1 1 2 3 * * * * * * * * * * * * * * * * * 4 5 TEXAS LOTTERY COMMISSION MEETING 6 7 DECEMBER 13, 2002 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 13th day of 20 December, 2002, from 8:30 a.m. to 1:05 p.m., before 21 Kimberlye A. Furr, RPR, CSR in and for the State of 22 Texas, reported by machine shorthand, at the 23 offices of the Texas Lottery Commission, 611 East 24 Sixth Street, Austin, Texas, whereupon the 25 following proceedings were had: 2 1 APPEARANCES 2 Chairman: 3 Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. James A. Cox, Jr. 6 7 General Counsel: 8 Ms. Kimberly Kiplin 9 Acting Executive Director: 10 Mr. Gary Grief 11 Assistant Director of Charitable Bingo: 12 Mr. Philip D. Sanderson 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 INDEX 2 Appearances.................................. 2 3 AGENDA ITEMS 4 Item Number 1................................ Item Number 2................................ 4 5 Item Number 3................................ 7 Item Number 4................................ 12 6 Item Number 5................................ 15 Item Number 6................................ 17 7 Item Number 7................................ 18 Item Number 8................................ 18 8 Item Number 9................................ 19 Item Number 10............................... 24 9 Item Number 11............................... 26 Item Number 12............................... 26 10 Item Number 13............................... 45 Item Number 14............................... 47 11 Item Number 15............................... 57 Item Number 16............................... 71 12 Item Number 17............................... 75 Item Number 18............................... 88 13 Item Number 19............................... 88 Item Number 20............................... 83 14 Item Number 21............................... 77 Item Number 22............................... 81 15 Item Number 23............................... 85 Item Number 24............................... 90 16 Reporter's Certificate....................... 91 17 18 19 20 21 22 23 24 25 4 1 CHAIRMAN CLOWE: Good morning. It's 2 8:30 a.m. This is December the 13th, 2002. My 3 name is Tom Clowe. Commissioner Whitaker is here; 4 Commissioner Cox is here. We're ready to call this 5 meeting of the Texas Lottery Commission to order. 6 We'll go immediately to Item No. 2 7 on our agenda: Report by the Bingo Advisory 8 Committee Chairman, possible discussion and/or 9 action regarding the Bingo Advisory Committee's 10 activities, including the December the 12th, 2002 11 committee meeting. 12 Virginia Brackett. Good morning. 13 MS. BRACKETT: Good morning. 14 The Bingo Advisory Committee met 15 yesterday, and we decided -- we took several action 16 issues of several things we want to take action on. 17 The Bingo Advisory Committee members will be 18 responsible for promoting, encouraging, and 19 assisting with the survey of the bingo industry. 20 The staff of the Bingo Division recognize the lack 21 of demographics of bingo players. Currently 22 nothing is available to the staff regarding who 23 plays bingo and why. A scientific survey is needed 24 to determine how to combat downtrends and other 25 recurring issues. The staff will design an 5 1 instrument to gather facts used to determine a plan 2 of action to combat the downtrend in players, and a 3 survey is in the process of being created by the 4 Bingo Division. The industry -- we hope that we 5 get an industry-wide goal from this and that it can 6 come from further results of the survey. 7 We also look at the possibility to 8 structure more conclusive quarterly reports which 9 would assist in indicating who the players are, 10 which days of week are the most heavily attended, 11 have the highest attendance, thus, the highest 12 income. The daily reports that we keep show this 13 information, but the quarterly reports do not, and 14 we feel that this could be a great help in 15 determining several issues of what makes the 16 players tick and what it is that they want. 17 The Advisory Committee will meet 18 with staff once a year to review the operating 19 training courses which are conducted in your 20 regions. Training courses are required of 21 operators no less than every two years. We'll 22 support the adoption of the rule so that procedure 23 can begin for the Bingo Advisory Committee to meet 24 once a year outside of Austin. 25 And we support the application of 6 1 Jack Dougherty of Austin as the public 2 representative to the Bingo Advisory Committee. We 3 have met with him. It will make two people from 4 Austin serving on the committee, but it seems that 5 it would be very difficult for someone who is 6 serving as an individual to not have support of the 7 organization, and it might be a good idea to have 8 someone who can come to every meeting, and he 9 attended the meeting yesterday. Billy Atkins and I 10 had a conference call with him, and then he was at 11 the meeting yesterday and met with several 12 different members of the committee. 13 That's it. 14 CHAIRMAN CLOWE: Any questions? 15 Thank you, Virginia. I attended a 16 portion of your meeting yesterday, and as I said to 17 you then and I'd like to repeat my comment, the 18 agenda items which I observed being handled, I 19 thought were extremely appropriate for the Bingo 20 Advisory Committee. They dealt with rule changes 21 and were very appropriate and I think will be 22 productive work on the part of the BAC. That was 23 the determination of, what is a charitable activity 24 insofar as expenses and the unit accounting rule 25 admission. And, in my mind, you had input from the 7 1 public; you had an excellent discussion; you 2 assigned a task group and then set a deadline for 3 that work to be started, and that, in my mind, is 4 the focus that the BAC should have as an advisory 5 group to the commission. So, I want to say to you 6 again this morning that I think that's the right 7 track to be on, and I'm hopeful that you will 8 continue to direct the BAC with that focus in the 9 future. 10 MS. BRACKETT: Well, that's my 11 intention. 12 CHAIRMAN CLOWE: Great. Thank you 13 so much. 14 MS. BRACKETT: Thank you. 15 CHAIRMAN CLOWE: Next, we'll go to 16 Item 3: Consideration of and possible action on 17 the continuation of the Bingo Advisory Committee. 18 MR. SANDERSON: Commissioners, you 19 have asked that this item remain on the agenda 20 while the rule relating to the BAC was being 21 considered. While it appears that there is an 22 almost unanimous desire to have an organization 23 such as the BAC, there have been numerous questions 24 raised as to their effectiveness. And I wasn't 25 here at yesterday's meeting, and apparently it went 8 1 fairly well, so I can't really comment on that, but 2 I hadn't talked to Billy about yesterday's meeting. 3 But there were comments made by 4 Chairman Clowe at the previous meeting that helped 5 the staff to focus on a direction for the BAC. 6 After his comments, Marilyn Matthew, a BAC member, 7 thanked him for his comments and stated that being 8 a new member, that gave her a frame work from which 9 to perform her duties as being a member of the BAC; 10 therefore, we started working on a frame work for 11 success. 12 We're putting together a manual for 13 the BAC that will clearly identify the expectations 14 for the members. Currently, we envision this 15 manual containing definitions of some of the common 16 terms that the BAC is exposed to; for example, 17 explaining the differences between the Acts and the 18 Rule. The manual would also expand and further 19 explain what purpose and objectives the BAC are 20 for, and it would contain an explanation of the 21 members' duties and responsibilities. 22 We believe that for anyone that 23 agrees to serve on this type of committee to 24 receive this type of information -- and we don't 25 know if in the past if it's ever been formally 9 1 presented to the members -- that this would be 2 helpful for the success of this frame work, and 3 it's dependent on the ability of the members to 4 advance to this type of a structure. 5 The BAC discussed a developmental 6 work plan yesterday, from what I was told, and the 7 upcoming year, and we'll look forward to getting 8 information as we move forward on this process. We 9 believe that by providing them with clear 10 expectations upfront, it will help them improve 11 their effectiveness, and it should help to improve 12 the quality of information that they provide to you 13 and, ultimately, to help improve the bingo industry 14 in Texas. 15 We hope to have the final 16 recommendation for your consideration at the 17 January meeting, and we'd appreciate any comments 18 that you may have for us to consider at this time. 19 CHAIRMAN CLOWE: Phil, I'd like to 20 comment on the fact that you were absent yesterday 21 attending jury duty; Billy was present during the 22 entire meeting, and he is absent today on an 23 authorized absence, and that's why you made the 24 comment that you have about your lack of knowledge 25 about the meeting yesterday. 10 1 This is a work-in-progress, as I see 2 it, and I've spoken with Chair Brackett a number of 3 times, and she is playing a leadership role that's 4 very strong in this, and I think it's going to be 5 beneficial for the committee. So much of what 6 we've seen, and was pointed out very clearly by the 7 Sunset Committee, about needs for the Bingo 8 Advisory Committee, in my opinion, is the 9 responsibility of the Lottery Commission. And I 10 can say that because that puts it more on my back 11 than the other two commissioners because I've been 12 here longer and I'm the designated bingo 13 commissioner. 14 But I think we do need a plan of 15 action, a work program. We need orientation for 16 the members, and we need to help them understand 17 their role in an advisory capacity dealing with 18 items that generate information from the bingo 19 industry and help the commission focus on things 20 they can do and not spend time dealing with issues 21 that are not the responsibility of the commission, 22 such as statutory items that the industry might 23 want to see come about. And I think we've 24 sharpened that focus over the last few months for 25 the members of the BAC and, hopefully, for members 11 1 of the industry. 2 As I perceive it, that industry does 3 not have what is generally thought of as an 4 association or a trade industry where so much of 5 what they have on their minds might be discussed, 6 and the BAC is not the proper venue for those types 7 of items as I, as one commissioner, see it. 8 So I think we're in a transformation 9 now; I think it's positive, and I hope that the 10 work that you're doing and that you're going to 11 present to us at our next meeting will be helpful 12 and move us along those lines. My recollection is 13 that the authorization of the Bingo Advisory 14 Committee expires in March of next year. 15 MR. SANDERSON: Yes, sir, that is 16 correct. 17 CHAIRMAN CLOWE: And so this 18 commission is timely and the work that it's 19 focusing on, with your help and the staff, in 20 approaching that date and making a decision as far 21 as how we see that advisory group should be 22 formulated beyond March of 2003. 23 MR. SANDERSON: Yes, sir, that's -- 24 our goal is to have information for you at the 25 January meeting so there will be plenty of time to 12 1 get the rule proposed and adopted and give us the 2 desire to go past March of 2003. 3 CHAIRMAN CLOWE: All right. And I 4 would like for you to rely on the Sunset Committee 5 staff as well; they spent a lot of time and effort. 6 As you work on this project, refer back to them and 7 get their counsel and advice so that we can have 8 the benefit of their opinions as we try to 9 formulate this new role for the BAC, if you would. 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN CLOWE: Great. 12 Then we'll move on to the next item, 13 which is No. 4: Consideration of and possible 14 action on nomination and/or appointment to the 15 Bingo Advisory Committee. 