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, FEBRUARY 2, 2012 § 9 10 11 12 COMMISSION MEETING 13 THURSDAY, FEBRUARY 2, 2012 14 15 16 17 BE IT REMEMBERED THAT on Thursday, the 2nd 18 day of February 2012, the Texas Lottery Commission 19 meeting was held from 9:05 a.m. until 11:10 a.m., at 20 the Offices of the Texas Lottery Commission, 611 East 21 6th Street, Austin, Texas 78701, before CHAIRMAN MARY 22 ANN WILLIAMSON and COMMISSIONERS J. WINSTON KRAUSE and 23 CYNTHIA TAUSS DELGADO. The following proceedings were 24 reported via machine shorthand by Autumn J. Smith, a 25 Certified Shorthand Reporter. 2 1 APPEARANCES 2 CHAIRMAN: 3 Ms. Mary Ann Williamson 4 COMMISSIONERS: Mr. J. Winston Krause 5 Ms. Cynthia Tauss Delgado 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: 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, FEBRUARY 2, 2012 ........... 7 4 AGENDA ITEM NO. I - Meeting Called to Order ........ 7 5 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action on external and internal 6 audits and/or reviews relating to the Texas Lottery Commission, and/or on the Internal Audit 7 Department’s activities, including the FY11 Financial Audit and/or Mega Millions and Powerball 8 agreed upon procedures ............................. 7 9 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action, including proposal of 10 repeal, of 16 TAC §402.302 relating to Card-Minding Systems, and proposal, of new rules 16 TAC §402.321 11 relating to Card-Minding Systems-Definitions, 16 TAC §402.322 relating to Card-Minding Systems-Site System 12 Standards, 16 TAC §402.323 relating to Card-Minding Device Standards, 16 TAC §402.324 relating to 13 Card-Minding Systems-Approval of Card-Minding Systems, 16 TAC §402.325 relating to Card-Minding 14 Systems-Organization Requirements, 16 TAC §402.326 relating to Card-Minding Systems-Distributor 15 Requirements, 16 TAC §402.327 relating to Card-Minding Systems-Security Standards, and/or 16 16 TAC §402.328 relating to Card-Minding Systems-Inspections and Restrictions ............... 11 17 AGENDA ITEM NO. IV - Report by the Charitable Bingo 18 Operations Director and possible discussion and/or action on the Charitable Bingo Operations 19 Division’s activities, including updates on licensing, accounting and audit activities, 20 pull-tab review, special projects, and upcoming operator training .................................. 16 21 AGENDA ITEM NO. V - Report, possible discussion 22 and/or action on lottery sales and revenue, game performance, new game opportunities, advertising, 23 market research, trends, and game contracts, agreements, and procedures ......................... 18 24 AGENDA ITEM NO. VI - Report, possible discussion 25 and/or action on transfers to the State ............ 29 4 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action on the agency’s 4 comprehensive business plan ........................ 30 5 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action, including 6 proposal, on new rule 16 TAC §401.320 relating to All or Nothing On-Line Game Rule ................... 34 7 AGENDA ITEM NO. IX - Report, possible discussion 8 and/or action on the 82nd Legislature .............. 46 9 AGENDA ITEM NO. X - Report, possible discussion and/or action on the Sunset review process 10 involving the agency ............................... 47 11 AGENDA ITEM NO. XI - Report, possible discussion and/or action on agency contracts, including 12 procurement on instant ticket testing services and/or outside counsel for intellectual property 13 legal services ..................................... 49 14 AGENDA ITEM NO. XII - Report, possible discussion and/or action on amendments to the 2010 lottery 15 operations and services contract, including whether the negotiation of the lottery operator's contract 16 in an open meeting would have a detrimental effect on the Commission's position in negotiations of 17 the lottery operator contract ...................... 49 18 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on GTECH Corporation ................. 51 19 AGENDA ITEM NO. XIV - Report by the Executive 20 Director and/or possible discussion and/or action on the agency’s operational status, agency 21 procedures, recent Department of Justice opinion regarding lotteries and federal Wire Act, and 22 FTE status ......................................... 53 23 24 25 5 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. XV - Consideration of the status and 4 possible entry of orders in: A. Docket No. 362-11-6746 – Wilson Food Mart #1 5 B. Docket No. 362-12-1319 – El Rancho Grocery C. Docket No. 362-12-1320 – On A Run Store 6 D. Docket No. 362-12-1321 – Mangum Food Mart E. Docket No. 362-12-1934 – Divine Financial 7 Services F. Docket No. 362-12-1933 – Homeboy’s Mobil 8 G. Docket No. 362-12-2350 – J & R Food Mart #3 H. Docket No. 362-12-2354 – La Homa Carniceria 9 & Drive Thru I. Docket No. 362-12-2353 – Fondren Quick Stop 10 J. Docket No. 362-12-2351 – Johnny Dangles’s Liquor Beer & Wine 11 K. Case No. 2011-1017 – Moonstruck Foundation, Inc. ...................................... 57 12 AGENDA ITEM NO. XVI - Public comment .............. 60 13 AGENDA ITEM NO. XVII - Commission may meet in 14 Executive Session: A. To deliberate the duties and evaluation of 15 the Executive Director pursuant to Section 551.074 of the Texas Government Code 16 B. To deliberate the duties and evaluation of the Internal Audit Director pursuant to 17 Section 551.074 of the Texas Government Code C. To deliberate the duties and evaluation of the 18 Charitable Bingo Operations Director pursuant to Section 551.074 of the Texas Government 19 Code D. To deliberate the duties of the General 20 Counsel pursuant to Section 551.074 of the Texas Government Code 21 E. To deliberate the duties of the Human Resources Director pursuant to Section 22 551.074 of the Texas Government Code F. To receive legal advice regarding pending or 23 contemplated litigation pursuant to Section 551.071 (1) (A) and/or to receive legal 24 advice regarding settlement offers pursuant to Section 551.071 (1) (B) of the Texas 25 Government Code and/or to receive legal 6 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 advice pursuant to Section 551.071 (2) of the Texas Government Code, including but 4 not limited to: Department of Texas, Veterans of 5 Foreign Wars et al. v. Texas Lottery Commission et al. Willis Willis v. 6 Texas Lottery Commission, GTECH Corporation, BJN Sons Corporation 7 d/b/a Lucky Food Store #2, Barkat N. Jiwani and Pankaj Joshi 8 Employment law, personnel law procurement and contract law 9 evidentiary and procedural law and general government law 10 G. To deliberate the negotiation of the lottery operator's contract pursuant to 11 Section 467.030 of the Texas Government Code ....................................... 60 12 AGENDA ITEM NO. XVIII - Return to open session for 13 further deliberation and possible action on any matter discussed in Executive Session .............. 61 14 AGENDA ITEM NO. XIX - Adjournment .................. 61 15 REPORTER'S CERTIFICATE ............................. 63 16 17 18 19 20 21 22 23 24 25 7 1 P R O C E E D I N G S 2 THURSDAY, FEBRUARY 2, 2012 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning. I'd 6 like to call the meeting of the Texas Lottery Commission 7 to order. Today is February the 2nd, 2012. The time is 8 9:05 a.m. Commissioners Krause and Delgado are present, 9 so we have a quorum. 10 AGENDA ITEM NO. II 11 The next item is consideration of and 12 possible discussion and/or action on external and 13 internal audits and/or reviews relating to the Texas 14 Lottery Commission. And on the internal audit 15 department activities including the fiscal year end 2011 16 financial audit and our Mega Millions and Powerball 17 agreed-upon procedures. 18 Catherine, this is your item, please. 19 MS. MELVIN: Good morning, Chairman. Good 20 morning, Commissioners. For the record, Catherine 21 Melvin, Director of the Internal Audit Division. 22 This morning I'm going to ask Mr. Scott 23 Krchnak and Ms. Kelli Leventhal to join us at the table. 24 They will be presenting the results of their recently 25 completed financial audit and also our required 8 1 agreed-upon procedures for our Mega Millions and 2 Powerball games. So I'd like to turn that over to them. 3 MR. KRCHNAK: Thanks, Catherine. 4 For the record, Scott Krchnak, audit 5 partner with Maxwell Locke & Ritter. 6 MS. LEVENTHAL: And for the record, Kelli 7 Leventhal. I was the engagement manager for the audit 8 for this past year for the Texas Lottery Commission. 9 So Maxwell Locke & Ritter audited the 10 financial statements of the Texas Lottery Commission for 11 the year ended August 31, 2011. We issued an 12 unqualified opinion, which is the best opinion that you 13 can get. Sometimes it's referred to as a clean opinion. 14 We also issued a report over financial reporting, and in 15 that report, we did not disclose any deficiencies 16 related to internal controls. 