0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE ? TEXAS LOTTERY COMMISSION ? 6 WEDNESDAY, JANUARY 6, 2010 ? 7 8 COMMISSION MEETING 9 WEDNESDAY, JANUARY 6, 2010 10 BE IT REMEMBERED THAT on Wednesday, 11 the 6th day of January 2010, the Texas Lottery 12 Commission meeting was held from 9:05 a.m. to 13 1:16 p.m., at the Offices of the Texas Lottery 14 Commission, 611 East 6th Street, Austin, Texas 78701, 15 before CHAIRMAN MARY ANN WILLIAMSON and COMMISSIONERS 16 DAVID J. SCHENCK and J. WINSTON KRAUSE. The following 17 proceedings were reported via machine shorthand by 18 Aloma J. Kennedy, a Certified Shorthand Reporter of 19 the State of Texas, and the following proceedings were 20 had: 21 22 23 24 25 0002 1 APPEARANCES 2 3 CHAIRMAN: Ms. Mary Ann Williamson 4 COMMISSIONERS: 5 Mr. David J. Schenck Mr. J. Winston Krause 6 GENERAL COUNSEL: 7 Ms. Kimberly Kiplin 8 DEPUTY EXECUTIVE DIRECTOR: Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: 10 Mr. Philip D. Sanderson 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - WEDNESDAY, JANUARY 6, 2010.......... 10 4 AGENDA ITEM NO. I - Meeting Called to Order....... 10 5 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action, including 6 adoption, on new rule 16 TAC ?401.317 relating to Powerball On-Line Game rule and/or report, 7 possible discussion and/or action on the Powerball game and/or agreement................... 10 8 AGENDA ITEM NO. III - Report, possible 9 discussion and/or action, including amendments, to the agency?s drawing audit 10 services contract and drawing studio and production services contracts..................... 14 11 AGENDA ITEM NO. IV - Report, possible 12 discussion and/or action on the 2009 demographic report on lottery players............. 19 13 AGENDA ITEM NO. V - Consideration of and/or 14 report, possible discussion and/or action on external and internal audits and/or reviews 15 relating to the Texas Lottery Commission, including the FY09 Financial Audit and the 16 Mega Millions Agreed Upon Procedures engagements, and/or on the Internal Audit 17 Department?s activities........................... 16 18 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, including 19 proposal, on repeal of and/or new rule 16 TAC ?402.202 relating to Transfer of Funds 20 Notification...................................... 39 21 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 22 proposal, on amendments to 16 TAC ?402.400 relating to General Licensing Provisions.......... 39 23 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action, including 4 proposal, on amendments to 16 TAC ?402.403 relating to Licenses for Conduct of Bingo 5 Occasions and to Lease Bingo Premises............. 39 6 AGENDA ITEM NO. IX - Consideration of and possible discussion and/or action, including 7 proposal, on amendments to 16 TAC ?402.404 relating to License Fees.......................... 39 8 AGENDA ITEM NO. X - Consideration of and 9 possible discussion and/or action, including proposal, on new rule 16 TAC ?402.408 10 relating to Designation of Members................ 39 11 AGENDA ITEM NO. XI - Consideration of and possible discussion and/or action, including 12 adoption, on amendments to 16 TAC ?402.101 relating to Advisory Opinions..................... 41 13 AGENDA ITEM NO. XII - Consideration of and 14 possible discussion and/or action, including adoption, on amendments to 16 TAC ?402.102 15 relating to Bingo Advisory Committee.............. 41 16 AGENDA ITEM NO. XIII - Consideration of and possible discussion and/or action, including 17 adoption, on amendments to 16 TAC ?402.103 relating to Training Program...................... 41 18 AGENDA ITEM NO. XIV - Consideration of and 19 possible discussion and/or action, including adoption, on amendments to 16 TAC ?402.409 20 relating to Amendment for Change of Premises or Occasions Due to Lease Termination or 21 Abandonment....................................... 41 22 AGENDA ITEM NO. XV - Consideration of and possible discussion and/or action, including 23 adoption, on new rule 16 TAC ?402.411 relating to Late License Renewal Fee.............. 41 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVI - Consideration of and possible discussion and/or action, including 4 adoption, on amendments to 16 TAC ?402.422 relating to Amendment to a Regular License 5 to Conduct Charitable Bingo...................... 41 6 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action, including 7 adoption, on repeal of 16 TAC ?402.702 relating to Location Verification Inspection...... 41 8 AGENDA ITEM NO. XVIII - Consideration of and 9 possible discussion and/or action, including adoption, on new rule, 16 TAC ?402.104 10 relating to ?Gambling Promoter? and ?Professional Gambler? and/or on amendments 11 to 16 TAC ?401.153 relating to Qualifications for License....................................... 68 12 AGENDA ITEM NO. XIX - Report by the 13 Charitable Bingo Operations Director and possible discussion and/or action on the 14 Charitable Bingo Operations Division?s activities, including updates on HB 1474 15 implementation, status of licensees, rulemaking and form revisions, audits, 16 pull-tab review, special projects, allocations, and upcoming operator training....... 74 17 AGENDA ITEM NO. XX - Consideration of and 18 possible discussion and/or action, including proposal, on amendments to 16 TAC ??401.201, 19 401.203, 401.205, 401.211, 401.216, and 401.220; and, on repeal of 16 TAC ??401.204, 20 401.206, 401.207, 401.208, 401.209, 401.210, 401.212, 401.213, 401.214, 401.215, 401.217, 21 401.218, 401.219, 401.221, 401.222, 401.223, 401.224, 401.225, 401.226, 401.228, and 22 401.229, all rules in 16 TAC Chapter 401, Subchapter C, Practice and Procedures rules....... 75 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXI - Consideration of and possible discussion and/or action, including 4 adoption, on amendments to 16 TAC ??401.402, 401.405, and 401.407 relating to Americans 5 with Disabilities Act requirements................ 77 6 AGENDA ITEM NO. XXII - Report, possible discussion and/or action on lottery sales 7 and revenue, game performance, new game opportunities, advertising, market research, 8 and trends........................................ 78 9 AGENDA ITEM NO. XXIII - Report, possible discussion and/or action on transfers 10 to the State...................................... 83 11 AGENDA ITEM NO. XXIV - Report, possible discussion and/or action on the 12 81st Legislature.................................. 87 13 AGENDA ITEM NO. XXV - Report, possible discussion and/or action on the lottery 14 operations and services procurement............... 92 15 AGENDA ITEM NO. XXVI - Report, possible discussion and/or action on the Mega 16 Millions game and/or contract..................... 112 17 AGENDA ITEM NO. XXVII - Report, possible discussion and/or action on GTECH 18 Corporation....................................... 112 19 AGENDA ITEM NO. XXVIII - Report by the Executive Director and/or possible discussion 20 and/or action on the agency?s operational status, agency procedures, and FTE status......... 112 21 22 23 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXIX - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-10-0741 ? Asia International Market 5 B. Docket No. 362-10-0554 ? Matas Meat Market & Food Store 6 C. Docket No. 362-10-0559 ? Diamond Mart 7 D. Docket No. 362-10-0560 ? Harlees Pik Kwik 8 E. Docket No. 362-10-0557 ? Express Mini Mart 9 F. Docket No. 362-10-0555 ? Jerry?s 10 G. Docket No. 362-10-0556 ? The Landmark Grocers 11 H. Docket No. 362-10-0297 ? Camp Bowie C-Store 12 I. Docket No. 362-10-0296 ? Sonny?s Food Mart 13 J. Docket No. 362-10-0299 ? One Stop Convenience Store 14 K. Docket No. 362-09-0232 ? King Food................................ 126 15 AGENDA ITEM NO. XXX - Public comment.............. 34 16 AGENDA ITEM NO. XXXI - Commission may meet in 17 Executive Session: A. To deliberate the appointment, 18 employment, and duties of the Executive Director pursuant to Section 19 551.074 of the Texas Government Code. B. To deliberate the duties and evaluation 20 of the Deputy Executive Director pursuant to Section 551.074 of the 21 Texas Government Code. C. To deliberate the duties and evaluation 22 of the Internal Audit Director pursuant to Section 551.074 of the Texas 23 Government Code. D. To deliberate the duties and evaluation 24 of the Charitable Bingo Operations Director pursuant to Section 551.074 of 25 the Texas Government Code. 0008 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXXI (continued) 4 E. To deliberate the duties of the General Counsel pursuant to Section 5 551.074 of the Texas Government Code. F. To deliberate the duties of the Human 6 Resources Director pursuant to Section 551.074 of the Texas 7 Government Code. G. To receive legal advice regarding 8 pending or contemplated litigation pursuant to Section 551.071(1)(A) 9 and/or to receive legal advice regarding settlement offers pursuant 10 to Section 551.071 (1) (B) of the Texas Government Code and/or to receive legal 11 advice pursuant to Section 551.071 (2) of the Texas Government Code, including 12 but not limited to: First State Bank of DeQueen, et al. 13 v. Texas Lottery Commission James T. Jongebloed v. Texas 14 Lottery Commission Texas Lottery Commission v. Leslie 15 Warren, Texas Attorney General Child Support Division, Singer 16 Asset Finance Company L.L.C., and Great-West Life & Annuity 17 Insurance Company Gametech International et al. v. 18 Greg Abbott Employment law, personnel law, 19 procurement and contract law, evidentiary and procedural law, and 20 general government law Lottery Operations and Services 21 procurement and/or contract Mega Millions game and/or contract 22 Request for Attorney General Opinion No. RQ-0771-GA................ 129 23 AGENDA ITEM NO. XXXII - Return to open 24 session for further deliberation and possible action on any matter discussed in 25 Executive Session................................. 130 0009 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXXIII - Adjournment.............. 130 4 REPORTER'S CERTIFICATE............................ 132 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0010 1 P R O C E E D I N G S 2 WEDNESDAY, JANUARY 6, 2010 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning. I 6 would like to call the meeting of the Texas Lottery 7 Commission to order. Today is January 6, 2010. The 8 time is 9:05. Commissioners Schenck and Krause are 9 present, and we have a quorum. 10 AGENDA ITEM NO. II 11 CHAIRMAN WILLIAMSON: Our first item on 12 the agenda is consideration of and possible discussion 13 and/or action, including adoption, on new rule 16 TAC 14 401.317, relating to Powerball On-Line Game rule 15 and/or report, possible discussion and/or action on 16 the Powerball game and/or agreement. 17 Pete, this is your item, I believe. 18 MR. WASSDORF: Thank you, Chairman. 19 Good morning, Commissioners. For the 20 record, my name is Pete Wassdorf, Assistant General 21 Counsel in the Legal Services Division. The first 22 item on your agenda is a two-part item. First there 23 is the consideration of the adoption of the proposed 24 Powerball rule and second is the consideration of the 25 authorization for Deputy Director Gary Grief to 0011 1 execute the reciprocal game agreement with the 2 Multi-State Lottery Association. 3 With respect to the rule, in your 4 November meeting, the Commission proposed new 16 TAC 5 401.317 relating to the Powerball on-line game rule. 6 The proposed rule was published in the December 4, 7 2009 issue of the Texas Register and is now ripe for 8 adoption. The staff held a public hearing on 9 December 14th at which no members of the public 10 appeared for comment. 11 The Commission did receive 163 positive 12 comments supporting the adoption and conduct of the 13 Powerball game and 27 positive or neutral comments, 14 copies of which are set out in the proposed order for 15 adoption, along with the proposed agency responses. 16 The proposed rule has been modified to 17 contain a provision allowing for an effective date to 18 be the latter of 20 days, as is prescribed by the 19 Administrative Procedure Act for final effectiveness, 20 or the execution of the reciprocal game agreement by 21 the Deputy Director. And there were also a few 22 typographical errors that were corrected. 23 With respect to the reciprocal game 24 agreement, a copy of the final draft of that is found 25 in your notebooks following the rule. This agreement 0012 1 is the product of negotiation among 45 jurisdictions 2 and represents an agreement that those jurisdictions 3 believe are compliant with the laws, rules and 4 regulations of their states, territory and district. 5 You will recall that the Texas and Mega 6 Millions states are not being admitted to be members 7 of the Multi-State Lottery Association but are merely 8 being authorized to conduct the Powerball game; and 9 conversely, the Powerball states are being authorized 10 to conduct the Mega Millions games. 11 Texas was somewhat fortunate that the 12 Legislature had authorized and given clear authority 13 for the Commission to enter into these multi-state 14 agreements, and so we didn't have as many problems 15 with our proposed rules as did some other states. 16 At this time I would be happy to answer 17 any legal questions you have. And since we had a 18 single point of contact between our agency and MUSL 19 for negotiations, I think Mr. Grief would be able to 20 answer any questions you have with respect to 21 substantive issues of those negotiations. 22 CHAIRMAN WILLIAMSON: Commissioners, do 23 you have any questions? 24 COMMISSIONER KRAUSE: We have a 25 contract? 0013 1 MR. WASSDORF: We have a final contract 2 that is now ripe for execution, yes, and a copy of 3 that is set out in your notebook following the 4 proposed rule. 5 COMMISSIONER KRAUSE: Perfect. 6 CHAIRMAN WILLIAMSON: All right. And 7 from what I understand, then, we have two action 8 items. We need to approve the contract and then give 9 Gary the authority to sign it. Is that correct? 10 MS. KIPLIN: That's correct. There are 11 two action items. One is with respect to the 12 contract, authorizing Gary to sign the contract, and 13 the other one is the consideration of the adoption of 14 the rule. 15 CHAIRMAN WILLIAMSON: All right. So, 16 Commissioners, do I hear a motion on the adoption of 17 the rule? 18 COMMISSIONER SCHENCK: Yes. I move we 19 adopt the rule. 20 COMMISSIONER KRAUSE: Second. 21 CHAIRMAN WILLIAMSON: All in favor? 22 COMMISSIONER SCHENCK: Aye. 23 CHAIRMAN WILLIAMSON: Aye. 24 COMMISSIONER KRAUSE: Aye. 25 CHAIRMAN WILLIAMSON: And the second 0014 1 motion, then, would be to authorize Deputy Director 2 Grief to execute the agreement? 3 MS. KIPLIN: Yes, that's correct. 4 CHAIRMAN WILLIAMSON: Do I hear a motion 5 on that? 6 COMMISSIONER SCHENCK: I so move. 7 CHAIRMAN WILLIAMSON: Is there a second? 8 COMMISSIONER KRAUSE: Second. 9 CHAIRMAN WILLIAMSON: All in favor? 10 COMMISSIONER SCHENCK: Aye. 11 CHAIRMAN WILLIAMSON: Aye. 12 COMMISSIONER KRAUSE: Aye. 13 MS. KIPLIN: Commissioners, I have an 14 order adopting the rule. 15 CHAIRMAN WILLIAMSON: All right. Thank 16 you, Pete. 17 AGENDA ITEM NO. III 18 CHAIRMAN WILLIAMSON: Our next agenda 19 item is a report, possible discussion and/or action, 20 including amendments, to the agency's drawing audit 21 services contract and drawing studio and production 22 services contracts. 23 Mike Fernandez, this is your item, I 24 believe. 25 MR. FERNANDEZ: Good morning, 0015 1 Commissioners. Happy New Year. 2 CHAIRMAN WILLIAMSON: Happy new year. 3 MR. FERNANDEZ: My name is Mike 4 Fernandez. I'm the Director of Administration. 5 I would like to advise the Commission 6 this morning, in following up on the adoption of the 7 Powerball rule, that the staff's intent in order to 8 support that implementation, that we will be amending 9 three contracts. The contracts are Davila, Buschhorn 10 and Associates, which effectively handled the drawing 11 audit services for the agency. M&S Works Drawing 12 Studio and Production Services produced the drawing, 13 if you will, in terms of the camera and transmissions. 14 And also Elephant Productions, who is the new 15 contractor that will be coming on-line in February to 16 provide drawing studio production services. So we 17 wanted to advise you that we will be reaching out to 18 them today and opening those discussions. 19 If you have any questions, I would be 20 happy to answer them. 21 CHAIRMAN WILLIAMSON: Commissioners, do 22 you have any questions? 23 COMMISSIONER KRAUSE: No questions. 24 COMMISSIONER SCHENCK: No. Thanks, 25 Mike. 0016 1 CHAIRMAN WILLIAMSON: All right. Thank 2 you. 3 AGENDA ITEM NO. V 4 CHAIRMAN WILLIAMSON: Our next item is 5 considerations of and/or report, possible discussion 6 and/or action on external and internal audits and/or 7 reviews relating to the Texas Lottery Commission, 8 including the 2009 financial audit and the Mega 9 Millions agreed-upon procedures engagements, and/or on 10 the Internal Audit Department's activities. 11 Ms. Melvin, I believe is yours. 12 MS. MELVIN: Good morning. 13 Commissioners. For the record, Catherine Melvin, 14 Director of the Internal Audit Division. This morning 15 I have with me representatives from the firm Maxwell 16 Locke & Ritter. I have Kelli Leventhal and Scott 17 Krchnak who are here to deliver the results of the 18 annual financial audit and the Mega Millions agreed- 19 upon procedures. 20 And I have also asked our controller, 21 Kathy Pyka, to join us at the table, too. So with 22 that, I'll turn that over. 23 MS. LEVENTHAL: Hi. For the record, my 24 name is Kelli Leventhal. I was the manager for the 25 Texas Lottery Commission audit. 0017 1 We performed the financial statement 2 audit for the fiscal year ended August 31, 2009. We 3 issued an unqualified opinion on this financial 4 statements which is more commonly referred to as the 5 clean opinion. It's the best opinion that you can 6 get. 7 The 2008 financial statements have been 8 restated to correct a misstatement. All 2008 9 financial statement amounts that have been corrected 10 have been noted as such. And then in Footnote 10 to 11 the financial statements, it further describes the 12 details of that restatement. 13 We also issued a report on internal 14 controls of the Texas Lottery Commission for the same 15 time period. We had two findings that came out of 16 that, which we discussed with and were agreed to by 17 management, and details of those findings are in that 18 internal control report included in the financial 19 statements. 