16 Phil, I think that's your item as 17 well. 18 MR. SANDERSON: Yes, sir. 19 You have in your notebook an 20 information sheet on Mr. Jack Dougherty, who is the 21 individual that was recommended by the BAC at the 22 last meeting. As you recall, the staff reported at 23 the last commission meeting the difficulty that we 24 have traditionally experienced in obtaining 25 qualified applicants for the general public 13 1 category. At the last meeting, it was discussed 2 that Chairman Clowe, BAC Chair Virginia Brackett, 3 and Billy Atkins would meet with Mr. Dougherty and 4 discuss the BAC. Chairman Clowe and Mr. Atkins met 5 with Mr. Dougherty on December the 3rd, and 6 Ms. Brackett had an opportunity to talk with him on 7 the phone that same day. 8 Mr. Dougherty is not associated with 9 any organization licensed to conduct bingo; 10 however, he informed us when we met with him on 11 December the 3rd that he plays bingo with some 12 frequency and that he believes that this will 13 enable him to bring a unique perspective to the 14 BAC. Additionally, Mr. Dougherty did attend all of 15 yesterday's BAC meeting and had the opportunity to 16 observe the activities of the BAC. 17 Staff would like to recommend the 18 commission appoint Mr. Dougherty to fill the term 19 in the general public category. 20 CHAIRMAN CLOWE: Commissioners, you 21 instructed me to meet with this gentleman, and I 22 did that, and he has a lengthy career in State and 23 City employment, and he has a genuine interest in 24 the bingo industry. I was favorably impressed with 25 him, as was Billy Atkins. Chair Brackett, has, I 14 1 think, also -- she indicated she interviewed him 2 over the telephone; she met him yesterday at the 3 BAC meeting, and she endorses his candidacy. 4 If you have any questions, I would 5 appreciate it at this time. 6 MS. WHITAKER: I take your 7 recommendation. 8 CHAIRMAN CLOWE: Then I move that he 9 be appointed to the Bingo Advisory Committee. 10 For what term? What's the proper 11 length of his term? 12 MR. SANDERSON: The term of the BAC 13 has traditionally been around one year, but they 14 are actually appointed until you appoint a new 15 committee. 16 CHAIRMAN CLOWE: Okay. And we're 17 reviewing those terms and whether they should be 18 for three years or one year and then rotating so we 19 have some continuity in there. 20 MR. SANDERSON: The proposed rule 21 does have a three-year staggered term for 22 membership. 23 CHAIRMAN CLOWE: Right. And since 24 the committee is now only authorized through the 25 end of March, the proper motion is that he be named 15 1 to the Bingo Advisory Committee, period? 2 MR. SANDERSON: Yes, sir. 3 CHAIRMAN CLOWE: Is there a second? 4 MS. WHITAKER: Second. 5 CHAIRMAN CLOWE: All in favor, 6 please say aye. The vote is three-zero in favor. 7 Thank you, Phil. Would you take 8 responsibility of notifying him and let's get him 9 oriented. 10 MR. SANDERSON: Yes, sir, we will. 11 Is he in the audience today? 12 CHAIRMAN CLOWE: I don't see him 13 here; I don't believe he's in attendance today. 14 MR. SANDERSON: Okay. We'll get in 15 touch with him. 16 CHAIRMAN CLOWE: Billy and I gave 17 him somewhat of an orientation in our conversation 18 with him, but he needs a more formal orientation. 19 Thank you, Phil. 20 MR. SANDERSON: Thank you. 21 CHAIRMAN CLOWE: The next item is 22 Item No. 5: Report, possible discussion and/or 23 action on Lottery sales and trends. 24 Good morning. 25 MS. SMITH: Good morning 16 1 Commissioners. For the record, I'm Toni Smith, 2 marketing director of the Texas Lottery Commission. 3 MR. SANCHEZ: For the record, my 4 name is Bart Sanchez. I'm the financial 5 Administration for the Texas Lottery. 6 MS. SMITH: Commissioners, the 7 year-to-date total sales -- 8 CHAIRMAN CLOWE: Is your mic on, 9 Toni? We can just barely hear you. You might get 10 a little closer to it. 11 MS. SMITH: Thank you. 12 Total fiscal year 2003 sales to date 13 are $762.9 million. This is up 6.9 percent from 14 fiscal year 2002 total sales to date of 15 $713.9 million. 16 Bart and I would be happy to answer 17 any questions that the commissioners may have 18 regarding sales. 19 MS. WHITAKER: What is, in your 20 opinion, responsive for the increase? 21 MS. SMITH: Well, I would like to 22 comment that "instants" seem to be doing very, very 23 well for us. The instant portion of the sales for 24 the weekend of December 7th were $46.2 million. 25 These are the highest instant game sales that we've 17 1 seen since June of 1997 when they were at $47.1 2 million. And the instant sales for last week for 3 our four holiday games that we had just for this 4 season represented $19.6 million of those sales. 5 Our newest addition to our holiday game family was 6 a $20 game. This was the first $20 instant game 7 that the Lottery has offered, and it sold $11.3 8 million last week. So we've had a lot of success 9 with the instants, and particularly our holiday 10 games. 11 CHAIRMAN CLOWE: That's a popular 12 game, and you're advertising it; I hear it on the 13 radio. And that's been successful? 14 MS. SMITH: Yes, sir, it has. 15 CHAIRMAN CLOWE: Where was the 16 winner from Wednesday? 17 MS. SMITH: You know, I don't know, 18 but I can find out before the meeting is over. 19 CHAIRMAN CLOWE: You can't seem to 20 get it over $12 million, can you? 21 MR. GRIEF: That ticket was brought 22 up in Brownsville. 23 CHAIRMAN CLOWE: Any other 24 questions? Thank you. 25 The next item is Item 6: Report, 18 1 possible discussion and/or action on lottery 2 advertising and promotions, including advertising 3 procurements. 4 MS. SMITH: Commissioners, I don't 5 have anything to report, but would be happy to 6 answer any questions that you have regarding 7 advertising. 8 CHAIRMAN CLOWE: I believe there are 9 none, Toni. Thank you. 10 MS. SMITH: Thank you. 11 CHAIRMAN CLOWE: The next item is 12 Item 7: Report, possible discussion and/or action 13 on the Legislative Appropriations Request for 14 fiscal year '04 and '05. 15 Mr. Sanchez. 16 MR. SANCHEZ: Good morning, 17 commissioners, again. I have nothing new to report 18 on the LAR, but I would be happy to answer any 19 questions right now. We're still working with the 20 legislative board office and the governor's 21 legislative office. 22 CHAIRMAN CLOWE: Thank you, Bart. 23 The next item is Item No. 8: 24 Report, possible discussion and/or action on Sunset 25 process involving the agency. 19 1 Nelda Trevino. 2 MS. TREVINO: Good morning, 3 Commissioners. For the record, I'm Nelda Trevino 4 the director for governmental affairs. I know 5 Melissa V. Senor [phonetic] provided an update 6 regarding our Sunset review at the November 22nd 7 commission meeting, and I have nothing new to 8 report on the Sunset review process, but I'll be 9 happy to answer any questions that you might have. 10 CHAIRMAN CLOWE: I believe there are 11 none, Nelda. 12 Moving to the next item, Item No. 9: 13 Report, possible discussion and/or action on the 14 78th Legislature, including the agency's 15 legislative proposals, and/or on legislative 16 briefings. 17 You're feeling better now than you 18 did at the last legislative briefing? 19 MS. TREVINO: Yes, sir, I am. Thank 20 you. 21 In your notebook, commissioners, you 22 have a legislative bill tracking report, and I have 23 provided you an updated report today. This is the 24 type of report that we will be providing to you 25 during the legislative session, and the report is 20 1 laid down in sequential bill order, beginning with 2 house bills and then followed by senate bills. 3 The report also identifies the bill 4 author and a brief caption of the bill. The track 5 code that you see noted on the bill tracking report 6 is an internal tracking code that we use to 7 identify the general subject matters of 8 legislation; for example, HR would be a human 9 resources bill, LOT would be a lottery related 10 bill. And then also noted on the report under the 11 track codes are the individual staff members that 12 have been assigned that bill for bill analysis. 13 As of December the 12th, 437 bills 14 have been pre-filed. We currently have identified 15 15 bills for tracking, all of which are noted on 16 the report that I handed out today. On our 17 tracking report, I do want to specifically 18 highlight house Bill 209 by representative Robert 19 Fuentes, and that's the bill that authorizes the 20 commission to participate in a multi-jurisdictional 21 lottery game. 22 I also want to note that I have 23 received a copy of a letter that was sent to each 24 of you from Steve Bresnen dated December the 11th 25 in which he provided a summary of suggestions that 21 1 the industry believes would be helpful to 2 charitable bingo. It is my understanding that most 3 of these suggestions have been previously provided 4 to the Bingo Advisory Committee, the Commission, 5 and the Sunset Advisory Commission. Some of these 6 suggestions that are noted in this letter are 7 policy issues that we also address in the agency's 8 Sunset self-evaluation report and also in the 9 agency's strategic plan. 10 As we have reported in previous 11 commission meetings, we continue to do the 12 appropriate research and analysis on these policy 13 issues in order to be an agency resource for the 14 upcoming legislative session. 15 And that's all I really have to 16 report today, and I'll be, again, happy to answer 17 any questions that you might have. 18 CHAIRMAN CLOWE: Thank you, Nelda. 19 If you'll remain seated, there is a public witness 20 form submitted to speak on this item by Mr. Stephen 21 Fenoglio, and I'll ask him to come forward at this 22 time. 23 I also have a form from Mr. Bill 24 Pruitt who states that he supports Mr. Fenoglio's 25 comments, but does not wish to appear, so we'll 22 1 note that for the record. 2 Good morning, Mr. Fenoglio. 3 MR. FENOGLIO: Good morning, 4 Mr. Chairman, Commissioners. For the record, my 5 name is Stephen Fenoglio, and I represent over 950 6 charitable business organizations, and I am the 7 replacement for Steve Bresnen for today, who had to 8 be out of town. 9 He had filed -- he and I had worked 10 on a letter that he filed with the commission 11 earlier this week. Two of the issues -- and 12 Ms. Trevino is correct, the positive agenda has 13 already before approved by -- or recommended for 14 approval by the BAC, and we didn't want to let 15 those issues die. And, as you know, Mr. Chairman, 16 you were there when we went through, pretty 17 exhaustively, yesterday at the BAC, the Bingo 18 Advisory Committee, the unit accounting issue, 19 which would take both the legislative -- new 20 legislative approval as well as regulatory rule 21 making. There was a favorable recommendation by 22 BAC for that. It's something that y'all had 23 discussed at your Sunset recommendations to the 24 Sunset Commission. 25 And we are on track, I'm happy to 23 1 report, to start a industry-wide effort to narrow 2 and focus and come with a favorable recommendation 3 beginning January 6th, 2003. That was something 4 that Billy Atkins and the Chair of the BAC worked 5 out. 6 The same is true for the charitable 7 distribution issue. And by that, I mean that it's 8 part of the positive agenda; it's the part that's 9 been discussed in several other meetings, to have a 10 rule making to clarify what expenditures can be 11 made from an agency's -- a charity's general fund 12 from bingo proceeds. And that is also on the same 13 fast track January 6th time frame where everyone is 14 supposed to communicate with Mr. Atkins if they 15 want to be involved in the process. And we 16 anticipate 10 to 15 people, we hope, who will get 17 involved in something we've kicked around for the 18 last year, a negotiated rule-making discussion 19 process. 20 So, I'll be happy to answer any 21 questions. We're ready to move forward and looking 22 forward to the legislative session coming up. 23 CHAIRMAN CLOWE: Well, I want to 24 thank you for the work that you and others are 25 doing on behalf of the bingo industry. I think the 24 1 input that you're giving the staff is extremely 2 valuable and the basis for the development of 3 responses to what the Sunset Committee, in my 4 recollection, indicated they wanted to see this 5 commission do. 6 And my hope is that we can come to 7 some level of proposals from the staff to the 8 commissioners sooner rather than later so we can be 9 timely with the report back to the Sunset 10 Committee, which I think they expect to hear from 11 us, so thank you for your good work in this area. 12 MR. FENOGLIO: You bet. And thank 13 you to your staff and happy holidays. 