17 We have also issued what is called a SAS 18 114 Letter, which is sometimes referred to as a 19 governance letter, and the main thing I would mention as 20 it relates to that letter is that we had no difficulties 21 in working with management while performing the audit. 22 We -- this year we issued three 23 agreed-upon procedures. For the period ended 24 March 31st, 2011, one was for Mega Millions; one was for 25 Powerball; and another was for Power Play. There were 9 1 no exceptions noted in the Mega Millions and Power Play 2 agreed-upon procedures, and there were two minor 3 exceptions that were noted in the Power -- Powerball 4 agreed-upon procedures report. 5 I would also note that, as I understand 6 it, this next year, for the year ended March 31st, 2012, 7 there'll be an additional agreed-upon procedures report 8 added that will cover Megaplier. 9 I guess, at this time I would just like to 10 mention that we really appreciated working with the 11 Controller's Office. I know that they've been very 12 busy, especially as it relates to the software 13 conversion and any time leading up to the audit. And 14 even during the audit, there were a lot of meetings, and 15 they were just very busy. Yet, they were still able to 16 find the time to give us the information we needed on a 17 timely basis. And they were always available for 18 questions. And this year, at Catherine Melvin's 19 request, we also worked with internal audit for a few 20 procedures; and they were also very helpful and very 21 smart people to work with. So we appreciated that 22 assistance. 23 Did you have any questions as it relates 24 to any of those reports? 25 CHAIRMAN WILLIAMSON: Commissioners, do 10 1 you have any questions or comments? 2 COMMISSIONER KRAUSE: I've got one 3 question. 4 Does Dodd-Frank have anything to do with 5 us? 6 MS. LEVENTHAL: I -- 7 COMMISSIONER KRAUSE: Dodd-Frank? 8 MS. LEVENTHAL: I don't believe so. 9 COMMISSIONER KRAUSE: Good. 10 MS. LEVENTHAL: All right. 11 Would you like to speak? 12 MR. KRCHNAK: If there are no other 13 questions, I just had one final comment. 14 Maxwell Locke & Ritter has been serving as 15 independent auditors for six years or so. A couple of 16 those years we worked under the State Auditor's Office, 17 and in our tenure as independent auditors, I just wanted 18 to compliment the office of the Controller this year. 19 This year was the cleanest general ledger, as well as 20 financial statement, that we've seen in our tenure. So 21 Kathy Pyka and Ben Navarro, just I want to compliment 22 them on the great work they've done. 23 CHAIRMAN WILLIAMSON: All right. Thank 24 you. We appreciate it. I agree, they do great work. 25 All right. Thank you. 11 1 MS. LEVENTHAL: Thank you. I appreciate 2 it. 3 MS. MELVIN: Thank you, Scott and Kelli. 4 Commissioners, I have no other items, 5 unless you have any questions for me. 6 CHAIRMAN WILLIAMSON: All right. 7 Commissioners, you have any other 8 questions? 9 (No response) 10 CHAIRMAN WILLIAMSON: All right. Thank 11 you very much. 12 MS. MELVIN: Thank you. 13 MR. KRCHNAK: Thank you. 14 AGENDA ITEM NO. III 15 CHAIRMAN WILLIAMSON: The next item is 16 consideration of and possible discussion and/or action, 17 including proposal of repeal, and new rules as 18 identified on the Open Meetings Notice for today's 19 meeting. 20 Sandy and Phil, this is your item. 21 MS. JOSEPH: Good morning, Commissioners. 22 For the record, my name is Sandra Joseph, special 23 counsel in the Legal Services Division. 24 Before you is consideration of a number of 25 proposed rulemakings. These all concern Card-Minding 12 1 Systems. First of all, is the proposed repeal of 16 TAC 2 §402.302 relating to Card-Minding Systems; and then the 3 proposal of new rules, 16 TAC §402.321 through §402.328, 4 all relating to definitions, approval, requirements, 5 standards, and inspections for Card-Minding Systems. 6 The overall purpose of the draft proposals 7 is threefold. First of all, to bring the administrative 8 rules into alignment with the NAGRA standards recently 9 adopted by NAGRA membership. 10 Second, to allow Card-Minding 11 manufacturers the option for and criteria for utilizing 12 an independent testing lab. 13 And finally, to make the rules more user 14 friendly by dividing the current rule into separate 15 rules based on their topic and applicability to 16 different licensees. 17 The proposed rules include a notice of 18 public hearing to be held on Wednesday, February 29th at 19 10:00 a.m. The Staff recommends that the Commission 20 approve publication of these rules in the Texas Register 21 in order to receive public comment for a period of 30 22 days. 23 CHAIRMAN WILLIAMSON: Thank you. 24 Phil, did you want to add anything? 25 MR. SANDERSON: Yes, Commissioner. Good 13 1 morning, Chairman and Commissioners. 2 The redraft of the Card-Minding rules has 3 been going on for quite some time, and I'll give you 4 some history. 5 We started redrafting these rules in late 6 2009, and when I had the draft rules, I circulated them 7 to the four testing facilities at the time that were the 8 major testing labs for bingo equipment. That was TST, 9 BMM, GLI, and Eclipse Gaming. GLI has since acquired 10 TST, so there's three major testing facilities now 11 worldwide. 12 After their review and input, I circulated 13 them to all the manufacturers. They're licensed in 14 Texas to receive their input; and then at that time, 15 NAGRA started a work-group committee to develop 16 standards for electronic bingo Card-Minding devices, of 17 which I was the Chair of that committee. And after the 18 input from the committee, which represented 19 manufacturers, testing labs, and other regulators around 20 North America, NAGRA adopted those standards in early 21 2011. 22 I -- there's some minor changes to the 23 standards to incorporate what is required in Texas and 24 things in Texas that we have the authority to add in our 25 regulations, such as capping the card faces to 66 per 14 1 unit and some other, you know, minor details just to 2 make them specific to Texas. Overarching, they are in 3 agreement with the NAGRA standards. These draft rules 4 were then placed on the website and circulated to the 5 industry, the individuals that had signed up to the 6 email subscription service. There were three comment 7 periods, basically, that were received. They were 8 posted, comment was received, provisions made, and sent 9 out again. So there were, you know, three different 10 chances out there for the industry to comment on these 11 rules. And I think now we have one, that I would say 12 for the most part, is about 99 percent in agreement with 13 the industry. There's always going to be something that 14 someone doesn't agree with. 15 But I believe these rules are now ready 16 for publication, to be proposed for public comment, so 17 that we can move forward with instituting an independent 18 testing lab, which I think will help us free up one 19 position in our staff to enforce other activities of 20 Bingo. 21 CHAIRMAN WILLIAMSON: Great. And just for 22 the record, Phil, tell -- put on the record what NAGRA 23 means. 24 MR. SANDERSON: NAGRA is the North 25 American Gaming Regulators Association. It's comprised 15 1 of regulators throughout North America, Canada, US, and 2 Mexico; and they've got the standards for pull-tabs, as 3 well as bingo paper, record keeping. And now we've 4 developed the standards for the bingo Card-Minding 5 Systems. 6 CHAIRMAN WILLIAMSON: All right. Great. 7 As we constantly talk about finding ways to make bingo 8 more efficient and whatever we need to do to get there, 9 so I appreciate that. 10 Any questions, Commissioners? 11 (No response) 12 CHAIRMAN WILLIAMSON: I have one witness. 13 Mr. Fenoglio, do you still want to come up? 14 MR. FENOGLIO: Thank you, Madam Chair. 15 For the record, my name is Steven Fenoglio. I'm an 16 attorney in Austin. We support going forward. This is 17 a work in progress, as Phil has stated. He's been very 18 open. There's still some tweaks we want to make and we 19 anticipate -- anticipating extensively in the 20 rulemaking. I'd be happy to answer any questions. 21 Thank you. 22 CHAIRMAN WILLIAMSON: All right. Good. 23 And I appreciate the fact, once again, we're trying to 24 make it easier for the charities to be able to 25 understand the statutes and find what they need to know. 16 1 I can -- I can appreciate that being in a highly 2 regulated industry that -- that anything that can get 3 there is great. 4 All right. Is there a motion? 5 COMMISSIONER KRAUSE: I make a motion that 6 we initiate the rulemaking process by publishing the 7 following rules in order to receive public comment. The 8 repeal of 16 TAC Section §402.302 and the proposed new 9 rules in its place, §402.321 through .328, inclusive. 10 CHAIRMAN WILLIAMSON: All right. Thank 11 you. 12 All in favor? 