation, and this would certainly do that. 19 The recommended -- the new required 20 distribution on this formula would be $13,896,000. 21 So that's very similar to what the current formula 22 would also be. It's not much different. So -- and 23 if that puts a spin on it that makes it more 24 acceptable, then it can probably work. 25 Proposal No. 3 goes down this road WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 111 1 of an off-the-top percentage. We have particular 2 problems with that. We see that one as being too 3 inflexible and causing very definite difficulties 4 with charities being able to comply with this, 5 unless you were going to use a distribution amount 6 that would be probably unacceptable. And I say in 7 here that you would have to be below the 8 percent. 8 If you look at the numbers that 9 staff has recommended -- has given you, you see 10 where at 8 percent, 1,082 organizations would be 11 able to meet out of these 1,392. So there would 12 still be a lot of the charities that could not meet 13 that recommendation. 14 So it would not work for all of the 15 charities all the time, and certainly not in any 16 one particular quarter. That would be a very bad 17 test to have just in any particular quarter. So 18 I'm just saying here that there has to be a better 19 way. 20 And proposal No. 4, this one, I 21 thought, had some merit, and I think that's what 22 maybe Commissioner Whitaker was talking about, some 23 blending of the two, of the staff recommendation 24 and maybe 4, where expenses are not to exceed 25 90 percent of adjusted gross. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 112 1 But also I understand what 2 Mr. Bresnon is saying here. We're going back to 3 that same road of just starting to put some fixed 4 fences on it, and that could cause us some problems 5 in some areas. 6 The new required distribution under 7 this formula, according to the staff information, 8 was 35 million 838. I don't really understand that 9 number because it does suggest to me that this 10 would require a negative cash flow to actually be 11 able to comply with that number, from the reports 12 that are being made here. 13 And if it were complied with, it 14 would have to reduce the undistributed proceeds 15 amount because you would have taken out some of 16 those funds from that negative cash flow, which I'm 17 seeing by just crunching the numbers available as 18 being the $2,399,000 negative cash flow. 19 It's interesting. If we look at the 20 numbers that are provided there for the total 21 authorized expenses, it's 79.53 percent of the 22 adjusted gross; and the adjusted gross being the 23 only money that is available to us. 24 You know, I don't really like any 25 kinds of formulas that are applied to the gross WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 113 1 number, because the gross number is just an 2 insignificant number. It doesn't mean anything. 3 The only thing that counts is what goes in the bank 4 that day. And if we gave it away in prizes and if 5 there was no money to go in the bank, we don't have 6 anything to work with. 7 So we've got to talk about 8 applications of numbers to something that's real. 9 And the money that went into the bank is the real 10 number. So I always like to look at, at least in 11 that point of view, the adjusted gross. 12 Well, 79.53 percent of the adjusted 13 gross and the positive cash that we would be 14 distributing according the recommendation at the 15 beginning here, was 20.33 percent. And then under 16 this new required distribution, under this formula 17 of not exceeding 90 percent -- or, I mean, expenses 18 allowance being 90 percent, we're ending up with 19 101.47 percent. So we've exceeded the available 20 cash. And so that would need to be somewhat 21 refined. 22 I like the staff recommendation as 23 far as being easy to manage. It looks like we have 24 a way of taking our -- we are able to take the 25 gross receipts and deduct all of our expenses, our WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 114 1 costs (inaudible), our lease payments to our 2 distributor, our payrolls, et cetera, and our rent; 3 and then distribute what is left or have it 4 available to distribute. We would then have to 5 define, of course, how much could be allowed to be 6 left into the bingo bank account, which is very 7 important. 8 So as long as it passes the test of 9 positive cash flow, it would seem that it has the 10 option of either staying in the bingo account or 11 being distributed to the general fund. And if we 12 don't have the amount that has to go into the 13 general fund, if that's -- if we leave it in some 14 kind of a flexible form so it's fluid, so it's -- 15 it can be taken to the general fund or it can be 16 left as working capital if we put some parameters 17 on what that money can be catalogued to be. 18 Now, if we choose to go down this 19 road, though, of through rule, identify what would 20 be considered reasonable and necessary, we've got a 21 very hard case on our hands there, because even 22 within charities that operate in a common, 23 competitive climate in a region like in Houston -- 24 where I have a number of charities at different 25 halls competing with each other -- I've had WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 115 1 expenses that go all over the map. 2 You know, I've got a hall that might 3 pay workers $20 a session; another hall that might 4 pay them $60 a session. But there is justification 5 for both directions, because in one hall, they're 6 not making very much money. They're paying $20, 7 and those people aren't selling very much, and they 8 probably aren't earning more than $20. And so it's 9 probably reasonable for them to be earning $20 a 10 session. 11 But in a hall where they are 12 aggressively -- they go out and they find qualified 13 people to work and they pay them more money, 14 they're actually getting a benefit out of it. And 15 the hall is successful, and there is more money 16 going to charitable purposes out of that hall 17 because of the higher expenditure. 18 So I'm finding a great deal of 19 difficulty in defining how you would determine what 20 would be a reasonable amount of money to pay a 21 worker or to pay any of these expenses that you're 22 going to have to deal with. It's going to be a 23 very difficult tool to work with, I think. And I 24 think where we are right now, we're not finding a 25 grievous amount of people that are abusing the law WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 116 1 now. 2 Now, those that are, we've taken 3 care of them. And I've had one like that, and he 4 needed to be taken care of. And I'm opposed to 5 them doing anything that uses money inconsistent 6 with what they have been formed for, and I always 7 speak out against any expense like that. 8 I've spoke out against their 9 expenses for electronics. When they first started 10 those, I said you cannot afford to pay that kind of 11 money for those expenses. I didn't win the battle. 12 I mean, they've got electronics today. 13 But I have continued to fight, and 14 I've -- I got it down from where they were at 15 30 percent, to continuing to recommend that they 16 keep lowering it, and now they've got it down to 17 10 percent. That's a big plus. We've come way 18 down on that. 19 So we're real pleased in what we're 20 seeing here today, that we've got four proposals 21 and then a staff recommendation that moves us away 22 from the disastrous effect of a 25 percent 23 off-the-top, which would have put us out of 24 business. So I'm very pleased with that. 25 And I'll be happy to answer any WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 117 1 questions that maybe -- because I did make notes 2 now that compensate to where we've come today. 3 COMMISSIONER WHITAKER: At what 4 level would you drew the line between a charity 5 that should stay in business and one that 6 shouldn't, and why? 7 MR. HEINLEIN: I think that if they 8 had failed to comply -- I hesitate to even bring up 9 some of my last pages I gave you there in testimony 10 because I don't know that -- Billy hasn't had a 11 chance to look at it, and you haven't either. So I 12 really don't want to bring it up. 13 But what I say in there is that the 14 test ought to be, at the time of license renewal, 15 if they have not complied with their distribution 16 requirements, they should not have their license 17 renewed. 18 COMMISSIONER WHITAKER: And here's 19 my question: What should that distribution 20 requirement be? One dollar over -- you know, a 21 positive flow of at least a dollar? 1 percent? 22 2 percent? 5 percent? No percent? 23 MR. HEINLEIN: My recommendation was 24 $50 in the example that I gave you. $50 -- not 25 $50 -- $50 per session that they conduct bingo. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 118 1 Just a flat -- you know, an off-the-top, if you 2 will. But I feel like if we can pay our workers 3 $50 a session -- and we ought to at least be able 4 to pay our charity $50 a session when we conduct 5 bingo -- what that would amount to for 156 sessions 6 that that charity conducts bingo if he is 7 conducting bingo three sessions a week, he's got to 8 distribute a minimum of $7,800, if you go there. 9 That's a small amount of money, but 10 my goodness, if he's going to be in bingo to 11 provide funds for his charity to operate on, I 12 would think there should be a minimum of something. 13 COMMISSIONER WHITAKER: Okay. 14 MR. HEINLEIN: And certainly that's 15 a pretty small minimum. But yet it could be done 16 as a test. They don't get their license renewed if 17 they haven't done that. 18 COMMISSIONER WHITAKER: Right. The 19 other question is, what did you think about the 20 suggestion I threw out that if you take the staff 21 recommendation and say -- and add the not to 22 exceed -- reasonable and necessary expenses not 23 exceed the current 6 percent rule? 24 MR. HEINLEIN: Well, they do exceed 25 that today. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 119 1 COMMISSIONER WHITAKER: Or some kind 2 of cap? That would make sense. 3 MR. HEINLEIN: As you see in this -- 4 in the example of the expenses that he has given me 5 there, our expenses were about 80 percent of the 6 adjusted gross, not 6. 7 COMMISSIONER WHITAKER: Well, 8 whatever that number would be, what is your 9 recommendation -- 10 MR. HEINLEIN: That's what his -- 11 that's what Proposal 4 is. Proposal 4 says that we 12 would give a 90 percent expense credit. I could 13 live with that. 14 COMMISSIONER WHITAKER: Could you 15 live with reasonable and necessary expenses not to 16 exceed? 17 MR. HEINLEIN: Well, yeah. Not to 18 exceed 90 percent? 19 COMMISSIONER WHITAKER: It could be 20 less, but it could be more. 21 MR. HEINLEIN: It could be less, but 22 not more. But that's going down that road of 23 making that fit all of these varying, different 24 situations. I don't even do books for all the 25 varying situations, and yet I know within the same WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 120 1 spectrum of those which I do, the circumstances are 2 just so different, all of these, that making one 3 rule to apply to all of them, it's got to be very 4 carefully looked at. 5 So I think that staff would have to 6 certainly look pretty carefully into that 7 90 percent number upon -- at all of the different 8 charities that are good charities that have good 9 workers and are trying very hard to make a profit 10 for their activities, like the volunteer fire 11 department. 12 I mean, they need that money to 13 pay -- I mean, I've got fire departments that they 14 just need that money just to pay their gas bill so 15 they can keep the trucks running to be available to 16 fight the fires in their community. That's an 17 important charity. But it may not take $50,000 a 18 year for them to do that. They might be real glad 19 to get $7,800, if that was all that was available. 20 COMMISSIONER COX: Going on to your 21 recommendation on the grandfather grant, as I 22 recall, our response to the -- response to the 23 sunset staff report, we didn't take a position one 24 way or the other with respect to grandfathered 25 leases or transferrability, but said that what we WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 121 1 wanted to do was develop a class or classes of 2 licensee that would be attractive enough to retain 3 capital that's already in the business and bring 4 additional capital to it. Specifically, we didn't 5 go to what that might look like. 6 Is your recommendation here 7 addressing what that might look like? 8 MR. HEINLEIN: Yes. 9 COMMISSIONER COX: Would you walk us 10 through that? 11 MR. HEINLEIN: Well, it's -- looking 12 at the current licenses that -- and I'm not sure 13 that I understood Mr. Atkins' testimony on that, 14 because I even have a charity hall that I'm not 15 sure where they would stand under that scenario 16 where you -- he removes this tier approach. 17 But at the last testimony, I heard a 18 gentleman testify who has a commercial license 19 today. It's available. And as I understand it, he 20 can charge $600 a day rent -- which, if there's two 21 sessions, that's $300 a session -- and he did 22 elaborate on the fact it was very difficult for him 23 to establish a commercial hall under that rent 24 structure. 25 And then in doing a lot of the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 122 1 testing for the charity halls that we do business 2 with and that -- obtained from around the state, I 3 found out that because of the climate of the 4 business today that these commercial or 5 grandfathered licenses are not collecting the $600 6 a session. In fact, they are collecting from an 7 average of about 250 to maybe, at the most, 400. 8 And there are very few that are even 9 averaging anything like that. It's more in the 10 range of $300 to $350. And I said, well, you know, 11 it appears to me -- and in some cases, I'd say -- 12 as Mr. Branom did testify that he had lost $107,000 13 at that rent level. 14 But it appeared to me that you've 15 already done some studies that $300 a session might 16 cover your cost of providing ability. And I've 17 looked at some of ours and found that it's close. 18 Not all cases. In some geographical areas, like 19 Houston, where you have a high profile I-45 20 situation, that 300 wouldn't cover that cost. 21 We're using that as a baseline 22 because you've already established that in that 23 license class. I said, well, at least there ought 24 to be a baseline that you guarantee in the 25 license -- lessor to obtain rent of $300. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 123 1 But then you give a caveat for a 2 grandfathered license who has been in the business 3 and has put a lot of capital in it. And so you 4 provide him with a clause that gives him unlimited 5 resources to collect more rent, to make actually a 6 profit consistent with the amount of profit that 7 the charity itself can obtain. 8 If the charity makes money, he can 9 also share it and make the same kind of money, and 10 you wouldn't even put a cap on it. And that would 11 be an extremely attractive way to entice a 12 businessman who has got a lot of business acumen to 13 be in the business. He can -- even if he had to 14 buy one of these licenses that are already out 15 there. Because I don't think they manufacture any 16 more of them. 17 But I think if you increase the 18 value of that license, it makes the guy -- like 19 Bill Gates says, you know what, this is an 20 opportunity that I can make some real money. I can 21 go in there and be sure and make the costs. I can 22 get $300, and I might get another thousand dollars 23 on that. And at the time I'm doing that, I'm 24 putting money into charitable activities in the 25 state of Texas that are very beneficial, and I can WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 124 1 be real proud of what I'm doing. 2 So I think it has some real 3 potential in looking at things in a different way. 4 And by the way, that $34 million -- and I made this 5 point at two other meetings, and want to clarify it 6 again -- it's a whole lot more than $34 million we 7 distribute in the state of Texas. Where a lot of 8 the charities are getting grant money, they are 9 getting matched ten to one, that could be over 10 $300 million. 11 And in an example I gave to you-all 12 at that meeting, the one association that got 13 25,000 and saved the state about two and a half 14 million, that's a ten to one. 15 So I think we well could have 16 $300 million worth of activity in the state of 17 Texas that comes from charitable bingo. It's a lot 18 more important industry than I think maybe we're 19 giving it credit for. And if we could shore that 20 up and cause it to increase a lot more, if every 21 dollar that we can distribute really means ten 22 dollars to the benefit of the state, we've got, you 23 know, a much bigger industry than what we're 24 allowing it to be thought of as. 25 So I'm -- I would be for -- I like WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 125 1 things where you don't have limitations on them. 2 If you don't limit how much money I can make, I'm 3 going to work real heard to find ways to make 4 money. But if you limited me and said, well, you 5 know, if you make more than $100, I'm going to take 6 it away from you -- then, you know, I'm not going 7 to have any incentive to make that. 8 COMMISSIONER COX: Let me follow 9 that line of reasoning. As I read your proposal, 10 you would limit that possibility for anyone but a 11 grandfathered lessor. 12 MR. HEINLEIN: I was only addressing 13 that lessor license that we talked about, yes. 14 COMMISSIONER COX: And so what if 15 there were another license -- something that isn't 16 there now, but one that was designed on a white 17 sheet of paper -- with the idea of keeping the 18 capital that's in the game and attracting new 19 capital to it? Would you put that provision in 20 that class of licensee? 21 And I'm thinking of one that 22 would -- and this may not be possible; I've got a 23 very superficial understanding of this -- but one 24 that would moot the issue of grandfathering and 25 transferability because it would be attractive to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 126 1 those people, as well as to others who might bring 2 capital into the industry. Would you think that 3 this ability to earn over and above the $600 would 4 be attractive to that kind of -- of others -- 5 MR. HEINLEIN: Yeah, I think it 6 would be attractive to others. I think, 7 although -- what we're trying to also be sure that 8 we don't do is undermine the viability of the 9 current license holders. I mean, we've got halls 10 that are in existence, and we're really seeing a 11 state of saturation of bingo and not really wanting 12 to build that climate of more facilities. 13 What we need to do is improve the 14 activity at each of these facilities that are 15 already there. So I don't know if we had a -- if 16 we've got a desire to increase the amount of 17 others. 18 What we would like to see, though, 19 is some new blood that would be willing to maybe 20 buy some of these licenses that are -- there are 21 34 inactive now, something like that -- somebody 22 that would be able to buy those and, you know, get 23 us a Bill Gates in here that could really turn one 24 of those facilities into a dynamite operation. 25 We've got to be given some new legislation in order WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 127 1 to do that, and we're going to be looking to the 2 legislature for some revenue enhancements to do 3 that with. 4 COMMISSIONER COX: Okay. Thank you. 5 MR. HEINLEIN: I just like any kind 6 of a program that has unlimited rewards to it, and 7 I think that's what I was trying to show you. It's 8 maybe a very complex thing to look at. I wasn't 9 really trying to bring that up today. So I just 10 thank you for the direction we're headed in, and it 11 looks like we've got, certainly, a positive way of 12 going. 