0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 16 TEXAS ADMINISTRATIVE CODE ? 6 ?402.101 ? 16 TEXAS ADMINISTRATIVE CODE ? 7 ?402.450 ? 16 TEXAS ADMINISTRATIVE CODE ? 8 ?402.451 ? 16 TEXAS ADMINISTRATIVE CODE ? 9 ?402.452 ? 16 TEXAS ADMINISTRATIVE CODE ? 10 ?402.453 ? 16 TEXAS ADMINISTRATIVE CODE ? 11 ?402.506 ? 16 TEXAS ADMINISTRATIVE CODE ? 12 ?402.514 ? 16 TEXAS ADMINISTRATIVE CODE ? 13 ?402.600 ? 14 PUBLIC HEARING ON RULEMAKINGS 15 WEDNESDAY, APRIL 14, 2010 16 BE IT REMEMBERED THAT on Wednesday, 17 the 14th day of April 2010, the above-entitled public 18 comment hearing was held from 10:10 a.m. to 19 11:05 a.m., at the Offices of the Texas Lottery 20 Commission, 611 East 6th Street, Austin, Texas 78701, 21 before SANDRA JOSEPH, SPECIAL COUNSEL. The following 22 proceedings were reported via machine shorthand by 23 Aloma J. Kennedy, a Certified Shorthand Reporter of 24 the State of Texas, and the following proceedings were 25 had: 0002 1 EXHIBIT INDEX 2 FENOGLIO IDENTIFIED 3 1. Documents reflecting Mr. Fenoglio's 4 comments and concerns 19 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 P R O C E E D I N G S 2 WEDNESDAY, APRIL 14, 2010 3 (10:10 a.m.) 4 MS. JOSEPH: Good morning. My name is 5 Sandra Joseph, Special Counsel for the Legal Services 6 Division of the Lottery Commission. We're here today 7 for a public hearing in order to receive comments on 8 eight different rulemaking initiatives. Those include 9 amendments to 16 TAC ?402.101 relating to advisory 10 opinions, new 16 TAC ?402.450 relating to requests for 11 waiver, new 16 TAC ?402.451 relating to operating 12 capital, new 16 TAC ?402.452 relating to net proceeds, 13 new 16 TAC ?402.453 relating to requests for operating 14 capital increase, amendments to 16 TAC ?402.506 15 relating to disbursement records requirements, new 16 16 TAC ?402.514 relating to electronic fund transfers, 17 and amendments to 16 TAC ?402.600 relating to bingo 18 reports. 19 The hearing was scheduled for 20 10 o'clock. As of 10:12, there is no one appearing to 21 offer comments. At this time we will recess until 22 10:30, in order to give anyone who is running late an 23 opportunity to appear. We will return at 10:30. And 24 if no one appears, we will close the hearing. 25 Thank you. 0004 1 (Recess: 10:12 a.m. to 10:39 a.m.) 2 MS. JOSEPH: All right. We are back on 3 the record. We did recess for a period of time to 4 allow anyone to appear that might be running late. 5 And, in fact, we do have Mr. Stephen Fenoglio present 6 who would like to offer comments on the rules. I see 7 no one else has appeared at this time. 8 Mr. Fenoglio, we do have eight different 9 rules that you have the opportunity to offer comments 10 on, and I'll allow you to take those in whatever order 11 you prefer. 12 MR. FENOGLIO: Sure. Thank you. And 13 thank you for holding the record open. I had 10:30 14 instead of 10:00 a.m. 15 On two rules, we have no comments other 16 than we support, and those are 16 TAC 402.542, net 17 proceeds, and 402.453, request for operating capital 18 increase. There was extensive discussion at a 19 previous BAC meeting, I believe, and we appreciate 20 staff's listening. The rest of my comments on the 21 remaining rules are brief. 22 Turning now to 402.514, electronic fund 23 transfers -- and I've given to you, Ms. Joseph, in 24 black-lined format my comments to each of the 25 following rules, the remaining rules, and I've also 0005 1 put line numbers so it will expedite. 2 In Subparagraph (b)(2)(B) it states, 3 "The licensed authorized organization or unit shall 4 maintain documentation of board approval of changes in 5 the person(s) authorized to execute electronic funds 6 transfers." 7 It is not the case that every 8 organization will actually have board approval for 9 electronic fund transfers. It may be in the case of 10 River City Bingo. And you've heard me talk about the 11 five charities there. We have a management team of 12 one or more members of each of the five organizations 13 who are delegated authority to act on behalf of each 14 of those organizations, and so the team members would 15 actually authorize someone to engage in electronic 16 funds transfers. 