13 COMMISSIONER KRAUSE: Aye. 14 CHAIRMAN WILLIAMSON: Aye. 15 COMMISSIONER DELGADO: Aye. 16 CHAIRMAN WILLIAMSON: Motion passes 3-0. 17 Thank you. 18 MS. JOSEPH: And I have a T-bar for your 19 initials. 20 CHAIRMAN WILLIAMSON: Okay. Great. 21 AGENDA ITEM NO. IV 22 CHAIRMAN WILLIAMSON: Let's go on to the 23 next item. 24 Phil, this is yours. Charitable Bingo 25 Operations Director: Report and discussion on 17 1 activities, updates on licensing, accounting, audit, 2 pull-tab reviews, special projects, and operator 3 training. 4 MR. SANDERSON: Yes, Commissioners. In 5 your notebook is a report on December activities. I 6 provided you a report on January activities that we just 7 finalized yesterday. And the only thing I would like to 8 point out is last month in January we issued over 950 9 licenses. And I haven't had a chance to go back and 10 look, but just from recollection, I think that is 11 probably the most licenses that we've actually issued in 12 a one-month period since I've been here at the Lottery. 13 It's a enormous amount of licenses. 14 So I would like to thank all of my staff, 15 not only the licensing examiners, but the accounts 16 examiners and auditors for utilizing their time 17 efficient and trying to keep things moving forward. 18 CHAIRMAN WILLIAMSON: All right. Yes. 19 When you told me that, I was very impressed by the 20 number. 21 Commissioners, do you have any questions 22 for Phil? 23 COMMISSIONER DELGADO: No, ma'am. 24 COMMISSIONER KRAUSE: No. 25 CHAIRMAN WILLIAMSON: Question on those: 18 1 Were those new, renewals, combination? I mean, do you 2 get any -- 3 MR. SANDERSON: The majority of them are 4 temporaries. 5 CHAIRMAN WILLIAMSON: Okay. 6 MR. SANDERSON: There were a lot of 7 temporaries this last year. Those -- now that we can 8 issue 24 at a time, you know, we can usually issue those 9 fairly quickly. However, due to the high volume of 10 temporaries, the renewals and original application 11 processing time kind of did increase a little bit, 12 number of days to process those, because of the focus on 13 the more time-sensitive temporary applications. 14 CHAIRMAN WILLIAMSON: All right. Thank 15 you very much. 16 AGENDA ITEM NO. V 17 CHAIRMAN WILLIAMSON: Let's go on to Item 18 5. Report, possible discussion and/or action on lottery 19 sales and revenue, game performance, new game 20 opportunities, advertising, market research, trends, 21 game contracts, agreements, and procedures. 22 Kathy and Robert, please. 23 MS. PYKA: Good morning, Commissioners. 24 For the record, my name is Kathy Pyka, 25 Controller for the Commission; and with me, to my right, 19 1 is Robert Tirloni our Products Manager. 2 Commissioners, the first chart that we 3 have for you this morning includes sales through the 4 weekend being January 28th, 2012. It was noted at the 5 bottom of the chart, our Fiscal Year 2012 sales are at 6 $1.593 billion, which is a $47 million increase over the 7 1.545 billion for the same period in Fiscal Year 2011. 8 Our instant ticket sales are noted on the 9 blue bar. They're just under $1.2 billion, which is a 10 $39.6 million increase over the 1.147 billion for Fiscal 11 Year 2011; and our on-line sales, noted on the red bar, 12 are at $405.3 million, which is a $7.4 million increase 13 over the same period last fiscal year. 14 Commissioners, before we move on with the 15 remainder of our sales presentation, we wanted to take 16 some time this morning to provide an update on the 17 recent $2 Powerball introduction that began here in 18 Texas on Sunday, January the 15th. The chart before you 19 provides a comparison of our weekly sales for Powerball 20 and Powerplay. Prior to the change to the $2 game, 21 noted with the blue bar, and then the sales after the $2 22 price point introduction are noted with the green bars. 23 So first focusing on the column of 24 $4.2 million. This was our first week of Powerball 25 sales under the $2 price point. The advertised jackpot 20 1 for that Saturday was $100 million. And as we compare 2 those sales to sales prior to the introduction of the $2 3 game, you'll note that the sales for that week exceeded 4 the $3.6 million total, which was $184 million jackpot; 5 the $187 million jackpot in April of 2011; as well as 6 the $171 million jackpot in May of 2011. So we've had a 7 phenomenal sales increase in comparing sales to prior to 8 the $2 introduction and looking at jackpot levels that 9 were above those levels. 10 And then moving to last week of sales, we 11 generated $4.8 million in total sales for the week. Our 12 Saturday advertised jackpot was $146 million, and again, 13 the sales for that week were greater than all previous 14 weeks with those jackpots between the range of 15 171 million all the way up to 187 million. 16 The good news that we see is weekly sales 17 for the new $2 price point game have well exceeded the 18 previous weeks. We had phenomenal sales for last 19 night's jackpot, and we'd like to note in summary that 20 total sales under this $2 price point have experienced a 21 28.5 percent increase in previous sales. And in Texas 22 and in comparing us to the remainder of the states in 23 the country, we're leading that sales increase along 24 with the states of Illinois and Georgia. So we're very 25 pleased with those overall sales results from the 21 1 introduction of the $2 price point. 2 Our next slide that we're going to move 3 to -- 4 MR. GRIEF: Chairman, before we move to 5 that next slide, if I could, I think it might be helpful 6 for the Commissioners to hear some of the reasons why 7 you have seen this successful launch of the $2 Powerball 8 game. I think Robert can comment on that. 9 MR. TIRLONI: Yes. Gary and 10 Commissioners, I think we've -- I think we've done quite 11 a few things right with the launch of Powerball in 12 Texas. I think we had very consistent, clear messaging 13 about the change. We focused on the bigger starting 14 jackpots, the jackpots doubling from 20 million to 15 40 million for the starting jackpot; focused on the 16 better overall odds and the better jackpot odds in the 17 game; and we were consistent with that message in the 18 point of sale in stores, on our flat panel displays that 19 we also have in store, and in our retailer 20 communications. We have to make sure we get retailers 21 on board with these game change -- game changes before 22 we can expect them to convey the positive benefits of 23 these changes to the players. 24 I think we had a really good TV and radio 25 campaign. I know I've been hearing it quite a bit. 22 1 Showing the -- the TV showed the new bigger $2 Powerball 2 game landing in Texas. So I think all of those elements 3 combined with clerk-retailer promotions that are just 4 ending -- one just ended last night. We have a player 5 promotion that's starting. We've really been focused on 6 this game and getting information about this game since 7 you adopted the rule in the fall. And I think all of 8 that combined leads to the build up and the successful 9 launch. 10 And I'm a little biased. But I'll tell 11 you we've gotten really good at making these game 12 changes, and in some circumstances, making them in 13 pretty short windows of time. We have a very detailed 14 roll-out plan that we use, a very detailed timeline that 15 we use. It involves all our vendors; and it involves 16 staff from almost every division within the whole agency 17 that comes together and executes against that plan to 18 make sure that we get all of the elements produced, 19 everything distributed, and make sure we hit that 20 launch -- launch window. And I think that's what's 21 contributed to our success with this game roll out. 22 MR. GRIEF: Chairman, I'd just add to 23 that. I think Robert summed it up very well. Our 24 lottery operator, GTECH, as you know, under the Texas 25 model, we utilize GTECH for our sales rep staff; and Joe 23 1 is here and so is Tom, who manages that sales staff. I 2 think they've done a phenomenal job in getting out there 3 to those retail locations and explaining the new $2 4 Powerball game and making sure the point of sale 5 material that Robert talked about was in place and 6 visible to the players. So it's been a really good team 7 effort. Our advertising vendors have done an 8 outstanding job, as well. Our internal staff, when you 9 look back, it's months and months of planning and 10 meetings to get something off the ground like this. So 11 it's been a really fine, fine effort on everyone's part. 12 CHAIRMAN WILLIAMSON: Well, like I said, I 13 commend you guys on doing that. When anybody asks me, 14 "How is the lottery doing?" I said "Have you seen our $2 15 Powerball? It's doing great." So thank you guys. 16 Thank GTECH. I mean, it's great, I think. 17 Commissioners? 18 COMMISSIONER KRAUSE: Well, I think the 19 proof is in the pudding when our customers like it, and 20 they're responding by spending their entertainment 21 dollars with us. 22 MR. TIRLONI: Yes, sir. 23 CHAIRMAN WILLIAMSON: The advertising -- 24 COMMISSIONER KRAUSE: Those are like 25 votes. 