13 And we are, as an industry -- and 14 Chairman Clowe, you've made it clear in several of 15 your presentations that we, as an industry, must be 16 looking down the road to changing things at the -- 17 legislature issues. We are doing that. We've 18 produced a book that -- we're getting ready to talk 19 to our legislators to do that, because much of what 20 we must do is at the legislative level, and we've 21 got to improve bingo. 22 And we've got to not pass something, 23 though, in this bingo act that we're talking about 24 right now that puts us out of business even -- that 25 will put us out of business if we lose these WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 128 1 grandfathered licenses right now, because we've had 2 some -- there's important capital that's underlined 3 that we cannot lose. We've got to keep that 4 capital. We've got charities that need to have 5 rules that they can live by down the road. 6 So thank you. 7 COMMISSIONER CLOWE: I want to thank 8 you. And I think we understand what you're saying. 9 I want to ask you a hard question, and it's a 10 question that I was called upon to ask at the 11 sunset committee meeting. 12 We know that the market for bingo is 13 in a reduction mode. We know that there is an 14 unequal distribution of player interest, not only 15 in the geographic areas in the state, but in the 16 days of the week and the kinds of halls that bingo 17 is played in. And we know that the state is 18 regulating -- we have had some references to the 19 trucking industry; I'm familiar with that -- but 20 we're not regulating private enterprise, per se, 21 here. We're regulating legalized gaming. 22 And in that agreement to have 23 legalized gambling in the state, one of the 24 benefactors of this was deemed to be charitable 25 operations. And we have had compelling testimony WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 129 1 from a number of charities as to how important that 2 income is to them. And so you get the sunset staff 3 review, and they say they're not distributing money 4 to the charities. 5 And given all of that, which you've 6 testified to -- and I can stipulate with you, when 7 the undistributed proceeds is 43 percent of the 8 gross, any public corporation you have that has 9 shareholders and is compelled to distribute 10 dividends, it keeps holding back this cash. It 11 keeps holding it back, and it doesn't make a 12 distribution. 13 And they say, well, we're going to 14 need that for a rainy day. You-all are only going 15 to have -- we may have a need for it. 16 And after a period of time, the 17 shareholders come or the IRS comes and says you've 18 got too much cash. You've got to make a 19 distribution or we're going to give you a special 20 tax on that. 21 MR. HEINLEIN: And do. 22 COMMISSIONER CLOWE: And do. 23 Now, that's kind of the way I see 24 the situation we've got. And, you know, these hard 25 times that we've talked about are there, but the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 130 1 undistributed fund is increased. And you've got to 2 deal with reality. I think this commission has got 3 to go back to the sunset committee and say here's 4 our recommendation. 5 And it can't be, well, we don't want 6 to change anything; we'll just keep it right like 7 it is. 8 MR. HEINLEIN: No, I think -- 9 COMMISSIONER CLOWE: Do you 10 understand the problem that I think -- 11 MR. HEINLEIN: I understand what 12 you're saying, but -- 13 COMMISSIONER CLOWE: -- the 14 commissioners are up against? 15 MR. HEINLEIN: -- I said I think we 16 have to -- we can put some parameters on it. 17 The average of the proceeds is not 18 unreasonable at 17,000. But probably what we have 19 is 500 -- you know, Billy would have to give you 20 some numbers on that -- probably 500 that had near 21 zero. And then we've got 500 with $200,000 in that 22 account, and that's where there was an increase and 23 there is more than is necessary. 24 COMMISSIONER CLOWE: What's your 25 recommendation, out of the staff recommendations? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 131 1 If you can buy off on one of those, what's the best 2 one? 3 MR. HEINLEIN: The one they 4 recommended. 5 COMMISSIONER CLOWE: You've done the 6 numbers -- 7 MR. HEINLEIN: Yeah. 8 COMMISSIONER CLOWE: -- as much in 9 depth as I've seen, as a public person in an 10 accounting system. So you would buy off on the 11 staff recommendation and deal with the devil of 12 defined expenses and the operating capital account 13 and just fight that devil -- 14 MR. HEINLEIN: Right. 15 COMMISSIONER CLOWE: -- year to 16 year? 17 MR. HEINLEIN: It hopefully wouldn't 18 have to be year to year, I think, if we could maybe 19 lay down some groundwork. 20 COMMISSIONER CLOWE: It might be; it 21 might not. 22 See, my view is, we go back to 23 Sunset on November 12th or the 13th. I think we've 24 got to go back to -- 25 MR. HEINLEIN: I agree. And I think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 132 1 you should have something to say to them about the 2 undistributed proceeds. I mean, you do need to 3 define that. 4 COMMISSIONER CLOWE: Well, I think 5 you folks are better qualified, maybe, than we are. 6 MR. HEINLEIN: I think Billy could 7 help us by giving us the information on how much is 8 in these varied accounts and give us some range 9 of -- 10 COMMISSIONER CLOWE: Well, 11 Mr. Bresnon has probably got a better handle on 12 that. I think he has corrected Billy's numbers. 13 MR. HEINLEIN: I don't have the 14 database for that, so I don't know -- 15 COMMISSIONER CLOWE: I just want 16 to -- I want to get a clearer understanding of the 17 sense of where we are in this process. And again, 18 you understand the commission is not the final 19 gatekeeper on this. 20 MR. HEINLEIN: I understand. 21 COMMISSIONER CLOWE: We owe them an 22 answer. 23 MR. HEINLEIN: But you need to give 24 them an answer, and I think that you can define it. 25 And I think I've given you testimony that I think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 133 1 it's something between 15,000 and 50,000 that 2 the -- my goal is that -- I think that the charity 3 needs the $15,000 in capital, and I don't think you 4 should have more than $50,000. It becomes 5 excessive. It's still his money. That's the other 6 thing. It's his money. He ought to be able to 7 keep it there if he wants to. But like you said, 8 the IRS has even got rules against that. 9 COMMISSIONER CLOWE: I question 10 whether it's his money or not. I question -- I 11 think that's the issue that the sunset staff has 12 brought up. That may be moneys that ought to be in 13 the charity's pocket. Maybe it's not his. 14 MR. HEINLEIN: Maybe it's not. 15 Right. 16 COMMISSIONER CLOWE: And I think 17 that's behind their 25 percent distribution 18 recommendation. That's the issue on the table. 19 MR. HEINLEIN: Right. Now, we 20 didn't bring it up here because I know somebody 21 else is going to talk about it, but it is something 22 that I have an awareness of because I have halls 23 that we've gone in this direction out of sometimes 24 desperation. 25 And that is what I call the single WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 134 1 business concept, which is something I do believe 2 has an effect on our costs. I think we could -- 3 it's part of the 4.1, like Mr. Bresnon says, 4 because it does affect our costs. 5 COMMISSIONER CLOWE: And you would 6 be in favor of that? 7 MR. HEINLEIN: Oh, absolutely. 8 Already, I'm backing up in doing that because I 9 didn't want to leave the podium without having said 10 something, because I've had such experience in that 11 area. It really began about four years ago because 12 I had these -- the very thing that was mentioned 13 here -- I don't know if it was back -- if we define 14 some things here that make it very difficult on 15 these charities, what ends up happening is that 16 they can't meet the requirements, and so they go 17 out of business, and the lessor has to go find 18 another charity to bring into the hall. 19 And four or five years ago, when I 20 first got involved in this, I saw that happening, 21 where there were halls that -- you know, they were 22 just like -- they were being even accused of using 23 the charity up, you know, and throwing it away, you 24 know, and give them another one. 25 That's a bad practice. I thought, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 135 1 oh, man, what's going on here? And I saw what was 2 happening. Because I really didn't understand 3 bingo. It's taken me a while just to try to 4 understand bingo. It's complicated. It doesn't 5 follow general accounting practices, you know. 6 You've got to define some new rules, almost. 7 So I said, you know, what's 8 happening here is that you've got a charity that's 9 playing on a particular day that's not profitable, 10 and you've got other charities that are supporting 11 him. I mean, he's supporting the hall by playing 12 on that inactive day. 13 Well, it was a hard sell because the 14 guy that's playing on the Saturday that's making a 15 lot of money, he does not want to get off. And I 16 had a hard time. It took me a while. And -- but 17 we began to get them to understand that you-all 18 have got to look at yourselves as operating a 19 single business. 20 You're in a bingo hall that's a 21 single location, you have an activity that the 22 people -- that the patrons that come in, they don't 23 know it's the fire department today and it's the 24 church tomorrow, and don't care. They're just 25 coming to play bingo. And so they're coming to a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 136 1 single establishment. They want to see the same 2 faces come to sell them every day. It's a 3 business. 4 And I said, you know, you-all have 5 got to rethink what you're doing. You've got to 6 think in terms of you're operating a single 7 business. 8 And so I began to produce something 9 that I called a single business concept. And so 10 when new charities were invited into a hall, I 11 would give them a speech, that you-all have got to 12 look at this in this way, that these are business 13 partners of yours. You are in a single business 14 together, and what one person does affects 15 everybody. And so if you're doing things that are 16 not legal or if you're doing something that's going 17 to cause you to lose your license, you're going to 18 hurt these other charities, and so you may be given 19 a notice by your lessor to get out. 20 So it's a principle that I think is 21 important. And instead of me cutting five checks 22 to Joe Smith every two weeks, I would sure love to 23 cut him just one check, and I would love to be able 24 to have one bingo bank account that all the 25 charities for all of the deposits that every day WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 137 1 would go into that one account. Then I wouldn't 2 have all these violations that come up on all of 3 our audits that says, oh, but you put their money 4 over in this account, and it should have been in 5 this account. Oh, yes. 6 And then I have the same problem 7 with the IRS. I've got to be sure and get the 8 right coupon book, you know, and put the right 9 person's identification that that money went to his 10 account. It doesn't always happen, so then I've 11 got a problem with the IRS. It usually takes me a 12 year to clean that up, and a lot of conversation, 13 because they made one deposit wrong and put it to 14 this account instead of this account. 15 Oh, we could clean up a lot of -- 16 you know, and I said -- I'm going to cut my own 17 throat, but I told my wife, I said I'm going to 18 have to cut my fees in half if they do this, so 19 I'll be out of business. 20 COMMISSIONER CLOWE: Thank you very 21 much. I appreciate it. 22 Next, I believe we have Sharon Ives, 23 representing the Bingo Interest Group. Good 24 morning. 25 MS. IVES: Good morning. This is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 138 1 still morning. Correct? 2 COMMISSIONER CLOWE: Barely, but it 3 is. 4 MS. IVES: Bear with me. My name is 5 Sharon Ives, with Fort Worth Bookkeeping. My 6 office handles bingo bookkeeping for over 40 bingo 7 organizations and approximately 10 grandfathered 8 lessors. 9 I want to start off by saying I do 10 not recommend setting a cap on expenses by rule. 11 Expenses differ by bingo hall location throughout 12 the state. I'm sure you-all heard the testimony 13 earlier that what may work for Texarkana may not 14 work for El Paso; what may work for Dallas may not 15 work for Brownsville type of thing. 16 It differs month to month. I'm sure 17 you know that the summer months are slow in the 18 bingo industry. And it also differs from season to 19 season. 20 It would be appropriate by a 21 case-by-case basis, but not by a rule. If expenses 22 are out of control, so to speak, I believe that 23 should be left up to the individual auditors that 24 are auditing that particular organization. But the 25 auditors in the bingo division use the authority WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 139 1 they already have, outlined in the Bingo Enabling 2 Act. 3 I know there was some talk earlier 4 on auditing all of the organizations at that 5 particular hall. I've been in the bingo business 6 since '84. The last time that the whole halls were 7 audited -- that's all the organizations plus the 8 lessor -- has been when the lottery commission 9 first took over the bingo, and that has not been 10 the case since. 11 We are being audited, one by one or 12 a couple at a time, but not the whole hall with the 13 lessor. I just wanted to clarify that. As a 14 matter of fact, I have an audit at 9:30 in the 15 morning. 16 Oh, I wanted to touch bases on the 17 loan issue as well. I believe Steve Bresnon had 18 brought it up earlier. We don't do that many loan 19 applications for the organizations. We help them 20 out with all their bookkeeping, obviously. That's 21 my business. 22 But the last one that we did that I 23 can remember off the top of my head was several 24 years ago, and that took up to three weeks to get 25 that approved. I know I kept threatening to go to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 140 1 Bank One, that I could get a loan in an hour, a lot 2 quicker than I could submit a loan application to 3 the bingo division. So like I said, that was years 4 ago, and I'm sure things have improved since then. 5 I also wanted to speak a little bit 6 about unit accounting -- I like that; that's 7 good -- what it is and how it could possibly work 8 to the benefit of the charities and the Texas 9 Lottery Commission, bingo division. 10 For analysis purposes, I just chose 11 one hall, one bingo hall in Fort Worth, that 12 happens to sell the instant bingo, the pull tabs, 13 as well as the electric bingo. During this past 14 quarter, which was third quarter '02, this 15 particular hall's five organizations that conduct 16 bingo wrote approximately -- I'm glad you're 17 sitting down -- 1,161 checks. That's for payroll, 18 accounts payable, et cetera. That's a whole lot of 19 check writing. 20 These organizations all employ 21 pretty much the same personnel for all the bingo 22 occasions. They employ around twelve workers and 23 up to six different security guards. They also 24 share the expense of electricity, water, gas, 25 telephone, and waste disposal service. They all WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 141 1 advertise in the same bingo newspapers. They also 2 all pay one-fifth of the janitorial service every 3 month, and most have the same bookkeeping service. 4 Now, I'm sure this is pretty common 5 around the state. Wouldn't this be nice if this 6 bingo hall could operate as a unit? Currently, if 7 one of those five organizations had a slow playing 8 day or time, we would constantly change or 9 flip-flop these organizations around so that it 10 would be beneficial for the charities as a whole. 11 In other words, the organizations 12 that have the better playing days are carrying the 13 ones that don't. Instead of all five organizations 14 receiving charity distributions that are uneven 15 amounts, so to speak, these amounts would be pulled 16 together so that each one receives an equal amount. 17 If unit accounting was an option, 18 just think of eliminating the complexity to the 19 organizations. Instead of writing 1,161 checks 20 during any particular quarter, they would only 21 write around 300. Also, they would not have to 22 worry about receiving a low amount on the charity 23 distribution. All five organizations would receive 24 the same amount. 25 Some of the benefits would be, or WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 142 1 could be, the Texas Lottery Commission bingo 2 division receiving one quarterly report; in other 3 words, fewer reports for them to process. They 4 would be able to audit up to seven charities for 5 that hall at one time. Instead of one, one month; 6 one, the next month, they could come in and audit 7 all seven, including the lessor. And there would 8 be no change in the prize fee amounts, in the prize 9 fee tax, the amount that's reported to the State -- 10 sent to the State, I should say. 11 The charities would write fewer 12 checks and receive an equal amount in distribution, 13 regardless of the playing days or playing times. 14 That's all I wanted to touch bases 15 on. Thank you. 16 COMMISSIONER CLOWE: Let's see if 17 there are any questions, please. 18 Nope, no questions. Thank you very 19 much. 20 All right. Thank you. And you're 21 from Fort Worth. Is that right? 22 MS. IVES: Yes, Fort Worth. 23 COMMISSIONER CLOWE: Thank you. 24 Next, we have Gene Garrison, I 25 believe it is. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 143 1 MR. GARRISON: Mr. Chairman? 2 COMMISSIONER CLOWE: Yes, sir. 3 MR. GARRISON: I have -- I'm 4 satisfied with the testimony that's been rendered. 5 I don't feel I need to testify. 6 COMMISSIONER CLOWE: Thank you, 7 Mr. Garrison. 8 Mr. Garrison indicated, off mike, 9 that he is satisfied with the testimony that's been 10 heard, and he does not wish to testify to the 11 commission at this time. 12 Next, we have Mr. William Smith; 13 Texarkana, Texas, I believe. 14 MR. SMITH: I agree with where 15 Mr. Garrison is concerned. 16 COMMISSIONER CLOWE: Mr. Smith is 17 indicating, off mike, that he is satisfied and does 18 not wish to testify. 19 Next, Mr. Robert Young. 20 MR. YOUNG: Thank you. Robert 21 Young, AMVETS -- that's all capital letters -- 22 representing American Veterans. I'm going to try 23 to make this brief, and in doing so, I hope I don't 24 take away from the importance I feel like this 25 issue is. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 144 1 I would like to speak on the part 2 that I think was hit upon earlier, of the 3 conventions, expenses that have been disallowed, 4 and the importance of our conventions as a veteran. 5 And I'm sure -- in speaking so, I'm sure there is a 6 lot of other charity organizations that have 7 similar-type functions. 8 I've been a member of AMVETS since 9 1972. It's probably -- I think about -- it was '79 10 or '80, I started attending conventions, with the 11 majority of them with some expenses paid. I have 12 paid my own expenses to some of them which -- you 13 know, that I'm concerned about that we need, and 14 one of the reasons being that in our organization, 15 we have a lot of older people that are on fixed 16 income and can't -- you know, couldn't afford to 17 attend these conventions without some assistance. 