1 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 7 REGULAR MEETING OF THE § 8 TEXAS LOTTERY COMMISSION § THURSDAY, JANUARY 20, 201l § 9 10 11 12 COMMISSION MEETING 13 THURSDAY, JANUARY 20, 2011 14 15 16 17 BE IT REMEMBERED THAT on Thursday, the 20th 18 day of January 2011, the Texas Lottery Commission 19 meeting was held from 9:12 a.m. to 11:36 a.m., at the 20 Offices of the Texas Lottery Commission, 611 East 6th 21 Street, Austin, Texas 78701, before CHAIRMAN MARY ANN 22 WILLIAMSON and COMMISSIONER J. WINSTON KRAUSE. The 23 following proceedings were reported via machine 24 shorthand by Aloma J. Kennedy, Certified Shorthand 25 Reporter. 2 1 APPEARANCES 2 CHAIRMAN: 3 Ms. Mary Ann Williamson 4 COMMISSIONER: Mr. J. Winston Krause 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Gary Grief 8 DIRECTOR, CHARITABLE BINGO OPERATIONS: 9 Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - THURSDAY, JANUARY 20, 2011........... 8 4 AGENDA ITEM NO. I - Meeting Called to Order........ 8 5 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action on external 6 and internal audits and/or reviews relating to the Texas Lottery Commission, and/or on the 7 Internal Audit Department’s activities, including the security study of the lottery and the FY10 8 Financial Audit and/or Mega Millions agreed upon procedures.................................... 8 9 AGENDA ITEM NO. III - Consideration of and 10 possible discussion and/or action, including proposal, on amendments to 16 TAC §402.502 11 relating to Charitable Use of Proceeds............. 17 12 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, including 13 repeal, on existing 16 TAC §402.501 relating to Distribution of Proceeds for Charitable 14 Purposes, and/or proposal, on new rule 16 TAC §402.501 relating to Charitable Use of Net 15 Proceeds........................................... 17 16 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, including 17 proposal, on amendments to 16 TAC §402.205 relating to Unit Agreements........................ 20 18 AGENDA ITEM NO. VI - Consideration of and 19 possible discussion and/or action, including proposal, on amendments to 16 TAC §402.203 20 relating to Unit Accounting........................ 20 21 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 22 withdrawal on proposed amendments and/or proposal on amendments to 16 TAC §402.604 23 relating to Delinquent Purchaser................... 21 24 AGENDA ITEM NO. VIII - Report, discussion and/or action on AG opinion GA-0812 relating 25 to bingo gift certificates and eight liners........ 23 4 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. IX - Report by the Charitable Bingo Operations Director and possible 4 discussion and/or action on the Charitable Bingo Operations Division’s activities, 5 including updates on staffing, licensing, accounting and audit activities, pull-tab 6 review, special projects, and upcoming operator training.................................. 32 7 AGENDA ITEM NO. X - Report, possible discussion 8 and/or action on lottery sales and revenue, game performance, new game opportunities, advertising, 9 market research, trends, and game contracts, agreements, and procedures......................... 33 10 AGENDA ITEM NO. XI - Report, possible discussion 11 and/or action on transfers to the State and the agency’s budget status............................. 40 12 AGENDA ITEM NO. XII - Report, possible discussion 13 and/or action on Lottery Operations and Services Contract Amendment No. 8 credit calculation........ 42 14 AGENDA ITEM NO. XIII - Consideration of and 15 possible discussion and/or action, including proposal, on amendments to 16 TAC §401.305 16 relating to “Lotto Texas” On-line Game Rule........ 44 17 AGENDA ITEM NO. XIV - Consideration of and possible discussion and/or action, including 18 proposal, on amendments to 16 TAC §401.315 relating to “Mega Millions” On-line Game Rule...... 44 19 AGENDA ITEM NO. XV - Consideration of and 20 possible discussion and/or action, including proposal, on amendments to 16 TAC §401.317 21 relating to “Powerball” On-line Game Rule.......... 44 22 AGENDA ITEM NO. XVI - Consideration of and possible discussion and/or action, including 23 proposal, on new rule 16 TAC §401.372 relating to Display of License.............................. 53 24 25 5 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. XVII - Report, possible discussion and/or action, including extension 4 on the advertising services contract, amendment to the instant ticket manufacturing and 5 services contract, and/or drawings audit services procurement............................... 54 6 AGENDA ITEM NO. XVIII - Report, possible 7 discussion and/or action on the lottery operations and services procurement................ 56 8 AGENDA ITEM NO. XIX - Report, possible 9 discussion and/or action on the 82nd Legislature... 78 10 AGENDA ITEM NO. XX - Report, possible discussion and/or action on GTECH Corporation...... 79 11 AGENDA ITEM NO. XXI - Report by the Executive 12 Director and/or possible discussion and/or action on the agency’s operational status, 13 agency procedures, and FTE status.................. 80 14 AGENDA ITEM NO. XXII - Consideration of the status and possible entry of orders in: 15 A. Docket No. 362-11-0443 – IZ Food Mart B. Docket No. 362-11-0444 – Tigermart 16 C. Docket No. 362-11-0445 – Super Stop Eagle Lake 17 D. Docket No. 362-11-0446 – Junction Food Mart 18 E. Docket No. 362-11-0447 – JC’s Conviniente Store 19 F. Docket No. 362-11-0818 – My Smokes G. Docket No. 362-11-0819 – Dolly Food 20 Store H. Docket No. 362-11-0820 – Xpress Lane 21 Snacks & Beverage I. Docket No. 362-11-0822 – Cigarette 22 Discount Shop J. Docket No. 362-10-3281 – Sunco 23 Marketplace No. 1 K. Docket No. 362-10-4952.B – Henry Hobbs 24 L. Case No. 2010-1090 – K&B Sales, Inc. D/B/A Goodtime Action Games................ 80 25 6 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. XXIII - Public comment............ 97 4 AGENDA ITEM NO. XXIV - Commission may meet in Executive Session: 5 A. To deliberate the duties and evaluation of the Executive Director pursuant to 6 Section 551.074 of the Texas Government Code. 7 B. To deliberate the duties and evaluation of the Internal Audit Director pursuant to 8 Section 551.074 of the Texas Government Code. C. To deliberate the duties and evaluation of 9 the Charitable Bingo Operations Director pursuant to Section 551.074 of the Texas 10 Government Code. D. To deliberate the duties of the General 11 Counsel pursuant to Section 551.074 of the Texas Government Code. 12 E. To deliberate the duties of the Human Resources Director pursuant to Section 13 551.074 of the Texas Government Code. F. To receive legal advice regarding pending 14 or contemplated litigation pursuant to Section 551.071 (1) (A) and/or to receive 15 legal advice regarding settlement offers pursuant to Section 551.071(1)(B) of the 16 Texas Government Code and/or to receive legal advice pursuant to Section 551.071(2) 17 of the Texas Government Code, including but not limited to: 18 First State Bank of DeQueen et al. v. Texas Lottery Commission 19 Texas Lottery Commission v. Leslie Warren, Texas Attorney General Child 20 Support Division, Singer Asset Finance Company L.L.C., and Great-West Life & 21 Annuity Insurance Company Department of Texas, Veterans of 22 Foreign Wars, et al. v. Texas Lottery Commission, et al. 23 John Doe v. Texas Lottery Commission and Greg Abbott, Texas Attorney 24 General 25 7 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. XXIV - (CONTINUED) 4 Employment law, personnel law, procurement and contract law, 5 evidentiary and procedural law, and general government law 6 Lottery Operations and Services procurement and/or contract........... 96 7 AGENDA ITEM NO. XXV - Return to open session for 8 further deliberation and possible action on any matter discussed in Executive Session.............. 96 9 AGENDA ITEM NO. XXVI - Adjournment................. 97 10 REPORTER'S CERTIFICATE............................. 98 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 1 P R O C E E D I N G S 2 THURSDAY, JANUARY 20, 2011 3 (9:12 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning. I 6 would like to call the meeting of the Texas Lottery to 7 order. Today is January 20th. The time is 9:12 a.m. 8 Commissioner Krause is present. We have a quorum. 9 AGENDA ITEM NO. II 10 CHAIRMAN WILLIAMSON: Item II, the next 11 item, is consideration of and possible discussion and/or 12 action on external and internal audits and reviews 13 relating to the Texas Lottery Commission, and/or the 14 Internal Audit Department's activities, including the 15 security study, the year-end financial audit and/or Mega 16 Millions agreed-on procedures. 17 Catherine, this is your item. And I know 18 we have some guests with you to present this as well. 19 MS. MELVIN: Yes, Madam Chair. Thank you 20 so much. Good morning, Commissioner. For the record, 21 Catherine Melvin, Director of the Internal Audit 22 Division. 23 This morning we do have some guests here 24 to present results of the audits that we've had 25 performed over the last month. First up, I would like 9 1 to introduce our financial auditors and ask them to come 2 to the table. And joining them will be our controller, 3 Ms. Pyka. 4 The financial audit was performed in 5 accordance with statute. And the firm Maxwell Locke & 6 Ritter performed that audit this year. With the firm is 7 Mr. Scott Krchnak; he is a partner with the firm. And 8 then our managing auditor or lead auditor in charge 9 would be Ms. Kelli Leventhal. So I'll turn it over to 10 them to present their results. 11 MR. KRCHNAK: Thank you, Catherine. 12 For the record, Scott Krchnak, audit 13 partner with Maxwell Locke & Ritter. 14 MS. LEVENTHAL: And for the record, I'm 15 Kelli Leventhal. I was the engagement manager with 16 Maxwell Locke & Ritter. 17 So we performed an audit of the financial 18 statements of the Texas Lottery Commission for the year 19 ended August 31, 2010, in which we issued an unqualified 20 opinion on those financial statements. In layman's 21 terms, sometimes that's referred to as the clean 22 opinion. It's the best opinion that we could issue. We 23 also issued a report on internal controls over financial 24 reporting in which we disclosed no discrepancies or 25 deficiencies. 10 1 For the prior year, August 31, 2009, we 2 did disclose two significant deficiencies. However, 3 both were resolved during the year ended August 31, 4 2010, so they were not repeated. 5 We've also issued a SAS 114 letter, 6 sometimes also referred to as a governance letter. And 7 the main thing I would like to point out in that is that 8 we had no difficulties in dealing with management when 9 performing the audit. We've also issued a report on 10 agreed-upon procedures related to Mega Millions, and we 11 have no findings related to the procedures that we 12 performed. 13 And one thing we would just like to note 14 for going forward for this upcoming year, we will also 15 perform an engagement on agreed-upon procedures covering 16 Powerball, and that will cover the period from 17 February 2010 through March 31, 2011. 18 Do you have any questions or -- 19 CHAIRMAN WILLIAMSON: Commissioner? 20 COMMISSIONER KRAUSE: Y'all do any audits 21 of any other agencies? 22 MS. LEVENTHAL: No, we -- 23 MR. KRCHNAK: State agencies, the only 24 other state agency we audit is the State Bar of Texas, 25 but we do audit -- 11 1 COMMISSIONER KRAUSE: Did they get a clean 2 opinion? 3 MR. KRCHNAK: Yes. 4 (Laughter) 5 COMMISSIONER KRAUSE: I wanted to be the 6 only one. 7 MS. LEVENTHAL: If I could take a moment, 8 I would like to commend the Controller's office. They 9 were very busy this year while we were performing the 10 audit; yet, they still put our requests first. And it's 11 always nice to work for a client where the turnaround is 12 so quickly, because it makes our job much easier. 13 CHAIRMAN WILLIAMSON: That's true. Just a 14 couple of questions, check up on Internal Audit staff 15 and our Controller staff. Did they provide you all 16 access -- provide you any information when you had -- 17 did you have any problems with anyone? 18 MS. LEVENTHAL: No, no. They provided us 19 everything that we requested. We also requested 20 information from Internal Audit as well, and they were 21 also very compliant and quick on the turnaround. 22 CHAIRMAN WILLIAMSON: Good. 23 Commissioner, do you have any comments or 24 questions? 25 COMMISSIONER KRAUSE: No, ma'am. 12 1 MS. LEVENTHAL: Thank you very much. 2 CHAIRMAN WILLIAMSON: Thank you. 3 MS. LEVENTHAL: Appreciate it. 4 MS. MELVIN: Thank you. 5 CHAIRMAN WILLIAMSON: Thank you. 6 MS. MELVIN: And, Commissioners, we do 7 have another audit also to report on, our security 8 study. This is a statutory requirement also, so I would 9 like to invite the firm that performed the review to 10 join us at the table. Also joining them is, from our 11 Internal Audit office, Ms. Nancy Walden. Nancy was our 12 main coordinating person on the audit. She was the 13 primary liaison. And so I'm going to actually turn it 14 over to her to introduce the gentlemen from Grant 15 Thornton. 16 MS. WALDEN: Thank you, Catherine. 17 For the record, my name is Nancy Walden 18 from the Internal Audit Division. 19 As y'all know, we are required by law to 20 have a biennial security study performed of the agency. 21 And Grant Thornton was selected as the people who are 22 going to do that for us. Before you is Mr. Nick 23 Vellani -- he was the project manager for the study -- 24 and Mr. Ed Hill who was the Executive Director and 25 project lead for it. I'm going to turn this over to 13 1 them and let them tell you the results of the study. 2 MR. HILL: Okay. Just for the record, my 3 name is Edward Hill, and I'm Executive Director with 4 Grant Thornton. And we successfully completed the 5 required biennial study. And based on the results of 6 our work, it appears that the Lottery does maintain 7 effective security controls, maintain the integrity and 8 overall integrity of the lottery operations. 9 We would like to thank everybody we worked 10 with, including the GTECH people. They were very 11 cooperative, the Internal Audit, and I think we worked 12 with almost all of the departments within the Lottery 13 and just received excellent cooperation and I think 14 allowed us to do a pretty efficient and effective 15 review. 