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 § 9 10 11 OPEN MEETING 12 Thursday, September 19, 2013 13 14 15 16 BE IT REMEMBERED THAT on Thursday, the 19th 17 day of September 2013, the Texas Lottery Commission 18 meeting was held from 10:05 a.m. until 12:45 p.m., at 19 the Offices of the Texas Lottery Commission, 611 East 20 6th Street, Austin, Texas 78701, before CHAIRMAN J. 21 WINSTON KRAUSE, and COMMISSIONERS VERONICA ANN EDWARDS, 22 KATIE DICKIE STAVINOHA and JODIE G. BAGGERTT; that the 23 following proceedings were reported via machine 24 shorthand by Lou Ray, a Certified Shorthand Reporter. 25 2 1 APPEARANCES 2 CHAIRMAN: Mr. J. Winston Krause 3 COMMISSIONERS: 4 Ms. Veronica Ann Edwards Ms. Katie Dickie Stavinoha 5 Ms. Jodie G. Baggett 6 GENERAL COUNSEL: Mr. Robert F. Biard 7 EXECUTIVE DIRECTOR: 8 Mr. Gary N. Grief 9 CHARITABLE BINGO OPERATIONS DIRECTOR Ms. Sandra K. Joseph 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, SEPTEMBER 19, 2013 .......... 9 4 I. The Texas Lottery Commission will call the meeting to order .............................. 9 5 II. Report, possible discussion and/or action 6 on Commissioner training, including ethics, administrative procedure, and open government 7 laws pertaining to the Texas Lottery Commission .................................... 9 8 III. Report, possible discussion and/or action 9 on lottery sales and revenue, game performance, new game opportunities, advertising, market 10 research, trends, and game contracts, agreements, and procedures .................... 50 11 IV. Report, possible discussion and/or action on 12 transfers to the State ........................ 61 13 V. Consideration of and possible discussion and/or action on the Texas Comptroller of 14 Public Accounts Post-Payment Expenditure Audit ......................................... 62 15 VI. Report, possible discussion and/or action on 16 the 83rd Legislature, including implementation of legislation .......................... NOT HEARD 17 VII. Consideration of and possible discussion 18 and/or action, including proposal, on amendments to 16 TAC §401.317 “Powerball®” 19 On-Line Game Rule ............................. 64 20 21 22 23 24 25 4 1 TABLE OF CONTENTS 2 PAGE 3 VIII.Consideration of and possible discussion and/or action, including proposal, on new 4 rules and rule amendments to implement the Commission’s sunset legislation (HB 2197) 5 and legislation relating to limits on prizes for bingo games (HB 394): 6 Procedural Rules A. Consideration of and possible 7 discussion and/or action, including proposal, on new 8 16 TAC §403.115 Negotiated Rulemaking and Alternative Dispute Resolution .... 14 9 B. Consideration of and possible 10 discussion and/or action, including proposal, on new 16 TAC §403.600 11 Complaint Review Process .............. 15 Lottery Rule 12 C. Consideration of and possible discussion and/or action, including 13 proposal, on new 16 TAC §401.3025 Instant Game Tickets Containing 14 Non-English Words ..................... 16 Bingo Rules 15 D. Consideration of and possible discussion and/or action, including 16 proposal, on amendments to 16 TAC §402.200 General Restrictions on 17 the Conduct of Bingo .................. 21 E. Consideration of and possible 18 discussion and/or action, including proposal, on amendments to 16 19 TAC §402.400 General Licensing Provisions ............................ 23 20 F. Consideration of and possible discussion and/or action, including 21 proposal, on amendments to 16 TAC §402.402 Registry of Bingo 22 Workers ............................... 17 23 24 25 5 1 TABLE OF CONTENTS 2 PAGE 3 G. Consideration of and possible discussion and/or action, 4 including proposal, on amendments to 16 TAC §402.403 Licenses for 5 Conduct of Bingo Occasions and to Lease Bingo Premises, and 16 6 TAC §402.411 Late License Renewal ..... 24 H. Consideration of and possible 7 discussion and/or action, including proposal, on amendments to 16 8 TAC §402.404 License and Registry Fees .................................. 24 9 I. Consideration of and possible discussion and/or action, including 10 proposal, on amendments to 16 TAC §402.410 Amendment of a License ... 26 11 General Provisions J. Consideration of and possible 12 discussion and/or action, including proposal, on amendments to 16 13 TAC §402.420 Qualifications and Requirements for Conductor’s License .. 19 14 K. Consideration of and possible discussion and/or action, including 15 proposal, on amendments to 16 TAC §402.700 Denials; Suspensions; 16 Revocations; Hearings ................. 26 L. Consideration of and possible 17 discussion and/or action, including proposal, on new 16 TAC §402.702 18 Disqualifying Convictions ............. 20 M. Consideration of and possible 19 discussion and/or action, including proposal, on new 16 TAC §402.703 20 Audit Policy .......................... 27 N. Consideration of and possible 21 discussion and/or action, including proposal, on new 16 TAC §402.705 22 Inspection of Premises ................ 28 23 24 25 6 1 TABLE OF CONTENTS 2 PAGE IX. Consideration of and possible discussion 3 and/or action on external and internal audits and/or reviews relating to the Texas 4 Lottery Commission, and/or on the Internal Audit Division’s activities, including 5 approval of the Fiscal Year 2013 Internal Audit Annual Report ........................... 65 6 X. Report, possible discussion and/or action 7 on GTECH Corporation .......................... 67 8 XI. Report by the Executive Director and/or possible discussion and/or action on the 9 agency’s operational status, agency procedures, awards, and FTE status ........................ 67 10 XII. Report by the Charitable Bingo Operations 11 Director and possible discussion and/or action on the Charitable Bingo Operations Division’s 12 activities, including updates on licensing, accounting and audit activities, pull-tab 13 review, and special projects .................. 72 14 XIII.Consideration of the status and possible entry of orders in: 15 Lottery NSF License Revocation Cases (Default) 76 A. Docket No. 362-13-4143 – Country 16 Food Store B. Docket No. 362-13-4144 – O’Connor Stop 17 C. Docket No. 362-13-4430 – AM Mini Mart D. Docket No. 362-13-4431 – Sprint 24 #204 18 E. Docket No. 362-13-4766 – JR Produce F. Docket No. 362-13-4767 – M&D Grocery 19 Store G. Docket No. 362-13-4769 – One Stop Food 20 Mart H. Docket No. 362-13-4898 – Super K 21 Kingwood Store I. Docket No. 362-13-4901 – Stop n Shop 22 J. Docket No. 362-13-4903 – Heart’s Liquor 23 24 25 7 1 TABLE OF CONTENTS 2 PAGE Other Lottery License Revocation 3 Cases (Default) K. Docket No. 362-13-3452 – Smoke 4 City #4 L. Docket Nos. 362-13-4594 and 5 362-13-4595 – A N D Food Store; Save Step Food Mart 6 Agreed Orders M. Case No. 2013-653 – North Oak 7 Grocery (Lottery) N. Docket Nos. 362-12-4675.B and 8 362-12-4676.B – Gun Barrel City Volunteer Fire Department; Humane 9 Society of Cedar Creek Lake, Inc. (Bingo) 10 XIV. Public comment .......................... NOT HEARD 11 XV. Commission may meet in Executive Session: ..... 86 12 A. To deliberate personnel matters, including the appointment, employment, evaluation, 13 reassignment, duties, discipline, or dismissal of the Executive Director, the 14 Charitable Bingo Operations Director, and/or the Internal Audit Director 15 pursuant to Section 551.074 of the Texas Government Code 16 B. To deliberate the duties of the General Counsel and/or the Human Resources 17 Director pursuant to Section 551.074 of the Texas Government Code 18 19 20 21 22 23 24 25 8 1 TABLE OF CONTENTS 2 PAGE 3 C. To receive legal advice regarding pending or contemplated litigation pursuant to 4 Section 551.071(1)(A) and/or to receive legal advice regarding settlement offers 5 pursuant to Section 551.071(1)(B) of the Texas Government Code and/or to receive 6 legal advice pursuant to Section 551.071(2) of the Texas Government Code 7 including but not limited to legal advice regarding the following items: 8 Department of Texas, Veterans of Foreign Wars et al. v. Texas Lottery Commission 9 et al. Willis Willis v. Texas Lottery Commission, 10 GTECH Corporation, BJN Sons Corporation d/b/a Lucky Food Store #2, Barkat N. Jiwani 11 and Pankaj Joshi The State Lottery Act, Texas Government 12 Code Chapter 467, the Bingo Enabling Act, the Open Meetings Act, employment law, 13 personnel law, procurement and contract law, evidentiary and procedural law, 14 and general government law Any item on this open meeting agenda 15 XVI. Return to open session for further 16 deliberation and possible action on any matter discussed in Executive Session ......... 87 17 XVII. Adjournment .................................. 88 18 REPORTER'S CERTIFICATE ............................. 90 19 20 21 22 23 24 25 9 1 P R O C E E D I N G S 2 THURSDAY, SEPTEMBER 19, 2013 3 (10:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN KRAUSE: Good morning. My name 6 is Winston Krause. And I'm grateful to have the 7 Governor appoint me to be the chairman of the Texas 8 Lottery Commission. 9 I also want to welcome our two new 10 Commissioners, Commissioner Baggett and Commissioner -- 11 COMM. STAVINOHA: Stavinoha. 12 CHAIRMAN KRAUSE: -- Stavinoha. So anyway 13 I'm going to be working on that. 14 (Laughter) 15 CHAIRMAN KRAUSE: We have a quorum. It is 16 September 19, 2013, and the time is 10:05 and this 17 meeting is in session. 18 AGENDA ITEM NO. II 19 CHAIRMAN KRAUSE: So the first thing that 20 we're going to do is have a little training by our 21 General Counsel for our new commissioners. 22 MR. BIARD: Thank you, Mr. Chairman. For 23 the record my name is Bob Biard, General Counsel. 24 Whenever there's a new Lottery 25 commissioner, this agency has a tradition of reviewing 10 1 the laws that govern the Texas Lottery Commission at 2 that commissioner's first meeting. And today we have 3 two new commissioners. 4 In addition, beginning September 1st this 5 year, the agency sunset legislation now requires new 6 appointees to complete a training program before they 7 may vote, deliberate or be counted as a member in 8 attendance at a Commission meeting. And I wanted to 9 state for the record that prior to this meeting both 10 Commissioner Baggett and Commissioner Stavinoha have 11 been through a required training session with me, with 12 our Executive Director Gary Grief, with our Bingo 13 Director Sandy Joseph, and with our Controller Kathy 14 Pyka. And we went over the legislation that created the 15 Commission, the budget of the Commission, the program, 16 functions, rules of the Commission, the most recent 17 formal audit, open meetings, public information, 18 administrative procedure, conflicts of interest and 19 ethics provisions. 20 So today, for purposes of the meeting, I 21 just wanted to put on the record that we have had that 22 training and hit some of the highlights regarding the 23 ethics, procedural and open government laws governing 24 the Commission. I have provided you a document entitled 25 Guide to Ethics Laws for State Officers and Employees. 11 1 This is a publication from the Ethics Commission, but 2 because the Lottery Commission has a number of 3 additional requirements, we've annotated it using blue 4 ink. And these provisions in blue are generally more 5 restrictive than the requirements that apply to other 6 state agencies. 7 For instance, with respect to gifts, other 8 agencies are subject to a de minimis exception that 9 allows accepting gifts under $50 in value. But this 10 exception doesn't apply to the Lottery Commission. The 11 Lottery Commission does have an exception for 12 commissioners accepting gifts that's given on account of 13 a relationship that's independent of your commissioner 14 status such as kinship or a personal, professional or 15 business relationship. 16 There's also a restriction that applies 17 just to the Lottery Commission against Commissioners 18 engaging in certain political activities. This is 19 unique to this agency. It is basically a restriction on 20 political fundraising. There are two Attorney General 21 opinions that discuss this provision, which applies only 22 to the Lottery Commission. 23 There's also a restriction against 24 accepting employment or remuneration from a person that 25 has a significant financial interest in the lottery, 12 1 which is generally our agency vendors, retailers who are 2 licensed to sell lottery tickets, bingo commercial 3 lessors, bingo distributors, bingo manufacturers. It's 4 a very quick overview of the ethics laws we discussed in 5 greater detail in our training session. 6 With respect to the procedural laws, under 7 the Administrative Procedures Act, the Commission has 8 two key roles. The first is to propose and adopt rules 9 relating to the lottery and charitable bingo; and second 10 to decide contested cases. The rules are general 11 statements of policy that generally apply to all people, 12 and you can talk to anyone you want to in connection 13 with agency rule proposals or adopted rules. 