18 And through necessity, we have cut 19 back on those expenses in the past until we've seen 20 some recent rulings. One of the things -- you 21 know, let me tell you some of the things we've have 22 to cut out. 23 We've talked about these -- I -- 24 also, to give you some more background on myself, 25 I'm past department commander of the state of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 145 1 Texas, which I chaired the annual convention and 2 the SEC's -- or executive council. It was just a 3 couple meetings a month on that. And in so, I was 4 the ex officio of all committees. And now I am 5 the -- for the state of Texas, the chairman of the 6 ROTC committee. 7 And what we do in conventions, among 8 other things, is we sit and determine goals, what 9 money we have, and where we're going to set our 10 goals and where we are going to divide it and who 11 gets what. 12 I'm trying to rush through this, and 13 I know I'm going to miss something. Our ROTC, we 14 have over 400 medals and certificates that was 15 distributed to different high schools throughout 16 the state of Texas. Our AADA is our -- our AADA 17 program, which is AMVETS Against Drugs and Alcohol, 18 we give scholarships, kindergarten through the 19 12th grade. These are judged at our convention by 20 the AADA committee and then approved. And these 21 are sent on to our national convention. 22 And while I'm on the national 23 convention, let me say this: When I -- I've been a 24 Texan all my life. The only time I was out of 25 Texas was my time in Viet Nam. I even served -- my WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 146 1 regular service in Texas was in El Paso and 2 San Antonio. 3 And I consider myself Texas, and 4 when I go to these national conventions, I am 5 Texas. I sit with the Texas delegation. I vote as 6 a Texan. And yes, I've had my expenses paid in the 7 past to these national conventions. 8 At those, we judge, national, the 9 AADA for the scholarships. And there is a national 10 scholarship through our national organization. And 11 I'm proud to say that Texas usually ranks, you 12 know, in the top three every year. We have a very 13 good program here in Texas. 14 Also, our Americanism. And our 15 Americanism, you know, is kindergarten through 16 12th grade. And what these are -- you say, well, 17 what does kindergarten do? They -- we go all the 18 way from posters to essays. And I don't know 19 exactly where they break it down, but at some point 20 they start writing essays instead of posters. 21 So we produce special benefits. 22 Boy Scouts. In several counties, we support the 23 FHA, and we do individual posts and stuff. They do 24 the Christmas baskets. In my personal post, we did 25 30 last year, and we just approved to do 30 more WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 147 1 for the needy during the holiday seasons, 2 Thanksgiving and Christmas. 3 These come out of our general funds, 4 which, you know, there is other money that goes 5 into that general fund, too. It doesn't all just 6 come from bingo. 7 But I guess, in all, what I'm trying 8 to say is, we need to be -- to offset some of our 9 expenses. We even need to use money to go to the 10 conventions because conventions are a necessity. 11 In fact, when we reapply for a bingo license -- 12 you-all have our by-laws and constitution, and by 13 looking at it, you can see that we are required to 14 go to these conventions. 15 And I'm going to tell you, it's -- 16 you know, a lot of people look at veterans, they 17 wear the funny hats and they drink beer and holler 18 out the windows and stuff, you know. But I'm not 19 going to say I haven't seen it in the past, but I 20 haven't seen it in a while. 21 But we do -- you know, we do have a 22 good time when we get together, but it's not just a 23 party, you know. I think somebody maybe on the 24 outside looking in may say, hey, they get together 25 and they want to have a little party. And that's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 148 1 not what it is. 2 But we have things -- and it's tough 3 to sit there and only have a certain amount of 4 money, and you've got to decide who gets the money 5 and where we cut back. Let me tell you some of the 6 cutbacks that we have had to make. We sponsored an 7 ROTC championship in Mesquite, Texas. And I'm 8 talking about thousands of dollars. We give out 9 over 700 trophies ands medals. We no longer do 10 this. 11 And the high schools in Texas had 12 adopted that as their state meet. I mean, when we 13 first started doing it, it was just local and 14 stuff, and the first we know -- but we don't have 15 that anymore because we didn't have the money to do 16 it. 17 Now a lot of the schools are having 18 to do it, and I don't know if they sell candy or 19 what. They still have one, but I don't think it's 20 sponsored by anyone. 21 Our drivers' contest that we used to 22 have down here, the state driving contest in 23 St. Marcos -- San Marcos, I mean -- we used to 24 have -- and what that was, is the drivers education 25 people from each one of the high schools would take WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 149 1 their top people -- and they would have their own 2 contest or whatever -- and they would send them 3 down there, and we funded the whole thing. We no 4 longer do that. We don't have the funds for that. 5 And these were some tough decisions. 6 Now, these decisions were made at our state 7 convention. Also, we used to get matching funds on 8 this driving stuff from our national -- on the 9 national level. We had -- they have dropped that 10 at this time. We used to go out and try to get 11 automobile sponsors and stuff, and we did get some 12 money there. But as the economy got worse, we 13 don't have those sponsors to even help us out. 14 But the bottom line is -- and if I 15 could come away and enlighten you any, these aren't 16 parties. These are needed. And when I go to that 17 convention in Texas, when I hit that microphone, 18 I'm representing Texas and I am Texas. And if this 19 money has helped for my airline or whatever, it was 20 spent on Texas because I'm representing Texas. 21 Thank you. 22 COMMISSIONER CLOWE: Thank you. 23 Questions? 24 COMMISSIONER WHITAKER: Quick 25 question: Are all your conventions outside of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 150 1 Texas? 2 MR. YOUNG: Oh, no. That's what I 3 was referring -- 4 COMMISSIONER WHITAKER: Okay. 5 MR. YOUNG: When I -- like I say, 6 I'm past department commander, which I chaired 7 those meetings. We have a convention, which is 8 usually in June here in Texas, a Texas convention. 9 And then we have two executive councils, which 10 consist of all the commanders. We have one in the 11 spring and one in the fall. 12 In fact, we're contemplating cutting 13 back to just a spring or possibly a fall. We're 14 looking at trying to cut some expenses there from 15 the fact that we may only go to two meetings 16 instead of three. 17 I left out one other that we used to 18 do. We used to -- the ROTC, they have what they 19 call the rifle -- I can't remember the exact 20 terminology -- where they go shoot in a -- and it's 21 a national meet where they send like -- I think 22 it's four or five of these young Americans, that 23 they go up there and complete. And we used to 24 sponsor that, and that's another one. And that was 25 pretty expensive sending them around the country. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 151 1 But I'm going to tell you, the 2 reason I am chairman now of the ROTC is that -- if 3 you've never been involved in it, you need to go 4 out and look and see what they are. These are the 5 young men and women that our lives may depend on 6 one of these days because most of them move on into 7 the military, and they can get a good background -- 8 these are some fine -- these are the good teenagers 9 that are out there. These are the ones that aren't 10 in trouble. And I feel it from my heart, and I 11 hope I'm talking from my heart, and I hope I got 12 into your heart a little bit. 13 Thank you. 14 COMMISSIONER WHITAKER: Thank you. 15 COMMISSIONER CLOWE: Mr. Young, I 16 think you misquoted one thing. You said you 17 supported the FHA. You meant the FFA, didn't you? 18 MR. YOUNG: Yeah. 19 COMMISSIONER CLOWE: Great. I 20 just -- 21 MR. YOUNG: Future Farmers or 22 whatever. 23 COMMISSIONER CLOWE: Future Farmers 24 of America, yeah. Great. 25 COMMISSIONER WHITAKER: FFA. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 152 1 MR. YOUNG: I don't personally 2 participate in that, but we do have people that do. 3 COMMISSIONER CLOWE: Good. Thank 4 you, sir. 5 MR. YOUNG: It used to be, like, 4H 6 or something like that. 7 COMMISSIONER CLOWE: That's right. 8 Thank you. 9 Don Webb is next, representing 10 AMVETS and Redmen. 11 MR. WEBB: Good morning. My name is 12 Don Webb. I'm from the Dallas area, and I 13 represent AMVETS and Redmen. I would just like to 14 say that I'm an executive director for AMVETS from 15 the state of Texas. 16 We have three meetings a year, and 17 what I would talk about -- what I want to talk 18 about was the expenses that occurred during that. 19 I send out letters three times a year to these 20 posts and their auxiliaries, telling them that they 21 need to be at this particular convention or this 22 SEC meeting. 23 And if they -- I have roll call, and 24 if they don't -- if they miss that roll call, 25 they're in danger of losing their charter. If they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 153 1 lose their charter, then they lose their license. 2 This is handled out of the general fund. 3 In the past, we've handled it out of 4 the general fund for 20 years. IRS has approved 5 it. We have had audits, and that's what we 6 approved. And now we -- it stands that we can't 7 use the general fund for the conventions. When we 8 have our conventions, it is a teaching process. We 9 go over 990's, we teach the -- you know, we're 10 there to conduct business. Like, whatever program 11 they're with, we help them with. That's about it 12 on the AMVETS part. 13 Now, in the Redmen part, which is 14 the -- one of the oldest fraternal organizations 15 there are, we have a teaching process there. We 16 have two meetings a year. Most of the time -- 17 yeah, there is just two meetings of that. We do 18 the same thing. If they don't have a 19 representative there, there is a chance that they 20 will lose their tribe and council charter. So they 21 have to have it. And we invite the lottery 22 commission, we invite the IRS to come down and sit 23 in on our meetings. So -- and it's a teaching 24 process. 25 So that's what we would like to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 154 1 consider that -- you know, that our expenses -- 2 that we can use expenses out of the general fund 3 for that. And I thank you for the time -- 4 COMMISSIONER CLOWE: For that 5 request, you're asking the adoption of the internal 6 revenue code or -- 7 MR. WEBB: Yes. Yes, sir. 8 COMMISSIONER CLOWE: Fine. Thank 9 you, sir. Thank you very much. 10 Mr. Jimmy Van -- I believe we've 11 finally gotten to you -- from Roanoke, Texas. Good 12 morning. 13 MR. VAN: Good morning, 14 Mr. Chairman, Honorable Commissioners. I am Jimmy 15 Van, and I represent the North Texas Firemen's 16 Association, who currently is playing bingo in a 17 commercial hall. 18 My beginning with bingo started in 19 1987. And from the years 1987 to 1995, I was with 20 a small volunteer fire department that I can 21 positively tell you would not have existed all 22 those years without our money from bingo. 23 Seriously. We bought two brand new brush trucks 24 and many pieces of equipment, safety items, so that 25 we could do our job efficiently and safely. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 155 1 And I sincerely appreciate this 2 particular council because in my dealings with 3 bingo before, I did not get a hearing here. And I 4 thank you very much for this opportunity today. 5 I would like to talk in support of 6 the "unit accounting," our new term. I really 7 believe that this would be very, very beneficial. 8 When we started in 1987, in our hall 9 there were four charities. We just randomly picked 10 the days that we would play, got our licenses. And 11 it just so happened that my fire department was 12 lucky enough to get the best nights, and we did 13 very well. Another charity, which was an animal 14 rights organization, got the worst days, and they 15 had a terrible time. 16 And after about two quarters, they 17 asked us if we couldn't share one or two of our 18 good nights with them, and we agreed. We had to 19 make an amendment to our license, sent all that in, 20 sent some money to you-all -- or to them. That was 21 the comptroller's office at that time. 22 And we did that for a couple of 23 quarters, and then we swapped nights again, filling 24 out more paperwork, sending in more money. And in 25 the process -- the secretary was using an WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 156 1 electronic typewriter, and in the process, she sent 2 in a license for two charities on the same night. 3 That was not caught until the night 4 of bingo. We were called and told we could not do 5 that; we were in violation of the law. And two 6 charities could not play bingo for about a week 7 until we got that straightened out. 8 It was an honest mistake. It was 9 just one of those things. Those electronic 10 typewriters have a memory, and it just made a 11 mistake. That mistake caused the bingo hall to 12 close for two nights during that week. 13 When people showed up and they saw 14 that sign on the wall that there would be no -- or 15 on the window that there would be no bingo, people 16 starting going to other halls. And it took us a 17 long time to build our clientele back up again. 18 It is very important that this has 19 to operate as a unit. Bingo is a business. And 20 although we did have some people that would come to 21 our session because they wanted to support the fire 22 department, as a general rule, most people have no 23 idea -- I mean, at the beginning, the bingo caller 24 will say tonight's session is being sponsored by 25 Mayhill Fire Department -- or the humane society or WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 157 1 whatever. 2 People don't listen. They don't 3 care. What's the first number? I want to yell 4 that magic word. Pay me. Show me the money. 5 But when they can't play because the 6 hall was closed because of a violation of a rule, 7 this interrupted my schedule, and it takes a while 8 to get back again. Revenue sharing would stop the 9 charities having to swap nights out. Because I'll 10 tell you something. Maybe Friday night this 11 quarter is real, real good. Next quarter, it may 12 not be. That may be the worst night. 13 And even though you may have a 14 charity that's playing on good nights this quarter, 15 it may be the worst nights by the fourth quarter. 16 I can almost assure you that I can show you on the 17 paperwork when the 1st and the 15th happened, 18 because a lot of folks that were on fixed -- Social 19 Security, fixed incomes, when they got their 20 checks, they came to play bingo. And toward the 21 end of that cycle, it was slower. 22 I can also show you the nights that 23 Monday bingo -- Monday football started. Monday 24 nights turned out to be a ghost town at our bingo 25 hall during that time. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 158 1 This would solve a lot of problems. 2 If we're all paying the same janitorial service -- 3 let's say it's $20 -- and each charity, if there 4 five, each paid them two dollars, we wrote five 5 checks for $20. Would it not make more business 6 sense to write one check to that same person for 7 $20? We're cutting down waste of paper, first of 8 all. We're cutting our labor costs, and we're 9 taking it and making things more efficient. Having 10 one form for you-all to take a look at would make 11 your jobs a lot easier and simpler. 12 Overall, I think that this makes a 13 lot of sense, and I would appreciate very much you 14 considering this as an option, not a mandatory 15 thing, because there would be some halls that may 16 not want to participant. And certainly, an 17 organization like the VFW or what have you that has 18 their own hall, they may choose not to do that. 19 But as an option, I think it would be a great 20 service to bingo in general. 21 And I appreciate your time, sir. 22 COMMISSIONER CLOWE: Thank you, sir. 23 Any questions for Mr. Van? Thank 24 you very much. 25 Is there anyone else wishing to give WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 159 1 testimony to the commission at this time? 2 Billy, do you have any comments for 3 the commissioners at this time? 4 MR. ATKINS: No, sir, not in 5 addition to those already made. 6 COMMISSIONER CLOWE: Commissioners, 7 how do you want to proceed? 8 COMMISSIONER WHITAKER: What's our 9 deadline again? 10 COMMISSIONER CLOWE: Well, the 11 commission is -- I don't think we have this 12 scheduled, do we, Nelda? The meetings are the 12th 13 and 13th of November. Do we know when we're on the 14 agenda? 15 MS. TREVINO: No, Mr. Chairman. We 16 don't know when those two days that our agency will 17 be taken up. But it's my understanding, in 18 communicating with the sunset staff, that in order 19 for any recommendation from the agency to be 20 considered by the sunset commission, it would have 21 to be in their hearing decision document that they 22 plan to provide to the sunset commission members at 23 least a week prior to the hearing. 24 And so again, in our discussions 25 with the sunset staff, the agreement that we made WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 160 1 with them was to make every attempt to have 2 documentation to them on our recommendations by the 3 end of this month, which would be next week. 4 COMMISSIONER CLOWE: So that's our 5 deadline. 6 COMMISSIONER WHITAKER: Okay. Well, 7 I'd like to discuss it, then. 8 COMMISSIONER CLOWE: Well, I think 9 we ought to discuss it. And it appears to me, if I 10 may presume, that there is no controversy over the 11 staff recommendation on 5.1 and 5.2. I mean, I'm 12 not sure "controversy" is the right word, but there 13 seems to be a higher degree of unanimity on that 14 recommendation. 15 So I would personally think that we 16 could move forward with a vote, and I would be 17 prepared to move the adoption of that 18 recommendation. 19 COMMISSIONER WHITAKER: Second. 20 COMMISSIONER CLOWE: Okay. Then I 21 think that's a motion. 22 Is there any discussion on that? 23 COMMISSIONER COX: Yes. I raised 24 the question earlier as to what applicability our 25 response, the staff's response, has to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 161 1 question. I still haven't been able to make that 2 link. 3 COMMISSIONER WHITAKER: I guess the 4 way I would see it is that the issue of whether 5 grandfathered clauses necessarily mean they have to 6 be phased out is a legislative policy decision. 7 This change solves a lot of the problems perceived 8 in the current setup, which would probably 9 eliminate a lot of the differences between the two 10 that gave rise to the urge to change it. 11 I guess my question to you, 12 Commissioner Cox, is do you feel that we ought to 13 say to the legislature, we agree with you that 14 "grandfathered" means that it is to be eliminated? 