16 So I don't know if you have any questions. 17 CHAIRMAN WILLIAMSON: Commissioner? 18 COMMISSIONER KRAUSE: No, ma'am. 19 CHAIRMAN WILLIAMSON: Just elaborate a 20 little bit. When you say "security study," what exactly 21 does that cover in terms of security? Obviously, you 22 know, the IT systems and whatever. Just give us a 23 little brief -- 24 MR. HILL: Okay. 25 CHAIRMAN WILLIAMSON: -- synopsis of that. 14 1 MR. HILL: The lottery statute actually 2 calls out a number of specific areas for us to evaluate 3 and look at. And I'll just read through those. It's 4 basically security over lottery personnel, sales agent 5 security, lottery operations and vendor security, 6 security against ticket counterfeiting and alterations 7 and other means of fraudulent winnings, security of 8 lottery drawings, lottery computer, data communications, 9 databases and system security, so the very technical 10 security around the systems involved, lottery premises 11 and warehouses security, security of the distribution of 12 tickets, security of ticket validation and payment 13 procedures, security involving unclaimed tickets or 14 prizes, security aspects of each lottery game. 15 And those were the 12 spelled out, and we 16 added also looking at -- oh, also security against 17 deliberate placement of winning tickets. And we also 18 looked at security around the Texas Lottery website. 19 CHAIRMAN WILLIAMSON: All right. I did 20 not know the specifics. Thank you for sharing that with 21 us. 22 COMMISSIONER KRAUSE: Did y'all take a 23 look at our second chance drawing procedures? 24 MR. VELLANI: Yes, we did. As part of our 25 unclaimed prizes, that was part of our test procedures, 15 1 and it came out clean. 2 COMMISSIONER KRAUSE: Thank you. 3 CHAIRMAN WILLIAMSON: All right. Thank 4 you. 5 MS. MELVIN: Thank you very much. 6 Commissioners, that's all I had this 7 morning -- 8 CHAIRMAN WILLIAMSON: Okay. 9 MS. MELVIN: -- unless you have any 10 questions. 11 CHAIRMAN WILLIAMSON: And I've asked this 12 question before, so I will ask you this: I know we have 13 lots of audits. How many have we had in the last two 14 years? 15 MS. MELVIN: We do have a lot of audits. 16 The Texas Lottery Commission has required audits by 17 statute. These two are examples of that. 18 You know, if we look back over the past 19 two years, you know, I would say we've had at least 20 four, five audits. However, what makes us different, I 21 think, than other state agencies is the statutory 22 requirements. We are one of maybe a dozen or so state 23 agencies that must have a financial statement audit. 24 That's not common among all the other state agencies. 25 The fact that we have a statutorily 16 1 required security study that's performed, that's -- you 2 know, Mr. Hill alluded to, just laying out the scope of 3 that review is pretty thorough. It spans all functions 4 of lottery operations, and so that's a pretty robust 5 review that's done. 6 However, I would actually point to the 7 audits that we can have done of our vendors, seeing how 8 they are so critical to lottery operations. That 9 provides us a lot of assurance regarding operations. 10 Specifically with our lottery operator 11 contract, we have a required contract compliance review 12 that goes through, systematically goes through the high 13 risk elements of that contract and verifies and attests 14 to whether our lottery operators are performing in 15 accordance with contract provisions. We request and 16 mandate by contract that a SAS 70 review is performed of 17 the lottery operator. And then I would say throughout 18 the year, as any incidents come up, we might require an 19 external auditor to review a situation. 20 So we have a lot of tools, I think, to 21 provide us that type of assurance. And then on top of 22 all that, we have Internal Audit. And so Internal 23 Audit, you know, we perform our reviews. We provide you 24 those reports, too. 25 CHAIRMAN WILLIAMSON: All right. It just 17 1 seems like to me that we have quite a few done. 2 COMMISSIONER KRAUSE: Well, it sounds like 3 our commission is probably the most well-run, 4 transparent and with best systems of virtually any 5 agency out there in the State of Texas. 6 MS. MELVIN: I will say, I've worked at 7 other state agencies, and I think one thing that's 8 different, although I think other agencies are moving 9 towards this model, is the extent of contract compliance 10 and audit requirements that we have in our contract that 11 we utilize, not just having the provision but that we 12 actually take advantage of. 13 CHAIRMAN WILLIAMSON: Good. All right. 14 Thank you. 15 MS. MELVIN: Thank you. 16 AGENDA ITEM NOS. III and IV 17 CHAIRMAN WILLIAMSON: All right. Let's go 18 on the to the next item, the consideration of and 19 discussion or action, including proposal, on amendments 20 to 16 TAC 402.502 relating to charitable use of 21 proceeds. 22 And, actually, we'll also do Item IV, 23 those two together, more or less. Okay. Then on to 24 Item IV as well; we'll include that. The same thing on 25 16 TAC 402.501 relating to distribution of proceeds for 18 1 charitable purposes. 2 And, Ms. Joseph, these two are your items, 3 please, ma'am. 4 MS. JOSEPH: For the record, my name is 5 Sandra Joseph, Special Counsel of the Legal Division. 6 Items III and IV both contain and 7 recommend proposed amendments. The first one, Item III, 8 concerns Rule 402.502 concerning the charitable use of 9 proceeds. The purpose of this amendment is to specify 10 what documents and records must be maintained by a 11 licensed authorized organization to validate the use of 12 its net proceeds for charitable purposes. The changes 13 to this rule are being proposed to make it consistent 14 with the statute -- minor changes. 15 Item IV is proposed repeal of existing 16 402.501 concerning distribution of proceeds for 17 charitable purposes and, in its place, proposed new Rule 18 402.501, charitable use of net proceeds. 19 The repeal of the existing rule and the 20 proposed new rule will remove the requirement to 21 distribute net proceeds, which was based on a formula 22 which is no longer in effect. And the proposed new rule 23 will put into effect and make it clear and to be 24 consistent with the statute as it now exists. 25 All of these rules are planned to have a 19 1 public hearing on Wednesday, February 16th. And the 2 staff recommends that the Commission initiate the 3 rulemaking process by voting to publish these three 4 actions for public comment. 5 CHAIRMAN WILLIAMSON: All right. Thank 6 you. 7 Commissioner, you have a question? 8 COMMISSIONER KRAUSE: No. I'm happy to 9 make a motion, though. 10 CHAIRMAN WILLIAMSON: Please make a 11 motion. 12 COMMISSIONER KRAUSE: I make a motion that 13 we publish these rules for comment. 14 CHAIRMAN WILLIAMSON: Kim, do we need to 15 be more specific on the -- 16 MS. KIPLIN: I think given the backdrop in 17 the announcement of the agenda item, what I understand 18 that's occurring is, you're proposing to -- let's see. 19 Amendments to 402.502, you're proposing a repeal of an 20 existing rule; that's 402.501. And you're proposing the 21 new rule, 402.501, all for public comment. 22 CHAIRMAN WILLIAMSON: All right. I second 23 the motion. 24 All in favor? 25 COMMISSIONER KRAUSE: Aye. 20 1 CHAIRMAN WILLIAMSON: Aye. 2 Motion passes two to zero on those items. 3 AGENDA ITEM NOS. V AND VI 4 CHAIRMAN WILLIAMSON: And let's see. 5 We'll go on V and VI. Can we do those together as well? 6 MS. JOSEPH: Yes. 7 CHAIRMAN WILLIAMSON: All right. These 8 items are consideration, discussion and/or action, 9 including proposal on amendments, to 16 TAC 402.205 10 relating to unit agreements and 16 TAC 402.203 relating 11 to unit accounting. 12 Sandy. 13 MS. JOSEPH: Yes. The purpose -- or 14 excuse me -- the effect of the proposed amendments to 15 these rules will minimize programming costs for the 16 Charitable Bingo Operating Division. The proposed 17 amendments to 402.205 concerning unit agreements is to 18 delete language that's duplicated in Rule 402.100 and to 19 add language that requires an accounting unit to notify 20 the Commission of a change in unit membership prior to 21 the date the unit membership changes. 22 The purpose of Rule 402.203 is to clarify 23 the requirements, process and timelines a licensed 24 authorized organization must follow relating to 25 expending its net proceeds in its bingo account when 21 1 joining an accounting unit. Both of these rules are 2 related to accounting units. 3 Again, the staff plans to hold a hearing 4 on these rules on February 16, 2010, at 10:00 a.m., and 5 we recommend that these rules be published in the Texas 6 Register in order to receive public comment. 7 CHAIRMAN WILLIAMSON: Thank you. 8 Commissioner, do you have any questions? 9 COMMISSIONER KRAUSE: (Shakes head) 10 CHAIRMAN WILLIAMSON: Would you like to 11 make a motion? 12 COMMISSIONER KRAUSE: I would like to make 13 a motion that the two rules that you specifically 14 mentioned be published for comment. 15 CHAIRMAN WILLIAMSON: I second that 16 motion. 17 All in favor? 18 COMMISSIONER KRAUSE: Aye. 19 CHAIRMAN WILLIAMSON: Aye. 20 Motion passes 2-0. 21 AGENDA ITEM NO. VII 22 CHAIRMAN WILLIAMSON: All right. Let's go 23 on to Item VII, the consideration of and possible 24 discussion and/or action, including withdrawal, on 25 proposed amendments and proposal on amendments to 16 TAC 22 1 402.604 relating to delinquent purchaser. 2 MS. JOSEPH: At the September 10, 2010 3 meeting, the Commission approved filing of proposed 4 amendments to bingo rule 402.604 concerning delinquent 5 purchasers. Public comments were received. A hearing 6 was held. And in response to those comments, the staff 7 recommends changes to the proposed amendments as they 8 were published. 9 However, because the changes are 10 substantive in nature, we believe that it is necessary 11 to withdraw the proposed rule and republish the new 12 proposed amendments; therefore, we recommend that you 13 direct the staff to withdraw the rule which is currently 14 outstanding and to, instead, publish the new draft 15 rules. 16 CHAIRMAN WILLIAMSON: Thank you. 17 Kim, is this an action item? 18 MS. KIPLIN: Yes, this is. It's your 19 rulemaking that is out there right now, and so the staff 20 is requesting your approval to withdraw that proposed 21 rulemaking and replace it with this new rulemaking, in 22 light of a comment that was received, they feel to give 23 better notice to the public on what's actually going to 24 be changed. 25 The other approach they could have taken 23 1 would be to go ahead and accept that comment, make those 2 changes and then request you-all adopt as revised. And 3 there is a real fine line in when have you changed a 4 proposed rule so much that you really ought to go back 5 and republish it? And I think in the staff's view, just 6 to make sure we did give adequate notice of what's 7 really going on, the changes, and give folks an 8 opportunity to comment on those changes, rather than ask 9 that you adopt it, they would like to go ahead and 10 propose and give everybody an opportunity to comment. 11 CHAIRMAN WILLIAMSON: Okay. Thank you. 12 Commissioner, would you like to make a 13 motion? 14 COMMISSIONER KRAUSE: I make a motion that 15 we withdraw the previously published rule, 402.604, and 16 republish the rule as proposed by staff. 17 MS. JOSEPH: All right. Thank you. I 18 have T-bars for you. 19 CHAIRMAN WILLIAMSON: Okay. 20 Second on the vote. 21 COMMISSIONER KRAUSE: Aye. 22 CHAIRMAN WILLIAMSON: Aye. 23 Vote basses 2-0. 24 AGENDA ITEM NO. VIII 25 CHAIRMAN WILLIAMSON: All right. The next 24 1 item is report, discussion and/or action on AG Opinion 2 GA-0812 relating to bingo gift certificates and 3 8-liners. 4 Phil, this is your item, please. 5 MR. SANDERSON: Good morning, Chairman and 6 Commissioner. 7 I have asked for this item to be placed on 8 the agenda to bring you up to date on your request of 9 May 6th for an Attorney General opinion of whether bingo 10 gift certificates and similar items constitute non-cash 11 merchandise prizes, toys or novelties as described under 12 Section 47.01(4)(B) of the Penal Code. 13 Staff began developing an administrative 14 rule related to other games of chance conducted during a 15 bingo occasion, back in September of 2008. After 16 several internal meeting, a draft rule was submitted to 17 then Commissioner Schenck for his review and input. On 18 February 16, 2010, the draft rule was assigned to the 19 BAC workgroup on market conduct to seek informal comment 20 and input from the bingo industry. A meeting was 21 scheduled with the workgroup members on March 23, 2010. 22 The workgroup held a second meeting on 23 April the 23rd of 2010. And after the workgroup 24 meetings and discussions, it was clear that there were 25 divergent views on whether an 8-liner machine that 25 1 issues coupons that are either redeemed for a gift 2 certificate, issued by an organization licensed to 3 conduct bingo that is then redeemed for bingo paper, 4 electronic card- minding devices and/or pull-tabs or it 5 is redeemed directly for the bingo products, whether 6 this device is a gambling device and, therefore, 7 prohibited for exhibition and play during a bingo 8 occasion. 9 At the April 23rd workgroup meeting, the 10 suggestion was requested for the agency to seek an 11 Attorney General opinion and it was discussed, and 12 Chairman Williamson submitted her opinion to the 13 Attorney General on May the 6th. 14 Subsequent to the Commission's request, 15 Rep. Thompson committed a similar request on July the 16 7th regarding whether certain business practices used by 17 charities and other conduct with bingo to maximize their 18 profits comply with Chapter 2001, Occupations Code, and 19 other applicable law. 20 By letter dated August the 23rd of 2010, 21 the Attorney General notified the Commission his office 22 was combining these two requests, because of the common 23 questions that were asked, and accordingly would answer 24 the questions together. 