24 1 CHAIRMAN WILLIAMSON: The advertising was 2 wonderful. It really was exceptional. 3 MR. TIRLONI: Thank you. 4 CHAIRMAN WILLIAMSON: Okay. 5 MS. PYKA: All right. So we'll move on to 6 the cumulative average daily sales comparison slide 7 which provided a comparison of our average daily sales 8 for Fiscal Year 2010, Fiscal Year 2011, and Fiscal Year 9 2012. 10 So Commissioners, as we look at the total 11 cumulative sales at the bottom of the chart, our average 12 daily for Fiscal Year 2012 is $10.6 million. This is a 13 3.7 percent increase over last fiscal year, and it's a 14 5.1 percent increase over Fiscal Year 2010. So then 15 moving up to the top of the chart, looking at the 16 on-line or jackpot game sales highlighted with the white 17 font. Our jackpot games have a total of $1.6 million. 18 That's a $63,000 increase over last fiscal year and an 19 $84,000 increase over Fiscal Year 2010. 20 So as noted on the slide, Lotto Texas, 21 Powerball, Powerplay, and Texas Two Step are all showing 22 increases over the previous fiscal year. 23 Then we'll move on down to the green font, 24 which includes our daily game subtotal. We're just at 25 over $1.1 million over the fiscal year. That's a one 25 1 and a half percent increase over Fiscal Year 2010 and 2 just slightly -- over 2010 and a slight increase over 3 the Fiscal Year 2011. Excuse me. I got my columns 4 confused there. And so as we look at Fiscal Year 2010, 5 the highlight there that we have on that slide, our 6 Daily 4 sales at 171,000 as a daily average; and that's 7 an 11.9 percent increase over last fiscal year and 21.1 8 percent increase over Fiscal Year 2010. 9 And then rounding up the slide are our 10 instant ticket sales at $7.9 million. That's an 11 increase of 315,000 over last fiscal year and of 12 $411,000 increase over Fiscal Year 2010. 13 So with that Robert will now cover actual 14 sales by game. 15 MR. TIRLONI: Thanks, Kathy. 16 So Commissioners, this is Fiscal Year 2012 17 sales through the week ending Saturday, January 28th. 18 It's got the same -- the slide has the same layout as 19 the previous. You see the jackpot games at the top in 20 white, and we are realizing an $8 million surplus in 21 Fiscal Year 2012 compared to 2011. 22 I'll point out that this deficit at Mega 23 Millions, this $18 million deficit, is all jackpot 24 related. In November of 2010, we had a Mega Millions 25 jackpot roll that started. The jackpot rolled all the 26 1 way through December, all the way through the holidays, 2 and we ended up in early January of 2011 with a 3 $355 million jackpot. So that's the reason for that 4 decline. We're up against -- Mega Millions is competing 5 with some -- a very high jackpot level that occurred a 6 year ago. So that's the reason for that decline. 7 The green in the middle of the chart are 8 our daily games. As Kathy mentioned, we're seeing good 9 growth on the Daily 4 product. Overall, we are down 10 slightly on our daily games, just about $800,000; but 11 all told for on-line, we are up $7.3 million. And our 12 instants continue to do very well. We're seeing strong 13 sales from the instant category this fiscal year. Those 14 sales are up, just under $40 million for the year, and 15 that rounds us out with $47 million surplus this fiscal 16 compared to last fiscal. 17 MS. PYKA: With that we'd be happy to 18 answer any questions -- no. Wait. I'm so -- 19 MR. TIRLONI: I actually have one more 20 thing. 21 MS. PYKA: -- sorry. Robert has products 22 to go through. I'm cutting Robert off. 23 MR. TIRLONI: We have -- I wanted to bring 24 to your attention a new game that is coming out. In the 25 past we have talked about our spotlight games, or we 27 1 also call them our Mega games. We've had two of those, 2 and we've produced those at the $20 price point. That 3 was our $500 Million Blockbuster and our $500 Million 4 Frenzy, but this is a first for us. This is a $10 5 spotlight game. And just as a reminder, spotlight game 6 is a game that has a slightly elevated price payout and 7 a very large print run; and that allows us to create 8 these spotlight games. So this game, $200 Million Cash 9 Spectacular, has ten top prizes of $1 million. It has 10 ten prizes of $100,000. It has over 8 million prizes in 11 the game, and it has over $200 million, total, in 12 prizes. This game starts on Monday, February 13th, so 13 we're just about two weeks out, a little less than that, 14 from the launch of this game. 15 Since we are continuing to support $2 16 Powerball through the month of February in terms of 17 advertising and POS support, this game will start its -- 18 its full advertising support in March. So it will start 19 in mid-February, and the full advertising support will 20 come into market in March. That will be TV, radio, 21 outdoor billboards, all point of sale. And so we think 22 this game is going to do very well being at the $10 23 price point, and we think it's going to help us continue 24 the good growth that we're seeing from the instant 25 category this year. 28 1 CHAIRMAN WILLIAMSON: All right. 2 MR. TIRLONI: And that is the end of our 3 presentation now, and we're happy to answer any 4 questions you might have. 5 CHAIRMAN WILLIAMSON: Commissioners, you 6 have any questions or comments? 7 COMMISSIONER KRAUSE: Are we still doing 8 the Black ticket? 9 MR. TIRLONI: Yes, sir. 10 COMMISSIONER KRAUSE: Okay. And so this 11 new one is going to compete with Black ticket? 12 MR. TIRLONI: It will. It will be out at 13 the same time, but we're continuing to see Texas Lottery 14 Black do well. And we're actually seeing really good 15 growth at the $10 price point. That's a focal price 16 point for us right now and for the GTECH sales force, 17 and so we think they're both going to be able to coexist 18 out there. And the 10 has really become a core product 19 for us now, kind of like our Weekly Grand and our Break 20 the Bank and our monthly bonus games. And so we believe 21 there's room to -- for Texas Lottery Black to be 22 successful and stay in market even with the launch of 23 this game. 24 CHAIRMAN WILLIAMSON: Great. Well, we'll 25 find out. 29 1 MR. TIRLONI: We will find out. 2 CHAIRMAN WILLIAMSON: All right. Thank 3 you. We don't have anymore questions. 4 MS. PYKA: Thank you. 5 MR. TIRLONI: Thank you. 6 AGENDA ITEM NO. VI 7 CHAIRMAN WILLIAMSON: We've come to Item 8 6. Report, possible discussion and/or actions on 9 transfers to the State. 10 Kathy, please. 11 MS. PYKA: Again, for the record, Kathy 12 Pyka, Controller for the Commission. 13 Commissioners, the first report in your 14 notebook reflects the transfers and allocations to the 15 Foundation School Fund, the Texas Veterans Commission, 16 and the allocation of unclaimed prizes for the period 17 ending December 31st, 2011. 18 Our total cash transfers to the State 19 amounted to $323 million through the fourth month of the 20 fiscal year, and the second page of your notebook 21 includes the detailed information for the monthly 22 transfers. Of the $323 million transfer to the State, 23 $310.2 million was the amount transferred to the 24 Foundation School Fund. We transferred $1.4 million to 25 the Texas Veterans Commission, and the balance of 30 1 $11.4 million was transferred from unclaimed lottery 2 prizes. 3 Commissioners, this represents a 6.25 4 percent increase or $18.2 million over the amount that 5 we transferred to the Foundation School Fund in 6 December of 2010. 7 And, Commissioners, wrapping up, looking 8 at cumulative transfers to the Foundation School Fund 9 through December, we're now at $13.9 billion as 10 cumulative transfers to the Foundation School Fund. 11 I'd be happy to answer any questions. 12 CHAIRMAN WILLIAMSON: Commissioners, you 13 have any questions? 14 (No response) 15 CHAIRMAN WILLIAMSON: Thank you. 16 AGENDA ITEM NO. VII 17 CHAIRMAN WILLIAMSON: Let's go on to Item 18 7. Consideration of and possible discussion and/or 19 action on the agency's comprehensive business plan. 20 Gary. 21 MR. GRIEF: Commissioners, you should have 22 before you a copy of the agency's proposed business plan 23 for Fiscal Years 2012 to 2015. I'd like to begin by 24 giving you some background on the history of the agency 25 business plan. 31 1 Back in August 2002, the Texas Sunset 2 Advisor Commission issued a staff report regarding the 3 Texas Lottery Commission; and among several 4 recommendations contained in that report, the Sunset 5 Commission Staff recommended that the Lottery Commission 6 develop a comprehensive business plan that would help 7 guide the Commission's major initiatives and ensure 8 their cost effectiveness. This business plan is not 9 statutorily required; and it is used by the agency to 10 compliment those reports that are statutorily required, 11 such as the agency's strategic plan, the legislative 12 appropriations request, and the operating budget. 