20 We have issued a SAS 114 letter which 21 sometimes is referred to as a governance letter. This 22 is the letter that was addressed to the Commissioners 23 directly. And the main thing I would want to point 24 out in that is that there were no difficulties or 25 disagreements in working with management in performing 0018 1 the audit. 2 And, lastly, back in May 2009, we issued 3 a report on agreed-upon procedures related to Mega 4 Millions for the year ended March 31, 2009, and we had 5 no findings as a result of that report. 6 And that's the summation. 7 CHAIRMAN WILLIAMSON: Thank you. 8 Commissioners, do you have any 9 questions? 10 COMMISSIONER SCHENCK: No. Thank you. 11 I'm glad to hear that you had the full support of the 12 staff and employees here. I noted you didn't get 13 necessarily the full support from the Commissioners. 14 I think I, for one, was pretty slow in getting my 15 questionnaire back to you, but I think you did get it. 16 MS. LEVENTHAL: Everybody eventually 17 spoke with me, so I appreciated that. And, as always, 18 especially working with the Controller's office, 19 they've always been very helpful, and I think this 20 year more than any other year. I think it went very 21 smoothly, and we appreciated, you know, their quick 22 assistance. 23 COMMISSIONER SCHENCK: Thank you. 24 CHAIRMAN WILLIAMSON: Any questions, 25 Commissioner? 0019 1 COMMISSIONER KRAUSE: I have no 2 questions. 3 MS. LEVENTHAL: Thank you very much. 4 CHAIRMAN WILLIAMSON: Thank you. And 5 thank y'all for your hard work. And I thank Kathy and 6 your staff and Cat and your staff for all of your 7 cooperation on that. Thank you. 8 AGENDA ITEM NO. IV 9 CHAIRMAN WILLIAMSON: Okay. Mike, I 10 skipped you -- Item No. IV. Sorry about that -- the 11 demographic report. 12 MR. FERNANDEZ: That's quite all right, 13 Commissioner. Good morning again. My name is Mike 14 Fernandez. I'm the Director of Administration. 15 This item is in response to our 2009 16 demographic study. As you know, the agency's 17 executive director, by legislation, is required to 18 conduct a study, a survey, a demographic survey of 19 Texas lottery players. As you also know, that that is 20 required to occur immediately prior to a legislative 21 session and that we provide the results of that to the 22 leadership. 23 The agency has historically done this 24 survey every year. This year we have engaged Dr. Jim 25 Granato of the University of Houston Center for Public 0020 1 Policy. I have him with me this morning, as well as 2 Dr. David Sizemore, who is our research director. And 3 Dr. Granato will be presenting the results of the 4 survey. 5 DR. GRANATO: Thank you, Dr. Fernandez. 6 For the record, my name is Jim Granato, 7 and I direct the University of Houston Center for 8 Public Policy. 9 To begin with in this survey, there was 10 one new feature. There's some elements of 11 continuity, obviously, the survey instruments are 12 similar so we can compare to prior years. But one 13 thing we did do, in keeping with new research is, we 14 expanded the cell phone portion of the sample. It's 15 now up to 18 percent. And there's compelling evidence 16 that suggests that there is growing use of cell phone- 17 only households. So in order to make the sample more 18 representative of the population, we have now 19 increased the proportionate cell phone -- that contain 20 cell phones from about 10 percent to about 18 percent. 21 COMMISSIONER SCHENCK: How do you do 22 that? Cell phone numbers aren't listed. How are you 23 getting the -- 24 DR. GRANATO: We use the same firm that 25 gives us the landline numbers. They're called Survey 0021 1 Sampling International, and they have access to these 2 numbers. It's a relatively new feature. We've had it 3 for three years now, and I don't think they're the 4 only firm that provides this service now. But it's 5 something that -- 6 COMMISSIONER SCHENCK: I don't know how 7 they get it; I don't know if you do either. But it 8 seems to me the methodology that they use to obtain 9 those numbers could skew your sample if it's people 10 that are only responding -- I don't -- we don't have 11 as perfect a universe, it seems to me -- 12 DR. GRANATO: Right. 13 COMMISSIONER SCHENCK: -- when you're 14 talking about mining for that data. And it could be 15 that there are characteristics held in common among 16 the group of people whose cell phone numbers would be 17 available to the person that you're getting it from. 18 DR. GRANATO: Well, there are 19 differences in characteristics. The issue, though, is 20 not the differences in characteristics -- in fact, I 21 can go through some of that if you would like -- but 22 it's the difference in behavior. That's what we're 23 looking for. I mean, cell phone users tend to be much 24 younger. The 18 to 34 demographic are the real 25 population shift here. 0022 1 COMMISSIONER SCHENCK: Well, my point 2 is, the person whose cell phone number is available, 3 the person you're getting it from may be different 4 from the person whose cell phone number is not 5 available. 6 DR. GRANATO: Okay. 7 COMMISSIONER SCHENCK: And I don't know 8 how you get around that challenge, because I don't 9 know how they're getting that information. I don't 10 think it's generally publicly available. They must be 11 getting it through some secondary means. And the 12 method by which they're getting it could affect -- 13 DR. GRANATO: True. 14 COMMISSIONER SCHENCK: -- the nature of 15 the sample that you're drawing from. 16 DR. GRANATO: True. 17 COMMISSIONER SCHENCK: But you're moving 18 from 10 to 18 percent an any event. It's an 19 improvement. But I'm just thinking, if that trend 20 continues as we do studies like this and other people 21 do studies like this, I think consideration of how 22 we're getting the contacts is pretty important. 23 DR. GRANATO: Well, what we could do is, 24 we can expand subsequent reports to looking at the 25 entire methodology with cell phone. So at this point 0023 1 what we did is, we just wanted to incorporate the best 2 methodology that was out there and survey -- the 3 survey that we worked with, they've been around for 4 decades, and they have a very good reputation in their 5 sampling protocols. 6 But I should tell you, what you're 7 saying is right. There's two things that are 8 happening with surveys that are troubling. One is the 9 rise of cell phones, cell phone usage. But the other 10 one is, people aren't answering the phone anymore. So 11 the problem we have is response rates for phone 12 service. Random, just dialing, it used to be the 13 seventies, 70 percent response rate. Now it's in the 14 twenties, and that's a good response rate. So we're 15 struggling with -- 16 COMMISSIONER SCHENCK: And that response 17 rate is not going to be even among all cohorts. 18 DR. GRANATO: Right. 19 COMMISSIONER SCHENCK: So you're going 20 to have basically older people answering the phone and 21 being willing to talk to you. Younger people you're 22 not going to find, because they're going to be more 23 sophisticated in not giving their cell phone numbers 24 out where you can get to them. And when you can get 25 to them, they're not going to answer the phone, 0024 1 they're not going to answer the survey. It's not a 2 problem that just you're having. I think -- 3 DR. GRANATO: It's everybody. 4 COMMISSIONER SCHENCK: -- it's even 5 political polling. 6 DR. GRANATO: 7 COMMISSIONER SCHENCK: That's why the 8 day before an election somebody is ahead by five 9 points in the poll and all of a sudden they lose by 10 10 points. There's tens of thousands of voters that 11 showed up that no one knew existed. 12 But I don't know. But, obviously, 13 you're aware of this problem. 14 DR. GRANATO: Correct. 15 COMMISSIONER SCHENCK: And to the extent 16 you can deal with it for us, you will. 17 DR. GRANATO: Right. Exactly. I mean, 18 we try to stay on top of that. Our sort of research 19 institute does deal with this. And we also partner 20 with the National Opinion Research Center of the 21 University of Chicago. They are the New York Yankees, 22 I guess, of survey methodology. They've been around 23 for 60 years, and they deal with this type of sampling 24 challenge, and they're extremely concerned about it 25 and they're studying it as we speak. 0025 1 COMMISSIONER SCHENCK: At some point 2 it's going to have to be some method other than phone 3 or -- 4 DR. GRANATO: Exactly. 5 COMMISSIONER SCHENCK: -- or a parallel 6 sample to check the deviation between them. 7 DR. GRANATO: Exactly. I mean, some 8 people are telling me they're using computers. I 9 mean, we've got groups like Knowledge Networks that 10 use -- people are going to PCs. And the issue, of 11 course, then is make sure you use paralleling of 12 sample. And there's a lot using Nano. I mean, 13 Tweeting may be something people start doing. Of 14 course, that's really something that again younger 15 people are using, not middle-aged folks like myself. 16 And so I should say this, too: It's a 17 change that's going to be we believe permanent, 18 because it's generational. I mean, it's not just in 19 surveys but it's also in what's happening when people, 20 even reading newspapers, are using new technology. 21 Paper-reading is not being done by younger folks; they 22 use the computer. 23 Let me continue. The sample size -- 24 next page. The sample size, in keeping with prior 25 surveys, is 1,700. The landline portion is 82; the 0026 1 cell phone portion is 18 percent. Since we're dealing 2 with a sample size of 1,700, the margin of error is 3 plus or minus 2.4 percent. So when the sample size 4 and the questions are being asked when you have this 5 large a sample, we have a reasonably good sense of the 6 error band. It's when we start getting the smaller 7 sample questions that deal with specific answers that 8 the error band starts to grow. And so checking for 9 differences for smaller samples is much more 10 difficult. 11 The revenue forecast. A revenue 12 forecast in this year comes out to be a little over 13 $4 billion. The margin of error here is -- the lower 14 bound is $3.96 billion; the upper bound is 15 $4.15 billion. 16 A word on sensitivity. One of the 17 numbers used in calculating this is the average spend 18 per month. It was $45.21. Imagine if people made a 19 mistake and the average was off by, say, $3.00. So 20 say $45 was $42. If you put that number in, the 21 forecast goes down to $3.78 billion. Imagine if 22 people are $3.00 below, and that's 48, is the average 23 spend. The forecast jumps up to $4.31 billion. 24 So again, since people are using their 25 memory to answer this type of a question, if there is 0027 1 a little bit of error here, the revenue forecast we do 2 have is somewhat sensitive, although I don't think 3 it's too far off from what the actual numbers are. I 4 think in 2008, the numbers were $3.67 billion. 5 COMMISSIONER SCHENCK: So this is a 6 pretty interesting validation point for your survey. 7 THE REPORTER: Sorry. I can't hear you. 8 COMMISSIONER SCHENCK: I say this is a 9 pretty good validation point for your survey, though, 10 the fact that you are projecting from the survey pool 11 what our revenues would be, then the fact that that 12 matches up pretty nicely with the actual revenue 13 suggests, at least in terms of what they're telling 14 you on what they're spending, it's reliable. 15 DR. GRANATO: Right. Correct. And 16 again, it's because the sample is larger. When you 17 get to 1,700, you're starting to get -- the margin of 18 error starts to shrink considerably. 19 General findings. I noted in general 20 findings, the participation rates, which we have 21 graphically represented later on in the presentation, 22 they're up. They're up to about 42 percent from 23 about -- a little under 38 percent. And it was 24 hovering on 38 percent the last two years. This year 25 it's up to 42 percent. So the effect of the economic 0028 1 crisis may have influenced more people to participate. 2 People are also spending more. As you 3 see, the differences between 2007, 2008, 2009, it's 4 higher than last year, lower than 2007. But again, 5 it's up and it's significant, too. This isn't a 6 chance occurrence. This is actually significantly 7 different. 8 In terms of demographic differences in 9 the overall sample, there are some differences in 10 gender. Males tend to play more. 11 COMMISSIONER SCHENCK: But before you 12 flip over there, you've shown that the spend rate 13 2007, '08 and '09, do we have available from any other 14 resources the average household income in Texas, 2007, 15 '08, and '09, to prove your thesis that with the 16 current -- with the economic distress, people are 17 playing more? Do we know, in fact, that Texans 18 actually made less money in 2009 than they did in 2008 19 and, yet, spent more per capita on lottery? 20 COMMISSIONER KRAUSE: Well, I would like 21 to augment that question, because one of the things 22 that staff has been talking to us about is that 23 because we had, you know, a hurricane that hit the 24 coast, you know, a couple of years ago -- 25 DR. GRANATO: Yes. 0029 1 COMMISSIONER KRAUSE: - and that 2 literally destroyed places where people could play. 3 And so, obviously, their ability to play was, you 4 know, restricted and that's made a comeback as, you 5 knew, rebuilding has occurred. So can you 6 distinguish? 7 DR. GRANATO: We would have to look at 8 the county differences or the district differences. 9 And I think this year the district that was up from 10 last year is Irving. 11 COMMISSIONER KRAUSE: Okay. 12 DR. GRANATO: That's the one that was 13 significantly different. You see these little blips, 14 but you have to make sure that that change isn't by 15 chance, it's actually something we call statistically 16 significant, and Irving was the one place where we saw 17 that. 18 COMMISSIONER KRAUSE: So does that 19 coincide with the completion of the stadium up there 20 and/or now having a game tied to the Dallas Cowboys? 21 DR. GRANATO: It could. 22 COMMISSIONER SCHENCK: But to my 23 question, do you know whether, in fact, the average 24 household or however we measure on census basis 25 income, is down in Texas, 2009? 0030 1 DR. GRANATO: We did not look at that 2 date, but we can get access to it. 3 COMMISSIONER SCHENCK: I would like to 4 know that -- 5 DR. GRANATO: Okay. 6 COMMISSIONER SCHENCK: -- because the 7 notion that people are playing our games in response 8 to stress bothers me, and I would like to know 9 whether, in fact, that correlation is supportive, as 10 you surmise. 11 DR. GRANATO: Right. Well, one point we 12 look at those in terms of we do have data, and we ask 13 people about their income, and we found no difference 14 between participants and non-participants there. It 15 didn't ring up in this particular year. So that's 16 just one snapshot. 17 COMMISSIONER SCHENCK: Do you ask people 18 whether they're currently employed? I guess if they 19 are not, they would tell us that their income is zero? 20 DR. GRANATO: We ask for employment 21 status, yes, we do. 22 COMMISSIONER SCHENCK: And have we seen 23 a change there? 24 DR. GRANATO: This year I think there 25 was, yes. 0031 1 COMMISSIONER SCHENCK: Okay. So it went 2 down? More people unemployed than there were last 3 year; and yet, more people played? 4 DR. GRANATO: I think that's correct. 5 COMMISSIONER SCHENCK: Okay. 6 DR. GRANATO: In terms of game results, 7 again, participation rates for most of the games we 8 examined -- all the games we examined, they're the 9 same and up for the most part. The game that stands 10 out in terms of being significantly up is Mega 11 Millions. 12 In terms of purchases, weekly rates are 13 up. Monthly rates were up last year. The exception 14 was the Texas Lottery Scratch Off. Monthly rates were 15 not up for the Texas Lottery Scratch Off. The average 16 time played, a general upward shift. Dollars spent, 17 again a general upward shift in all games. 18 COMMISSIONER SCHENCK: What does that 19 mean, "average time played"? I mean, how long it 20 takes them to scratch off a ticket or -- 21 DR. GRANATO: How many times -- you are 22 asked how many times you play a week, how many times 23 you play a month, and just the average times you play. 24 And I really -- 25 COMMISSIONER SCHENCK: Occurrences, in 0032 1 other words? 2 DR. GRANATO: Yes. Exactly. 3 Okay. And then these are just 4 comparisons within each game to see if there are 5 differences, using these demographic variables. And 6 for the most part, there aren't. I mean, we have 7 several questions on demographic variables, but I'm 8 highlighting the ones that were significantly 9 different. Pick 3 Day has, as you can see, four 10 significant differences based on education, income and 11 race. In particular, one with race, it's the African- 12 Americans and native Americans that are playing Pick 3 13 Day more than prior, than the comparison group. But 14 again, these are all reporting significant differences 15 within these categories in comparison to prior year. 16 And now finally just some selective 17 figures just on participation. This is any game, the 18 participation. As you can see, there was a 19 significant drop, starting in 2006, from 45 percent to 20 38 percent. By now we're starting to see an up-tick. 21 The Pick 3 Day, there is a drop, but 22 it's consistent with what it was in 2007. 23 Cash 5, a slight increase. Again, this 24 is within margin of error, so you have to watch it. 25 So that's why we say it's about the same. So what you 0033 1 see here is, with the exception of Mega Millions, 2 you're seeing a good deal of stability. 3 Playing Lotto Texas, this was 4 historically the game that most folks played, and 5 there was a drop in 2008, and it's stabilized at about 6 60 -- about 70 percent. 7 Scratch Off, there has been an increase 8 since 2007, although it's not where it was in 2006. 9 Texas Two Step, an increase from -- do 10 you want to go back to 2007 where 10 percent 2007, 11 we're now up to 13 percent. 12 COMMISSIONER SCHENCK: I think you said 13 the one variable that was affected here on Two Step 14 was age. Is it that older people are playing Two Step 15 and younger people are not? 16 I'm sorry. That's a very detailed 17 question. My assumption is that -- you said that was 18 the only category that was affected. 19 DR. GRANATO: That is correct. It's 20 age. 21 COMMISSIONER SCHENCK: I think young 22 people don't know what the two-step is. 23 DR. GRANATO: The game or the dance? 