14 CHAIRMAN CLOWE: The next item, Item 15 No. 10: Consideration of and possible action on 16 appointment and employment of the Executive 17 Director and/or the Deputy Executive Director. 18 Ms. Kiplin, do you have something 19 for us on that? 20 MS. KIPLIN: Commissioners, the 21 Human Resources Director Jim Richardson is also 22 here. We want to report to you that we received 23 over 100 applications for this position and would 24 like to move forward to begin to have you-all take 25 a look at those and try to set up a time where you 25 1 can begin the process -- the selection process. 2 CHAIRMAN CLOWE: I'd like to state 3 on the record that it's my belief that each of the 4 commissioners has spent time reviewing these 5 applications and is personally involved in this 6 process. I want to thank you and Jim and Dianne 7 Morris for serving as, what might be called, a 8 selection committee on behalf of the commissioners, 9 since we can only be here individually and review 10 this material. 11 The commissioners, I believe, have 12 indicated to you that they are agreeable to a 13 meeting, and at that time, we would review the 14 applicants that we have determined are the ones 15 that we want to interview. And I believe January 16 the 9th is a date that is possible for that 17 meeting, and I'm going to ask you on behalf of the 18 commission to notice a meeting on January the 9th, 19 2003 to begin at 8:30 a.m. 20 And I'm going to state that the 21 purpose of that meeting will be to interview 22 candidates for the Executive Director position; the 23 agenda will reflect that. And it's not our 24 intention -- it's not my intention to conduct any 25 other business on behalf of the commission at that 26 1 time. 2 Is that agreeable, Commissioners? 3 Anything further on that? 4 Is Mr. Richardson -- anything 5 further from you, Jim? You're prepared to go 6 forward on that basis? 7 MR. RICHARDSON: Yes. 8 CHAIRMAN CLOWE: Very good. 9 Anything further? 10 MS. KIPLIN: No. Just, for the 11 record, Mr. Richardson indicated that he was 12 prepared to go forward, off the record. 13 CHAIRMAN CLOWE: Thank you. 14 The next item is Item 11: 15 Consideration of and possible discussion and/or 16 action on State Auditor's Office, external audit 17 reports and/or internal audit reports relating to 18 the Texas Lottery Commission and/or on the Internal 19 Audit Department's activities. 20 I believe we're past this item, and 21 there's no comment from anyone at this time on 22 that? 23 Item 12: Report, possible 24 discussion and/or action on HUB and/or minority 25 business status and/or contract management. 27 1 Mr. Robert Hall. Good morning, 2 Robert. 3 MR. HALL: Good morning, 4 Mr. Chairman, Commissioners. For the record, my 5 name is Robert Hall. I'm director of Business 6 Development and Employments Division. 7 MR. COLA: And for the record, my 8 name is Rob Cola. I'm the contracts manager. 9 MR. HALL: Commissioners, in your 10 notebooks, you have several -- I believe, about 11 three or four attachments we're going to update you 12 on this morning, and we're also going to give you a 13 presentation on the contract management process 14 that we have in store for the commission. 15 But, first, let me tell you, by way 16 of the minority participation of the board, we have 17 no updates for you just yet; we only have -- we 18 have included in your notebooks a report for 19 September and October, and we will be forwarding 20 you the November report whenever this document is 21 made. In addition to that, we will also be coming 22 to you in the January meeting of 2003 requesting 23 your action and approval on the release of the 24 minority business participation report to the 25 legislatures. 28 1 At your request, the Minority 2 Development Services conducted a contract 3 management customer service survey. We have since 4 received the results of the survey, as stated last 5 month, and we are prepared this morning to share 6 the results with you of that survey with the hope 7 that this survey will communicate not only to our 8 commissioners, directors, and staff that there is a 9 need for us to develop a new -- develop a program 10 that will train everyone on how the process was 11 being utilized. 12 Mr. Cola is going to help me with 13 that presentation, and we're just going to go 14 through each slide. We've also included the 15 results in your notebook to follow. And if you 16 have any questions during this presentation, please 17 feel free to stop us and we will be happy to answer 18 those questions. 19 The goal and purpose of the survey 20 was to obtain feedback regarding the Texas Lottery 21 Commission's management process. We also wanted to 22 obtain feedback regarding the survey results to 23 help us provide useful input into the contract 24 managers planning process and then also to identify 25 the roles of those involved with initiating and 29 1 administering in the Texas Lottery Commission's 2 contracts. 3 On August 20th, the commissioners 4 requested that we conduct a survey; the contract 5 management did that. From that survey, we obtained 6 feedback from all division directors and selected 7 staff from 10-18 regarding the survey which was 8 sent out to over 70 persons identified by the 9 directors on 10-30. The survey was conducted from 10 October 30th until November the 15th, and we 11 received a total of 29 anonymous responses on 12 11-15. We immediately began to tabulate those 13 results on November 15th until December the 4th, 14 and we've highlighted those results to our 15 commission directors on the 11th of December, and 16 we've also sent out a memorandum just yesterday, on 17 the 12th, indicating we were developing a planning 18 committee to discuss the role and responsibility of 19 contract management, and as you can see today, 20 we've highlighted the results for you. 21 I'm just going to give you a general 22 overview of what the results were, and I'll read 23 each question associated with that; we have 18 24 different questions. And, again, I'll be happy to 25 answer any questions that you may have. 30 1 Contract management has clearly 2 communicated contract management responsibilities 3 to the divisions. 4 Most people were either neutral or 5 disagreed with that particular application or 6 question. 7 Question two, I receive current 8 information and updates regarding the contract 9 management policies and procedures. 10 Again, most people were neutral and 11 most disagreed with that process. 12 Question three, training on how to 13 initiate and monitor the contract will be useful in 14 carrying out my contract responsibilities. 15 As you can see, most people strongly 16 agreed with this process. 17 Question four, I am aware of the 18 Texas Lottery Commission's internal processes for 19 determining when a contract should be renewed. 20 Most people did agree and also were 21 somewhat neutral, meaning that there's probably a 22 need for clarification in the process. 23 Question five, I am aware of the 24 Texas Lottery Commission's internal process for 25 determining when a new [inaudible] should be 31 1 conducted. 2 Most people, again, agreed with the 3 process, and some were neutral, but there were also 4 some that disagreed. 5 Question six, I am aware of the 6 Texas Lottery Commission's internal process for 7 determining whether contract rules -- contract 8 rules and services should be discontinued. 9 Most people, again, agreed and were 10 neutral, and some were not familiar with the 11 process or disagreed with the current process. 12 Question seven, I know where to 13 obtain or how to write specifications for a 14 specific bid on service. 15 Again, most people disagreed with 16 this particular item, but there seems to be a 17 parallel between those who -- or some that do know 18 how to obtain a specification or at least write 19 them. 20 Question number eight, I understand 21 how the bonding and insurance funds are established 22 for a contract. 23 Most of the people that responded 24 strongly disagreed or disagreed with this 25 particular process, which relates to us that we may 32 1 have a need for training in this particular area. 2 Question number nine, having a copy 3 of the purchase order is helpful in monitoring 4 contract for services related to that division. 5 As you can see, most people strongly 6 agreed with this particular process. 7 Question ten, copies of contracts 8 are helpful in monitoring contract for service 9 related to my division. 10 Again, most people strongly agreed, 11 and also agreed that this process would be helpful. 12 Question number 11, contract 13 monitoring guidelines are helpful in monitoring 14 contract service related to my division. 15 And, again, most people strongly 16 agreed, and also agreed that this process would be 17 helpful. 18 Question 12, post contract 19 [inaudible] are helpful in monitoring contract and 20 services related to my division. 21 Most people agreed, and also 22 strongly agreed, but some were still neutral. And 23 we do have this process in place right now. 24 Question 13, compliance check lists 25 are also helpful in monitoring contract of services 33 1 related to my division. 2 Most people, again, agreed, and also 3 strongly agreed that this process will continue to 4 be helpful. 5 We had another question related to 6 this same particular area. The following are 7 helpful in monitoring contract service related to 8 my division, and we received written responses to 9 this particular area, and we gave our respondents 10 an opportunity to do that in the next set. 11 The service level agreements for IT 12 contracts would be helpful; letters to vendors for 13 noncompliance would be helpful and also to clarify 14 who is responsible; notification when contracts are 15 signed by the vendor and the Lottery would also be 16 helpful to some of the respondents, as well as who 17 to contact and provide feedback to, to report 18 noncompliance issues. 19 Question number 15, I know how to 20 document and report on performance issues when 21 monitoring a contract. 22 Most of the people here -- and it 23 was kind of a different -- it was kind of an equal 24 response here, but most -- we think that most 25 people disagreed that are not familiar with the 34 1 total process of how to report performance related 2 issues. 3 Question 16, the divisions treatment 4 and the assessment of liquidated damages are 5 sanctions of how the services are being monitored. 6 Most people agreed, and some were 7 also neutral in terms of this particular process. 8 Question number 17, quality contract 9 compliance is useful for clarifying contract issues 10 and keeping staff updated. 11 Most people agreed that this process 12 does work and it is helpful. 13 Question number 18, contract 14 management, rather than the division, should be 15 responsible for managing all contracts. 16 As you can see, there were a 17 strong -- there's a strong agreement that contract 18 management should be responsible for managing the 19 contract, but there was some that said they 20 strongly disagreed with this process. 21 So some of the findings would 22 dictate that there is a need to clearly communicate 23 contract measures, roles, and responsibilities and 24 work with them. Second, there is a need to 25 continue to enhance the contract management package 35 1 that we disseminate, and also continue to conduct 2 quality meetings, and then definitely a need for 3 contract management training. 4 So what's next? We are in the 5 process of developing -- as I said before, we sent 6 out a memorandum yesterday to all division 7 directors, assistant managers, and selected staff 8 that have been identified by the divisions asking 9 for participation of staff on a contract planning 10 committee. 11 The Goal of this committee is to 12 identify every task, every step, every process that 13 is involved in our processes. Not to say that it 14 is not already identified, but just to ensure that 15 every step is identified and we know who is 16 responsible for administering those roles. 