17 In the case of a number of non-profit 18 organizations I regularly represent, including those 19 five organizations, they don't have board approval for 20 people to write checks, make deposits, et cetera, 21 absent extraordinary circumstances. And certainly 22 for-profit organizations, other than when they first 23 are organized, a bank will typically -- on a new 24 organization that's seeking to open an account, will 25 require board approval to open the first account and 0006 1 delegating signature authority. But after that, it's 2 just a signature card. So it's a little, we believe, 3 over-reaching to mandate always board approval for 4 that. 5 And then in Subparagraph (c) concerning 6 recordkeeping for electronic funds transfers -- it's 7 Page 2 of my document, Lines 10 and 11 -- "the name of 8 the person executing the EFT transaction on behalf of 9 the organization or unit" mean that the organization 10 would have to always keep that information available. 11 I can envision it, and certainly from my experience in 12 representing non-profits, very few are utilizing 13 electronic funds transfer opportunities today. But I 14 think in five years, it will be more and more. 15 In the case of my own office, my legal 16 assistant and I both have authority to go on-line and 17 make electronic funds transfers. We don't keep track 18 of if I did it or Barbara Larson did it. And, for 19 example, for paying a light bill, does it really 20 matter who authorized it? It seems to me that the 21 organization -- you have to trust the organization. 22 There is a designated agent who is responsible and the 23 organization is responsible. It's unreasonable to 24 have readily available exactly who authorized an 25 electronic funds transfer. It's just not going to be 0007 1 regularly available all the time. In the case of 2 Fort Worth Bookkeeping -- and I did visit with Sharon 3 Ives about this -- her office does have authority for 4 certain organizations to do electronic funds 5 transfers. It's in the name of Fort Worth Bookkeeping 6 who is ultimately responsible. She won't know 7 necessarily if it's herself, Sharon Ives, who did the 8 EFT transaction or one or more of her other designated 9 employees. 10 So again, it's a little difficult to 11 always be able to have that information immediately 12 available. Certainly if it's an extraordinary 13 transfer, the organization you would expect would be 14 able to determine who authorized it, especially if 15 it's a questioned expense. But for the ordinary run 16 of things, they're not going to know that. And I 17 would suggest to you that most for-profit 18 organizations are similarly not going to have all of 19 that recordkeeping immediately available. 20 Turning to .506, disbursement records 21 requirements, the Subparagraph (b)(2), written lease 22 agreement. And you can tell on Line 21 where I've 23 indicated the words "or other period." And what I'm 24 trying to get at is, certain lessors aren't giving an 25 invoice for rental amounts by occasion. It may be 0008 1 rental amounts by week or by month. And so you're 2 asking them to do something that they would not 3 ordinarily do. Certainly they have to have support 4 for the rental payments, including the location, the 5 rental dates and the rental amounts, but it may not be 6 by occasion. 7 On Page 2, Lines 16-17, which is 8 Subparagraph (B)(10), requiring the charity or unit to 9 "maintain records to document any expenses for 10 promotions or door prizes" -- and I've highlighted 11 "paid with bingo funds" -- certain charities, and 12 certainly some of the charities at River City Bingo, 13 don't always utilize bingo funds to pay for a door 14 prize or for a promotion. It's not mandated that they 15 do so. But if they are going to use bingo funds, then 16 they have to have all the information available to 17 support it. So what I want to make sure of is, it 18 doesn't foreclose an organization from utilizing 19 non-bingo funds to pay for some of those promotion 20 type expenses. 21 On Page 3, Subparagraph (e)(1), I think 22 what the concept here is, the cash disbursements 23 journal would merely be a check register. And if 24 that's the case, then that's simple to do. But in the 25 case of certain organizations -- River City charities 0009 1 and the unit being one -- we work on an accrual basis, 2 not a cash basis. And if the agency is asking us to 3 convert our records from an accrual basis over to a 4 cash basis, that's going to create a hardship and an 5 expense. And there are other organizations that do it 6 on a cash accrual basis. 7 In the last comment on this draft rule 8 before it was published for public comment, there were 9 a number of comments about that. And I know the staff 10 have made changes, heard us. So I guess if the cash 11 disbursements journal is nothing more than a check 12 register, that's easy for any organization. Hopefully 13 it's easy for any organization on either a cash or 14 accrual basis to produce if they're doing it timely. 