24 COMMISSIONER SCHENCK: Apparently both. 25 DR. GRANATO: And Mega Millions, this is 0034 1 the one that people are playing more. Megaplier, 2 about the same, 12 percent. 3 And that concludes my presentation. 4 CHAIRMAN WILLIAMSON: Thank you. 5 Commissioners, do you have any questions 6 or comments? 7 COMMISSIONER SCHENCK: I would 8 appreciate if you could follow up on that financial 9 data. I think this is one of the most important 10 studies and one of the most important presentations we 11 have. I appreciate it when we have it. I think it is 12 probably very useful, I think on a policy level, to 13 the people at the Legislature as well as to us. So 14 the more detail we can have, the better. I do think 15 in future surveys, to the extent we can keep looking 16 to this cell phone -- 17 DR. GRANATO: We can do more in-depth 18 discussions on cell phone methodology and the 19 challenges that are based on that type of sampling 20 technique. 21 CHAIRMAN WILLIAMSON: Thank you. 22 DR. GRANATO: Thank you. 23 AGENDA ITEM NO. XXX 24 CHAIRMAN WILLIAMSON: And at this point 25 I'm going to move Agenda Item XXX, the public comment, 0035 1 to now. 2 Kim, do I have all the ones -- I know 3 there was one you were checking on. 4 MS. KIPLIN: Yes. And my understanding 5 is that that witness affirmation form would not come 6 forward. 7 CHAIRMAN WILLIAMSON: Okay. 8 MS. KIPLIN: So you have all the witness 9 affirmation forms -- 10 CHAIRMAN WILLIAMSON: Okay. So 11 Mr. Busald. 12 MR. BUSALD: Thank you, Commissioner, 13 for your consideration of time and so on for those who 14 appear to testify. 15 For the record, my name is Gerald 16 Busald. I'm a professor of mathematics at San Antonio 17 College. As you know, last May I appeared before the 18 Commission and urged the Commission to be more 19 proactive about the issue of clerks cheating. Of 20 course, I didn't know at the time just how prophetic I 21 was about that issue. And I do appreciate the steps 22 that have been taken. The time stamp on on-line games 23 is a good move and my suggestion that retailers were 24 going to be able -- all the retailers were going to be 25 able to have ticket checkers. That needs to be 0036 1 followed up, though, with actually making that happen. 2 I think you have commented on that, 3 Commissioner Schenck, that can't we make that happen 4 and not just leave it at the option of the retailer. 5 And we know that that's not a perfect check, because 6 it's my understanding in the million dollar 7 embarrassment, they did have a ticket checker at that 8 location. So, still, people will cheat, so it's not a 9 guarantee. So I do hope you follow through. I just 10 had like two or three little suggestions to consider 11 because, obviously, it's bad for the state to be 12 embarrassed in the way it happened in that issue. 13 Once again, I urge you to be proactive 14 on the idea of stings. California has done it; 15 Minnesota has done it. They've caught many clerks. 16 If it's publicized, I think it scares other clerks if 17 they are aware of it, so that can happen. If you wait 18 for complaints and follow up on complaints, we know 19 often people don't complain because they don't know 20 they were cheated. In the case of the million 21 dollars, the person didn't realize he was cheated 22 until after the fact. And so, you know, you need to 23 be proactive in that area, and you can't wait for 24 people to complain, just us being reactive, and it 25 won't necessarily get the issue done. 0037 1 One way that can maybe help that is not 2 allow clerks to purchase tickets at the place where 3 they work, period. There are some lotteries that 4 don't allow this, because of this same issue. And 5 failing that, as least when someone comes in to claim 6 prizes, at least do audits on are clerks at this store 7 claiming more prizes than would seem normal, some of 8 those things that can be done. And at least on 9 questioning someone who comes in for a large prize, 10 "Are you a clerk at a retail store?" That seems to be 11 a very logical question to ask someone that apparently 12 was not asked when this last person received their 13 money. 14 And finally, I urge you once again to 15 publicize and make available the information when 16 clerks are caught cheating. Downplaying it doesn't 17 have the deterrent value of discouraging other clerks, 18 and plus publicizing, taking time -- I know you say, 19 "Sign the back of your ticket." And, obviously, 20 everybody should do that. 21 But if it's publicized that a clerk is 22 caught cheating instead of making it very difficult to 23 get the information, as apparently was true in the 24 last article I read about, that it was very difficult 25 to get the information about how clerks were cheating, 0038 1 publicize it and that may have a deterrent value. 2 Thank you for your consideration. 3 That's all I have. 4 CHAIRMAN WILLIAMSON: Thank you. 5 Now before we have comments, Kim, would 6 you like to refresh the Commissioners on our 7 conditions on dealing with public comments. 8 MS. KIPLIN: Yes, I'll be glad to. This 9 is a public comment agenda item. And so because there 10 is not specific notice given to the public regarding 11 the topics that are covered under public comment, the 12 Commission is limited in its deliberations to whether 13 you want to post for a future Commission meeting an 14 agenda item specific to give the public notice or 15 responding to an inquiry from a member of the public. 16 That's the limitations. 17 MR. BUSALD: Thank you. 18 CHAIRMAN WILLIAMSON: Thank you. 19 Do either of you have a -- before you 20 leave -- 21 MR. BUSALD: Okay. 22 CHAIRMAN WILLIAMSON: -- I need to ask 23 my fellow Commissioners if they have anything they 24 would like to -- 25 COMMISSIONER SCHENCK: Well, I'm not 0039 1 sure to what extent I'm going to be able to comment. 2 But I've commented at many public meetings like this 3 on this issue, and I agree with much of what I've 4 heard. So I'm going to leave it at that. 5 MR. BUSALD: Thank you. 6 CHAIRMAN WILLIAMSON: Thank you. And I 7 believe that's the only public comment request I have 8 right now. 9 AGENDA ITEM NOS. VI, VII, VIII, IX AND X 10 CHAIRMAN WILLIAMSON: So we will go on 11 to -- this will include Items VI through X. This is 12 consideration of and/or possible discussion and/or 13 action, including proposal, on repeal of and/or new 14 rule 16 TAC 402.202 relating to Transfer of Funds 15 Notification. 16 And, Sandy, I believe all of this and 17 all the other items are yours. 18 MS. JOSEPH: Yes. Items VI through X 19 are all proposals for amendments to rules, in response 20 again -- once again to HB 1474 adopted by the last 21 Legislature and effective October 1, 2009. These are 22 all charitable bingo rules. The proposals have been 23 circulated informally to interested persons in the 24 public, and any comments they made have been 25 considered at this time. 0040 1 We have scheduled a hearing for these 2 rules on -- planning it for February 16th at 3 10:00 a.m. And I would recommend that the Commission 4 vote to publish these for public comment in order to 5 receive comments for a period of 30 days. 6 Perhaps I should read each rule, just to 7 be sure that they're in the record, what we're talking 8 about here. Item VI concerns new rule 16 TAC ?402.202 9 relating to transfer of funds notification. 10 Item VII is amendments to 16 TAC 402.400 11 relating to general licensing provisions. 12 Item VIII is amendments to 16 TAC 13 ?402.403 relating to licenses for the conduct of bingo 14 occasions and to lease bingo premises. 15 Item IX, amendments to 16 TAC ?402.404 16 relating to license fees. 17 And Item X concerns 16 TAC 402.408, a 18 new rule relating to designation of members. 19 And again, I recommend that you vote to 20 publish these rules for public comment. 21 CHAIRMAN WILLIAMSON: Commissioners, do 22 you have any questions? 23 Do you want us to do these one at a 24 time, Kim, or put them all together on one motion? 25 MS. KIPLIN: I'm fine with you putting 0041 1 them together all in one motion, based on the way that 2 Ms. Joseph laid it out. And I believe you have 3 individual T-bar memos that will be part of each 4 rulemaking file. 5 CHAIRMAN WILLIAMSON: All right. 6 COMMISSIONER SCHENCK: I will move that 7 we adopt -- I'm sorry -- that we publish for public 8 comment the staff's proposed rules to 16 TAC 402.202, 9 .400, .403, .404 and .408. 10 CHAIRMAN WILLIAMSON: Second? 11 COMMISSIONER KRAUSE: Second. 12 CHAIRMAN WILLIAMSON: All in favor? 13 COMMISSIONER SCHENCK: Aye. 14 CHAIRMAN WILLIAMSON: Aye. 15 COMMISSIONER KRAUSE: Aye. 16 MS. JOSEPH: And with your permission, 17 I'll bring those T-bars forward at the end of my next 18 presentation. 19 CHAIRMAN WILLIAMSON: All right. 20 AGENDA ITEM NOS. XI THROUGH XVII 21 CHAIRMAN WILLIAMSON: And next item, I 22 believe, is yours as well, XI through XVII. 23 MS. JOSEPH: Yes. Items XI through XVII 24 include recommended adoption of rule amendments that 25 have been previously proposed and public comments have 0042 1 been received, or the opportunity for comments. We 2 did hold a public hearing on all of these rules on 3 November 3rd. One person, Mr. Steve Fenoglio, 4 appeared at the hearing and generally commented in 5 favor of all of the rules. 6 Item XI, 402.101 concerning advisory 7 opinions, clarifies time periods for requesting and 8 providing additional information, in addition to 9 making some changes that are appropriate as a result 10 of the recent legislation. And staff does recommend 11 that this rule be adopted without changes to the 12 proposal. 13 I think, if it's all right with you, 14 I'll go ahead and summarize all of these. 15 Item XII concerns ?402.102, Bingo 16 Advisory Committee. The changes to this rule include 17 information on grounds for inquiry and removal of a 18 Bingo Advisory Committee member. It provides more 19 flexibility in scheduling meetings and changes the due 20 date for the annual work plan and report that is 21 submitted to the Commission by the Bingo Advisory 22 Committee. 23 Mr. Stephen Fenoglio did comment at the 24 hearing on this. And, in addition, two written 25 comments were received. Mr. Fenoglio commented that 0043 1 he believed that the standards were not as clear as 2 they could be regarding removal of a BAC member and 3 that perhaps they were too vague and broad. For 4 instance, a criteria that if someone who is engaged in 5 unlawful conduct could equal a parking ticket, 6 arguably. The staff's response to these comments is 7 that the Commission will exercise its discretion in a 8 reasonable manner, understand his concerns that -- 9 belief that we would not recommend tying the 10 Commission's hands to be very detailed. 11 Another comment was that it's important 12 to appoint both manufacturers and distributors to the 13 BAC. The staff agrees with that perspective, that it 14 is very beneficial to have varying perspectives. 15 There was no change to the rule suggested by that 16 commenter that that comment was made. 17 And, finally, there was a comment to the 18 effect of whether or not the list of reasons for 19 possible removal was an all-inclusive list. And the 20 comment suggested that, as written, the rule implied 21 that it was not all-inclusive. Our response is, 22 that's true. It is not an all-inclusive list. The 23 rule retains discretion for the Commission to consider 24 other matters that are not included in the list. 25 The staff recommends that the rule be 0044 1 adopted as proposed, with the exception of just one 2 change which deletes reference to a repealed section 3 of the Bingo Enabling Act, ?2001.252(1). No changes 4 are recommended in response to the comment. 5 CHAIRMAN WILLIAMSON: Thank you. 6 Commissioners? 7 MS. JOSEPH: I have additional items. 8 CHAIRMAN WILLIAMSON: Oh, all right. 9 MS. JOSEPH: That is the one with the 10 most comments, but I'll continue. Are there any 11 questions about that item at this time? 12 COMMISSIONER KRAUSE: I do; I have a 13 question. Instead of listing causes for removal, 14 can't we just simply say that, you know, any member 15 can be removed, you know, at the Commissioners' 16 discretion and not have to make a list? 17 MS. JOSEPH: We certainly could. 18 COMMISSIONER SCHENCK: I agree with 19 that. I think I made that comment. 20 MS. KIPLIN: If I could interject, your 21 rule had that. And I think, based on direction from 22 the Commission, I believe, we were directed to put in 23 not an exhaustive, comprehensive laundry list but 24 examples. But you always retain that. It is at your 25 pleasure, and you can -- 0045 1 COMMISSIONER SCHENCK: I think to be 2 clear, Kim, we say in the rule, "(2) The Commission 3 may consider any of the following, among other things 4 to be grounds . . ." 5 MS. KIPLIN: Yes. 6 CHAIRMAN WILLIAMSON: So we still have 7 discretion, we just listed some items specifically, as 8 well as discretion, if I understand this correctly. 9 COMMISSIONER SCHENCK: Well, as long as 10 the world understands that we understand it that way. 11 COMMISSIONER KRAUSE: Well, I understand 12 it that, you know, if there is something that makes 13 the Commissioners feel like a member is not 14 appropriate, that a person who is serving is not 15 appropriate for membership, then can be removed for 16 any reason or no reason, and that's that. 17 MS. JOSEPH: I believe that is true, and 18 I don't believe this rule changes that. 19 MS. KIPLIN: No, it does not. The rule 20 specifically says each member serves at the pleasure 21 of the Commission, your point. 22 COMMISSIONER SCHENCK: Unfettered and 23 wide discretion. 24 COMMISSIONER KRAUSE: Let it be known. 25 COMMISSIONER SCHENCK: If we're taking 0046 1 these issues one at a time -- and I think, Sandy, 2 maybe we should -- I would like to go back to the rule 3 before this one -- 4 MS. JOSEPH: Oh, right. Certainly. On 5 the advisory opinions. 6 COMMISSIONER SCHENCK: On advisory 7 opinions. 8 MS. JOSEPH: All right. 9 COMMISSIONER SCHENCK: I'm a little 10 confused about, under the text of the rule -- and 11 maybe this is compelled by the House bill -- "An 12 advisory opinion may be relied upon by the requestor 13 as well as any other person whose conduct is 14 substantially consistent with the opinion and the 15 facts stated in the request." Doesn't that really 16 make it a rulemaking and wouldn't it compel us to go 17 through public notice and comment? 18 MS. KIPLIN: Well, there is a specific 19 provision in the statute that makes it clear that this 20 is not -- issuance of an advisory opinion is not a 21 rulemaking under the Administrative Procedures Act. 22 COMMISSIONER SCHENCK: But our rule here 23 seems to give it that effect. 24 MS. KIPLIN: I think -- and, Sandy, you 25 can correct me if I'm wrong -- but the language that 0047 1 you just stated is part of the statute, if I'm not 2 mistaken -- 3 MS. JOSEPH: I think that's correct. 4 MS. KIPLIN: -- the opinion is 5 substantially -- 6 COMMISSIONER SCHENCK: Who is going to 7 be responsible internally for making these decisions, 8 because if it does not come to the Commission and we 9 issue an advisory opinion of some kind, I mean -- and 10 perhaps we put it on our website and we don't agree 11 with it and we have some case or controversy before 12 us, what this rule is suggesting is that the 13 Commission's hands are tied, the three of us are 14 without power to change it unless we make a new rule 15 that operates prospectively only. 16 MS. KIPLIN: You know, I will say that 17 that has been an issue that we have discussed on a 18 staff level. And I think what the Commission, at the 19 time of the advisory opinion, locking into effect and 20 then the rule, and it's really the Commission that 21 issues those opinions. 22 COMMISSIONER SCHENCK: So that will 23 always come through us? 24 MS. KIPLIN: Well, they don't. You are 25 relying on the judgment of your staff by this rule, 0048 1 that you've delegated it down to the Bingo Operations 2 Director, and then the General Counsel is also in part 3 of it. But whatever authority you delegate, you 4 obviously retain and there is -- 5 COMMISSIONER SCHENCK: But we wouldn't, 6 because once that authority has been exercised by 7 Phil, or the Bingo Director, in a particular case, 8 it's all over. Once it comes to us, we can't disagree 9 with it. 10 MS. KIPLIN: Well, I think if it's in a 11 particular case and you're looking at it -- these are 12 not rules. This is an expression of interpretation. 13 I understand your concern. The other way that -- when 14 this goes back years -- and it's good to have this 15 discussion again -- the other way is that we bring 16 these requests for bingo advisory opinions to you. 17 There is a clock, though, that is ticking. And I 18 believe it's 60 days. 19 MS. JOSEPH: Sixty days. 20 MS. KIPLIN: So it creates a little bit 21 of a logistical dilemma. But we can certainly do 22 that. I mean, we can certainly bring these draft 23 opinions or we can bring the request for the advisory 24 opinion to you-all. 25 Another option -- you know, I'm just 0049 1 thinking off the top of my head -- is that the staff 2 work with one Commissioner on those that are in -- I 3 think the staff does a pretty good job in identifying 4 those that we think are fairly clear-cut and those 5 that are not, that are fuzzy. But we can work with 6 one Commissioner. I will say that working with one 7 Commissioner, obviously, is not the same as being an 8 expression of the Commission. 9 COMMISSIONER SCHENCK: No. And it puts 10 that person in the hot seat while everyone is -- 11 MS. KIPLIN: Yes. 12 COMMISSIONER SCHENCK: But do you see -- 13 am I the only one that has this concern? I don't 14 know. But it seems to me that -- in (4) we say, "The 15 response shall clearly state that the opinion is 16 advisory in nature. . ." But then in the next 17 sentence we say it ". . . may be relied upon by the 18 requestor as well as any other person. . ." 19 But that seems to look a lot like a rule 20 to me. And then it says in (7) that we can't do 21 anything to modify or revoke it unless it operates 22 prospectively only. So that sure looks like a rule. 23 CHAIRMAN WILLIAMSON: So what happens if 24 there is an advisory opinion and the person who is the 25 recipient of that disagrees with it and wants to bring 0050 1 it another level, doesn't it still come to us at that 2 point or not? 3 MS. KIPLIN: Well, you know, if somebody 4 were to request that there be an agenda item. But, 5 no, it doesn't necessarily come to -- would come to 6 the Commission's level. 