17 As you can see on this particular 18 time line, we are hoping to have the first meeting 19 next week on the -- actually, it's not the 18th, 20 but the 19th, and after this particular meeting, we 21 hope to have some meetings in January to sum it all 22 up. And after that, we hope to have this process 23 through training and everything else in place by 24 March. 25 In your notebooks, we have provided 36 1 you with a sample of a couple of documents. One is 2 a listing of all of the prime contracts that we 3 have, meaning prime services contracts that are 4 associated with the agency's commission, and in 5 addition to that, all other service warranty 6 contracts over $100,000. And these are the 7 contracts that we will start working with to 8 identify the responsible roles and the tasks 9 associated with the business services. 10 We have also included in your 11 notebook a draft, and I want to echo draft, of a 12 time line to give you kind of an idea of what steps 13 will be included in the general process that will 14 be identified, and that's also in your notebooks 15 for you. 16 So one of the objectives is -- an 17 additional objective is to build on the contract 18 management program to incorporate best prices for 19 Texas Lottery Commission services, forecast the 20 Texas Lottery Commission's contracts in advance 21 prior to each fiscal year, provide useful contract 22 information through and to the divisions, provide a 23 better reporting structure regarding the status of 24 all contract activity to the commissioners and the 25 commission, educate and train staff about the 37 1 contract measuring processes, and then last is to 2 maintain an environment that solicits and rewards 3 contracts in a competitive and timely manner. 4 And that is all I have for you in 5 regards to the contract management program and in 6 regards to the survey. And we will -- myself and 7 Mr. Cola would be happy to answer any questions 8 that you have. 9 MR. COX: Question? 10 CHAIRMAN CLOWE: Yes. 11 MR. COX: Robert, if I understand 12 this, you sent 70 surveys to people, all of whom 13 are employees. You sent 70 surveys to people who 14 are all employee of the Texas Lottery Commission. 15 Is that correct. 16 MR. HALL: Yes, sir, it is. 17 MR. COX: And you got only 41 18 percent of those back? 19 MR. HALL: Yes, sir. 20 MR. COX: Do you have any thoughts 21 on why so few of our employees would respond to our 22 questionnaire? 23 MR. HALL: No, I don't. I can say 24 that we would like to have had 70 to 100 percent 25 response on this, but, ultimately, we were pleased 38 1 with the responses that we got, which was almost 2 half of the surveys sent out. We will use that 3 information in our processes to determine how we 4 proceed. 5 And, again, this is not the last 6 opportunity for staff to have feedback. We're 7 developing this planning process, these planning 8 meetings, and, hopefully, there will be an issue 9 that will invite the staff members to participate. 10 They will have input in this process as well. 11 CHAIRMAN CLOWE: I think 12 Commissioner Cox has hit on a very important point 13 that amplifies the obvious results of your survey, 14 that we need to do a better job. 15 And, Rob, do you have anything to 16 comment on in regard to what is obviously a need to 17 better communicate and better educate in this area? 18 MR. COLA: Yes, sir. We're excited, 19 and we realize this is a challenge, and we're 20 committed to leaving no stone unturned and 21 communicating with folks and making sure that they 22 understand the importance. 23 On the response of the numbers, I 24 think it's a good place in the process of 25 formalizing our contract management program that 39 1 there is a need. And it very well can be a 2 reflection on me and my staff, and, really, the 3 challenge we have to continue to communicate and be 4 open to everybody. 5 MS. WHITAKER: I want to say that, 6 because this does touch on meetings and 7 implications of a contract, you are going to work 8 this out closely with legal. Is that correct? 9 MR. HALL: Yes, ma'am. 10 MS. WHITAKER: And perhaps that's 11 part of the source of contention? 12 MR. HALL: Yes. Let me answer that. 13 We have asked for, in terms of our 14 blind sense of direction, if requested correctly, 15 you know, a planning commission. We have asked for 16 mandatory participation of our legal, security, and 17 also purchasing to be a part of this. 18 Am I answering that correctly? 19 MS. KIPLIN: Commissioners, if I 20 may, Mr. Hall and I are working very closely on 21 this matter, and I've had an opportunity to review 22 the materials that were presented to you today. We 23 recognize that there is a significant need for 24 legal to be involved, and I think that we'll work 25 very well together to get to a solution. 40 1 I think Mr. Hall and I share common 2 objectives and common goals in terms of planning. 3 We both agree that the contract management and the 4 procurement process is a sub-category of overall 5 agency planning. It needs to be planned much 6 further out I think, and Mr. Hall agrees, than it 7 is now so that we're not taxing the same resources 8 at the same time, which causes there to be delay in 9 other projects and then the rush at the end, so 10 we'll continue to move forward. 11 MS. WHITAKER: And, also, the whole 12 idea of the interpretation of contracts, we need to 13 have a very centralized approach to that. 14 MS. KIPLIN: I think, there is a 15 clear understanding that the contract 16 interpretation is a legal construction, and the 17 appropriate referrals will be made to legal for 18 those particular matters as they arise. 19 CHAIRMAN CLOWE: Well, and I think 20 that's right, and then I think there's an overall 21 business need that is concerning to me. And I'm 22 very happy that you've done this survey, and, you 23 know, we need to be examining ourselves and 24 improving our performances. You've clearly 25 identified the fact that a number of our own 41 1 employees aren't responding, as Commissioner Cox 2 pointed out. What's the reason for that? Don't 3 they think it's important enough to share their 4 information? Are they concerned that they don't 5 have information to share? Is education needed? 6 And, Rob, you've been in this job 7 how long? 8 MR. COLA: About a year and a half, 9 Chairman. 10 CHAIRMAN CLOWE: So, you're getting 11 started. But, clearly, I think the Sunset 12 Committee report pointed out that we need a better 13 business plan, and this is inclusive in my mind of 14 planning and the developments of this phase of the 15 granting of contracts and the monitoring of 16 contracts that will improve the performance of the 17 successful vendors and the product that the Lottery 18 Commission is getting for the dollars that are 19 being spent. 20 And, of course, the contracts, some 21 of them we award are very large amounts, and we 22 need to have our people educated and well equipped 23 with legal knowledge as well as a business sense. 24 Gary, that falls in your arena, and 25 I know that you're working with, I think, TC Mallet 42 1 in a development business plan for this agency as 2 well as others that will encompass, I hope, a 3 better performance and a better understanding on 4 behalf of our employees in this area. 5 MR. GRIEF: Yes, sir, we are. 6 Actually, Mike Langor is heading up that project in 7 the Lottery operations. And, as you know, for an 8 agency of this size, we have a tremendous amount of 9 contracts that we're involved in, and the contract 10 work of this agency drives a great deal of our work 11 here, so this document and this process that Robert 12 and Rob are working on is going to be a big part of 13 the foundation of our overall business plan looking 14 into the future. This is going to drive a lot of 15 our priorities as an agency over time. 16 So, yes, I would tell the 17 commissioners, I'm very engaged in this process. 18 I've been working closely with Robert and giving 19 him suggestions and my comments as we work through 20 this. 21 CHAIRMAN CLOWE: And, you know, my 22 sense is that this is good information to have, and 23 it points out that we need to be out ahead of this 24 process and we need to be monitoring these 25 contracts so that we get everything that we bought, 43 1 and we don't see anything fall through the cracks, 2 and we help our vendors provide everything that 3 they bid to provide for their dollars. And a good 4 business plan that covers not only this area, but 5 other areas in the agency, would give our 6 employees -- our managers the guidelines they need 7 to perform better, and I think we've been lacking 8 in that in the past. 9 MR. GRIEF: I agree with you, and 10 we'll work to improve it. 11 MR. HALL: Mr. Chairman, let me 12 assure you that Rob and I have been working very 13 close together as well, and you have our 14 commitment; we will do the best job to make sure 15 this process is concluded in terms of training our 16 staff, but also making sure that everything in 17 terms of our objectives are communicated out. 18 CHAIRMAN CLOWE: Well, I just want 19 to say, and I think I can say on behalf of the 20 commissioners, Robert, we want this kind of 21 introspective examination. We welcome this kind of 22 report that shows, obviously, we need to do a 23 better job, and we're glad that you're focussed on 24 not telling us how good things are, but where 25 things need to be done to get better performance. 44 1 That's what we want the managers in this agency 2 focused on. 3 MR. HALL: Yes, sir. 4 I only have two other updates for 5 you in regards to the statewide HUB report. We 6 just received notification on December the 4th from 7 the Texas Building Commission. We had originally 8 reported that the total statewide utilization was 9 9.65 percent. There was revised -- a revised 10 report released revealed the actual utilization was 11 11.65 percent, which we were glad to hear. 12 It didn't change the overall total 13 HUB utilization, but it decreased the total 14 expenditures from $10 million to $8 billion -- 15 excuse me -- instead of $10 billion, $8 billion 16 total expenditures. 17 And the last update I have for 18 you -- or, excuse me -- yes, the last update I have 19 for you is in regards to, if you haven't noticed 20 yet, we've changed our division name to Business 21 Development and Compliance to incorporate both 22 sections of minority development as well as to 23 contract management. 24 Thank you for the opportunity. And 25 if you have any other questions, we'll be happy to 45 1 answer those. 2 CHAIRMAN CLOWE: How's our mentor 3 program going, Robert? 4 MR. HALL: Since the update that we 5 provided you back in October, I think it was, we 6 are still in the monitoring phase. We have two 7 vendors that have lapsed in their certifications, 8 and we are working with them to get recertified, 9 but other than that, we think the program is still 10 going very well. 11 CHAIRMAN CLOWE: Keep us updated. 12 MR. HALL: Yes, sir, I will. 13 CHAIRMAN CLOWE: Thank you, both. 14 MR. HALL: Thank you. 15 CHAIRMAN CLOWE: Next, we'll go to 16 Item 13 on the agenda: Report, possible discussion 17 and/or action on the agency's demographic study of 18 the Lottery. 19 Toni Smith? 20 MS. SMITH: Commissioners, the data 21 collection for the biannual demographic study has 22 been completed, and a draft of the final report 23 will be submitted to the acting executive director 24 today, and upon his approval, then forwarded to the 25 commission next week. And if it pleases the 46 1 commission, in the next commission meeting, I can 2 report on the results of this. 3 CHAIRMAN CLOWE: Let me ask a -- 4 MS. KIPLIN: I will say that there 5 is a requirement that the executive director 6 provide the commission with the report, report the 7 results of the demographic study to the commission, 8 governor, and legislature before the convening of 9 each regular legislative session. My understanding 10 is the session begins, I think, it's January 14th, 11 and Ms. Trevino is nodding her head in agreement. 12 So we will work this out so that we can meet this 13 requirement. 