14 However, you also sit as the tribunal to 15 decide contested cases where the legal rights of a party 16 are determined after an opportunity for a hearing. At 17 the Lottery Commission, contested cases usually involve 18 a lottery or bingo licensee, and the issues are whether 19 to assess penalties or suspend or revoke a license. In 20 these cases, so-called ex parte communications are 21 prohibited, which means you may not communicate with any 22 one person or party to a case about an issue related to 23 the case unless all parties have been notified and have 24 an opportunity to participate. 25 The last item I will touch on is with 13 1 respect to the Open Meetings Act and Public Information 2 Act. We talked about those separately, but I wanted to 3 remind you that a new commissioner is required to take 4 the Attorney General's online training program on both 5 of these laws within 90 days of taking office. And in 6 this case that 90th day is December 15th. There's a 7 certificate you can print out from the Attorney 8 General's website when you've finished -- you know, 9 these are like two one-hour videos you watch. And you 10 print it out that you've completed it. And you can 11 return those to me and we'll maintain them here which 12 says what the statute requires us to do once you've 13 completed that training. 14 I won't go into any greater detail on open 15 meetings and public information except to note that 16 today for the first time the Lottery Commission is 17 sitting as a five-member board instead of three, which 18 increases the number of commissioners required for a 19 quorum from two to three. So now there must be at least 20 three commissioners present in order to conduct business 21 at a meeting. 22 This is a very broad overview. There's a 23 lot of information in these laws, so I just want to say 24 please -- to all the commissioners, always feel free to 25 contact me or anyone in legal services if you have a 14 1 question about any of these laws or how they apply. 2 Thanks. 3 AGENDA ITEM NO. VIII 4 CHAIRMAN KRAUSE: Thanks, Bob. We have a 5 number of people that want to testify on item -- agenda 6 Item No. VIII, so we're going to take that out of order. 7 Who I want to hear from first is the staff to explain 8 the proposed rules that we're going to consider today, 9 the discussion and/or action on new rules and rule 10 amendments and that kind of thing. 11 And so anyway, I'd like to go ahead and 12 hear from Ms. Rienstra, on 8A, and then Mr. White on 8B 13 and then so on. And after that we'll have the testimony 14 from the people that signed up to come and testify 15 before us. Please go. 16 MS. RIENSTRA: Thank you. Good morning. 17 I'm Deanne Rienstra on behalf of the Commission. I'm 18 Assistant General Counsel, and I am here to present the 19 proposed new rule 403.115, negotiated rulemaking and 20 alternative dispute resolution. 21 The Sunset Commission added a new 22 provision to Chapter 467 of the Government Code, which 23 requires the Commission to develop and implement a 24 policy to encourage negotiated rulemaking and 25 appropriate alternative dispute resolution. This 15 1 proposed Rule 403.115 therefore provides a framework by 2 which these processes may be undertaken. Staff 3 recommends the Commission initiate rulemaking by 4 publishing the proposed rule in the Texas Register. I'm 5 happy to answer any questions. 6 CHAIRMAN KRAUSE: Any questions? 7 (No response) 8 CHAIRMAN KRAUSE: Okay. Thank you -- 9 MS. RIENSTRA: Thank you. 10 MR. WHITE: Good morning, Chairman, 11 Commissioners. For the record my name is Stephen White 12 Assistant General Counsel. Under Tab 8B is a proposed 13 new rule, 16 Texas Admin Code Section 403.600, complaint 14 review process. The purpose of the proposed new rule is 15 to implement a new section of the Texas Lottery Act, 16 specifically Section 467.111, which provides that the 17 Commission shall maintain a system to promptly and 18 efficiently act on each complaint filed with the 19 Commission, shall by rule adopt and publish procedures 20 governing the entire complaint process, shall analyze 21 the complaints, identify any trends or issues and 22 prepare a report on the trends and issues identified. 23 The Legislature also mandated that the 24 Commission initiate a rulemaking process to implement 25 Section 467.111 along with a number of other provisions 16 1 not later than January 1st, 2014. Accordingly, the 2 staff recommends the Commission initiate the rulemaking 3 by publishing the proposed new Rule 403.600 in the Texas 4 Register, and I'll be happy to answer any questions. 5 CHAIRMAN KRAUSE: Any questions? 6 (No response) 7 CHAIRMAN KRAUSE: Thank you, sir. 8 Ms. Burnett? Did I say that right? 9 MS. BURNETT: Burnett, like Carol. 10 (Laughter) 11 MS. BURNETT: Wow, people are still old 12 enough to know who she is. I'm amazed. 13 Yes, sir. Good morning, Commissioners, 14 chairman. My name is Lea Burnett. I'm an Assistant 15 General Counsel with the Commission. I'm here in front 16 of you today to propose for your consideration the 17 proposal of new rule 16 TAC 401.3025 relating to instant 18 game tickets containing nonEnglish words. 19 The purpose of this proposed new section 20 is to implement changes to the lottery contact made 21 pursuant to the Section 7 of our sunset bill, House Bill 22 2197, which requires the Commission to establish by rule 23 a specific word threshold number that -- when that 24 threshold is passed in terms of the nonEnglish words 25 that are listed on the ticket, we will then also publish 17 1 disclosures in that same nonEnglish language. 2 The staff recommends that the Commission 3 initiate the rulemaking process by publishing the 4 attached proposed new rule in the Texas Register to 5 receive public comment for a period of 30 days, and I'm 6 available for any questions. 7 CHAIRMAN KRAUSE: Questions? 8 (No response) 9 CHAIRMAN KRAUSE: While you're here, why 10 don't you go ahead to the other ones that you're 11 supposed to talk about. 12 MS. BURNETT: We certainly can do that. 13 Sure. Okay. 14 So I'm also working on proposed new rule 15 16 TAC 402.402 related to the registry of bingo workers. 16 CHAIRMAN KRAUSE: That's Agenda Item 17 No. 8F? 18 MS. BURNETT: It is. 19 CHAIRMAN KRAUSE: Okay. 20 MS. BURNETT: The purpose of the proposed 21 amendments to this rule -- it's an existing rule for the 22 new commissioners, and it governs the listing of bingo 23 workers on a particular registry list so they're allowed 24 to assist in the conduct of bingo. There were 25 changes -- the purpose behind these amendments is to 18 1 implement changes to Occupations Code Chapter 2001 that 2 were made pursuant to Sections 18, 21 and 32 of our 3 sunset bill, which is House Bill 2197. 4 Sections 18 and 21 amended the Occupations 5 Code to change the statutory parameters governing the 6 licensure or registration following criminal conviction 7 of applicants. In this particular rule we're addressing 8 applicants for the bingo registry list. 9 Section 32 authorizes the Commission to 10 set and charge bingo worker registration application 11 fees as well. So in addition to the changes we're 12 making related to the registry list regarding the 13 criminal convictions, there were also in a separate 14 amendment fee rules that were required. And so there 15 are some changes in references that are embodied in this 16 rule that we had to also correct in order to address 17 those changes. 18 Specifically, the amendment seeks to 19 conform the existing rule to the changes made in the 20 sunset bill relating to charging fees, licensure or 21 registration following a criminal conviction. We are 22 implementing the requirements of new 2001.0541, which 23 states the Commission shall adopt rules and guidelines 24 to comply with Occupations Code Chapter 53, which is a 25 separate section of the Occupations Code incorporating 19 1 certain requirements when examining licensees and 2 looking at the criminal convictions that they may have 3 had when applying. 4 At this point we are recommending that the 5 Commission initiate the rulemaking by publishing the 6 attached proposed amendments in the Texas Register to 7 receive public comments for a period of 30 days related 8 to the proposed amendments. 9 CHAIRMAN KRAUSE: Any questions? 10 (No response) 11 CHAIRMAN KRAUSE: (Inaudible) 12 THE REPORTER: I'm sorry, Commissioner, 13 but we can't hear you. 14 CHAIRMAN KRAUSE: If we can continue with 15 8J? 16 MS. BURNETT: We are also in front of you 17 this morning to propose amendments to 16 TAC 402.4 18 relating to the qualifications and requirements for a 19 bingo conductor's license. Similar to the explanation I 20 provided regarding 402.402, this is to make changes to 21 the existing rules that would embody changes that were 22 made by the sunset bill to how we govern and look at 23 criminal convictions in our licensing process. 24 Specifically, we're talking about conductors. 25 The changes that we're proposing this 20 1 morning are made to a chart which is -- which is in 2 the -- which is in the back of the rule, which talks 3 about how we will look at criminal convictions in regard 4 to the licensure of these entities. 5 At this point we recommend that the 6 Commission initiate the rulemaking process by publishing 7 the attached proposed amendments in the Texas Register 8 to receive public comments for a period of 30 days. 9 Does anyone have any questions? 10 CHAIRMAN KRAUSE: Questions? 11 (No response) 12 CHAIRMAN KRAUSE: And then your last item 13 is 8L? 14 MS. BURNETT: This will be a new rule. 15 We're proposing 16 TAC Section 402.702, disqualifying 16 convictions. The purpose of this new rule is to 17 implement changes to the Occupations Code made pursuant 18 to several sections of our sunset bill as we've 19 discussed this morning, rules on the consequences of 20 criminal convictions. 21 The sunset bill changed some of the 22 language regarding how criminal convictions are weighed 23 in the licensing process. As a result of that, we are 24 proposing these new rules to incorporate the examination 25 of Chapter 53 of the Occupations Code which relate 21 1 specifically to the duties of a licensee who is going 2 before a body to get an occupational license and how 3 those are related to the license and whether or not they 4 can be considered in terms of disqualifying someone for 5 a license. 6 There are several different licensees that 7 are -- that are handled by the bingo -- the bingo 8 division. And so in doing so, there's -- you'll look at 9 the rule and there's different sections that's relate -- 10 that can either relate to the bingo registry workers 11 and/or the actual licensees. 12 So at this point we would recommend that 13 you initiate the rulemaking process by publishing the 14 proposed new rule to receive public comment for 30 days. 15 CHAIRMAN KRAUSE: Thank you, ma'am. Any 16 questions? 17 (No response) 18 CHAIRMAN KRAUSE: Mr. Persons. 19 MR. PERSON: Good morning, Commissioners. 20 For the record, James Person, assistant general counsel. 21 I guess my first one is Agenda Item 8D, which is rule 22 402.200. That governs the general restrictions on the 23 conduct of bingo. 24 The Bingo Enabling Act generally prohibits 25 licensees from awarding prizes at a single bingo 22 1 occasion of more than $2500. House Bill 394, which has 2 recently passed in the last legislative session, 3 exempted bingo games that award individual prizes of $50 4 or less from that $2500 cap. So we're -- we are 5 recommending proposed amendments to 402.200 to help 6 ensure that the HB 304 exemption is properly applied. 7 First, it would clarify that a written 8 game schedule must be provided to players and that all 9 bingo games and the prizes for each game must be listed 10 on that schedule. 11 Second, in order to qualify for the HB 394 12 exemption, the prize for that game must be listed on the 13 schedule as not exceeding $50. We believe this will 14 allow the bingo division staff to better audit the $50 15 or less games. 16 And I do want to clarify there has been 17 some questions. The game schedule that is required to 18 be provided to the players can be amended during -- 19 during the play of a bingo occasion. It just has to be 20 documented on that schedule. There had been some 21 confusion. 22 So we recommend the rulemaking process be 23 initiated for this. 24 CHAIRMAN KRAUSE: Everybody in the 25 audience been able to hear the explanation? 23 1 All right. Questions, Commissioners? 2 (No response) 3 CHAIRMAN KRAUSE: All right. If you'll 4 carry on with Item E. 5 MR. PERSON: Okay. Staff is recommending 6 amendments to Rule 402.400, which is the general 7 licensing provisions. This rule allows potential bingo 8 conductors to request a determination of eligibility for 9 a license from the Commission. The fee for such 10 determination was previously set at a hundred dollars 11 because that was the fee for the lowest class of bingo 12 conductor licenses at that time. 13 This past summer, however, the Commission 14 increased bingo conductor license fees so that the fee 15 for the lowest class is now $132. The proposed 16 amendments to 402.400 would increase the determination 17 of eligibility fee to $132 to match the new low fee for 18 bingo conductor licenses. The proposed amendments would 19 also delete a reference to systems service providers. 