7 COMMISSIONER SCHENCK: I think this is 8 becoming sort of like a left field. It's like a 9 parking lot for issues. People can go get an advisory 10 opinion that sets over there and that's all that 11 happens to it. But then my concern is, there appear 12 to be these consequences in our draft rule that treat 13 this like effectively a law, not just the requestor 14 but anyone else in a like position, unless and until 15 we change it and it goes forward prospectively only. 16 These advisory opinions can cover any issue that 17 affects bingo. Right? 18 MR. SANDERSON: It's anything that's an 19 interpretation of the Act or rules, yes. 20 MS. KIPLIN: But to your point, I will 21 say that -- and the statute is very clear that an 22 advisory opinion is not a rule, it's not an APA rule. 23 Is it an interpretation of the statute? Yes, it is. 24 COMMISSIONER SCHENCK: Okay. But if you 25 can explain the meaningful difference to me between an 0051 1 opinion -- an interpretation of a rule that's binding 2 on us and a rule, then I would find that helpful. To 3 me, that sure operates a lot like a rule. 4 MS. KIPLIN: It's probably splitting 5 hairs. But the real difference is the process by 6 which an advisory opinion is issued versus a 7 rulemaking process. 8 COMMISSIONER SCHENCK: Well, I think 9 we're giving too much weight to an advisory opinion in 10 this draft rule. I worry about that. I think we as a 11 Commission will not be able to deal with an issue -- 12 COMMISSIONER KRAUSE: This is an opinion 13 given by the Bingo Advisory Board? 14 COMMISSIONER SCHENCK: No, by Phil. 15 CHAIRMAN WILLIAMSON: By the Bingo 16 staff. 17 MR. SANDERSON: By the Bingo Director, 18 with input from Legal. 19 MS. KIPLIN: And the same thing, years 20 ago when this statute came into the Bingo Enabling 21 Act, the Commission -- obviously, a different 22 complement of commissioners -- wrestled with the very 23 issue in terms of authority and delegation. And the 24 safeguard was to at least have the Legal Division 25 involved in the drafting and the analysis of the 0052 1 advisory opinions that the Bingo Division Director is 2 issuing, on delegated authority from the Commission, 3 no doubt. 4 COMMISSIONER SCHENCK: It seems to me 5 that we have a case in front of the Texas Supreme 6 Court right now where we have conflicts in state 7 statutes, apparently. We have Texas APTRA. We have a 8 Texas -- or I'm sorry -- an Austin Court of Appeals 9 decision from two months ago applicable to the 10 Comptroller's office, striking down their practice of 11 issuing advisory opinions without seeking public 12 notice and comment. 13 We have a general state law that 14 requires whenever we effect positive law that's going 15 to be generally applicable to the public, we provide 16 notice and opportunity for comment. This is now 17 becoming -- and I understand the Legislature wants a 18 fast track for opinions to the regulated community. 19 But what this is effectively doing is 20 cutting the Commission out of the process of 21 developing its own rules and conferring that on Phil, 22 which I have every confidence in Phil and I think that 23 would work fine. But in any particular case when we 24 get a case or controversy in front of us and we have a 25 debate about what the rule means, someone will point 0053 1 back to this advisory opinion and we will be powerless 2 to deal with it. 3 COMMISSIONER KRAUSE: Well, in my area 4 of the law, the tax law, you know, what happens is, is 5 that the government agency makes regulations and 6 rulings. And when the public disagrees with them, 7 then they can bring it to someplace where it can be 8 reviewed. And if those are things that we can review 9 and decide if we agree with it or not, then I'm 10 comfortable with that. 11 And if no member of the public feels 12 like that the interpretation of the advisory opinion 13 is, you know, significantly harmful or varies from 14 other rules actually, you know, adopted by the 15 Commission, or statute, then it looks like that that 16 might be okay. 17 COMMISSIONER SCHENCK: Well -- 18 COMMISSIONER KRAUSE: And to some 19 extent, we let the public, you know, help police what 20 the interpretations are. And if they go out of 21 bounds, then we'll hear about it. 22 COMMISSIONER SCHENCK: I think that's 23 right. It's just a question of whether -- the only 24 layer in which there is a difficulty is for the three 25 of us, because we're effectively written out of this 0054 1 process. 2 COMMISSIONER KRAUSE: Well, how do we 3 write this rule so that we are the final authority on 4 this? 5 MS. KIPLIN: Well, one way you could 6 write it is to have all the requests for the advisory 7 opinions come to you-all, and you can deliberate them 8 in the public and then you can direct the staff in 9 terms of the advisory opinion and the language of the 10 advisory opinion that you want to issue. But the Open 11 Meetings Act, you know, puts that constraint to where 12 that process would have to occur in the public. 13 COMMISSIONER SCHENCK: I think that's 14 fine. Why don't we just, before the advisory opinion 15 is actually issued, have it come up as an agenda item 16 in front of the Commission. You can tell us -- or 17 Phil's successor 50 years from now what it is you are 18 intending to answer on behalf of the Commission and 19 make sure we understand the answer that's going out 20 that's going to be binding on us. 21 MS. KIPLIN: I think the issue would be 22 just logistics, the fact that the Commission is 23 required to issue this advisory opinion within 60 days 24 of the request of the advisory opinion. And, you 25 know, there is drafting and analysis that's occurring. 0055 1 We can certainly do our dead-level best to bring 2 those. And I'm thinking if we miss the 60-day clock, 3 what I'm hearing is -- and, of course, we would try 4 not to. But what I'm hearing is, your preference 5 would be to have that brought before you before those 6 advisory opinions are issued. 7 COMMISSIONER SCHENCK: That would be my 8 preference. I don't think we often go 60 days without 9 a meeting of this commission. 10 CHAIRMAN WILLIAMSON: Mr. Fenoglio, I 11 know you have a great deal of experience with all of 12 this. Obviously, you have a comment to make. 13 MR. FENOGLIO: Yes. For the record, my 14 name is Stephen Fenoglio. I did not file a comment on 15 this, and it's consistent with my comments that I 16 filed. I actually helped draft this provision of the 17 Bingo Enabling Act. And the concern at the time was 18 that different auditors were issuing on the fly, if 19 you will, different opinions. And so we wanted to 20 write into the process, if someone requested an 21 advisory opinion, that they could rely upon it, and 22 that's the language that's in 2001.059(c). 23 It does say, Commissioner Schenck, to 24 your point, only the person who requested the advisory 25 opinion can rely upon it. It seems a little silly 0056 1 that if -- 2 COMMISSIONER SCHENCK: No. It says the 3 requestor as well as any person whose conduct is 4 substantially consistent with the opinion. 5 MR. FENOGLIO: Well, I was citing the 6 statute -- 7 COMMISSIONER SCHENCK: Yes. 8 MR. FENOGLIO: -- 2001.059(c) that says, 9 "A person who requests an advisory opinion under 10 Subsection (a) may act in reliance on the opinion in 11 the conduct of any activity under any license issued," 12 et cetera, "if the conduct is substantially consistent 13 with the opinion and the facts stated . . ." 14 COMMISSIONER SCHENCK: Yes. So our 15 draft rule has substantially broadened the reach of an 16 advisory opinion. 17 MR. FENOGLIO: If I may, it seems a 18 little silly that if Fenoglio requested an advisory 19 opinion on behalf of Charity A and he gets a response 20 back that says, "You may do whatever you requested. 21 We find that activity consistent," and then I advise 22 all my other clients, "Well, only Charity A is covered 23 by that," do we want to now request 180 separate -- 24 similar advisory opinions or identical advisory 25 opinions and tie Phil's staff up with having to issue 0057 1 another 180 or -- I lose track of the number of 2 licensed authorized organizations. There are over 3 1,100. 4 And to the other point, the last 5 Commission of Chairman Clowe and Commissioner Cox had 6 this same discussion and were concerned. From my side 7 of the table, sitting on my side of the table, this 8 has not been a big issue. I don't think Phil -- or, 9 prior to that, Billy -- went out on a limb at all. 10 Some of these I agree with, some I didn't. But I 11 certainly would like the fact that a commission or a 12 commissioner or the Commission itself stamped 13 "Approval" on it. If I have an opinion or a charity 14 has an opinion that's favorable, it would simplify a 15 whole lot of the stuff. 16 COMMISSIONER SCHENCK: But I think this 17 rule as it's written would be doing that. Every time 18 you get an advisory opinion, we're saying, "This is 19 the Commission speaking." 20 MR. FENOGLIO: Well, and that's what the 21 statute says, that if the issue -- whoever the 22 requestor is, framed it -- 23 COMMISSIONER SCHENCK: As you very 24 effectively pointed out, the statute says that as to 25 you, and you're one requestor. 0058 1 MR. FENOGLIO: And again, if you want to 2 get covered up with 1,100 requests for an advisory 3 opinion -- 4 COMMISSIONER SCHENCK: No, that's called 5 a rule request. You can make those at any time. But 6 those come through the Commission. 7 MR. FENOGLIO: You could. 8 COMMISSIONER SCHENCK: An advisory 9 opinion is advisory in nature. And that's the thing 10 that I find potentially problematic here is, we're 11 taking what would be advice at an informal level and 12 turning it into a binding Commission position that has 13 the effect of changing the positive rules of this 14 agency as to the world. 15 MR. FENOGLIO: And the statute says that 16 if -- again, .059(c) says exactly that. It's not much 17 different than IRS revenue rulings that the IRS 18 Commissioner may not ever see, but they're issued and 19 people rely upon those rulings. And that was, by the 20 way, some of the process I had, are there other 21 federal and state agencies that do issue rulings that 22 licensees can follow, until there is a new ruling that 23 might be issued that countermands that, and that 24 happens in the IRS practice all the time. So -- 25 COMMISSIONER SCHENCK: Okay. Let me ask 0059 1 this question of you -- Steve, thank you. That's 2 helpful. If an advisory opinion is issued before 3 there is an opportunity for a regular commission 4 meeting for all three commissioners to discuss it, 5 what's to stop the Commission at the next meeting a 6 week later saying, "You know, I want another advisory 7 opinion going out saying exactly the opposite"? 8 MS. KIPLIN: Well, I don't think a 9 commission would be stopped from saying, "We don't 10 agree with what was issued." I can say that, you 11 know, we use our best judgment. Honestly, sometimes 12 we may miss something. But when we think that there's 13 something that's controversial or subject to two 14 interpretations and there has been no case that's 15 been -- a contested case order that's been issued or 16 any expression of rulemaking in the past, we've gotten 17 ahold of the -- contacted the chairman of the agency 18 or the designated Bingo commissioner. 19 You know, we have worked through those 20 issues. I think Mr. Fenoglio is correct. We do our 21 dead-level best in terms of interpretation. And 22 sometimes there may be a disagreement among -- 23 COMMISSIONER SCHENCK: I don't doubt 24 that at all. There is a potential problem down the 25 road that I see, and I would prefer to have the 0060 1 undesignated non-bingo Commissioners also involved on 2 these issues. 3 (Laughter) 4 COMMISSIONER KRAUSE: Well, we always 5 defer to the Bingo Commissioner. But anyway, you 6 know, I don't see why that an advisory opinion ought 7 to apply to any person other than the requestor. And 8 the reason is, is that if there gets to be a 9 groundswell, you know, of 108 -- or 1,100 was 10 suggested -- then, obviously, you know, the bingo 11 director will, you know, let the Commission know about 12 that. 13 COMMISSIONER SCHENCK: And then propose 14 a rule. 15 COMMISSIONER KRAUSE: Exactly. And in 16 addition to that, you know, I'm happy for that process 17 to stay in place. But another justification for an 18 advisory opinion to apply to the requestor only is 19 that we as the Commission don't want to be bound by 20 that. And the reason is, is that it's all well and 21 good to have a rulemaking where there is, you know, an 22 open meeting and the public can come forward. But 23 frequently what happens is, is that, you know, the 24 application of a rule negatively to a regulated person 25 doesn't arise until there is some kind of a 0061 1 proceeding, some kind of a disciplinary proceeding to 2 take the license away, to discipline, you know, 3 whoever it is. 4 And that's when the real critical 5 application of the rule comes into clear relief and 6 the criticism of that rule. And that's when I want to 7 hear about: How is it actually applying? In a public 8 meeting way beforehand, people don't always have the 9 ability to determine how it's going to affect them in 10 the future, and so I don't want to rely on that 11 exclusively. I want to be able to have, you know, a 12 conflict come where a person that the rule is being 13 applied to be able to very clearly articulate why it's 14 wrong so that we can hear about that, if that makes 15 sense. 16 COMMISSIONER SCHENCK: I think I'm going 17 to propose, Madam Chairman, that we table this 18 rule and make -- I'm going to propose at least a 19 change to Paragraph (e)(5), "An advisory opinion may 20 be relied upon by the requestor" and strike the words 21 "as well as any other person," and then continuing, 22 "whose conduct is substantially consistent with the 23 opinion and facts stated in the request." 24 And if we get multiple requests for 25 advisory opinions on the same topic, I think it's a 0062 1 signal that we need a rule made. 2 CHAIRMAN WILLIAMSON: Kim, if we table 3 this now, what would be the effect if we want to go 4 back and look at it? And, obviously, I think 5 Commissioner Schenck, you know, would participate in 6 getting that kind of stuff along with the statute, to 7 satisfy his concerns. So what would be the effect if 8 we table this now? Would we have to rewrite it, 9 repost it, get comments, basically start the process 10 all over again? 11 MS. KIPLIN: Well, if you table it in 12 terms of just letting this die right now -- you have a 13 current rule on bingo advisory opinion in effect. 14 Today you have a couple of options. One is, you can 15 adopt as is, obviously. The other one is, you can 16 adopt and you can make this change. I'm not -- 17 COMMISSIONER SCHENCK: This is not too 18 material a change? 19 MS. KIPLIN: And I was getting to that. 20 I'm not so certain that this is a substantial change 21 that would require republication. But to be on the 22 safe side, you can always republish, and then that 23 will begin a new rulemaking, and you'll get public 24 comment opportunities and so forth and so on, and so 25 you can do that. 0063 1 But, no, if you table this rule -- I 2 want to make sure you know, there is an existing rule. 3 This is just amendments to an existing bingo advisory 4 opinion rule. And to the concern that, Commissioner 5 Schenck, you stated, there is still that delegated 6 authority to the Bingo Director, with the General 7 Counsel's participation. 8 CHAIRMAN WILLIAMSON: Right. If we 9 table -- I mean, it will stay as is until we go back? 10 MS. KIPLIN: That's right. 11 COMMISSIONER SCHENCK: I don't know it's 12 that material to change what I'm suggesting here. All 13 I'm saying is that we track what the statute says 14 instead of expanding the statute. 15 MS. JOSEPH: Well, I believe this 16 language is in the current rule. 17 MR. SANDERSON: This language is in the 18 current rule. 19 MS. JOSEPH: I don't have it before me. 20 But since it is in the current rule, I think that 21 would be a pretty big change, a substantial change, to 22 say that it's only -- 23 COMMISSIONER SCHENCK: All right. My 24 proposal is that -- this is the way I want it. 25 MS. JOSEPH: Okay. 0064 1 COMMISSIONER SCHENCK: So we can vote 2 and I can lose. That's fine. But my proposal is 3 going to be to republish the rule. 4 CHAIRMAN WILLIAMSON: Okay. Phil, how 5 many more amendments do we need to deal with? 6 MR. SANDERSON: How many of the other -- 7 CHAIRMAN WILLIAMSON: How many new 8 bingo -- 9 MR. SANDERSON: The new rule? There's 10 still approximately 12 rules that have not been 11 brought before you, 12 to 13. 12 CHAIRMAN WILLIAMSON: Okay. 13 MR. SANDERSON: There's probably another 14 eight that will be ready for adoption at the next 15 Commission meeting. 16 CHAIRMAN WILLIAMSON: So we're still 17 several months into this process? 18 MR. SANDERSON: Yes. And the changes I 19 believe to this rule here primarily are all driven by 20 the HB 1474. And I think I've heard in the past from 21 General Counsel that statute trumps rule to begin 22 with, so . . . 23 CHAIRMAN WILLIAMSON: Okay. Then what I 24 would like to do, I think, Commissioner Schenck, is 25 basically pass on this, spend some time in discussion, 0065 1 because I would rather take care of it where there is 2 proper notice and public comment and basically, you 3 know, spend some time talking about it -- 4 MS. JOSEPH: All right. 5 CHAIRMAN WILLIAMSON: -- just on this 6 particular rule. 7 MS. JOSEPH: All right. 8 CHAIRMAN WILLIAMSON: Okay. Are there 9 any others? 10 MS. JOSEPH: Yes, there certainly are. 11 Thank you. And I'm sorry that I didn't offer 12 opportunity to talk about that earlier. Yes. So 13 we've now covered, I believe, Items XI and XII. 14 Item XIII concerns Rule 402.103 15 concerning the training program. There were no 16 written comments on this one. A person appeared in 17 support; that was Mr. Fenoglio. We recommend one 18 change to the rule as proposed, and that's to clarify 19 wording regarding confirmation of attendance at a 20 training course. That rule is recommended adopted 21 with that change, with a minor clarification in the 22 wording. 23 Any questions about that? 24 CHAIRMAN WILLIAMSON: Commissioners? 25 MS. JOSEPH: All right. Item XIV 0066 1 concerns 402.409, amendment for change of premises or 2 occasions due to lease termination or abandonment. 3 There were no comments against this rule 4 or recommending any changes, so the staff recommends 5 that it be adopted without changes. Any questions, 6 Item XIV? 7 Item XV concerns 402.411, late license 8 renewal. Again, the only comment was in favor of the 9 rule. We do recommend one minor change, to reverse 10 the order of subsections (i) and (j), because it would 11 flow better with the information that is provided. 