15 But if you're talking about a cash disbursements 16 journal being something other than a check register, 17 we would suggest that you're going a little further 18 than would be required for organizations that are on 19 an accrual basis. 20 And then in Subparagraph (f), the rule 21 as drafted says, "Bank fees incurred because the 22 organization fails to maintain sufficient funds...to 23 cover expenditures...will not be considered a 24 reasonable or necessary expense." That's contrary to 25 the IRS practice, which generally allows those type of 0010 1 expenses. And so my suggestion is "may," and you 2 would look at the circumstances. 3 For example, if there were in a 4 particular period 27 insufficient funds checks written 5 to an organization from individuals who had never had 6 an insufficient funds check and the organization's 7 check bounced and, therefore, bank fees were 8 associated with that, that might be a reasonable 9 expense for the non-profit to be able to duck. 10 Alternatively, if the non-profit 11 organization routinely, regularly has significant bank 12 fees because it doesn't maintain sufficient balance, 13 then that might be an issue where an auditor would 14 say, "You know, we've warned you four or five times 15 about this. We're going to start denying these 16 expenses, these bank fees expenses." So the word 17 "may" would give the agency the authority to determine 18 on a case-by-case basis. 19 MS. JOSEPH: All right. Before you go 20 on, I would like to note for the record that Phil 21 Sanderson, Director of the Bingo Division, and 22 Mr. Bruce Miner, Manager of the Bingo Division, and 23 Kimberly Kiplin, General Counsel, are in the hearing 24 room. And if they have any questions they would like 25 to ask for clarifications, I invite them to do so. 0011 1 MR. FENOGLIO: And with that, where I've 2 commented on these rules and the following rules, 3 where I made comments, I want the record to be clear 4 that with the exception of those comments, my clients 5 support the rules as drafted and published. 6 MS. JOSEPH: All right. On this 7 particular rule, on Page 2, Subsection (c) -- 8 MR. FENOGLIO: Oh, yes. 9 MS. JOSEPH: -- I don't believe you 10 comments, although I see some highlighting here. 11 MR. FENOGLIO: I'm sorry. I missed 12 that. 13 On that one, my comment has to do with, 14 we don't quarrel with an organization or unit must 15 maintain records to document allocation of expenses 16 which are shared by organizations, but the words "or 17 other persons." If there are records -- for example, 18 in a bingo hall where the organization, licensed 19 authorized organization or the unit has available 20 records of other persons who are utilizing that space 21 and there is an allocation of expenses and the 22 organization has those records, they also should be 23 required to maintain those records as well. 24 And in some cases, that would be the 25 case, where the licensed authorized organizations are 0012 1 aware of non-regulated charities having access to the 2 hall. For example, it could be a snack bar, there 3 could be a sales office, what have you, and they have 4 those records available in the allocation of expense, 5 then we think it would be appropriate for them to 6 maintain those records and make them available. 7 I think that was all on -- yes, it was. 8 Turning to 402.600, bingo reports, the 9 only change is in Subparagraph (f)(1). And it's not a 10 provision I recognize that the agency was seeking a 11 change to, but it's more in the way of an edit 12 concerning the requirements that a manufacturer or 13 distributor are required to retain and report and 14 specifically if it's -- I want to make it clear that 15 the agency has no jurisdiction over distributors 16 providing bingo product on unregulated sites; for 17 example, military facilities, Fort Sam Houston. The 18 way it reads, they would technically have to report 19 that to the agency. 20 It is my understanding, long practice is 21 the agency doesn't require that to be reported. If 22 I'm incorrect, I know I'll get corrected. But the way 23 it reads, technically they should report that. I 24 don't think the agency cares how much bingo product is 25 provided to the Fort Sam Houston military reservation. 