20 This reference is obsolete because this Commission no 21 longer licenses system service providers. 22 And we recommend you initiate the 23 rulemaking process for those amendments to 402.400. 24 CHAIRMAN KRAUSE: Questions? 25 COMM. EDWARDS: No. 24 1 CHAIRMAN KRAUSE: G? 2 MR. PERSON: G. In response to the 3 passage of the agency sunset legislation in the last 4 legislative session, staff is recommending amendments to 5 Rules 402.403, which covers licenses for the conduct of 6 bingo occasions and to lease bingo premises, and Rule 7 402.411, which is the late license -- late license 8 renewal rule. 9 The sunset legislation requires the 10 Commission to adopt rules governing each part of the 11 license renewal process. The proposed amendments to 12 Rule 402.411 would accomplish that. They outline the 13 various renewal requirements and how the Commission will 14 review renewal applications. 15 The proposed -- the sunset legislation 16 also requires that licensees seeking a renewal must 17 submit the same information that they submitted with 18 their initial application when they submit their renewal 19 application. So we are proposing amendments to Rule 20 402.403 to clarify that. And we recommend you initiate 21 the rulemaking process for those amendments. 22 CHAIRMAN KRAUSE: Questions? 23 (No response) 24 CHAIRMAN KRAUSE: H? 25 MR. PERSON: Staff is recommending several 25 1 amendments to Rule 402.404, which is the license and 2 registry fee rule. Last month the Commission voted to 3 adopt emergency amendments to correct an error in the 4 parameters which determine the amount of fees paid by 5 commercial lessors. Those parameters were in conflict 6 with statutory parameters. 7 Pursuant to the Administrative Procedure 8 Act, those emergency amendments will only be valid for 9 several months. So they must eventually be adopted on a 10 permanent basis through the regular rulemaking process, 11 and that is what we recommending you do now. 12 The remaining amendments to Rule 402.404 13 are recommended in response to the agency's sunset 14 legislation. That legislation requires all applicants 15 for a two-year bingo conductor or commercial lessor 16 license to pay the requisite license fee for both years 17 up front. Previously applicants for a two-year license 18 could pay their fees in two annual installments. 19 The sunset legislation also requires the 20 Commission to set the license fees for manufacturer and 21 distributor license and the fees to amend a license. 22 The proposed amendments set those fees. 23 Finally. Various fees for licenses and 24 the administrative -- and administrative hold are 25 currently set at a hundred dollar because that was the 26 1 fee for the lowest class of bingo conductor and 2 commercial lessor licenses. However, as I previously 3 stated, the Commission recently increased conductor and 4 lessor license fees so that the lowest fee is now $132. 5 We are recommending an increase of that -- the hundred 6 dollar fee matches the $132 fee now. 7 And with that we recommend the rulemaking 8 process be initiated. 9 CHAIRMAN KRAUSE: Questions? 10 COMM. EDWARDS: No. 11 CHAIRMAN KRAUSE: We'll continue with 8I. 12 MR. PERSON: 8I, Rule 402.410, which is 13 the general provisions governing the amendment of a 14 license. The fee to amend a license issued by the 15 Commission was set by statute in the Bingo Enabling Act 16 at $10. With the passage of our sunset bill, however, 17 the Commission must now set that fee. The proposed 18 amendments do that and we will keep the fee at $10. 19 We recommend you initiate the rulemaking 20 process for that rule. 21 CHAIRMAN KRAUSE: Questions? 22 (No response) 23 CHAIRMAN KRAUSE: 8K? 24 MR. PERSON: Rule 402.700, which is the 25 rule that governs denial, suspensions, revocations and 27 1 hearings, our sunset bill requires the Commission to 2 adopt rules governing the temporary suspension of 3 licenses. We believe current Rule 402.700 satisfies 4 this requirement. We're just proposing some minor 5 amendments to clarify that and make that clear. 6 And we recommend you initiate the 7 rulemaking process for that. 8 CHAIRMAN KRAUSE: Is there questions? 9 (No response) 10 CHAIRMAN KRAUSE: 8M? 11 MR. PERSON: In response to the passage of 12 the agency sunset legislation, staff is recommending new 13 rule 402.703, the audit policy. Our sunset bill 14 included a requirement that the Commission develop a 15 policy for auditing licensees under the Bingo Enabling 16 Act. It also requires that we use audit risk analysis 17 procedures to identify which licensees are most at risk 18 of violating the Bingo Enabling Act or our rules. 19 This new rule would serve as the 20 Commission's new policy for conducting audits. Among 21 other things, it would outline the Commission's 22 authority to conduct audits, how licenses will be 23 selected for audit, how audit entrance and exit 24 conferences will be conducted, and how the Commission 25 will issue audit reports. It also clarifies that the 28 1 Commission may invoice a licensee for any Commission 2 costs related to an audit of that licensee. 3 And we recommend you initiate the 4 rulemaking process for that. 5 CHAIRMAN KRAUSE: Thank you, sir. And 6 your last item? 7 MR. PERSON: We're also recommending in 8 response to the agency sunset legislation new Rule 9 402.705, the inspection of premises. The sunset bill 10 requires the Commission to develop and implement 11 policies and procedures related to the inspection of 12 premises where bingo is being conducted or intended to 13 be conducted or bingo equipment is used or found. 14 The new rule would satisfy the statutory 15 requirement by outlining the Commission's authority to 16 conduct inspections and by listing some of the factors 17 the bingo division will use to determine the priority of 18 its inspections. 19 And we recommend you initiate the 20 rulemaking process for this one. 21 CHAIRMAN KRAUSE: Thank you for your 22 testimony. Do we have questions of this witness? 23 COMM. BAGGETT: No, I don't. 24 CHAIRMAN KRAUSE: We will now hear from 25 our witnesses that have signed up to testify. And out 29 1 of deference for our former bingo director, we'll hear 2 from Mr. Sanderson first, then our former general 3 counsel, Kim Kiplin, and she's got somebody that's going 4 to testify with her named Dan West. After that, veteran 5 testifiers Mr. Bresnen and then everybody else just 6 alphabetical order. So, Phil, you're up. 7 MR. SANDERSON: Good morning, Chairman 8 Krause, Commissioners. Congratulations on your 9 appointment as chairman. Commissioners Baggett and 10 Stavinoha -- 11 COMM. STAVINOHA: Stavinoha. 12 MR. SANDERSON: -- Stavinoha on your 13 appointment. And I would just like to say welcome. 14 My name is Phil Sanderson. I'm the 15 consultant with Sanderson Consulting Services, and today 16 I'm here representing Texas Charity Advocates on Rules 17 402.702, 402.402 and 402.420, primarily dealing with the 18 background investigations. 19 First, I'd like to point out that -- I was 20 anticipated of speaking after Ms. Kiplin. And so to 21 keep from repeating several items, I'll defer to her on 22 her discussions as it relates to the vagueness and the 23 broadness of the rule. So I'll concur with her remarks 24 after she -- before she makes those remarks. 25 (Laughter) 30 1 CHAIRMAN KRAUSE: You heard it here. 2 MR. SANDERSON: I believe that 3 implementing these rules in the current format are 4 creating an administrative nightmare. The process to go 5 through the background investigations with the 6 background specialists and enforcement division is very 7 time consuming. There are between 6 and 8,000 8 backgrounds conducted annually at last count when I was 9 here. There may be more or less, you know, at this 10 current time. There are several of those that come back 11 with possible convictions. 12 The broadness of the language in 702 and 13 the lack of any kind of guidelines or lists for these 14 background specialists to utilize is something that I 15 think would hopefully in the future be available. There 16 are numerous convictions or nolo contendres or just 17 deferred adjudications that could indicate an individual 18 is not qualified to either be a worker registry or, in 19 this case, listed on the license with a conductor, 20 lessor, distributor or manufacturer. I believe that 21 there are some areas that in working with the staff I 22 think we could come up with some language that would 23 help alleviate some of those problems. 24 The other -- you know, furthermore, I 25 think that there are -- the time spent in doing these 31 1 background investigations is going to delay the issuance 2 of worker registry badges for individuals to work. It 3 will delay the issuance of license applications. 4 There's a lot of agencies that don't necessarily report 5 to DPS in a timely manner. So theoretically when you 6 run these backgrounds on an annual basis for some 7 individuals and with the lack of no timeline on certain 8 convictions or disqualify -- or deferred adjudications, 9 they'll have to look back for years and years and -- 10 every time to see if there is a conviction or a 11 disqualifying conviction. And at the same time they'll 12 have to request from the local authorities the documents 13 that support that conviction. 14 Ms. Joseph, the bingo director, is going 15 to spend a lot of time answering questions of her 16 interpretation of whether a conviction is disqualifying 17 for not. There are several instances in the past where 18 there have been some areas that individuals could be 19 disqualified, but because of deferred adjudication they 20 were -- you know, they were not disqualified, so that's 21 a whole new operation there. 22 Without having any look-back on any 23 grandfathering of those positions, they have an 24 individual that has been listed on the registry or a 25 license application for deferred adjudication could 32 1 possibly be disqualified now. So I think that there 2 should be a grandfathering of those that have been in 3 operation at this point in time. 4 Implementation of these rules, like I 5 said, will require some guidelines of some sort. 6 Hopefully, the Commission will be privy and approve 7 those guidelines in a public forum. And I appreciate 8 the opportunity to provide public comment at the meeting 9 today. Texas Charity Advocates and I look forward to 10 participating during the public comment period on these 11 rules and the other rules. Thank you. 12 CHAIRMAN KRAUSE: You bet. We really 13 count on the record being well developed to get the 14 perspective of our -- you know, I guess, for lack of a 15 better word "customers." So please help us develop that 16 record with, you know, good comments both written and, 17 you know, oral. 18 MR. SANDERSON: Will do, Commissioners. 19 CHAIRMAN KRAUSE: Thank you, sir. 20 Ms. Kiplin? 21 MS. KIPLIN: Does that work? I have Dan 22 West with me. 23 Well, good morning, Commissioners. 24 Mr. Chairman, congratulations. Commissioners, 25 congratulations on your appointment. And, Commissioner 33 1 Edwards, congratulations for still continuing. 2 My name is Kim Kiplin, and I'm the -- I'm 3 an attorney here in town with the law firm of Dykema 4 Gossett. I do appreciate the reference to being the 5 former general counsel. And I have to say on a personal 6 side this is a little bit strange being on this side of 7 the bench. 8 But with that said, I'm here today with 9 Dan West, who's the State Assistant Adjutant with the 10 Department of Texas with the Veterans of Foreign War, 11 and we are here on behalf of VFW. We do appreciate the 12 opportunity to comment today on the proposed rules. 13 Specifically we are here on 402.402, 402.420 and 14 402.702, all relating to the issue of disqualifying 15 criminal convictions and implementation of some sunset 16 legislation. 17 We're opposed as the rule is currently 18 drafted. We think that the way that the rules are 19 currently drafted -- they're just written in such a 20 broad fashion that they're not giving people who are 21 affected reasonable and fair notice of what would be a 22 disqualifying offense. There is a list, but that list 23 has including but not limited to language, so it's a 24 term of enlargement and it doesn't really put people on 25 notice. We'd like to see that language replaced with 34 1 language where at least there would be a provision that 2 said any offense that's substantially similar to those 3 that are listed in Texas or another jurisdiction could 4 be considered. We think that gives better notice. 5 We do think that there are some provisions 6 in the rule when you -- when you link it to Chapter 53 7 that do have a look-back to where if there is a 8 disqualifying offense it would only be applied within a 9 particular prescribed period of time from the date of 10 application. We'd like to see that throughout the rule. 11 We don't think that Chapter 53 applies to 12 license holders. And we think when the Bingo Enabling 13 Act in Chapter 53 are construed together, it really does 14 not allow for the Commission to look to disqualifying 15 convictions or offenses for officers, directors, 16 10 percent shareholders of a corporates licensee, and we 17 look forward to providing further comment on that 18 particular aspect during the comment period. 