12 That is a non-substantive change, so the staff would 13 recommend adoption of that, with only that one minor 14 change. 15 Any questions? 16 Item XVI concerns 402.422, amendment to 17 a regular license to conduct charitable bingo. Again, 18 the staff recommends adoption without changes. The 19 only comment received was in support of the proposal. 20 Any questions? 21 And Item XVII concerns Rule 402.702, 22 location verification inspection. This is a proposed 23 repeal. The rule is no longer necessary because the 24 requirements are contained in the Bingo Enabling Act. 25 The only comment received supported the repeal. The 0067 1 staff recommends adoption of the repeal. 2 So in light of the discussion, at this 3 point staff would recommend that Items XII through 4 XVII be adopted as recommended by the staff. 5 CHAIRMAN WILLIAMSON: Except -- 6 MS. JOSEPH: Yes. I did not include 7 Item XI in that on advisory opinions. 8 COMMISSIONER SCHENCK: I'll make a 9 motion, if this is timely, that we adopt the staff 10 recommendation and adopt amendments to 16 TAC 402.102, 11 .103, .409, .411, .422 and .702. 12 CHAIRMAN WILLIAMSON: Is there a second? 13 COMMISSIONER KRAUSE: Second. 14 CHAIRMAN WILLIAMSON: All in favor? 15 COMMISSIONER SCHENCK: Aye. 16 CHAIRMAN WILLIAMSON: Aye. 17 COMMISSIONER KRAUSE: Aye. 18 CHAIRMAN WILLIAMSON: And at this time 19 it's 10:10. We'll take a 15-minute break. 20 MS. KIPLIN: Commissioners, I have 21 orders on each of those rule adoptions. 22 (Recess: 10:10 a.m. to 10:28 a.m.) 23 CHAIRMAN WILLIAMSON: We're ready to get 24 back in session. It's 10:28. 25 0068 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN WILLIAMSON: Our next agenda 3 item is XVIII, consideration of and possible 4 discussion and/or action, including adoption, of new 5 Rule 16 TAC 402.104 relating to gambling promoter and 6 professional gambler and/or on amendments to 16 TAC 7 401.153 relating to qualifications for license. 8 Pete, I believe this is your item. 9 MR. WASSDORF: Well, here we are again. 10 Good morning, Commissioners. For the record, my name 11 is Pete Wassdorf. And we're here with Item No. XVIII, 12 a definition for "professional gambler" and "gambling 13 promoter" under the Bingo Enabling Act and an 14 amendment to the State Lottery Act defining the term 15 "professional gambler." 16 These, as you will recall, have been in 17 process over a year now. And during the first 18 iterations of them, we received some comments but not 19 an extraordinary amount of public comment. But after 20 the rule was withdrawn by operation of law in 21 September and they were republished, we received a 22 significant amount of comment. And we also received a 23 letter commenting from the Chairman of the Lottery's 24 Oversight Committee, Rep. Kuempel. And for that 25 reason, the staff decided to bring this issue to the 0069 1 Commission not as a recommendation for adoption but as 2 a request for direction on how you wanted to proceed 3 on this item. 4 CHAIRMAN WILLIAMSON: So I guess before 5 we have any discussion, Pete, what are our 6 options on -- I mean, what are the different things we 7 can do with this today? 8 MR. WASSDORF: Today you could vote to 9 adopt the rule; you could vote to not adopt the rule. 10 The rule was proposed I think in October and has to be 11 acted on within six months. And so we have until 12 early April to take any action, so you could table 13 this issue and take it under consideration until a 14 later meeting. 15 MS. KIPLIN: If I could just jump in 16 here. And I hate to disagree with Pete on one matter. 17 But I'm not certain that you're in a position today to 18 vote to adopt the rule, because you don't have the 19 rule with the preamble in front of you where you would 20 have the agency response and so forth. 21 And so I think that would be premature 22 for you to be able to vote to adopt the rule today. 23 You could direct staff to bring something back for the 24 next Commission meeting. And I don't mean to quibble, 25 but . . . 0070 1 CHAIRMAN WILLIAMSON: Okay. All right. 2 Thank you. 3 Commissioners, do you have any comments 4 or discussion on this? 5 COMMISSIONER SCHENCK: Well, my question 6 is, then, what's on the agenda for today? 7 MS. KIPLIN: What's on the agenda is the 8 topic and the ability to have the Commission 9 deliberate through the comment that you have received. 10 And we've given you a summary of the comment and the 11 comment itself. 12 The proposed rule is a reference. You 13 recall what you proposed. I think Rep. Kuempel's 14 letter is also part of your package. And so what's on 15 the agenda for today is an opportunity to deliberate 16 and to direct staff on how you would like to proceed. 17 CHAIRMAN WILLIAMSON: Okay. 18 COMMISSIONER KRAUSE: Well, Commissioner 19 Williamson, do you want to tell us what you know about 20 this? 21 CHAIRMAN WILLIAMSON: Well, what I would 22 like to do, in light of the letter from Chairman 23 Kuempel, is I know he was here when this bill was 24 passed. I believe that's what his letter said, if I 25 recall correctly, and I'm sure someone will correct me 0071 1 if I'm wrong. I would just like to have some time to 2 have a discussion with him, what the thoughts were at 3 that time, their intent with those words, 4 "professional gambler" and "gambling promoter," what 5 their intent was, what their thoughts were in regard 6 to that and just kind of discuss with him sort of what 7 we're grappling with here and get his thoughts and 8 input. 9 Since this is a statutory item, I would 10 like to at least get that information probably before 11 we decided where we wanted to go with this. So that's 12 sort of where I am on that. 13 COMMISSIONER SCHENCK: I'm fine on 14 waiting to get that input. I would like to have this 15 set for some sort of action while there is still a 16 window to act on it, which I'm assuming our next 17 meeting will be fine. 18 Just speaking only for myself, we've 19 been over this ground multiple times. And I think the 20 statute speaks for itself, and I'm going to look to 21 the words of the statute, and I think we'll move 22 forward from there. 23 COMMISSIONER KRAUSE: Well, I've got two 24 considerations that are important to me, and to some 25 extent they may conflict. On the one hand, I'm not 0072 1 interested in being involved in, you know, making a 2 rule that benefits one player in a market at the 3 expense of another. So that's not something that I 4 think that the Commission ought to be involved with 5 is, you know, playing favorites, you know, with the 6 result of its rules. 7 On the other hand, these are definitions 8 of -- these definitions are punitive, because people 9 who are found to fit these definitions are denied 10 licenses or they're disciplined or there is an adverse 11 consequence to defining that they are a professional 12 gambler or a gambling promoter. 13 And so one of the things that I'm 14 interested in is using these definitions in a way that 15 eliminate or -- "attack" maybe is a better word for me 16 to use -- those people who hold licenses, lottery 17 licenses or, you know, are allowed to operate 18 charitable bingo halls, and at the same time they're 19 operating 8-liner casinos nearby. 20 And so what those people are doing by 21 running these 8-liner casinos is, they are 22 cannibalizing the games that we are in charge of. And 23 the Legislature has told us that we are supposed to, 24 you know, promote and enhance the revenue aspects of 25 what we do. And when we allow licensees or people who 0073 1 are charitable bingo operators to slip away and run 2 8-liners, then I want to be able to take them out of 3 the good things that we have to offer, because they're 4 hurting what we do. 5 So my definition is going to need to 6 include some way for us to not have to rely on, you 7 know, law enforcement agencies of the county or the 8 state or whoever but that we get to use our discretion 9 to deny licenses or the ability to operate charitable 10 bingo to those people that we think are dirty. 11 CHAIRMAN WILLIAMSON: All right. Thank 12 you. 13 Mr. Fenoglio, I have your witness form. 14 Are you still interested in making a comment? 15 MR. FENOGLIO: Not at this point, Madam 16 Chair. I see where the Commission is going with this. 17 CHAIRMAN WILLIAMSON: Okay. 18 MS. KIPLIN: I will say, to respond to 19 Commissioner Schenck's request, the rules were 20 published in October, and so we have six months from 21 then for y'all to act on the rule or it will expire by 22 operation of law. 23 CHAIRMAN WILLIAMSON: All right. Thank 24 you. 25 Thank you, Pete. 0074 1 AGENDA ITEM NO. XIX 2 CHAIRMAN WILLIAMSON: Our next item is 3 XIX, report by the Charitable Bingo Operations 4 Director and possible discussion and/or action on the 5 Charitable Bingo Operations Division's activities, 6 including updates on House Bill 1474 implementation, 7 status of licensees, rulemaking and form revisions, 8 audits, pull-tab review, special projects, allocations 9 and upcoming operator training. 10 Phil, this is your item, please. 11 MR. SANDERSON: Good morning, 12 Commissioners. In your notebook is the report of the 13 November activities of the Bingo Division, and I 14 provided you a hard copy of the December report this 15 morning, in front of you. 16 And I would like to indicate for 17 Commission Schenck the staffing of the Audit section, 18 we've got the administrative assistants hired. We're 19 routing the requisition form for the quality control 20 specialist and hope to have that posted within the 21 next week and will post for the four vacant auditor 22 positions within the next two to three weeks. 23 And I'll be glad to answer any questions 24 you may have. 25 CHAIRMAN WILLIAMSON: Commissioners, do 0075 1 you have any questions? 2 COMMISSIONER SCHENCK: Thank you, Phil. 3 CHAIRMAN WILLIAMSON: Thank you. 4 AGENDA ITEM NO. XX 5 CHAIRMAN WILLIAMSON: The next item is 6 consideration of and possible discussion and/or 7 action, including proposal, on amendments to 16 TAC 8 ?401.201, 401.203, 401.205, 401.211, 401.216, and 9 401.220; and, on repeal of 16 TAC ?401.204, 401.206, 10 401.207, 401.208, 401.209, 401.210, 401.212, 401.213, 11 401.214, 401.215, 401.217, 401.218, 401.219, 401.221, 12 401.222, 401.223, 401.224, 401.225, 401.226, 401.228, 13 and 401.229, all rules in 16 TAC Chapter 401, 14 Subchapter C, Practice and Procedures rules. 15 Kristen, I believe this is yours. 16 MS. GUTHRIE: Thank you. Good morning, 17 Commissioners. For the record, my name is Kristen 18 Guthrie. I'm an Assistant General Counsel in the 19 Legal Services Division. 20 This item concerns rulemaking 21 proceedings to amend or repeal certain rules of the 22 Texas Administrative Code Chapter 401, Subchapter C, 23 Practice and Procedures rules. The State Office of 24 Administrative Hearings revised its Practice and 25 Procedures rules which became effective November 26, 0076 1 2008. The staff believes that these proposed 2 amendments and repeals before you today streamline the 3 language to make the Commission's Practice and 4 Procedures rules more accessible and easier to use by 5 removing language that conflicts with the Commission's 6 current practice and by removing language that 7 conflicts with SOAH's new Practice and Procedures 8 rules. The repeals also eliminate provisions that are 9 redundant with SOAH's rules. 10 The rules under Tab 20 are the staff 11 recommended repeals and amendments for your 12 consideration and publication in the Register. I 13 would be happy to answer any questions you may have. 14 CHAIRMAN WILLIAMSON: Thank you. 15 Commissioners, do you have any 16 questions? 17 COMMISSIONER SCHENCK: No. Thank you. 18 CHAIRMAN WILLIAMSON: And I believe this 19 is an action item. Is that correct, Kim? 20 MS. KIPLIN: Yes, it is. Staff is 21 recommending that you vote to publish these 22 rulemakings, proposed rulemakings in the Texas 23 Register for a public comment period. 24 CHAIRMAN WILLIAMSON: All right. Is 25 there a motion? 0077 1 COMMISSIONER SCHENCK: I will move that 2 we publish Proposed Rule 401.201 for public comment. 3 CHAIRMAN WILLIAMSON: Second? 4 COMMISSIONER KRAUSE: Second. 5 CHAIRMAN WILLIAMSON: All in favor? 6 COMMISSIONER SCHENCK: Aye. 7 CHAIRMAN WILLIAMSON: Aye. 8 COMMISSIONER KRAUSE: Aye. 9 MS. GUTHRIE: And I have T-bar memos for 10 your signature. 11 MS. KIPLIN: And it's for all of these 12 rules -- 13 CHAIRMAN WILLIAMSON: Right. 14 MS. KIPLIN: -- that are listed in the 15 open meetings notice. 16 AGENDA ITEM NO. XXI 17 CHAIRMAN WILLIAMSON: And I see the next 18 item is XXI, consideration of and possible discussion 19 and/or action, including adoption, on amendments to 16 20 TAC 401.402, .405, .407 relating to Americans With 21 Disabilities Act requirement. 22 Kim, I understand this is your item. 23 MS. KIPLIN: Yes, it is. At an earlier 24 meeting, you-all voted to propose amendments to these 25 existing rules. These are on the Americans With 0078 1 Disabilities Act rules for lottery retail locations. 2 The proposed rules were published in the 3 December 4, 2009, issue of the Texas Register. There 4 was a public comment hearing that was held. There was 5 no public comment, either written or appearances at 6 the comment hearing. 7 The staff at this time is requesting 8 that the Commission vote to adopt these rules as they 9 were published in the Texas Register. 10 CHAIRMAN WILLIAMSON: Thank you. 11 Commissioner, is there a motion? 12 COMMISSIONER KRAUSE: I move that we 13 adopt the recommended action. 14 COMMISSIONER SCHENCK: I second. 15 CHAIRMAN WILLIAMSON: All in favor? 16 COMMISSIONER SCHENCK: Aye. 17 CHAIRMAN WILLIAMSON: Aye. 18 COMMISSIONER KRAUSE: Aye. 19 MS. KIPLIN: Thank you, Commissioners. 20 I have orders on these rulemakings. 21 AGENDA ITEM NO. XXII 22 CHAIRMAN WILLIAMSON: The next item is 23 report, possible discussion and/or action on lottery 24 sales and revenue, games performance, new game 25 opportunities, advertising, market research, and 0079 1 trends. 2 Kathy and Robert, I believe this is your 3 item. 4 MS. PYKA: Thank you, Madam Chair. 5 Again for the record, my name is Kathy Pyka, the 6 Controller for the agency. With me on my right this 7 morning is Robert Tirloni, our Products Manager. 8 Our first chart that we have for you 9 this morning, Commissioners, reflects comparative 10 sales data through the week ending January 2, 2010. 11 Total Fiscal Year 2010 sales through this 18-week 12 period are $1.26 billion, an increase of $42.4 million 13 over the $1.22 billion in Fiscal Year 2009. 14 Fiscal Year 2010 instant ticket sales 15 reflected on the second blue bar are $933.4 million, 16 representing a $7 million increase over Fiscal Year 17 2009 sales. 18 Fiscal Year 2010 on-line sales reflected 19 on the second red bar are $324 million, a 20 $35.4 million gain over Fiscal Year 2009 sales. 21 Our next slide reflects cumulative 22 average daily sales for Fiscal Years 2008, 2009 and 23 2010. Commissioners, while we recognize that Fiscal 24 Year 2009 sales are lower than normal due to the 25 impact of Hurricane Ike, this slide further highlights 0080 1 that we are trending slightly ahead of Fiscal Year 2 2008 sales, based on a daily average of sales by 3 fiscal year. Through the 18 weeks of the fiscal year, 4 our daily average sales for Fiscal Year 2010 are 5 $10.1 million, reflecting a 2.1 percent increase over 6 FY '08 and a 4.1 percent increase over Fiscal Year 7 2009 sales. 8 The jackpot games are highlighted in 9 white, and they reflect a total average of 10 $1.5 million for Fiscal Year 2010, with all of our 11 jackpot games leading the two prior fiscal years. 12 The daily games are highlighted in green 13 of just over a million dollars and they -- just under 14 $1.1 million, I should say, and they're slightly under 15 our prior two fiscal years. And the instant ticket 16 sales are highlighted in yellow and again are at 17 $7.5 million, just between Fiscal Year 2008 and 2009. 18 With that, Commissioners, Robert will 19 now discuss sales by game. 20 MR. TIRLONI: Good morning, 21 Commissioners. For the record, my name is Robert 22 Tirloni. I am the Products Manager for the 23 Commission. 24 This next chart compares Fiscal Year '10 25 to Fiscal Year '09, and it's broken down by game. 0081 1 Similar to the previous chart, our jackpot games are 2 up at the top in white. And when looking at 2010 over 3 2009, you see our jackpot games are all up. 4 Green is the daily games. Our Daily 4 5 game is up. We have some declines on our add-on games 6 for Pick 3 and for Daily 4. That's our Sum It Up 7 add-on games. And we have a decline on Pick 3 and on 8 Cash 5. Overall, our on-line category as a whole is 9 up in 2010 compared to 2009. And again, we do see an 10 increase this current fiscal year in our instant 11 ticket sales. 12 I will point out that Lotto is our best 13 selling on-line game. Pick 3 is very close behind. 14 They have about a $3 million difference between the 15 two. 16 This is one of those charts that we are 17 showing you now on a quarterly basis. This is our 18 instant ticket sales through the week ending Saturday, 19 January 2nd, so this is the 18 weeks. And this shows 20 the fiscal year instant sales of $933 million broken 21 out by our price points. 22 A little bit of change since we probably 23 last looked at this pie chart earlier in the fiscal 24 year. The $5.00 continues to be our best selling 25 price point, but our second best selling price point 0082 1 is now the $20 price point. 2 You'll notice the two and the 10 are 3 almost dead even, and then that's followed by the 4 three. We continue to see good results from our 5 spotlight game, the $20 Mega game. And we also had a 6 successful $20 holiday game that we believe led to the 7 $20 price point being in the second best selling slot 8 for our instant product category. 9 And, Commissioners, that is our sales 10 report for you for this month. Kathy and I would be 11 happy to answer any questions that you might have. 12 CHAIRMAN WILLIAMSON: Commissioners, do 13 you have any questions? 14 COMMISSIONER SCHENCK: No. I'm very 15 impressed with this data. 16 Robert, why is it that Lotto Texas has 17 suddenly taken off? Is it just the jackpot amounts 18 are freakishly large? 19 MR. TIRLONI: We had that big run up to 20 $76 million. And it seems like ever since we had that 21 jackpot, our sales have just seemed to remain strong. 