14 CHAIRMAN CLOWE: That's an annual? 15 MS. KIPLIN: Biannual. 16 CHAIRMAN CLOWE: And help me, Toni; 17 I'm trying to remember the surveys that we've done 18 in the past. This includes a broad arena of 19 questions regarding players and their attitudes? 20 MS. SMITH: Yes, sir. This would -- 21 CHAIRMAN CLOWE: Demographic as well 22 as, I might say, philosophical? 23 MS. SMITH: Well, this one is more 24 purely demographic in the sense of age groups, 25 income, spending habits, which is very valuable. 47 1 It's our annual segmentation study and tracking 2 study that gives us more the attitudinal and 3 opinions of the players, and I think we are 4 presenting that to the commission, the segmentation 5 study next week. 6 CHAIRMAN CLOWE: Very good. Thank 7 you. 8 The next is Item 14: Report, 9 possible discussion and/or action, including 10 issuance of a procurement document, on the agency's 11 1-900 number. 12 Mr. Mike Fernandez. Good morning, 13 Mike. 14 MR. GRIEF: Commissioners, if I 15 could, I had to ask Mike Fernandez, director of our 16 IT division, to present you with information today 17 about this particular item. I also asked Keith 18 Elkins to come to the table as well. Keith will 19 also be available to answer any questions that you 20 might have after Mike presents you with his 21 information. 22 MR. FERNANDEZ: Good morning, 23 Mr. Chairman, Commissioners, Mr. Grief, 24 Mr. Sanchez. My name is Mike Fernandez. I am the 25 director of information technology, and with me 48 1 this morning, I have a fellow colleague director 2 Mr. Elkins, and we're here before you to give you a 3 status update on the status -- on a situation we 4 have with your 1-900 results line. 5 As I'm sure you're aware, the 6 Lottery Commission has offered a results line 7 virtually since the inception of the Lottery. I 8 think, perhaps, for 36 months we didn't have one. 9 Originally, it was a local exchange number, meaning 10 just a local telephone number that anyone could 11 call, and I believe shortly after that came up, we 12 had a complaint filed by the local carrier because 13 we were overloading their switches during our draw 14 period, so they had filed a complaint. And I think 15 we had heard some other comments made from the 16 Lottery Commission at that time as well as the 17 carrier that that was unfair to folks outside of 18 the -- outside of that local exchange number. 19 Subsequent to that, we went to, 20 then, the general service commission, who is now, I 21 think, Billing and Procurement Commission, and 22 acquired a 1-900 service, which ran for a number of 23 years. The State of Texas did change carriers, and 24 at that time, we did change local 1-900 service. 25 We were notified by the current 49 1 carrier that, effective 1, January, that the 2 billing and collection piece of that, they will no 3 longer carry -- or they will no longer facilitate. 4 When we got that notification, a number of meetings 5 were held with senior staff and, at that time, the 6 current director, and a decision was made to 7 curtail that service, to do away with the 1-900 8 service. Subsequent to that, then in a future 9 briefing, or in briefings to the current director, 10 Mr. Grief asked us to go and look at options, 11 currents options, that would be available and to do 12 a thorough cost benefit analysis of those options. 13 We immediately set about doing that 14 with the assistance from Mr. Sanchez' folks, and 15 Identified what we believed were the viable options 16 and then put together what we also believe the cost 17 benefit -- or the cost benefit to discuss those. 18 We had additional meetings with the other directors 19 and asked for their thoughts and feelings, not only 20 about the cost benefit, but perhaps other issues 21 that might impact a recommendation. Ultimately, 22 after those meetings, we agreed on that and went 23 forward with a recommendation to the director. 24 Mr. Grief accepted the 25 recommendation of staff and further directed that 50 1 we go forward and develop a strategy to notify 2 those current users of the 1-900 number, if 3 possible, as well as any others, the public that 4 would avail themselves to notification of that 5 service. And I believe Mr. Elkins is here with me 6 this morning to address that strategy. 7 MR. ELKINS: Good morning, 8 Commissioners, Mr. Chair. 9 We've looked at this from all 10 different angles, and we've come up with what I 11 think is a good alternative to get the word out, 12 not only that the 900 number is going to be 13 discontinued, but also all the alternatives that 14 currently exist and that will exist after that for 15 obtaining results in different ways. For example, 16 we have expanded our live TV network and our TV 17 network that is currently carrying the drawings on 18 a tape delay basis, trying to cast as big a whale 19 as we could across the state for people, that they 20 would be able to tune into a TV set or their local 21 cable company. 22 I'm pleased to say that, with the 23 recent addition of the Texas Cable News Network 24 that originates out of Dallas which has coverage on 25 cable to 109 cities, we are now in more than 51 1 80 percent of the different markets across Texas, 2 so we almost have 100 percent availability of TV 3 drawings across the state. In addition to that, we 4 are also looking at various other things. In 5 January, callers that do call the 1-900 number will 6 be notified that they will not be charged for the 7 call, and they will get a recording that the 8 results line is being discontinued and will provide 9 to them the different alternatives that they can 10 get the numbers, whether that's at the local retail 11 outlets that obviously have the numbers that they 12 can print out on paper stock and hand to the 13 players. Most of them print those out and have 14 them readily available on their counter. We will 15 also be having the -- we have made arrangements to 16 have the website updated electronically, which is 17 usually within about the first 15 minutes after a 18 drawing, it has the correct results. Not only can 19 you go and see the results of that particular 20 night's drawing, but, of course, we added a feature 21 some time back where you can go in and put in any 22 number and see if you've ever won any of our draws, 23 which has been a very poplar feature as well. 24 In addition to that, we are also 25 compiling lists of various newspaper outlets around 52 1 the state that print the results in their local 2 papers or may offer a local phone number, if 3 someone wants to call in in that area, that we can 4 provide to people if they call in looking for that. 5 We'll have articles in the publications that we put 6 out here at the Lottery, such as Roundup and 7 Winning, in January notifying that the service is 8 going away and the different alternatives that are 9 there to get the results. 10 Player Connect is a feature that we 11 will also be highlighting coverage about. If 12 someone wants to sign up electronically to get the 13 drawing results, that is a feature that the Lottery 14 provides. How To Play brochures are being printed, 15 which will also provide the various alternatives to 16 the 1-900 number. Any current advertising of the 17 1-900 number will be discontinued, and I believe it 18 already has been discontinued. There will be play 19 station inserts prepared by the marketing division 20 for the retailers at various locations around the 21 state, and also the marketing division is preparing 22 some business-size cards with various alternatives 23 to the 1-900 number that will be available to 24 players at those locations as well. 25 Of course, we'll do our standard 53 1 notification with the news media notifying them 2 about the 1-900 number going away and the various 3 alternatives. We're also meeting with various 4 associations for both the print and broadcast media 5 and trying to enlist their help in helping us 6 spread the word and see if there are any 7 alternatives for their clients that we haven't 8 considered, or they may want to pick this up if 9 they're not currently advertising the draw results. 10 I think that we cast a pretty wide 11 net to, not only to inform players that a service 12 that was there is not going to be there anymore, 13 but there are a lot of different new services where 14 you can get the results as quickly. 15 MR. FERNANDEZ: Mr. Chairman, 16 Commissioners, if we can answer any questions, we 17 would be happy to do so. 18 MS. WHITAKER: This on here, on the 19 website, it's updated 15 minutes after the drawing? 20 MR. FERNANDEZ: Yes, ma'am. 21 MS. WHITAKER: How fast does the 22 1-900 number get the numbers out? 23 MR. FERNANDEZ: Possibly the same 24 period of time. 25 MS. WHITAKER: So there's no 54 1 advantage to the 1-900 number? 2 MR. FERNANDEZ: I would generally 3 think there's no advantage. 4 MS. WHITAKER: I mean, I think we 5 ought to make sure it's no more a delay, as soon as 6 possible. 7 MR. FERNANDEZ: Certainly. And as 8 Mr. Elkins eluded to, we're looking at strategies 9 to make that happen more quickly. 10 MS. WHITAKER: Good. 11 MR. ELKINS: In that regard, I might 12 also add, Commissioner, that, some time ago, we 13 made some significant changes to our home page 14 making the draw results more prominent when you 15 come to our website, and I'm pleased to report 16 that, through November 2002, it was the sixth month 17 in a row that we've had more than 1 million visitor 18 sessions to our site. And looking at the web 19 trends analysis for people that are coming, the 20 vast majority, I would say more than 90 percent, of 21 people who come to our website never make it past 22 the home page, so we are convinced that they are 23 coming for the draw results, they get them, and 24 then go on, and hopefully buy more tickets. 25 CHAIRMAN CLOWE: Do you have 55 1 anything to add, Gary? 2 MR. GRIEF: A follow-up comment to 3 Commissioner Whitaker's question. Just to let all 4 the commissioners know, the timing on the Gtech 5 terminals will be as quick or quicker than the 6 1-900 number was. The numbers are available at the 7 retailer locations very soon after the draw, and 8 that is a very poplar outlet for players to obtain 9 those numbers. 10 CHAIRMAN CLOWE: So the alternative 11 means to the players are the terminals where they 12 bought the ticket, the video that comes from live 13 coverage on the television, and tape -- Texas Cable 14 News Network, I think you said is the broadest 15 broadcasting of that, the newspapers, the website. 16 Where else? 17 MR. ELKINS: Well, with the website, 18 they can -- they can either go to the Video on 19 Demand and watch the drawing and get the results 20 there or they can just look at the results, so they 21 have two different alternatives, or they could 22 watch it live, if they wanted to, via the web for 23 the Lotto game for the stations carrying us live. 24 We have, I think, Texas Cable News Network; their 25 tape delays in their 109 cities by about ten 56 1 minutes, but they do have the drawing live there. 2 It was a very good partnership to get them. 3 MR. GRIEF: Any of our 22 claim 4 centers as well, Mr. Chairman, have those numbers 5 available. 6 CHAIRMAN CLOWE: So that's five 7 sources for that information. 8 Mike, what are the other states 9 doing? Have you surveyed what the other lottery 10 operations in the U.S. are doing? 11 MR. FERNANDEZ: Yes, sir, we have. 12 And, in fact, we went back over that again 13 yesterday. Currently, seven states are offering 14 1-900 services. We know for sure that two of them 15 are going away; some of them are looking at the 16 same thing, or going through the same scenarios 17 that we had been running through. Eleven states 18 currently offer 1-800 numbers, and then there are 19 fourteen others that offer a local number in which 20 they do speak to folks -- or eleven of those 21 fourteen do actually speak -- you can zero out and 22 talk to someone. 23 CHAIRMAN CLOWE: And my 24 understanding of this decision, based on a business 25 aspect of it, is that, with the removal of the 57 1 service from the present carrier, the financial 2 burden to the agency is such that it is 3 unattractive, and the thought is that the recipient 4 of the information will be charged such a high 5 charge that they wouldn't want to use the services. 