15 COMMISSIONER COX: Well, I thought 16 that our previous response was that we agreed that 17 there needed to be categories of licenses that were 18 attractive to capital. And I would have thought 19 that our recommendation would have been -- thank 20 you, Billy -- since the agency -- this is our 21 response (indicating) to the Sunset Advisory 22 Commission staff report on Issue 5. 23 COMMISSIONER CLOWE: Let me ask you 24 if you are being picked up on the mike. 25 COMMISSIONER COX: Okay. Thank you, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 162 1 sir. 2 And our response says: The agency 3 concurs in the idea of not having two different 4 types of licenses; however, the agency does not 5 agree that the recommendation will correct the 6 identified problems regarding the existence of 7 licensed types, and in fact, may exacerbate those 8 problems. The recommendation does not take into 9 consideration the (inaudible) capital availability 10 that certain licensees have claimed to have made to 11 charities over time. Furthermore, the issue 12 welcomes any approach that would eliminate 13 confusion regarding this issue. 14 And my question was, what does this 15 have to do with that? And I thought Billy said 16 nothing. 17 COMMISSIONER WHITAKER: I think this 18 eliminates some of confusion which was behind our 19 response to the sunset report -- I mean, some of 20 the complexities. 21 Right, Billy? 22 MR. ATKINS: Yes, ma'am. 23 And if I can address, 24 Commissioner Cox, your question, our recommendation 25 doesn't reach to the sunset recommendation WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 163 1 regarding the elimination of the grandfathered 2 lessor or the transferability. I think what the 3 staff was operating off of, what I think 4 Commissioner Whitaker was referring to, was the 5 sentence in the agency's recommendation regarding 6 the two different types of licensees. We were 7 looking at the grandfathered commercial lessor and 8 the non-grandfathered commercial lessor. 9 And it's traditionally that 10 non-grandfathered commercial lessor that's a part 11 of the tier system that we're recommending 12 eliminating. 13 COMMISSIONER WHITAKER: In other 14 words, by eliminating the tier system, we've 15 eliminated a lot of the differences between the 16 two, and therefore, some of the impediments to 17 capital of the non-grandfathered situation. 18 COMMISSIONER COX: Well, if the -- 19 if that class of licensee didn't attract any 20 capital, then no one would be in it. So I'm still 21 not understanding what we're doing here. 22 COMMISSIONER CLOWE: My answer and 23 the answer that I have in my mind is that if we 24 adopt the staff recommendations, grandfathering 25 will die if that's the decision that the sunset WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 164 1 committee makes and legislation is introduced and 2 passed that causes that to come about. 3 The capital represented in the 4 industry today by that class of licensee would go 5 under the staff proposal into the category titled 6 "Association of Licensed, Authorized 7 Organizations." And that gave me comfort that 8 there was a place that the entrepreneurs and the 9 capitals that I see as necessary in this industry 10 would have a place to operate. 11 Billy, did I state that correctly? 12 MR. ATKINS: You did. You stated it 13 probably more from the direction that we hadn't 14 been looking at as far as individuals with the 15 capital developing the locations that the 16 associations could go into. I think we looked at 17 it from the position that the organizations, by 18 forming an association, would be able, on their 19 behalf, to accumulate additional capital in order 20 to open up a facility. 21 COMMISSIONER CLOWE: But there's 22 nothing to preclude the entrepreneur and the person 23 who has capital from entering into that structure 24 and having a place there to operate, as I 25 understand it. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 165 1 MR. ATKINS: That's correct. 2 COMMISSIONER CLOWE: That's what 3 gave me comfort about this staff proposal. 4 COMMISSIONER COX: Thank you. 5 COMMISSIONER WHITAKER: Let me ask 6 you this, Chairman Clowe. 7 As I understand it, Billy, you were 8 saying that the association would be made up solely 9 of charities. 10 MR. ATKINS: Yes, ma'am. 11 COMMISSIONER WHITAKER: So, 12 Chairman, you would be talking about an 13 entrepreneur being a part of a charity or funding a 14 charity -- 15 COMMISSIONER CLOWE: That's a 16 possibility as I see it. 17 COMMISSIONER WHITAKER: -- as 18 opposed to being a stand-alone partner in the 19 association? 20 COMMISSIONER CLOWE: And he couldn't 21 be -- the entrepreneur could not be a stand-alone 22 partner. 23 MR. ATKINS: The entrepreneur, as we 24 envisioned it, could not be -- they wouldn't be a 25 part of the charity, nor would they be a part of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 166 1 the association. They would be an individual that 2 takes a facility and says I want to turn this into 3 something that's suitable for the conduct of bingo; 4 and then, in turn, lease it to this association of 5 charities to conduct their bingo games. 6 COMMISSIONER CLOWE: That's a more 7 practical rule than the entrepreneur. That's 8 right. But it gives them a place. 9 MR. ATKINS: Yes, sir. 10 COMMISSIONER CLOWE: And they -- 11 COMMISSIONER WHITAKER: And it 12 also -- 13 COMMISSIONER CLOWE: Excuse me. 14 COMMISSIONER WHITAKER: And it also 15 simplifies, I think, the arrangements between the 16 charities. 17 MR. ATKINS: Yes, ma'am, we do too. 18 COMMISSIONER CLOWE: Billy, a 19 clarifying question: If the entrepreneur assumes 20 that position in the structure, that individual 21 then would be unregulated. Is that not correct? 22 MR. ATKINS: Yes, sir. They would 23 not be licensed. This would be -- it would be a 24 business agreement that that association enters 25 into now, just like the associations we currently WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 167 1 have, do. 2 COMMISSIONER CLOWE: I'm trying to 3 get back to Commissioner Cox's question. If the 4 charities in this entity of an association, by 5 joining together, can create capital and conduct -- 6 or qualify, that's a better word -- for a lease and 7 for the generation of physical facilities, that 8 sort of thing, they could do that under this 9 proposed structure. 10 If they're unable to and they turn 11 to an entrepreneur, they could make a contract with 12 that individual. And the individual, as I see it, 13 would take the risk of having a lease, investing in 14 the tables and the chairs and the equipment that's 15 required, and the charity would make that 16 agreement, that operating agreement with him. 17 They might not have adequate capital 18 to do that, but the entrepreneur would take that at 19 a higher risk, perhaps, than an owner of a building 20 might, and for a longer term. 21 MR. ATKINS: That's correct, with 22 the exception that the entrepreneur would not -- 23 when you say "equipment," I think in my mind "bingo 24 equipment." The organizations would be responsible 25 for the bingo equipment. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 168 1 COMMISSIONER CLOWE: I'm thinking -- 2 when I say "equipment" -- thank you -- I'm thinking 3 of tables and chairs and snack bar equipment. 4 That's non-bingo equipment. 5 MR. ATKINS: Non-bingo. You're 6 correct. And that's a business decision that that 7 individual would make to undertake that risk to 8 lease to those organizations, to that association. 9 COMMISSIONER CLOWE: See, I think -- 10 my best guess is, that's where these individuals 11 are going to go. They're going to go to a position 12 where they take on that risk and they invest that 13 capital. And this proposal of an association is 14 better, and it gives more power to the members, 15 bargaining power to the members of the association, 16 than any one of them would have individually. 17 And I would certainly be 18 agreeable -- if Commissioner Whitaker wants to 19 withdraw her second, I would withdraw my motion if 20 you have a motion for a better solution. 21 COMMISSIONER COX: No, I can't come 22 up with that. 23 COMMISSIONER CLOWE: I think our 24 motion got on the table maybe a little faster than 25 you wanted it to come, so I want to give you all WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 169 1 the leeway that you need. 2 COMMISSIONER COX: That's way beyond 3 my abilities -- 4 COMMISSIONER CLOWE: You're overly 5 modest. 6 COMMISSIONER COX: -- in the time 7 allowed. 8 COMMISSIONER WHITAKER: Do you want 9 to postpone voting on it, Commissioner Cox? 10 COMMISSIONER COX: No. I'm prepared 11 to vote now. 12 COMMISSIONER CLOWE: I guess one of 13 the strongest incentives I think I have to vote for 14 this is that I had seen staff and those public 15 persons who were in the industry come together and 16 say we can live with this. And that motivates me 17 to recommend it to the sunset committee and say 18 this is the best solution that we've come up with. 19 And again, I want to say I don't 20 think anything we do is final. The legislature 21 certainly is the final voice. But I think if we -- 22 if we can -- come up with a reasonable and proper 23 solution, it's incumbent on us to offer it up. 24 Any further discussion? 25 All in favor, please say aye; WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 170 1 opposed, no. 2 The vote is 3-0 in favor. 3 Commissioners, we have next to deal 4 with the staff recommendation on Issue 4.1. We've 5 heard quite a bit of testimony about that today, 6 and I think it is almost two-pronged now in our 7 deliberations. It's the formula to allow for 8 distribution of moneys to the charities. And as 9 part of that, I think in our discussion, questions 10 have been raised about the establishment of a 11 definition of "authorized expenses" as it relates 12 to current practice or a change in our 13 recommendation to the adoption of the Internal 14 Revenue Service Code. 15 And then I think there is another 16 issue which we've had testimony on which is not 17 encompassed by a staff recommendation that's before 18 us, and that is the so-called unit accounting 19 proposal. 20 Those are the issues that, as I see 21 it from the testimony we've had here today, the 22 commission would be in a position to deliberate 23 about and possibly find a focus to deal with. So I 24 would ask, what is your pleasure? 25 COMMISSIONER WHITAKER: Well, I'll WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 171 1 jump in. 2 On the staff recommendation, you can 3 tell what I'm troubled by, and that is, we have -- 4 I sensed a deep concern on the part of the sunset 5 commission that the only reason that these 6 activities are allowed is to generate distributions 7 to charities. I have a notion that, that over a 8 hundred of them or almost a hundred of them were 9 not required to make any distribution at all, 10 bothered them clearly. 11 What also bothered -- 12 (Brief interruption.) 13 COMMISSIONER WHITAKER: I think they 14 were also concerned about the perception that if 15 this is a business, how is it that you can have a 16 90 percent expense-to-revenue ratio or a 99 percent 17 revenue ratio, and still be in compliance? 18 The staff recommendation does deal 19 with the zero cash flow, and there seems to be 20 consensus that as to those charities that came out 21 to generate a positive cash flow, that they ought 22 to not be licensed. So that, at least, deals with 23 that piece of it. 24 The question I would throw out to 25 the two of you is, to what extent should we go WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 172 1 beyond that and require more than zero, more than 2 1 percent. If we were to use the numbers of the 3 accountant, which is 7,800 per year, per charity, 4 that would take you up to about, like, an 8 percent 5 floor. That's very close to the 10 percent floor 6 that Billy was talking about on the expense cap. 7 The average distribution by a 8 charity was 20 percent, which is getting close to 9 the 25 percent the Sunset was recommending. I 10 don't know what the answer is, but something along 11 these lines is striking me as appropriate, and that 12 is, no less than 10 percent; but some kind of 13 guidance, if you will, so that the charities have 14 some incentives to start working toward, say, like 15 the average of 20 percent. 16 I don't know how you word that, but 17 I'm uncomfortable with the staff recommendation 18 having, you know, basically just one dollar being 19 sufficient. 20 COMMISSIONER CLOWE: How do you feel 21 about that? 22 COMMISSIONER COX: Well, I share the 23 concern. The recommendation in the staff's report 24 is that anyone who can't make a distribution would 25 have come and show cause as to why they should WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 173 1 continue to be licensed. That sounds like a lot of 2 administrative activity. It would be nice if there 3 was some nice, clean, one-two-three strike kind of 4 a way to go at it. 5 Billy, do you look at all now at the 6 viability of a charity, or do they get to stay in 7 business as long as they can drag themselves to the 8 starting line? 9 MR. ATKINS: I'm not sure I followed 10 your question. 11 COMMISSIONER COX: Do they get to 12 stay in business forever even if they're not making 13 any money and they're not making a distribution? 14 MR. ATKINS: If they're in 15 compliance with the Act, yes. 16 COMMISSIONER WHITAKER: Commissioner 17 Cox, what I heard out in the audience was an 18 acknowledgment that you could even eliminate the 19 just cause and say -- because a year is an average 20 of four quarters, there seems to be consensus that 21 you could simply say that they have to make a 22 distribution annually, period, because that would 23 be a bright-line test -- if I heard everybody 24 correctly. 25 COMMISSIONER COX: So if someone WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 174 1 went into business in the fourth quarter, would 2 they be on four rolling quarters, or would they be 3 on an annual basis? 4 COMMISSIONER WHITAKER: I'm sure you 5 could do four rolling. 6 COMMISSIONER CLOWE: That would be 7 their fiscal year, probably. 8 MR. ATKINS: Commissioner Whitaker? 9 COMMISSIONER WHITAKER: Yes. 10 MR. ATKINS: Could I try and get 11 some clarification on -- I think your 12 recommendation or your questions in general, you 13 were talking about modifying the staff's 14 recommendation with the caveat that there be a 15 distribution of at least 10 percent. 16 COMMISSIONER WHITAKER: Right now, 17 I'm just addressing what Commissioner Cox is 18 talking about, and that is, even your 19 recommendation seems to have quite a bit of red 20 tape in it. So I was addressing perhaps, given the 21 feedback we've gotten today, if you could eliminate 22 that piece of the red tape, at least. But -- now, 23 I would like to have feedback on whether there is 24 anything beyond that that we should do. 25 COMMISSIONER COX: Why would a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 175 1 charity that's not making money want to stay in the 2 game? 3 MR. ATKINS: Commissioner Cox, I 4 think that's a better question asked to those 5 charities. I mean, I could only speculate. My, 6 you know, speculation could be that they're, you 7 know, just filling a hole in the one hall or that 8 they're individuals associated with that 9 organization who would be making money and don't 10 really care if their charity is being helped or 11 not. 12 But I don't know that I'm prepared 13 to tell you why a charity would want to do that. I 14 don't know why they would. Maybe they're 15 operating -- maybe they're hoping against hope that 16 some day they will make money. 17 COMMISSIONER COX: Okay. What's the 18 magic formula for this? 19 COMMISSIONER CLOWE: I'll just muddy 20 the water a little bit more. 21 You know, I don't think we can focus 22 totally on just those charities that aren't getting 23 a distribution. And we've had good and compelling 24 testimony on how difficult it is for charities, for 25 reasons of random luck, in some cases, of the time WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 176 1 they play and certainly the place they play. 2 But I think the problem the sunset 3 staff put on the table for us to consider is that 4 there are charities that are making good money or 5 receiving good money from bingo operations, and 6 there is, in their opinion, too much money 7 undistributed. And the crux of their proposition 8 is to force those moneys out of those accounts into 9 the charities. 10 And my sense, from what I heard when 11 we went to the committee and appeared before them, 12 was that there is an inevitability that some 13 charities will cease to conduct and be involved in 14 bingo if they don't meet a rule that they want us 15 to make a recommendation about. 16 And I think, as I've mentioned 17 before, there was some degree of unawareness that 18 there is no rule that the commission has today to 19 put a charity out of business that isn't getting 20 distribution. And I sense some anticipation that 21 that was going to be part of their deliberations. 22 COMMISSIONER WHITAKER: I am 23 interested in this idea of unit accounting because 24 I am troubled by the fact that one charity might 25 just get a bad slot and another would get a good WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 177 1 slot. And I do see some real benefits in that. I 2 think it is somewhat complicated, though. 3 COMMISSIONER CLOWE: It is. And I 4 share in that as well. 5 COMMISSIONER WHITAKER: And if you 6 had that as an option, then what I hear folks 7 saying is the ability to actually generate some 8 cash that would go into distributions would be a 9 lot easier because you're already dealing with an 10 industry average of 20 percent, which is just 11 5 percent less than the commission was 12 recommending. 13 So the question here is, how do you 14 get that lower 20 percent in a position where they 15 could achieve that goal or something close enough 16 to it that's it's acceptable. That's why it seems 17 to me that if you put, say, like a 10 percent 18 expense cap, which I hear folks saying is -- or at 19 least a minimum of -- 800 is what I heard. 20 Okay. Let's assume we accepted that 21 or 8,000 or 10,000, and then put something else in 22 that said but the average is 20 percent, and over 23 time, a charity needs to be taking all reasonable 24 actions to achieve that. That sounds money to me. 25 But on the other hand, it gives the flexibility WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 178 1 that I hear folks saying they need, and at the same 2 time addresses the sense that the whole purpose of 3 this venture is to provide money for charity. 4 I don't know. As a lawyer, I'm used 5 to those terms, right, so it doesn't bother me as 6 much. But I'm not administering it day to day like 7 you are, Billy. 8 MR. ATKINS: And I guess, 9 Commissioner Whitaker, my response would be is if 10 you look at the sunset finding, which is charities 11 are not making maximum charitable distributions, 12 and if you look at the unit accounting as a means 13 to do that, again, I don't see it maximizing those 14 distributions. 15 If you have an organization that's 16 making a lot of money on a Saturday night and an 17 organization that's not making as much money on a 18 Monday night, and this organization subsidizes this 19 organization in order to even them out, I don't see 20 money growing; I just see it being redistributed. 21 COMMISSIONER COX: Well, Billy, I 22 think that I see money growing, if for no other 23 reason than because of reduction of administrative 24 expense. 