0013 1 Under .450, request for waiver -- and 2 there was quite a bit of comment previous to the draft 3 rule. We appreciate the changes that have been made. 4 And it was something that I believe Mr. Sanderson -- 5 and it could have been Mr. Miner said -- in the 6 Advisory Committee meeting about the staff would be 7 producing an example or a template of a business plan. 8 We would like to see that as a part -- assuming the 9 rule is drafted -- adopted. 10 And we certainly agree with, under 11 Subparagraph (3) at the top of Page 2, which is 12 Paragraph (A), the word "may," with a credible 13 business plan, include the following, we like the word 14 "may" as opposed to "shall," the way it was previously 15 drafted. 16 And then in Subparagraph (G), the market 17 analysis, a lot of my clients still have questions 18 about what type of analysis and specifically 19 competition in the bingo industry. Clearly they could 20 do an analysis of publicly available data, and I 21 assume the staff isn't requiring them to go out and 22 independently obtain perhaps competitive data. And 23 again, there are just a lot of concerns about, "What 24 are you talking about, a market analysis or the 25 business plan itself? Is that one that only an MBA 0014 1 could draft?" We don't think so. We don't think that 2 should be the standard. But there's still a lot of 3 concern in the industry about the type of data that 4 would be required. 5 And, similarly, in Subparagraph (d) at 6 the bottom, we agree with the word "may" as opposed to 7 "shall" and the top of Page 3, Subparagraph (e), the 8 word "may," previously "shall." 9 And then also in that paragraph, the way 10 it reads today, "The Commission may consider the 11 following in the approval of waiver applications." We 12 would hope that it would be either "approval or 13 modification." And by that, I would like to have the 14 staff have the maximum flexibility. They might look 15 at an application that asks for them -- and I'm going 16 to make it up -- an additional 100,000 over what 17 they're allowed to have under the statute. 18 And the staff looks at that and says, 19 "You know, there is no way we can approve 100,000; but 20 based on what you've submitted, we could give you 21 60,000 over and above. But since our rule only says 22 we can approve it, you've got to resubmit. We'll go 23 through the process again. If you'll resubmit for 60, 24 we'll approve it." 25 Well, why don't you just have the 0015 1 authority for the staff to look at it and say, "Not 2 only could -- we might approve it, but we might modify 3 it," again just to give the staff more flexibility. 4 Under .451, operating capital, this 5 is -- and we appreciate the changes the staff had 6 made. Still a lot of comment from our side of the 7 table about what is exactly intended. And in 8 Subparagraph (b), we make the observation, the bingo 9 account balance of an organization -- and it states 10 "on the last day of each calendar quarter may not 11 exceed." 12 And we're suggesting that just one 13 particular day is arbitrary. I think we all know and 14 we've all been in a position where either we or family 15 members or organizations have had to move money 16 around, because they didn't have sufficient. And so 17 they either delay payment of reasonable expenses to 18 when they get money in or they pay those expenses 19 sooner than they're due, because they want the tax 20 benefit of having that as an expense. 21 In fact, the State of Texas regularly 22 has played shell games when they've needed to balance 23 the budgets, because they've moved expenditures 24 outside of a fiscal year to the next day. And several 25 years ago the Legislature made changes in their 0016 1 expenditure of payroll from the last day, the end of 2 the fiscal year, to the next day, meaning instead of 3 the last of the month, the first of the month, of the 4 next month, to avoid that. 5 And so we don't have a solution to it. 6 But it seems to me that just picking one specific day 7 and saying, "That's the day" might invite arbitrary 8 numbers as opposed to perhaps an average number of a 9 particular quarter or a particular month. 10 Now turning to 402.101, the advisory 11 opinion rule -- and it occurs to us that the process 12 as it's worked today has been helpful to the industry. 13 There is not a huge volume of advisory opinions that 14 are requested or issued. 