25 On October 22nd, Opinion No. GA-0812 was 26 1 issued. The summary of the Opinion is as follows: 2 Texas courts have repeatedly considered 3 the legal status of 8-liner machines that award gift 4 certificates redeemable at retail establishments or 5 tickets redeemed for further play and have determined 6 that those machines are gambling devices and do not meet 7 the requirements for exclusion under Subsection 8 47.01(4)(B) of the Penal Code. 9 Similarly, a device that awards bingo 10 cards or paper, card-minding devices and pull-tab bingo 11 or gift certificates redeemable for the same is not 12 rewarding the player exclusively with non-cash 13 merchandise, prizes, toys or novelties under Subsection 14 47.01(4)(B) of the Penal Code. 15 After receiving the Opinion, the staff 16 began a review of the initial draft rule on other games 17 of chance, and we harmonized that rule with the content 18 of the Attorney General's Opinion. The draft rule was 19 reassigned to the BAC workgroup and has been 20 disseminated amongst the members of the industry for 21 review and informal comment. 22 The next BAC meeting is tentatively set 23 for March the 9th, 2011, and this draft rule will be on 24 their agenda for discussion. In the meantime, staff has 25 received inquiries as to what actions will be taken on 27 1 prior complaints relating to the use of these devices 2 described in the Opinion during a bingo occasion and 3 whether or not the division intends to make any criminal 4 referrals, take any administrative actions on current 5 licensees. 6 I would like to restate our regulatory 7 objective which was adopted by the Commission in 8 September of 2006: "Charitable bingo is an important 9 fundraising activity for a variety of Texas non-profit 10 organizations. The Charitable Bingo Operations Division 11 of the Texas Lottery Commission is charged with the 12 strict control and close supervision of bingo conducted 13 in this state so that bingo is fairly conducted and 14 proceeds are used for an authorized purpose. 15 Our goal is to achieve voluntary 16 compliance and assist licensees through training and 17 education. We will strive for the highest levels of 18 professionalism, conducting our regulatory activities 19 fairly, competently and consistently, and we will 20 develop clear regulatory requirements in an open 21 environment, encouraging two-way communication." 22 We have used this regulatory objective as 23 a guideline while developing all of our administrative 24 rules over the past four years. As you know, we have 25 had several rulemakings in that time period. And the 28 1 division is now working on the game-of-chance rule and 2 would like for it to be -- once it gets published and 3 comment and adopted, it will inform the licensees what 4 the division's expectations are in complying with the 5 section of the Act regarding other games of chance. 6 As such, staff is making a recommendation 7 that we do not reopen any complaints that were 8 investigated or received prior to the issuance of the AG 9 Opinion. Any complaints received henceforth will be 10 conducted in accordance with our complaint process. 11 That concludes my remarks, and I'll be 12 glad to answer any questions. 13 CHAIRMAN WILLIAMSON: Thank you. 14 Commissioner, do you have any questions? 15 COMMISSIONER KRAUSE: Don't think so. 16 CHAIRMAN WILLIAMSON: So summarize this in 17 language that I can understand. So what does this tell 18 me, that no longer there will be any sort of a device 19 out there that offers a second opportunity to get a -- 20 MR. SANDERSON: A device that issues or 21 awards a coupon that's redeemable for either a gift 22 certificate for any retailer establishment as it relates 23 to the Opinion. For bingo, a gift certificate for any 24 bingo product, or issues a coupon that can be redeemed 25 for bingo product would constitute that device to be a 29 1 gambling device and not exempt from the amusement 2 machine exemption that's in the Bingo Enabling Act for 3 other games of chance. 4 CHAIRMAN WILLIAMSON: Okay. That I 5 understand. And then the second part is -- I know we've 6 had concerns or complaints in the past about this. We 7 really are not interested in going backwards. 8 MR. SANDERSON: Correct. 9 CHAIRMAN WILLIAMSON: And basically from 10 this point forwards, then we would look into that? 11 MR. SANDERSON: Yes, ma'am. 12 CHAIRMAN WILLIAMSON: Okay. 13 Is this an action item or is this 14 something we're just saying, "Yes, we agree," or what do 15 we need to do with this? 16 MS. KIPLIN: This is not an action item; 17 this is a report item. And at a future meeting -- and I 18 don't know when that meeting will be -- I think staff 19 intends to present to you-all for your consideration the 20 proposed rule on other games of chance and imagining 21 that that particular document will incorporate the 22 tenets from this Attorney General Opinion as it relates 23 to the redemption of a gift certificate for these 24 coupons coming from 8-liners and making it clear that 25 that would be a prohibited conduct in a bingo hall. And 30 1 I think at that time that will be up for you-all for 2 your action. 3 CHAIRMAN WILLIAMSON: Okay. But since we 4 don't have anything in place right now, are you planning 5 on using this new direction as of right now? 6 MR. SANDERSON: The agency has previously, 7 as far as I know, always has given deference to AG 8 Opinions, and so that's what -- if the Opinion indicates 9 that these devices are not exempt from the amusement 10 machine exclusion in the Bingo Enabling Act as another 11 game of chance, then we would investigate and -- 12 CHAIRMAN WILLIAMSON: Okay. So just as a 13 matter of practice, from now forward this is how you'll 14 deal with it? 15 MR. SANDERSON: Yes, ma'am. 16 MS. KIPLIN: That's right. Agencies give 17 deference to Attorney General Opinions unless they're 18 repealed, contradicted by case law. So we will give 19 deference to the Abbott Opinion, and we'll use this as a 20 guidepost, a guideline, and we'll include the tenets of 21 this opinion, like I said, in this proposed rule. But 22 we'll use this. If we get complaints, my understanding 23 is that we will be applying this opinion. And, 24 obviously, if people disagree with this Opinion, then 25 there will be a form that they can challenge that. 31 1 CHAIRMAN WILLIAMSON: Sure. Does the 2 industry, are they aware of this Opinion? 3 MR. SANDERSON: We have posted it on our 4 website, the notice, when it was issued. There was an 5 email to the email group, that I have sent out 6 notification that it was issued. I have heard of other, 7 you know, bingo halls taking some sort of action based 8 on the AG Opinion. 9 CHAIRMAN WILLIAMSON: Okay. That would be 10 my concern is, (1) it's communicated out there; and (2) 11 that they understand it's from this point forward and 12 we're not going to go backwards. 13 MR. SANDERSON: And I think we also have 14 an article about the AG Opinion in our current Bingo 15 Bulletin that we're publishing right now that should be 16 out by the end of the month. 17 CHAIRMAN WILLIAMSON: Okay. All right. 18 Commissioner, do you have any other -- 19 anything you would like to -- 20 COMMISSIONER KRAUSE: No, ma'am. 21 CHAIRMAN WILLIAMSON: Okay. 22 MS. KIPLIN: Chairman Williamson, I've 23 just been handed two witness affirmation forms, and I 24 want to bring those to your attention. One is by 25 Mr. Minch not indicating what item and then another by 32 1 Mr. Kohler indicating Item IV and noting against. We're 2 past Item IV, so... 3 CHAIRMAN WILLIAMSON: All right. Well, I 4 appreciate that. But as you guys know, I've pretty much 5 said you've got to be here when we start and get it in, 6 so I think right now I'll decline on those. 7 AGENDA ITEM NO. IX 8 CHAIRMAN WILLIAMSON: All right. Let's go 9 on to Item IX, the report by the Charitable Bingo 10 Operations Director and possible discussion and/or 11 action on the Charitable Bingo Operations Division's 12 activities, including updates on staffing, licensing, 13 accounting and audit activities. 14 And, Phil, this is your item, please. 15 MR. SANDERSON: Commissioners, in your 16 notebook is the standard monthly report of bingo 17 activities during the month of December. And I'll be 18 glad to answer any questions that you may have. 19 CHAIRMAN WILLIAMSON: So right now we have 20 seven staffing vacancies -- nine -- 21 MR. SANDERSON: We currently have eight 22 staffing vacancies. 23 CHAIRMAN WILLIAMSON: Eight staffing 24 vacancies. 25 MR. SANDERSON: Well, I take that back. 33 1 Nine. 2 CHAIRMAN WILLIAMSON: Nine. 3 MR. SANDERSON: There's a person just 4 retired. 5 CHAIRMAN WILLIAMSON: Okay. 6 MR. SANDERSON: There are nine vacancies 7 in Bingo right now, yes, ma'am. 8 CHAIRMAN WILLIAMSON: Okay. All right. 9 Commissioner, do you have any questions? 10 COMMISSIONER KRAUSE: No, ma'am. 11 CHAIRMAN WILLIAMSON: All right. Thank 12 you. 13 AGENDA ITEM NO. X 14 CHAIRMAN WILLIAMSON: Let's go on to Item 15 X, report, possible discussion and/or action on lottery 16 sales and revenue, game performance, advertising, 17 marketing. 18 Kathy and Robert, this is your item, 19 please. 20 MS. PYKA: Good morning, Commissioners. 21 My name is Kathy Pika, Controller for the Commission. 22 With me to my right is Robert Tirloni, our Products 23 Manager. 24 This morning the first chart that we have 25 for you reflects comparative sales data through the week 34 1 ending January 15, 2011. Total Fiscal Year 2011 sales 2 through this 20-week period are $1.403 billion, an 3 increase of $6.8 million over the same period last 4 fiscal year. 5 Moving to our Fiscal Year 2011 instant 6 sales that are reflected on the second blue bar, they're 7 at a billion 40 million dollars, which is a $2.9 million 8 increase over this same period last fiscal year. 9 And then our on-line sales for Fiscal Year 10 2011 again are represented on the second red bar, are at 11 $362.4 million, which is a $3.9 million gain over the 12 prior fiscal year. 13 So, Commissioners, before we move on to 14 the next slide, I would like to highlight the 15 significance of our most recent Mega Millions jackpot 16 roll that was advertised at $355 million and eventually 17 supported $380 million. 18 When we appeared before you last month, we 19 recorded a year-over-year sales decline of 20 $40.8 million. And with that decline, we had a decline 21 on the on-line product of $22.9 million. And as we've 22 just noted, we now have a $6.8 million total surplus, 23 with a $3.9 million on-line surplus. 24 A few of the highlights that I would like 25 to share on that Mega Millions jackpot roll, on our draw 35 1 cycle that was the last draw cycle of the jackpot roll, 2 which included January 1st through January 4th, our draw 3 sales for that cycle were $15.8 million. That was our 4 highest single draw sales total since we began selling 5 the Mega Millions product. 6 I would also like to highlight that the 7 draw sales specific to that Tuesday, January 4th, were 8 $12.9 million. Again, that was our single highest day 9 of draw sales since we began selling the Mega Millions 10 product. The draw sales for the total roll cycle were 11 $46.4 million, which was our third highest draw sales 12 total since we joined Mega Millions. 13 And then last, during the week of the 14 jackpot, the $355 million jackpot, total sales, 15 including all products, for that week were 94 and a half 16 million dollars. Commissioners, that's our seventh best 17 week of lottery sales since the lottery began here in 18 Texas. 19 CHAIRMAN WILLIAMSON: So how long has that 20 been, 18 years? 21 MS. PYKA: Eighteen years. 22 CHAIRMAN WILLIAMSON: Is that right? 23 MS. PYKA: Going on 18 years. 24 CHAIRMAN WILLIAMSON: So that's the 25 seventh best in 18 years, with all of the swings of the 36 1 economy? 2 MS. PYKA: Yes, ma'am. 3 CHAIRMAN WILLIAMSON: I mean, it's just -- 4 still, it's hard to -- it's just kind of hard to 5 comprehend. It's amazing. 6 MS. PYKA: Certainly we wanted to get 7 those highlights and share those with you, pretty 8 impressive. 9 Our next slide that we have for you 10 includes a cumulative daily sales comparison average for 11 Fiscal Years 2009, 2010 and Fiscal Year 2011. As 12 reflected by total cumulative sales, our daily sales 13 average for Fiscal Year 2011 is at $10.2 million, which 14 is a 1.2 percent increase over Fiscal Year 2010 sales 15 and a 5.2 percent increase over Fiscal Year 2009 sales. 16 Again, last month when we were before you, we were 17 looking at a 3.2 percent decline on the average daily 18 sales figure. 19 The jackpot games highlighted in the white 20 font reflect an average daily total of a million and a 21 half for Fiscal Year 2011, which is certainly a slight 22 increase over last fiscal year. 23 Our daily games highlighted in the green 24 font are just below $1.1 million which, as noted, are 25 above the Fiscal Year 2010 daily average and just below 37 1 the Fiscal Year 2009 daily average. And what we would 2 like to highlight on this particular grouping is that 3 our Pick 3 sales, at 742,000 as a daily average, are up 4 1.4 percent over last fiscal year, and then our Daily 4 5 sales, at 153,000, are up just under 9 percent over last 6 fiscal year. 7 And then last, our instant sales, at 8 7.59 million as a daily average, again, up above the 9 Fiscal Year 2010 and 2009 years, which reflects, of 10 course, a $76,000 increase over last fiscal year. 11 So with that, Robert is going to highlight 12 the actual daily sales figures. 13 MR. TIRLONI: Good morning, Commissioners. 14 For the record, my name is Robert Tirloni. I'm the 15 Products Manager for the Commission. 16 This slide shows our fiscal year to date 17 sales comparison through the week ending this past 18 Saturday, January 15th. As Kathy mentioned, our total 19 sales for the Fiscal Year 2011 compared to Fiscal 2010 20 are up $6.9 million. If we look at the slide in the 21 groupings, our jackpot games are up, our daily games are 22 up as a whole, and our instant games are up 2.9 million. 23 Lotto is lagging a little behind 2010. 24 We're still competing with some large jackpots that the 25 Lotto game experienced last fiscal year, a mid- 38 1 $70 million jackpot, and then Lotto rolled all the way 2 up to a $99 million jackpot, so that's the reason for 3 that decline. 