25 MR. ATKINS: And I will agree that I WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 179 1 do think the unit accounting could result in that. 2 COMMISSIONER COX: And it creates 3 some efficiency that I think is just money lying on 4 the ground that we ought to, if we can, enable the 5 industry to pick up. Now, is there any downside -- 6 from your side -- on the unit account? Does that 7 make your life better, worse, or the same? 8 MR. ATKINS: On the surface, I'll 9 tell you that it will probably make our lives 10 better. But I'm going to say it again. I think 11 it's a much bigger issue than is being proposed 12 here today. And I think it merits a lot more 13 consideration than just what's being given here 14 today. 15 COMMISSIONER COX: So you don't want 16 us to act on that today? 17 MR. ATKINS: I'm not uncomfortable 18 with the commission acting on it today in terms of 19 there is agreement that this should be -- would be 20 beneficial and should be explored further. I mean, 21 I guess I'm a little uncomfortable with the 22 commission making a decision today -- yes, we want 23 to do it and have it in place tomorrow -- or 24 something similar. But I'm definitely in support 25 of exploring it further. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 180 1 COMMISSIONER CLOWE: Well, now, in 2 your view -- let me go back and ask a question that 3 I think maybe we've asked before, and refresh my 4 memory. The unit accounting rule would require a 5 statutory change, wouldn't it? 6 MR. ATKINS: Yes, sir -- 7 COMMISSIONER CLOWE: I think we've 8 covered this ground -- 9 (Speaking simultaneously.) 10 MR. ATKINS: -- a bunch. 11 COMMISSIONER CLOWE: I mean, the 12 legislature is going to make this decision, and 13 we're going to be called on to discuss it and give 14 testimony. If the commission were to vote on that 15 issue today, what that would constitute, in my 16 mind, is putting it on the table. 17 And I think it's going to be on the 18 table anyway, but I think it answers the question 19 that if I were a legislator, I would turn to the 20 bingo division and the lottery commission and say 21 how do you feel about this? 22 We'll just go ahead and cross that 23 bridge. And, you know, I think it's incumbent on 24 us as commissioners, when we hear a lot of 25 testimony and issues are put before us that we can WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 181 1 deal with, if we can, I think we ought to try to 2 deal with them. 3 I want to continue to muddy the 4 water a little bit. You put forth a good proposal 5 for consideration. And in public deliberations, 6 you know, you've got to make some sausage -- 7 COMMISSIONER WHITAKER: Right. 8 COMMISSIONER CLOWE: -- so I think 9 we ought to also consider the staff recommendation 10 and consider recommending to the sunset committee 11 their recommendation and giving the idea of 12 100 percent of net proceeds to be distributed after 13 prizes and expenses and a reasonable amount being 14 allocated to the capital operating fund. 15 I heard from public witnesses that 16 the staff and the public is working together 17 through education and doing a better job now than 18 in prior years of identifying expenses which are 19 allowable. And I understand, from Mr. Bresnon's 20 testimony, that that's a problem. And I don't want 21 to go into more regulation, but I have confidence 22 that based on current performance, if the 23 legislature adopted that and directed us to conform 24 to that law, we could write rules that would codify 25 good current practice. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 182 1 We've heard testimony that a big 2 part of the problem about expenses right now is 3 those which are authorized and not authorized. And 4 I think we've got to bring ourselves, if we can, to 5 deal with that. 6 So what I'm saying is, I'd like us 7 to entertain the idea of adopting the staff 8 recommendation and dealing with the devil of what 9 are reasonable expenses and a reasonable operating 10 fund, and offer that solution up to the sunset 11 committee. I think -- excuse me -- 12 COMMISSIONER WHITAKER: Go ahead. 13 COMMISSIONER CLOWE: -- I'm almost 14 finished. 15 And I think that, coupled with a 16 consideration of the unit accounting rule, would 17 move us along to where there may be a high level of 18 intent on behalf of the legislature to see these 19 moneys come out of undistributed accounts and go to 20 the charities. And I feel there is strong drive 21 about that issue, and I must say that -- you know, 22 I think we've got to do something about that in our 23 deliberations. 24 COMMISSIONER WHITAKER: My 25 preference would be to go to the sunset commission WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 183 1 and go with staff recommendation because -- that's 2 my favorite -- because it would deal with 3 119 charities who have not had a positive cash 4 flow. So there is a willingness by the industry to 5 deal with the folks at that level. 6 That would then take us to a point 7 very close to where we get with that 10 percent 8 cap, which creates a lot of problems. It creates a 9 lot of complexity, I think, to the extent that a 10 charity is chronically not able to do something 11 more than 1 percent or 2 percent or 5 percent, 12 though I think that they will probably have to be 13 looked at pretty closely on their expenses, which 14 is within our power. 15 So this recommendation acknowledges 16 that most people are doing okay, and it doesn't add 17 layers of regulation that can have unintended 18 consequences. I think as a backup, we might 19 suggest what I was saying. 20 COMMISSIONER CLOWE: And offer them 21 two proposals to consider. 22 COMMISSIONER WHITAKER: With our 23 recommendation being for the first, but here's a 24 backup. 25 COMMISSIONER COX: As to the staff WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 184 1 proposal, the only real problems I have with it are 2 a lack of knowledge as to what the rules that would 3 be set out might say. And I know that that 4 shouldn't keep us from going ahead on this, but I 5 want to talk a little bit about what I think those 6 rules should say and see if we have general 7 agreement on what they ought to say. 8 On the reasonable and necessary 9 expenses, my own inclination is the same as the 10 volumes of testimony that we've heard, that you 11 can't make arbitrary rules; it's got to be a 12 facts-and-circumstances kind of situation, and that 13 means that it's going to continue to take audit 14 time. But so be it. 15 As for the operating account and 16 what's enough and what's too much, I heard 15 17 and 50, and that's probably a place to start. It 18 may not be where you end, but it's probably some 19 formula like that, where the minimum amount that's 20 needed to assure that winners get paid and expenses 21 get paid, is the operating capital requirement, and 22 the rainy day fund layers on top of that an instant 23 number, and it comes out with some kind of two-step 24 approach like that. 25 I would like to use the IRS as a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 185 1 tool, as much as we can, on determining charitable 2 purposes. But it seems we're limited by the 3 constitution in dealing with the issue of whether 4 the money is spent in the state or not. And I 5 don't know how much authority we have to make the 6 interpretation that if it's paid through a Kansas 7 travel agency to a Texas airline, that that's a 8 Texas expense or whether it isn't. So that's kind 9 of a tar baby for me. 10 And as to the distribution, at least 11 annually, I think I would want to probably 12 structure it the way it's recommended here; that, 13 yes, you must make a distribution, but you do have 14 an opportunity to show why you should be given more 15 time. And maybe it should based on the first full 16 year of operation, and maybe any unit accounting 17 provisions that are put in place might be given 18 time to show fruit -- to bear fruit before folks -- 19 a lot of folks are put out of business. 20 COMMISSIONER WHITAKER: I think in 21 that case, the burden ought to be on the charity. 22 And to the extent we need to change the statute, I 23 think we should, because I think what I hear folks 24 saying is there is an expectation that 25 distributions will be made. So we're talking about WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 186 1 extraordinary circumstances in which it might not 2 be made. 3 On the -- do you want to talk about 4 the IRS thing? 5 COMMISSIONER CLOWE: Yes, ma'am. 6 COMMISSIONER WHITAKER: Okay. I 7 tend to agree with what Billy is saying about the 8 IRS, in that if we have to follow pretty much what 9 they are developing, that's -- there are tax 10 specialists who do nothing but look at that. And 11 I'm just leery of wedding ourselves or having to 12 follow that. 13 What I hear Billy saying is, to the 14 extent there is guidance we can yield from that, 15 great. But I don't see that as solving the 16 industry's concerns. 17 Another concern I have is that I 18 tend to read charitable purpose as a further 19 limitation on a charitable organization; for 20 example, a fraternal organization. I think you 21 could read the statute as saying fraternal 22 organizations, but only to the extent that they are 23 giving it for X, Y, Z purpose. 24 If that's true, then there's a 25 broader policy concerned here, and that is that the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 187 1 legislature is not just saying anything a fraternal 2 organization wants to do is okay; it has to be a 3 certain type or a laundry list. 4 If that's true, then where do we go 5 for guidance on that? It seems to me we highlight 6 that policy decision and let the legislature chew 7 on it; however, I do like the elimination of those 8 broad words that Steve Bresnon has pointed out, 9 which is "indeterminate number." I think that adds 10 some fuzziness that is not helpful. 11 COMMISSIONER CLOWE: Well, I think 12 we ought to try to give these folks an answer if we 13 can. I think they have been put in the position of 14 wondering if they can spend some of these moneys on 15 certain things, and then they don't know, when they 16 decide, either to do it -- and then they get 17 audited, and then we have an opinion; or they don't 18 do it, out of an abundance of caution, and they 19 miss out on what they feel are legitimate needs for 20 the use of these funds. So if we could, I would 21 like us to try to deal with this and offer up a 22 recommendation. 23 I understand your concerns about the 24 tax aspect and the red tape and that sort of thing. 25 COMMISSIONER WHITAKER: Have you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 188 1 ever wandered into a tax library? 2 COMMISSIONER COX: The -- can you 3 help me a little bit, Commissioner Whitaker, with 4 how a charitable purpose, as the IRS might look at 5 it, might be different from a charitable purpose as 6 a legislator was looking at it? And I'll elaborate 7 on that a little bit before I hand it over to you. 8 I know that one of the big issues 9 that my wife and I look at when we make 10 contributions to charity is, what is the 11 administrative expense and what's the fundraising 12 expense and how much money is getting spent on the 13 real core charitable purpose, as opposed to the 14 support operations. 15 COMMISSIONER WHITAKER: Right. 16 COMMISSIONER COX: And I'll just 17 leave it at that and ask you to... 18 COMMISSIONER WHITAKER: I don't 19 know, to muddy the waters. I -- my reading of the 20 Bingo Enabling Act is that the reason that they 21 separately consider charitable purpose, instead of 22 just going with whatever is within the purpose of 23 the delimited organizations, was precisely to make 24 a distinction, which would mean the administrative 25 support costs, which might be tax deductible -- or WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 189 1 excuse me, which might be within the purpose of a 2 501(c)(3) and the direct purpose of the charity. 3 And so I guess, once again, I go 4 back to what is the policy here and should the 5 legislature -- my thought is, shouldn't we lay this 6 out as an option to them and let them decide if -- 7 what they consider to be acceptable as the 8 administrative support issues? Because if they 9 think that's within the policy of the Bingo 10 Enabling Act, then I like the idea of having a 11 single set of rules. 12 I don't want to have to be bound by 13 getting the IRS to agree with us. I think we ought 14 to be able to make our own determination of what it 15 means. But barring that, to me, it's out of our 16 hands because it goes down to a policy decision 17 that is within the focus of the Act. 18 COMMISSIONER COX: And I'm in 19 complete agreement with that. 20 COMMISSIONER CLOWE: Well, if we 21 can, I think we ought to try to deal with 4.1, and 22 then I think we're discussing 4.2. This would be a 23 part of 4.1. Or if you want to, we can deal with 24 4.2 and then deal with 4.1. 25 MR. ATKINS: Can I, Mr. Chairman, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 190 1 try and address Commission Cox's question about a 2 difference? One difference between the Internal 3 Revenue Service and the Texas statute is, I 4 believe, that the Internal Review Service allows 5 the charitable organization to extend their funds 6 for the benefit of their members; whereas, under 7 the Bingo Enabling Act, those funds, other than 8 normal or reasonable compensation, cannot benefit a 9 member. 10 I think that the view of the Bingo 11 Enabling Act is external. 12 COMMISSIONER COX: So if a church 13 were raising money, it might not be able to spend 14 money for a church social that it could spend for 15 mission work? 16 MR. ATKINS: (Nodding head.) Or a 17 more common example is a direct cash donation to a 18 member who may have lost his or her job or have 19 some sort of -- probably a better example is a 20 member that has some sort of catastrophic medical 21 expense. 22 MS. KIPLIN: I guess if I could 23 follow up, then my concern based on that is that we 24 would be put to the task of reading two different 25 bodies of law and trying to figure out whether WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 191 1 there are conflicts or not. 2 And I did have a quick -- just a 3 quick scan today while I was sitting here, and the 4 excerpt I think that Mr. Bresnon provided is really 5 just an identification, I think, in the main, of 6 exempt organizations. But I'm not so sure that it 7 really went into the issue of charitable purpose. 8 I think there were other statutes that may get into 9 that. So then we're having to deal with two bodies 10 of law and, once again, trying to figure out 11 conflicts -- 12 COMMISSIONER WHITAKER: Where you'd 13 eliminate -- 14 MS. KIPLIN: -- and then 15 recognizing -- 16 COMMISSIONER WHITAKER: You'd 17 eliminate the charitable definition, so you 18 wouldn't have that as a statute. 19 MS. KIPLIN: But then if there were 20 others limiting the statutes -- limiting the 21 statutory language in the Bingo Enabling Act that 22 may not be under that particular definition, that's 23 when you start getting into the problems, having to 24 look at the -- 25 COMMISSIONER CLOWE: That's a good WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 192 1 point. That's a good point. 2 COMMISSIONER WHITAKER: But you have 3 that problem now anyway. I mean, basically, each 4 different statute is a different statute you have 5 to harmonize, and so... 6 MS. KIPLIN: But now we're having to 7 look at inserting the Act -- of -- the Enabling Act 8 into a body of tax law. 9 COMMISSIONER WHITAKER: I have a 10 feeling that there is a deeper issue, and that is, 11 I don't think the legislature, in passing the Bingo 12 Enabling Act, intended to have the moneys used for 13 all those broad purposes. If I'm wrong, then we 14 have a live issue. If I'm right, we can't even 15 really make a recommendation off that, because that 16 gets to the heart and soul of how broad gambling 17 should be in Texas. Or can we? 18 What I'd like to do is to go and ask 19 them, is your purpose to enable, through bingo, not 20 just this direct furthering of these purposes, but 21 also the support and also the administrative and 22 also the -- within the organization -- member 23 benefits. 24 If so, then we would like to 25 recommend using this standard, subject to the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 193 1 following qualifications. 2 COMMISSIONER CLOWE: Well, another 3 choice might be to agree with the sunset staff's 4 Recommendation 4.2 that there needs to be a better 5 definition of "authorized expenses" -- 6 COMMISSIONER WHITAKER: Yes. 7 COMMISSIONER CLOWE: -- and not 8 offer up a solution. 9 COMMISSIONER WHITAKER: And then 10 it's up to the industry to go and talk to the 11 legislature about the policy issues. 12 COMMISSIONER CLOWE: You know, if we 13 don't think it's workable and we're not comfortable 14 with it among ourselves, I don't think we ought to 15 force ourselves, on this issue, to reach a 16 recommendation representing a conclusion. 17 COMMISSIONER WHITAKER: I agree. 18 COMMISSIONER COX: I agree. 19 COMMISSIONER CLOWE: Okay. Well, 20 then, I will move, in regard to 4.2, that the 21 commission report back to the sunset committee that 22 we recommend that clarification is required of 23 charitable expenses that are authorized under 4.2. 24 Is that the correct verbiage? 25 MS. KIPLIN: Charitable purpose. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 194 1 COMMISSIONER CLOWE: Charitable 2 purpose. 3 MR. ATKINS: I'm sorry. Charitable 4 purpose and authorized expenses. 5 COMMISSIONER CLOWE: Okay. And that 6 the commission and its staff would like to work 7 with the sunset committee towards a best possible 8 improvement of that definition. 9 COMMISSIONER WHITAKER: And I would 10 like, I guess, in our discussions with them, to 11 highlight what we see are the policy decisions that 12 aren't obvious until you kind of start looking at 13 this more. 14 COMMISSIONER CLOWE: And continue to 15 call on the staff and members of the industry to 16 share the benefit of their experience with the 17 sunset committee and the legislators so that this 18 can be more clearly defined. 19 Billy, do you have a question? 20 MR. ATKINS: I do. And I guess my 21 question is sort of -- the commission is changing 22 their earlier recommendation on 4.2? 23 COMMISSIONER WHITAKER: Read it to 24 us, please. 25 COMMISSIONER CLOWE: Yeah. Read it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 195 1 to us. 2 MR. ATKINS: The recommendation was 3 that the commission should clarify the designation 4 of "charitable purpose" and "authorized expense." 5 Charitable distribution regulation is confusing, 6 not only because of the current complexity of the 7 formula, but also because of the confusion about 8 how charities can spend bingo proceeds. 9 Accordingly, this recommendation 10 would direct the commission to use its existing 11 authority to pass rules clarifying and providing 12 examples of what are acceptable distribution and 13 expenses within the scope of the statute, and that 14 Agency's response was that Agency concurs with this 15 recommendation. 16 The agency is in the process of 17 drafting a rule which would further explain what 18 are allowable distributions and expenses. 19 COMMISSIONER WHITAKER: I guess what 20 I want to do is add a layer, and that is, can we 21 have a layer -- can we have some discussion with 22 them on the foundational policy issues, which is, 23 is the Bingo Enabling Act intended to narrow the 24 uses of money so that you could not use, as a 25 matter of policy, the IRS guidelines; or is that a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 196 1 misinterpretation of the Act? Or if it is not a 2 misinterpretation of the Act, do they want to 3 broaden the Act, allow that? 4 And then based on that, we're then 5 in a position to go in, and with rule making, 6 resolve some of the sub-issues; for example, the 7 convention issue. If that's a concrete issue, then 8 we ought to deal with it by discussion and decision 9 in a way that's fair to the industry so they're not 10 left guessing. I mean, I can understand why it's 11 no fun at all to try to comply and not know until 12 you've done it, that you did it. 13 COMMISSIONER COX: I wonder if we 14 couldn't stay with our response and do the things 15 that you're suggesting on a less formal basis. 