19 We are concerned about the draft rules and 20 its application to renewals for folks who are currently 21 licensed and have been actively engaged in their 22 licensed activity, but now in a renewal something that 23 was not earlier considered to be a disqualifying 24 conviction will now come into play and make somebody 25 who's currently licensed ineligible. So we are 35 1 concerned about that and we'd like to work with the 2 staff on perhaps coming up with some solution to that. 3 We know that staff has been working very, 4 very hard on implementing the sunset legislation. It's 5 a huge undertaking, very short period of time. We would 6 like to participate at the time that rules are being 7 drafted. We think ultimately it would be a better 8 product for both the agency and for those the agency 9 regulates. And we think that's also consistent with the 10 Lotter's requirement now to engage in negotiated 11 rulemaking, and we heard earlier today a rule that would 12 be proposed for that. 13 So we do appreciate the opportunity to 14 provide comment. We look forward to working with the 15 Commission and the staff on this matter and any other 16 matter that affects the veterans of foreign wars bingo 17 charitable funds raising. And I know that Mr. West has 18 a comment also. 19 MR. WEST: Good morning, Commissioners. I 20 am not as suave or sophisticated as most people. My 21 experience is to deal with heavily armed Iraqis and so 22 excuse me if I make little procedural gaffs I don't even 23 know exist. 24 As has been previously mentioned, my name 25 is Dan West. I work as the State Assistant Adjutant for 36 1 the Texas Veterans of Foreign Wars. For those of you 2 not familiar with military terms, it's a -- an assistant 3 adjutant is a fancy word for chief operations officer. 4 I oversee 80,000 combat veterans here in the state of 5 Texas at 341 VFW posts. 6 As we all know, our country has been at 7 war, two fronts, maybe even a third opening up here. 8 And our young men and women that are returning back from 9 those conflicts are experiencing different types of 10 wounds, different types of mental issues. One of those 11 coming back familiar with all veterans is that they just 12 want to feel useful again. 13 And when you come back into a civilian 14 marketplace where the veteran unemployment rate is well 15 over 25 percent, and the general consensus in the public 16 is that, well, you're an Iraq veteran, you have PTSD, 17 you're crazy, I'm not going to hire you. It tends to 18 get those veterans feeling a little depressed. And as 19 has been a time honored tradition since the times of 20 Julius Caesar, they imbibe a little bit. 21 And we have some very professional and 22 active law enforcement officers out there who let these 23 young men and women know that is not acceptable in a 24 civilian place that you're at here, and so they get in 25 trouble with the law. The state of Texas has recognized 37 1 that and has been very proactive in establishing 2 veterans courts. 3 And you're asking, well, what does this 4 have to do with the Lottery Commission? Well, when you 5 talk about passing or making legislation or rules that 6 prohibit individuals from participating because of past 7 infractions, it becomes an issue with us because part of 8 our healing process is that you're -- you may go out, 9 you may go drinking, you do something that gets you with 10 a misdemeanor offense, Class A or Class B. Part of the 11 veterans courts that we have here in Texas requires that 12 veteran to work with the Veterans Administration 13 specifically with mental health issues. What was the 14 reason that you started the illegal activity or the 15 activity that got you into the court system. 16 So that has put a lot of our veterans 17 working with mental health professionals, which is a 18 great thing. It's helped identify and get them those 19 things. But part of that rehabilitation process is to 20 be useful again. And so we work with the Veterans 21 Administration through the Veterans of Foreign Wars to 22 identify those young men and women, those veterans who 23 have found themself in that system, to come into our VFW 24 posts. And one of the things that we know that will 25 help them be useful to help other veterans, to help 38 1 maybe bring a little income in for their family, is to 2 help work bingo. It helps get them into an organized 3 system where there are some rules they know that they 4 can follow. 5 And I would ask that we give some 6 consideration to those veterans who have given so much 7 for our country, for our very freedoms, at least some 8 consideration when we talk about some rulemaking here 9 that might potentially disqualify them from helping the 10 community, helping fellow veterans and helping 11 themselves in their own healing process. 12 Thank you for the opportunity to speak 13 here today. 14 CHAIRMAN KRAUSE: Thanks for coming down 15 to talk to us. 16 MS. KIPLIN: Thank you. And we'll be 17 happy to answer any questions, and we look forward to 18 providing comment during the comment period and working 19 with the staff. 20 CHAIRMAN KRAUSE: The only question I have 21 is your testimony is solely directed at items under 22 Agenda Item 8. Right? Isn't that -- 23 MS. KIPLIN: No, it's the three rules on 24 the disqualifying conviction. 25 CHAIRMAN KRAUSE: Okay. Gotcha. 39 1 MS. KIPLIN: If I didn't make that clear, 2 I apologize. 3 CHAIRMAN KRAUSE: That's okay. Thank you. 4 MS. KIPLIN: Thank you very much. 5 CHAIRMAN KRAUSE: Veteran testifier Steve 6 Bresnen. 7 Before you start, let me ask a question. 8 You're going to be visiting with us about items under 9 Agenda Item VIII, but also you're -- you want to testify 10 about Agenda Item XII. 11 MR. BRESNEN: I did, but in the interest 12 of brevity, I'll -- 13 CHAIRMAN KRAUSE: Because I'm willing to 14 take XII out of order and do that next. 15 MR. BRESNEN: That would be great. If you 16 don't mind -- if you don't mind doing that, I'll do mine 17 on 8 and then at whatever time you want. 18 CHAIRMAN KRAUSE: And then what about -- 19 it looks like Agenda Item VI. 20 MR. BRESNEN: I understood you were going 21 to skip VI. If you are going to skip VI, I had some 22 handouts. I talked to Mr. Biard about it, and I'll just 23 correspond with you separately on that. 24 CHAIRMAN KRAUSE: Beautiful. 25 MR. BRESNEN: Okay. 40 1 CHAIRMAN KRAUSE: Agenda Item VIII items. 2 MR. BRESNEN: Thank you very much, 3 Mr. Chairman. After Commander West, I don't feel like a 4 veteran testifier. I hope I make as many procedural 5 gaffs as he did. 6 And welcome to the new commissioners and 7 congratulations on your appointment. We look forward to 8 working with y'all. 9 Before I get started on the substance, if 10 you're here from charitable bingo, would you just raise 11 your hand today? We have a real good history of working 12 closely with the agency on these issues. We have good 13 relationships and so we look forward to continuing that 14 with new commissioners, lots of turnover in the agency, 15 so we want to continue that. I've got a suggestion 16 about how to do that, but I'll raise that in the end in 17 item 12 if that's okay with you. 18 My first comment I would like to make with 19 regard to 402.200. This is the rule that would 20 implement House Bill 394. That bill represents some 21 deregulation by the Legislature so that a $50 prize and 22 under doesn't count towards the $2500 prize. I was glad 23 to hear the gentleman say that you can make changes to 24 your schedule, your game schedule, on the fly, because 25 this change in the statute was fully intended to give 41 1 people much more flexibility and let them tailor their 2 games to the amount of money available, the interest of 3 the patrons and that sort of thing. The $2500 cap on 4 bingo has been there for a couple of decades. We don't 5 have the luxury that the lottery side of the 6 Commission's efforts have to be able to change up games 7 much. So the $50 deal is -- may not seem like a big 8 deal, but it's a huge deal to these folks out here. So 9 I appreciate the clarification and the flexibility that 10 the agency is showing on that. 11 On the other side of the coin, on Page 4 12 of that rule, it says that if you're -- if your $50 game 13 is not on the game schedule, you don't get the benefit 14 of the statutory $50 exemption from the $2500 prize cap. 15 I don't think that complies with the statute. We'll 16 work with the staff. I don't think you can deny that. 17 As long as the prize is $50, it doesn't count towards 18 the 2500. 19 And we don't want to inadvertently set 20 people up for two offenses. If the $50 wasn't on your 21 schedule, you would be guilty of violating the rule that 22 it has to be on the schedule. And if it took you over 23 the 2500, you would be in violation of the $2500 cap if 24 that $50 prize by rule doesn't apply. You don't get the 25 exemption because of this rule. So we don't want to set 42 1 people up for multiple -- multiple violations. 2 And finally, it -- we need to do some work 3 on the rule because for those of you who don't know 4 bingo. You can be sold a half-pay bingo card. So the 5 prize may be a hundred dollars for a game, but if you 6 win, you bought a half-pay bingo card, you're going to 7 get $50. And we want to make sure that in those 8 situations that $50 prize doesn't count towards $2500. 9 So we'll come back and work with the staff on some 10 details like that. 11 Now I'd like to turn my comments to 12 402.702 and the related rules and say that I fully 13 subscribe to Ms. Kiplin's and Mr. Sanderson's comments. 14 Mr. Barnstone will comment later, and we've all 15 coordinated to try to make it brief and to the point for 16 y'all. So we'll subscribe to their comments as well. 17 The thing that I have a concern about is 18 we're -- there's a change now in what could potentially 19 be a disqualifying criminal offense. We have a bunch of 20 people who you have criminal background records on -- 21 stretching back -- some of these people have been 22 involved -- well, I only say since bingo has been legal. 23 So if you -- once you start looking back, you've already 24 got it in the record. In many cases, to the extent you 25 retain those records, you have a record of criminal 43 1 background in the past that may not have previously been 2 a disqualifying offense. 3 So what we don't know from the rule or 4 practice, whether that person is under a duty to now 5 surface those offenses s that may be covered by the new 6 rule. Generally speaking, you have a requirement to 7 supplement the record if your license information 8 changes during the licensing period, then you have to 9 affirmatively tell the agency of the change. Well, 10 nothing has changed in these people's background, but 11 the rule is changing. So we're going have to have some 12 guidance about people not getting tagged for not 13 upgrading their information when they may not know fully 14 what this rule's going to actually apply to, 15 particularly because of the including but not limiting 16 to legislation. So we have some work to do on that. 17 That all said, we're glad to see the 18 negotiated rulemaking rule in the -- in process here. 19 And I'm going to make a suggestion to you -- I'll do 20 this by separate correspondence -- that the bingo 21 advisory committee that you have legal authority to do 22 be reestablished so some of these wrinkles can be worked 23 out in the meantime. 24 That said, I'll be happy to answer any 25 questions, and I appreciate your time and attention to 44 1 these -- and thank you very much for the courtesy of 2 going early. 3 CHAIRMAN KRAUSE: Happy to do it. 4 Commissioners, any questions? 5 (No response) 6 CHAIRMAN KRAUSE: Thanks for your -- 7 MR. BRESNEN: And, Mr. Chairman, I'll just 8 stand down on No. XII, because it was the BAC that I was 9 going to mention -- 10 CHAIRMAN KRAUSE: Okay. 11 MR. BRESNEN: -- and I'll just shoot you a 12 separate correspondence and save that time for you. 13 Thank you very much. 14 CHAIRMAN KRAUSE: Alrighty. Do we have a 15 motion? 16 COMM. EDWARDS: Yes. This is -- is there 17 somebody else going to speak? 18 CHAIRMAN KRAUSE: Oh, I'm sorry, we've got 19 Anatole Barnstone, and then after him Sharon Ives. 20 MR. BARNSTONE: Thank you, Mr. Chairman, 21 Commissioners. Welcome. Again my name is Anatole 22 Barnstone. I represent various charities that conduct 23 bingo. And I'm actually here on behalf of K&B Sales, 24 Inc. I'm here to address the new proposed Rule 402.702 25 which deals with the criminal backgrounds of licensees 45 1 and applicants and potentially of other people as well. 2 Really, I just want to echo Kim Kiplin's 3 remarks and Mr. West's remarks, and she pretty well 4 covered that. I just wanted to add two points. 