1 1 2 3 4 5 TEXAS LOTTERY COMMISSION 6 7 8 COMMISSION MEETING 9 10 11 April 14, 2016 12 13 10:00 a.m. 14 15 AT 16 17 TEXAS LOTTERY COMMISSION 18 19 611 East 6th Street 20 21 Austin, Texas 78701 22 23 24 25 2 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: Doug Lowe Carmen Arrieta-Candelaria 4 Robert Rivera Peggy A. Heeg 5 GENERAL COUNSEL: Bob Biard 6 7 EXECUTIVE DIRECTOR: Gary Grief 8 CHARITABLE BINGO OPERATIONS DIVISION DIRECTOR: Alfonso D. Royal III 9 10 LICENSING AND ACCOUNTING MANAGER: Desira Glenn 11 12 ADMIN. DIVISION DIRECTOR: Michael R. Fernandez 13 CONTROLLER: Katheryn J. Pyka 14 ASSISTANT GENERAL COUNSEL: James Person 15 McCONNELL JONES 16 LANIER & MURPHY, LLP: Darlene Brown 17 PRODUCTS & DRAWINGS MANAGER, 18 LOTTERY OPERATIONS DIVISION: Robert Tirloni 19 HUB COORDINATOR: Joyce Bertolacini 20 --oo0oo-- 21 22 23 24 25 3 1 PROCEEDINGS, THURSDAY, APRIL 14, 2016 2 TABLE OF CONTENTS 3 Page 4 I The Texas Lottery Commission will call the meeting to order. 5 Pledge of Allegiance to the U.S. and Texas flags.................................. 7 6 II Report, possible discussion and/or action, 7 including approval, on the Charitable Bingo Operations Division annual report 8 for calendar year 2015....................... 11 9 III Consideration of and possible discussion and/or action, including proposal, on 10 amendments to 16 TAC 402.103 (Training Program), 402.200 (General Restrictions 11 on the Conduct of Bingo), 402.203 (Unit Accounting), 402.205 (Unit Agreements), 12 402.210 (House Rules), 402.300 (Pull-Tab Bingo), 402.301 (Bingo Card/Paper), 13 402.303 (Pull-tab or Instant Bingo Dispensers), 402.324 (Card-Minding Systems -- 14 Approval of Card-Minding Systems), 402.325 (Card-Minding Systems -- Licensed Authorized 15 Organization Requirements), 402.400 (General Licensing Provisions), 402.404 (License and 16 Registry Fees), 402.407 (Unit Manager), 402.411 (License Renewal), 402.420 17 (Qualifications and Requirements for Conductor License), 402.424 (Amendment of a License by 18 Telephone or Facsimile), 402.451 (Operating Capital), 402.500 (General Record Requirement), 19 402.504 (Debit Card Transactions), 402.506 (Disbursement Records Requirements), 402.511 20 (Required Inventory Records), 402.514 (Electronic Fund Transfers), 402.600 (Bingo 21 Reports and Payments), 402.602 (Waiver of Penalty, Settlement of Prize Fees, Rental Tax, 22 Penalty and/or Interest), 402.603 (Bond or Other Security), 402.703 (Audit Policy), 23 402.706 (Standard Administrative Penalty Guideline), 402.707 (Expedited Administrative 24 Penalty Guideline), and 402.708 (Dispute Resolution); and on new 402.413 (Military 25 Service Members, Military Veterans, and Military Spouses).............................. 16 4 1 TABLE OF CONTENTS (Continued) 2 Page IV Report, possible discussion and/or action 3 on the agency's advertising strategy, including functions of the advertising 4 vendor under the advertising services contract....................................... 47 5 V Report, possible discussion and/or action 6 on agency major contracts, including the status of the lottery operator contract, 7 and whether discussion relating to the negotiation of the lottery operator contract 8 in an open meeting would have a detrimental effect on the Commission's position in the 9 negotiations.................................... 60 10 VI Report, possible discussion and/or action on agency major contracts, including 11 amendment, renewal or extension on the contract(s) for instant ticket 12 manufacturing and services...................... 63 13 VII Report, possible discussion and/or action on agency prime contracts, including the 14 contract for Houston Texans trademark license and promotional support services........ 63 15 VIII Report, possible discussion and/or action 16 on agency prime contracts, including extension (i) on the contract for risk 17 review and compliance monitoring services; (ii) on the contract for market research 18 services; and (iii) on the contract for security officer services....................... 64 19 IX Report, possible discussion and/or action 20 on HUB and/or minority business participation, including approval of the agency's Fiscal Year 21 2015 Minority Business Participation Report..... 69 22 X Report, possible discussion and/or action on lottery sales and revenue, game performance, 23 new game opportunities, advertising, promotional activities, market research, 24 trends, and game contracts, agreements, and procedures...................................... 65 25 5 1 TABLE OF CONTENTS (Continued) Page 2 XI Report, possible discussion and/or action on 3 transfers to the State........................ 57 4 XII Report, possible discussion and/or action on external and internal audits and/or reviews 5 relating to the Texas Lottery Commission, and/or on Internal Audit activities, including approval 6 of Procurement to Payment Business Cycle Audit Report and Agency's Key Performance Measure 7 Audit Report.................................. 73 8 XIII Report by the Charitable Bingo Operations Director and possible discussion and/or action 9 on the Charitable Bingo Operations Division's activities, including licensing, accounting 10 and audit activities, pull-tab review, and special projects............................... 76 11 XIV Report by the Executive Director and possible 12 discussion and/or action on the agency's operational status, major contracts, agency 13 procedures, awards, and FTE status............. 84 14 XV Consideration of the status and possible approval of orders in enforcement cases: .............. 85 15 Lottery NSF License Revocation Cases (Default 16 Unless Otherwise Noted) A. Docket No. 362-16-1009 - Francis Mini Mart 17 B. Docket No. 362-16-1010 - MLKing Grocery C. Docket No. 362-16-1394 - Father & Son Tobacco 18 Store, LLC Lottery Agreed Orders 19 D. Case No. 2016-163 - NAT 24 #1 E. Case No. 2016-162 - Zambala Enterprises, LLC 20 F. Docket No. 362-16-2045 - Super K Corner Store 21 XVI Public Comment -- .............................. -- 22 XVII Commission may meet in Executive Session: A. To deliberate personnel matters, including 23 the appointment, employment, evaluation, reassignment, duties, discipline, or 24 dismissal of the Executive Director and/or the Charitable Bingo Operations Director 25 pursuant to Section 551.074 of the Texas Government Code. 6 1 TABLE OF CONTENTS (Continued) 2 Page 3 B. To deliberate the duties of the General Counsel and/or the Human Resources 4 Director pursuant to Section 551.074 of the Texas Government Code 5 C. To receive legal advice regarding pending or cone templated litigation or settlement 6 offers, or other legal advice, pursuant to Sections 551.071(1) and (2) of the 7 Texas Government Code, including but not limited to legal advice regarding the 8 following items: Pending and potential litigation regarding 9 Fun 5's Scratch Ticket Game #1592, including but not limited to Travis Co. District 10 Court Cause No. D-1-GN-14-005114 (Steele, et al. v. GTCH Corp.); Dallas Co. District 11 Court Cause No. DC-14-14838 (Nettles v. GTECH Corp. and Texas Lottery Commission 12 (on appeal); and El Paso County Court No. 2014-DCV-4113 (McDonald v. GTECH Corp.). 13 State of Texas v. Equal Employment Opportunity Commission et al. 14 Legal advice regarding the State Lottery Act, Texas Government Code Chapter 467 15 (including sec. 467.037 - Division of Responsibilities), the Bingo Enabling Act, 16 the Open Meetings Act, the Administrative Procedure Act, employment law, personnel 17 law, procurement and contract law, evidentiary and procedural law, and general 18 government law. Legal advice regarding any item on this open meeting agenda......... 61 19 XVIII Return to open session for further deliberation 20 and possible action on any matter posted for discussion in Executive Session. Any matter 21 posted for Executive Session also may be the subject of discussion and/or action in open 22 session prior to Executive Session............ 62 23 XIX Adjournment................................... 88 24 --oo0oo-- 25 7 1 AGENDA ITEM I 2 CHAIRMAN KRAUSE: We're going to do 3 something unusual today and start early. It is actually 4 9:58; and I'm calling the meeting of the Texas Lottery 5 Commission to order on April 14, 2016. We have a full 6 house as far as commission members are concerned, 7 Commissioners Arrieta-Candelaria, Heeg, Lowe, Rivera are 8 all present. We have a quorum. 9 As we've started doing since we got new 10 commissioners, we are going to say the pledge to the 11 flag of the United States of America and to the Texas 12 flag. I've asked Commissioner Arrieta-Candelaria to 13 lead us in that. 14 (Pledges.) 15 CHAIRMAN KRAUSE: We'll proceed to the 16 next item on the agenda, which is the Charitable Bingo 17 report of 2015. 18 MR. GRIEF: Mr. Chairman, if I could -- 19 excuse me, please -- 20 CHAIRMAN KRAUSE: Yes. 21 MR. GRIEF: -- we do have a guest here, 22 Toben Molica, from Scientific Games. I was hoping we 23 might -- 24 CHAIRMAN KRAUSE: Okay. 25 MR. GRIEF: -- with the permission of the 8 1 Commission, we'll take him first, if possible. 2 CHAIRMAN KRAUSE: Okay. That's 3 fantastic. 4 MR. GRIEF: Very good. Thank you, 5 Mr. Chairman. 6 We do have a guest, Mr. Toben Molica, 7 from Scientific Games. Toben is the Vice-President of 8 Sales for North America. I've known Toben for several 9 years now. He's an industry veteran, and we're glad to 10 have him here. And he's going to share with you just 11 kind of a general overview of Scientific Games, what 12 they provide for us and the other work that they do 13 around the country and the world. 