16 What it says is that our regulations are confusing, 17 and we need to clarify, and wouldn't it be 18 appropriate for us to find out the legislative 19 intent before we clarified them. And perhaps we 20 can find that out without going through a formal 21 process with the sunset commission. 22 COMMISSIONER WHITAKER: Fine by me, 23 if that's doable, Nelda. 24 She's silent. 25 COMMISSIONER CLOWE: Well, if we do WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 197 1 that, it -- in my mind, if we said, okay, sunset 2 staff, we'll do that -- if we've got to wrestle 3 with these details, we've got to make the 4 decisions. It doesn't give the industry, in my 5 opinion, the additional opportunity to talk to the 6 legislators about it. It keeps that ball in our 7 court. 8 COMMISSIONER WHITAKER: Well, put it 9 in both courts. Can we do that? 10 You're saying put it in both courts; 11 just how? 12 COMMISSIONER COX: Yes, absolutely. 13 COMMISSIONER WHITAKER: So do we 14 take guidance from Nelda? 15 COMMISSIONER CLOWE: Now, you're 16 saying put it in both courts? 17 COMMISSIONER COX: Well, I think 18 that it needs to be in both courts. Whether it's 19 through the sunset process or not, I don't know. 20 But it seems that if someone had 21 just told us, without regard to sunset -- if Steve 22 had just said your stuff is confusing, we ought to 23 look at our stuff and see if it's confusing. And 24 if we need to go find legislative intent or ask for 25 clarifying statutes, we would do that in the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 198 1 ordinary course of things. 2 COMMISSIONER CLOWE: And I think 3 that's what Steve Bresnon is saying. And he's 4 saying the industry that he represents -- and many 5 others have said that individually -- they're 6 unclear about what they can and can't do. And we 7 have not been able, in a proactive way, to give 8 them opinions and direction. So they're in the 9 Catch 22 of having to make these expenses, and then 10 either it's approved or it isn't approved. 11 I like the idea of it being in both 12 courts. I'd like to give the industry the 13 opportunity to talk to the sunset committee and 14 their legislators and open it up. And maybe the 15 statute will be changed, but it will be approved 16 and clarified so that we get some help on making 17 those determinations. 18 I'm not afraid to take on the job of 19 making the determinations at all, but I would like 20 to have the legislature give us as much direction 21 as is possible in that task. 22 COMMISSIONER COX: I agree. 23 COMMISSIONER CLOWE: So how -- if 24 we're -- I think I'm sensing some degree of 25 agreement here. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 199 1 COMMISSIONER WHITAKER: Yes. 2 COMMISSIONER CLOWE: How do we 3 codify that in a motion? 4 COMMISSIONER WHITAKER: Well, I 5 guess I'd like to ask Nelda. 6 How do we codify that? 7 MS. TREVINO: It would seem to me, 8 then, in order maybe for the discussion to take 9 place before the sunset commission -- and what I'm 10 hearing, I think, that's what you-all are wanting 11 to take place -- that there might be something that 12 we, as the agency, can include in the document that 13 we ultimately send to the sunset staff. 14 And again, I think it's going to be 15 real important that there be something in that 16 hearings decision document. To my understanding, 17 again, if there is not an issue laid out in that 18 hearing decision document, then that would preclude 19 the sunset commission members from deliberating it 20 in their discussions at the November hearing. 21 COMMISSIONER WHITAKER: Okay. So 22 the motion should be what, as to language? 23 MS. TREVINO: I think I'd like to 24 defer to Billy on that. 25 MR. ATKINS: Thanks for that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 200 1 Is this a stand-alone motion, or is 2 this an all-encompassing motion, I guess? 3 COMMISSIONER CLOWE: It's 4 stand-alone, I think, on 4.2. That's all we're 5 talking about right now. 6 MR. ATKINS: That the agency would 7 recommend that there be given further consideration 8 to the issue relating to the definition of 9 "charitable purpose" and "authorized expense," 10 including input or review of legislative intent? 11 COMMISSIONER WHITAKER: Do we need 12 to even move on this? Don't we just want to talk 13 with people? I mean, don't we want -- 14 COMMISSIONER CLOWE: That's a good 15 question. 16 Do we need a motion on this? 17 COMMISSIONER WHITAKER: And don't we 18 just really want the final document to reflect this 19 as an issue? Right? 20 MS. KIPLIN: I think what your 21 agency response was before, was we can concur -- we 22 concur, and we're moving forward in a rule. I 23 think if we're moving forward in a rule, we would 24 be remiss not to seek out the legislative intent 25 behind that to give us some guidance on what was WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 201 1 meant by that statute. 2 I did agree with Mr. Bresnon that 3 that statute -- it could be clarified and make it 4 more helpful to both the industry and also the 5 regulator, but I don't necessarily think you need 6 an action item. And if we're standing on the fact 7 that we're going to move forward with regard to a 8 rule, then we're going to run the statutory 9 authority, and hopefully, the legislative intent 10 will give guidance. If not, we will come back and 11 let you know that. 12 COMMISSIONER WHITAKER: Could we put 13 in our document the issue of having them consider 14 the purpose behind that portion of the Act? 15 Because it does -- if they will tell us this is the 16 language you're construing, then we will have a 17 rule that specifies it, eliminates uncertainties, 18 if we can. 19 I think -- but here is another issue 20 on that, and that is that, you know, we're aware of 21 an unclarity that we think invokes policy concerns 22 that we would like their input on. 23 MS. KIPLIN: And I appreciate that. 24 And I'm looking at it, I guess, from a real 25 technical, legal standard; and that is, if we're WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 202 1 working on a rule making, and part of it is the 2 statutory authority, and we're not really clear 3 about the possible words that are used in the 4 statute, then one would need to search out the 5 legislative history. 6 The legislative history is a record 7 throughout an entire session. It's not what one 8 member of the legislature thinks was intended by 9 that. 10 COMMISSIONER WHITAKER: But help 11 us -- 12 MS. KIPLIN: You know, if we -- if I 13 could see guidance -- but if we're standing on a 14 rule -- 15 COMMISSIONER WHITAKER: Whatever 16 they give us, we'll construe, including all of the 17 statutory canons and construction. How do we 18 articulate, and do we need a motion, to ask them to 19 consider the issue that we've been raising? Do we 20 need to move? Do we need to add a paragraph? Do 21 we need to make sure it's included in that final 22 hearing report? 23 MS. KIPLIN: Let me make sure I 24 understand exactly what your focus is; that it has 25 to do with the interaction -- for lack of a better WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 203 1 word, I guess -- between the IRS and a more 2 broadened approach versus the Bingo Enabling Act, 3 and was it really intended to be that narrow. 4 And I think if we're looking at 5 changing -- if we're looking at the fact that there 6 may be, in you-all's mind, a need to change the 7 statute, then I think that's something that you 8 will want to bring to the attention of the 9 sunset -- 10 COMMISSIONER WHITAKER: Now is the 11 time to fix it, is my point. Now is the sunset 12 process, and so what I'd like to do is have 13 somebody go talk to them and then -- I assume that 14 they will agree and tee it up as an issue. I mean, 15 as you're saying, it shouldn't be this big of a 16 deal, because we're just engaging in dialogue. 17 MS. KIPLIN: I think that what 18 you're wanting is the opportunity to engage in that 19 kind of a dialogue. 20 COMMISSIONER WHITAKER: Yes. 21 MS. KIPLIN: I don't think that's an 22 action on -- I think that's a direction to the 23 staff to make requests on the part of the industry. 24 MR. ATKINS: If I'm understanding 25 the conversation correctly, and if the issues under WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 204 1 consideration deal with Section 2001.454 of the 2 Bingo Enabling Act, use of net proceeds for 3 charitable purpose, it might be that we just amend 4 the agency response to include our previously -- 5 our previous response, but at the same time, 6 request that Sunset consider that section and 7 whether they believe it needs -- 8 COMMISSIONER WHITAKER: I like that. 9 I like that. Great. 10 Are we finished? 11 COMMISSIONER COX: Is that a motion? 12 COMMISSIONER WHITAKER: Is that a 13 motion that we vote? 14 MS. KIPLIN: So the motion would be 15 that you would want to amend -- 16 COMMISSIONER WHITAKER: What Billy 17 said. 18 MS. KIPLIN: -- your earlier 19 response to include a review of the statute and 20 whether the statute ought to be revisited. 21 COMMISSIONER CLOWE: And then I 22 think, you know, we've got to have the discussion 23 that you referred to. And I think that comes in 24 the committee or in some forum where we say we 25 think this thing is vague; we're trying to give a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 205 1 definition; we find it very difficult with the 2 current statute. Could you clarify this and give 3 us a better definition? And one of the things that 4 has been proposed by industry -- and they'll be 5 talking to you -- is the internal revenue code. 6 Can you give us some direction here? 7 I think that's where we were. 8 COMMISSIONER WHITAKER: Right. 9 Second. 10 COMMISSIONER CLOWE: Is that a 11 motion, then, that you want? 12 MS. KIPLIN: If we're going to amend 13 the agency response, yes. 14 COMMISSIONER CLOWE: Okay. I think 15 we are. 16 COMMISSIONER WHITAKER: So moved. 17 COMMISSIONER CLOWE: All in favor, 18 please say aye. 19 COMMISSIONER WHITAKER: I moved and 20 seconded, so I need a second. Sorry. 21 COMMISSIONER COX: Second. 22 COMMISSIONER CLOWE: All in favor, 23 please say aye. 24 The vote is 3-0 in favor. 25 Commissioner Cox seconded that motion. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 206 1 Okay. Do you want to take up the 2 easy one or the hard one now? The idea of a unit 3 accounting rule, or do you want to take up the 4 distribution of proceeds, 4.1, or do you want to 5 take them up together? 6 COMMISSIONER WHITAKER: Let's get 7 the other issue out of the way, staff 8 recommendations. 9 COMMISSIONER CLOWE: Okay. 10 COMMISSIONER WHITAKER: That's not 11 easy. 12 COMMISSIONER CLOWE: That's 4.1. 13 COMMISSIONER WHITAKER: 4.1. 14 COMMISSIONER CLOWE: Yeah. How do 15 you want to do that? 16 COMMISSIONER WHITAKER: I mean, I 17 would like to move, based on what I said before; 18 that is, what I'd like to present to them is the 19 staff recommendation, the preferred alternative, 20 with a back-up alternative being something that has 21 a floor and an aspirational goal. "Aspirational" 22 is probably too wishy-washy. 23 But clearly, there is an average of 24 20 percent. Most charities can reach it. To the 25 extent that you can't, something happens, but you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 207 1 shouldn't be able to follow up to a level -- 2 THE REPORTER: I'm sorry, what did 3 you say? 4 COMMISSIONER WHITAKER: It's that 5 tiered -- the back-up solution would be, if we feel 6 we have to put some floor, agree on that floor 7 percentage. And then separately, I'd like to ask 8 for you-all's view about whether we also, in 9 addition to a floor, put some kind of, like, 10 aspirational median goal, which, if not met, would 11 probably lead to a closer look at the expenses. 12 Now, that adds some bureaucratic 13 burdens, but I heard the legislature as being 14 hungry for something other than a charity that 15 comes in with a dollar positive cash flow. And 16 this would be a way of addressing that, short of 17 25 percent, which is inflexible. 18 And I would propose 10 percent as 19 the floor, and I would propose that if a charity 20 falls below 20 percent that there is certainly the 21 option to look more closely at the reasonable and 22 necessariness -- that would be a factor in 23 determining the reasonable and necessariness of the 24 expenses. Period. 25 COMMISSIONER CLOWE: And then if WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 208 1 they don't make that within a year's operating 2 experience, their license would be revoked. 3 COMMISSIONER WHITAKER: No. It 4 seems to me that if they had -- if the expenses are 5 looked at, and they're reasonable and necessary and 6 it's over 10 percent, well, then, that's what the 7 statute requires. 8 Because some of these folks -- 9 there's so much variance between charities that 10 you -- what you're really trying to do is 11 accomplish eliminating those who don't ever give 12 anything to charity, eliminate the issue of a lot 13 of money being stored that's not being distributed. 14 And that's solved by the staff recommendation. 15 And then third, you're trying to 16 solve a perceived need by the legislature to have 17 something more than one dollar. And I think this 18 back-up solution would solve that if they consider 19 that to be a big issue, but at the same time 20 provide some flexibility, given the great range of 21 the charities. 22 But let me add one more thing. It 23 would also, however, have the charities be mindful 24 of the obligation to give money and to be working 25 towards making sure expense structures, in fact, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 209 1 are reasonable and necessary. But I don't like the 2 "have to." You know, I don't like that "have to." 3 I'm persuaded by what I'm hearing, 4 that most charities are, in fact, distributing 5 significant amounts of money. So you hate to 6 impose an inflexible rule that deals with just a 7 few. 8 So that's why I would keep that 9 20 percent as more of a marker against which you 10 could perhaps be -- if you don't reach 20 percent, 11 then that becomes part of the issue of whether your 12 expenses are reasonable and necessary. It's just 13 one of the factors that's looked at. In the real 14 world, what that would mean is the staff would have 15 the authority to look more closely at those 16 expenses. 17 COMMISSIONER CLOWE: It would 18 trigger an audit. 19 COMMISSIONER WHITAKER: It might not 20 trigger an audit, but then it might. 21 COMMISSIONER COX: Well, Billy, 22 there is no limitation on your -- 23 COMMISSIONER WHITAKER: They can 24 audit now. 25 COMMISSIONER COX: -- ability to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 210 1 look at anything you want to now. You just spend 2 your resources where you think the risk is the 3 greatest? 4 MR. ATKINS: The only limitation is 5 the number of people we have to... 6 COMMISSIONER WHITAKER: If a 7 charity, say, had 11 percent, and then a review is 8 done of their expenses and it was determined those 9 expenses were reasonable and necessary, well, then, 10 fine. If it's 90 percent, I guess, then you have 11 problems. That charity would probably have to 12 tuck -- you know, tighten their belts a little bit 13 and get it at least over the 10 percent line. 14 COMMISSIONER COX: Are you thinking 15 of -- did you hear the numbers 20 and 10? Or there 16 should be some numbers such as -- 17 COMMISSINER WHITAKER: Some numbers. 18 Some numbers, that's right. 19 COMMISSIONER COX: -- 20 and 10 -- 20 COMMISSIONER WHITAKER: Yeah. 21 COMMISSIONER COX: -- that would 22 address these principles. 23 COMMISSIONER WHITAKER: Yeah. Yeah. 24 COMMISSIONER COX: I don't have a 25 problem with that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 211 1 COMMISSIONER WHITAKER: And the 2 reason that I go to 10 percent is the testimony 3 that $7,800 was accepted as, like, a minimum, and 4 that keeps you very close to the 10 percent, if I'm 5 reading the numbers right. 6 FROM THE FLOOR: About 7 percent. 7 COMMISSIONER WHITAKER: About 8 7 percent. 9 And then Billy had suggested, as one 10 of the alternatives, the 10 percent -- 90 percent 11 expense cap. And if you did 10 percent, you're 12 including three-fourths of the charities. But I'd 13 save that as a backup, because I do think the staff 14 recommendation, combined with what I've been 15 hearing folks say today, indicates to me that this 16 would solve, really, the tough issues and that the 17 industry is working to tighten up its focus and do 18 right by its purposes. 19 COMMISSIONER COX: Well, I think 20 that the most important unresolved issue that I see 21 on the staff recommendation is to make -- it says 22 make a distribution, in the statute. Well, how 23 much? 24 COMMISSIONER WHITAKER: Right now, 25 it would be a dollar. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 212 1 COMMISSIONER COX: And that clearly, 2 I don't think, is what we're after -- 3 COMMISSIONER WHITAKER: Well, it 4 would -- 5 COMMISSIONER COX: -- trying to get 6 3,000-and-whatever charities that are raising a 7 dollar a year. 8 COMMISSIONER WHITAKER: Well, two 9 things: One is, this would, in fact, deal with 10 119 charities that don't have positive cash flow. 11 COMMISSIONER COX: It would at least 12 get rid of a few of them that apparently aren't -- 13 COMMISSIONER WHITAKER: And there's 14 consensus that they ought to be dealt with. 15 It separately deals with the issue 16 of undistributed funds. And if you distribute out 17 those funds, the total that would have to be 18 distributed goes way up. It does not deal with the 19 charity that gives a dollar. 20 But it seems to me that the clear 21 message to the industry is that that's not 22 adequate, but that I'm hearing them say, we know 23 that and we're going to work as hard as we can, 24 within the structure of reasonable and necessary 25 expenses, to produce as much as we reasonably can. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 213 1 So what we could do is define 2 "reasonable and necessary" as -- well, just leave 3 it as it is, because I think it's inherent that to 4 be reasonable and necessary, it has to be somewhat 5 consistent with the whole purpose of a venture, and 6 that is to produce some money to be distributed. 7 And that leaves it fairly flexible, 8 with the clear message to the industry being 9 obviously, one dollar is not going to cut it. In 10 fact, I heard the figure of 7,800, which is a whole 11 lot more than a dollar. 12 And I guess the question I have is, 13 based on what I'm hearing and the actual history of 14 the charities, if we eliminate the 119, right, then 15 we've solved the great percentage of the problem. 16 And shouldn't we then just, within this frame work, 17 continue to work and tighten up expenses if it 18 proves to be a problem? 19 You know, I think this gives us a 20 frame work that we can work in. But if the 21 legislature isn't comfortable with that, then we 22 offer -- we say here's a frame work we think is 23 workable that is not the 25 percent. And then the 24 industry could argue where that percentage should 25 be. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 214 1 COMMISSIONER CLOWE: I think it's 2 reasonable. 