13 The original business plan, which covered 14 Fiscal Years 2005 to 2007, was developed by the 15 management team with assistance from the UT School of 16 Business. And it was initially presented to the Lottery 17 Commission in the July 2004 commission meeting, and 18 ultimately approved by that commission in November 2004. 19 The most recent business plan, the one 20 we've been operating under, covered Fiscal Years 2008 21 through 2011; and it was developed all in-house by the 22 management team. And it was approved by the Commission 23 in the December 2007 commission meeting. 24 The previous business plan contained a 25 number of individual action plans that crossed all 32 1 divisions of the agency, and these action plans have 2 been used very effectively as tools to keep us focused 3 on our business goals. This was accomplished by 4 conducting a comprehensive review of each action plan's 5 status on a regular basis. Those reviews involved my 6 receiving a written report from each division that was 7 impacted; and then ultimately, we had a meeting that 8 would be attended by the involved management team 9 members where we would discuss each action plan in 10 detail and make any adjustments to that action plan, if 11 we needed to. 12 Now, the new business plan that you have 13 in front of you today, it is currently in draft form; 14 and it covers Fiscal Years 2012 through 2015. We 15 recently sent that draft to you for your review. We 16 have narrowed the focus of this plan this go-around to 17 concentrate on the core business functions of the 18 agency, and that is the operation of the Texas Lottery 19 and the regulation of Charitable Bingo. 20 The Lottery Operations Divisions -- 21 Division and the Charitable Bingo Operations Division 22 were both primarily responsible for the development of 23 the plan, but the entire management team had an 24 opportunity for input. I want to express special thanks 25 to Mr. Robert Elrod of our Media Relations Division for 33 1 the many hours that he has put in editing and formatting 2 our new plan. 3 Today Staff is looking for your approval 4 of the new business plan, and we would be happy to 5 answer any questions that you might have. 6 CHAIRMAN WILLIAMSON: All Right. Thank 7 you. 8 Commissioners, do you have any questions 9 or comments? 10 (No response) 11 CHAIRMAN WILLIAMSON: I'd like to commend 12 y'all for doing this. I mean, I think this is critical. 13 As you know, the lottery is a business; and if you don't 14 have some vision of where you think you need to be, I 15 think it's real hard to be effective. So I commend 16 y'all for doing that and for the Sunset Group to 17 understand that this is what a business needs to 18 understand where they're going. I mean, we need to be 19 forward looking as well as backward looking, I believe. 20 So I commend you again, and I think this is a good tool 21 to get there. 22 And I know this is not necessarily an 23 action item, but I think that we should go ahead and 24 formally approve this plan, unless the Commissioners 25 object to that. So just make a motion to ... 34 1 COMMISSIONER KRAUSE: I make a motion we 2 adopt this plan. 3 CHAIRMAN WILLIAMSON: Is there a second? 4 COMMISSIONER DELGADO: Second. 5 CHAIRMAN WILLIAMSON: All in favor? 6 COMMISSIONER DELGADO: Aye. 7 CHAIRMAN WILLIAMSON: Aye. 8 COMMISSIONER KRAUSE: Aye. 9 CHAIRMAN WILLIAMSON: Motion passes 3-0. 10 COMMISSIONER KRAUSE: Thank you. 11 CHAIRMAN WILLIAMSON: Thank you, Staff. 12 Staff, y'all did a great job. 13 Michael, thanks. 14 AGENDA ITEM NO. VIII 15 CHAIRMAN WILLIAMSON: Okay. The next item 16 is consideration of and possible discussion and/or 17 action including proposal on new game -- a new rule 16 18 TAC §401.320 relating to All or Nothing On-Line Game 19 Rule. 20 Pete and Robert, this your item, please. 21 MR. TIRLONI: Good morning again, 22 Commissioners. For the record, my name is Robert 23 Tirloni. I'm the products manager for the Commission. 24 We're here today to talk about a new 25 on-line game concept and a rule proposal. We're going 35 1 to change it up a little bit today. I'm going to go 2 first and walk through a brief PowerPoint that describes 3 the game, then Pete will follow up and talk to you all 4 about the rule proposal. 5 So I thought it would be good to start off 6 today by kind of summarizing our on-line game portfolio 7 and what it looks like. What you see before you right 8 now is an actual piece of point of sale that we use in 9 stores; and our retailers really like this point of sale 10 piece because, at a glance, it shows you all of our 11 on-line games and the days that they're drawn. So, you 12 know, somebody walking into a store on Thursday can 13 immediately see what games are being drawn on Thursday. 14 So like I said, this is a very well received piece. And 15 if we start -- if our supplies start to get a little 16 low, we hear from the retailers pretty quickly, and we 17 make sure we get these back out. 18 And you'll see from looking at this that 19 we have, up towards the top, we have our multi-state 20 game. So we have $2 Powerball, which we've been talking 21 about quite a bit lately, and we have Mega Millions. 22 Those are on different draw days. In Texas we are 23 fortunate enough to be able to support our own in-state, 24 multi-million dollar jackpot game. A lot of states 25 nowadays, they don't have their own in-state game. They 36 1 just have the multi-state games. But we are a large 2 enough state to be able to, not only have the two 3 multi-state games, but also have our own in-state 4 jackpot game. 5 We also have Texas Two Step on Mondays and 6 Thursdays. That's also a jackpot game but a much 7 smaller scale. So that game has a jackpot that starts 8 at $250,000, and then it increases as the jackpot rolls. 9 So it's really nice because we have jackpot game 10 offerings every day of the week, Monday through 11 Saturday. 12 Then we have our daily games. Pick 3, 13 which is our three digit; Daily 4, which is our four 14 digit; and Cash 5, which is our five digit game. Those 15 are drawn every Monday through Saturday, and Pick 3 and 16 Daily 4 are drawn twice a day. So they're drawn at 17 12:27 and 10:12 at night. 18 So when you look at this, you see we have 19 a pretty full product portfolio on the on-line game 20 side. And if you go to other states, you probably won't 21 find too much or, you know, too many different other 22 concepts or games in market that we don't already have; 23 but we're always looking to see what we can do better. 24 Can we enhance any of our games or can we introduce 25 anything new? And so we started talking to GTECH in the 37 1 fall of 2010 about introducing a new game. And we 2 wanted something that was going to fit within the 3 portfolio and compliment what we had already but also be 4 different and unique. And so when GTECH starting 5 looking at game designs, they focused on the $2 price 6 point to provide differentiation from what we already 7 had. Now, of course, at that time we didn't have $2 8 Powerball, but that was a focus. And that's a focus 9 industry-wide is to get on-line games above the $1 price 10 point. 11 I think we talked a little bit about that 12 when we first started talking about $2 Powerball. The 13 goal eventually on the on-line side is to mirror the 14 success that we've experienced on the instant side by 15 introducing different games at different price points. 16 The game designs that you'll end up seeing 17 that we actually focus-group tested, they all had a 18 higher price payout than our typical on-line games. 19 Most online games or most of our on-line games pay out 20 at 50 percent. The games that were designed had payouts 21 right around 55 to 56 percent, and that allows the game 22 designer to create more valuable prize tiers in the 23 game. 24 Another goal of the designs was to create 25 concepts with good overall odds of winning. Obviously, 38 1 the reason for that is to be able to have players 2 experience more frequent wins when they're playing the 3 game and multiple drawings per day. We've had good 4 success with Pick 3 and Daily 4 having two drawings per 5 day. We believe that the reason our instant games are 6 so successful is because they provide instant 7 gratification. Pick 3 and Daily 4 are probably the 8 closest you get to that on the on-line game side because 9 they are drawn twice a day, six days a week. 10 So we did market research on all of the 11 concepts. There were four concepts that were tested, 12 and we had two different phases of the research. The 13 first phase was focus-group research, and that was 14 conducted in August of 2011. 15 The second phase of the research was 16 quantitative, and that was conducted a month later via 17 the internet. And we had 1,200 players participating in 18 that research. 