14 Toben. 15 MR. MOLICA: Thank you, Gary. I 16 appreciate the kind introduction. I will try to be very 17 brief. 18 I really want to thank, Mr. Chairman and 19 members of the Commissioners for allowing me to explain 20 a little bit about Scientific Games, who we are, what we 21 do, and specifically what we do for the Texas Lottery. 22 Scientific Games is a worldwide company. 23 We have printing facilities in four continents -- excuse 24 me -- on four continents. We have our main facility in 25 Alpharetta, Georgia. We have a plant in Montreal, 9 1 Canada. We have a plant in Leeds, England; and we have 2 a plant in Beijing, China. 3 We print all around the world. We have 4 150 lottery customers around the world; but more 5 specifically, I view our goal to the Texas Lottery 6 really as one main mission, not to grow your sales but 7 to grow your bottom-line profit, the money that the 8 Lottery returns back to education. That, I take as a 9 personal goal for Scientific Games; and that's what we 10 try to do for the Texas Lottery. 11 And we have great games, exciting games, 12 fun games; but, more importantly, our games are secure. 13 And we uphold the integrity of the Texas Lottery. At 14 the end of the day, the integrity of the Texas Lottery 15 is of the utmost importance to Scientific Games. 16 So we have a wide variety of products and 17 services. I won't go into each and every one of them, 18 but everything from scratch tickets to interactive 19 games, play-for-fun games on your mobile phone, systems. 20 We provide drawing systems for the Powerball tickets, 21 the terminals. We provide all of those products and 22 services globally. 23 Again, at the end of the day, we are here 24 to serve the Texas Lottery, whatever Gary needs. And 25 take my word for it, you have one of the best right 10 1 here, sitting next to you, in the industry. Gary is 2 fair, honest, just a gentleman, if you want to say it 3 that way. He is an industry leader, an expert; and, 4 again, you have one of the best running your operation. 5 We are extremely proud to be a partner of 6 the Texas Lottery, and we look forward to a very bright 7 future. 8 If there's any questions that you have -- 9 that was a very slight overview. Again, we're just 10 proud to be a part of the Texas Lottery Commission; and 11 we look forward to furthering education in Texas. 12 CHAIRMAN KRAUSE: Commissioners? 13 (No response.) 14 CHAIRMAN KRAUSE: I just want to thank 15 you guys for doing a great job for us. Your 16 relationship with us is very important to us and to the 17 school children of the state of Texas. I look forward 18 to working with you guys. 19 Anyone else? 20 MR. MOLICA: I appreciate that. If 21 you're ever in Atlanta, please give me a call; and we'll 22 give you a tour. It's something to see. 23 CHAIRMAN KRAUSE: Thank you, sir. 24 MR. MOLICA: Thank you very much. 25 CHAIRMAN KRAUSE: Next, Mr. Royal. 11 1 AGENDA ITEM II 2 MR. ROYAL: Good morning, Commissioners. 3 You should have a copy of the 2015 Charitable Bingo 4 Operations Division Annual Report. The Annual Report 5 provides financial information on the condition of bingo 6 in the state and is statutorily required to be submitted 7 to state leadership. I've asked Desira Glenn, the Bingo 8 Division Licensing and Accounting Services Manager, to 9 highlight the financial data in calendar year 2015. 10 But before she begins, I do want to 11 mention a few non-financial accomplishments of the 12 Division. The Bingo Operating Services System, known as 13 BOSS, that is used by staff in the administration and 14 management of the Charitable Bingo Program was fully 15 implemented. As you're aware, BOSS also allows 16 licensees and bingo workers to submit applications, 17 reports, and remit payments online. 18 In 2015 audit and game inspection 19 activities increased 45 percent in comparison to 20 calendar year 2014. Some of those activities resulted 21 in: Twenty-four active consent orders, totalling 22 approximately $211,000 related to the operation of 23 illegal gaming machines in bingo locations and the 24 under-reporting of prize fees; 45 audits that resulted 25 in the re-depositing of approximately $84,000 in the 12 1 bingo bank account, which basically goes directly to 2 charitable distributions because all expenses have been 3 paid. Those amounts are related to incorrect 4 merchandise valuations or unreasonable or unnecessary 5 expenses. 6 The Division also launched a statewide 7 training initiative in 2015 that provided onsite bingo 8 training that included accounting, licensing, audit, 9 bingo operations, and bingo services portal for 10 approximately 320 representatives in Arlington, Austin, 11 Houston, and San Antonio. 12 I will now turn it over to Desira to 13 speak specifically on the financial data. 14 MS. GLENN: Thank you. 15 Good morning, Mr. Chairman and 16 Commissioners. 17 I wanted to provide the information 18 contained in this presentation, and I am delighted with 19 the progress of charitable bingo in this state. Now, 20 I'm going to provide an overview of calendar year 2015 21 Charitable Bingo Operations. The data is as of 22 March 10th, 2015. Included in this presentation there 23 will also be data from 2014. These figures will differ 24 from the 2014 annual report due to audit adjustments and 25 required quarterly report amendments. 13 1 I will start with where the money comes 2 from. Total gross receipts were $756.8 million. Total 3 gross receipts included 347 million on regular bingo 4 sales, 409 of pull-tab sales. Of regular bingo receipts 5 approximately 178.8 million were card sales, and 6 168 million were electronic card sales. The pull-tab 7 receipts included approximately 10.7 million of instant 8 pull-tab sales and 398.7 million on event pull-tab 9 sales. 10 Gross receipts increased by more than 11 $17 million this past year. This is a 2.3 percent 12 increase over the previous year. More than half of the 13 receipts were attributed to pull-tabs, which increased 14 by approximately $16.3 million or 4.2 percent over 2014. 15 Adjusted gross receipts is gross receipts 16 less prizes awarded. Here you see that total prizes 17 awarded increased by 2 percent. Despite this slight 18 increase in prizes adjusted gross receipts increased by 19 almost 5 percent. 20 This slide shows where the money went. 21 In 2015 prizes awarded equaled $575 million; bingo 22 worker salaries, 41.8 million; rent payments, 23 44.9 million; cost of goods sold, 33.5 million; 24 charitable distributions, 28.5 million; other expenses, 25 2.6 million; license fees, 3 million; and rental taxes, 14 1 900,000. 2 Charitable Bingo -- excuse me -- 3 charitable distributions are the true measure of the 4 success of the Charitable Bingo Operations. As you can 5 see charitable distributions went up 10.3 percent over 6 2014. 7 The Bingo Enabling Act requires that net 8 proceeds from charitable bingo be used for the 9 charitable purposes of an organization conducting bingo. 10 In 2015, 2.7 million more dollars than in the previous 11 year that was raised in charitable bingo was invested in 12 Texas communities through various charitable acts. 13 This is a look at how charitable 14 distributions relate to gross receipts and invested 15 gross receipts. As receipts increased, charitable 16 distributions increased. 17 Last year gross receipts totalled more 18 than $756.7 million; and of that, 4 percent was 19 charitable distributions. Similarly, adjusted gross 20 receipts totalled more than $181.5 million; and of that, 21 16 percent was used for charitable purposes around the 22 state. 23 Winners of charitable bingo pay a 24 5 percent prize fee. This fee comes from the winnings. 25 Charitable bingo conductors collect the fees and remit 15 1 them to the State quarterly. Each quarter the prize 2 fees are remitted from local jurisdictions and 3 allocations from the division. Last year $29 million 4 was collected from charitable bingo winners as prize 5 fees and disbursed as allocations. 6 This concludes the financial overview of 7 the 2015 annual report. 8 Alfonso. 9 MR. ROYAL: Commissioners, 2015 was a 10 good year; and I do look forward to the current year 11 surpassing it as we continue our approach of educating 12 our licensees to operate profitable, charitable bingo. 13 I ask for your approval of the report. 14 CHAIRMAN KRAUSE: Commissioners? 15 COMMISSIONER LOWE: Alfonso, I think this 16 is a great report. I think that you're doing a great 17 job. I wasn't here before you got here, though, so I 18 can't compare to predecessors; but just from what I've 19 heard from people, I'm very proud to be associated with 20 you in this effort. 21 So as far as this report, I think that 22 it's a great report. I would like to see that green 23 slice that goes to charities even bigger because I think 24 that makes -- if it grows bigger, we have a credible 25 reason to exist; and I think the industry wants that as 16 1 well. 2 So, with that in mind, Chair, I'll move 3 to approve this report as presented by Mr. Alfonso 4 Royal. 5 COMMISSIONER ARRIETA-CANDELARIA: Second. 6 CHAIRMAN KRAUSE: Before we take a vote, 7 I just want to thank Commissioner Lowe, who -- if 8 there's anybody that doesn't know, he is the officially 9 designated Bingo Commissioner; and we're going to hear 10 from him because he has been putting a lot of his 11 personal time in executing his duties as the Bingo 12 Commissioner. 13 But, anyway, we have a motion; we have a 14 second. All in favor say, "Aye." 15 (Chorus of "Ayes.") 16 All opposed say, "Nay." 17 (No response.) 