5 First, the proposed rule 402.702 gives 6 broad -- really almost infinite -- power to the 7 Commission staff to decide what is a disqualifying 8 conviction. This isn't just a problem for Commission 9 staff and it's not just a problem for applicants. Every 10 single company that holds a license needs to make a 11 decision about who they can hire and who they can't 12 hire. They need clear standards. They shouldn't have 13 to put their bingo licenses on the line every time they 14 hire someone who, say, has a DWI on the record or some 15 other arguably germane offense. They need to know going 16 into it what will disqualify them and what will not, and 17 we don't think that the currently drafted rule provides 18 those standards. 19 Second, we're concerned that the way the 20 rule is currently drafted, particularly sections (c) and 21 (e) appear to give the Commission authority that goes 22 beyond its statutory power. Chapter 2001 does give the 23 Commission authority to consider the criminal 24 backgrounds of people who aren't licensed but are 25 somehow connected to the licensee. That would include 46 1 spouses, for example, or employees, officers, directors. 2 It does give authority for the Commission to consider 3 that, but that authority is limited. It only applies to 4 conditions for fraud and for gambling. 5 The Legislature expressly took out in the 6 sunset legislation the authority to screen for the 7 spouses and the employees, to screen them for fraud -- 8 I'm sorry, not fraud, for felonies and mills demean 9 involving moral turpitude. That's no longer in there. 10 Instead they replaced that with Chapter 53. 11 We think that as a result of that change, 12 the Commission does not have authority to screen the 13 spouses, the employees, et cetera, et cetera, for 14 anything other than gambling or fraud. And we think 15 that's pretty clear in the statute. So the Austin Court 16 of Appeals has been very clear and it says that a rule 17 is invalid if it imposes additional conditions on a 18 license that are not permitted by the statute, and we 19 think that the rule as currently drafted does that. 20 Just one final point, Commissioners. I 21 don't know if anyone here has read the Eric Dexheimer 22 article in the Austin American Statesman from back in 23 February which talks basically about licensing agencies 24 running amuck and disqualifying a lot of potential 25 licensees for issues that really aren't germane to their 47 1 license. They use one example of a nurse that someone 2 approached her in a parking lot and she pulled a gun on 3 him and she ended up losing her nursing license as a 4 result of that. So it is important for the Commission 5 to recognize that -- not just the legal, but also the 6 fairness limitations on its authority. 7 And I appreciate your time. Thank you. 8 CHAIRMAN KRAUSE: We're -- we'll count on 9 you to help us supplement the record during the comment 10 period. 11 MR. BRESNEN: Thank you, Chairman. 12 CHAIRMAN KRAUSE: Ms. Ives -- Ives -- help 13 me out with that. 14 MS. IVES: Ives. Hi. Good morning. My 15 name is Sharon Ives with Fort Worth Bookkeeping. And I 16 guess as a bookkeeper I have concerns on Rule 402.703 17 audit policy. My concerns are where it lists paragraph 18 (b)(2) on Page 1, the number of severity of complaints 19 made against the license. I have at my office received 20 letters from the Lottery Commission regarding complaints 21 that people had either did online, called in, 22 complaining that they have the same winners in bingo all 23 the time. And I answer these letters and respond. 24 Would that constitute what type severity 25 on complaints? Because you're always going to have 48 1 disgruntled nonwinners in any bingo hall in the state of 2 Texas. I was just curious to how many of these would 3 constitute severity of complaints. 4 Also I know -- let's see, (b)(1), the 5 Commission may audit the licensee at any time. And then 6 also on the back, Page 5, paragraph (h) it says the 7 Commission may invoice a licensee for the costs related 8 to an audit of that license. I would like to know -- or 9 kind of curious how many other state agencies bill for 10 audits? And will the invoice or bill be detailed as far 11 as the mileage, the hourly rate, what hotel, et cetera? 12 Who will make the decision as to whether the audit would 13 constitute an invoice? And will the audits take place 14 at the regional offices of the Texas Lottery Commission 15 or at the CPA or bookkeeper's office? 16 Those are my concerns. 17 CHAIRMAN KRAUSE: And you're always 18 welcome to talk to our staff, who have probably many of 19 the answers to your questions. 20 MS. IVES: Great. Thank you. 21 CHAIRMAN KRAUSE: I want to recognize that 22 eight people gave witness affirmation forms that have 23 said -- indicated that you do not want to testify. And 24 what I'd like to do now is if any of you have changed 25 your mind about that and you'd like to come and give us 49 1 some comments, we're open for business right now and 2 we'd love to hear from you. 3 (No response) 4 CHAIRMAN KRAUSE: And so nobody is taking 5 me up on my invitation. Do we have a motion on these 6 proposed rules? 7 COMM. EDWARDS: This is Commissioner 8 Veronica Ann Edwards. I move that the Commission 9 approve the staff's consideration of and possible 10 discussion and/or action for 16 TAC 403.115, 16 TAC 11 403.600, 16 TAC 401.3025, also 402.200, 402.400, 12 402.402, 402.403, 402.411, 402.404, 402.410, 402.420, 13 402.700, 402.702, 402.703 and 402.705. 14 CHAIRMAN KRAUSE: Anybody want to give us 15 a second? 16 COMM. BAGGETT: I'll second it. 17 CHAIRMAN KRAUSE: All right. I call for a 18 vote. Everybody want to vote aye or nay, let's hear 19 ayes first. 20 (Those voting in favor so responded) 21 CHAIRMAN KRAUSE: No nays. It passes. 22 MR. BIARD: Thank you, Commissioners. I 23 have for each one of those items that Commissioner 24 Edwards mentioned a T-bar memo that has a spot for you 25 to initial that you approved publication of these rules. 50 1 So there's -- I'm sorry, but there's 14 of these. I'm 2 going to hand them to you if y'all will just initial 3 them where it stays approved, we'd appreciate that. 4 And I also want to note that there has 5 been a hearing already scheduled on October 16th on the 6 bingo rules. At 10:00 a.m. I believe. 7 AGENDA ITEM NO. III 8 CHAIRMAN KRAUSE: Very good. Let's move 9 back to the agenda and Item No. III. Kathy Pyka and 10 Robert Tirloni are going to give us a report. And then 11 after that agenda item, we're going to take a 10-minute 12 break. 13 MS. PYKA: Good morning, Commissioners. 14 My name is Kathy Pyka. I'm the Controller for the 15 Commission. And with me to my right is Robert Tirloni 16 who is our products manager. 17 Commissioners, this morning we'll be 18 presenting to you fiscal year 2013 year-end financial 19 results for the Commission. Our first chart that we 20 have for you this morning includes comparative sales 21 data through fiscal year 2013 as compared to the 22 previous fiscal year. Commissioners, we ended the 23 fiscal year with $3.22 billion in instant ticket sales 24 or scratch-off game sales as noted on the second orange 25 column. This is a new sales record marking the best 51 1 year of instant ticket sales in the Commission's 2 history, and it reflects a sales increase of more than 3 $130 million over last fiscal year, which if you recall 4 last fiscal year was also an all-time sales record for 5 the Commission. 6 Our draw sales, which includes on-line 7 games such as Lotto Texas, Powerball, Pick 3, Daily 4, 8 concluded the fiscal year with 1.15 billion in total 9 sales as noted on the second blue bar. Commissioners, 10 this increase is attributed to the continued success of 11 our $2 Powerball Game, as well as the Daily 4 results 12 and the new recent game that was started in fiscal year 13 2013, the All or Nothing Game. 14 Both products combined resulted in total 15 sales of 3 point -- $4.37 billion, which is an increase 16 of $185 million over last fiscal year, and again is an 17 all-time sales record for the Commission. So two sales 18 records there, one on instant tickets sales and one on 19 all-time sales. 20 CHAIRMAN KRAUSE: I'm sorry, can you say 21 that again? 22 MS. PYKA: We have two new records in 23 fiscal year 2013. One on total instant ticket sales and 24 the second on all-time sales for the agency. 25 CHAIRMAN KRAUSE: Fantastic. 52 1 MS. PYKA: Commissioners, the next slide 2 that we have for you this morning provides an overview 3 of the history of both instant ticket sales and draw 4 sales from the inception of the lottery through 2013. 5 We'll start with the instant ticket product. It's noted 6 with the orange bar. And the first year of the lottery 7 in 1992 we had $591,000 of instant ticket sales. This 8 grew to 2 billion in sales by the time we reached fiscal 9 year 1997. 10 Commissioners, this was the point in which 11 there was a legislative cap placed on prize payout. The 12 Legislature placed a 52 percent prize payout cap on our 13 product, and we saw a very sharp decline in standard 14 ticket sales as a result of that instant ticket prize 15 payout cap. The cap was repealed in fiscal year 2000, 16 but at the same time that it was repealed, there was 17 also a cap placed on or a link placed on the prize 18 payout cap to our advertising budget. This was 19 eventually repealed by the 81st Legislature, and you'll 20 see a nice increase in sales reaching all the way to 21 3 billion last fiscal year followed by that new sales 22 record for fiscal year 2013 that we just visited on. 23 And next we'll talk about draw sales. 24 They're noted on the blue bar. And of course we just 25 noted that we had total sales of 1.15 billion fiscal 53 1 year 2013, and you'll notice that this is our highest 2 level of draw sales since fiscal year 2004. So we're 3 very pleased with those results on the draw side as 4 well. 5 Our next slide includes for you a 6 comparison of sales by game, comparing fiscal year 2013 7 sales to fiscal year 2012. So we'll begin with our 8 jackpot games. They're noted there in the white font. 9 So our jackpot games are -- the games that are included 10 are Lotto Texas, Mega Millions along with the add-on 11 feature that we have there, which is Megaplier; 12 Powerball, its add-on feature Power Play; and Texas 13 Two-Step. And I should probably go back up and note 14 that Lotto Texas also has an add-on feature, which is 15 Lotto Extra. 16 We wrapped up the fiscal year with 680 17 million in total draw sales, which was an almost $6 18 million decline from the previous fiscal year. But we 19 want to note we had phenomenal results with the 20 Powerball Game of almost 300 million in sales, or 21 $126 million gain as compared to last fiscal year. 22 You'll see that we did have a decline in 23 Mega Million of 99 million, but that was all jackpot 24 driven. We didn't have a large jackpot last year in 25 Mega like we did in Powerball. 54 1 I want to move down to the daily games. 2 They are noted with the blue font. Our daily games are 3 Pick 3, Daily 4, along with their add-on games. We have 4 Cash 5, as well as All or Nothing. We wrapped up the 5 year with a total sales value of 473.5 million on our 6 daily games, which was a $55 million increase over last 7 year. We want to highlight within this category the 8 continued success of Daily 4. It set another all-time 9 sales record. And then we have the new game, All or 10 Nothing, which generated $63.6 million in total sales 11 last year. 12 And then we'll close it out with instant 13 ticket sales at the bottom of the slide with $3.22 14 billion in sales, which again was $136 million gain over 15 the previous fiscal year. We followed that up with 16 total sales of $4,376,000,000, which is the $185 million 17 gain over the previous fiscal year. 18 So with that, Robert will now provide an 19 overview of additional sales detail. 20 MR. TIRLONI: Thank you, Kathy. 21 Good morning, Commissioners. For the 22 record, my name is Robert Tirloni. I'm the products and 23 drawings manager for the Texas Lottery. 24 So this next slide is our fiscal year '13 25 sales of 4 point -- almost 4.4 billion. And we're 55 1 showing you this pie chart to show you the split between 2 our two product categories. So our instants or our 3 scratch-off products represent almost 74 percent of that 4 total. And our draw games, which as Kathy mentioned are 5 Lotto, Powerball, Mega Millions, et cetera, represent 26 6 percent of that total. 7 This is actually a very normal split for 8 us in Texas. We're a heavy instant ticket state, and 9 we have been for quite some time. This is really a 10 result of the differences between the two product 11 categories. With scratch-offs they're typically 12 prominently displayed in retail. We have price points 13 from $1 up to $50. We've got a lot of different themes, 14 a lot of different game styles and play styles. 15 And probably the most drastic difference 16 between the two categories is that on the scratch-off 17 games, after a player purchases them and actually 18 scratches them, they immediately know if they've won a 19 prize. With our draw game product, you're typically 20 buying a wager, the ticket prints out of a terminal, and 21 you're waiting into the future for a drawing to take 22 place to find out if you've won. And that typically is 23 the reason or the rationale for the instant ticket 24 category being the more popular of the two. 25 Delving down a little deeper, we're going 56 1 to look at the draw sales on this slide. And so these 2 are just all of our -- all of our draw games, no instant 3 games are included in this pie chart. So this 4 represents the 1.15 billion in draw game sales. 