6 Is that correct? 7 MR. FERNANDEZ: That's correct. 8 CHAIRMAN CLOWE: They just have to 9 call in long distance, I guess, via -- well, we 10 would have to have that service that they could 11 call? 12 MR. FERNANDEZ: Yes, sir. 13 CHAIRMAN CLOWE: And we don't have 14 it -- 15 MR. FERNANDEZ: That's correct. 16 CHAIRMAN CLOWE: -- under your 17 proposal? 18 MR. FERNANDEZ: That's correct. 19 CHAIRMAN CLOWE: Thank you. I don't 20 believe there are any other questions. 21 Then next is Item 15: Report, 22 possible discussion and/or action on the agency's 23 annual financial audit. Mr. Sanchez? 24 MR. SANCHEZ: Mr. Chairman, 25 Commissioners, I'll have the final audit and the 58 1 power-point presentation distributed to you right 2 now. Commissioners, I'm happy to report that the 3 annual financial audit for physical year '02 is 4 complete. The final draft was provided in your 5 notebook, and it's basically the same. 6 As you know, the Texas Lottery is 7 required to have a financial audit performed under 8 Texas Government Code 466.017 where it reads, that 9 the executive director shall provide for a 10 certified public accountant to conduct an 11 independent audit for each fiscal year of all 12 accounts and transactions of the Lottery. The 13 certified public accountant shall present an audit 14 report to the executive director, the commission, 15 the governor, the comptroller, and the legislature 16 not later than the 30th day after the submission 17 date of the annual financial report that is 18 required under the general appropriation act. So 19 the due date for this financial audit, as I said 20 previously before, is December 20th. 21 And, today, let me just present a 22 notary of the audit financial statements. I think, 23 in past years, I haven't done this, so I thought 24 I'd just provide a real global overview of some of 25 the accomplishments that the agency has made. 59 1 As you know, the sales, the audited 2 financial sales, for the Texas Lottery for fiscal 3 year '02 is $2.966 billion, which is 5 percent more 4 than the previous year, fiscal year '01. And we've 5 provided you a breakdown of what that is comprised 6 of, and, as you can see, as we've said before, that 7 the major portion of our sales come from instant 8 tickets, which is 65 percent. 9 Next, we give you a breakdown of the 10 prize expense, which is an increase from last year 11 of 4.26 percent, and we also provide you a 12 breakdown by the type of game. As you can see, the 13 instant ticket has the most prize expense of 14 61.8 percent, and this is a real global overview of 15 the operating expenses for the Texas Lottery, which 16 we've said before, prize expense is a major 17 portion. Which the overall prize payoff for fiscal 18 year '02 came up to be 57.8 percent. Retailer 19 commissions, as you know, is 5 percent, and the 20 Lottery operator, we came out to 90 percent, which 21 came out to 3.05 percent; that's the contract rate 22 for fiscal '02, and then other operating expenses 23 came out to 2.7 percent, or $80.80 million. 24 The administered allocation the 25 Texas Lottery had for fiscal '02 was 60 1 $193.9 million, which was comprised of the 2 legislative appropriate amount plus on rider four, 3 we had the 3.67, and that's what makes up that 4 amount, and we only spent $170.9 million, which 5 gave us unspent administrative funds in the amount 6 of $23 million. 7 And just to clarify for everyone, 8 the audited financial statements are based on the 9 accrued basis. That's a requirement by generally 10 accepted accounting principle, and these transfers 11 are based on those. The monthly transfer that you 12 normally see in your notebook is cash basis, and 13 those are the amounts provided to the comptroller. 14 So just keep in mind, sometimes when you see two 15 amounts, one is the accrual basis and one is the 16 cash basis. 17 Two total transfers from fiscal year 18 '02 were $928.9 million in the accrual basis, which 19 was an increase of 7.5 percent. We also provided 20 the cash basis, maybe that's the amount that a lot 21 of people are familiar with, which we've said 22 before was $956.6 million, which is an increase 23 from the previous year of 10.6 percent. And here's 24 a breakdown of the beneficiaries that received 25 those amounts. 61 1 And let me introduce our certified 2 public accounting firm; it is McConnell and Jones. 3 And I'll let them introduce themselves, and they 4 can provide some of those points. 5 MR. McCONNELL: Good morning, my 6 name is Mike McConnell, and I'm the managing 7 partner of McConnell and Jones. 8 MR. EATON: My name is David Eaton, 9 and I am the director for the Assurance Services 10 Group. I practice for McConnell and Jones. 11 MR. McCONNELL: You will note in the 12 report that you received, in the front there, that 13 we have issued a clean opinion -- or unqualified 14 opinion on this year's -- this year's financial 15 statements, and you'll also note that we did not 16 issue a report on controls this year, and it's our 17 understanding that this is the first year that the 18 Lottery has not had a report on controls; however, 19 we did have some verbal comments, you know, with 20 Bart and his staff that centered on the development 21 of written policies and procedures with respect to 22 the administrative and general controls in the IT 23 area. 24 In last year's report, we did, 25 however, have a written finding that recommended 62 1 that we implement a new system, and I'm sure Bart 2 would agree, we're happy to report they have put in 3 a new system. They went through a conversion 4 process, I think, in the last quarter, and the new 5 system went online effective September 1st. And 6 one of the things that we will be doing when we 7 come out to do the audit next year is to see 8 whether or not we've got those written policies and 9 procedures in place and how effective they're 10 working with that new system. 11 And now what I'll do is turn it over 12 to our director Eric to discuss more details about 13 the audited financial statements. 14 MR. ERIC: Thank you, Mike. 15 If you'll go ahead and turn to -- I 16 want to highlight, I guess, some of the accounting 17 changes that have happened since the prior year, 18 mostly those affecting our GASB 34, just a general 19 overview of the basic GASB 34. GASB 34 requires 20 basically a new reporting model for the 21 governmental entities, and those effects are, you 22 know, eliminating your general long-term debt, 23 general fixed asset account groups, and bringing 24 those into your governmental fund basis, and 25 actually depreciating those fixed assets, which 63 1 brings your governmental fund type, which was 2 previously modified on accrual basis, into a full 3 accrual basis. 4 With that being a full accrual 5 basis, they have also combined a presentation into 6 an entity-wide financial statement. The 7 proprietary fund, which is basically the Lottery 8 operations and prize payout funds, are -- were 9 always on a full accrual basis, so it was a limited 10 effect on those, but the governmental fund types, 11 which includes your bingo, did have some effects on 12 restating the prior year term balances. And that's 13 just a general overview. When we go through the 14 actual effects, we can go through the financial 15 statements themselves. 16 One of the other changes was NBNA 17 [phonetic], which is in the front section, and 18 basically that information is presented for an 19 additional analysis of the financial statements. 20 It's to make it easier for the readers to 21 understand and review. 22 And, if you'll turn to the -- page 23 11, which is your statement in assets, this is a 24 new financial statement than what has previously 25 been reported, which is basically your 64 1 government-wide financial statement, which is 2 combining operations of your governmental fund 3 types and your proprietary fund types. And the 4 changes on the governmental activities, of course, 5 are including your furniture, fixtures, and 6 equipment, fixed assets, and the accumulated 7 depreciations as well as including the general 8 long-term debt of account group which comprised and 9 compensated the absences. 10 You'll note down at the bottom, your 11 total net assets for the combining entity 12 $101 million, and those are set off in different 13 classifications as noted on the bottom. The next 14 page is also a new financial statement. This is 15 your statement of activities, and a major change is 16 reporting activities by function. So if you'll 17 look at the right, you have your governmental 18 activities and your business-type activities and 19 the major departments or functions of those 20 activities are listed, and also, moving right, 21 you'll see that your expenses are listed by 22 activity and your revenues by activity, if 23 identifiable. There are, at the bottom, other 24 revenues that are not specifically related to a 25 primary function or program, and those are listed 65 1 between, of course, governmental activities and 2 business-type activities. You'll see the 3 adjustments at the bottom of the page, the 4 beginning net assets, for your governmental funds 5 types, and I'll go into detail of those in the 6 footnotes. It's $190,000 reduction from the prior 7 year of fund balance, which is now your -- 8 reclassified as net assets. And on your business 9 type activities, it is $512,000, which is basically 10 just a change in policy and capitalization of fixed 11 assets. 12 The Lottery implemented a new 13 capitalization from $1,000 to $5,000 in the current 14 year, in fiscal year '02. Also GASB paid for -- 15 also required you to report on your fund financial 16 statements, and those are listed on pages 13 17 through 19, and basically goes through your balance 18 sheet, your governmental funds, your statement of 19 revenues your expenses and changes in fund balance, 20 and your changes in nets assets for governmental 21 and prize funds. You'll also see a reconciliation 22 between your full accrual basis and your modified 23 accrual basis, which still the reporting model for 24 your funds statements -- or governmental fund 25 types. 66 1 You'll want to look at your page 18, 2 which is your -- I'm sorry -- page 19 is your cash 3 flow statement, which reports cash flows for the 4 year, receipts from customers $2.9 billion, 5 payments to suppliers for goods and services 6 $304 million, payments to employees $14 million, 7 and payments for other expenses of $1.7 million, 8 which is basically prize payments for the most 9 part. 10 Also reported on page 21 and 22 is 11 your fiduciary funds; your agency funds are in 12 there that are -- they're not identified in the 13 footnotes, but it's basically moneys held on behalf 14 of vendors. And those are required to be listed 15 out separately, and they are not included in this 16 statement of activities nor in the statement of -- 17 statement of net assets for the combined entities. 18 MS. WHITAKER: What's the total 19 number only? 20 A. The total member only is last year's 21 financial statements. It's a good -- a good 22 question to ask. If you'll go back on page 10 and 23 11, which is our entity-wide financial statements, 24 because these are new financial statements -- I'm 25 sorry -- page eleven and twelve. We have 67 1 reclassified and re-presented the 2001 financial 2 information in the new format, so that requires a 3 new classification of certain items and includes 4 the general long-term debt and the general fixed 5 account groups into the new format report files. 6 Those are last year's audited financials. 7 MR. SANCHEZ: Basically, it's just 8 to provide comparative informations. 9 MS. WHITAKER: So we've reduced by a 10 bunch what we're holding in fiduciary funds? 11 MR. SANCHEZ: Yes. 12 MR. ERIC: Now, the fiduciary funds 13 are the funds that -- from bingo they -- yeah, the 14 savings bond account for employees, and those are 15 listed on -- if you want to turn to the footnotes, 16 on page 27, there's a listing of those fiduciary 17 funds, U.S. savings bond fund and the suspense 18 fund. 19 MR. SANCHEZ: Those used to be under 20 the agency funds. 