18 CHAIRMAN KRAUSE: Carried by acclamation. 19 AGENDA ITEM III 20 CHAIRMAN KRAUSE: Next on the agenda we 21 have James Person, who is going to talk to us about the 22 new proposed rules which we're going to start the 23 rulemaking process on in a moment. 24 We need lights, too. 25 MR. ROYAL: Chairman Krause, if I may? 17 1 Commissioners, I previously reported an 2 industry stakeholder workgroup was developed in 3 conjunction with the revision on the rule review. The 4 purpose of the review was to provide input on the 5 proposed changes that had been submitted in the rule 6 review proceedings, along with agency staff proposed 7 recommendations. This 13-member workgroup is comprised 8 of representatives from the Veterans of Foreign War, The 9 National Association of Fundraising Ticket 10 Manufacturers, Conservative Texans for Charitable Bingo, 11 Texas Charity Advocates, The Bingo Interest Group, 12 commercial lessors, manufacturers, distributors, 13 bookkeepers, and charitable organizations that were 14 assembled for that task. Additionally, Commissioner 15 Lowe, the designated Bingo Commissioner participated in 16 workgroup meetings as well. 17 I'd like for those members of the rule 18 stakeholder workgroup to please stand, if you would, 19 you're here. 20 (Individuals standing.) 21 MR. ROYAL: Commissioners, Kim Kiplin, 22 Steve Bresnen, Steve Fenoglio, Darrin Peters, Megan 23 Meyers, and Will Martin. 24 Thank y'all for being a part of that 25 workgroup. 18 1 They provided an enormous amount of 2 valuable input into the process, and I look forward to 3 our continued working relationship with them as we move 4 forward. 5 Lastly on today's item, if the Commission 6 votes to initiate this rulemaking process, I want to 7 emphasize there will be additional opportunities for the 8 public during the public comment period for industry 9 stakeholders and others to provide further comments on 10 these rule proposals. 11 Commissioners, with this, I'll turn it 12 over to James Person who will talk specifically about 13 the rule proposal. 14 MR. PERSON: Thank you, Alfonso. 15 Mr. Chairman. For the record, my name is 16 James Person. I'm an attorney here at the Commission. 17 In this rulemaking staff is proposing 18 amendments to 29 current bingo rules and one new rule. 19 And I'll begin with amendments. Several of the proposed 20 changes are relatively insubstantial. We are removing 21 obsolete language, correcting spelling errors, updating 22 form names; but in the interest of brevity, I will focus 23 my talk on some of the more substantial. But I want to 24 stress that all the proposed changes are explained in 25 detail in your packets. 19 1 The first matter I want to address is the 2 proposed changes to Rule 402.603 which governs bonds. 3 Under the Bingo Enabling Act, bingo conductors, 4 manufacturers, unit managers are required to obtain and 5 maintain bonds. The current rule also covers the 6 submission of bonds from commercial lessors; but as you 7 may recall, the Legislature recently repealed that bond 8 requirement. So we are now proposing to delete all 9 references in the rule to the submission of lessor 10 bonds. 11 For bingo conductors the current rule 12 allows for a bond to be released after two years of 13 fulfilling their prize fee payments; however, the Bingo 14 Enabling Act requires that the bond be maintained for 15 the entire period of licensure. So we are proposing a 16 fix for that. 17 But the staff recognizes that it can be 18 very difficult for conductors to obtain bonds in certain 19 instances, so while we cannot release the bond in its 20 entirety, we can set the bond at a lower amount. So in 21 this proposal we are asking that bingo conductors that 22 have eight consecutive quarters of fulfilling their 23 prize fee payment requirements, their bond amount will 24 be reduced to $100. But if a conductor does not fulfill 25 their prize fee payment requirements and a jeopardy 20 1 determination is filed again them, the Division may then 2 raise their bond amount. 3 Staff is also proposing a change to the 4 way in which unit manager bond amounts are calculated 5 and that affects, again, 402.603 and 402.407. Currently 6 the formula used to determine a unit manager's bond 7 results in very high bond amounts, which is a huge 8 disincentive for individuals even to seek these types of 9 licenses. In fact, we currently have no unit managers 10 licensed; and it's my understanding that we never have. 11 Under the proposal staff has developed a formula that we 12 believe will result in lower bond amounts for unit 13 managers, and it is our hope that this will spur more 14 individuals to seek our unit manager licenses. 15 Another significant change the staff is 16 proposing can be traced back to the agency Sunset 17 Review. Currently 402.706 includes a chart of the most 18 common violations, violations of the Bingo Enabling Act 19 and our rules that the Division encounters and the 20 corresponding administrative penalty that is generally 21 imposed for those violations. The Sunset Commission had 22 recommended and the Legislature ultimately required that 23 the agency update that chart and include instances in 24 which a particular violation could result in some 25 licensing action, either suspension, revocation, or 21 1 denial. The staff proposes changes to these rules to 2 accomplish this task. 3 Among the changes to the chart itself, I 4 want to point out that we are heightening the 5 punishments for the violation of having gambling devices 6 at a bingo hall during a bingo occasion. For that 7 violation we're proposing to amend the chart as stating 8 that the Division may seek license revocation, 9 suspension, or denial and/or an administrative penalty 10 of up to a thousand dollar for the first offense; and 11 this goes along with public policy of trying to get 12 these machines out of the bingo hall. 13 Staff is also proposing amendments to 14 Rule 402.300 which governs pull-tab tickets. Among the 15 proposed changes in that rule is that we no longer 16 require that certain information, such as ticket price 17 and game name, be printed on a particular side of the 18 ticket. The information still needs to be on the 19 ticket, but the manufacturer could place it on either 20 side. 21 We're also clarifying when pull-tab 22 tickets can be sold and be redeemed. For winning 23 instant tickets, they must be claimed during a bingo 24 occasion in which that ticket was available for sale. 25 For event tickets, the event that determines the winner 22 1 must occur during the same bingo occasion at which the 2 first ticket from that deal is sold; but we do have 3 exceptions for those organizations that are a unit and 4 that are conducting consecutive occasions for no more 5 than a 24-hour period. 6 I do want to stress that none of the 7 proposals alter the core functionality of pull-tab 8 tickets. We are not proposing anything that can 9 reasonably be interpreted as an expansion of gambling or 10 gaming. 11 Some of the additional proposed changes 12 are: To no longer require players that are seeking a 13 refund from a voided transaction to provide their 14 address and telephone number. 15 We're proposing to further restrict when 16 a renewal application can be submitted to the 17 Commission. Currently the rule states that a renewal 18 application cannot be submitted more than 90 days prior 19 to the current license expiration date. We are 20 proposing to lower that threshold to 60 days. 21 We are proposing to allow certain license 22 amendment requests to be submitted by e-mail. Currently 23 the rule allows it by fax and telephone numbers, so 24 we're just adding another avenue for them to seek 25 amendments. 23 1 We are proposing to require the Division 2 to notify inactive accounts of any delinquency and to 3 provide any supporting documentation if any exists. 4 The last amendment I'll talk about is 5 just we are going to allow licensees that receive a 6 notice of administrative violation in a settlement 7 agreement to request an informal dispute resolution 8 conference with the Bingo Director or his designee in 9 the event they wanted to work something out rather than 10 just flat out agree to the proposed agreement. 11 And that brings us to the one new rule 12 that staff is proposing and that's 402.413 and this 13 would implement Chapter 55 of the Occupations Code. 14 Chapter 55 provides certain benefits for active duty 15 military personnel, their spouses, and veterans who are 16 applying for licenses in their individual capacity or 17 applying to be listed on the bingo worker registry. The 18 proposal will waive fees and expedite the licensing 19 process for these individuals in certain circumstances. 20 So staff is recommending to the 21 Commission that we begin the rulemaking process by 22 submitting these amendments and the one new rule to the 23 Texas Register so that we may receive any public 24 comments on the proposal. 25 And that concludes my prepared remarks; 24 1 but if you have any questions, I'll do my best to answer 2 them. 3 CHAIRMAN KRAUSE: The first thing I'd 4 like to do is to hear from our Bingo Commissioner if 5 he's got some comments since he personally participated 6 in some of these stakeholder meetings. 7 Mr. Lowe. 8 COMMISSIONER LOWE: Thank you. 9 You know, I don't think we're going to 10 make everybody happy with the rules we adopt; but from 11 my participation and my observations about the process, 12 I think we got good input from the industry, from the 13 significant players in this. And I'm satisfied that at 14 their present state -- they're not final yet -- but in 15 their present state, we have a pretty good set of rules 16 that we're going to submit. 