4 But all-in-all, with the Mega Millions 5 information Kathy shared with you a few moments ago and 6 what I believe was a very strong suite of holiday games, 7 we're obviously positioned well at the start of the new 8 calendar year, and we're very busy working on 9 initiatives that are going to be coming out this spring. 10 I did give you a sample of our brand-new 11 scratch-off game, Texas Lottery Black. That is a new 12 $10 game. It just started on Monday, so it's just 13 getting out into all the dispensers in all of our retail 14 locations. It's a new style game for us. It's got a 15 different look and feel, and so we're excited about that 16 game line. That game is not getting TV or radio 17 support, but in store it is getting full point-of-sale 18 presence, so we're looking forward to some good success 19 with that game as well. 20 CHAIRMAN WILLIAMSON: Great. I think 21 someone told me that you were going to advertise in 22 Texas Monthly for this game? 23 MR. TIRLONI: Yes, that will be in Texas 24 Monthly. 25 CHAIRMAN WILLIAMSON: It will be 39 1 interesting to see how that works. I'm glad we're doing 2 that. I think it's a little bit different arena for us 3 to advertise. 4 MR. TIRLONI: I agree, a different 5 publication and probably a different audience. 6 CHAIRMAN WILLIAMSON: I will say your 7 peppermint -- the scratch-off, the one that had the -- 8 MR. TIRLONI: Yes, ma'am. 9 CHAIRMAN WILLIAMSON: It's very popular. 10 I had a lot of people say, "Why did you run out? You 11 know, I went there and they didn't have it, and I went 12 to four stores." So I said, "I don't know. I'll ask." 13 MR. TIRLONI: We're glad when it runs out. 14 CHAIRMAN WILLIAMSON: It was a very 15 popular game, at least in my part of the world. 16 MR. TIRLONI: Yes. We heard positive -- 17 that was the first scented game that we've ever done. 18 And I don't know if the people at the warehouse were 19 thrilled with having to smell that all day, but it was 20 well-received so we'll be looking to do some of those in 21 the future as well. 22 CHAIRMAN WILLIAMSON: Okay. Great. 23 MR. TIRLONI: And that concludes our 24 report. But if you have any other questions, we're 25 happy to answer those. 40 1 COMMISSIONER KRAUSE: So we need some more 2 jackpots. Right? 3 MR. TIRLONI: Absolutely. You know, we 4 just rolled on Powerball, so we're over a 100 million on 5 Powerball now, which is good. When you kind of get over 6 that 100-million-dollar mark, that tends to bring in 7 some new players and, you know, not your regular or your 8 typical players, so that's good. But another good 9 jackpot roll like we just experienced on Mega Millions 10 this fiscal year, whether that be from Powerball or Mega 11 Millions, would be great for our sales and revenue this 12 year, yes. 13 CHAIRMAN WILLIAMSON: All right. 14 MS. PYKA: Thank you, Commissioners. 15 AGENDA ITEM NO. XI 16 CHAIRMAN WILLIAMSON: Kathy, go ahead. 17 The next item is yours, the transfer of funds. 18 MS. PYKA: Thank you, Madam Chair. Again 19 for the record, Kathy Pyka, Controller for the 20 Commission. 21 The first report in your notebook, 22 Commissioners, reflects the total transfers and 23 allocations to the Foundation School Fund, the Texas 24 Veterans Commission, as well as the allocation of 25 unclaimed prizes through the period November 30, 2010. 41 1 Total transfers to the state through this 2 period were $225.4 million. And as we go to the next 3 page of your notebook, you'll note that that 4 $225.4 million transfer included a $208.5 million 5 transfer to the Foundation School Fund, with a million 6 point 8 transferred to the Texas Veterans Commission, 7 with a balance of $15.1 million transferred from 8 unclaimed lottery prizes. 9 Commissioners, this represents a 12.53 10 percent decrease, or $29.8 million under the amount 11 transferred to the Foundation School Fund in November of 12 2009. But again, that's through November. And as we've 13 just highlighted on the sales overview, our sales have 14 played a significant change in the trend, going into 15 January. 16 We have also completed the December 17 transfer document, with a total of 291.9 now transferred 18 to the Foundation School Fund, so I wanted to give that 19 information. And we certainly expect that January will 20 close that gap somewhat. 21 The next item in your notebook includes a 22 report of the Fiscal Year 2011 method of finance summary 23 for the third quarter ending -- or the first quarter 24 ending November 30, 2010. The Commission's lottery 25 account budget for Fiscal Year 2011 is $208.84 million. 42 1 And of this amount, 73 percent is expended and 2 encumbered through the first quarter. 3 And the Bingo Operations budget funded by 4 general revenue is $15.51 million, and 37 percent of 5 that is expended and encumbered through the first 6 quarter. 7 That's all I have for you this morning on 8 that item, Commissioners, unless you have any other 9 questions. 10 CHAIRMAN WILLIAMSON: Commissioner? 11 COMMISSIONER KRAUSE: (Shakes head) 12 AGENDA ITEM NO. XII 13 CHAIRMAN WILLIAMSON: All right, Kathy. 14 If you'll go on to the next item, please, No. XII on the 15 credit on the contract. 16 MS. PYKA: Certainly. Thank you again. 17 Again, for the record, Kathy Pyka, Controller for the 18 Commission. 19 Commissioners, this morning I wanted to 20 provide an update for you on the Amendment No. 8 of the 21 Lottery Operations and Services contract and the amount 22 due to the Commission for the first quarter of Fiscal 23 Year 2011. Section 10.3.3 of the amendment provides an 24 annual credit to the Commission equal to 12 percent of 25 GTECH's annual incremental revenue for sales over the 43 1 previous fiscal year for every tenth of a percent in 2 increase in overall prize pay-out percentage. 3 This particular section of the contract 4 did not result in a credit the first quarter of Fiscal 5 Year 2011, as there were not an increase in sales. 6 However, we did have a credit under Section 10.3.4 of 7 the amendment, which is where GTECH is required to 8 provide an annual credit to the Commission equal to four 9 and a half percent of the annual incremental difference 10 in revenue to the state if sales remain flat or decline 11 and there is an increase in prize payout. 12 So, Commissioners, this section of the 13 contract resulted in a credit of $800,686 during the 14 first quarter of Fiscal Year 2011. We have billed that 15 credit, and we have certainly received those funds. 16 And I would be happy to answer any 17 questions that you might have. 18 CHAIRMAN WILLIAMSON: Commissioner? 19 COMMISSIONER KRAUSE: Did they pay yet? 20 MS. PYKA: They have. We received those 21 funds with one of our December invoices. 22 CHAIRMAN WILLIAMSON: All right. 23 MS. PYKA: Thank you, Commissioners. 24 CHAIRMAN WILLIAMSON: Thank you. 25 44 1 AGENDA ITEM NOS. XIII, XIV AND XV 2 CHAIRMAN WILLIAMSON: Let's go on to Item 3 XIII, consideration of and possible discussion and/or 4 action, including proposal, on amendments to 16 TAC 5 401.305 relating to Lotto Texas on-line game rule. 6 Pete, this is your item, please. 7 MR. WASSDORF: Good morning, Commissioner 8 and Chairman. 9 With your permission, Agenda Items XIII, 10 XIV and XV have some common elements in them. And if I 11 could make a presentation on that common portion on all 12 three of them? 13 CHAIRMAN WILLIAMSON: Sure. Please go 14 ahead and do all three of those together. It will be 15 fine. 16 MR. WASSDORF: Agenda Items XIII, XIV and 17 XV are proposing amendments to 16 TAC 401.305, 401.315 18 and 401.317, respectively. 19 The common elements here and the purpose 20 that we're trying to accomplish is to go from a cash 21 option or from an annutized option default to a cash 22 option default as new equipment is transitioned in under 23 the new lottery operator contract. 24 As you know, winning jackpot players may 25 receive payments either in a lump sum cash payment, 45 1 which is called the cash value option, or in 2 installments which are annutized at a currently 3 prevailing interest rate, the annutized option. There 4 are two types of terminals generally for this, and those 5 are retailer-operated terminals and self-service 6 terminals. 7 Currently there are two types of retailer- 8 operated services terminals and two types of self- 9 service terminals. And under the new contract, there's 10 going to be three types of retailer-operated terminals 11 and one type of self-service terminals. And each one of 12 those is -- they're going to operate a little 13 differently than they do now. 14 Rather than trying to explain that in a 15 narrative form, we have included a chart in the rule 16 that will show what cash payment option will be 17 accomplished with each of those types of terminals. And 18 we're doing that because there is going to be a 19 transition period throughout the year, when you're going 20 to have old terminals in use and new terminals coming on 21 and being used. And when all of the new terminals are 22 completely installed, we will probably come back in and 23 amend these rules and take that chart out and have a new 24 rule in place. 25 These terminals, the new terminals are 46 1 going to essentially operate so that a player can select 2 a cash -- a Quick Pick cash option payment, which is the 3 most frequently used payment. Or if he wants to, he can 4 get the annutized payment by inserting a play slip in 5 the self-service machines. And if he has not made a 6 selection, that play slip will be rejected, and so it 7 will force a decision on him. As I said, the staff 8 proposes a transitionary period during the installation 9 of the new terminals. And we're hopeful that that will 10 explain, that the chart will explain to the public the 11 various options on payment. The rules for Agenda Items 12 XIII, XIV and XV is for Texas Lotto, Mega Millions and 13 Powerball, and each of them have similar changes to 14 them. 15 In addition to those changes, Item XIV has 16 some additional changes that I would like to bring to 17 your attention. The Mega Millions states, the states 18 which participate in the Mega Millions games, more and 19 more of them are adopting the Megaplier game with 20 respect to their Mega Millions games. And the Mega 21 Millions states have adopted new rules which will 22 incorporate the Megaplier feature. Some of those 23 changes have differed from Texas' Megaplier rule; and, 24 therefore, we are amending the changes that we're making 25 to the Mega Millions rules with respect to those changes 47 1 will clarify the prize amount calculation methodology 2 for this Megaplier during promotional periods, and it 3 will provide additional transparency to the public 4 related to the application of the liability cap of the 5 Mega Millions rules. And it will authorize, in the case 6 of special promotions, to increase the second tier prize 7 if the Mega Millions states choose to offer that. 8 And we have scheduled a public hearing on 9 these proposed amendments at 2:00 p.m. on Wednesday, 10 February 16th, here at the Commission headquarters. 11 And if you have any questions, I would be 12 happy to answer them; otherwise, we ask that you 13 authorize the proposal and comment on these proposed 14 amendments. 15 CHAIRMAN WILLIAMSON: Okay. First of all, 16 I'm going to need somebody -- no offense, Pete -- that 17 understands exactly what these machines are going to do 18 that we're transitioning onto. 19 Michael, was that you? 20 Once again, give it in simple terms for 21 me, please. What that means or what we're going to see, 22 what a player is going to see when this happens. 23 MR. ANGER: Sure. So under our new 24 contract -- for the record, my name is Michael Anger, 25 Lottery Operations Director. 48 1 Under our new contract, we're going to 2 have new equipment, both in the retail locations for 3 retailer use and also for player use. And the way our 4 default options for our drawing games for jackpot prizes 5 now are set, the ticket automatically defaults to an 6 annuity option or the player has an alternate for 7 selection. 8 But on our self-service equipment today, 9 we have a computer touch screen, that the player goes 10 through a series of menu options to select their ticket. 11 So they select all of the functionality that they want 12 in the design of, you know, their ticket: Picking their 13 numbers, picking their payment type, all of those types 14 of things. 15 The new equipment that we're getting is 16 more along the lines of how our instant scratch-off 17 self-service equipment is today, where you just walk up, 18 you see the game you want, you hit a button and you get 19 a ticket. 20 And so the drawing games will now be 21 featured on those new pieces of equipment in exactly the 22 same way. There won't be a touch screen interface for 23 players to select their drawing game tickets. There 24 will simply be Quick Pick buttons on the machine for the 25 drawing games that Pete alluded to, the games that we 49 1 have rule changes put forward for. 2 So a player will walk up. And if they 3 want a $5.00 Quick Pick, they will can hit the $5.00 4 Quick Pick button, but the default option on the machine 5 will be to generate a ticket for the player that's a 6 cash value ticket as opposed to the annuity option. 7 And the reason that we're doing that is, 8 in the beginning when we introduced cash value option 9 here in the state, we kept the default option as annuity 10 for players. But we took a close look when we realized 11 that we were going to be bringing in this new equipment, 12 and we looked at player-selected options. And we knew 13 from you experience and players claiming prizes over 14 time, that many players are selecting cash value. 15 Well, we pulled those numbers, and the 16 numbers are in the neighborhood of 90 percent across the 17 board for all of those jackpot games. So even though 18 the default out there in the marketplace today is 19 annuity, 90 percent of the players are going against the 20 default option and selecting cash value. So we're 21 trying to make the default option on these new pieces of 22 equipment in line with what the public really has out 23 there as their preference. 