19 The good news is that both the qualitative 20 and the quantitive research revealed the game All or 21 Nothing was the favorite concept of all four. And 22 that's good news when you find that out through the 23 quantitive research because the qualitative or 24 focus-group research, you're dealing with a much smaller 25 audience. You're talking to, you know, maybe 20, 30, 40 39 1 people and getting some initial feedback about the 2 concepts. When you hear good things about a game in the 3 focus groups and then that gets validated or verified, 4 so to speak, in the bigger research group, that's good 5 news. 6 So the All or Nothing game, one of the 7 reasons it was popular in the focus groups was it was 8 simple and easy to understand and to play. And again, 9 the good news is the quantitive research backed that up. 10 69 percent of the participants said that All or Nothing 11 was easy to understand. The All or Nothing concept was 12 appealing to everybody who participated; but it was also 13 a favorite amongst our Pick 3, Daily 4, and Cash 5 14 players. And that's important because those are the 15 daily game players. So those are the people who play on 16 a regular daily basis, and so we want to make sure if 17 we're going to introduce another daily game, that those 18 players like the concept. 19 And the last notable thing from the 20 research has to do with our lapsed players. Our lapsed 21 players rated this as a preferred game concept. 22 50 percent of them said that they would purchase All or 23 Nothing if it were available for sale in Texas, and any 24 time we can introduce a product that's going to bring 25 people who have stopped playing back into the game, 40 1 that's a positive too. 2 So All or Nothing, how does the game work? 3 How do you play? We already talked about the price 4 point. It's $2 per play, and players choose 12 out of 5 24 numbers. And then we draw 12 out of 24 numbers. 6 Very unique feature of this game is how 7 you win the top prize of $250,000. You can win by 8 matching all 12 numbers, or you can win by matching zero 9 numbers. So that -- you know, that is a very unique 10 feature of this game. I'm going to show you all the 11 prize tiers on the next slide. 12 And the drawings would be held four times 13 a day at 10:00, 12:27, 6:00, and 10:12 p.m. Now, the 14 12:27 p.m. and the 10:12 p.m., those are our existing 15 day and nighttime drawings. So really we're introducing 16 two new draw times per day for this game, and that would 17 be 10:00 and 6:00. The 6:00, I will tell you, was well 18 received by players also in the research. The 6:00 p.m. 19 draw time was very well received. 20 The logo you see on the screen, I wanted 21 to show that to you. We kind of like it. That is a 22 logo that was designed for the mocked-up How to Play 23 brochures. Every game that was tested had a How to Play 24 brochure that the research participants could look at, 25 almost as if they were going into a retail store and 41 1 picking up the brochure. And that was the logo design 2 that was on the All or Nothing brochure. 3 So if you all eventually choose to adopt 4 this rule in the future, we'll probably tweak that a 5 little bit to kind of get it in sync with the way our 6 other logos look, but I just kind of wanted you to see 7 the color scheme and the look of the logo that was used 8 in the research. 9 So here are all of the prize tiers. So 10 you'll notice, as I mentioned, you can win the top prize 11 of $250,000 by either matching zero numbers or matching 12 all 12, and this -- we refer to this as an hourglass 13 game. You can kind of see the top portion of the matrix 14 and the bottom portion mirror each other. So you see 15 you win $500 if you match 11 numbers, but you also win 16 $500 if you match one number. You win $50 if you match 17 two numbers or ten numbers. You win $10 if you match 18 three numbers or nine numbers, and then you win $2 if 19 you match four numbers or eight numbers. And I do have 20 to point out, if you play and you match five, six, or 21 seven numbers, you don't win a prize. So that will 22 take -- you know, that will take some education on our 23 part with our retailers and our players. 24 I do also want to point out we talked 25 about the odds as, you know, that was the goal of these 42 1 game designs. Those are very, very good overall odds 2 for an on-line game. The best overall odds right now 3 for our games is Cash 5, and that's one in eight. So 4 that's almost double -- double this. But those are very 5 good overall odds. Those are comparable to the overall 6 odds of winning on a $2 scratch-off game, so we're 7 excited about that. 8 I have a brief schedule of events for you 9 to kind of put all of -- all of our -- this whole rule 10 proposal in prospective. So we're talking about the 11 game and the rule today. If you choose to publish the 12 rule in the Texas Register, we will have a public 13 comment hearing here on February 29th; and the rule 14 would be ready for your consideration to adopt probably 15 in late March, possibly early April. And if you choose 16 to adopt the rule right around that time, late March, 17 early April, we project that we can have this game 18 launched by Sunday, August 5th. And that's really good 19 because that would give us a solid three weeks of sales 20 from this new game right at the end of the fiscal year, 21 but we would also then be starting our new fiscal year 22 with a new game that's already been out in market. And 23 hopefully, we would be building up some momentum with 24 that game and be off to a real successful sales start 25 for the next fiscal year. 43 1 So that's the end of my presentation. I 2 know Pete needs to talk to you about the rule, but I'm 3 happy to answer any questions. I do want to just say 4 that we've been working with GTECH on this concept for, 5 as I said, awhile. Staff is very excited about this 6 game and about this concept. We think it's different. 7 We think it's unique, and we think there's a lot of 8 opportunity -- a lot of marketing opportunity with this 9 game; just the way you play, the way you can win, and 10 it's just different. And we're excited about it. 11 CHAIRMAN WILLIAMSON: Okay. 12 Commissioners, you have any questions? 13 COMMISSIONER KRAUSE: I've got a couple -- 14 couple of questions. How do you find lapsed players? 15 MR. TIRLONI: The research company does 16 that. When they are recruiting players to come in for 17 the focus groups, they have to fill out a questionnaire 18 that asks them about their playing history; and a lapsed 19 player, for this research, was defined as somebody who 20 had played a game in the past six months but had not 21 played for in the last month. So they had been a 22 player, but something caused them to stop playing. And 23 all of that's determined through the questionnaires or 24 the responses they give to questions. They're all 25 screened in order to get into the groups. 44 1 COMMISSIONER KRAUSE: So by launching this 2 in August -- and we're going to have had three launches 3 of new products this fiscal year. Because we completed 4 one, we've got one in a couple weeks, and then this one 5 in August. 6 MR. TIRLONI: Yeah. Actually, there's 7 more than that. There's -- well, there's a lot more 8 than that; but our big initiatives, besides the $10 9 spotlight game I talked to you about, we have another 10 $20 one coming out -- another $20 spotlight game coming 11 out in, I believe it's May or April. 12 Yes, we're very busy. 13 CHAIRMAN WILLIAMSON: Cynthia, you have 14 any? 15 COMMISSIONER DELGADO: This isn't the 16 final logo or? 17 MR. TIRLONI: It's not the final logo, no. 18 We'll probably, if you all end up adopting this rule -- 19 the square layout does not work as well for us on our 20 website, and we're, you know, developing a mobile 21 website right now. And so most of our game logos for 22 our on-line games are rectangular, and so we'll probably 23 keep a lot of these same design elements but tweak it a 24 little bit. 25 CHAIRMAN WILLIAMSON: All right. Great. 45 1 All right, Pete. You want to take care of 2 the legal side, please. 3 MR. WASSDORF: Good morning, 4 Commissioners. For the record, my name is Pete 5 Wassdorf, Assistant General Counsel in the Legal 6 Services Division, and I'm continuing on with Agenda 7 Item 8. 8 With any new on-line game, the Commission 9 publishes game-specific rules which detail how the game 10 is played, the terms and conditions of play, the price 11 point, the times and days of the draws for the game, the 12 prize tier, the odds of winning, each winning match, and 13 the dollar amount of the prizes. 14 Before you is Agenda Item No. 8, that 15 would -- a proposed rule that would effectuate the All 16 or Nothing game described by Robert; and the Staff 17 recommends that the Commission initiate the rulemaking 18 process for consideration of adoption of §401.320 after 19 a 30 day public comment period and to set a public 20 hearing on the proposed rule at 9:00 a.m. on 21 February 29th, 2012. 22 And that's it for me. I'm happy to answer 23 any questions. 