17 And I do thank everybody that was 18 involved in the process. As Alfonso said, these people 19 were there; and there were other people there that are 20 not here today. 21 You know, it's not perfect; but I think 22 it's a real good start. 23 Thank you, James, for your hard work. 24 MR. PERSON: Thank you, sir. 25 CHAIRMAN KRAUSE: We have some witnesses 25 1 that would like to testify on this particular rule, and 2 the first one I'm going to call up is Kim Kiplin. And 3 while she's coming up, if there's anybody in this room 4 that's not aware, Ms. Kiplin is the former General 5 Counsel to the Texas Lottery Commission; and as such, 6 she was basically my lawyer for a long time. 7 (Laughter.) 8 CHAIRMAN KRAUSE: So, anyway, we hold her 9 in high regard. 10 MS. KIPLIN: Thank you very much. 11 Mr. Chairman, Commissioners, good 12 morning. 13 As Commissioner Krause said, my name is 14 Kim Kiplin. I'm an attorney here in Austin. I'm here 15 today on behalf of the Department of Texas Veterans of 16 Foreign Wars. 17 As I indicated to you back in the 18 August 2015 meeting when you-all initiated the rule 19 review on the bingo rules that the VFW would be very 20 much interested in that process and would participate in 21 the stakeholder meetings that Mr. Royal convened, we 22 did; and we appreciate the opportunity to participate in 23 those meetings. 24 I will echo what Commissioner Lowe has 25 said. I don't think we're all going to be happy. We 26 1 all have different roles. I thought it was a good 2 process in the terms of the candor and the discussion, 3 and so I appreciate that opportunity. We can always 4 improve as we go along. 5 We will submit comment, though, on issues 6 that we still think do need to be addressed; and we'll 7 do that during through the comment period. 8 I would like to take the time, though, 9 today briefly to bring your attention to one issue that 10 I do find troubling because I think it puts a license 11 holder in an untenable position when the license holder 12 is submitting a renewal application which has to be 13 accompanied with a renewal application fee. Currently 14 the Division is taking the position that an application 15 that is not accompanied with this renewal application 16 fee is incomplete; and as such, it will be returned 17 unprocessed. 18 So the trouble with that is that if there 19 is a dispute on the amount of that renewal fee, the 20 organization is in a position of having to go ahead and 21 pay even though they do not agree with the amount; or 22 the application is going to be returned unprocessed. 23 What's the impact if it's returned 24 unprocessed? Potentially a filing deadline on a renewal 25 application has been missed. And in some cases, they 27 1 can be barred from actually submitting that renewal 2 application; in other cases, they have to pay a late fee 3 for missing that deadline. 4 So, in my mind, what's exasperating this 5 particular situation right now is the fact that the 6 Division now is sending out these notices of outstanding 7 liability that are due for alleged license fees and 8 potentially other fees that in some cases go back to 9 '97, some 19 years ago. And as I understand, this is 10 the result of the ledger reconciliation project which 11 reconciled ledger entries but perhaps without the 12 underlying source documents to support those ledger 13 entries because -- well, because it's so old that under 14 the records retention schedule, the source documents, 15 like the applications themselves, probably have been 16 destroyed. 17 So what that means is an organization 18 that gets one of these notices and questions whether 19 they owe that amount to the Division, they have to go 20 ahead and submit it even though they may not -- they may 21 be questioning it or are in dispute; or they're going to 22 risk having the application being sent back unprocessed. 23 We just don't think that's fair that an 24 organization's put in that position or caught in that 25 situation where, if they don't really owe it, they have 28 1 to pay; and then they will have to be waiting for a 2 refund in order to get their money back. 3 So to address this issue, we did propose 4 different language in this rule. It's 402.411, License 5 Renewal, that an application would not be considered 6 incomplete based on a failure to submit the license 7 renewal fee or a portion thereof; and we would like this 8 language to be included in the rule adoption. 9 That's the issue that I wanted to bring 10 to your attention today. On behalf of the VFW, though, 11 we do appreciate the opportunity to comment today; and 12 we will do the same during the comment period. 13 I'm happy to answer any questions you 14 have. Thank you very much for the opportunity to 15 comment. 16 CHAIRMAN KRAUSE: Commissioners? 17 COMMISSIONER LOWE: Kim, let me ask you 18 this: If we had a digital -- if we require a digital 19 submission of the application and electronic payment, 20 wouldn't you avoid some of this? 21 I know that it's a change. I'm having to 22 change my law practice where you submit all the 23 pleadings online and pay everything digitally. It's a 24 change; but I think if there is a screen that says, 25 "You've got to pay this before you go to the next step," 29 1 it would -- I think it would help. It would help on our 2 end, on the applicant's end. So what do you think about 3 that, first? And then I've got some other thoughts, 4 too. 5 MS. KIPLIN: Well, you know, I'm not 6 technologically savvy; but I am committing to go green. 7 So I agree with you in terms of digital. I'm not sure 8 that it would cure this particular issue unless what 9 we're saying is they can file the application; and then 10 that date was hit, right? And then we can dispute the 11 amount that's owed. It's really the issue on -- and 12 like I said, what's exasperating are these old debts are 13 coming up where my clients are saying, "What is this? 14 This is 19 years old." 15 COMMISSIONER LOWE: And I wish that we 16 could wave a wand and do away with it, but the 17 Comptroller's Office might get upset at us. We can't 18 just do away with those old ones. And the other way is 19 we owe y'all; we owe some money to y'all, too. 20 Right, Alfonso, we owe money to them? 21 MR. ROYAL: That is correct. 22 COMMISSIONER LOWE: So I'm not sure you 23 guys want to call it even. 24 MS. KIPLIN: Well, how about a different 25 process than holding a license application, you know -- 30 1 for lack of a better word -- hostage in terms of meeting 2 a deadline? 3 How about -- I had a client recently 4 receive one of these notices that goes back to -- you 5 know, the ledger entry is '97; and it just said, "Pay 6 this within 30 days." But there wasn't any information 7 on what happens if you don't agree. 8 There needs to be some vehicle to resolve 9 that to where that's not tied to the very critical 10 license itself because, you know, if you're holding it 11 to the license and then, ultimately, if you don't take 12 care -- you know, somehow or another you disagree and 13 the license is denied because of that, you've got to sit 14 out a year versus, "Let's resolve the issue on what's 15 the money that's owed." And let's not tie it, you know, 16 to this license itself, a separate vehicle. You know, 17 there's a jeopardy determination. 18 And, you know, if it's a tax, you have 19 that process through the Comptroller's Tax Code. So 20 maybe perhaps just use a different process for those 21 organizations that think, "I don't owe this. Tell me 22 how I owe this." 23 COMMISSIONER LOWE: I think we're just 24 kind of stuck where we are at this point in time on that 25 issue, and I appreciate your concerns. I really do. I 31 1 know Alfonso and his staff do. I think as far as to get 2 this thing going, I think we're ready to go. 3 MS. KIPLIN: Well, what I'm asking for 4 is: Don't tie it to your license renewal, this amount 5 that's coming up and claiming that the license renewal 6 application is incomplete and, therefore, will not be 7 processed and, therefore, will be sent back as if it 8 never was filed. So this critical timeline, that's the 9 issue. That's the issue for my clients. 10 CHAIRMAN KRAUSE: Thank you very much. 11 We're really just starting the rulemaking process, and 12 so the opinions will be looked at and considered. 13 MS. KIPLIN: Thank you. 14 CHAIRMAN KRAUSE: You bet. 15 The next witness is Mr. Steve Bresnen. 16 And while he's coming up, I'm going to introduce him. 17 He is the Dean of the Bingo Attorneys Bar. He's been 18 representing bingo interests before this Commission 19 since its inception. 20 MR. BRESNEN: Thank you, Mr. Chairman; 21 but I believe Mr. Fenoglio will take that arrow for me 22 if you don't mind. 23 (Laughter.) 24 MR. BRESNEN: I do want to comment on the 25 rules, but I want to point out something to you real 32 1 quick. In the financial data that you were given, it 2 said the charities got 28 million and some changes; and 3 the government got 29 million and some change. So those 4 charities are performing; they're doing their job. And 5 our Government is taking money that they've produced and 6 I think it's in the violation of the Constitution and 7 I'm trying to do something about that. 8 I want to thank you for letting me speak 9 today. 