24 Now, Pete did mention that players can 25 still select annuity as their selected payment option 50 1 with regard to these pieces of equipment, because 2 they'll also take a play slip. So if a player just 3 doesn't want cash value option and doesn't want Quick 4 Pick, they can still fill out a play slip, they can 5 insert it in the machine, and the machine will generate 6 a ticket with any design that they would like. So, 7 really, this is just making us right sized with the 8 players' interests and then also, you know, moving us in 9 the direction of being consistent with the equipment 10 we're deploying in the field. 11 So, as Pete mentioned, there is a table 12 that will explain to players -- because we're going to 13 have a period of time in transition, we're going to have 14 both pieces of equipment out there. So this table 15 that's in the rule outlines how both pieces of equipment 16 work, with the idea being that we would come back at 17 some later date, after all of our equipment has been 18 converted during the conversion process, and we'll put 19 that back out. And so the default option would be cash 20 value on that self-service equipment. 21 CHAIRMAN WILLIAMSON: All right. So this 22 really covers the new equipment that's starting to come 23 in place. Basically you're trying to cover both 24 situations with this? 25 MR. ANGER: Exactly. 51 1 CHAIRMAN WILLIAMSON: Okay. 2 Commissioner, do you have any questions? 3 COMMISSIONER KRAUSE: What brought it to 4 our attention that we needed to change this around, 5 considering that, you know, 90 percent of the people are 6 picking the payout? 7 MR. ANGER: Basically on our experience 8 and the prizes being claimed here in our offices. You 9 know, that's heightened it to our attention. And this 10 seemed like a good and logical time to make this change. 11 COMMISSIONER KRAUSE: Okay. 12 MR. ANGER: It was consistent with the 13 equipment conversion we're doing, and it just seemed 14 like the right time. 15 COMMISSIONER KRAUSE: So y'all have 16 actually known about this for a long time, that people 17 were significantly favoring the payout over the annuity? 18 MR. ANGER: Yes, sir. 19 CHAIRMAN WILLIAMSON: Okay. 20 COMMISSIONER KRAUSE: That's less trouble 21 for us anyway. 22 CHAIRMAN WILLIAMSON: True. All right. 23 Any other questions on any of the 24 proposals? 25 COMMISSIONER KRAUSE: No, ma'am. 52 1 CHAIRMAN WILLIAMSON: All right. I know 2 this is an action item. All right. Would you like to 3 make a motion on all three of these items? 4 COMMISSIONER KRAUSE: Well, I didn't write 5 down all the rules. I don't have my agenda with me. So 6 all of the rules that Pete mentioned -- okay? -- 7 401.305, 401.315 and 301.317 (sic) be published -- 8 CHAIRMAN WILLIAMSON: Correct. 9 COMMISSIONER KRAUSE: -- for comments so 10 that we can make some changes to this. 11 MR. WASSDORF: That's correct. 12 COMMISSIONER KRAUSE: That's my motion. 13 CHAIRMAN WILLIAMSON: All right. Is that 14 okay? 15 MS. KIPLIN: I think it was 401.317. 16 COMMISSIONER KRAUSE: 317; 305, 315 and 17 317. 18 MS. KIPLIN: Excellent. 19 CHAIRMAN WILLIAMSON: All right. Second. 20 All in favor? 21 COMMISSIONER KRAUSE: Aye. 22 CHAIRMAN WILLIAMSON: Aye. 23 Motion passes 2-0. 24 MS. KIPLIN: Commissioners, I have T-bar 25 memos to reflect your vote. 53 1 MR. WASSDORF: Thank you, Michael. 2 AGENDA ITEM NO. XVI 3 CHAIRMAN WILLIAMSON: Okay. We're on -- 4 what? -- XVI? 5 MR. WASSDORF: We're on Item XVI. 6 CHAIRMAN WILLIAMSON: All right. 7 MR. WASSDORF: Again for the record, my 8 name is Pete Wassdorf, Assistant General Counsel in the 9 Legal Services Division. 10 I direct your attention to Item Agenda 11 Item XVI. Staff proposes a new rule at 16 TAC 401.372 12 entitled "Display of License." The purpose for the 13 proposed new rule is to comply with the Texas Government 14 Code, section 466.157, which requires the Commission to 15 prescribe by rule the criteria for the display of the 16 license in the place of business at which the licensed 17 sales agents sell lottery products. 18 This is an item that was brought to our 19 attention I think by the Internal Audit, that we did not 20 have a rule for that. And the proposed new rule will 21 provide that all licenses shall be prominently and 22 conspicuously displayed and visible and available to the 23 public. And they could post either an original license 24 or a copy of the license, as long as it's of the same 25 size and clarity as the original license. And they will 54 1 not display one which has been revoked or altered in any 2 substantive way. 3 CHAIRMAN WILLIAMSON: All right. 4 Commissioner, do you have a question? 5 COMMISSIONER KRAUSE: (Shakes head) 6 CHAIRMAN WILLIAMSON: Yes, they can add it 7 to the wall with all the other licenses that are 8 required by the state and federal government to display. 9 Would you like to make a motion, please? 10 COMMISSIONER KRAUSE: I make a motion that 11 we adopt 401.372 to take whatever action is necessary to 12 make that happen. 13 CHAIRMAN WILLIAMSON: I second. 14 All in favor? 15 Aye. 16 COMMISSIONER KRAUSE: Aye. 17 CHAIRMAN WILLIAMSON: Motion passes 2-0. 18 MS. KIPLIN: I have a T-bar memo for that. 19 AGENDA ITEM NO. XVII 20 CHAIRMAN WILLIAMSON: Let's go on to Item 21 XVII, a report, possible discussion and/or action, 22 including extension, on the advertising services 23 contract, amendment to the instant ticket manufacturing 24 and services contract and drawing audit services 25 procurement. 55 1 Mr. Fernandez, this is yours, please. 2 MR. FERNANDEZ: Good morning, Madam 3 Chairman, Commissioner Krause. My name is Mike 4 Fernandez. I'm the Director of Administration. And 5 this is a briefing item to advise the Commission of 6 staff's intent to take action on two contracts, the 7 first being TracyLocke. We intend to execute an 8 amendment to extend that contract for one year. 9 The second being Scientific Games 10 International, one of our ticket manufacturers. We 11 intend to amend that contract to take advantage of a 12 voluntary cost reduction, and so we wanted to advise you 13 of this. 14 I also have noticed up a drawing audit 15 services RFP, and I would like the Commission to permit 16 us to pass that item until a later Commission meeting. 17 And that's all I have on those items, 18 Commissioners. 19 CHAIRMAN WILLIAMSON: Okay. 20 COMMISSIONER KRAUSE: Thank you for your 21 report. 22 CHAIRMAN WILLIAMSON: Commissioner? 23 Okay. At this time we'll take a 10-minute 24 break. It is 10:10. 25 (Recess: 10:10 a.m. to 10:23 a.m.) 56 1 CHAIRMAN WILLIAMSON: We will resume. It 2 is 10:23. 3 AGENDA ITEM NO. XVIII 4 CHAIRMAN WILLIAMSON: We're on to Item 5 XVIII, report, possible discussion and/or action on the 6 lottery operations and services procurement. 7 Mike, I know this is your item. 8 And I think, Gary, you were going to add 9 some comments as well at this point. Okay. 10 MR. FERNANDEZ: Good morning, 11 Commissioners. For the record, my name is Mike 12 Fernandez. I'm the Director of Administration. And as 13 you know, this has been a standard reporting item on 14 your agendas I guess for at least a year, perhaps 15 longer, regarding the acquisition of the lottery 16 operator services contractor. And I'm here this morning 17 to advise you that, as you know, we entered into a 18 contract December the 14th, and we also informed you 19 that this posting will no longer be on your agenda, and 20 I'm happy to report that. 21 I do believe that, in discussions with 22 Mr. Grief, that we will be coming in front of you from 23 time to time to give you a status report on the 24 implementation of the conversion. I would like to say, 25 on behalf of the staff that worked on this project, that 57 1 we found it to be an honor certainly to represent the 2 agency in this important endeavor, and we do appreciate 3 that opportunity. And so in the latter parts of my 4 career, I did appreciate serving on that committee in 5 the capacity that I did. 6 So with that, Gary, I would like to turn 7 it over to you. 8 MR. GRIEF: Well, just for the record, 9 Mike has been telling me he's in the latter part of his 10 career for a long time now. 11 (Laughter) 12 MR. FERNANDEZ: I have a daughter in law 13 school. 14 CHAIRMAN WILLIAMSON: So you'll be here a 15 little bit longer anyway. Right? 16 MR. GRIEF: How much latter we can go. 17 Well, Commissioner, as Mike said, I'm very 18 pleased that we've concluded the lottery operator 19 procurement process. And given the nature of the 20 industry and our history with this particular contract, 21 we were very concerned about receiving a protest on this 22 particular award. But as Mike has said, that protest 23 period has come and gone, and we did not receive a 24 protest. And that's a tribute to the staff that worked 25 so hard on this project and so diligently over a long 58 1 period of time, led my Mike as the Chairman of the 2 evaluation committee. 3 Texas Lottery staff and GTECH are now 4 fully immersed in the conversion and the implementation 5 process. In reaching this successful conclusion, I 6 believe it's worth noting for the record several of the 7 steps that we took and decisions that we made over time 8 in order for us to get there. From Day One, we operated 9 under the assumption that we were going to receive a 10 protest, and that ultimately ended up being an 11 overarching guideline for us and a help, quite frankly, 12 in making sure that we followed the process to the 13 letter. 14 We started working on this RFP very, very 15 early. Our first serious discussions occurred all the 16 way back in August 2007. And we made a decision way 17 back then that we would be as flexible as possible with 18 the schedule that we came up with. And because we took 19 that approach, we were able to extend the proposal 20 deadline once on our own accord and another time at the 21 request of one of the proposers. We did all that in an 22 effort to reduce the risk of a protest based on a 23 timeline issue. 24 Months prior to issuing the RFP, we met in 25 person with all of the prospective bidders. We asked 59 1 for their input on strategies to encourage participation 2 from all the vendors out there who were capable of 3 bidding on this contract. We discussed very openly and 4 frankly our incumbency issue with GTECH. And by that, I 5 mean that GTECH has been the only lottery operator we've 6 ever had here in Texas since we initiated the lottery 7 back in 1992. And we shared with each of the 8 prospective bidders the strategy and the steps that we 9 were taking to try to level the playing field and 10 encourage competition and bids from all those capable of 11 doing so. 12 I had direct conversations with all of the 13 CEOs of the prospective bidders, to give them my 14 personal assurance that this was going to be a fair and 15 a competitive process. And at every opportunity, we 16 reminded the vendors that healthy, fair competition was 17 not only good for the Texas Lottery Commission but was 18 also good for the industry. 19 Then we worked together to put together a 20 top flight team. We procured the services of the very 21 best consultants that we could identify, although we 22 learned a hard lesson in our experience with Gartner, 23 which was a worldwide company just as GTECH was. And 24 that lesson was that we have to go above and beyond 25 reasonableness when it comes to doing conflict checks. 60 1 We used our best and our most experienced 2 staff on this RFP, and we used several additional senior 3 staff members as advisory members to that team. We 4 received outstanding support from the Office of the 5 Attorney General throughout the entire process. And in 6 addition, the outside counsel that we used to complement 7 the services of the AG had experience in the Texas 8 lottery operator procurement process, having been 9 involved the last time we went through this. 10 And we recruited the Director of the Texas 11 Statewide Procurement Division, Ron Pigott at the State 12 Controller's office which, as you know, is the financial 13 arm for the State of Texas. We added Ron to that 14 committee, and he gave us added expertise and 15 credibility. And we have reached out to Controller 16 Combs and personally thanked her for allowing Ron to 17 participate in that process with us. 18 Now, regarding the development of the RFP 19 itself, we began identifying the requirements well in 20 advance of the procurement, and we even used two 21 requests for information to get the landscape of the 22 bidding environment, if you will. And we used our 23 consultants and our senior staff to identify issues and 24 opportunities for us to explore. We focused on making 25 the RFP document clearly identify all of the 61 1 responsibilities and the detailed requirements for every 2 item which required a bidder to respond to. We believe 3 that that was absolutely essential to make sure that the 4 bidders understood and they could respond thoroughly and 5 completely to our requirements. But just as 6 importantly, so that they could put a sharp pencil to it 7 and give us the absolute best price that they could 8 offer. And Mike and his team established a very formal 9 and open process for the prospective bidders to 10 communicate with us and obtain information and 11 clarification throughout the process. 12 Another critical point is that we made a 13 decision early on to be open and transparent. You have 14 heard those words many times as we've worked through 15 this process. We discussed our progress openly, early 16 and consistently in our monthly board meetings as we 17 went through it. We made a strong effort to include and 18 brief state leadership and key legislative members all 19 along the way. And we even invited legislative members 20 to attend our board meeting, to take tours of the 21 current GTECH operations, all in the hopes of providing 22 them a deeper level of understanding. That proved 23 invaluable later on in the process. 24 And we worked under the premise from the 25 very first day that all the documents involved in this 62 1 procurement were going to be made available to the 2 public and be posted on our agency website right after 3 we made the announcements, including the evaluation team 4 members' notes. Now, that accomplished two things. 