22 Lotto also has a very loyal player base. We don't see 23 much differentiation from draw-to-draw in terms of the 24 sales. And we have seen a slight decline on Pick 3, 25 which I think that's helped put Lotto into, you know, 0083 1 the best selling on-line game. 2 But it will be interesting to see, since 3 you've adopted the Powerball rule, how all of that 4 plays out once we introduce another jackpot game into 5 the mix. 6 COMMISSIONER SCHENCK: Well, you'll 7 track it, I'm sure. 8 MR. TIRLONI: We will be definitely 9 doing that for you-all and for ourselves. 10 CHAIRMAN WILLIAMSON: Thank you. 11 MR. TIRLONI: Thank you. 12 AGENDA ITEM NO. XXIII 13 CHAIRMAN WILLIAMSON: XXIII, Kathy, 14 that's yours as well, transfers to the state, I 15 believe. 16 MS. PYKA: Yes. Again for the record, 17 Kathy Pyka, Controller for the Commission. 18 Tab 3, XXIII includes information on the 19 agency's transfers to the state. The first report 20 reflects transfers and allocations to the Foundation 21 School Fund, the allocation of unclaimed prizes for 22 the period ending November 30, 2009. Total cash 23 transfers to the state amounted to $280.3 million for 24 the first three months of the fiscal year. With 25 regard to the detail of that $280.3 million transfer 0084 1 to the state, $238.3 million was the amount 2 transferred to the Foundation School Fund. 3 We made our first one million dollar 4 transfer to the Texas Veterans' Commission with a 5 balance of $41 million transferred to the State of 6 Texas General Revenue Fund for unclaimed lottery 7 prizes. This represents a 4 percent or a $9.1 million 8 increase on transfers to the Foundation School Fund 9 comparing the same period to last fiscal year. 10 The last document in your notebook, 11 Commissioners, includes our cumulative sales, 12 expenditures, and expenditures from 1992 to date. 13 Total cumulative transfers to the Foundation School 14 Fund through November of this year amount to 15 $11.9 billion. 16 I would be happy to answer any 17 questions. 18 CHAIRMAN WILLIAMSON: Commissioners, do 19 you have any questions? 20 COMMISSIONER SCHENCK: I believe we had 21 our first transfer to the Military Veterans Fund? 22 MS. PYKA: To the Texas Veterans 23 Commission. It was just over a million dollars, and 24 it represented about two-thirds of that month of 25 sales. Their sales did not start until like the 0085 1 second week of November. 2 COMMISSIONER SCHENCK: And how long will 3 that game run? 4 MS. PYKA: That game will run until -- I 5 mean, it will go through our normal closing process 6 like we do our other lottery games. And I know that 7 the products team has another game in the works 8 similar to the current game. 9 CHAIRMAN WILLIAMSON: And I guess my 10 question is, how are the sales -- and I don't know 11 whether you can answer this or Michael or whomever -- 12 the sales on this game, how are they tracking now? 13 MS. PYKA: I think we're just under -- 14 right now a little bit under a million dollars a week. 15 Robert, do you have the detailed data, 16 by chance? 17 CHAIRMAN WILLIAMSON: I mean, is it 18 steady? Is it up? Is it down? Or what is it doing? 19 MR. TIRLONI: For the record, Robert 20 Tirloni, Products Manager. Veterans cash -- and I'm 21 looking back to the week ending December 12th -- that 22 week it did slightly over a million. The following 23 week ending 12/19, it dropped to about 880, and then 24 it picked up the last two weeks. So it was back up to 25 883 for the week ending 12/26, and then it bumped up a 0086 1 little bit again for the week ending January 2nd, to 2 almost $913,000. 3 CHAIRMAN WILLIAMSON: Okay. Thank you. 4 MR. TIRLONI: And as Kathy said we do 5 have a second game that we've already executed, and we 6 expect to have that in probably in the next few weeks. 7 So as soon as the first one does close, the second one 8 will be entered into market. 9 COMMISSIONER SCHENCK: What are we doing 10 to promote that new game? 11 MR. TIRLONI: The new one that's coming 12 out or this -- 13 COMMISSIONER SCHENCK: The second one. 14 MR. TIRLONI: The second one? 15 COMMISSIONER SCHENCK: Yes. 16 MR. TIRLONI: The standard point of sale 17 that we produce for all of our games. Since we didn't 18 receive any extra marketing dollars to support that 19 game, we've just been relying on the point of sale in 20 ticket -- or in dispensers that we use for every game. 21 CHAIRMAN WILLIAMSON: Now, I know there 22 were some of the representatives, Tate -- 23 MR. TIRLONI: PSAs. 24 CHAIRMAN WILLIAMSON: Yes, public 25 service announcements. Is that targeted towards their 0087 1 districts? Is that what they're using those for or do 2 you know? 3 MR. TIRLONI: I believe so. I would 4 have to have somebody from Media Relations or 5 Governmental Affairs answer that specifically. I know 6 they taped quite a few of those, though, and I believe 7 they were then going to let the representatives or 8 senators try to get those placed, so to speak, in 9 their markets or in their districts. 10 CHAIRMAN WILLIAMSON: Okay. All right! 11 Great! 12 Nelda, I'll have you answer that when 13 you come up to your item. Okay? 14 MS. PYKA: Thank you, Commissioners. 15 CHAIRMAN WILLIAMSON: Thank you. 16 AGENDA ITEM NO. XXIV 17 CHAIRMAN WILLIAMSON: So the next item 18 is report on the Legislature. And, Nelda, since we 19 had this question, you can hopefully give us a little 20 bit of insight on that. 21 MS. TREVINO: Good morning, 22 Commissioners. For the record, I'm the Director of 23 Governmental Affairs. 24 I did not have a report to provide to 25 you today. But in response to the question, Chairman 0088 1 Williamson, there was a group of legislators -- and I 2 don't have the list in front of me -- but particularly 3 the bill authors -- Sen. Leticia Van de Putte, Rep. 4 Chris Turner, Sen. Chris Harris and numerous other 5 members did tape some public service announcements 6 that the agency's Media Relations Department 7 coordinated. And those members were provided the 8 public service announcements. And they are, as Robert 9 indicated, using them in their particular districts. 10 CHAIRMAN WILLIAMSON: All right. 11 Commissioners, do you have any questions? 12 COMMISSIONER SCHENCK: Are we 13 tracking -- well, no. We've lost Robert. I would 14 wonder -- 15 CHAIRMAN WILLIAMSON: Well, he can come 16 back up. 17 COMMISSIONER SCHENCK: I was wondering 18 if we're tracking sales to see what effect those PSAs 19 are having in particular districts. Do we know 20 whether those public service announcements, which I 21 know were very well done -- 22 MR. TIRLONI: We have not done that yet. 23 We can try to get with the legislative offices and 24 work with Media Relations to see when and if those 25 PSAs actually aired. That's the challenge with those, 0089 1 is you can give them to TV stations, you don't know if 2 they will actually use them. 3 COMMISSIONER SCHENCK: What about 4 cross-selling? Have we thought about promoting, for 5 instance, like the Cowboy or the Mavericks scratch off 6 game, along with the Veterans game? Are they obliged 7 to help us in the advertising or the promotion of 8 those games? Could we get -- I don't know -- Tony 9 Romo to put his arms around an Iraq veteran and -- 10 MR. TIRLONI: We can -- 11 MR. GRIEF: Robert, if I could, just to 12 try to go back to your original question, 13 Commissioner, about what we do to promote these games. 14 We entered into lengthy discussions with the bill 15 sponsors at the time that this legislation was put 16 forward and tried, and they also tried to get some 17 funding, some additional funding from the Legislature 18 to actually give us some advertising dollars to 19 support these games, and that went in vain. We 20 weren't able to do that. 21 And we were very clear with the sponsors 22 that the support we could give these games would be 23 the point-of-sale material. And we've made that 24 commitment and we and followed through on that, both 25 with the first game and we'll do so with the second 0090 1 game. 2 Now when we start talking about perhaps 3 cross-promoting and cross-selling, I just want to be 4 sure that staff doesn't run afoul of any policy issues 5 that may be better served at a Commission level or a 6 legislative level, because there's two different 7 beneficiaries involved here. There's the Foundation 8 School Fund and then there's the Veterans Assistance 9 Fund. And we would certainly not want to get in the 10 middle of any debate on that, so we would want to 11 defer to the Commission or to the Legislature for 12 guidance on that one. 13 COMMISSIONER SCHENCK: Well, I'm asking 14 the question about whether we've considered the 15 feasibility or not. I'm not proposing a specific 16 action item. And I'm sure I wouldn't want to water 17 down our existing media efforts with a confused media 18 marketing effort. But perhaps TracyLocke or someone 19 else could determine whether or not it would be 20 helpful to both games to associate one with the other. 21 Or perhaps it's not a message we want to be sending, 22 and it might annoy someone in the Legislature to be 23 communicating that. 24 I know that there was a bill passed to 25 exclude us from advertising the fact that money is 0091 1 going to a School Foundation Fund, so I know we have 2 to be careful about these sorts of things. I was just 3 asking the question. 4 MR. GRIEF: And the answer to that 5 question is no, we have not. 6 MS. TREVINO: And I would just also 7 add -- I neglected to mention, in addition to those 8 public service announcements, the bill sponsors, along 9 with some of those other members, when the game was 10 originally kicked off in November, there was, for lack 11 of a better word, sort of a media blitz, if you will, 12 where there were several press conferences that were 13 held around the state with that particular legislator 14 and with members of the Texas Veterans Commission and 15 some of the veterans' organizations. So I know also 16 there was that effort, and I believe the Veterans 17 Commission continues to get some outreach also through 18 their veterans' organizations in promoting the game. 19 And I also just wanted to recognize not 20 only the staff here at the agency but particularly 21 Melissa Villasenor in the Governmental Relations 22 Division who coordinated a lot of those efforts with 23 those members, along with our Media Relations 24 Division. And I would ask Melissa if she has anything 25 to add that I neglected to mention. 0092 1 MS. VILLASENOR: Thank you, Nelda. 2 For the record, I'm Melissa Villasenor, 3 Governmental Affairs representative. 4 Now, I think to be specific, there are 5 numerous media blitzes that went around throughout the 6 state. We had Sen. Chris Harris, Sen. Leticia Van De 7 Putte, Rep. Chris Turner. We had Rep. Abel Herrero, 8 Rep. Solomon Ortiz in the Corpus Christi/Robstown 9 area, Sen. Eddie Lucio from The Valley, and it was 10 very successful. 11 I have been participating in many 12 meetings with Mr. Tirloni, with the Advisory 13 Commission, the Fund for Assistance Advisory 14 Commission meetings -- committee meetings -- and they 15 continue. And we have done -- we'll be meeting with 16 them in this next month as well for the launch and the 17 timeline for veterans' winnings. 18 CHAIRMAN WILLIAMSON: All right. Thank 19 you. 20 AGENDA ITEM NO. XXV 21 CHAIRMAN WILLIAMSON: The next item is 22 XXV, report, possible discussion and/or action on the 23 lottery operations and services procurement. 24 Mr. Fernandez, I believe this is your 25 item. 0093 1 MR. FERNANDEZ: Yes, ma'am. Thank you 2 very much. 3 Good morning, Commissioners. My name is 4 Mike Fernandez. I'm the Director of Administration. 5 And I wanted to give you a status update on the RFP 6 development for lottery operations and services. 7 First, I am very pleased to report that 8 the Texas Lottery Commission issued a request for 9 proposal for lottery operations and services Monday, 10 January the 4th at 4:00 p.m. So we are very pleased, 11 after all of the hard work, to issue that report. 12 I do, however, want to make you aware of 13 another event. As you are aware, in July 2008, the 14 agency contracted with Gartner, Incorporated, to 15 provide consulting services in connection with the 16 RFP. TLC and Gartner staff worked closely in 17 developing the new RFP, and I believe we have an RFP 18 the agency can be very proud of. 19 I regret to inform you this morning that 20 I canceled the Gartner agreement following Gartner's 21 disclosure last week that their firm is providing 22 contract services to GTECH, which is in direct 23 violation of Gartner's agreement with TLC. 24 While I have full confidence in the 25 services Gartner provided to the TLC and have no 0094 1 reason to question Gartner's explanation that the 2 failure to comply with the terms of its contract with 3 TLC simply was an oversight, I believe this agency 4 must avoid even the appearance of any impropriety in 5 all aspects of lottery operator procurement. And for 6 this reason, Gartner has been instructed to cease all 7 consulting services immediately and wind up this 8 engagement. 9 We have requested that Gartner provide 10 information regarding the contract it has with GTECH. 11 Specifically we have requested a copy of Gartner's 12 contract with GTECH, together with a timeline and 13 detail of all services provided and payments rendered. 14 Also we have requested GTECH provide information to us 15 regarding this contract. I have directed staff to 16 actively explore options for substitute services to 17 assist the agency through the remainder of its RFP 18 process. 19 If I can answer any questions, I will be 20 happy to do so. 21 CHAIRMAN WILLIAMSON: Commissioners? 22 COMMISSIONER KRAUSE: Does our contract 23 with Gartner provide any kind of punitive action that 24 we can take for their breach of contract? 25 MR. FERNANDEZ: No, sir, it does not. 0095 1 COMMISSIONER KRAUSE: Do we owe them any 2 money that we can set off because of our damages? 3 MR. FERNANDEZ: To my knowledge, based 4 on a cursory review, we have paid to date. There is 5 an area that we're still reviewing, and that's 6 immediately prior to the issuance, the packets. But 7 as far as I'm concerned, if that's the case, it would 8 certainly be very minimal and there would be lengthy 9 discussions surrounding that in case that is the fact. 10 COMMISSIONER SCHENCK: What have we paid 11 them so far? 12 MR. FERNANDEZ: We paid them 13 approximately one point -- 14 COMMISSIONER SCHENCK: Are we getting 15 any of that back? 16 MR. FERNANDEZ: No, we will not get that 17 back. That is a deliverable-based contract, 18 Commissioner, and that information and those services 19 were delivered. 20 COMMISSIONER SCHENCK: Well, I have a 21 lot of questions. I'm not going to ask them all 22 today. I'm sympathetic to the fact that these 23 problems can occur in a large business. How big is 24 Gartner? 25 MR. FERNANDEZ: Gartner has 4,000 0096 1 associates worldwide, and they are placed in 80 2 countries. 3 COMMISSIONER SCHENCK: And we will find 4 out from them who was responsible for each one of 5 these contracts and at what level of the company they 6 were operating? I assume they don't have 4,000 7 people, each of whom have the ability to enter into 8 contracts on their own, without checking with other 9 people? 10 MR. FERNANDEZ: That is correct. And in 11 notifying Gartner, both verbally and in writing, we 12 requested that they provide all information 13 surrounding that engagement. And I was able -- or was 14 in a pre-scheduled meeting that did occur yesterday -- 15 or day before yesterday -- and it is my understanding 16 that they are now putting that together, they're 17 talking to the principals that were involved in that. 18 And we should get a complete and full report from 19 them, I suspect, hopefully within this day but 20 certainly within the week. 21 COMMISSIONER SCHENCK: Am I right in 22 understanding that this first came to the staff's 23 attention after Christmas? 24 MR. FERNANDEZ: Well, it came to my 25 attention I would say approximately at 4:00 p.m. on 0097 1 the 30th of December. 2 COMMISSIONER SCHENCK: Well, thank you 3 for bringing this promptly to our attention. And I'll 4 have more questions I suspect, but I prefer to get 5 more information -- 6 MR. FERNANDEZ: Absolutely. 7 COMMISSIONER SCHENCK: -- allow you to 8 get more information before us. 9 MR. FERNANDEZ: And we will keep you -- 10 obviously, Mr. Grief and Ms. Kiplin are very much 11 involved in this, and we will keep them apprised as we 12 receive additional information. 13 CHAIRMAN WILLIAMSON: Commissioner 14 Krause, do you have any questions? 15 COMMISSIONER KRAUSE: I'm just disgusted 16 with Gartner. That's it. 17 CHAIRMAN WILLIAMSON: Well, since we 18 have Mr. Rivera here with GTECH, we'll put him on the 19 hot seat and see what he can share with us from their 20 perspective on this situation. 21 MR. FERNANDEZ: Just take my chair. 22 MR. RIVERA: Thank you very much. 23 Commissioners, for the record I am Ramon 24 Rivera. I am the Account Development Manager for 25 GTECH in Texas. 0098 1 Late Monday afternoon, Deputy Executive 2 Director Gary Grief notified me that the consulting 3 agreement with Gartner was going to be terminated by 4 the Texas Lottery. He went on to explain that the 5 reason for this termination was that Gartner revealed 6 to the Texas Lottery an existing contractual 7 relationship with GTECH. 8 I told Mr. Grief that I didn't know 9 anything about that kind of relationship that GTECH 10 might have with Gartner but told Mr. Grief that I 11 would check into the matter. Right after the call 12 with Gary, I called Alan Eland who is the Senior Vice 13 President of Operations and my boss and inquired. 14 Alan also stated he didn't know about this agreement 15 but indicated that he would check in the corporate 16 office. 17 Yesterday we discovered that there is an 18 existing contractual consulting relationship with 19 Gartner which was executed in mid-November of 2009 by 20 our product management office, which we call the PMO. 21 COMMISSIONER SCHENCK: Where is that 22 office? 23 MR. RIVERA: It's located in Providence, 24 Rhode Island. 25 COMMISSIONER SCHENCK: Okay. What 0099 1 jurisdiction does that relate to? Is it corporate- 2 wide? 3 MR. RIVERA: The project management 4 office is responsible for worldwide systems 5 implementations. They typically get involved with an 6 account when that account is in a conversion or when a 7 product sale is being made. At this point the PMO 8 office has had no interaction with the Texas account. 