10 I want to thank Mr. Royal for the way he 11 conducts his business. I've enjoyed working with him. 12 Sometimes it's been a little more -- I've been a little 13 more difficult than I probably should have been. For 14 that, I apologize. 15 MR. ROYAL: Likewise. 16 (Laughter.) 17 MR. BRESNEN: Commissioner Lowe, I think 18 you can see from the meeting that we had that people 19 were both respectful and candid; and so I thought the 20 process was a good one and people did a good job. 21 But I also note from having been a staff 22 member around the Capitol for 17 years that there's a 23 hub of people that really do the work; and there are 24 people like me and Alfonso that are in the face of it 25 sometimes. 33 1 And this was my first opportunity to work 2 in great detail with James Person. He did a fantastic 3 job. He's extremely capable. You've got a great staff 4 member there. 5 And I'd never met Desira Glenn before, 6 but she's done an equally outstanding job in her new 7 position. 8 I hope you will let them know privately 9 or publicly that you really appreciate the work that 10 they did. 11 This is by far, in the time that I've 12 been involved with bingo, the most detailed work-through 13 of the rules. We sought more than we got. So I'm 14 always a little less than satisfied when I get less than 15 I wanted. But there were some important things that are 16 being done in the rules, including Rule 402.200, which 17 is on my sign-in sheet, which I registered against for 18 reasons I'm going to tell you in just a second; even in 19 that rule, there are some good things that are being 20 done. I did not register against any other rules. We 21 will participate fully in the comment period. 22 I think, despite a number of good 23 changes, there are some opportunities that were missed 24 in three categories: 25 One is that there are some regulations 34 1 that will remain -- unless we are successful in the 2 comment period in eliminating them -- that really are 3 traps for the organizations and provide very little 4 public policy benefit, if any. 5 There are some administrative processes 6 that we would have liked to have seen some more finality 7 and some deadlines put into, some timelines, and some 8 ease of use that we think could also improve things. 9 And then there were some opportunities 10 for the charities to maybe make more money under the 11 existing law that are being missed. And I'd like to 12 talk about one of those in particular. 13 I just realized that I walked off without 14 the copy of the statute that I intended to bring so you 15 could follow along. This is very brief, so if you don't 16 mind if I... 17 Right now in the aggregate regular bingo 18 in a given occasion can pay out no more than $2500. 19 Pull-tabs don't count against that, just regular bingo; 20 and there's what we call a 50-dollar game exemption that 21 doesn't count towards the 2500. I worked my tail off to 22 pass that 50-dollar game exemption and so I think I know 23 what was intended, but I certainly know what the statute 24 says. I'm going to read it to you very briefly. The 25 intro basically says this doesn't count towards the 35 1 2500. "Bingo games that award individual prizes of $50 2 or less." "Bingo games that award that individual 3 prizes of $50 or less." Very straightforward. 4 We asked for an amendment to the rule 5 that would bring it within the statute. The current 6 rule provides that that exemption only applies -- in 7 order for a bingo game to qualify for the exemption, the 8 total aggregate amount of prizes actually awarded for 9 that game must not exceed $50. That is not what the 10 statute says. Bingo games that award individual prizes 11 of less than $50 don't count towards the 2500. 12 So we ask for a change in the existing 13 rule to say that a prize of $50 that's actually awarded 14 does not count towards the 2500. That is the plain- 15 language interpretation of the statute. 16 What difference does it make? If I offer 17 a prize of $100 and two people bingo at once, they each 18 are going to get paid $50. That hundred, then, instead 19 of a hundred dollars counting towards my 2500-dollar 20 limit, there'd be two 50-dollar prizes; and that hundred 21 would not count against it. So if I've got the revenue 22 and I've got the people in the hall, then, I can play 23 another game for a hundred dollars and give the players 24 another opportunity to win, give the organization 25 another opportunity to do business and make some money. 36 1 And I'll be consistent entirely with the plain language 2 of the statute. 3 So the reason I'm bringing that up to you 4 now is because you're going to see it in comments; and 5 we're going to ask you, Commissioners, to not let your 6 eyes glaze over because there's a lot of work here. But 7 we're going to comment in detail, and we would ask you 8 to look at those comments and think about them and not 9 think that this is the final part of the process. 10 I think, Commissioners, and I think, 11 Mr. Royal, that you would agree that we never over- 12 reached; we never sought anything that we don't think is 13 currently legal. We're not asking you to turn yourself 14 into a pretzel to do something that doesn't make sense 15 because we never sought anything for the people who pay 16 me, which is the lessors. 17 Oddly enough, the Legislature, in its 18 wisdom, gave the people that pay me tax relief and kept 19 the $29 million from the charities. We're going to try 20 to do something about that. We'll be asking for your 21 help, formally and informally, in that regard. 22 Mr. Chairman, thanks for letting me speak 23 today. 24 CHAIRMAN KRAUSE: Certainly. 25 MR. BRESNEN: I hope you'll pay attention 37 1 to this 50-dollar game issue because it's just one more 2 opportunity for the charities to be able to do something 3 that's commercially reasonable, and it fits within the 4 plain language of the statute. 5 Thank you very much. I'd be happy to 6 answer any questions. 7 CHAIRMAN KRAUSE: Commissioners? 8 COMMISSIONER LOWE: Thank you for your 9 work. 10 CHAIRMAN KRAUSE: Mr. Fenoglio, I guess 11 you're the Dean of the Bingo Advocacy Bar. 12 COMMISSIONER LOWE: He looks like a 13 lawyer. 14 MR. FENOGLIO: Yes, I guess I am, 15 Mr. Chairman. 16 My name is Steven Fenoglio. I'm an 17 attorney in Austin, and I have some handouts. 18 (Distributing documents.) 19 MR. FENOGLIO: And I'll be brief. It's 20 not going to take as long as these pages; but I want to 21 put some meat on the bone to one of your comments, 22 James. 23 So I'm here representing Texas Charity 24 Advocates, which is a statewide organization that 25 represents over 350 charitable organizations and 38 1 business organizations involved in bingo. I also 2 represent a couple hundred other organizations that 3 aren't involved with TCA. And we appreciate the time 4 that Mr. Royal and his staff have given; it's been 5 substantial. 6 I spent over 50 hours of my time meeting 7 with clients and folks like Mr. Bresnen and Ms. Kiplin, 8 not including the time that we spent meeting with 9 Mr. Royal. 10 We proposed 39 rule amendments. The 11 staff is recommending today 29, with one new one, the 12 veterans' rule. There is some overlap in some of our 13 comments; but there's, I think, about 11 rule amendments 14 that we proposed that staff didn't adopt. We'll take 15 them one at a time. 16 The first comment is on the audit policy, 17 and one of the biggest issues we've had is stale audits. 18 Mr. Royal has done a good job of making them a lot 19 quicker. But one of the things we want -- it's a 20 side-by-side comparison I gave you, with the TCA 21 comments on the left and the staff proposals on the 22 right -- subparagraph D2. We struck the language that 23 gave staff five years to complete an audit. Staff wants 24 that time. We think five years is too long, period. 25 I'm sure most of you have a hard time remembering what 39 1 you did last week, much less five years ago; and while 2 the charities are required by auditing rules and regs to 3 keep paperwork for four years, it gets stale. 4 Some of the cash register receipts -- in 5 River City Bingo, here in Austin, where I have been 6 involved for 20-plus years, we put the cash register 7 receipts in a storage unit. It's not air-conditioned; 8 and after about three years, the print goes away. If 9 staff wants to audit three years prior, well, good luck. 10 A lot of the paperwork is gone. Obviously, if it's an 11 electronic copy, we've still got that on a computer; but 12 if it's a paper copy, like a cash register receipt, the 13 data's gone. 14 16 TAC 402.200, Mr. Bresnen talked about 15 it. I want to talk a little bit about something totally 16 different and that is traps that are in that rule. For 17 example, the rule requires the charity, the caller in 18 this case, to document replacement of a specific bingo 19 ball or bingo ball set and keep those records for four 20 years. Why? We don't think it's a requirement. We 21 don't think it should be a requirement. And if you 22 don't do that and you get dinged in an audit, you can 23 pay a penalty. If an employee doesn't do it and it's in 24 violation of a hall policy, that hall can discipline the 25 employee. 40 1 If a customer complains and says, "I 2 can't see the inspection of your bingo hall," well, that 3 hall might decide to tell the customer: Go to another 4 hall if you don't like it. It ought to be on the 5 charity to make that call, not Government telling us to 6 do that. 7 I want to talk about 402.411. Here's 8 where the rubber meets the road on an allegation by the 9 staff -- this is a real-life example -- a 29-page 10 handout is the documentation that I had to get when the 11 staff said at River City Bingo, "You owe $7.92 for a 12 non-payment three times." Initially, it was a hot 13 check, $7.92. We've never written a seven-dollar-and- 14 ninety-two-cent check to the State for anything. This 15 was for prize fees that were allegedly underpaid. They 16 said, "If you do not pay this amount of money, we will 17 not issue your license," which means there's no bingo. 