5 Powerball is the biggest piece of the pie this fiscal 6 year. There were five jackpots that were triple digit 7 jackpots this past fiscal year. Two of them were in the 8 realm of the $600 million jackpot amount. So that is 9 what is driving that $330 million in Powerball sales. 10 Our second best product on the draw game 11 side is Pick 3. We like this because this is not a 12 jackpot game. We have no control over the jackpot 13 games, so we like to see our Pick 3, which is one of our 14 daily games, performing so well. And actually in the 15 past Pick 3 has actually been our best selling draw 16 game, which many people find surprising when you think 17 about the jackpot levels that Powerball and Mega 18 Millions can generate. 19 Lotto is our third best selling. Lotto 20 Texas is what we like to call our flagship game. Not 21 because of what it represents in sales, but just because 22 it's the game that most people think about when they 23 think about the Texas lottery. That game, as Kathy 24 mentioned, we added a Lotto Extra, which is an add-on 25 feature to that game this past year. 57 1 One other thing that I will note and Kathy 2 mentioned a little bit about this, Lotto actually 3 outsold Mega Millions this past year. That's surprising 4 since Mega Millions is a multistate jackpot game. The 5 Mega Millions group has announced changes to the Mega 6 Millions game, and those will actually become effective 7 next month in October. On October 19th we'll start 8 selling a new version of Mega Millions. And the hope is 9 that the changes to that game will generate much higher 10 jackpots than we've seen here recently. 11 Same pie chart, but now we're looking at 12 instant ticket sales. So this represents the 3.2 13 billion in instant ticket sales in fiscal '13. Our $5 14 price point is our best selling price point. This past 15 fiscal year it represented just over a billion dollars 16 in sales. Our 10 is our second best selling price 17 point, followed by our 20. 18 The 10 and the 20 is where we have our 19 spotlight scratch off games. Those are games where we 20 print a large quantity of tickets. They have large 21 prizes available in the game, and there are a lot of 22 those prizes in the game. So those have been very 23 strong performers for us, and that's what is making the 24 10 and the 20 be in the second and third position for 25 this past fiscal year. 58 1 One other note, this very thin sliver is 2 the $7 price point. That's a discontinued price point. 3 We're no longer selling the $7 -- we're no longer 4 selling $7 scratch-off games. So moving forward into 5 the next fiscal year, you won't even see that 6 represented. 7 This is just a list of our top 15 instant 8 ticket games for the fiscal year. Just a couple of 9 things to note. Again at the top, these 10s and 20s are 10 our spotlight games that I just mentioned a moment ago. 11 You'll see our two $50 games are also in the top 15, but 12 I think the big takeaway when you look at this list of 13 our top 15 games is that we have appealing products at 14 all of our price points. So we have games in the top 15 15 at our two, our three, our five, our 10, our 20 and our 16 $50 price points. The only price point that's not 17 represented on here is the $1 price point. 18 And this is just a comparison of our -- 19 the fiscal year '13, the year that just ended, compared 20 to fiscal year '12. Again, this is showing all of the 21 different price points that we offer. And we have 22 experienced growth this past fiscal year at the 3, the 23 5, the 10, the 20 and the 50. I should have said before 24 I did that that fiscal year '13 is in blue and fiscal 25 year '12 is in the orange. But we've experienced growth 59 1 at almost every price point. The one and the two did 2 experience slight decline. And as I mentioned a moment 3 ago, the 7 is a discontinued price point. 4 With that Kathy has a couple more slides 5 to wrap up the presentation. 6 MS. PYKA: Thanks, Robert. 7 Commissioners, the State Lottery Act 8 authorize the Commission up to 7 percent of gross sales 9 to use for administrative purposes. Of this amount, the 10 Commission's 2013 budget was 211.5 million out of that 11 lottery dedicated account, which represented 4.83 12 percent of gross sales. 13 I wanted to note through cost containment 14 measures, our final expenditure tally for fiscal year 15 2013 ended up being $194.3 million. This is our lowest 16 administrative expenditure rate in the Commission's 17 history again. So another record for the Commission. 18 We ended up spending 4.44 percent of gross sales for 19 administrative purposes. 20 So then moving on to the next slide, we 21 provided an overview of our sales record. We've talked 22 about the cost containment with administrative, and I 23 wanted to wrap it up with the final piece of this, and 24 that is our revenue highlight. We wrapped up the fiscal 25 year with revenue transfers to the state of 60 1 $1,201,000,000. Commissioners, this is our highest 2 record in revenue transfers in the Texas Lottery 3 history, and it breaks the previous record that was set 4 in 1997. So that record has been out there for a good 5 number of years. 6 In comparison, the last fiscal year, this 7 is an increase of $46 million over last fiscal year, and 8 breaks the previous record by $18.3 million. 9 And with that, that concludes our sales 10 presentation this morning. We'd be happy to answer any 11 questions that you might have. 12 CHAIRMAN KRAUSE: Commissioners, any 13 questions while we have her on the hot seat? 14 COMM. STAVINOHA: Good job. 15 CHAIRMAN KRAUSE: -- records. Three 16 records. It's a big year. 17 MS. PYKA: Four. 18 CHAIRMAN KRAUSE: Four? 19 MR. TIRLONI: But we're not counting. 20 (Laughter) 21 CHAIRMAN KRAUSE: That's a record. All 22 right. Well, let's take a five-minute break and 23 reconvene at 11:20 and see if we can get this done by 24 noon. 25 (Recess: 11:12 a.m. to 11:23 a.m.) 61 1 AGENDA ITEM NO. IV 2 CHAIRMAN KRAUSE: The Lottery Commission 3 will reconvene. We are continuing with Agenda Item 4 No. 4, Kathy Pyka. 5 MS. PYKA: Again for the record, my name 6 is Kathy Pyka. I'm the controller for the Commission. 7 Commissioners, while the notebook includes the transfer 8 data for the month of July, I'm going to provide the 9 year-end results and then give a snapshot of that that 10 transfer detail included. 11 So the 1.201 billion transferred to the 12 State for fiscal year 2013, 1,135,000,000 was 13 transferred to the Foundation School Fund; 5.7 million 14 was the amount transferred to the Texas Veterans 15 Commission. And the balance, or 59.9 million was 16 transferred as a result of unclaimed lottery prizes. 17 Commissioners, this represents a 3.4 18 percent increase or 36.9 million over the amount 19 transferred to the Foundation School Fund for fiscal 20 year 2012. And our cumulative transfers to the 21 Foundation School Fund are now at $15.89 billion. 22 This concludes my presentation. I'll be 23 happy to answer any questions. 24 CHAIRMAN KRAUSE: Can you elaborate on the 25 unclaimed prizes and where that goes? 62 1 MS. PYKA: Certainly. The unclaimed 2 prizes, we have a share that goes to the 3 Multi-Categorical Teaching Hospital in the value of 4 $5.75 million per year. There's a small share related 5 to the Texas Veterans Commission game that goes back to 6 Texas Veterans Commission. And the balance presently 7 goes to the General Revenue Fund. 8 With our sunset legislation, effective 9 next fiscal year, that's balance will not go to the 10 General Revenue Fund but will go to the Foundation 11 School Fund. 12 CHAIRMAN KRAUSE: Thank you. 13 MS. PYKA: You're welcome. 14 CHAIRMAN KRAUSE: Questions for this 15 witness? 16 (No response) 17 AGENDA ITEM NO. V 18 CHAIRMAN KRAUSE: Next agenda item? 19 MS. PYKA: Again for the record, Kathy 20 Pyka, Controller for the Commission. 21 Commissioners, on August 28th of this year 22 the Commission received results from our post payment 23 audit recently completed by the Comptroller of Public 24 Accounts. The review included payroll, travel and 25 purchase transactions for the Commission for the 63 1 one-year period of March 2012 through February of 2013 2 to determine our compliances with applicable state laws. 3 A copy of the report is provided in your notebook, and 4 with the exception of one direct deposit authorization 5 form, the review included no other exceptions and it was 6 a great review for the Commission. 7 I'd be happy to answer any questions. 8 CHAIRMAN KRAUSE: How great of a result 9 was it really? 10 MS. PYKA: Well -- 11 CHAIRMAN KRAUSE: A really great result. 12 MS. PYKA: A really great result. There 13 were over 800 transactions reviewed from payroll to 14 travel to payment to prize to lottery operator. And of 15 those 800-plus transactions, the form in the file was 16 there but it was just not the updated form. 17 In all of my years in being involved in 18 state government, I've never been involved in a review 19 that well -- or that exceptional I will say. And in 20 reviewing the State Comptroller's website, I've not 21 really seen anybody else with a review with those 22 exceptional results. So it was -- it was great. 23 CHAIRMAN KRAUSE: Good work. Good work. 24 MS. PYKA: Thank you. That concludes my 25 presentation. 64 1 AGENDA ITEM NO. VII 2 CHAIRMAN KRAUSE: We are passing Item VI 3 and going on to Item VII, Deanne Rienstra. 4 MS. RIENSTRA: Okay. Commissioners, 5 Deanne Rienstra, Assistant General Counsel. I have a 6 proposed amendment to 16 Texas Administrative Code 7 Section 401.317, which is our Powerball On-Line Game 8 Rule. The staff recommends proposed amendments to the 9 Texas Lottery's Powerball Game Rule in order to 10 implement changes to the power play feature and other 11 game rule changes recently adopted by the MUSL board. 12 If approved, these proposed amendments will be published 13 in the Texas Register. 14 I'm happy to answer any questions. 15 CHAIRMAN KRAUSE: Commissioners? 16 (No response) 17 CHAIRMAN KRAUSE: Motion? 18 COMM. EDWARDS: I make a move that the 19 Commission approve the Staff recommendation for 16 TAC 20 401.317 for Powerball On-Line Game Rule. 21 COMM. BAGGETT: I'll second. 22 CHAIRMAN KRAUSE: Call for a vote. All 23 ayes? 24 (All those voting in favor so responded) 25 CHAIRMAN KRAUSE: Any nays? 65 1 (No response) 2 CHAIRMAN KRAUSE: Passed by acclamation. 3 MR. BIARD: Thank you, Commissioners. I 4 have a T-Bar memo for you to sign. 5 AGENDA ITEM NO. IX 6 CHAIRMAN KRAUSE: Agenda Item No. IX. 7 Kathy Pyka. 8 MS. PYKA: Commissioners, again for the 9 record, Kathy Pyka, Controller for the Commission. 10 Commissioners, the Texas Internal Audit 11 Act requires our agency submit an internal audit annual 12 report to the governor, the Legislative Budget Board, 13 the Sunset Advisory Commission and the State Auditor's 14 Office, as well the governing board and the agency's 15 Executive Director each year. The report for the fiscal 16 year 2013 is due by November 1st of this year. 17 Commissioners, included at your desk is a 18 copy of the report drafted for your approval, noting 19 that our internal auditor position is presently vacant. 20 And upon either hiring an internal auditor or an audit 21 firm, the Commission will submit an amended report for 22 fiscal year 2013 upon completion of that report 23 following its approval by the Board. 24 I'll be happy to answer any questions. 25 This is an action item for your consideration. 66 1 CHAIRMAN KRAUSE: So how are we going to 2 select our outside internal auditor? 3 MS. PYKA: The selection of -- 4 CHAIRMAN KRAUSE: We've got a little list 5 to pick from. 6 MS. PYKA: There are vendors that are on 7 the state contract that are available. There is also a 8 list of vendors available to us to submit the RFP to. 9 CHAIRMAN KRAUSE: Okay. Is there a motion 10 to approve this report? 11 COMM. EDWARDS: I move that we approve the 12 staff's recommendation for the report. 13 CHAIRMAN KRAUSE: Call for a vote. All 14 ayes? 15 (All those voting in favor so responded) 16 CHAIRMAN KRAUSE: Any nays? 17 (No response) 18 CHAIRMAN KRAUSE: No nays. Passes by 19 acclamation. 20 MR. BIARD: Thank you, Commissioners. I 21 have a letter for the Chairman to sign to send to the 22 Governor, the Legislative Budget Board, the Sunset 23 Advisory Commission and the State Auditor. 24 25 67 1 AGENDA ITEM NO. X 2 CHAIRMAN KRAUSE: Agenda Item 10, Mr. Gary 3 Grief. 4 MR. GRIEF: Commissioners, this is the 5 item regarding GTECH. And other than what is in your 6 notebooks today, I have nothing further to report under 7 this item. 8 CHAIRMAN KRAUSE: Do we have anybody from 9 GTECH? 10 MR. GRIEF: They had to cancel. 11 CHAIRMAN KRAUSE: Okay. 12 MR. GRIEF: So it will be at a future 13 meeting, and I'll have an update for you on that item. 14 AGENDA ITEM NO. XI 15 CHAIRMAN KRAUSE: Let's continue with 16 Agenda Item XI. 17 MR. GRIEF: Mr. Chairman and 18 Commissioners, I do have some comments I would like to 19 make and share with you regarding our end-of-year sales 20 reports and the sales record and the cost containment 21 numbers that Kathy shared with you earlier regarding 22 fiscal year '13. 