9 The scope of the consulting agreement 10 was to analyze and assess the practices of the PMO and 11 to recommend changes in processes and procedures to 12 keep track -- to keep in touch with best practices. 13 It should be noted that Gartner is not an industry but 14 a worldwide -- sets worldwide standards in the 15 technology sector for things of this nature. 16 It is also important to note, 17 Commissioners, that -- let me explain the scope of 18 the -- I mean the size of the contract. The total 19 cost of this contract was $150,000 plus expenses, and 20 the duration was to be six weeks. 21 It is also important to note that a 22 contract of this nature is within departmental 23 authorizations to approve. In other words, the 24 manager that approved this contract and initiated the 25 procurement didn't have to consult with external legal 0100 1 counsel, for example, to get approval to do it. It's 2 just within the purview of a department as it's 3 seeking to improve its operations. 4 I will also report to the Commission 5 that yesterday and again this morning we had 6 conversations with Gartner. And in an abundance of 7 caution and to avoid any appearance of impropriety, 8 that contract with Gartner was terminated, and Gartner 9 has agreed to refund GTECH any monies paid as a result 10 of that contract. That's basically what I know about 11 the situation, Commissioners. And I would be pleased 12 to answer any questions that you might have. 13 COMMISSIONER SCHENCK: From your 14 understanding -- or let me ask it this way: If you 15 cannot give me the assurance today, I would appreciate 16 your being able to give me the assurance later, but 17 I'll ask if you can give me the assurance today that 18 no aspect of any contract between GTECH and Gartner 19 called for Gartner to be paid additional sums of 20 money, depending on the result of the -- 21 MR. RIVERA: The outcome of the RFP? I 22 can give you the assurance today, sir, that that did 23 not occur. 24 COMMISSIONER SCHENCK: Thank you. 25 MR. RIVERA: We did not receive any 0101 1 information to my knowledge -- and we've certainly 2 checked into this -- with respect to Gartner's work 3 with the Texas Lottery. 4 COMMISSIONER SCHENCK: Thank you. 5 CHAIRMAN WILLIAMSON: Commissioner 6 Krause, do you have any questions? 7 COMMISSIONER KRAUSE: No, ma'am. 8 CHAIRMAN WILLIAMSON: Thank you, Ramon. 9 I'm sure there will be much more discussion about this 10 but appreciate your coming forth and sharing this with 11 us. 12 MR. RIVERA: Thank you, Chairman. 13 MS. KIPLIN: Commissioners, if I could 14 go back to the question that Commissioner Krause posed 15 in terms of the contract with Gartner that the Lottery 16 Commission had and remedies, in light of the breach, 17 it was a breach of the contract. There are no 18 liquidated damages or contract sanctions that are 19 associated with this type of breach. So the remedies 20 would be at this point unclear, but there was a clear 21 breach of the contract. 22 COMMISSIONER SCHENCK: There is such a 23 thing, to go to Hadley vs. Baxondale, of foreseeable 24 consequential damages. I think this was foreseeable, 25 this sort of damage. But again, these things happen, 0102 1 and it's unfortunate. I'm also unhappy, very unhappy, 2 very angry. We have two very large institutions. It 3 would be better in a perfect world that the 4 departmental level people wouldn't have any authority 5 to do anything, because they will do things that end 6 up making problems. 7 I don't run GTECH; I don't run Gartner. 8 We'll deal it with from our side. But we have 9 something we need to deal with here, very sensitive. 10 And I appreciate the staff bringing it to our 11 attention as promptly as they did, and I appreciate 12 that Gartner and GTECH are assuring us that they're 13 going to give us their full cooperation in elucidating 14 the facts here, and then we'll deal with them as we 15 are able to and need to. 16 CHAIRMAN WILLIAMSON: And I guess maybe 17 at this time, maybe a little more of elaboration -- 18 either Mike or Gary, whoever feels more comfortable in 19 answering this -- what exactly did Gartner do for the 20 lottery in their role in regards to this RFP? I mean, 21 what impacted the (cough) that they have on whatever 22 the final outcome? 23 MR. FERNANDEZ: Well, again, Mike 24 Fernandez, Administration Director. 25 Gartner was engaged to do a number of 0103 1 things. And I guess, for lack of a better term, I 2 could say heavy lifting. And what they did is that 3 they took a look at all of the current services that 4 are required to operate the lottery, both externally 5 and internally. And what they did is that they mapped 6 all of those services and they surrounded those with 7 what we call use cases, the way those processes work, 8 how they interface both with our staff and our 9 operations and with our current service provider and 10 identified what those resource requirements would 11 take. 12 They then turned and looked at the 13 market externally to see who are those service 14 providers currently and what slices can be provided in 15 whole or in part by various service providers and what 16 the cost relationships to those services are, whether 17 you were to bring them in-house, whether you were to 18 parse them out and then to take a look at the risk 19 associated with doing so. 20 And through the course of that, what 21 they did is, they documented all our processes so at 22 the end of the day you know exactly how you operate, 23 you know what resources are required to do so, you 24 know what's being provided by a service provider, down 25 to a very fine level of detail. 0104 1 So that information then was the basis 2 to then begin developing an RFP. So we knew what we 3 looked like. And in conversations and interviews, 4 they garnered this information. But then work groups 5 then moved forward independent of one another in 6 specific areas to identify where we wanted to take the 7 agency over the next five to ten years, how do we want 8 to look and operate as an organization? So they 9 worked very closely with us in mapping that, which 10 ultimately concluded in the RFP. 11 And that's not to minimize the work that 12 the agency has done, because that requires Mr. Anger's 13 staff, Ms. Pyka's staff, my staff, Ms. Kiplin's staff, 14 all of the operating units within the organization. 15 So it was a very, very large work effort, both on the 16 part of the agency and the part of Gartner. What I 17 will say to you is that that took us up to the point 18 where we are today; that took us up to the release of 19 that RFP. 20 The last comment I made to you is 21 that -- I said directing staff. Well, the fact is, 22 that's myself and Toni Erickson right now, and 23 certainly with assistance from Ms. Kiplin's office. 24 And we will come forward with recommendations to 25 Mr. Grief. 0105 1 But the next part of this, then, would 2 be then to start to look at the negotiations and how 3 we would proceed through those negotiations up through 4 and the award of the contract. So they would provide 5 an expertise, as Mr. Rivera alluded to, in terms of 6 the technological part of that and the validation and 7 verification of that technology. In other words, if 8 you're seeing bids, these folks have resources in this 9 industry that clearly has a leadership role, an 10 understanding the way big systems operate and how 11 those transactions are run. So we were looking to 12 them to provide systems expertise, if you will, in 13 that area as well as a knowledge of sourcing 14 strategies, et cetera. 15 COMMISSIONER SCHENCK: Mike, as I 16 recall, it was quite difficult to find an entity 17 available to perform this contract service for us. 18 MR. FERNANDEZ: That is correct. What 19 we did, Commissioner -- and I know perhaps some of 20 you -- I don't know if Commissioner Krause is -- but, 21 you know, this came out of what we refer to as Plan B: 22 What's going to happen when the contract ends or if 23 something were to happen to the contract? 24 And what we found basically, 25 Commissioner, we were looking for someone that could 0106 1 come in and help us do the things that I have just 2 addressed. What we found in working with other 3 agencies, the Department of Information Resources and 4 other groups, is that there are probably four 5 companies worldwide that are heavily engaged in this 6 type of work, two of which do not operate in the 7 government sector. They have no practices there, 8 Gartner and one other firm, Gartner being the largest 9 government sector operator and then another firm on 10 the east coast that does from time to time do 11 government work. 12 We went out with an RFP hoping that we 13 would see responses from these firms. We did not. 14 And we spoke with them prior to the release of that 15 RFP to see if they might be interested and certainly 16 to get a contact that we could mail the RFP to. 17 We did, however, get responses from a 18 number of firms. We went through that exercise two 19 times -- two times. And the last time we thought we 20 were in a position to make an award, what we found, I 21 get a call from the firm that was being discussed as 22 the candidate for award, or notification of award, and 23 was informed that they had a conflict. They had a 24 contract with one of our prime vendors, an accounting 25 engagement. Just like that, we eliminated it. 0107 1 COMMISSIONER SCHENCK: Okay. Well, here 2 we are again. Who was the prime vendor? Was it 3 SciGames or was it -- 4 MR. FERNANDEZ: It was SciGames. 5 COMMISSIONER SCHENCK: Okay. Kim, as I 6 recall, we have the right or the power, specifically 7 with respect to the lottery operator contract, to go 8 into executive session to discuss matters that might 9 affect the agency's ability to manage a competitive 10 bid. I don't think any of this is -- 11 MS. KIPLIN: I know which statutory 12 provision you're thinking of, and it's the ability to 13 deliberate the negotiations of the contract, and so 14 it's specific to that aspect of it. 15 COMMISSIONER SCHENCK: Okay. Well, 16 then, let me ask a couple more questions, if I can. 17 CHAIRMAN WILLIAMSON: Sure. 18 COMMISSIONER SCHENCK: We have talent 19 in-house that is available to us to help put together 20 this RFP. Has any of it not been involved directly 21 with Gartner already? 22 MR. FERNANDEZ: I would say that it has 23 all been involved with Gartner. 24 MR. GRIEF: And, Commissioner, if I 25 could, I would like to supplement Mike's answer, as 0108 1 you're pondering your next question. 2 Yes, Gartner was a consultant, but they 3 were just one of several resources that we've utilized 4 in this process. We've had the services of outside 5 counsel, Graves Dougherty. We've had the services of 6 the Attorney General's office. We have certainly 7 utilized our own counsel's office to a great extent. 8 And I also want to emphasize that 9 Gartner, the staff from Gartner that was assigned to 10 this project had no lottery experience when they came 11 into this. As Mike said, they had systems and general 12 business consulting experience. And they came in over 13 the 16 odd months that they were here and they mapped 14 out our various functions and our vendors' various 15 functions and learned as best they could over that 16 period of time. 17 But when it came down to decisionmaking 18 as to the various components of the RFP that's now 19 been released, the structure of that RFP and how we 20 would move forward, that was all made at the senior 21 management team level. I want to emphasize that. 22 COMMISSIONER SCHENCK: I think that's a 23 very important clarification. Thank you, Gary. 24 What I'm doing -- and I'm trying to 25 decide whether I want to do this on the fly and as I'm 0109 1 thinking of this -- is whether it's worth -- whether 2 there's a resource available or if it's worth the time 3 or energy to have someone who has not been involved in 4 this look at the end product we've got here and help 5 us with that. And I think I'm going to leave it at 6 that for right now. 7 MR. GRIEF: Just to maybe add to the 8 discussion, Mike, if you would discuss the process 9 that we use with the Controller of Public Accounts and 10 their review of the RFP prior to its being issued. 11 MR. FERNANDEZ: Well, one of the things, 12 as you may recall -- and I did I think speak to this 13 previously -- is that all state agencies are required 14 to send to the contract advisory team any contract 15 with a value of a million dollars or more -- I say 16 "contract." I apologize -- an RFP for their review. 17 Prior to its issuance, we did send this 18 RFP to the contract review team which operates under 19 the Comptroller of Public Accounts office, and they 20 had the opportunity to review it. They did believe 21 that it was a very good RFP and did offer some 22 comments, which we took. 23 Prior to that time, prior to that 24 request, we did reach out to the Controller of Public 25 Accounts and ask that they appoint a member to our 0110 1 review committee to work as part of the review team to 2 review the responses to this bid. 3 We were notified that they were going to 4 appoint to this team, to our team, a gentleman named 5 Ron Pigott, and he is the director of the contract 6 review team. He's an attorney by professional 7 training and a former Attorney General's staff member. 8 So he had the opportunity to come over and receive a 9 full briefing from our project manager, Ms. Erickson 10 and myself, spent the better part of the day with us. 11 And we went through all of the aspects, the thinking 12 behind the process, the staff involvement and the 13 fundamental premise of actions that we were taking. 14 And at the end of that period, Ron said 15 to me personally that -- he said, "You know, Mike, I 16 think this is probably one of the most thoughtful and 17 well-orchestrated RFPs that I've seen" -- because I 18 wanted Mr. Grief to hear that. 19 So I also asked him if he had a moment 20 and I would like to introduce him to our Deputy 21 Executive Director, and I did take him up to Gary's 22 office, and we had the time to speak. And again, Ron 23 reiterated that issue to Gary and, in fact, commenting 24 about various agency RFPs, not specifically, but that 25 as opposed to ours. 0111 1 I did have the opportunity -- Gary asked 2 if I had talked to Ron about this, because now we're 3 beginning to schedule meetings for our staff with the 4 General Counsel's office as we begin this process. 5 Gary asked me if I had contacted him, and I did 6 contact Ron this week, earlier this week, to advise 7 him of the upcoming meetings but also to make him 8 aware of this particular issue, and again had the 9 opportunity to discuss these, certainly in his 10 capacity as a review team member but as a TPASS 11 director. 12 Ron said well, you know, that he 13 understood, not unlike Commissioner Schenck had 14 alluded to, that these things can happen in large 15 companies. And, you know, again he found that to be a 16 very unfortunate circumstance but was looking forward 17 to working with us as we went through the review 18 process, so that for what it's worth. 19 COMMISSIONER SCHENCK: Well, I think 20 that these independent extra agency resources are 21 important. I think that the prospect of maybe having 22 some of these people talk to us directly instead of 23 having Mike testify for them -- 24 MR. FERNANDEZ: Yes, sir. 25 COMMISSIONER SCHENCK: -- might be 0112 1 useful. I don't know if it needs to occur in an open 2 meeting. Maybe better that it does; I don't know. 3 But I think whatever we can do to attenuate any 4 appearance of a problem I think would be good, and I 5 think the independence of the Attorney General's 6 office and the Comptroller has already brought to this 7 is very valuable. And I have every confidence that 8 the staff has brought its expertise to bear and was 9 assisted here in some respect by Gartner in a way that 10 probably had no problems associated with it. But we 11 need to be very careful on how we proceed. 12 CHAIRMAN WILLIAMSON: Thank you. 13 Any comments? 14 Thank you, Mike. 15 MR. FERNANDEZ: Yes, ma'am. 16 AGENDA ITEM NOS. XXVI, XXVII, XXVIII 17 CHAIRMAN WILLIAMSON: The Items XXVI 18 through XXIX will be report, possible discussion 19 and/or action on the Mega Millions game and/or 20 contract. 21 Gary, if you'll start with your items, 22 please. 23 MR. GRIEF: Certainly, Madam Chair. 24 Commissioners, in addition to the 25 information that I've provided you today in your 0113 1 notebooks, I have three other items I would like to 2 brief you on. One is regarding the Mega Millions 3 game. I would like to brief you on a game change that 4 I will likely be bringing to you at the next 5 Commission meeting. 6 As the Mega Millions group worked 7 through the many details that were involved in adding 8 Powerball to our game mix over the last several 9 months, we've come to realize that in trying to be 10 good stewards of our individual jurisdictions, the 11 manner in which we currently advertise jackpots for 12 Mega Millions should be modified. 13 I'll remind you first that there is a 14 difference in the way Mega Millions handles its 15 advertised jackpots versus how Powerball handles their 16 jackpot. In a nutshell, Mega Millions guarantees the 17 advertised jackpot amount, while Powerball qualifies 18 its advertised jackpot as being only estimated, with 19 the final sales and the prevailing interest rates at 20 the time dictating the actual amount that will be paid 21 to any jackpot winner. 22 Since we will be effectively doubling 23 the population that will have access to both of these 24 games once cross-selling is fully initiated, we 25 believe that the more prudent approach, and in trying 0114 1 to protect the interests of the state, is to move the 2 Mega Millions game in line with the methodology used 3 in Powerball and change our jackpot approach 4 accordingly. 5 Along with the increased population base 6 will come increased risks for guaranteeing these 7 jackpots, since we likely will, one, see jackpot 8 levels that we have never seen before and, two, will 9 be working in completely uncharted territory with no 10 sales history available to us from selling both games 11 in all jurisdictions. 12 So while we will begin the cross-selling 13 initiative under our current Mega Millions rule which 14 guarantees the advertised jackpots, the Mega Millions 15 group has decided to move away from that. And I'll be 16 bringing a rule change before you in the very near 17 future to that effect. 