18 I filed a request for the documentation. 19 I've been intimately involved as a volunteer, as a Board 20 Chair, as an unpaid legal advisor to that hall for over 21 20 years. We've written a hot check. Prove it. Let's 22 see it. I had to go through four requests before the 23 staff finally admitted, "There's no hot check; but going 24 back to '04, you owed 7.92." 25 "Can you give us the documentation for 41 1 it?" The only thing they have is a spreadsheet, no 2 underlying documentation. 3 Staff suggested to me, "Mr. Fenoglio, why 4 don't you get your records going back to '04?" 5 Do you keep your financial records for 14 6 years, 12 years? I think your response is probably 7 "no." So you can't prove it. So what do you do? Well, 8 you could litigate $7.92. Great. Instead, we paid it. 9 The suggestion we have in our language would solve that 10 problem. 11 By the way, if we wanted to litigate it, 12 I'm not sure we could because of the uniqueness of the 13 SOAH, State Office of Administrative Hearings, hearing 14 process. 15 The next rule 16 TAC 402.511. We're 16 trying to eliminate some unnecessary and irrelevant 17 information. What difference does it make if we have 18 both the name of the distributor and taxpayer number on 19 a log? If we want to know that information, we can go 20 look at the invoices. Why do we have to have it? 21 Again, another trap for the unwary. 22 The number of tickets in a deal. The 23 invoice states the number of tickets in the deal. The 24 deal of pull-tabs, the box, if you will. The box is 25 approved by the Commission staff. They know, because 42 1 they've approved it, how many tickets are in each of 2 those boxes. If the manufacturer is wrong in their 3 count, the Lottery Commission can and, in fact, has 4 sanctioned the manufacturers and distributors for 5 selling the box with an incomplete number of tickets. 6 Finally is 16 TAC... 7 CHAIRMAN KRAUSE: I think I heard the 8 magic word "finally." 9 MR. FENOGLIO: You did. 10 (Laughter.) 11 MR. FENOGLIO: This is the one-cent 12 penny. 16 TAC 402.602 is highlighting again what 13 Ms. Kiplin said earlier, although, this isn't her 14 client; this is mine. And I attached for you the 15 notice: Pay a penny. You owe it going back to '97. If 16 you don't pay it, we kill you. 17 "We liked to see the -- we paid the 18 penny. Could you give us the proof?" 19 "We have a spreadsheet. That's it." 20 So that takes time, effort, and money on 21 our part. There's a solution to that and it's in both 22 the Bingo Enabling Act and the Comptroller Statutes 23 about what is owed and can someone write that off. And 24 the answer is: If it costs more to collect, the 25 Comptroller says, "Don't collect it." 43 1 One penny, really? We're going to spend 2 time on one penny? And there are a host of examples of 3 less than a dollar going back 10, 15 years. Those are 4 some of the frustrations that we have on our side. 5 That's why we wanted the rules changed to give some 6 flexibility so we don't have to chase pennies, nickels, 7 and dimes. 8 I'd be happy to answer any questions. 9 CHAIRMAN KRAUSE: Commissioners? 10 COMMISSIONER LOWE: Now, I think these 11 issues are valid concerns; and we're going to keep 12 working to see if Bob can't figure a way out of this. 13 He's our General Counsel, and he's really smart. 14 CHAIRMAN KRAUSE: Thank you. 15 What we're really doing here is beginning 16 the rulemaking process. So when our official input 17 process begins, there will be opportunities to give 18 input, both orally in meetings and in written 19 submission. 20 And so, anyway, the bottom line is that 21 the Commission wants the staff to do a good job and be 22 open to the concerns of people that its regulate; but as 23 a Commission we are not interested in staff being 24 subject to regulatory capture. 25 MR. FENOGLIO: Mr. Chairman, I want to 44 1 make one statement so y'all know. I visited with 2 Mr. Royal about both of those examples before ever 3 making a comment here. River City goes back to 2015 and 4 I had a meeting with him and that was the context of 5 some of our comments. We didn't get very far on those, 6 but we're not trying to hide the ball in any way on 7 this. 8 CHAIRMAN KRAUSE: Sure. 9 Well, I have a Bingo Commissioner and 10 he's an attorney and he's going to be really helpful in 11 this process. And I'm giving him my appreciation up 12 front. 13 So, anyway, I do want to thank the 14 industry stakeholders for participating in the rule 15 development. Again, we do need input. We want to have 16 good, commonsense rules that help us do our job; and our 17 job is to regulate charitable bingo. We are not perfect 18 and we're human, but we want to do a good job. And 19 having an open exchange is important. And if anyone has 20 any other comments other than what we've already heard, 21 then I expect them to come during the rulemaking 22 process. 23 Commissioners? 24 COMMISSIONER ARRIETA-CANDELARIA: I just 25 have a general question that pertains to Rule 402.400, 45 1 and it's really a policy question with regards to the 2 provision that we may require an applicant to attend a 3 pre-licensing interview. And one of the things that I 4 had asked about early on was some of the things, the 5 cases that we hear and some of the practices from some 6 of our licensees I think could be averted if -- the 7 negative issues could be averted if we had proper 8 training. And I don't know if this language here 9 allows, if that was the intent, because it's a 10 pre-licensing interview. And I'm assuming that -- is 11 that an interview, Mr. Person, about whether or not 12 someone has the capacity to hold the license; or is it 13 just an information interview? 14 MR. PERSON: Having never done one of 15 those, I'd have to defer to Alfonso on that. 16 MR. ROYAL: Commissioner, what that 17 interview is, that is not on the fitness test. That is 18 more or less for the organization and their 19 qualifications to obtain a bingo license. Upon 20 receiving that bingo license, the licensee, the bingo 21 chair person, the designated individual for that 22 particular organization who is ultimately responsible 23 for a bingo operation, is required to go through bingo 24 training. 25 That bingo training is where we provide 46 1 the oversight and the necessary information so that they 2 would be successful in bingo. So that training does 3 exist for them. That training is statutorily required. 4 We're looking to modify that and update that because it 5 is stagnant. And we do need to provide more training, 6 which is why we've done the statewide training 7 initiative that we began last year. 8 COMMISSIONER ARRIETA-CANDELARIA: Okay. 9 MR. ROYAL: So not only do you have the 10 bingo chairperson training that is statutorily required, 11 the Division has also put forth another set of trainings 12 available to the industry; and we'll continue to do 13 that. Our next group we're working on is a series on 14 accounting, to actually help our operators with their 15 books. 16 COMMISSIONER ARRIETA-CANDELARIA: Okay. 17 Thank you. 18 MR. ROYAL: You're welcome. 19 COMMISSIONER ARRIETA-CANDELARIA: That 20 was my only question. 21 CHAIRMAN KRAUSE: All right. Is there a 22 motion to approve the recommendation to begin the 23 rulemaking process? 24 COMMISSIONER LOWE: So moved. 25 COMMISSIONER RIVERA: Second. 47 1 CHAIRMAN KRAUSE: All in favor say, 2 "Aye." 3 (Chorus of "Ayes.") 4 All opposed say, "Nay." 5 (No response.) 6 CHAIRMAN KRAUSE: It's unanimous. 7 Thank you, sir. 8 MR. PERSON: Thank you, Mr. Chairman. 9 CHAIRMAN KRAUSE: Next we'll hear from 10 Mr. Michael Anger, who has a guest. 11 AGENDA ITEM IV 12 MR. ANGER: Good morning, Commissioners. 13 For the record, my name is Michael Anger; 14 and I'm the Lottery Operations Director for the 15 Commission. 16 Commissioners, I have a brief 17 presentation for you this morning on the agency's 18 advertising services activities. The presentation is 19 going to focus basically on the nature of the agency's 20 advertising and the role of Texas Lottery staff in 21 overseeing and managing and administering to the 22 advertising services contract with LatinWorks and the 23 role that they play in providing services to us in area 24 of the marketing communications. 25 I'm joined this morning by Christy 48 1 Kranik. Christy is the Executive Vice President and 2 General Manager of LatinWorks, who is our current agency 3 advertising services vendor; and following my 4 presentation, she will provide you with a brief overview 5 of LatinWorks and the role they play in providing 6 services to us. 7 Commissioners, this slide is just a brief 8 summary overview of the status of our advertising 9 services contract. You will recall that in February 10 Mike Fernandez came before you and briefed you on the 11 staff's intent to exercise one of two renewal options 12 related to the advertising services contract with 13 LatinWorks. LatinWorks has been providing primary 14 advertising services to us since May of 2012. We've now 15 exercised that first of the two renewal options that are 16 available to the Commission, and that contract now 17 extends through August 31st of 2018. 