23 By any measure, we have just concluded the 24 most successful year in the history of the Texas 25 Lottery. As Kathy said, we ended the year with $3.22 68 1 billion in scratch-off sales alone. That's $130 million 2 more than the record hat we set just last year. In draw 3 sales, because of $2 Powerball, the All or Nothing Game 4 and Daily 4, we ended the year at 1.5 billion, the 5 highest amount of draw sales we've had since fiscal year 6 2004. 7 Another very healthy sign for all of our 8 games is that both scratch-offs and draw sales increased 9 by 4.4 percent. They each increased by 4.4 percent. 10 That's an indication that our advertising and our 11 promotion efforts are really clicking and hitting on all 12 cylinders for all of our products. 13 So with both scratch-offs and draw games 14 having healthy gains over last year's record levels, we 15 once again set an all-time sales record of 4.37 billion. 16 That wipes out the record that we set just last year by 17 more than $185 million. 18 And finally, not to be overshadowed by 19 sales and revenue and just as important is how we manage 20 our administrative budget. Things like how we negotiate 21 contracts, and how we monitor the performance of our 22 vendors in those contracts, how we streamline our budget 23 and, quite frankly, how we just contain our costs, those 24 efforts contribute directly to our bottom line. And 25 they help determine how much money we're actually going 69 1 to be able to transfer to the state of Texas for 2 education, for the fund for veterans' assistance and 3 other good causes. 4 So as Kathy said, this year we set another 5 record in that regard. We only spent 4.44 percent of 6 sales for administrative costs. Contrast that with the 7 7 percent that we're statutorily allocated to spend. 8 But always more important than sales or cost containment 9 measures is the amount of money that we're actually able 10 to transfer at the end of the year to good causes. 11 So keep in mind -- remember that last year 12 we set an all-time sales record, just last year. But we 13 were unable to get over that hump from 1997 and beat the 14 old net revenue transfer mark that was set many years 15 ago. 1997 was a time when the lottery was much newer, 16 much fresher to the public, and it was a time when our 17 prize payout percentage was actually much lower. Some 18 of us, as Kathy somewhat alluded to, have been chasing 19 that 1997 record our entire career here at the Texas 20 Lottery. 21 But no more. This year we're going to 22 transfer more than $1.2 billion to the state of Texas. 23 That's $46 million more than last year, and that beats 24 the 1997 record by more than $18 million. Not only will 25 that money contribute to public education, to veterans' 70 1 services and other good causes, but it will help us in 2 sharing a very positive message about the Texas Lottery 3 with the Legislative Review Committee that's going to 4 soon be appointed as a result of the passage of our 5 sunset bill. 6 I want the Commission to know how proud I 7 am of the agency staff for their efforts to reach all 8 these new records. It's the result of their hard work, 9 as well as the result of our vendor partners like GTECH 10 our lottery operator, like Scientific Games, GPC and 11 Pollard who are the three printers for our scratch off 12 games, and like Latin Works, our advertising agency 13 who's based right here in Austin. All of those things 14 working together, our staff and our vendor partners, 15 have gotten us to where we are this year. 16 Now, that said, we have a tall mountain to 17 climb this year to try to beat the records that we just 18 set. We're in the gaming business. And quite frankly, 19 records like this can, in large part, be determined by 20 how the numbers fall for us. We have to count on record 21 jackpots, things like that to keep us moving forward. 22 But I want you to know that you can depend 23 on the staff of this agency going forward to look for 24 ways to improve, to continue to innovate our games, to 25 keep them fresh and entertaining for our players and, 71 1 bottom line, to stay focused on our mission of 2 generating revenue for the state of Texas. 3 Commissioners, that concludes my report 4 for this morning, and I would be happy to answer any 5 questions. 6 CHAIRMAN KRAUSE: What kind of stars 7 aligned in 1997 to make that such an outstanding year 8 that it was so hard to recreate? 9 MR. GRIEF: From the day the lottery began 10 in 1992 -- and I was here -- until that year, 1997, the 11 Lotter's arch of sales and revenue was straight up. And 12 we got to that points and that was the session when the 13 Legislature cut our prize payout percentage and didn't 14 allow us to pay over 52 percents back in prizes. And 15 our players felt that, our retailers sensed it 16 immediately, and play dropped like a rock. 17 And the reality is we've been recovering 18 from 1998 ever since. If you remember the chart that 19 Kathy put up, you saw that drop, and it's been just a 20 slow steady climb, with the last three years really 21 being an accelerated jump to the new record. 22 So we certainly hope to continue that. We 23 have, I think, some really exciting ideas in the 24 pipeline for this coming year as far as expansion of our 25 retailer base into possibly some chain stores that 72 1 currently don't sell lottery products. We've got some 2 new product ideas we want to really test in market to 3 see how well those go. 4 So the future is very bright for us. And 5 I want to take this opportunity to also congratulate 6 you, Chairman Krause, on your appointment as Chair; 7 Commissioners Baggett and Stavinoha, welcome to the 8 Board. Thank you for your continuing support, 9 Commissioner Edwards. We think we have really good 10 things ahead of us in the next year. 11 CHAIRMAN KRAUSE: Expectations are high. 12 MR. GRIEF: Very high. 13 CHAIRMAN KRAUSE: Sounds great. 14 MR. GRIEF: Thank you. 15 AGENDA ITEM NO. XII 16 CHAIRMAN KRAUSE: Sandra Joseph? 17 MS. JOSEPH: Thanks. Item XII. In 18 addition to the information that I have for you under 19 Item XII of the notebook, I would just like to give you 20 a few highlights of what we're working on in bingo 21 currently. 22 First of all, I'm excited to tell you that 23 we have entered into a contract with RFD & Associates to 24 redesign the bingo system. That's the software system 25 by which we manage all of our business. It's very 73 1 significant to us and to the licensees. We met with RFD 2 on Tuesday, along with IR -- the information resources 3 team that's going to spearhead this and talked about 4 expectations, roles and responsibilities, et cetera. 5 This is a two-and-a-half-million-dollar project that 6 needs to be completed within the next two years. So 7 it's going to be a footrace with a lot of commitment 8 and -- but it really looks like we have the right people 9 to do the job. 10 RFD has done previous work for the agency 11 and, as I understand, has done a great job for other 12 agencies. So we're happy about that. 13 We have just at the end of the year, by 14 August 31st, by our deadline we completed scanning of 15 800,000 pages of licensing records. These were paper 16 records that were maintained in our file room, and we 17 were able to get those scanned. In the future they'll 18 be accessible in the agency's document repository. It 19 will be much easier for people to retrieve them, and 20 also it frees up space for us. 21 We need that space, leading to the next 22 item I want to talk about, because we're in the process 23 and on the verge hiring some additional personnel in 24 bingo. The Legislature authorized us to hire 14 more 25 people to assist, particularly with our audit function. 74 1 That appropriation to us was contingent upon the 2 Commission raising certain licensing fees to cover the 3 cost of those folks. We did that. That rule is in 4 effect. 5 There was one more contingency, and that 6 was for -- that rule, along with supporting information 7 to be submitted to the Comptroller of Public Accounts, 8 for them to certify that it looked like the rule was in 9 fact going to be sufficient to raise enough money to 10 cover that. We're waiting on that certification 11 approval from the Comptroller. And at that time we have 12 waiting in the wings a number of applicants that have 13 been interviewed. We're ready to make offers; we just 14 need that final go-ahead. So we'll be working on 15 getting those folks on board and training them and 16 trying to develop our organization structure to make the 17 best rules of everybody we have. So that's a big 18 project. 19 I did want to also mention that in regard 20 to HB 394, it was referenced this morning in regards to 21 a rule that's being proposed to implement it. HB394 was 22 the bill that allowed bingo games with prizes of $50 or 23 less to be exempted from the $2500 cap on bingo 24 occasions. And that statute went into effect upon the 25 governor's signing the bill, and so those games are 75 1 currently being played by some organizations. We're 2 going to have to have some reporting on those games to 3 keep track and make sure that's fitting within their 4 parameters. 5 We expect that reporting to begin with the 6 first quarter of 2014. Right now we have just -- we are 7 just asking people to maintain records of those games 8 played, but we'll come up with -- we're coming up with a 9 new quarterly report so that they can, you know, 10 effectively report that to us. 11 In light of, you know, the comments today, 12 I want to assure you that we will be working with those 13 folks that you heard comments from and others and 14 carefully considering what they have to say and, 15 hopefully, coming up with some things that will satisfy 16 their needs and our needs. 17 CHAIRMAN KRAUSE: Very good. I just want 18 to contrast the phenomenal success of the lottery side 19 of the house with the struggles that the bingo division 20 has had, primarily with the Legislature, and on the 21 cutbacks and the budget and that kind of thing. And so 22 I think it's a sign of success that the lottery is -- 23 has got such outstanding results because it's got good 24 people and good leadership -- great leadership. And I 25 think that the bingo division is recovering very well 76 1 under your leadership, and I appreciate everything you 2 and the staff are doing over there. 3 MS. JOSEPH: Thank you. I have got some 4 very committed folks. 5 AGENDA ITEM XIII 6 CHAIRMAN KRAUSE: Now we're going to move 7 on to orders. Bob? 8 MR. BIARD: Thank you, Commissioners. Tab 9 XIII contains lottery and bingo enforcement matters. 10 Today we have 15 enforcement cases for your 11 consideration. 12 Tabs A through J in your notebooks are 13 lottery retailer license revocations. I'd like to take 14 these up together because they all involve the lottery 15 retailer having insufficient funds in their bank account 16 and they can be handled in a single order. 17 K and L, Tabs K and L are other lottery 18 license revocation cases; and Tabs M and N are agreed 19 orders, which are settlements presented for the 20 Commission to approve. 21 So starting with Tabs A through J, these 22 are recommended lottery license revocations. These 23 cases were all presented at the State Office of 24 Administrative Hearings for revocation ons the grounds 25 the licensee failed to have sufficients funds available 77 1 to cover electronic fund transfers to the Lottery 2 Commission's account. The SOAH judge recommends 3 revocation in each of these cases, and the staff 4 recommends that you vote to approve the order in each 5 case revoking the license. 6 If you approve, I have a single order that 7 covers all of these cases. 8 CHAIRMAN KRAUSE: Just for the benefit of 9 new commissioners, how do we know the amount that's 10 supposed to be in there when we sweep? And how do we 11 know that it's short? 12 MR. GRIEF: I'll ask Michael Anger -- 13 CHAIRMAN KRAUSE: All right. 14 MR. GRIEF: -- our lottery operations 15 director. This is a really great opportunity to lay 16 that out, especially for the new commissioners. 17 MR. ANGER: Good morning, Commissioners. 18 For the record my name is Michael Anger, and I'm the 19 lottery operations director. Welcome to the new 20 commissioners and congratulations, Chairman. 21 CHAIRMAN KRAUSE: Thank you. 22 MR. ANGER: The lottery, on a realtime 23 basis, through the gaming system that GTECH operates for 24 us keeps track of all retail sales of lottery tickets. 