5 One, it assured that we would not be accused of 6 slow-paying, if you will, on providing any documents to 7 bidders who might feel aggrieved by the process. And 8 the other is, it insured a built-in level of quality 9 control for us to follow as we generated and produced 10 documents throughout the entire process. 11 As we began drafting the requirements, a 12 few things became very apparent to us. One, we 13 determined that a seven-year primary term, at a minimum, 14 was absolutely necessary to maximize competition and 15 also ensure that we could get the very best price from 16 each bidder. We also learned from several other states' 17 recent experiences and their bidding processes that the 18 more detailed and the more specific the scoring was, the 19 less risk you had of a protest being filed based on the 20 scoring itself. And so to make that crystal clear, we 21 ended up with 96 individual scoring lines in our score 22 sheets. And to make that clear to our vendors, we 23 actually published the actual score sheets that we were 24 going to use in this RFP itself. 25 And we determined that cost would not be 63 1 the driver for the successful bidder. As a point of 2 reference, compared to the potential net revenue that's 3 generated by the Texas Lottery, compared to what we pay 4 the lottery operator, it's less than 10 percent. And 5 when you compare what we pay the lottery operator to 6 gross revenue, it's less than three percent. So we went 7 against the grain, because the level and scope of 8 services we require is much greater than most other 9 jurisdictions. And we only allocated costs as 10 10 percent. We felt that the quality and the 11 reliability of the goods and service that were going to 12 be proposed were worth at least 90 percent of the 13 scoring that would be done. 14 Now, standard practice in the industry for 15 most major lottery procurements -- and my experience has 16 been, even at this agency, is for the Executive Director 17 to stay out of the process altogether, with the only 18 exceptions usually being approval of the members of the 19 evaluation committee and then approval of the ultimate 20 recommendation that comes from that committee. 21 But for this procurement, I took a 22 different approach. I was in every meeting. I went to 23 every site visit, every oral presentation, every 24 discussion, every scoring section that took place. This 25 was the most significant undertaking in the life of our 64 1 agency, and it was a contract that's potentially worth 2 well over a billion dollars. And if I was going to be 3 held responsible, I was going to be involved. 4 I also made a change to our process 5 regarding HUB or minority-owned participation 6 requirements. I took responsibility from the staff for 7 determining whether or not each bidder either passed or 8 failed the HUB requirements. On a deal of this 9 magnitude, I could not and I would not place that level 10 of responsibility on the staff. 11 Our statutes in Texas are challenging 12 regarding HUB participation, as GTECH and the other two 13 vendors will certainly attest to. We made extraordinary 14 efforts during this process to provide them with help 15 and assistance. We had mandatory meetings solely to 16 discuss the HUB and minority participation requirements. 17 We offered them as much advice and insight as they could 18 stand and as they wanted. 19 We also ensured we had a very clearly 20 delineated protest process outlined in the RFP. And, 21 just as importantly, we made sure that we communicated 22 that to the bidders. And on the human level and as a 23 courtesy and a sign of respect, I personally contacted 24 each vendor's CEO by telephone prior to the public 25 announcement of the apparent successful proposer, and I 65 1 briefed them on the results and thanked them for their 2 efforts, because I recognize on a contract of this 3 magnitude, they're expending time and resources well in 4 excess of a million dollars, just to put together a 5 proposal. 6 And in our relatively small and incestuous 7 business, you can be surprised who your partner might be 8 when you wake up in the morning. So establishing and 9 keeping those vendors and having good positive business 10 relationships was absolute critical throughout the 11 process. 12 And I want to share with you some 13 highlights of the new contract. Obviously and, of 14 course, we're going to receive all new terminals, an all 15 new system, all new communication equipment with the 16 state-of-the-art equipment that's available from GTECH. 17 And it's something that we hope will energize and 18 enthuse our retailers and the GTECH sales staff as well. 19 In addition, we're going to see changes 20 and improvements to the GTECH sales and marketing team, 21 and those are going to have a more increased focus on 22 retail recruitment and top selling retailers. We think 23 that's where the opportunities lie. 24 But in addition to the goods and services 25 that we're required under the base bid, we negotiated 66 1 with GTECH several other items, and these are all geared 2 to generate additional revenue. Understand that these 3 items were not part of GTECH's base bid but were 4 negotiated in above and beyond that. 5 Some highlights: A web-based player 6 registration system that will link us with our players 7 for informational, promotional and data-gathering 8 purposes, a new program known as Renaissance that will 9 enhance the use of debit cards, which are allowed by 10 statute as a method of purchasing lottery tickets, 11 allowing us to pilot player loyalty programs, electronic 12 payment of prizes and other marketing programs as well. 13 Also above what was called for in the RFP, 14 we negotiated in an additional number of specialty 15 terminals, player-activated terminals and self-check 16 terminals. We also negotiated in 19- and 22-inch flat 17 panel monitors to be placed at every retailer location 18 that will accept one, which will allow us to send our 19 various information, marketing data, sales data, 20 transaction data, and it will allow us to reach our 21 players in a more effective manner right at the point of 22 sale. 23 We also will receive a limited number of 24 advance play stations, enhanced neon signs for placement 25 at the retail location, specialty three-panel jackpot 67 1 signs which in effect are mini-billboards which will be 2 placed in the front of many of our retailer locations, 3 advertising the Powerball, Mega Millions jackpots as 4 well as our lottery logo. We also have several 5 enhancements to the ongoing and very significant 6 requirement that GTECH handle the warehousing and 7 distribution of our instant tickets, and these 8 enhancements are going to allow us to deal in a more 9 effective manner on financial transactions that we have 10 with our retailers. That will be very important to our 11 retailers, somewhat transparent to our players but very 12 important as well. 13 Several other items and programs were also 14 negotiated in, way too many for me to try to brief you 15 on this morning. But some of those will be ready to go 16 by September 1st, which is when the contract begins, 17 some of which will come later, as both Texas Lottery and 18 GTECH staff work up the requirements and make sure that 19 we have a smooth transition and everything in place 20 before we start those programs. 21 And the cost for all this, all these goods 22 and services that I mentioned and all of the baseline 23 requirements, are all going to be provided at 2.2099 24 percent of sales. That's a roughly 18 percent cost 25 reduction from what we're currently paying. Or, taken 68 1 another way, the savings to the state of over 2 $160 million over the nine-year initial term of the 3 contract, approximately $18 million per year less than 4 what we're currently paying, all based on current sales 5 levels. And, in addition, we negotiated in a schedule 6 of rebates at various higher sales levels in which we 7 might even see additional savings down the road. 8 I'm extremely proud and grateful to all of 9 the agency staff and Mike in particular, the other state 10 agency personnel at the Controller's office and the AG 11 and our outside consultants and our outside legal 12 counsel, all of who played a huge role in getting us to 13 this point. We believe that this is now an industry 14 model that will be looked at very closely by other 15 lotteries around the world, and it's a process that 16 we're going to be pointing to and talking about with 17 pride for many years to come. 18 Commissioners, today we have with us Alan 19 Eland from GTECH, who is their Senior Vice President of 20 the Americas and the individual who was responsible for 21 the negotiation of the contract with us, as well as Joe 22 Lapinski who is the brand-new GTECH Texas account 23 General Manager, although he is by no means new to 24 Texas. Joe served for a number of years as Ramon's 25 No. 2 person here. And I know that they are both 69 1 anxious to share some comments with you this morning as 2 well. 3 CHAIRMAN WILLIAMSON: All right. 4 MR. ELAND: I'm Alan Eland, for the 5 record, from GTECH, Madam Chair, Commissioner Krause. 6 I would first like to start off by saying 7 that on behalf of all of our 5,600 employees, we at 8 GTECH don't take this business for granted. We 9 appreciate the trust that you've put in us, and we'll 10 continue to work hard, as we have the last 18 years, to 11 earn that trust each and every day. 12 I'll amplify only slightly Gary's very 13 thorough description of the process to say that, you 14 know, we at GTECH, this is the way we earn our business. 15 We respond to RFPs. That's the way that we sell. And 16 we have never participated in a process as clear as this 17 one to achieve the goals that you have set out to 18 achieve, which was to have competition. 19 There were three bidders. There's three 20 suppliers in this market. So everybody that could 21 participate did participate. There are many examples of 22 procurements where there is limited participation, 23 either one or only two. 24 And then, secondly and most importantly, 25 to achieve the goal of not having a protest. The best 70 1 way not to have a protest, to prevent a protest, is to 2 have a good and thorough process and to follow that up 3 with the award and posting all of the information 4 on-line the day of the award. Clearly that part of the 5 process contributed to achieving the second goal. 6 I would also say that, you know, as the 7 incumbent, we were very conscious of our status. And 8 like the lottery began to prepare for this RFP years 9 ago, so did we. We, over the last two and a half years, 10 began to develop innovations specifically for Texas that 11 we knew we would include in our proposal and had a 12 dedicated team to augment the team here on the ground. 13 It did nothing but began to research and develop how we 14 would respond to this RFP. So at no time did we take 15 our position as the incumbent for granted or this 16 business for granted, and that includes the price that 17 we ultimately ended up giving you as well. 18 Our energies now are directed towards the 19 conversion. It's a short conversion time period. We 20 were prepared when the contract was awarded with this 21 conversion. We've got a dedicated team on the ground, 22 supplementing Joe's team on the ground, and we're 23 working tirelessly to make sure this conversion comes 24 off as it should be, and that's as smooth as possible. 25 With us today, I would like to introduce 71 1 also GTECH's chief technology officer who has 2 responsibility for those implementations worldwide, and 3 that's Matt Whalen. 4 Finally -- and I'll give Joe a second to 5 talk -- a transition and a leadership role in an account 6 as big as Texas is usually difficult. In this case, I 7 can say it's not. As Gary said, Joe has been on the 8 ground here in Texas and working closely with Ramon for 9 11 years, so he's very aligned with the expectations of 10 the Texas Lottery and knows very well how Ramon and Gary 11 and the rest of the staff have worked day-to-day. 12 Joe, over those 11 years, has accepted 13 challenges from us that took him outside of Texas. We 14 asked him to run a project in Georgia for us at one 15 point, and lived there for nine months. That experience 16 will help him tremendously as we do the conversion over 17 this next year. We asked him to assume responsibilities 18 for almost a year for our operation in Louisiana. He 19 made the sacrifice, went to Louisiana for a bit, then 20 came back. And again, I think those experiences will 21 help Joe as he transitions into the leadership role. 22 So I'll turn it over to Joe. 23 MR. LAPINSKI: For the record, I'm Joe 24 Lapinski with GTECH. 25 All great words I've heard from Gary and 72 1 Alan this morning, but I would like to tell you (1), 2 it's a privilege for me to be the account general 3 manager for GTECH in Texas. I grew up in San Antonio. 4 I take great pride in being part of the organization 5 that supports this lottery here in this state. 6 I know I've taken a few detours in Georgia 7 and Louisiana over the years. But as Ramon likes to 8 say, I'm a bad penny, he just can't get me to disappear. 9 So I keep coming back. 10 Our strategy with this proposal that we 11 made for this bid, this procurements, started out with a 12 simple philosophy; and that is, the lottery's business 13 needs will drive all of our solutions. And a lot of 14 innovations that came out of this proposal were the 15 result of a lot of work by a lot of people on our team 16 trying to understand the lottery's needs and in taking 17 our technology and coming up with solutions that were 18 customized for this market and for this customer. 19 And as we go into the new contract, I 20 intend to continue that philosophy with our staff and 21 with our entire organization in the state; and that is, 22 you know, we view this contract as not just important or 23 a large contract, but most of the people that work 24 around the state are, you know, native to Texas and take 25 great pride as well. So the priority is: Identify what 73 1 the needs are for the lottery and make sure our 2 solution -- whether it's our organization, whether it's 3 our technology -- meets those needs. 