18 Commissioners, as I mentioned, the Texas 19 Lottery Commission staff are ultimately responsible for 20 the agency's advertising strategy and tone and nature of 21 our advertising. We take that responsibility very 22 seriously. 23 We are guided primarily by a statutory 24 requirement, the State Lottery Act. Specifically, 25 Section 466.110 of the State Lottery Act related to 49 1 prohibited advertisements says, "The Legislature intends 2 that advertisements and/or promotions sponsored by the 3 Commission or the Division for the Lottery not be of a 4 nature that unduly influences any person to purchase a 5 lottery ticket or a number." 6 And, Commissioners, what I'd like to 7 share with you is how agency staff apply that; and on 8 the next two slides I've included here our Advertising 9 Sensitivity Guidelines. I've also provided you a hard 10 copy at your places there that you can take a look at if 11 you'd like. I know this is a bit of an eye chart here, 12 but I'd like to call your attention to a couple 13 specifically related to the prohibited advertising 14 requirement. But the full list of Advertising 15 Sensitivity Guidelines covers both our application of 16 the prohibited advertising requirement in our statute, 17 and then the other items here relate to how the agency 18 has come to define how we want our brand treated in the 19 marketplace. 20 Going back to the prohibited advertising 21 requirements, the ones that are specifically related to 22 that are the first three: Advertising should not unduly 23 influence. Advertising should not overpromise. 24 Advertising should not show a change of lifestyle and 25 should not present, directly or indirectly, any lottery 50 1 game as a potential to relieving any person's financial 2 or personal difficulty. 3 And I'd also like to point out Item 5 on 4 this slide. "Advertising should not portray product 5 abuse, obsessive play, or preoccupation with gambling." 6 And then, finally, I'd like to call your 7 attention to Item Number 8 related to the prohibited 8 advertising requirement. "Advertising should not 9 specifically target with the intent to exploit a person 10 or a specific group or economic class." 11 COMMISSIONER LOWE: What does Number 10 12 mean? 13 MR. ANGER: "Advertising should not 14 solicit children." 15 COMMISSIONER LOWE: No, Number 10. 16 "Advertising should not stereotype Texans." I'm proud 17 to be a Texan. 18 MR. ANGER: We want to make sure that we 19 have advertising that brings to light the nature and the 20 feeling of being a Texan, you know, across the 21 multicultural diversity of our state; but when we say 22 that, not stereotyping, we mean it to not treat Texans 23 as caricatures or in some sort of disrespectful way. 24 COMMISSIONER LOWE: I'm for that. 25 MR. ANGER: So that's a summary of our 51 1 advertising guidelines. We apply these on a daily basis 2 in our work with the advertising agency. Those 3 requirements are a part of our RFP, and we provide those 4 to the advertising agency. They apply them in creating 5 our creative work, and then it's the agency staff's 6 responsibility to also monitor and ensure we're being 7 compliant with those activities. 8 I do want to touch on briefly the 9 agency's advertising strategy, essentially how we build 10 our plan and apply our advertising. We essentially work 11 a year in advance with regard to our advertising. 12 We're currently in the early development 13 stage of our fiscal '17 advertising plan, and the way we 14 do that is we develop our product plan during the spring 15 of each year. So we identify products we plan to bring 16 to the marketplace in the upcoming fiscal year, so 17 starting in September 2016, we build that plan out for 18 the whole year. 19 We share that with the advertising 20 agency. They apply their knowledge and expertise with 21 regard to changes in the marketplace with regard to 22 consumer media consumption, new products, new 23 advertising vehicles, and new strategies that we might 24 use in communicating with the public about our products. 25 They develop an advertising plan which we bring here and 52 1 present to the Commission staff. 2 That is typically an iterative process 3 where we work back and forth and give feedback on that 4 plan. We'll go back a couple of times. They will 5 finalize the plan and provide that to us, and we will 6 approve that plan. 7 From there, they develop an actual media 8 plan where they basically lay out the framework of our 9 expenditures around our big product news and cover 10 initiatives that we want to communicate about with the 11 public; for instance, we did our beneficiary 12 advertising. And they would build a media plan based on 13 our advertising budget allocated for that fiscal year. 14 And that basically becomes our guidebook we work from as 15 we carry out our advertising during the course of the 16 fiscal year. 17 Now, that's a living, breathing document 18 and is subject to change during the course of the year; 19 but we work ahead, have a structured plan, and we'll 20 modify that based on changes in the marketplace or based 21 on new products that may come to light. If we come 22 across a product in the fall that we want to introduce 23 in the spring, it requires advertising support; so we'd 24 modify the plan over the course of the year to 25 accommodate support for that product. So that's the way 53 1 that process works. 2 The last thing that I wanted to touch on 3 with you is we establish goals for the advertising 4 agency relating to the plans. The three goals we have 5 here on the screen are the goals that we have 6 established for the advertising agency for this year. 7 We will be reviewing those goals as part of the 8 establishment of the FY '17 advertising plan. 9 I'd like to call your attention to the 10 third goal on this list, "Increase overall participation 11 in lottery games." That goal we view really as a driver 12 for the first two goals listed on this page. And I want 13 to make clear, though, what we mean when we say 14 "increase overall participation." What we don't mean is 15 increasing current customers' participation levels with 16 regard to their expenditures on the lottery. 17 What we're focused on is the percentage 18 of adult eligible Texans who can participate in the 19 lottery games participating. We want to grow and expand 20 kind of the base, if you will, of players who are 21 participating in the lottery games; and a lot of our 22 advertising focuses on that. 23 So we're trying to reach new audiences. 24 We're trying to reach light and lapsed customers to show 25 them new products that we have available, communicate 54 1 about those and the attributes of those and the fun of 2 participating in those games. And those are the folks 3 that we're trying to reach through our advertising 4 strategy. 5 That concludes my portion of the 6 presentation. I'd be happy to answer any questions that 7 you have of me at this time, or I can turn it over to 8 Christy and allow her to make her presentation. 9 CHAIRMAN KRAUSE: Commissioners? 10 COMMISSIONER LOWE: Just one question. 11 On the issue of the responsible gambling, the initiative 12 for that, is that part of our overall thrust? 13 MR. ANGER: We don't receive specific 14 funding from the Legislature for responsible gambling 15 programs. There was a time when the Legislature did 16 have actual funding that was required out of the Lottery 17 Operations Division's budget where we funded a 18 Responsible Gambling Hotline here in the state of Texas. 19 It was a voluntary transfer that occurred through the 20 Commission to fund that hotline. That was de-funded 21 several years ago by the Legislature. 22 But what we do is we intersperse 23 responsible gambling communications throughout our 24 communication vehicles. We work with Kelly Cripe's 25 team, Media Relations, with regard to social media. We 55 1 have rich and robust information on the website. We 2 also have pamphlets with regard to responsible gambling, 3 and we put them in play stations at retail locations 4 around the state to help players have access to 5 information that if they have an issue, to know where 6 they can go and find resources; and we also provide that 7 information to our retailers. 8 Just this last year we reached Level 2 9 Certification with the World Lottery Association with 10 regard to our responsible gaming initiatives here at the 11 Texas Lottery Commission. So that's something that we 12 take very seriously and we integrate with regard to our 13 marketing and communications development. 14 COMMISSIONER LOWE: Thanks. 15 MR. ANGER: Absolutely. 16 CHAIRMAN KRAUSE: Thank you. 17 Let's hear from Christy. 18 MS. KRANIK: Mr. Chairman, Commissioners, 19 and other esteemed members of the Texas Lottery 20 Commission, I'm Christy Kranik, Executive Vice-President 21 and General Manager at LatinWorks. 22 And before I tell you a little bit more 23 about the agency, I want to start with a quick video. 24 (Video playing.) 25 MS. KRANIK: So hopefully that gives you 56 1 a little feel for our culture, along with some snippets 2 of the exciting marketing we've done for the Texas 3 Lottery throughout the years. 4 LatinWorks is a full-service cultural 5 branding agency based here in Austin, Texas. And as 6 Michael said, we have had the esteemed pleasure and 7 honor of being your advertising services agency of 8 record since 2012. 9 And as we look back through the years, we 10 think there are really three key themes that have helped 11 us to build this dynamic, very collaborative working 12 relationship with the Texas Lottery; and those things 13 are commitment, productivity, and innovation. 