21 MR. ERIC: If you'll look on page 22 45, which is our presentation of the budgetary 23 comparison for governmental fund types, which 24 basically presents your original budget, your 25 appropriated budget, your final appropriated 68 1 budget, and then the actual on the budgetary basis 2 with the variances listed out in there. And 3 there's also a reconciliation on that to your full 4 accrual basis on the bottom. 5 MR. SANCHEZ: And, of course, that 6 only applies to bingo as a governmental fund. 7 MR. ERIC: And your net -- I mean, 8 your net effect is $110,000 difference between your 9 final budget and your actual amounts on your fund 10 balance. 11 And that's about all I have. Any 12 questions or comments? 13 MS. WHITAKER: Is there anything 14 particularly that you observed that we should be 15 noting? 16 MR. ERIC: No. I mean, it is a new 17 year for the new reporting models, and there's -- 18 there was a challenge to get the financial 19 statements in the presentation format that was 20 required, and Bart and his staff were very helpful 21 in providing us with everything that we needed in 22 order to make it. 23 MS. WHITAKER: Okay. So you're 24 satisfied with the information you were given, the 25 access, and you feel it's a clean opinion of 69 1 what's -- 2 MR. ERIC: Yeah. Everything 3 really -- I mean, you never know. The report on 4 internal controls this year, which is the first for 5 the agency ever, so we're very happy with the 6 progress that's been made following up on prior 7 recommendations. 8 MS. WHITAKER: Okay. 9 MR. COX: I'm looking at page -- I'm 10 looking at page 11. Is this a standard form that's 11 prescribed by some governmental agency or by 12 statute. 13 MR. ERIC: Yes, it is prescribed by 14 GASB. 15 MR. COX: Okay. So there is a 16 government accounting standard that requires a 17 caption, vehicles, boats, and aircrafts, whether or 18 not there are boats and aircrafts? 19 MR. ERIC: No. That's the -- that's 20 the internal classification for that type of fixed 21 asset, and I think that's the State's call. 22 MR. SANCHEZ: That's the 23 classification provided by the comptroller. 24 Commissioners, if I may, I'd like to 25 recognize the team, the team members of my staff, 70 1 that contributed to this. It seems like this is 2 a -- I think we've made progress in my area, and I 3 would like to introduce Ben Navaro [phonetic] to my 4 right, and Nora Guerra [phonetic] to my left. Also 5 I'd like to give appreciation to the bingo 6 division, which certainly has been of great 7 assistance to us. 8 CHAIRMAN CLOWE: Okay. Could we 9 have the lights up, please? I always want to see 10 the auditor's eyes when I ask him a question. I 11 don't want to ask this question in the dark. 12 We appreciate your report, and we 13 appreciate the hard work that went into it. Is 14 there anything that you want to call to our 15 attention that we should know about in regards to 16 any concerns that you might have? Obviously, 17 you've given us a clean audit, unqualified, but is 18 there anything that you want to tell us at this 19 point in time regarding you're audit of our 20 financials? 21 MR. ERIC: No, sir. We've presented 22 everything that should be presented and that is 23 required to be reported. 24 CHAIRMAN CLOWE: Thank you, very 25 much. 71 1 MR. ERIC: Thank you. 2 CHAIRMAN CLOWE: Thank you, Bart, 3 and all of you. 4 MS. WHITAKER: Thank you all. 5 CHAIRMAN CLOWE: Next item is 16: 6 Report, possible discussion and/or action on the 7 agency's security audit. Commander Pitcock. 8 MR. PITCOCK: Thank you, sir. 9 My name is Michael Pitcock, 10 commander of security for the State Lottery 11 Commission. I have provided to you via e-mail, and 12 then plus hard copy, a copy of the security audit. 13 And at this time, I'm going to report that the 14 security audit is complete. The audit followed 15 Article 466.020, as in the Lottery Act, and if you 16 want to follow the draw perimeters of what we 17 followed. At this time, I want to turn my comments 18 over to Tom Bark, and we would be glad to answer 19 any questions you have based on the security audit. 20 Thank you. 21 MR. CLARK: Good morning. My name 22 is Tom Bark, and I'm director of technology 23 Services for Jeff Floral's Austin office. As 24 Mr. Pitcock just indicated, Jeff Floral's office 25 completed the security audit of the Texas Lottery 72 1 Commission. The audit was a comprehensive review 2 of the security of -- of Lottery security. The 3 security work was performed at both -- at the Texas 4 Lottery Commission as well as the Gtech Texas 5 Facilities and the Scientific Games, Georgia 6 Facility. 7 I wanted to communicate to you today 8 that we received a complete cooperation support 9 from Texas Lottery management and staff, as well as 10 the management and staff at Scientific Games and 11 G Tech. We were on a really tight time line to get 12 this engagement performed within the required time 13 frame and would not have been able to do that 14 without the support of everyone involved. 15 We did not find any issue that we 16 felt impacted the integrity of the Lottery games. 17 The issues identified, we've discussed with 18 management, and they are, again, taking 19 appropriate -- in some cases, some of those things 20 have already been fixed, and other things, the 21 recommendations are being considered. 22 I will be glad to answer any 23 questions that you have. 24 MS. WHITAKER: Any particular part 25 of this that you think we should focus on more than 73 1 others? Any areas of concern that are out there? 2 MR. CLARK: Yeah. I mean, just -- I 3 mean, I think some of the overall -- the issues up 4 front regarding security officer and security 5 infrastructure in place of the agencies and things 6 that would be bigger -- well, you know, some of the 7 things we find are symptoms of not having other 8 controls in place. Some of these infrastructure 9 type things we think are important for the 10 commission to be aware of. 11 MS. WHITAKER: Well -- 12 MR. CLARK: Issue number one, you 13 know, with the overall security and that sort of 14 thing. But to answer your question, nothing really 15 sticks out as a -- as something that would be of 16 particular concern to you-all. 17 MS. WHITAKER: So, what I hear you 18 saying, the security is strong and these are ways 19 to continue to strengthen it? 20 MR. CLARK: Yes, ma'am. 21 MS. WHITAKER: Is that how you would 22 say it? 23 MR. CLARK: Yes, ma'am. In 24 security, you have to look at an ongoing process, 25 and in looking at the processes in place, it's 74 1 apparent that the security is a strong focus of 2 this agency, and we were happy with the work that's 3 being done. 4 MS. WHITAKER: And there's nothing 5 that you wanted to do that you were not able to do. 6 Is that right? 7 MR. CLARK: No. 8 MS. WHITAKER: There's no 9 information that you asked that you didn't get? 10 MR. CLARK: Right. 11 CHAIRMAN CLOWE: Mr. Clark, this is 12 your first time to audit our security, is it not? 13 MR. CLARK: Yes, sir. 14 CHAIRMAN CLOWE: And what's the term 15 of your contract with the commission? 16 MR. CLARK: The term of the contract 17 was to perform this one audit; it's basically this 18 one engagement. 19 CHAIRMAN CLOWE: And how often is 20 this audit conducted, Mike? 21 MR. PITCOCK: Every two years prior 22 to legislative session. 23 CHAIRMAN CLOWE: And who conducted 24 it the last time? 25 MR. PITCOCK: Price Water House 75 1 Coopers, and they provided the service before that 2 in Austin. 3 CHAIRMAN CLOWE: Very good. I think 4 there are no further questions. We want to thank 5 you for this work, and we appreciate your efforts. 6 MS. KIPLIN: Commissioners, this is 7 actually an action item, and the executive director 8 must provide the report to the commission, but it's 9 the commission that provides it to the governor and 10 the legislature before the convening of each 11 regular legislative session, and so I would think 12 that your motion would be a motion to approve the 13 executive director's submission on your behalf of 14 this report to the required persons. 15 CHAIRMAN CLOWE: So moved. 16 All in favor, please say aye. 17 Opposed, no. The vote is three-zero in favor. 18 Commissioners, we have one last 19 item: Report, possible discussion and/or action on 20 the agency's advertising contracts. Mr. Bennett. 21 MR. BENNETT: Thank you, 22 Commissioners. 23 For the record, my name is Rich C. 24 Bennett, and I'm the deputy general counsel for the 25 Texas Lottery Commission. As was reported to you 76 1 previously, Fogarty, Klein & Monroe filed a protest 2 of the award of the general marketing and services 3 contract to DDB Dallas. Pursuant to the 4 commission's rules, the protest was to -- the 5 acting executive director issued a termination 6 denying the Fogarty, Klein & Monroe's protest. The 7 time for filing an appeal to the commission has 8 past, and no appeal has been filed. 9 I'll be happy to answer any 10 questions that you may have. 11 CHAIRMAN CLOWE: Are there 12 questions? 13 Thank you, Mr. Bennett. 14 MR. BENNETT: Thank you. 15 CHAIRMAN CLOWE: Commissioners, what 16 is your pleasure? We've come to a point in the 17 agenda where we can go into executive session or we 18 can hear the reports that are covered under items 19 20 and 21 and 22. 20 MS. WHITAKER: Let's cover them. 21 CHAIRMAN CLOWE: All right. We're 22 going to stay in public session and cover those 23 items, but before we do that, we'll take a 24 ten-minute break. And it's almost five after; 25 let's try to reconvene here in about ten minutes. 77 1 (A short break was taken.) 2 CHAIRMAN CLOWE: Come back to order 3 and go to item number 21: Report by the Acting 4 Executive Director and/or possible discussion 5 and/or action on the agency's financial and 6 operational status, FTE status, and retailer 7 forums. 8 Gary Grief. 9 MR. GRIEF: Commissioners, I'd like 10 to ask Bart Sanchez, Jim Richardson and Toni Smith 11 to come forward to brief you on our financial 12 operations, status of FTE and status of retailer 13 forums. 14 MR. SANCHEZ: Commissioners, we're 15 finalizing the December transfer which will be 16 going out today, and the total amount transferred 17 to the State for the month of December is 18 $98.3 million, which is comprised of $65.2 million 19 for the sales of the month of November and the 20 administrative -- unspent administrative fund 21 remaining, which is about $15 million, and then 22 unclaimed prizes in the amount of $18.2 million. 23 It's my understanding that this transfer will push 24 the AC beyond the $10 billion amount, which I think 25 Keith is preparing a press release on that. 78 1 If you have any questions on that, I 2 would be happy to answer those. 3 The next item I have is on the 4 budget, which I have nothing new to report, but I 5 would be happy to answer any questions. 6 CHAIRMAN CLOWE: Thank you. 7 MR. RICHARDSON: Commissioners, the 8 FTE status is in your notebook. If you have any 9 questions, I'd be happy to answer those for you. 10 CHAIRMAN CLOWE: Thank you. 11 MS. SMITH: Commissioners, we have 12 reviewed the retailer town meeting forum and 13 frequency and have made recommendations to the 14 acting executive director to reduce the number of 15 town meetings to four per year on a quarterly 16 basis. The format will be changed by asking the 17 retailers to complete a survey prior to the 18 meeting, and this survey will replace the need for 19 the current Round Table discussion topics. 20 The retailers will see a 21 presentation on various instant game processes and 22 be able to express their opinions on them at that 23 time. We'll continue with sales awards presented 24 to the top selling retailers and with up updates on 25 Lottery issues and then conduct a question and 79 1 answer discussion through a panel discussion. 2 In addition, marketing is looking at 3 the implementation of some retailer partnership 4 meetings that would involve a smaller group, say, 5 10 to 20 retailers, from various trade styles. At 6 these meetings, the retailers can voice their 7 opinions on more specific issues in a smaller 8 environment, such as game concepts, the point of 9 sell materials we supply them, the incentive 10 contests, advertising and promotions. 