4 So the priority will be alignment as well 5 as transparency. And the way we'll achieve those needs 6 is (1), understand the lottery's priorities and their 7 desires and their goals and then (2), operate with 8 transparency and open communication so that the lottery 9 can be confident that as their operator vendor, we're 10 doing as they expect, meeting the service levels that 11 they set and representing them well in the public. 12 And I look forward to the challenge. 13 We've got an exciting eight months as we go into this 14 next contract, and I look forward to lots of mutual 15 success here in the State of Texas. 16 CHAIRMAN WILLIAMSON: All right. Thank 17 you. 18 Commissioner, do you have any comments, 19 questions? 20 COMMISSIONER KRAUSE: Joe, expectations 21 are high. 22 (Laughter) 23 CHAIRMAN WILLIAMSON: Particularly now. 24 I won't belabor this very long. Certainly 25 the staff, as I have said over and over and over again, 74 1 you guys are the easiest people in the world to brag on. 2 And I know people get tired of me doing that out -- when 3 I get out of this building. But I would take you 4 anywhere and run any business, whether it's under a 5 government or under the SEC. 6 GTECH, I appreciate your methodology, your 7 approach and everything that you have done. And as 8 well, I want to thank SciGames for your participation in 9 this bid process. It was as important and as critical 10 as anything else that we did, and I appreciates that. 11 And I don't think there is anyone here 12 from Interlott, but I would thank them as well. Without 13 competition, you know, where are we in the way we run 14 our style of government and society? 15 Having said that, other than that, thank 16 you very much. We look forward to a successful 17 partnership. And hopefully our sales will continue to 18 increase, despite what you might read. 19 COMMISSIONER KRAUSE: I have a couple of 20 questions. 21 CHAIRMAN WILLIAMSON: Sure. 22 COMMISSIONER KRAUSE: Okay. Joe, I 23 understand that this is state-of-the-art. Is that 24 right? 25 MR. LAPINSKI: That's correct. 75 1 COMMISSIONER KRAUSE: All right. So 2 everybody is going to be copying us, you know, our joint 3 effort, and so I like that. You know, Texas ought to be 4 the envy of the nation in more than just in our economy. 5 Joe, let me ask you some just really 6 simple questions about the contract. The new technology 7 is what makes this special. And so how is our contract 8 anticipating the fact that given that it's a nine-year 9 primary term, that, you know (a), we will jointly 10 develop, you know, some new technologies or have some 11 new perspectives and then (b), you're going to see in 12 the marketplace, you know, what -- you know, the 13 competitors are rolling out new products, new 14 technologies, new, you know, business systems and 15 methods and that kind of thing. 16 Does our contract allow for us to be able 17 to adopt those kind of things on a pretty easy basis, 18 that, you know, increased productivity and that kind of 19 thing? 20 MR. ELAND: I'll jump in, Commissioner 21 Krause. I would say that the contract absolutely allows 22 for the adoption of new technologies or processes, 23 hopefully, that would drive sales or that would keep 24 Texas on the leading edge. The contract as structured 25 has that flexibility. And I would say, furthermore, we 76 1 have a potential 15-year contract. While we executed a 2 nine-year base, those other years that are remaining out 3 there, who knows what edge leading technology will look 4 like nine years from now? 5 COMMISSIONER KRAUSE: Yes. 6 MR. ELAND: But you will have the 7 opportunity with those additional years to be able to 8 get those things as well. 9 COMMISSIONER KRAUSE: Excellent. 10 MR. GRIEF: Could I add something to that, 11 Commissioner? 12 COMMISSIONER KRAUSE: Yes, please. 13 MR. GRIEF: Also, I think it's worth 14 noting, this isn't a fixed fee contract. So the fact 15 that GTECH is incentivized -- if sales go up, has a 16 built-in feature in it that although our contract may 17 not call for a refresh of terminals or communications 18 network, et cetera, if GTECH sees that there are 19 opportunities there with new technology to increase 20 sales and drive our aligned bottom lines, they will be 21 motivated to make those changes. 22 And so I think that's important in the way 23 that our contract is structured. It gives them the 24 motivation, as us, to always continue looking at revenue 25 generation and the bottom line, rather than just paying 77 1 them a fixed fee for services rendered. 2 COMMISSIONER KRAUSE: Well, you know, we 3 had a new rule today that had us change the default on 4 how we pay, you know. And apparently that's something 5 that we've known for a long time, and we waited until 6 now, because it's a good time to do it. And I would 7 like for us to not have to feel like we have to wait for 8 the next contract to, you know, do things like that. So 9 that's basically just, you know, gathering and analyzing 10 information and acting on it, you know, from both your 11 side and our side. 12 And so I guess that's another part of what 13 I'm interested in, is keeping us, you know, fresh and 14 new and innovative and that kind of thing so that we are 15 responsive. Ultimately we are here to satisfy our 16 customers and that's the public, you know, provide a 17 great entertainment option that they perceive as fair 18 and fun, and so we're partners in that. 19 I'm glad to have y'all on board. 20 MR. LAPINSKI: Thank you very much. 21 CHAIRMAN WILLIAMSON: Is that it? 22 All right. Thank you, gentlemen. 23 MR. ELAND: Thank you. 24 MR. LAPINSKI: Thank you, Chairman and 25 Commissioner. 78 1 AGENDA ITEM NO. XIX 2 CHAIRMAN WILLIAMSON: Let's go on to XIX, 3 report, possible discussion and/or action on the 82nd 4 Legislature. 5 Nelda, this is your item, please. 6 MS. TREVINO: Good morning, Commissioners. 7 For the record, I'm Nelda Trevino, the Director of 8 Governmental Affairs. 9 As you are aware, the Legislature convened 10 its regular session on January the 11th, and you have 11 been receiving legislative bill-tracking reports that 12 have been filed of legislation that impacts the agency, 13 and we have provided you this morning with an updated 14 copy of that report. 15 There have been over 1,100 bills that have 16 been filed so far, and we are currently tracking 47 17 bills. With the exception of the two bills that I 18 mentioned at last month's Commission meeting, there have 19 been no additional bills that have been filed that are 20 specifically related to the Lottery Commission. 21 We will continue to provide you with these 22 bill-tracking reports on a regular basis throughout the 23 legislative session. We'll also advise you, once the 24 Lt. Governor and the Speaker have made committee 25 assignments, we'll advise you of those committee 79 1 compositions, particularly the committees that are the 2 overall committees for this agency. 3 And, lastly, staff is reviewing the 4 proposed general appropriations bill that Chairman Pitts 5 laid out yesterday, and we are comparing that with the 6 agency's legislative appropriations request to compare 7 any differences from the proposed bill versus what the 8 agency has requested. 9 That concludes my report, and I'll be glad 10 to answer any questions. 11 CHAIRMAN WILLIAMSON: Thank you. 12 Commissioner, do you have any questions? 13 COMMISSIONER KRAUSE: No, ma'am. 14 CHAIRMAN WILLIAMSON: All right. Thank 15 you. 16 MS. TREVINO: Thank you. 17 AGENDA ITEM NO. XX 18 CHAIRMAN WILLIAMSON: XX, report, possible 19 discussion and/or action on GTECH Corporation. 20 Gary. 21 MR. GRIEF: Other than what's in your 22 notebook, Commissioners, I have nothing further to 23 report on that item. 24 25 80 1 AGENDA ITEM NO. XXI 2 CHAIRMAN WILLIAMSON: Okay. Do you want 3 to just go ahead on with XXI, then, on your agency 4 report? 5 MR. GRIEF: Certainly. The same for that 6 item. Other than what's in your notebooks, nothing 7 further. 8 CHAIRMAN WILLIAMSON: All right. Thank 9 you. 10 AGENDA ITEM NO. XXII 11 CHAIRMAN WILLIAMSON: I think at this 12 point now we are up for the consideration of the status 13 and possible entry of orders in cases posted on the 14 agenda. 15 Kim, if you will take over, please. 16 MS. KIPLIN: Yes. Thank you. 17 Commissioners, we've got a couple of cases 18 that I would like to pull out. But with your 19 permission, I would like to take Letters A through I 20 first. Those are all lottery retail cases in which at 21 the time the Lottery swept the account for the monies 22 owed to the state, there were insufficient funds 23 available. Those cases proceeded to the State Office of 24 Administrative Hearings for revocation of the license. 25 And in each of those cases, the Administrative Law Judge 81 1 did uphold the staff's recommendation. And the staff 2 does request that you vote to adopt the Administrative 3 Law Judges' proposed findings and conclusions and revoke 4 the license in each of these cases. Those are Letters A 5 through I. 6 CHAIRMAN WILLIAMSON: Commissioner, do you 7 have any questions? 8 COMMISSIONER KRAUSE: (Shakes head) 9 CHAIRMAN WILLIAMSON: Would you make a 10 motion, please. 11 COMMISSIONER KRAUSE: My motion is, is 12 that for Agenda Items A through I, that we adopt staff 13 recommendation -- I'm sorry. Not the staff 14 recommendation -- but the ALJ's recommendation to 15 revoke -- and to revoke these licenses. 16 CHAIRMAN WILLIAMSON: Second. 17 All in favor? 18 COMMISSIONER KRAUSE: Aye. 19 CHAIRMAN WILLIAMSON: Aye. 20 Motion passes 2-0. 21 MS. KIPLIN: Thank you. Commissioner, 22 Letter J is a lottery case, Sunco Marketplace No. 1. I 23 know that the principal for Sunco Marketplace No. 1 is 24 here, and I've had some discussion with them. And I 25 believe Michael Anger has -- he has not given me a 82 1 witness affirmation form -- and I know that they 2 visited. 3 This case -- I would like Steve White, if 4 you would come forward. He represented the staff at the 5 matter, in case you have any questions. So I'm 6 proceeding, knowing that I don't have a witness 7 affirmation form, and I don't know whether that's where 8 everybody landed or not on that. 9 CHAIRMAN WILLIAMSON: Well, let's present 10 the case and then we'll talk about it. 11 MS. KIPLIN: Okay. 12 Stephen, I'm going to turn it over to you 13 to present the case, if you will. 14 MR. WHITE: Yes, ma'am. Thank you. 15 For the record, my name is Stephen White. 16 I'm an Assistant General Counsel. 17 This was a contested case in which the 18 facts were mostly not disputed. The proposal for 19 decision is under Tab J. But the facts of the case 20 were: In December of 2008, a lottery player submitted 21 five Texas Lottery instant scratch-off tickets for 22 validation and payment at Sunco Marketplace. 23 Maria Melendez was the clerk on duty at 24 Sunco at the time. Ms. Melendez took the five tickets 25 from the player, scanned the tickets through the lottery 83 1 terminal. The terminal indicated that one ticket was a 2 two dollar winner, another ticket was a three dollar 3 winner, and one ticket was a $500 winner. The remaining 4 tickets were shown to be non-winning tickets. 5 Ms. Melendez gave the player $5.00 for the 6 two dollar and three dollar winning tickets and told the 7 player that she could not pay him the $500 winning 8 ticket, because she did not have enough money in the 9 register and returned the three dollar winning ticket to 10 the player rather than the $500 winning ticket. 11 On December 13, 2008, Ms. Melendez 12 presented the $500 winning ticket to another lottery 13 retailer and collected a $500 prize. As a result of her 14 unlawfully collecting this $500 prize, Ms. Melendez pled 15 guilty to theft and paid $100 fine and was placed on 16 probation for six months. 17 Although Sunco did not dispute the factual 18 allegations, it argued that it should not be held 19 responsible for the wrongful acts of its employee, as it 20 did not participate, approve or authorize the wrongful 21 acts of Ms. Melendez. 22 The Commission did not dispute the fact 23 that Ms. Melendez's wrongful acts were committed without 24 the knowledge, approval or authorization of Sunco 25 management. But it is the Division's policy, consistent 84 1 with prior agency practice and case law, a knowing and 2 willful wrongful act of an employee or agent of a 3 corporation is a knowing and willful act of the 4 corporation. 5 The fact that the wrongful act in this 6 case was committed by an employee rather than a manager 7 or officer of the corporation is considered a mitigating 8 factor, which is why the Division sought only a 10-day 9 suspension of the license rather than revocation. As 10 pointed out in the Judge's proposal for decision, a 11 10-day suspension for this violation is the minimum 12 authorized by agency rule. Had an officer or owner of 13 the corporation committed the fraud, the Division, as it 14 has in the past, would have sought revocation of the 15 license. 16 The Administrative Law Judge agreed with 17 the Division, that the 10-day suspension was an 18 appropriate sanction under the facts of this case. 19 The Division asked the Commission to adopt 20 the proposal for decision, findings of fact and 21 conclusions of law of the Administrative Law Judge, with 22 one exception. The Division believes the Administrative 23 Law Judge cited to the wrong standard of liability for a 24 corporation in her Conclusion of Law No. 6. 25 The ALJ proposed Conclusion of Law No. 6 85 1 states, "Sunco can be held liable for the acts of its 2 employees if it knew or should have known about the 3 acts," citing the case of Wishnow v. Texas Alcoholic 4 Beverage Commission. 5 The correct standard is set out in the 6 cases cited in the draft order, is that a corporation 7 can be held liable for the acts of its employees 8 committed within the scope of their employment which 9 violate the terms of the license, even though the acts 10 are against the interest of the licensee. 11 And the Division asked the Commission to 12 change Conclusion of Law No. 6 to read, "Sunco can be 13 held liable for the acts of its employees committed 14 within the scope of their employment which violate the 15 terms of their license, even though the acts are against 16 the instructions of the licensee," in accordance with 17 case law cited therein. 