24 CHAIRMAN WILLIAMSON: Thank you. 25 Commissioners, do you have any questions 46 1 of Pete? 2 COMMISSIONER DELGADO: No, ma'am. 3 CHAIRMAN WILLIAMSON: Do I hear a motion? 4 COMMISSIONER KRAUSE: I make a motion that 5 we initiate the rulemaking process by publishing the 6 proposed rule 16 TAC §401.320 in order to receive public 7 comment. 8 CHAIRMAN WILLIAMSON: Second? 9 COMMISSIONER DELGADO: Second. 10 CHAIRMAN WILLIAMSON: All in favor? 11 COMMISSIONER KRAUSE: Aye. 12 CHAIRMAN WILLIAMSON: Aye. 13 COMMISSIONER DELGADO: Aye. 14 CHAIRMAN WILLIAMSON: Motion passes 3-0. 15 And at this time we'll take a break until 16 10:15. It is 9:55 -- 56. 17 MS. KIPLIN: Commissioners, I have a memo 18 that, if you'll initial, will reflect your vote on this 19 matter. 20 (Recess: 9:56 a.m. to 10:15 a.m.) 21 CHAIRMAN WILLIAMSON: Okay. We're back in 22 session. It is 10:17. 23 AGENDA ITEM NO. IX 24 CHAIRMAN WILLIAMSON: Our next item is 25 No. 9, is report, possible discussion and/or action on 47 1 the 82nd Legislature. 2 Nelda. 3 MS. TREVINO: Good morning, Commissioners. 4 For the record, I'm Nelda Trevino, Director of 5 Governmental Affairs. On this agenda item, I do not 6 have an update to provide, but I'll be glad to answer 7 any questions that you might have. 8 CHAIRMAN WILLIAMSON: All right. Thank 9 you. 10 Commissioners. Do you have any questions? 11 (No response) 12 CHAIRMAN WILLIAMSON: All right. 13 AGENDA ITEM NO. X 14 CHAIRMAN WILLIAMSON: We continue on to 15 No. 10. Report, possible discussion and/or action on 16 the Sunset review process involving the agency. 17 MS. TREVINO: Again, Commissioners, for 18 the record I'm Nelda Trevino, Director of Governmental 19 Affairs; and I have a brief report regarding the 20 agency's Sunset review. 21 The Sunset Advisory Commission Staff is 22 concluding its evaluation and review work of the agency, 23 and we should still anticipate the Sunset Staff report 24 to be issued in March. Once the Staff report has been 25 issued, the agency will be required to formally provide 48 1 responses to the recommendations that have been made, 2 and this will be a matter that we will bring to you for 3 your discussion at the March meeting. 4 In your meeting notebook, we included the 5 Sunset Advisory Commission meeting schedule for agencies 6 currently under Sunset review; and you will note that 7 the Sunset Commission is scheduled to meet on April the 8 10th, 2012, to hear public testimony on the Lottery 9 Commission and the recommendations that have been made 10 by the Sunset Staff. At this commission hearing, the 11 agency will have the opportunity to provide testimony 12 and to answer any questions that the commission members 13 may have at that time. The Sunset Commission is then 14 scheduled to meet again on June the 5th through 6th, and 15 at this meeting, the Commission will make their 16 decisions and adopt their recommendations related to the 17 Lottery Commission for the full legislature to consider 18 when it convenes in January of 2013. 19 And this concludes my report on this 20 agenda item, and I'll be glad to answer any questions. 21 CHAIRMAN WILLIAMSON: Thank you, Nelda. 22 Commissioners, do you have any questions? 23 COMMISSIONER KRAUSE: No. 24 CHAIRMAN WILLIAMSON: All right. Thank 25 you. 49 1 AGENDA ITEM NOS. XI AND XII 2 CHAIRMAN WILLIAMSON: Let's go on to Item 3 11. Report, possible discussion and/or action on the 4 agency contracts including procurement on instant ticket 5 testing services and/or on outside counsel for 6 intellectual property legal services. 7 Mr. Fernandez, please. 8 MR. FERNANDEZ: Good morning, Madam 9 Chairman, Commissioners. 10 For the record, my name is Mike Fernandez. 11 I'm the Director of Administration. Item No. 10 in your 12 packet is a briefing item. The first item in that -- 13 under No. 10, is we've provided for your review the 14 agency contracts, reports for both prime and high risk. 15 Also in this item, I would like to advise 16 the Commission of Staff's intent to issue RFPs for 17 instant ticket testing services, as well as outside 18 counsel for intellectual property and legal services. 19 Both those contracts expire the end of August, and Staff 20 has now begun drafting RFPs. We anticipate releasing in 21 perhaps late spring, I suspect. So we wanted to advise 22 you of that. I'd be happy to answer any questions, if 23 you have any. 24 CHAIRMAN WILLIAMSON: All right. Thank 25 you. 50 1 Commissioners, do you have any questions? 2 (No response) 3 MR. FERNANDEZ: Item No. 11, I also have, 4 Commissioners. 5 Again for the record, my name is Mike 6 Fernandez, Director of Administration. Item No. 11, 7 again, is a briefing item to advise the Commission of 8 Staff's intent to amend the GTECH contract services, 9 Amendment No. 3, the Lottery Operator contract. And 10 this amendment will deal with triggers for sanctions. 11 We -- you know, as we move through -- move through the 12 early stages of the conversion, what we're finding is 13 that there are some things that we need to clarify, some 14 things that we need to adjust. We will also be changing 15 and modifying language clarification in areas that will 16 be more specific and more direct. 17 So I wanted to advise you of the intent to 18 amend the contract with Amendment No. 3. Again, I 19 suspect that we will see some of these over the next, 20 you know, 6 to 12 months and then perhaps periodically 21 as we move through the -- certainly the life of the 22 contract, not unlike the previous one. But I'd be happy 23 to answer any questions regarding that. 24 CHAIRMAN WILLIAMSON: Okay. Thank you. 25 Commissioners, do have any questions? 51 1 COMMISSIONER KRAUSE: No, ma'am. 2 CHAIRMAN WILLIAMSON: All right. Thank 3 you. Thank you, Mike. 4 So that took care of Item 12, as well. 5 Mike, is that right? 6 MR. FERNANDEZ: I believe just 10 and 11 7 and 12. 8 MS. KIPLIN: Madam Chairman, it was 11 and 9 12. 10 CHAIRMAN WILLIAMSON: So we just took care 11 of 11 and 12. Right? 12 MR. FERNANDEZ: That's correct. 13 CHAIRMAN WILLIAMSON: All right. 14 AGENDA ITEM NO. XIII 15 CHAIRMAN WILLIAMSON: Let's move on to 16 Item 13. Report, possible discussion and/or action on 17 GTECH Corporation. 18 Gary. 19 MR. GRIEF: Chairman, other than the 20 information in your notebooks, I have nothing further to 21 report further on that item. 22 CHAIRMAN WILLIAMSON: Commissioners, do 23 you have any questions? 24 COMMISSIONER DELGADO: No, ma'am. 25 CHAIRMAN WILLIAMSON: Mr. Lapinski, I have 52 1 a question for you. 2 MR. LAPINSKI: Good morning, Chairman and 3 Commissioners; and for the record, I'm Joe Lapinski, 4 Account Development Manager for GTECH in Texas. 5 CHAIRMAN WILLIAMSON: Can you give us the 6 status report, please, on the conversion? 7 MR. LAPINSKI: Yeah. So currently we 8 continue to move forward, you know, with some of the 9 challenges we have with POS Live. Things that were 10 unanticipated, requirements that need to be modified, 11 and we continue to address those issues with Staff. 12 We're also preparing for Phase 2 of this, where we have 13 additional deliverables under the new contract. We'll 14 start that requirement development this spring and work 15 with Staff to schedule and implement those future 16 changes, as well. 17 CHAIRMAN WILLIAMSON: All right. Thank 18 you. 19 So, generally speaking, everything is 20 running well? 21 MR. LAPINSKI: Running well, yes. 22 CHAIRMAN WILLIAMSON: All right. Thank 23 you very much. 24 MR. LAPINSKI: Thank you. 25 53 1 AGENDA ITEM NO. XIV 2 CHAIRMAN WILLIAMSON: Next item: Report 3 by the Executive Director and/or possible discussion 4 and/or action on the agency's operational status, agency 5 procedures, recent Department of Justice opinion 6 regarding lotteries and federal Wire Act, and FTE 7 status. 8 Gary. 9 MR. GRIEF: Chairman and Commissioners, 10 other than the items that are in your notebook today, 11 what I -- what I want to focus on this morning, I would 12 like to comment on that recent Department of Justice 13 opinion. 14 As you know, the DOJ has recently issued 15 an opinion concluding that the federal Wire Act only 16 applies to sports betting and wagering. This opinion 17 reversed the DOJ's long-held opposition to many forms of 18 gambling using telecommunication systems that cross 19 state or national borders. You may have also seen some 20 articles indicating that some believe that this recent 21 opinion opens the door to internet gambling. 22 By way of background, this legal opinion 23 issued by the DOJ's Office of Legal Counsel last 24 September, but only made public last December, came 25 about in response to requests from the New York and the 54 1 Illinois lotteries to clarify whether the Wire Act of 2 1961 prevented those states from using telecommunication 3 systems, i.e. the internet, to sell lottery tickets to 4 adults within their own state borders. The DOJ opinion 5 now says it does not. Although that opinion dealt 6 specifically with lottery tickets, some have said that 7 it may open the door for states to allow internet poker 8 or other forms of internet gambling that don't involve 9 sports. There have been several articles written 10 indicating that some states are interested in internet 11 gambling as a way to raise additional tax revenue. 