15 And so changing the rule as has been 16 published for public comment seems to be trying to -- 17 looking for a problem to solve when there's no problem 18 that's there, and specifically as it relates to -- the 19 change was only the requestor can rely upon an issued 20 advisory opinion, as opposed to today when an advisory 21 opinion is issued. I and others in the industry look 22 at the opinion and consider the facts and 23 circumstances that were stated and then advise the 24 charities, or the charities themselves read it and 25 take action based upon that. 0017 1 The way it's published, they would be 2 fraught with doing that, even if the facts were 3 identical to those stated in the advisory opinion or, 4 in the words of other agency advisory opinion 5 provisions -- and I have cites to several -- in which 6 the fact situation that is substantially similar to 7 the fact situation in which the person is involved. 8 And that specifically is a rule that applies both to 9 engineers and geoscientists, different agencies, where 10 those regulated industry, being the geoscientists or 11 the engineers, can rely on an advisory opinion issued 12 by that agency. 13 And it's a defense to prosecution or to 14 imposition of an administrative penalty that a person 15 reasonably relied on a written advisory opinion 16 relating to -- and, again, the language is, quote, "a 17 fact situation that is substantially similar to the 18 fact situation in which the person is involved." 19 And that cite back -- by the way, it's a 20 statute, Texas Government Code 1002.353. And there is 21 a similar provision for engineers, 1001.604 of the 22 Occupations Code. I think I said Government Code. 23 It's Occupations Code. 24 And then I think everyone -- many people 25 are aware of the Texas Ethics Commission that 0018 1 regularly issues advisory opinions either at the 2 request of an individual or the Ethics Commission on 3 its own has both the statutory and rulemaking 4 authority to issue one if they decide that it's in the 5 best interest of the state or the folks who are going 6 to rely on agency interpretation. 7 And no one has ever suggested that if 8 it's identical fact situation, that one elected 9 official can -- only can rely on it and a different 10 elected official -- and there are thousands of elected 11 officials in the State of Texas, when you think of 12 from state reps, state senators, down so city council, 13 et cetera, who regularly rely upon -- and county 14 commissioners, et cetera, who regularly rely upon 15 those issued decisions. So we think it should be if 16 the facts are similar, substantially similar -- and, 17 you know, those can be fact-intensive cases. 18 Ms. Joseph, you're nodding. I know you 19 know what I'm talking about. But that's the case with 20 case law today. You and I can read a case and perhaps 21 we agree that the facts are similar, substantially 22 similar to the case we separately have and agree that 23 that case is binding and go on down the road. And we 24 don't have to say, "Well, let's relitigate that issue 25 again." 0019 1 The way the draft rule is published, 2 charities would not be able to rely upon that and 3 would incur additional cost and expense to draft their 4 own. And since there are well over a thousand 5 licensed authorized organizations, I think it's in the 6 agency's best interest to allow regulated licensed 7 authorized organizations or commercial lessors or 8 distributors or manufacturers to rely upon published 9 advisory opinions. Again, the caveat would always be, 10 "Well, if the facts are different, then maybe you can 11 and maybe you can't rely upon it." 12 So those are all the comments I have. 13 MS. JOSEPH: All right. Thank you for 14 those comments. 15 And I would like to, as a group, these 16 draft documents that reflect your comments and 17 concerns, mark them as Fenoglio Exhibit 1, just for 18 the record. 19 (Exhibit Fenoglio No. 1 marked) 20 MR. FENOGLIO: Yes. 21 MS. JOSEPH: Are there any questions 22 from anyone on the staff? 23 No? 24 Thank you for being here and -- 25 MR. FENOGLIO: You bet. 0020 1 MS. JOSEPH: -- taking time to share 2 your comments with us. They're always helpful. 3 MR. FENOGLIO: Great! Thank you. 4 MS. JOSEPH: All right. At this time, 5 seeing no one else to offer comments, this hearing is 6 adjourned at 11:03. 7 (Meeting adjourned: 11:03 a.m.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0021 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 23rd day of April 2010. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/10 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25