18 And just a little backup, is why we are 19 asking for this change. As stated by the Texas Court of 20 Appeals, quote, "The law is settled in this state that a 21 licensee or permittee is responsible for the acts of his 22 agent employee, or servant, which violate the terms of 23 the license or permit, even though the acts are against 24 the instructions of the licensee or permittee." That's 25 Texas Liquor Control Board v. Floyd. 86 1 The U.S. Supreme Court has stated, in sort 2 of explaining why this should be the standard: "With 3 regard to corporations and other associations, it is 4 elementary that such impersonal entities can be guilty 5 of 'knowing' or 'willful' violations of regulatory 6 statutes through the doctrine of respondent superior." 7 The U.S. Supreme Court went on to explain 8 the logic behind this liability, stating "Thus, pressure 9 is brought on those who own the entity to see to it that 10 their agents abide by the law." And that's U.S. v. A&P 11 Trucking Company. 12 For the reasons stated above, the Division 13 asks the Commission that you adopt the proposal for 14 decision, findings of fact and conclusions of law with 15 the one exception cited. 16 CHAIRMAN WILLIAMSON: Okay. 17 Commissioner, do you have any questions? 18 COMMISSIONER KRAUSE: Well, the Order of 19 the Commission is the proposed order you're 20 recommending? 21 MR. WHITE: Yes, sir. 22 COMMISSIONER KRAUSE: Okay. 23 CHAIRMAN WILLIAMSON: Okay. 24 COMMISSIONER KRAUSE: Sounds reasonable to 25 me. 87 1 CHAIRMAN WILLIAMSON: Being an employer, I 2 know I'm responsible for my employees and have had to 3 pay -- and understand the ramifications of that. 4 Unfortunately, that's just a part of being an employer. 5 So do you want to make a motion? 6 COMMISSIONER KRAUSE: I make a motion that 7 we adopt the proposed order of the Commission as 8 presented by the staff in this docket number. 9 CHAIRMAN WILLIAMSON: Second. 10 MR. WHITE: Thank you. 11 CHAIRMAN WILLIAMSON: All in favor? 12 COMMISSIONER KRAUSE: Aye. 13 CHAIRMAN WILLIAMSON: Aye. 14 Motion passes 2-0. 15 MS. KIPLIN: Commissioners, if I could 16 direct your attention to Letter K, that is a registry 17 worker case, Henry Hobbs. This is the Bingo Division 18 action to remove Mr. Hobbs from the registry, due to a 19 disqualifying criminal conviction. 20 And the Administrative Law Judge agrees 21 with the staff and has recommended the removal. And the 22 staff requests that you vote to approve the 23 Administrative Law Judge's proposed findings, 24 conclusions of law and proposed order. 25 CHAIRMAN WILLIAMSON: Commissioner, do you 88 1 have any questions? 2 COMMISSIONER KRAUSE: I do not. 3 CHAIRMAN WILLIAMSON: Will you make a 4 motion, please. 5 COMMISSIONER KRAUSE: I make a motion to 6 adopt the order of the Commission proposed by the staff 7 to adopt the findings of fact and conclusions of law of 8 the Administrative Law Judge in this case involving 9 Henry Hobbs. 10 CHAIRMAN WILLIAMSON: Second. 11 All in favor? 12 COMMISSIONER KRAUSE: Aye. 13 CHAIRMAN WILLIAMSON: Aye. 14 Motion passes 2-0. 15 MS. KIPLIN: Commissioners, that leaves 16 remaining Letter L. This is a proposed agreed 17 settlement and agreed order between the Charitable Bingo 18 Division and K&B Sales, Inc., d/b/A Goodtime Action 19 Games. And I would like for Mr. White to lay that out 20 for you. 21 Mr. Fenoglio is in the audience and did 22 represent the respondent. And I don't know; he may wish 23 to address the Commission as well. 24 CHAIRMAN WILLIAMSON: Right. And I have 25 your affirmation form -- 89 1 MR. WHITE: Again, my name is Stephen 2 White, Assistant General Counsel. You have in your 3 binder an agreed order marked as Tab XXIIL. This agreed 4 order involves the application for re-licensure of K&B 5 Sales, Inc. 6 As a background, K&B is a licensed 7 distributor of bingo supplies and equipment. In 2005, 8 it merged with Aces Wired, Inc., now known as Four 9 Corners, Inc. In 2006, Aces Wired, along with officers, 10 owners and employees of K&B, began promoting and 11 operating gaming machines that were subsequently held to 12 be illegal gambling devices throughout Texas, including 13 at licensed bingo halls. Aces Wired and K&B refer to 14 these devices as amusement with prize, or AWP gaming 15 devices. 16 The Office of the Attorney General, along 17 with other law enforcement agencies, conducted a joint 18 task force investigation into the operation of these 19 gaming devices that ultimately resulted in Aces Wired, 20 Inc., three affiliated companies and 29 individuals, 21 including officers, employees and agents of K&B, being 22 indicted for various offenses, including felony 23 organized criminal activity by promoting gambling, money 24 laundering, and tampering with evidence. 25 Ultimately, in August 2009, the three 90 1 affiliated companies pled guilty to felony organized 2 criminal activity by promoting gambling, and misdemeanor 3 possession of a gambling device. Several officers and 4 agents of K&B pled guilty to non-gambling related 5 offenses and received deferred adjudication. 6 In September 2010, after completing an 7 investigation, Bingo Operations denied K&B's license 8 renewal application for various reasons, including -- 9 1. K&B Sales and/or officers, owners, 10 and/or other persons active in K&B, are or have been 11 gambling promoters or professional gamblers within the 12 meaning of Bingo Act; and 13 2. K&B Sales violated the prohibition of 14 conducting other games of chance proscribed by Section. 15 2001.416 of the Bingo Enabling Act. 16 The primary legal issue is whether the AWP 17 gaming devices were illegal gambling devices. A 18 secondary issue is what is a professional gambler and 19 gambling promoter within the meaning of the Bingo 20 Enabling Act. 21 K&B Sales asserts that their AWP gaming 22 devices fell within the bona fide amusement device 23 exception of the definition of a gambling device in the 24 Penal Code.. 25 Consistent with case law and opinions of 91 1 the Attorney General cited in the agreed order, it is 2 the Division's position that the bona fide amusement 3 device exception does not apply and did not apply to the 4 AWP gaming devices. The agreed order details the 5 Division's policy on this issue, a policy consistent 6 with case law and opinions of the Attorney General. 7 The Division acknowledges, however, that 8 it has not previously made clear what is an illegal 9 gambling device, what is a professional gambler and a 10 gambling promoter within the meaning of the Bingo 11 Enabling Act. For these reasons, the Division believes 12 denying and disqualifying K&B Sales from licensure as a 13 distributor would be unreasonably harsh, and the public 14 would be better served by imposing an administrative 15 penalty. 16 The proposed agreed order states Bingo's 17 position as to what constitutes a gambling device and 18 what constitutes a professional gambler and gambling 19 promoter. 20 The specifics of the agreed order include: 21 1. K&B agrees to abide by the Bingo 22 Division's interpretation of what is a gambling device, 23 a gambling promoter and professional gambler, so long as 24 that interpretation does not contradict any legislative 25 change. 92 1 2. K&B Sales agrees to an administrative 2 penalty, consistent with agency practice, in the amount 3 of $2,286,000, all of which but $228,600 will be 4 suspended for a period of five years on the condition of 5 full compliance with the agreed order. 6 3. And lastly, K&B agrees to reimburse 7 the Commission $28,134 in investigatory, legal and 8 administrative expenses. 9 In sum, the Bingo Division believes that 10 this is a fair resolution of the case and sets out a 11 clear agency policy on the issues involved. 12 CHAIRMAN WILLIAMSON: Thank you. 13 Phil, do you want to add anything to this 14 before we start asking questions? 15 MR. SANDERSON: I would just like to add a 16 few comments. First off, I think this agreed order goes 17 along with the policies that we've had in the past as it 18 relates to assessing the administrative penalty. 19 Secondly, I think it also deals with the 20 regulatory objective, as I mentioned in an earlier 21 agenda item, about us providing clear guidance to the 22 organizations that we license so they understand what is 23 expected of them and what the Division would regulate 24 and look at. And I think this agreed order definitely 25 does that at the same time. 93 1 And that's all the comments I have. 2 CHAIRMAN WILLIAMSON: Okay. 3 Commissioner, do you have any questions? 4 COMMISSIONER KRAUSE: How long have you 5 been working on this -- months, years? 6 MR. WHITE: Probably -- we've been aware 7 of for a very long time -- years. You know, the actual 8 application and the actual denial was, you know, perhaps 9 a year or so ago. 10 COMMISSIONER KRAUSE: Okay. Do we have 11 any other cases that are that old? 12 MR. WHITE: I hope not. 13 MR. SANDERSON: I believe there -- there 14 are some audits that we're still working on from 2006, 15 '07 or '08, somewhere in there -- 16 COMMISSIONER KRAUSE: Lord almighty! 17 MR. SANDERSON: -- that are investigations 18 that may be coming before you later. 19 COMMISSIONER KRAUSE: Getting this wrapped 20 up can help us focus on those. 21 MR. SANDERSON: Yes, sir. 22 CHAIRMAN WILLIAMSON: Okay. Mr. Fenoglio, 23 do you want to share anything? 24 MR. FENOGLIO: For the record, the name is 25 Stephen Fenoglio. And not unless you have questions, 94 1 Madam Chair and Commissioner Krause. 2 CHAIRMAN WILLIAMSON: Okay. 3 Do you have any questions? 4 COMMISSIONER KRAUSE: (Shakes head) 5 CHAIRMAN WILLIAMSON: Phil, just give us 6 the administrative point. How do you handle this? If 7 we approve this, the 200,000, how does that come in? 8 How do we account for that? How do we kind of provide 9 oversight to see that this is being managed correctly 10 and that they're doing what they say they were going to 11 do in this agreed order? 12 MR. SANDERSON: If the Commission signs 13 and adopts the agreed order, the penalty that was 14 assessed will be due in 12 monthly installments, 15 beginning the first day of the month after you sign the 16 order, which will be the 1st of February. 17 We in our system will have reminders set 18 up to have the compliance specialist in my department 19 verify that payment has been received each month. 20 Should payment should not be received, then, of course, 21 it would go to the terms of the agreed order that they 22 failed to meet those terms, and possibly a hearing would 23 be set on that matter. 24 The administrative cost of 28,000 is due I 25 think within 30 days or immediately as it relates -- 95 1 it's a one-time payment; it's not spread out over the 12 2 months. And we would monitor that as well. 3 The industry is pretty good about letting 4 us know if things happen out there. So if there is any 5 indication that they entered back into this operation in 6 Texas, that we would surely find out. 7 CHAIRMAN WILLIAMSON: Good. I would 8 encourage y'all to make sure that they pay these 12 9 payments timely. 10 MR. SANDERSON: And we definitely will do 11 that. 12 CHAIRMAN WILLIAMSON: Other than that... 13 COMMISSIONER KRAUSE: Motion? 14 CHAIRMAN WILLIAMSON: We're ready for a 15 motion, yes. 16 COMMISSIONER KRAUSE: I make a motion that 17 in the matter of K&B Sales, d/b/a Goodtime Action Games, 18 that we adopt the proposed consent order recommended by 19 the staff in this case. 20 CHAIRMAN WILLIAMSON: I second. 21 All in favor? 22 COMMISSIONER KRAUSE: Aye. 23 CHAIRMAN WILLIAMSON: Aye. 24 Motion passes 2-0. 25 96 1 AGENDA ITEM NO. XXIV 2 CHAIRMAN WILLIAMSON: At this time I move 3 the Texas Lottery Commission go into executive session 4 to deliberates the duties and evaluation of the 5 Executive Director, Internal Audit Director and 6 Charitable Bingo Operations Director and deliberate the 7 duties of the General Counsel and Human Resources 8 Director, pursuant to Section 551.074 of the Texas 9 Government Code and to receive any legal advice 10 regarding pending or contemplated litigation pursuant to 11 Section 551.071(1)(A) and to receive legal advice 12 regarding settlement offers pursuant so Section 13 551.071(1)(B) of the Texas Government Code and to 14 receive legal advice pursuant to Section 551.071(2) of 15 the Texas Government Code, including but not limited to 16 those items posted on the open meetings notice for 17 purposes of receiving legal advice. 18 Is there a second? 19 COMMISSIONER KRAUSE: Yes, ma'am. Second. 20 CHAIRMAN WILLIAMSON: All in favor? 21 Aye. 22 COMMISSIONER KRAUSE: Aye. 23 CHAIRMAN WILLIAMSON: The vote is 2-0. 24 The Texas Lottery Commission will go into executive 25 session. The time is 11:13 a.m. Today is January 20, 97 1 2011. 2 (Off the record for executive session: 3 11:13 a.m. to 11:35 a.m.) 4 AGENDA ITEM NO. XXV 5 CHAIRMAN WILLIAMSON: The Texas Lottery 6 Commission is out of executive session. The time is 7 11:35 a.m. 8 AGENDA ITEM NO. XXIII 9 CHAIRMAN WILLIAMSON: Our next item is 10 public comment, and there is none. 11 COMMISSIONER KRAUSE: Where is the public? 12 Let the record reflect there is no public. 13 CHAIRMAN WILLIAMSON: And there is no 14 action to be taken as a result of the executive session. 15 AGENDA ITEM NO. XXVI 16 CHAIRMAN WILLIAMSON: So at this time I 17 believe, if you will make a motion. 18 COMMISSIONER KRAUSE: I make a motion that 19 we adjourn this Commission meeting. 20 CHAIRMAN WILLIAMSON: I second. 21 All in favor? 22 COMMISSIONER KRAUSE: Aye. 23 CHAIRMAN WILLIAMSON: Aye. 24 Motion passes 2-0. 25 (Meeting adjourned: 11:36 a.m.) 98 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 Shorthand 5 Reporter in and for the State of Texas, do hereby 6 certify that the above-mentioned matter occurred as 7 hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings of 9 such were reported by me or under my supervision, later 10 reduced to typewritten form under my supervision and 11 control and that the foregoing pages are a full, true 12 and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set my 14 hand and seal this 31st day of January 2011. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/12 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 8140 North Mo-Pac Expressway Suite II-120 22 Austin, Texas 78759 23 24 25