18 I also want to be clear that this 19 proposed change will not have any impact in the manner 20 in which we guarantee jackpots for either Lotto Texas 21 or Texas Two Step, our two in-state jackpot games, as 22 the risks that I've described to you that are inherent 23 with the cross-selling of Mega Millions and Powerball 24 are not germane to those two games. 25 And I would be happy to answer any 0115 1 questions you might have, or if you would prefer to 2 ask questions when I do, in fact, bring that rule 3 before you for consideration. 4 CHAIRMAN WILLIAMSON: Commissioners, at 5 your pleasure. 6 COMMISSIONER KRAUSE: I'm not sure 7 that I was -- just make sure that I was listening, you 8 know, carefully to what you were having to say. Does 9 our agreement with Mega Millions require us to be that 10 exact or do we have the flexibility of determining how 11 we advertise the Mega Millions side of it? 12 MR. GRIEF: All states must be in 13 uniform the way they advertise the jackpots that are a 14 member of Mega Millions. Right now the current 15 agreement is, we must guarantees those jackpots. So 16 we would be moving as a group, as one body, to not 17 guarantee those jackpots going forward. 18 COMMISSIONER KRAUSE: How long does that 19 take? That sounds like a political move. 20 MR. GRIEF: It would be a rulemaking 21 process for us here in Texas. The actual execution of 22 the finance and operating procedures change that would 23 be necessary to move in that direct could be done 24 pretty quickly. 25 COMMISSIONER KRAUSE: Well, I guess what 0116 1 I'm asking is, is how long does it take to get the 2 other states on board? 3 COMMISSIONER SCHENCK: Mega Millions is 4 a much smaller game than Powerball. We're talking -- 5 MR. GRIEF: There's only 12 states. 6 And, to be quite frank, Texas, because of our 7 rulemaking process that's inherent with our agency and 8 our state government, we are always the one state that 9 takes the longest to move to any change in anything 10 that has to do with the games. 11 COMMISSIONER KRAUSE: Have you done any 12 informal polling of the lottery directors in those 13 other states? 14 MR. GRIEF: Yes, sir, and it's unanimous 15 to move in this direction. 16 COMMISSIONER KRAUSE: Perfect. 17 COMMISSIONER SCHENCK: I have one 18 concern. I like guaranteeing the jackpot because I 19 think it forces us to be conservative. I think we had 20 this debate, when we were going to Powerball, that 21 unlike Mega Millions, we will not have the control 22 that we do on our -- what is it? -- Thursday morning 23 and Tuesday morning calls, whatever it is, where we 24 historically -- Texas has been pounding down the 25 number so that we're not telling people that we're 0117 1 going to pay them money where we don't want to pay 2 them if we don't have the money in hand. 3 And as you're saying, there's risk 4 because we're moving to interweaving these two 5 national -- nearly national games now. There will be 6 controversy when we advertise -- we, collectively MUSL 7 or Mega Millions -- a prize and someone doesn't get 8 the money. They're going to be upset at some money. 9 And I want an assurance that at least 10 with respect to Mega Millions where we have 11 considerable sway in what that advertised number is, 12 that we're still advertising conservatively, weighing 13 in the risk that the sales may be down as a result of 14 these games being offered in both jurisdictions. So I 15 will have that concern, and I would like that concern 16 to be addressed. Also I would like Mega Millions and 17 Powerball to work out the conflict we have and the 18 drawing dates. I think both of these games are 19 drawing on a Saturday. Is that right? 20 MR. GRIEF: No, sir. Powerball is drawn 21 on Wednesdays and Saturdays, while Mega Millions is 22 drawn on Tuesdays and Fridays. 23 COMMISSIONER SCHENCK: Okay. 24 MR. GRIEF: So we don't have a 25 conflict -- 0118 1 COMMISSIONER SCHENCK: Yes. Friday, 2 Saturday is pretty close. I think that should be 3 looked at also, because you may have a big Mega 4 Millions on -- Saturday? 5 MR. GRIEF: Friday. 6 COMMISSIONER SCHENCK: -- on Friday and 7 a not as big Powerball on Saturday. And the Powerball 8 group is going to want to advertise a big number to 9 try to get the sales up, knowing that Mega Millions 10 will be drawn the day before. So experience is going 11 to have to be -- 12 MR. GRIEF: That will be the key. 13 COMMISSIONER SCHENCK: -- the key here. 14 But I want those estimates to be conservative, knowing 15 that we're taking a risk and we're proposing to move 16 it away from the Commission and put it under the 17 winning player. 18 MR. GRIEF: I share your concern, 19 Commissioner, and you can be certain that Texas will 20 be conservative in our estimates. I have to point 21 out, we'll be one of 45, once all states are involved 22 in cross-selling. And when we have our -- I'll give 23 you an example. When we have our Mega Millions 24 jackpot estimation, it is a sheer majority vote as to 25 what level the jackpot is advertised at. 0119 1 And there are numerous occasions -- I 2 think that's a word I can use -- in which Texas is 3 out-voted. And normally if there is a small 4 difference -- I'll give you an example. Let's say 5 we're at -- the projected advertised sales and 6 interest rates support a jackpot of $99.5 million. We 7 always vote 99; whereas, in other states where the 8 same circumstances are not as they are here in Texas, 9 with the scrutiny, et cetera, they don't hesitate to 10 one for a hundred. And if we're short, we're short. 11 We'll pony up if we're short. So I can assure you we 12 don't ever vote in that regard. 13 COMMISSIONER SCHENCK: Well, I can tell 14 you, my position is clear. I don't want to pony up if 15 we're short. And the best way not to pony up if 16 you're short is don't be short. So I had rather that 17 we advertise the lower numbers, particularly if we're 18 going to pay for it. And there is always the risk 19 we're talking about effectively looking forward, 20 someone else's money, being very generous with the 21 numbers you start putting on the board, and I don't 22 want that. 23 MR. GRIEF: That's the inherent downside 24 to multi-state games, is you lose the ability to have 25 full control of the game mechanics. And one of those, 0120 1 of course, very important one, is the advertised 2 jackpot. 3 COMMISSIONER SCHENCK: Yes. 4 COMMISSIONER KRAUSE: It seems like a 5 discussion somewhere, somebody told me that the 6 difference between the Powerball estimated amount and 7 the actual amount has been a really small percentage. 8 MR. GRIEF: It has. In looking back -- 9 COMMISSIONER KRAUSE: And what is that? 10 MR. GRIEF: -- at history -- 11 COMMISSIONER KRAUSE: Is it less than 12 one percent difference or less than two percent 13 difference? 14 MR. GRIEF: I can tell you, I've seen 15 three or four occurrences where the advertised jackpot 16 was not met by the actual sales and interest rate. 17 And I want to say off the cuff one was about a 18 $66 million jackpot in which they were only able to 19 pay about 63. I think another was in the thirties 20 where there was also a two or $3 million dollar 21 difference. And I can't recall the third, but I know 22 it was similar. 23 So I think that's the kind of 24 differences that you're seeing. The concern -- the 25 bigger concern, when we do implement cross-selling, 0121 1 there is a possibility -- and, of course, for me it's 2 a hope -- that we're going to have 400, $500 million 3 jackpots, perhaps even higher. And it's in those 4 areas where, when you have 45 different jurisdictions 5 who are weighing in with estimations, that gravely 6 concerns me, because just a small down-tick in 7 interest rates from a Tuesday to a Friday or a 8 Wednesday through a Saturday can equate to tens of 9 millions of dollars in the change in what you're 10 thinking you're going to be able to pay for a jackpot 11 and what you're actually going to be able to pay. 12 So we as a group, Mega Millions, are 13 concerned about that. We want to mitigate that risk 14 by moving away from the guarantee and being very 15 prudent, being very responsible and being conservative 16 in our estimates. 17 COMMISSIONER SCHENCK: The more you move 18 away from the guarantee, the more you will face the 19 argument that it's a sham, that you're pumping up the 20 numbers to increase sales. And that's again why I 21 think it's all the more important that we be 22 conservative with estimating those numbers. 23 Now, as I hear you explain it, the 24 concern you have is almost on a percentage basis, that 25 there is a percentage risk. So if the $400 million 0122 1 jackpot is out there, if the interest rate factor is 2 down $10 million, but to that winner, getting 3 $430 million versus $440 million, I don't think we'll 4 get a lot of arguments. Right? I mean, it is -- 5 MR. GRIEF: That is exactly the premise 6 that Powerball puts forward in their rationale for not 7 ever having guaranteed jackpots. 8 COMMISSIONER SCHENCK: Okay. 9 COMMISSIONER KRAUSE: Well, I guess it's 10 moot since all the other 12 Mega Millions states are 11 informally telling you that they're willing to go to 12 estimated and all of that. But, you know, don't they 13 help pony up if there is a difference, too? 14 MR. GRIEF: Absolutely. 15 COMMISSIONER KRAUSE: Okay. 16 MR. GRIEF: It's proportional by sales. 17 COMMISSIONER KRAUSE: Okay. Well, I 18 guess, because they're willing to go to it, I suppose 19 that, you know, to accommodate Commissioner Schenck's 20 wish to be able to make a guarantee, maybe what we 21 could do is say, "Okay. We estimate it at 22 $400 million, so we're going to advertise a guarantee 23 at 95 percent of that amount," and that ought to 24 provide plenty of flexibility to be able to make that. 25 That would be conservative. 0123 1 COMMISSIONER SCHENCK: I'm not 2 necessarily pushing for that, and I'm not pushing this 3 necessarily to hold on to the guarantee. I'm just 4 saying if we're going to move away from it, I want 5 assurances that we're going to be very conservative in 6 estimating what the number is going to be so that we 7 don't put up on a board $450 million in a 4 point font 8 on the board underneath, "Estimated. No guarantee you 9 will actually get this prize if any amount," and that 10 we'll pay in U.S. dollars or opposed to lira or pesos 11 or something else. The game needs to maintain its 12 integrity. 13 MR. GRIEF: What I hear you say, 14 Commissioner, is two-fold. One, you want us to make 15 sure that our estimate is certainly conservative but 16 also exercise our best efforts, as a member of both 17 games, to impress upon the other directors in other 18 states the need to be conservative and the need to 19 think that through and make sure that we do our very 20 best effort in giving out a fair jackpot estimation, 21 one that we believe can be met, even perhaps with some 22 down-tick in interest factor or perhaps a snowstorm on 23 the east coast that may knock out some level of sales 24 around the country. Those are the things we have to 25 be aware of. 0124 1 CHAIRMAN WILLIAMSON: Of course, I would 2 point out, Powerball has been around how long? 3 Thirty, 40, a long time. 4 MR. GRIEF: Or at least 25 years. 5 MR. TIRLONI: Yes. 6 CHAIRMAN WILLIAMSON: So the people that 7 have played that get that it's an estimate, I assume. 8 COMMISSIONER SCHENCK: But I'm not 9 worried about that; I'm worried about the Texans. 10 CHAIRMAN WILLIAMSON: Well, hey, we've 11 got a great guaranteed game in this state. 12 MR. GRIEF: Have two of them, actually. 13 CHAIRMAN WILLIAMSON: Two of them. 14 MR. GRIEF: Lotto Texas and Texas Two 15 Step. 16 CHAIRMAN WILLIAMSON: You know, some 17 good marketing opportunity there. 18 COMMISSIONER SCHENCK: Yes. 19 MR. GRIEF: Okay. My second item 20 regarding Powerball, just continuing on that theme, 21 our target date for starting Powerball sales is 22 January 31st. And I want to be very careful that I 23 say that's a target date. When you're dealing with 45 24 jurisdictions and three different vendors, there are 25 all types of issues that we're still trying to 0125 1 overcome between now and the 31st. And, of course, we 2 are not allowed to purchase any goods and services 3 until after today, when this rule is actually passed. 4 So we are moving very quickly. 5 Our agency, led by Brenda Pisana, our 6 Security Director; Julie Terrell, our On-Line Products 7 Coordinator; and Conchita Rivers, our drawing 8 supervisor, they have a monumental task ahead of them, 9 and this reaches throughout our organization to get 10 ready for the 31st. I want to publicly thank everyone 11 that's been involved in the preparations thus far, 12 along with our vendors. And I want to let the 13 Commission know that our agency and our vendors are 14 going to be burning the candles at both ends to make 15 sure that we have a timely implementation and we start 16 generating that revenue for the Foundation School 17 Fund. 18 The last item I have for you, 19 Commissioners, has to do with GTECH. On 20 December 11th, GTECH informed me of a potential issue 21 with instant ticket validations on the GTECH central 22 system, and they sent me a letter in that regard, a 23 copy of which has been put in your notebook. As a 24 result, I've asked Catherine Melvin, our Internal 25 Audit Director, to act as the agency's point of 0126 1 contact for all issues related to this matter. 2 We held a meeting on December 17th 3 between numerous agency staff that are involved in 4 this matter, and GTECH, to review the facts that were 5 known at that time. We designed investigative plans 6 going forward, and we established reporting 7 parameters. 8 GTECH has committed and they are 9 demonstrating complete and total cooperation with the 10 agency as our staff are looking into this matter. And 11 we'll continue to keep you apprised as more 12 information comes to light. 13 And Cat or I would be happy to answer 14 any questions that you might have on that matter. 15 CHAIRMAN WILLIAMSON: Commissioners? 16 COMMISSIONER SCHENCK: I don't have any 17 questions. Thank you. 18 COMMISSIONER KRAUSE: No questions. 19 MR. GRIEF: Madam Chair, that concludes 20 my report. 21 AGENDA ITEM NO. XXIX 22 CHAIRMAN WILLIAMSON: Okay. That gets 23 us down to possible entry of orders. 24 Ms. Kiplin. 25 MS. KIPLIN: Commissioners, in your 0127 1 notebooks are proposals for decisions, and the letters 2 are A through K. These are all lottery revocation 3 cases. They're all for insufficient funds being 4 available at the time that the lottery swept the 5 account. 6 Let me just talk a little bit about K. 7 That's King Food. That matter was a matter that we 8 got -- a proposal for decision was issued by a former 9 Administrative Law Judge with the State Office of 10 Administrative Hearings that was adverse to the 11 staff's position. We filed exceptions in that case, 12 and then we didn't hear from the State Office of 13 Administrative Hearings and then contacted them to try 14 to get the status of that. 15 To make a long story short, the 16 Administrative Law Judge that was assigned to review 17 those exceptions agreed with the staff's exceptions 18 and issued amended findings, and so the staff is 19 recommending that you vote to adopt the findings and 20 conclusions as they were amended by the newly assigned 21 Administrative Law Judge. There were no replies, by 22 the way, filed by the respondent in that case. 23 COMMISSIONER SCHENCK: I think that 24 answers everything, then, doesn't it. 25 MS. KIPLIN: Yes. So the staff at this 0128 1 time is requesting that you-all vote to accept the 2 Administrative Law Judge's recommendations in each of 3 these cases. 4 CHAIRMAN WILLIAMSON: Questions or 5 comments, Commissioners? 6 COMMISSIONER SCHENCK: None from me. 7 COMMISSIONER KRAUSE: I move we accept 8 these recommendations. 9 COMMISSIONER SCHENCK: I second the 10 motion. 11 CHAIRMAN WILLIAMSON: All in favor? 12 COMMISSIONER SCHENCK: Aye. 13 CHAIRMAN WILLIAMSON: Aye. 14 COMMISSIONER KRAUSE: Aye. 15 MS. KIPLIN: And Commissioners -- I'm 16 sorry. 17 CHAIRMAN WILLIAMSON: Go ahead. 18 MS. KIPLIN: I'm jumping in on you on 19 the vote. 20 CHAIRMAN WILLIAMSON: That's okay. It's 21 all right. 22 MS. KIPLIN: I'm ready. We have the 23 orders. 24 COMMISSIONER SCHENCK: I think we voted 25 "Yes," didn't we? 0129 1 CHAIRMAN WILLIAMSON: Yes, we did. 2 MS. KIPLIN: Did you vote? Okay. I'm 3 sorry. 4 COMMISSIONER SCHENCK: We "Ayed." It 5 was a unanimous, enthusiastic vote. 6 AGENDA ITEM NO. XXXI 7 CHAIRMAN WILLIAMSON: All right. So at 8 this time I move the Texas Lottery Commission go into 9 executive session to deliberate the appointment, 10 employment and duties of the Executive Director, the 11 Deputy Executive Director, Internal Audit Director, 12 Charitable Bingo Operations Director and deliberate 13 the duties of the General Counsel and Human Resources 14 Director, pursuant to Section 551.074 of the Texas 15 Government Code and to receive legal advice regarding 16 any pending or contemplated litigation, pursuant to 17 Section 551, including but not limited to those items 18 posted on the open meetings notice for purposes of 19 receiving legal counsel. 20 Is there a second? 21 COMMISSIONER SCHENCK: I second the 22 motion. 23 CHAIRMAN WILLIAMSON: All in favor, say 24 "Aye." 25 COMMISSIONER SCHENCK: Aye. 0130 1 CHAIRMAN WILLIAMSON: Aye. 2 COMMISSIONER KRAUSE: Aye. 3 CHAIRMAN WILLIAMSON: The vote is 3-0. 4 We will go into executive session. The time is 5 11:45 a.m. Today is January 6, 2010. 6 (Recess: 11:45 a.m. to 1:15 p.m.) 7 AGENDA ITEM NO. XXXII 8 CHAIRMAN WILLIAMSON: All right. The 9 Texas Lottery Commission is out of executive session. 10 The time it 1:15 p.m. 11 There is no action to be taken as a 12 result of the executive session. 13 AGENDA ITEM NO. XXXIII 14 CHAIRMAN WILLIAMSON: And I believe we 15 have no further agenda items. So if someone would 16 like to make a motion to adjourn. 17 COMMISSIONER KRAUSE: First I'm going to 18 congratulate the Chair on running a very efficient and 19 effective meeting and that this is the earliest we've 20 ever been able to adjourn, and I'm very proud of her 21 for that. 22 But I make a motion that we adjourn now. 23 COMMISSIONER SCHENCK: I second. 24 CHAIRMAN WILLIAMSON: All in favor? 25 Aye. 0131 1 COMMISSIONER KRAUSE: Aye. 2 COMMISSIONER SCHENCK: Aye. 3 CHAIRMAN WILLIAMSON: The meeting is 4 adjourned. 5 (Meeting adjourned: 1:16 p.m.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0132 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 15th day of January 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