12 We have carefully reviewed this opinion; 13 and we have concluded that, since the State Lottery Act 14 neither expressly authorizes nor prohibits the internet 15 sell of lottery tickets, that the sale of Texas Lottery 16 tickets over the internet is a significant policy 17 decision best determined by the Legislature. As a 18 result, in the absence of such express authority, we 19 have no intention of pursuing internet lottery sales. 20 Now, related to this issue is a recent 21 letter that we've received from the Attorney General's 22 Office. That letter is dated January 24th, and it 23 notified the agency that Senator Jane Nelson has asked 24 for an attorney general's opinion on two questions. The 25 first of which has to do with the Texas Lottery's 55 1 authority to conduct second-chance drawings for losing 2 tickets via the internet. The second question, and the 3 one relevant to the DOJ opinion I previously discussed, 4 has to do with the Texas Lottery's authority to conduct 5 any game of chance via the internet. 6 We've been asked to submit a written brief 7 on both of these matters by February 23rd, and we will 8 do that. 9 Regarding the first question having to do 10 with the Texas Lottery's authority to conduct 11 second-chance drawings for losing tickets via the 12 internet, included in our to-be-submitted brief will be 13 the important clarification that the Texas Lottery only 14 receives entries for second-chance drawings over the 15 internet. We do not conduct those drawings over the 16 internet. The drawings are done in our Texas Lottery 17 Draw studio, right across the way here, under the same 18 set of stringent guidelines that all of our game 19 drawings are conducted under. 20 However, all that said, I do want to 21 reiterate our position on the Texas Lottery's authority 22 to conduct any games of chance on the internet. And our 23 position is: In the absence of express legislative 24 authority, we have no intention of pursuing internet 25 lottery sales. 56 1 I'd be happy to answer any questions. 2 CHAIRMAN WILLIAMSON: All right. Thank 3 you. 4 Commissioners, you have any questions or 5 comments or thoughts? 6 COMMISSIONER KRAUSE: So in the absence of 7 any direction at all, we're going to wait and let the 8 legislature tell us? 9 MR. GRIEF: That is correct. 10 COMMISSIONER KRAUSE: All right. Good. 11 CHAIRMAN WILLIAMSON: Commissioner? 12 (No response) 13 CHAIRMAN WILLIAMSON: Yeah. Well, 14 obviously, we're all on the same page as that. That'd 15 be a huge policy change. 16 However, in terms of the on-line forms, I 17 think that that was -- I know how awkward it was in the 18 past when you were sending paper in via the mail. And I 19 don't know about you guys, but I can't tell you the last 20 time I filled out a paper form. I mean, if you're 21 submitting forms, you're doing it on-line. If you're 22 applying to go to a conference or registering for 23 something, so I think that makes sense. I think it's a 24 lot more efficient, and I think that the opportunities 25 of accuracy are a lot greater in terms of who is 57 1 submitting those forms. 2 So I was happy to understand that that's 3 what we were doing with that now and not using that big 4 old paddle anymore to stir up pieces of paper. 5 MR. GRIEF: Yes, ma'am. 6 CHAIRMAN WILLIAMSON: I think that that 7 was a smart way to go with that. So thank you for that. 8 AGENDA ITEM NO. XV 9 CHAIRMAN WILLIAMSON: And at this point, I 10 believe we are on Item 15. Consideration of the status 11 and possible entry of orders in cases posted on the 12 agenda. 13 Kim, this is your item, please. 14 MS. KIPLIN: Commissioners, if I can, I 15 would like to take letters A through J for -- as one 16 matter. 17 Commissioners, those are all lottery 18 cases, enforcement cases, where when we swept for the 19 funds that were owed to us, the account was insufficient 20 fund. We moved forward at the State Office of 21 Administrative Hearings in each of those matters on a 22 revocation of the license. The State Office of 23 Administrative Hearings Administrative Law Judge 24 recommend revocation, and the Staff would request that 25 you all approve the orders -- or in this case, it's a 58 1 mass docket order, but would approve the order revoking 2 all the licenses. 3 CHAIRMAN WILLIAMSON: Thank you. 4 Commissioners, do you have any questions 5 on any of these? 6 (No response) 7 CHAIRMAN WILLIAMSON: Do I hear a motion? 8 COMMISSIONER KRAUSE: I hear a motion -- I 9 make a motion that we accept the recommendation of the 10 Administrative Law Judge in action items A through J on 11 Item No. 15. 12 COMMISSIONER DELGADO: Second. 13 CHAIRMAN WILLIAMSON: All in favor? 14 COMMISSIONER KRAUSE: Aye. 15 CHAIRMAN WILLIAMSON: Aye. 16 COMMISSIONER DELGADO: Aye. 17 CHAIRMAN WILLIAMSON: Motion passes 3-0. 18 MS. KIPLIN: Make sure I have an order for 19 those cases. 20 That leaves the remaining letter K. This 21 is a proposed agreed order in the matter of Moonstruck 22 Foundation, Inc. It is a bingo licensee. Moonstruck 23 Foundation, Inc. conducted two unlicensed, unauthorized 24 occasions. The Staff has reached a settlement agreement 25 and recommends that you vote to approve the agreed 59 1 order. The penalty is $250 to be paid for the violation 2 of administrative penalties. So with that, Staff would 3 recommend that you vote to approve that order. 4 CHAIRMAN WILLIAMSON: Commissioners, you 5 have any questions or comments? 6 COMMISSIONER KRAUSE: Yes. 7 What charity does Moonstruck Foundation 8 benefit? 9 MS. KIPLIN: I'll look to the Bingo 10 Director. 11 MR. SANDERSON: Moonstruck Foundation is a 12 foundation of its own. I don't know exactly -- I 13 haven't looked up what their purpose is, but I can 14 definitely find out and get back to you on that, 15 Commissioner. 16 COMMISSIONER KRAUSE: I'd be interested to 17 know. 18 MR. SANDERSON: Yes, sir. 19 COMMISSIONER KRAUSE: In the meantime, I 20 make a motion that we take -- accept Staff's 21 recommendation on this agreed order. 22 CHAIRMAN WILLIAMSON: Is there a second? 23 COMMISSIONER DELGADO: Second. 24 CHAIRMAN WILLIAMSON: All in favor? 25 COMMISSIONER KRAUSE: Aye. 60 1 CHAIRMAN WILLIAMSON: Aye. 2 COMMISSIONER DELGADO: Aye. 3 CHAIRMAN WILLIAMSON: Motion passes 3-0. 4 MS. KIPLIN: Commissioners, I have that -- 5 AGENDA ITEM NO. XVI 6 CHAIRMAN WILLIAMSON: And the next item is 7 public comment, and there is no one interested in public 8 comment. 9 AGENDA ITEM NO. XVII 10 CHAIRMAN WILLIAMSON: So at this time, I 11 move the Texas Lottery Commission go into Executive 12 Session to deliberate the duties and evaluations of the 13 Executive Director, Internal Auditor Director, and 14 Charitable Bingo Operations Director and to deliberate 15 the duties of the General Counsel and Human Resources 16 Director pursuant to Section 551.074 of the Texas 17 Government Code and to receive legal advice regarding 18 any pending or contemplated litigation pursuant to 19 Section 551.071 (1)(A) and regarding any settlement 20 offers pursuant to Section 551.071 (1)(B) of the Texas 21 Government Code and to receive legal advice pursuant to 22 Section 551.071(2) of the Texas Government Code 23 including, but not limited to, those items posted on the 24 Open Meetings Notice. 25 Is there a second? 61 1 COMMISSIONER DELGADO: Second. 2 COMMISSIONER KRAUSE: Second. 3 CHAIRMAN WILLIAMSON: All in favor? 4 COMMISSIONER DELGADO: Aye. 5 CHAIRMAN WILLIAMSON: Aye. 6 COMMISSIONER KRAUSE: Aye. 7 CHAIRMAN WILLIAMSON: Motion passes 3-0. 8 We will go into Executive Session. The 9 time is 10:32 a.m. Today is February the 2nd, 2012. 10 (Off the record for Executive Session: 11 10:32 a.m. to 11:10 a.m.) 12 AGENDA ITEM NO. XVIII 13 CHAIRMAN WILLIAMSON: The Texas Lottery 14 Commission is out of Executive Session. The time is 15 11:10 a.m., and there's no action to be taken as a 16 result of the Executive Session. 17 AGENDA ITEM NO. XIX 18 CHAIRMAN WILLIAMSON: So is there a motion 19 to adjourn? 20 COMMISSIONER DELGADO: I would like to 21 motion we adjourn. 22 CHAIRMAN WILLIAMSON: Is there a second? 23 COMMISSIONER KRAUSE: Second. 24 CHAIRMAN WILLIAMSON: All in favor? 25 COMMISSIONER DELGADO: Aye. 62 1 CHAIRMAN WILLIAMSON: Aye. 2 COMMISSIONER KRAUSE: Aye. 3 CHAIRMAN WILLIAMSON: Motion passes 3-0. 4 (Commission meeting adjourned: 11:10 a.m.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 63 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Autumn J. Smith, 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 14 my hand and seal this 10th day of February 2012. 15 16 17 ________________________________ 18 Autumn J. Smith Certified Shorthand Reporter 19 CSR No. 8871 - Expires 12/31/13 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