25 So for our drawing games, those occur with 78 1 each and every transaction that's generated from the 2 terminal. The customer comes in, makes a request for a 3 purchase. That transaction gets logged on the central 4 gaming system, and we know in realtime that that expense 5 is being booked against that retailer's account. So we 6 once a week collect those monies by sweeping their 7 account minus the 5 percent commission the retailers are 8 eligible for. 9 Now, on the instant ticket side, we don't 10 have quite the realtime tracking with regard to instant 11 tickets. Those are sold in packs of tickets, and so a 12 pack of tickets arrives at a retail location. The 13 retailer activates that pack of tickets and makes it 14 available for sale. Then those tickets settle against 15 the retailer's account in one of a number of ways. They 16 can settle those tickets immediately. So they can force 17 those tickets to settle and charge immediately against 18 their account. They can settle on time, which is 45 19 days, or they can settle based on the validations in the 20 pack, and that's the most common way that tickets settle 21 for the retailers. 22 So we know in each pack of tickets that we 23 sell for every game that we offer, there's a guaranteed 24 low prize number or value that's in each of those packs 25 of tickets. So say we have a pack that's a face value 79 1 of $500, we may know that there's $220 in small prize 2 value tickets in that pack of tickets. And so when the 3 retailer reaches 70 percent of those prizes being 4 validated either at their location or another location, 5 the pack automatically settles against their account. 6 So on a weekly basis, we're taking those 7 realtime drawing game transactions that they have sold 8 that they owe us monies for, plus any packs that have 9 settled against their account. So that's the amount 10 that we sweep from their account only a weekly basis. 11 And they have a direct relationship with us. They 12 establish an account. They receive reports of the 13 monies that they owe and they can access those on their 14 retail terminal. We also9 have a website that we have 15 available to retailers to give them more in depth detail 16 with regard to all of their transactions. 17 But ultimately they have to deposit those 18 funds that they owe to us. We basically extend credit 19 to them. So they deposit those funds in that account 20 and then we sweep those out on a weekly basis. In the 21 case of these retailers that you have cases before you 22 now, those retailers failed to have those funds 23 available, and one of two things has occurred. They can 24 be -- we can pursue revocation of the license if we 25 sweep their account once. We provide notice to them and 80 1 we try to give them the opportunity to go ahead and make 2 payment to us. If they fail to make payment to us at 3 all, then we pursue revocation of the license. So that 4 can happen after your very first nonsufficient funds 5 sweep. 6 But the rule associated with retailers 7 also says that in any one-year period of time, you can't 8 have more than four NSFs with us. So if you reach that 9 cap of four nonsufficient fund sweeps, at that point 10 you -- essentially we've determined that it's too 11 difficult to continue to do business with that licensee 12 and try to collect the monies that they owe to the state 13 of Texas. So at that point, consistent with our rule, 14 we take those cases to SOAH and recommend revocation. 15 MR. GRIEF: Michael, can you also explain 16 to the Commission the ability you have if a retailer's 17 sweep does come back NSF? 18 MR. ANGER: Yes. We have a broad range of 19 collection tools available to us under the tax code. We 20 essentially have the same tools available to us that the 21 Comptroller of Public Accounts has for collections 22 activities. So, you know, our initial efforts obviously 23 are just reaching out to the retailer, trying to get 24 them to come forward and make payment for the monies 25 that they owe us. But we can also put liens against 81 1 property. We can put freezes on bank accounts. So we 2 have a broad range of collection tools that we can 3 pursue to try to collect the monies that owed to the 4 Commission. And I'll just take this opportunity to 5 share with you that we're very effective in collecting 6 the monies that are owed to the state by our licensees 7 as a result of the sales transactions that they conduct 8 on our behalf. 9 We set a standard on an annual basis of 10 trying to stay under .02 percent of all lottery sales 11 with regard to collections. And we just concluded our 12 year-end numbers and we were at .006 percent. So far, 13 far below a single percentage point of retailers don't 14 make payments to us. 15 If we have retailers that through all of 16 our collection efforts that are exhausted and the 17 account balance that they owe us is a significant 18 amount. We also pursue collection through the Attorney 19 General's Office and we refer those over to them and 20 they conduct some additional collection efforts. So 21 we're very successful in that regard. 22 MR. GRIEF: When you get a report that a 23 retailer has gone insufficient funds, what can you do to 24 stop the bleeding? 25 MR. ANGER: We can summarily suspend, and 82 1 that's what we do with these retailers. We will 2 summarily suspend their accounts. So we'll turn off 3 their terminal so they can't continue to conduct sales, 4 and GTECH will go out and collect the tickets from that 5 location. 6 So if they're not forthcoming immediately 7 to address their NSF situation, we can cease their sales 8 immediately so that they don't continue to extend 9 further and further credit on our account essentially. 10 CHAIRMAN KRAUSE: Excellent explanation. 11 MR. ANGER: Thank you. 12 CHAIRMAN KRAUSE: Do we have a motion on 13 these orders? 14 COMM. EDWARDS: I move we adopt the 15 Staff's recommendation for lottery NSF license 16 revocation for cases listed under A through J. 17 CHAIRMAN KRAUSE: Second? Do we have a 18 second? 19 COMM. STAVINOHA: Yes. 20 CHAIRMAN KRAUSE: Call for a vote. All 21 ayes? 22 (Those voting in favor so responded) 23 CHAIRMAN KRAUSE: Any nays? 24 (No response) 25 CHAIRMAN KRAUSE: Any these orders are 83 1 approved. 2 MR. BIARD: Thank you, Commissioners. 3 I'll move on to the next item. Tab K is a proposed 4 revocation of a lottery retailer's license. In this 5 case the licensee, who is the sole owner of a store, 6 plead guilty to evading arrest, which is a third degree 7 felony and he was sentenced to four years confinement. 8 The sentence was suspended and the license was on 9 community supervision for four years and fined $1500 15. 10 However, 10 years have not elapsed since this occurred, 11 and that alone renders the retailer ineligible for a 12 license. 13 This case was presented at the State 14 Office of Administrative Hearings. The SOAH 15 administrative law judge recommends revocation, and 16 staff recommends that you vote to approve the order 17 revoking the license. 18 CHAIRMAN KRAUSE: You want to go ahead and 19 tell us about Item L? 20 MR. BIARD: Sure. Item L is also a 21 proposed revocation of a lottery retailers license. In 22 this case the licensee appeared at the hearing. In many 23 of these cases the licensee does not appear. In this 24 case he did. And the licensee had failed to disclose on 25 his application for a license that the president of the 84 1 company had pled guilty to two counts of gambling and 2 fined $1,000. Ten years have not elapsed since the 3 termination of the sentence, so that also renders this 4 retailer ineligible for a license. The case again was 5 presented at SOAH and the judge recommends revocation. 6 And staff recommends you vote to approve the order. 7 CHAIRMAN KRAUSE: Discussion questions? 8 (No response) 9 CHAIRMAN KRAUSE: Motion? 10 COMM. EDWARDS: I make a motion the 11 Commission adopt the staff's recommendation for other 12 lottery license revocations for cases listed in K and L. 13 UNIDENTIFIED SPEAKER: Second. 14 CHAIRMAN KRAUSE: Call for a vote. All 15 ayes? 16 (Those voting in favor so responded) 17 CHAIRMAN KRAUSE: Any nays? 18 (No response) 19 CHAIRMAN KRAUSE: These license 20 revocations are approved. 21 MR. BIARD: Thank you, Commissioners. I 22 have two orders. 23 CHAIRMAN KRAUSE: And if you'll just go 24 ahead and do both M and N? 25 MR. BIARD: Sure. Yes. Tab M is an 85 1 agreed order. M and N are both settlements, and those 2 come to you in the form of agreed orders for the staff 3 and the licensee have come to some sort of agreement. 4 Tab M is an agreed order involving a lottery retailer. 5 In this case the retailer assessed a 25-cent charge for 6 purchasing a $5 Lotto Texas Quick Pick ticket which is a 7 violation of the State Lottery Act, which prohibits a 8 licensee from charging more than the price fixed by the 9 Commission for a lottery ticket. 10 In this case the staff reached a 11 settlement with the licensee to just suspend the license 12 for a period of ten days. Staff recommends you approve 13 this order. 14 Tab N is the only bingo matter before you 15 today on the enforcement cases, and there are two orders 16 here. This is actually follow-up from a case that was 17 presented at the last Commission meeting, the Golden 18 Belle Bingo Hall case which involved the use of 8 liner 19 gambling machines in two bingo halls in Gun Barrel City 20 and Granbury, Texas. 21 At the last meeting the Commission 22 approved four agreed orders involving the lessor of the 23 hall and three of fire charities that were the subject 24 of this case. Today we have the last two charities 25 involved who have submitted their signed settlement 86 1 papers. And we have agreed orders for both of these 2 charities that we recommend you approve today. 3 CHAIRMAN KRAUSE: Discussion questions? 4 COMM. EDWARDS: No. 5 CHAIRMAN KRAUSE: Motion? 6 COMM. EDWARDS: I make a motion we adopt 7 the Staff's recommendation for the Commission on agreed 8 orders listed under M and N. 9 COMM. BAGGETT: I second. 10 CHAIRMAN KRAUSE: Call for a vote. All 11 ayes? 12 (Those voting in favor so responded) 13 CHAIRMAN KRAUSE: Any nays? 14 (No response) 15 CHAIRMAN KRAUSE: These agreed orders are 16 approved by the Commission. 17 MR. BIARD: Thank you, Commissioners. 18 There's one order for M and two orders for N. 19 And then that concludes the enforcement 20 orders under Tab XIII. 21 AGENDA ITEM NO. XV 22 CHAIRMAN KRAUSE: Excellent. At this 23 time, I move that the Texas Lottery Commission go into 24 Executive Session. We're going to do several things. 25 We're going to deliberate personnel matters, including 87 1 the appointment, employment, evaluation and 2 reassignment, duties, discipline or dismissal of the 3 Executive Director, the Charitable Bingo Operations 4 Director -- and we don't have an internal audit director 5 at the moment, but we are going to discuss that. Also 6 the duties of the General Counsel and/or the Human 7 Resources Director, all pursuant to Section 551.074 of 8 the Texas Government Code. We're also going to receive 9 legal advice regarding pending or contemplated 10 litigation or settlement offers pursuant to Section 11 551.071(1) and legal advice pursuant to Section 12 551.071(2) of the Texas Government Code, including but 13 not limited to those items posted on the Open Meetings 14 notice for the purpose of receiving legal advice. 15 Do I have a second? 16 COMM. EDWARDS: Second. 17 CHAIRMAN KRAUSE: Call for a vote. 18 (Those voting in favor so responded) 19 CHAIRMAN KRAUSE: There being no nays, 20 then we are in Executive Session. 21 (Recess: 11:57 a.m. to 12:43 p.m.) 22 AGENDA ITEM NO. XVI 23 CHAIRMAN KRAUSE: The Texas Lottery 24 Commission is out of Executive Session at 12:43. 25 There's one action item. It's a motion that I'm making. 88 1 I move that the Commission request the 2 Governor and Legislative Budget Board approve the 3 setting of a salary rate for the Executive Director's 4 position at an amount not to exceed $221,500 pursuant to 5 Section 3.04, Article IX, of the General Appropriations 6 Act, to be paid utilizing general revenue dedicated 7 Lottery Account No. 5025 funding. 8 Is there a second? 9 COMM. EDWARDS: I second. 10 CHAIRMAN KRAUSE: And I call for a vote. 11 Give me the "ayes" first. 12 (All those voting in favor so responded) 13 CHAIRMAN KRAUSE: Any "nays"? 14 I hear no nays. This motion is approved. 15 AGENDA ITEM NO. XVII 16 CHAIRMAN KRAUSE: Do we have a motion to 17 adjourn this meeting? 18 COMM. EDWARDS: I motion we adjourn the 19 meeting. 20 CHAIRMAN KRAUSE: Second? 21 COMM. BAGGETT: Second. 22 CHAIRMAN KRAUSE: Let's call for a vote on 23 that. Give me the "ayes." 24 (All those voting in favor so responded) 25 CHAIRMAN KRAUSE: Any "nays"? 89 1 I hear none. The motion is approved and 2 we're adjourned. 3 (Proceedings concluded at 12:45 p.m.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 90 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Lou Ray, Certified Shorthand Reporter 5 in and for the State of Texas, do hereby certify 6 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, 10 later reduced to typewritten form under my 11 supervision and control and that the foregoing pages 12 are a full, true, and correct transcription of the 13 original notes. 14 IN WITNESS WHEREOF, I have hereunto set my 15 hand and seal this 30th day of September 2013. 16 _______________________________ 17 LOU RAY 18 Certified Shorthand Reporter CSR No. 1791 - Expires 12/31/13 19 Firm Registration No. 276 20 Kennedy Reporting Service, Inc. 1016 La Posada Drive, Suite 294 21 Austin, Texas 78752 512.474.2233 22 23 24 Job No. 112739 25