3 Billy, how do you feel about that? 4 MR. ATKINS: I don't know what -- 5 we'll do what the commission directs. 6 COMMISSIONER CLOWE: We're not 7 debating that. We're... 8 MR. ATKINS: I mean, I'm hesitant to 9 make any specific comment on it without having an 10 opportunity to sit down and run or look at 11 numbers. I mean, in theory, I understand, 12 Commissioner Whitaker, what you're saying. I mean, 13 it appears that -- and I hope I'm not way off base, 14 but that your backup is similar to our Proposal 4. 15 Not exactly, but -- 16 COMMISSIONER WHITAKER: It's 17 similar. 18 MR. ATKINS: -- it's similar. 19 COMMISSIONER WHITAKER: It's 20 similar. 21 MR. ATKINS: So, I mean, I think in 22 that sense, we could go in and make amendments to 23 that, I think, to cover what Commissioner Whitaker 24 is talking about. 25 COMMISSIONER WHITAKER: And then it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 215 1 would be up to the industry to persuade the 2 legislature that the staff recommendation provides 3 the necessary safeguards. And if they can't, then 4 we've at least gone on record as to what we think 5 is a reasonable floor. 6 COMMISSIONER CLOWE: Commissioners, 7 if you're agreeing, I'd like to hear from 8 Mr. Bresnon at this point and get his reflexion on 9 this discussion. 10 MR. BRESNON: Thank you. 11 Steve Bresnon, on behalf of the Bingo Interest 12 Group. 13 If I'm understanding what you're 14 saying, and it was to get drafted in the way that I 15 understand that you said it, what it would be doing 16 is, is you'd have -- your basic regime would be as 17 laid out in the staff recommendation, minus the 18 broad-based rule making for expenses for everybody. 19 But if you fell below some -- what 20 we're calling some kind of a floor of -- on your 21 distribution, that you would then be subject to a 22 more rigorous review of your expenses to determine 23 whether they're reasonable and necessary. 24 COMMISSIONER WHITAKER: No. I guess 25 what I'm saying is, the first of the staff WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 216 1 recommendation was done without a floor. It just 2 has the requirement that it be reasonable and 3 necessary expenses and that you have to have 4 positive cash flow and that you have to distribute 5 all of your moneys except what's in your operating 6 account. 7 MR. BRESNON: Yes, ma'am. 8 COMMISSIONER WHITAKER: What I'm 9 suggesting as a backup is some kind of floor below 10 which, if you fell, there would be a sanction, I 11 guess. Okay? Because that's set fairly low. Then 12 the issue is, can you give the legislators some 13 comfort, short of legislating more than that, that 14 there will be an effort by charities to increase 15 their distributions if they can. 16 And it seems to me that if the 17 average is "X," whatever the average is for all 18 charities, maybe that's kind of an aspirational 19 benchmark. And if the charity doesn't reach that, 20 they can reasonably expect to have their expenses 21 looked at a little bit more closely. 22 Maybe that's a bad idea. What do 23 you think? 24 MR. BRESNON: I think it's a good 25 idea as an administrative practice to have more WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 217 1 scrutiny leveled at those who are not doing as 2 well. Now, I don't know what number to put in the 3 blank there. 4 COMMISSIONER WHITAKER: Right. 5 MR. BRESNON: But I could -- to me, 6 it would make a -- it would be a sensible practice 7 just administratively, if somebody is not making 8 any money, to go out and look into it and see why, 9 and see if, you know, expenses are not reasonable 10 and necessary. 11 That aspect of it, I think I can 12 say, I'm -- not having had the opportunity to talk 13 to my clients or anything, or seeing, you know, 14 specific language -- that aspect of it, I don't 15 think will -- you know, would stick on the way down 16 because I think the people I represent are not 17 defensive about what their expenses are. 18 COMMISSIONER WHITAKER: Right. 19 MR. BRESNON: I just -- I don't know 20 where you draw that if -- I guess the -- let's just 21 call it the 10 percent that you've been referring 22 to. 23 COMMISSIONER WHITAKER: Right. 24 MR. BRESNON: Would that be just an 25 absolute? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 218 1 COMMISSIONER WHITAKER: We're just 2 basically saying that -- 3 MR. BRESNON: And 10 percent of 4 what? 5 COMMISSIONER WHITAKER: I don't 6 know. The issue is, should there be a floor other 7 than zero. And I heard several folks kind of 8 struggle with, well, yeah, there probably should be 9 because, you know, one dollar each year is just not 10 going to look very good. 11 MR. BRESNON: Right. And at some 12 level, as a practical matter, the people are 13 effectively out of business. You know, the one 14 dollar, you're out of business. I think the 15 difficulty people are having, we can conceptualize 16 it, but we're really hesitant to come out and say, 17 you know, do this, do this number, because you 18 don't know how that cuts across, you know, an 19 entire industry out there. 20 COMMISSIONER WHITAKER: Well, I 21 guess you could say if it's below 10 percent, then 22 the presumption is that expenses are not reasonable 23 and necessary and, you know, maybe add another 24 burden of proof. 25 MR. BRESNON: Some kind of burden WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 219 1 shifting? 2 COMMISSIONER WHITAKER: Something 3 like that. 4 MR. BRESNON: You know, I'm -- it's 5 just -- I'm winging it now, so I may get crucified 6 at lunch, but, you know, maybe if you took the 7 staff's proposal, and in place of that sentence 8 where it says "through rule, establish what are 9 reasonable and necessary expenses," if you had that 10 in this concept that you're talking about, you plug 11 in there that if you fall below some floor, then 12 you're, you know, subject to a review of whether 13 your expenses are reasonable and necessary, and 14 maybe the burden is on you; it's your burden. 15 COMMISSIONER WHITAKER: So it's like 16 an automatic review. If it falls below a certain 17 level of the presumption -- 18 MR. BRESNON: Something like that. 19 COMMISSIONER WHITAKER: -- being 20 that it's reasonable, then the burden is on the 21 charity to say why it's not. 22 MR. BRESNON: Yeah. The only -- you 23 know, having -- 24 COMMISSIONER WHITAKER: Then you 25 don't have something inflexible -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 220 1 MR. BRESNON: Yes, ma'am. 2 COMMISSIONER WHITAKER: -- in the 3 process. 4 MR. BRESNON: Having been 5 responsible for helping run an agency in the 6 comptroller's office at one time and having 7 participated in the establishment of audit rules 8 and things, you -- I think the agency itself wants 9 to retain control over its resources. 10 COMMISSIONER WHITAKER: Right. 11 MR. BRESNON: And so, you know, put 12 into the statute, you must do something below this 13 amount. 14 On the other hand, if you back up 15 and think about my original position, which is, you 16 have the authority to do this now, I think the 17 agency right now could say if you go below a 18 certain amount, we're going out there, we're 19 looking at them, you're going to be under extra 20 scrutiny. I don't think you could shift the burden 21 right now, but I do think you could be pretty hard 22 nosed at that level. 23 So that's another reason why I would 24 suggest that you hold onto that authority and don't 25 get trapped in rules that cut across the whole WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 221 1 industry. But you may want to tell the 2 legislature, one of the things that we could do is 3 give special scrutiny to people who fell below a 4 certain floor. Then people in the industry would 5 certainly know there was an expectation on an 6 amount there. 7 COMMISSIONER WHITAKER: And then I 8 guess the final question would be, the presumption 9 with that is that if the charity was producing a 10 dollar, that their expenses would be found to be 11 too high. But there is going to be a category of 12 charities that probably have adequate expenses that 13 just aren't cutting the mustard but are able to get 14 at least a dollar cash flow. 15 But I don't know, maybe we don't 16 worry about that; maybe we do. I don't see that 17 there are very many in that category, though. 18 MR. BRESNON: No, ma'am. And I 19 think you're in danger of trying to cover every 20 permutation and combination that could occur out 21 there, and then the perfect is the enemy of the 22 good. You know, David Heinlein has talked about 23 this. Maybe you have some, you know, basic dollar 24 amount that people have got to do. 25 The clearer the -- I think the more WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 222 1 agency flexibility you have -- if everybody -- if 2 you said 50 bucks, everybody in here would probably 3 go I can do 50. But, you know, I don't know about 4 everybody everywhere. 5 So I'm struggling real hard to 6 avoid, you know, picking a number out of the air, 7 and more -- talk about more process than about, you 8 know, a finite, hard and fast rule. 9 COMMISSIONER WHITAKER: Okay. Well, 10 it seems to me, then, that you're kind of in 11 agreement with the preference of the staff 12 recommendation because it does empower us to do a 13 lot. If that's not satisfying and there is some 14 desire by the legislature to insist on a guaranteed 15 minimum, then we could talk about some number. And 16 that discussion probably doesn't have to be 17 resolved today. 18 MR. BRESNON: I expect we'd have to 19 talk about some number in -- 20 COMMISSIONER WHITAKER: I think we 21 would. 22 COMMISSIONER CLOWE: I think we'd 23 better clarify some numbers. If we're talking 24 about a percent, you know, a minimum of 10 percent 25 has been mentioned. What's in my mind, to answer WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 223 1 your question, is 10 percent of adjusted gross 2 receipts. 3 COMMISSIONER WHITAKER: Right. 4 COMMISSIONER CLOWE: I think that's 5 the percentage that we're talking about. And then, 6 if the audit occurs and the expenses are found to 7 be reasonable and the return is below that, I got 8 the impression that the intent of the sunset 9 committee was, you know -- there is -- your 10 going-out-of-business aspect of it. 11 COMMISSIONER WHITAKER: Now, what 12 I've heard them saying is, okay, maybe 25 percent 13 is too high and maybe it's a little too inflexible, 14 but we're not comfortable with charities going year 15 to year not paying anything or paying so little 16 that it makes a mockery of the overall purpose of 17 the statute. So that's what we're all struggling 18 with. 19 MR. BRESNON: I understand. 20 COMMISSIONER CLOWE: I think that's 21 what the staff said. And I think the members of 22 the committee now want us to come back and say, 23 well, if you think 25 percent, the staff 24 recommendation, is too high, what do you recommend? 25 COMMISSIONER WHITAKER: And my WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 224 1 thought would be, this staff recommendation solves 2 many, if not all, of the issues they are struggling 3 with, particularly if "reasonable and necessary 4 expenses" means that there has to be some 5 appropriate ratio, which may be left on a 6 case-by-case basis. 7 In other words, obviously, the lower 8 the distribution, the more the scrutiny is going to 9 be. And I think that's understood. Right? 10 MR. BRESNON: I'll tell you what, 11 I'd be willing to -- without consulting with my 12 clients -- 13 COMMISSIONER WHITAKER: I see 14 somebody shaking their head yes, nodding yes. 15 MR. BRESNON: Yes, ma'am. I think 16 that's what people -- you know, these are good, 17 straightforward people, and they would say, you 18 know, hey, yeah. 19 COMMISSIONER WHITAKER: If that 20 doesn't satisfy the legislature, then it seems to 21 me this floor and goal approach is a good thing to 22 come up with. And then the -- then you-all can 23 debate with them what the number should be. And my 24 question to you, Chairman, is, do you think we need 25 to bring up a percentage now. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 225 1 COMMISSIONER CLOWE: Yeah, I do. I 2 do. I think we need to be as definitive as we can, 3 and I'm thinking about 10 percent. 4 COMMISSIONER WHITAKER: Well, that's 5 the number that keeps on hitting me. That's just a 6 little bit more than you-all were talking about, 7 and gives a bright-line test that I think is 8 workable. 9 Do you want to chew on it? 10 MR. BRESNON: No, ma'am. I've 11 chewed on this long enough. 12 COMMISSIONER CLOWE: He wants to be 13 done with it. 14 MR. BRESNON: I think -- 15 COMMISSIONER WHITAKER: Let's go 16 with 10 percent. 17 MR. BRESNON: You know, I don't 18 think I can add anything to it that will illuminate 19 it or -- I hate to say that -- 20 COMMISSIONER CLOWE: Well, it's a 21 process -- 22 MR. BRESNON: Yes, sir. 23 COMMISSIONER CLOWE: -- and so we're 24 trying to make the best decision to go back to the 25 sunset committee, if we can, and say we think this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 226 1 is the best we can do at this point in time, and 2 it's going to get worked on some more. Everybody 3 knows that. 4 MR. BRESNON: Yes, sir. 5 COMMISSIONER WHITAKER: I'm not 6 hearing a great -- I mean, we are very sensitive to 7 wanting to listen to what you-all are saying. I 8 understand that you're in a position that you 9 haven't consulted with -- 10 MR. BRESNON: Sure. 11 COMMISSIONER WHITAKER: -- your 12 folks on that. 13 So barring further input, my thought 14 would be 10 percent. 15 COMMISSIONER CLOWE: Okay. Have you 16 got a motion out of this? 17 MS. KIPLIN: This is the backup. 18 Correct? 19 COMMISSIONER CLOWE: Yeah. 20 COMMISSIONER WHITAKER: Yeah. 21 COMMISSIONER CLOWE: The sense of it 22 is -- that I have is that the commission is moving 23 towards the idea of adopting the staff 24 recommendation -- this is a sidebar comment -- 25 accepting the burden of a definition of acceptable WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 227 1 and proper expenses and the burden of a proper 2 operating capital account definition; and then 3 saying all net proceeds must be distributed to 4 charities. 5 If a charity doesn't meet that test, 6 then we see that its contributions received is less 7 than 10 percent of adjusted gross receipts, that 8 triggers an audit to determine whether the expenses 9 are reasonable or not. 10 COMMISSIONER WHITAKER: That's a 11 little different than what I'm saying. 12 COMMISSIONER CLOWE: Well, then, 13 give me the -- 14 COMMISSIONER WHITAKER: Let me state 15 that -- what I thought. 16 The motion would be to accept the 17 staff recommendation, premised on the understanding 18 that the lower the amount of distribution, the more 19 the reasonableness and necessity of their expenses 20 will be questioned -- can be questioned. 21 That doesn't need to be part of the 22 statute, but that's kind of the rationale for 23 the -- the basis of the staff recommendation makes 24 sense. 25 So the motion would be to accept the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 228 1 staff recommendation, with the back-up solution 2 being a specified floor of 10 percent, below which 3 a charity couldn't go. If a charity -- 4 COMMISSIONER CLOWE: If the first 5 idea is not accepted -- 6 COMMISSIONER WHITAKER: -- is not 7 accepted -- 8 COMMISSIONER CLOWE: -- this would 9 be an alternative. 10 COMMISSIONER WHITAKER: And the 11 alternative would be to set 10 percent as the 12 minimum floor below which they cannot go and a -- 13 and an aspirational goal -- I don't like that word, 14 but something -- a goal of achieving the median, 15 which is, in this case, a 20 percent median -- but 16 that might change over time, right -- and if they 17 don't, then that would -- then, see, I don't want 18 to -- let's not add that. Let's say it's a 19 10 percent floor and just leave it at that. 20 COMMISSIONER CLOWE: Well, don't you 21 think they're going to say, well, what if? 22 COMMISSIONER WHITAKER: What if 23 above that? Well, then, it would be -- 24 COMMISSIONER CLOWE: No, no, what if 25 below that. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 229 1 COMMISSIONER WHITAKER: If below it, 2 then I would think that would be insufficient and 3 they would lose their license. Perhaps they could 4 be given a year to bring it back up, but... 5 COMMISSIONER COX: I am looking at 6 the sunset staff report, trying to find out what 7 they said would happen to those people who couldn't 8 pony up 25 percent. Do you recall? 9 COMMISSIONER CLOWE: I think they 10 assume they would go out of business. 11 MS. KIPLIN: Yes. 12 COMMISSIONER COX: But did they say 13 that? 14 MS. KIPLIN: Yes. There was a 15 sense -- if you'll hand it to me, then maybe I can 16 locate it right off the bat. 17 MR. ATKINS: It's towards the end. 18 MS. KIPLIN: Yes. 19 MR. ATKINS: Commissioner Whitaker, 20 I'm sorry, can I ask you what you mean by "floor"? 21 COMMISSIONER WHITAKER: Below 22 which -- 23 MR. ATKINS: So you're saying -- 24 COMMISSIONER WHITAKER: If 25 distributions are less than 10 percent, then they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 230 1 would be sanctioned. 2 MR. ATKINS: 10 percent of what? 3 COMMISSIONER WHITAKER: Of the 4 adjusted gross. 5 MR. ATKINS: Adjusted gross. 6 COMMISSIONER CLOWE: Receipts. 7 MR. ATKINS: Okay. How are we 8 defining "adjusted gross"? 9 COMMISSIONER WHITAKER: Receipts 10 minus prizes. 11 MR. ATKINS: Not expenses? 12 COMMISSIONER WHITAKER: Right. 13 COMMISSIONER CLOWE: And I think -- 14 in my mind, you've changed a little bit there as we 15 discussed that. Let me get it clarified. 16 At one point, I thought you were 17 talking about if it dropped below the 10 percent of 18 adjusted gross receipts, it triggers an audit as to 19 the reasonableness of the operating expenses and 20 maybe some action would be taken. 21 And then the last thing I heard you 22 say was, if they drop below 10 percent over a 23 reasonable period of time -- 24 COMMISSIONER WHITAKER: I guess my 25 original thought had been below 10 percent. There WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 231 1 is a level above one dollar and less than 2 25 percent that should be required of a charity. 3 The reason we don't think we ought to have to set 4 that is, we think that the staff recommendation 5 gives us enough teeth to deal with those who are so 6 close to the line that they never have very much to 7 distribute. So we don't need a floor. If the 8 legislature wants more than that, then a floor that 9 I would recommend would be 10 percent, below which, 10 if they can't produce that, then they're out of 11 business. 12 COMMISSIONER CLOWE: Then they lose 13 their license over a period of time. 14 COMMISSIONER WHITAKER: Right. And 15 then between that floor and perhaps the median, 16 which is 20 percent, there is going to be the 17 understanding that the expenses will be looked at 18 or could be looked at. 19 COMMISSIONER CLOWE: I understand 20 what you're saying. 21 COMMISSIONER COX: So our backup 22 would be essentially the sunset staff 23 recommendation with 10 percent in there, rather 24 than 25. 25 COMMISSIONER WHITAKER: Yes. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 232 1 COMMISSIONER CLOWE: Now, as I 2 understand the staff recommendation that we're 3 talking about as being our priority recommendation, 4 there is no penalty in that, insofar as a minimum 5 annual contribution. It just says 100 percent of 6 net proceeds. And so if there isn't any net 7 proceeds under that proposal and that formula, 8 there is no sudden death. 9 COMMISSIONER WHITAKER: But the 10 assumption is going to be that if you are that 11 close to the line, that your expenses are probably 12 unnecessary and unreasonable. 