11 And we're also researching the 12 possibility of a retailer trade show that we could 13 maybe conduct once a year. Other jurisdictions 14 have done this, and it's where Lottery 15 representatives from the various divisions are 16 present, key Lottery vendors, certain trade 17 organizations, and possibly even other state 18 agencies to give the retailers an opportunity to 19 discuss one-on-one some issues and possibly recruit 20 new retailers, so we're investigating that also. 21 That's where we are with the plans for the town 22 meetings. And that's what Gary has agreed to. 23 MR. COX: Toni, how many meetings 24 have we had in previous years? 25 MS. SMITH: We were conducting ten a 80 1 year, knocking off in the November and December 2 months because of the busy time for our retailers 3 through the holidays. 4 MR. COX: So you were having -- and 5 these were around the state? 6 MS. SMITH: Yes, sir. 7 MR. COX: With the four, are you 8 going to have them in the four corners of the 9 state, if you will, or central locations that will 10 be the same every year, or will you rotate around 11 the -- 12 MS. SMITH: We'll rotate so that we 13 can, when those occur, have visited each of the ten 14 districts and then be sure we have that opportunity 15 to have those type of meetings statewide. The 16 smaller partnership meetings in -- we're proposing, 17 say, five of those a year, would also be in various 18 areas of the state so that we still have an 19 opportunity to get feedback from our retailers 20 throughout the state. 21 MR. COX: And do these -- these 22 meetings, I guess, supplement feedback that we get 23 on a continual basis through Gtech. Is that 24 correct? 25 MS. SMITH: Yes, sir. We've 81 1 actually found that it's actually a good monitoring 2 tool between our vendors and our retailers, because 3 the retailers are very candid about any concern or 4 problems they may have had in those open meetings, 5 and it gives us an opportunity to sort of gauge 6 what's going on and the vendors an opportunity to 7 respond with solutions to those problems. 8 MR. COX: Thank you. 9 MR. GRIEF: And that concludes my 10 report for the day. 11 Are there any questions? 12 CHAIRMAN CLOWE: Any questions? 13 Thank you. 14 Next, Item 22: Report by the 15 Charitable Bingo Operations Director and possible 16 discussion and/or action on the Charitable Bingo 17 Operations Division's activities. 18 And in Billy Atkins' absence, Phil 19 Sanderson. 20 MR. SANDERSON: Chairman and 21 Commissioners, in your notebook, you have the 22 standard report from the Bingo Operations Division. 23 I'd like to point out a few items. The audit 24 position that was open in Dallas has been filled by 25 Sharon Johnson from Houston, so now we're going to 82 1 begin the process of posting for a position in 2 Houston. And on the allocations, I'd like to draw 3 your attention -- and it's just for informational 4 purposes -- that a change has occurred in the memo 5 that we only provide to you regarding the 6 allocations. Each memo we provide you on a 7 quarterly basis contains a list of the top five 8 cities and counties that receive allocations 9 quarterly. 10 Beginning in the second quarter of 11 2002, Wichita Falls has replaced the City of Austin 12 in the top five cities. We believe that this is 13 due in large part because, in the first quarter of 14 2002, we had issued four new licensees to conduct 15 bingo in Wichita Falls, and, although, they did 16 move ahead of Austin, Austin's allocations for the 17 quarter did increase $1,200, so we feel like that 18 just the number of organizations playing and paying 19 out prizes and, therefore, committing prize fees 20 has caused Wichita Falls to move into that top 21 five. 22 And then, also, the Hidalgo County, 23 in the third quarter, replaced Bell County in the 24 top five counties, and a large part of this is due 25 to the fact that there was one organization in 83 1 Hidalgo County that had paid two quarters worth of 2 prize fees to the State during the second quarter 3 which caused them to jump ahead of Bell County. 4 And we feel like that, starting, you know, next 5 quarter, Bell County will be back up in the top 6 five. 7 And then the 20th anniversary report 8 we were preparing to publish this report, and 9 current plans call for it to be distributed to all 10 licensees, the legislature, and other jurisdictions 11 that regulate bingo. 12 And if you have any questions, I'll 13 be glad to answer them. 14 CHAIRMAN CLOWE: Thank you, Phil. 15 Next we'll go to item number 20: 16 Consideration of the status and possible entry of 17 various orders covered through letters A through E. 18 Ms. Kiplin, would you help us with 19 that? 20 MS. KIPLIN: Yes, I'd be glad to. 21 Commissioners, the dockets that are 22 identified in letters A through D are contested 23 case proceedings that occurred at the State Office 24 of Administrative Hearings, and they were all 25 Lottery Licensees subject to all Lottery licenses. 84 1 In each of those, the proposal for a decision and 2 the proposed order that was issued by the 3 administrative law judge recommended revocation. 4 All of them are as a result of insufficient funds 5 being available at the time that the commission 6 swept the licensee's account for money owed to the 7 State. At this time, the staff does recommend that 8 you enter the order -- proposed orders that were 9 recommended by the administrative law judge. 10 Docket number E is a bingo matter, 11 and it is an agreed order between the bingo 12 division and a licensee. It is as a result of an 13 audit which indicated different findings, for 14 example, one was the organization's failure to 15 comply with the 40 percent cap on use of 16 card-minding devices, a failure to have a sign on 17 card-minding devices, and things of that nature. 18 The staff is inclined to recommend 19 the order which is requiring different processes to 20 be put in place by the organization to prevent 21 these kinds of violations in the future. There is 22 no history of violations on the part of this 23 particular licensee, and the licensee has attended 24 the operator training, and with that, the staff 25 recommends the entry of this agreed order. 85 1 CHAIRMAN CLOWE: You say that the 2 staff is inclined? 3 MS. KIPLIN: The staff recommends. 4 CHAIRMAN CLOWE: Okay. 5 MS. KIPLIN: It's a poor choice of 6 words on my part. 7 CHAIRMAN CLOWE: I second. All in 8 favor, please say aye. Opposed, no. The vote is 9 three-zero in favor. 10 We'll take just a minute to sign 11 these orders. 12 The next scheduled item is Item 23: 13 Is there anyone wishing to make public comment to 14 the commission? 15 I believe there is no one, so I 16 believe we're ready to go into executive session, 17 and unless there's any other business? 18 At this time, I move the Texas 19 Lottery Commission go into executive session: 20 To deliberate the appointment, 21 employment, and duties of the Executive Director 22 and/or Deputy Executive Director pursuant to 23 Section 551.074 of the Texas Government Code; 24 To deliberate the duties of the 25 Acting Executive Director pursuant to Section 86 1 551.074 of the Texas Government Code; 2 To deliberate the appointment, 3 employment, evaluation, reassignment, duties, 4 discipline, or dismissal of the Internal Audit 5 Director pursuant to Section 551.074 of the Texas 6 Government Code; 7 To deliberate the appointment, 8 employment and/or duties of an Acting Internal 9 Audit Director pursuant to Section 551.074 of the 10 Texas Government Code; 11 To deliberate the duties and the 12 reassignment of the Internal Audit Senior Auditor 13 and/or Auditor VI pursuant to Section 551.074 of 14 the Texas Government Code; 15 To deliberate the duties and 16 evaluation of the Charitable Bingo Operations 17 Director pursuant to Section 551.074 of the Texas 18 Government Code; 19 To deliberate the duties of the 20 General Counsel and Security Director pursuant to 21 Section 551.074 of the Texas Government Code; 22 To receive legal advise regarding 23 pending or contemplated litigation and/or to 24 receive legal advise pursuant to Section 551.071 25 (1) (A) or (B) of the Texas Government Code and/or 87 1 to receive legal advice pursuant to Section 551.071 2 (2) of the Texas Government Code, including but not 3 limited to: TPFV Group, Inc. Versus Texas Lottery 4 Commission; Retired Sergeant Majors' Association 5 et.al versus Texas Lottery Commission et. al; 6 Loretta Hawkins versus Texas Lottery Commission; 7 States of Minnesota et. al versus NIGC et. al; 8 Scientific Games and Pollard Banknote versus Texas 9 Lottery Commission and Linda Cloud, Executive 10 Director; TXTV versus Texas Lottery Commission; 11 Ieric and Chris Rogers versus Texas Lottery 12 Commission and Executive Director; Keane versus 13 Texas Lottery Commission; Patsy Henry versus Texas 14 Lottery Commission; Contract regarding the 15 charitable bingo system; the employment law, 16 personnel law, procurement and contract law and 17 general government law. 18 Is there a second? 19 MS. WHITAKER: Second. 20 CHAIRMAN CLOWE: All in favor, say 21 aye. Opposed, no. The vote is three-zero in 22 favor. 23 The Texas Lottery Commission will go 24 into executive session. The time is 10:32 a.m. 25 Today is December 13th, 2002. 88 1 (Executive Session.) 2 CHAIRMAN CLOWE: The Texas Lottery 3 Commission is out of executive session. The time 4 is 1:02 p.m. 5 Is there any action to be taken as a 6 result of the executive session? 7 Are there any motions? If not, 8 let's move on to the next item on the agenda. 9 I believe we have completed all the 10 items on the public agenda, and with no one here to 11 address the commission -- I've been informed by Jim 12 Richardson that the commission has received the 13 resignation of Debra Cloud, the internal auditor 14 director. I would like to have the two auditors 15 who are in the internal audit department report on 16 a functional basis to Commissioner Jim Cox. I 17 think that his heading up what might be called a 18 transition team, or a auditing group, for an 19 interim period will be a very positive thing for 20 the commission, and the commission will deliberate 21 further action as it is able to in the near future. 22 So, in the meantime, if those individuals in the 23 internal audit department will coordinate and look 24 to Commissioner Cox for direction, he will head 25 that effort. 89 1 Do you have any questions, those of 2 you who are in that department? 3 MS. GEORGE: Good afternoon. I'm 4 Katy George and with me is Belinda May, and we are 5 the internal audit department as it stands now. 6 Thank you for this decision. Obviously, we needed 7 to move forward, and that's certainly our goal over 8 the next days and weeks, and I think we have 9 provided you some interim information on what we 10 have in process right now. 11 Commissioner Cox, how would you like 12 us to proceed in terms of coordinating with you on 13 a functional basis? 14 MR. COX: Why don't we meet with Jim 15 Richardson right after this meeting and talk about 16 that. 17 MS. GEORGE: That would be great. 18 Thank you all very much. 19 CHAIRMAN CLOWE: Thank you. 20 MS. KIPLIN: I guess the only 21 comment I have is, I know that Ms. George didn't 22 mean anything by the significance of it, but it 23 really isn't a decision. The commission has taken 24 no action. I think that this is just an interim 25 transition. 90 1 CHAIRMAN CLOWE: There's no action 2 taken, and it was a request on my part, no official 3 action of the commission. 4 Any comment? 5 I believe there's no further 6 business to come before the commission at this 7 time, so we will stand adjourned at 1:05 p.m. 8 Thank you all very much. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 91 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, KIMBERLYE A. FURR, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter 10 set out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 16 Witness my hand on this the 23rd day of 17 December, 2002. 18 19 20 KIMBERLYE A. FURR 21 Texas CSR No. 6997 Expiration Date: 12/31/03 22 1609 Shoal Creek Boulevard Suite 202 23 Austin, Texas 78701 (512) 474-4363 24 25 JOB NO. 021213KAF