13 COMMISSIONER COX: Or that you're 14 just going to get out of business because you're 15 not viable. 16 COMMISSIONER WHITAKER: Or that 17 you're going to get out of business anyway. 18 COMMISSIONER CLOWE: Well, you don't 19 have that situation today. 20 COMMISSIONER WHITAKER: What do you 21 mean? 22 COMMISSIONER CLOWE: Well, there are 23 charities that aren't getting any contributions, 24 and they're in business. 25 COMMISSIONER WHITAKER: Well, that's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 233 1 not true. I don't think so. Let me look at the 2 numbers. I understand that there are 96 charities 3 that were not required to make a distribution. Of 4 those, only 18 did not make any distribution at 5 all. 6 We would be dealing, under the staff 7 recommendation, with 119 charities actually going 8 out of business. So we would be actually dealing 9 with that bottom tier, with the staff 10 recommendation. 11 COMMISSIONER CLOWE: Is that a 12 correct understanding of it? 13 MR. ATKINS: It is, 14 Commissioner Clowe. And I draw your attention to 15 the last sentence of the staff's proposal that 16 there would be sanctions for failure to make a 17 distribution and/or to maintain a positive cash 18 flow. 19 COMMISSIONER CLOWE: Okay. 20 MR. ATKINS: So, you know, we did 21 anticipate the possibility that, again, prizes and 22 expenses would be such that it would equal to zero. 23 In that case, we would look at the organization. 24 COMMISSIONER CLOWE: Okay. I think 25 that's necessary. I think the legislature is going WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 234 1 to look for that. I don't think there is a sense 2 of allowing charities to continue to operate with 3 no contribution coming to them year after year. I 4 think it's incumbent on us to deal with it. 5 COMMISSIONER WHITAKER: Now, we 6 could, if you wanted to, instead of the minimum 7 floor, say the amount distributed shall be a 8 reasonable proportion to the reasonable and 9 necessary expenses. And then that gives us 10 discretion. And the industry knows -- the industry 11 has a sense of what's an adequate distribution. 12 You know, they know it's not one dollar, and they 13 know it's not five dollars. Now, maybe that's too 14 wishy-washy, but -- 15 COMMISSIONER CLOWE: I'd rather 16 leave that kind of language out. 17 COMMISSIONER WHITAKER: Okay. 18 COMMISSIONER CLOWE: I think we need 19 it to be, coming from us, as definitive as we're 20 comfortable with, and then Sunset and the 21 legislature, they're going to work. 22 COMMISSIONER WHITAKER: Okay. 23 COMMISSIONER CLOWE: But I would 24 rather be as definitive as we're comfortable with. 25 Did you get a motion? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 235 1 MS. KIPLIN: I think the motion -- 2 the first part of the motion was to accept and 3 approve the staff's recommendation. And then there 4 was a back-up motion, and the back-up motion, as I 5 understand it, is to -- 6 COMMISSIONER CLOWE: No, it's not a 7 back-up motion. It's -- 8 MS. KIPLIN: I'm sorry, it's a 9 back-up -- 10 COMMISSIONER CLOWE: It's an 11 alternative choice. 12 MS. KIPLIN: Yes. It's a motion for 13 an alternative. So you're going to put out two for 14 the sunset. The second one is the requirement that 15 a charity make a distribution, and your floor on 16 that is going to be 10 percent of the adjusted 17 gross income. 18 COMMISSIONER CLOWE: Annually. 19 MS. KIPLIN: Annually. And they'll 20 look at it over a year, perhaps, a year to bring it 21 back. And then that charity will be subject to 22 losing its license, should it not meet that floor. 23 COMMISSIONER CLOWE: I believe 24 that's the motion. 25 COMMISSIONER WHITAKER: So vote. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 236 1 COMMISSIONER CLOWE: Is there a 2 second? 3 COMMISSIONER COX: Second. 4 COMMISSIONER CLOWE: All in favor -- 5 MR. ATKINS: Commissioners, I'm 6 sorry, before you do that -- now it's my turn to 7 muddy the waters. Just -- if we work off of the 8 figures that we have now, based on 2001 figures, as 9 it works out, if there were 28 percent of the 10 licensees that weren't able to meet that 10 percent 11 and it resulted in us having to do some type of 12 audit, review, et cetera, of their operations, that 13 could represent an expense, an additional expense, 14 to that agency. 15 COMMISSIONER WHITAKER: Say that 16 again. 17 MR. ATKINS: If there is 28 percent 18 of the licensees that -- should the legislature go 19 with that alternate recommendation, some of the 20 sunset comments that they put on there as fiscal 21 impact, et cetera, there could potentially be a 22 fiscal impact to the division, over and above our 23 normal audits, to do some sort of review, audit, 24 analysis of those organizations that aren't meeting 25 the formula. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 237 1 MS. KIPLIN: Can I -- can I 2 interject, Mr. Atkins? You know, I haven't had a 3 chance to -- this is the -- what I'm thinking is, 4 based on the motion, if it is approved, the 5 10 percent, that's it. 6 And it would be -- there would be an 7 enforcement action based on the reporting by the 8 entity, and, you know, I'm thinking that it would 9 be either -- I understand what you're saying in 10 terms of volume, but I'm maybe missing what you're 11 saying in terms of auditing. I'm thinking it's 12 going to be the same reporting that we have with 13 the reporting with prize fees and the rental tax. 14 MR. ATKINS: Okay. 15 COMMISSIONER CLOWE: There was a 16 discussion about auditing when you drop below 17 10 percent, but that's not what the motion ended up 18 being. 19 MR. ATKINS: Then I retract my 20 statement. 21 COMMISSIONER CLOWE: Okay. But that 22 point is answered -- 23 MR. ATKINS: Okay. 24 COMMISSIONER CLOWE: -- in your 25 mind, isn't it? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 238 1 MR. ATKINS: Yes, sir, if that is 2 dropped off. 3 COMMISSIONER CLOWE: Okay. The 4 motion has been made and seconded. Is there any 5 further discussion before we have the vote? 6 All in favor, please say aye. 7 The vote is 3-0 in favor. 8 Now, Commissioners, we have one 9 remaining issue that we haven't dealt with, and 10 that is a consideration of a recommendation perhaps 11 as part of the consideration of this item we just 12 voted on to recommend to the sunset committee that 13 they consider a unit accounting rule. 14 And we've had extensive discussion 15 about that here today. 16 Gary, we asked Billy if he discussed 17 these issues with the sunset staff. He indicated 18 he had transmitted this data to them; they had not 19 responded. Maybe I should ask you, what is your 20 sense, if the commission were to undertake and make 21 a recommendation on this item which is not a part 22 of the sunset staff review, how that would be 23 received or how it would be looked on? Are you 24 asking Nelda to come forward to help you with that? 25 MR. GRIEF: Yes, sir, I am, since WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 239 1 Nelda has assumed the project leadership of the 2 sunset review project and has had the latest 3 contact -- 4 COMMISSIONER CLOWE: I'm sorry, I 5 wasn't aware of that. 6 MS. TREVINO: Commissioners, I have 7 not had specific discussions with the sunset staff 8 in regards to the proposals that Billy transmitted 9 to them, but in previous discussions with 10 Karen Latta, the project manager, I certainly got 11 the impression that they would be open to any other 12 alternatives or options in regards to these 13 recommendations, and if it was even somewhat 14 outside of their specific recommendation, I think 15 they would welcome it. 16 COMMISSIONER CLOWE: Commissioners, 17 this is a new thing that's come up, you know. It 18 really wasn't discussed at any time, in my 19 recollection, in the BAC meetings or in the sunset 20 staff meetings or in the committee meeting, and I'm 21 of a mind to offer this up as a recommendation for 22 their consideration. I know Billy has got some 23 concerns about this which have to be worked out. I 24 think we could say this is something we'd like for 25 them to consider and we'd like to work on the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 240 1 details as we go through this process, as it might 2 be very helpful to the industry. 3 COMMISSIONER WHITAKER: I agree. 4 COMMISSIONER CLOWE: I would so 5 move. 6 COMMISSIONER WHITAKER: Second. 7 COMMISSIONER COX: Could you help me 8 a little bit with what the motion is? 9 COMMISSIONER CLOWE: The motion is 10 to ask the sunset committee to consider -- this 11 requires a statute change -- allowing bingo 12 operations to be reported to the commission as a 13 single unit, rather than as separate units, each 14 charity its own. 15 COMMISSIONER COX: To operate -- 16 MS. KIPLIN: Well, and I heard you 17 say it would be reported, and I think it's much 18 broader than that. I think it's allowing bingo 19 operations to occur in a unit and to be able to 20 share in both the revenue and also the expenses. 21 COMMISSIONER CLOWE: Yeah. 22 FROM THE FLOOR: At a given 23 location. 24 MS. KIPLIN: And by constitution, at 25 a single location. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 241 1 COMMISSIONER CLOWE: By the lessor? 2 COMMISSIONER COX: Well, looking at 3 the words -- 4 COMMISSIONER CLOWE: Or by the 5 charity or by the -- 6 MS. KIPLIN: By the unit. 7 COMMISSIONER CLOWE: By the unit. 8 Okay. By the unit. There's where the -- 9 COMMISSIONER COX: Let me see if 10 this wording -- and I'm not offering this as a 11 suggestion, but rather maybe clarification. This 12 is what Steve said: To permit a group of charities 13 at one location to conduct bingo activities using a 14 single count and distribution formula applied to 15 that one account. 16 COMMISSIONER CLOWE: Why don't we 17 withdraw the second and the motion, and adopt that 18 as the motion. 19 COMMISSIONER COX: Did we intend to 20 do all of that? 21 COMMISSIONER CLOWE: I think we did. 22 COMMISSIONER COX: To let them 23 operate that way, manage the distribution formula 24 that way and report that way? 25 COMMISSIONER CLOWE: I think that's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 242 1 the intent. 2 COMMISSIONER WHITAKER: I think so, 3 and I guess so. I want to add a caveat that I 4 don't think I want a position to say let's 5 recommend it with that exact language. I want to 6 say this sounds like it has some merit; we haven't 7 looked at it before; it could have unintended 8 consequences, but we'd like them to put their 9 wonderful minds to work on looking at it. 10 COMMISSIONER CLOWE: But what we're 11 talking about is the direct quote that Steve 12 Bresnon gave us. 13 COMMISSIONER COX: Yes, it's that. 14 COMMISSIONER CLOWE: It is that, and 15 that's what we want to look at. 16 COMMISSIONER WHITAKER: Do we have 17 to do a motion on this? I don't think it's at the 18 point of a motion. 19 MS. KIPLIN: I think if you want it 20 to come from the agency and you want it to be 21 incorporated into whatever document that we are 22 forwarding to the sunset, I think it does require a 23 motion; that they -- that you're putting out here a 24 new item. This is a new issue, and it will -- 25 COMMISSIONER WHITAKER: Okay. It's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 243 1 a motion. It is the sense of the commission that 2 this idea has merit and warrants further study. 3 COMMISSIONER CLOWE: Would you 4 withdraw your second? 5 COMMISSIONER WHITAKER: Yes. 6 COMMISSIONER CLOWE: And I'll 7 withdraw the motion. And then that is the motion 8 I'll make. 9 COMMISSIONER WHITAKER: Second. 10 COMMISSIONER CLOWE: What the 11 commissioner said about the commission wants 12 further study. This item -- and this item is it, 13 to quote from Mr. Bresnon. 14 MS. KIPLIN: So you're not making a 15 motion for them to consider statutory changes 16 allowing -- 17 COMMISSIONER WHITAKER: Right. 18 MS. KIPLIN: -- this unit approach, 19 but instead, that it merits further studying of the 20 unit approach. 21 COMMISSIONER WHITAKER: It is the 22 sense of the commission -- 23 COMMISSIONER CLOWE: Put in 24 "merits." 25 COMMISSIONER WHITAKER: -- that it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 244 1 has merit and warrants further study by the sunset 2 staff. 3 COMMISSIONER CLOWE: And I think 4 that infers that we like the idea of it, but we 5 want more study, and we want to make sure that it's 6 good in every aspect. But to the point that we 7 have it -- and I don't know when the other 8 commissioners got it, but I think I got it on 9 Monday of this week -- I like what it says, and I 10 like what I've heard today about it. And it seems 11 to me to be a positive step in the right direction. 12 COMMISSIONER WHITAKER: And you 13 might say: Warrants further study by the 14 commission and by us and by them. 15 COMMISSIONER CLOWE: That's right. 16 Okay. I think now I've made that 17 motion. Would you second it? 18 COMMISSIONER WHITAKER: Second. 19 COMMISSIONER CLOWE: And then would 20 we be ready to vote? 21 All in favor, please say aye; 22 opposed, no. 23 The vote is 3-0 in favor. 24 Commissioners, I think that's all 25 the subjects we have to act on as a result of this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 245 1 agenda. Do you-all have any -- 2 COMMISSIONER WHITAKER: I just want 3 to say thank you to the members that came and the 4 folks that came here today. It was extremely 5 helpful to get this feedback. As you could tell, 6 these issues are complicated, and I was greatly 7 helped. Thank you. 8 COMMISSIONER CLOWE: It's not easy, 9 and it's in the public. That's the way the people 10 want it. So you have to watch us thrash around a 11 little bit. 12 We're ready to go, then, to the next 13 item on the agenda. 14 MS. KIPLIN: Next item on the 15 agenda, report, possible discussion, and/or action 16 on the Lotto Texas online game. 17 I think you wanted to -- 18 COMMISSIONER CLOWE: Let us just 19 take a short break for the reporter, and then I'll 20 get organized and we'll be ready to move forward. 21 Thank you. Let's take a short break. 22 (Recess.) 23 COMMISSIONER CLOWE: Let's come back 24 to order. 25 The next item on the agenda is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 246 1 Item 5, report, possible discussion, and/or action 2 on the Lotto Texas online game. I understand, 3 Mr. Grief, you want to pass that item. 4 MR. GRIEF: Yes, sir, that's 5 correct. 6 COMMISSIONER CLOWE: Is there anyone 7 wishing to address the commission at this time in 8 regard to any matters from the public view? 9 Gary and Billy, are you-all going to 10 have any reports to make to the commission under 11 Items 7 and 8? 12 MR. ATKINS: I do not. 13 MR. GRIEF: I do not either. 14 MR. ATKINS: Can I just very 15 quickly, for the record, Mr. Chairman -- I think 16 you referred to the report, possible discussion on 17 the Lotto Texas as Item 5. It's Item 4. 18 COMMISSIONER CLOWE: Yes, sir. The 19 Lotto Texas online game? 20 MR. ATKINS: Yes, sir. 21 COMMISSIONER CLOWE: Did I misspeak 22 on that? 23 MR. ATKINS: I thought I heard you 24 say Item 5, and I looked at that being the 25 executive session. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 247 1 COMMISSIONER CLOWE: Okay. If I 2 said 5, I meant 4, and we would pass that. 3 I believe at this time, the record 4 should reflect that Commissioner Whitaker is 5 briefly absent and that Commissioner Cox and I are 6 continuing. 7 At this time, I move the Texas 8 Lottery Commission go into executive session to 9 deliberate the duties of the acting executive 10 director pursuant to Section 551.074 of the Texas 11 Government Code; 12 To deliberate the duties and 13 evaluation of the internal auditor and charitable 14 bingo operations director pursuant to 15 Section 551.074 of the Texas Government Code; 16 To deliberate the duties of the 17 general counsel and security director pursuant to 18 Section 551.074 of the Texas Government Code; 19 To receive legal advice regarding 20 pending or contemplated litigation and/or to 21 receive legal advice pursuant to 22 Section 551.071(1)(A) or (B) of the Texas 23 Government Code and/or to receive legal advice 24 pursuant to Section 551.071(2) of the Texas 25 Government Code; WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 248 1 To receive employment law and 2 general government law advice relating to the 3 appointment, employment, and duties of the 4 executive director; employment law, personnel law, 5 procurement and contract law, and general 6 government law. 7 Before I ask for a second, I want to 8 note that Commissioner Whitaker is here. 9 Now, is there a second for this 10 motion? 11 COMMISSIONER WHITAKER: Second. 12 COMMISSIONER CLOWE: All in favor, 13 please say aye. 14 The vote is 3-0. 15 The Texas Lottery Commission will go 16 into executive session. The time is 1:48 p.m. 17 Today is October 23, 2002. 18 MS. KIPLIN: 1:38? 19 COMMISSIONER CLOWE: 1:38 p.m. Is 20 that incorrect? That's as close as I can get it 21 from the clock on the wall. 22 MS. KIPLIN: I'm sorry, I thought 23 you said 1:48. 24 COMMISSIONER CLOWE: You-all are 25 watching me closely, aren't you? Cut me a little WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 249 1 slack. 2 (Executive Session.) 3 COMMISSIONER CLOWE: The commission 4 is out of executive session. The time is 3 -- 5 that's 2:50 p.m. 6 Is there any action to be taken as a 7 result of the executive session? 8 I believe not. If not, we have now, 9 I believe, concluded the items on the agenda. Is 10 there anything else to be brought before the 11 commission while we're in session? 12 Commissioners, if you could look at 13 your calendars and help us at least determine a 14 tentative date for our November meeting, I think 15 that would be helpful to Gary and others. What is 16 your pleasure? 17 COMMISSIONER COX: Are you thinking 18 of a general date? Early, middle? 19 COMMISSIONER CLOWE: Well, we've met 20 twice now in October, this meeting being the 23rd. 21 I'm suggesting maybe not before the third week in 22 November, but I'm open to whatever your pleasure 23 is. I have no... 24 MR. ATKINS: Mr. Chairman? 25 COMMISSIONER CLOWE: Sir? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 250 1 MR. ATKINS: Could I just point out 2 some dates in November? The 12th and the 13th are 3 scheduled -- were scheduled for the sunset hearing, 4 and the -- 5 COMMISSIONER CLOWE: The 12th and 6 the 13th. 7 MR. ATKINS: Of November. Yes, sir. 8 COMMISSIONER CLOWE: And we're 9 hopeful that all three commissioners can attend 10 when our agency is scheduled. 11 MR. ATKINS: And there is 12 tentatively scheduled a Bingo Advisory Committee 13 meeting for the 21st. 14 COMMISSIONER CLOWE: All right. 15 Thank you, Billy. 16 COMMISSIONER COX: There is also a 17 legislative briefing on the 20th that I think you 18 asked me to attend. 19 COMMISSIONER CLOWE: If you can, 20 yes, sir. 21 COMMISSIONER COX: Okay. 22 COMMISSIONER WHITAKER: What about 23 the 15th? The next week is Thanksgiving, isn't it? 24 What day is Thanksgiving? 25 FROM THE FLOOR: The 28th. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 251 1 COMMISSIONER WHITAKER: The 28th? 2 All right. How about the 22nd then? 3 COMMISSIONER COX: Works for me. 4 COMMISSIONER CLOWE: Tentatively, 5 then, the commission plans to meet on Friday, 6 November 22nd, at 8:30 a.m. And we will confirm 7 that as that date grows closer. 8 Any other items to come before the 9 commission before we adjourn? 10 Thank you all very much. We are 11 adjourned. 12 (Proceedings adjourned.) 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 252 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. 021023STL 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363