14 So nothing I talk about today, including 15 the successful campaigns that we've created together, 16 can happen without commitment. And the commitment goes 17 beyond the commitment that the Texas Lottery Commission 18 and LatinWorks have for one another; but when we talk 19 about commitment, we really see our role as ensuring 20 that we are doing everything possible to realize the 21 Texas Lottery Commission as continuing to contribute to 22 Texas education and to veteran services. And so knowing 23 that we play a small part in helping to achieve 24 year-over-year growth in contributions is extremely 25 satisfying for our organization. 57 1 Productivity, to me, is also very vital 2 to our relationship as well as our collective success; 3 and a key part of that is for the agency to stay at the 4 pulse and the forefront of consumer behaviors and 5 attitudes. We place a huge value on brand insights and 6 consumer insights, and it's those insights that help us 7 to lead the very successful, creative campaigns. 8 Now, as Michael mentioned in his 9 presentation, there are many sensitivities that we must 10 respect when we are developing work for the Texas 11 Lottery; but as an agency, we do not see those 12 sensitivities as obstacles but, rather, opportunities to 13 dig deeper and really uncover those insights and come up 14 with creative solutions for the Lottery. 15 At LatinWorks we have a mindset-driven 16 approach which means that we ensure we're identifying 17 those universal human truths, the things that tie us all 18 together so that we respectfully reach Texan adults of 19 all backgrounds with our positive message, which speaks 20 to what Michael was saying earlier. We focus on things 21 that unite us as individuals, and that's the core of how 22 we think as an agency and what drives our creative 23 product. 24 The next piece I want to talk about 25 that's closely tied with that is innovation; and quite 58 1 simply, brands that are not continuously innovating and 2 evolving to keep up with an ever-changing consumer and 3 media space are becoming less and less relevant. So as 4 an agency, we're focusing on identifying where the 5 consumers are going so we can meet them there and 6 effectively engage them with our message. 7 Under the leadership of Mr. Grief, we 8 seek and strive to accelerate our marketing and 9 communication plans to focus more in key areas, like 10 digital and experiential events and sponsorships. 11 And lastly, Commissioner Lowe, Texas 12 definitely is in our blood; and we share the same pride 13 that the Texas Lottery has for our great state. And we 14 believe that it's a unique motivator for our audience. 15 In addition to living deep in the heart 16 of Texas, as an agency we've been fortunate enough to 17 work on many brands that really see Texas as a center 18 for growth. Our agency was founded in Texas in 1998; 19 and we believe that our Texas experience has really been 20 instrumental in helping us create the effective 21 marketing campaigns, along with our partners at the 22 Texas Lottery. 23 Really, none of this would be possible 24 without the collaboration, partnership, and leadership 25 from Michael Anger and his team. 59 1 So this concludes my presentation, and 2 I'd be happy to take any questions. 3 CHAIRMAN KRAUSE: Commissioners? 4 LatinWorks became our prime advertising 5 contractor in 2012 because, before that, they were a 6 subcontractor to our prime contractor; and it was 7 fascinating to me that the subcontractor was winning all 8 the industry awards for innovation in advertising and 9 being publicly recognized in the industry journals. 10 So that made us believe that we didn't 11 necessarily have the best person working on it, and so 12 we made LatinWorks the prime contractor. And the 13 additional benefit that we got out of that is that 14 LatinWorks was a minority-owned firm; and so having 15 LatinWorks be the prime contractor for us, that 16 catapulted the Lottery Commission up to one of the top 17 spots in State Government for having public contracts. 18 So, anyway, the way that process works is 19 to help out minority contractors; and this case it 20 worked out spectacularly well because they've been so 21 successful that they have now lost that status. But we 22 still have the best advertising agency as our prime 23 contractor. 24 And we appreciate what you do because it 25 shows in the records that we are setting, you know, week 60 1 after week, month after month, in all of our lottery 2 offerings. 3 MS. KRANIK: Thank you, Mr. Chairman. 4 AGENDA ITEM V 5 CHAIRMAN KRAUSE: We are going to hear 6 from Mr. Michael Fernandez. 7 MR. FERNANDEZ: Good morning, 8 Mr. Chairman, Commissioners, Director. My name is 9 Michael Fernandez. I'm the Director of Administration. 10 Item V in your notebook, staff is seeking 11 Commission approval to open discussions and negotiations 12 with IGT for the potential extension of the lottery 13 operations and services contract. 14 MR. BIARD: Commissioners, I'm going to 15 interject at this point. 16 For the record, I'm Bob Biard, General 17 Counsel. 18 Whenever potential changes to the lottery 19 operator contract are a topic of discussion at a 20 Commission meeting, you've got the opportunity for an 21 Executive Session relating to the negotiation of the 22 lottery operator contract; but before you may have such 23 an Executive Session, the Lottery Statutes require the 24 Commission to determine in writing that an open meeting 25 would have a detrimental effect on the Commission's 61 1 position in the negotiations. 2 So if there's interest in an Executive 3 Session on this item, there first needs to be a motion 4 and a vote to make that determination; and in that 5 event, I have prepared a short order for your signature. 6 And then, after that, the Chairman can 7 make a motion to go into Executive Session relating to 8 the negotiation of the lottery operator contract; and if 9 you just want to meet in Executive Session once at this 10 meeting, the Chairman could also announce that the 11 Executive Session is for all purposes, including for 12 personnel and to receive legal advice. 13 AGENDA ITEM XVII 14 CHAIRMAN KRAUSE: All right. Well, as 15 Chairman, I'm going to make a motion to go into Execute 16 Session. 17 I'm looking for a second. 18 COMMISSIONER RIVERA: Second. 19 CHAIRMAN KRAUSE: All right. All in 20 favor say, "Aye." 21 MR. BIARD: Excuse me. I'm sorry, 22 Chairman. The first -- the motion needs to be to make 23 the determination that discussion in open meeting would 24 be detrimental to the Commission's position in 25 negotiations. 62 1 CHAIRMAN KRAUSE: Okay. Everything that 2 Bob says is incorporated into my motion. 3 (Laughter.) 4 COMMISSIONER RIVERA: Second. 5 CHAIRMAN KRAUSE: All in favor say, 6 "Aye." 7 (Chorus of "Ayes.") 8 CHAIRMAN KRAUSE: All right. The next 9 thing is that we're going to make this an effective 10 Executive Session; and after we discuss the lottery 11 operation contract, we're also going to discuss -- I 12 make a motion to go into Executive Session to deal with 13 matters under Government Code 467.030, 551.074, and 14 551.071. 15 Do I have a second? 16 COMMISSIONER RIVERA: Second. 17 CHAIRMAN KRAUSE: All in favor say, 18 "Aye." 19 (Chorus of "Ayes.") 20 CHAIRMAN KRAUSE: That way we only have 21 one Executive Session. So we are going to take a 22 bathroom break and go into Executive Session. 23 MR. BIARD: And it is 11:12 -- 11:13. 24 (Off the record from 11:13 to 11:54 a.m.) 25 AGENDA ITEM XVIII 63 1 CHAIRMAN KRAUSE: The Texas Lottery 2 Commission is out of Executive Session at 11:54 a.m.; 3 and so, anyway, the Commission accepts the Staff's 4 recommendation on the Agenda Item Number V. 5 But you have other agenda items. 6 MR. FERNANDEZ: Yes, Mr. Chairman, I do. 7 AGENDA ITEM VI 8 MR. FERNANDEZ: Again for the record, my 9 name is Michael Fernandez, Director of Administration. 10 Item VI in your notebook is a briefing item. It is to 11 advise the Commission of the staff's intent to amend the 12 current instant ticket contract with Pollard Banknote 13 for ticket add-on features. 14 If you have any questions, I'd be happy 15 to answer. 16 CHAIRMAN KRAUSE: Commissioners? 17 (No response.) 18 AGENDA ITEM VII 19 MR. FERNANDEZ: The next item, 20 Mr. Chairman, is also my item, Number VII in your 21 notebook. It is a briefing item also. It is to advise 22 the Commission of staff's intent to renew our trademark 23 licensing and promotional support agreement with the 24 Houston Texans. 25 If you have any questions, I'd be happy 64 1 to answer them. 2 CHAIRMAN KRAUSE: Commissioners? 3 (No response.) 4 AGENDA ITEM VIII 5 MR. FERNANDEZ: And then, lastly, 6 Commissioners, Item Number VIII in your notebook is a 7 briefing item. It is to advise the Commissions of 8 staff's intent to extend three current contracts each 9 for a one-year period. 10 The first is for our risk review and 11 compliance monitoring services with Grant Thornton. 12 That would be for a one-year extension. 13 Next is for our market research services 14 with Strategic Research Partners, also for a one-year 15 period. 16 And, lastly, it's for security officer 17 services with Vets Securing America for security 18 services for our main campus here in Austin, Texas. 19 If you have any questions, I'd be happy 20 to answer them. 21 CHAIRMAN KRAUSE: Commissioners? 22 (No response.) 23 CHAIRMAN KRAUSE: You have done your 24 duty. 25 MR. FERNANDEZ: Thank you. 65 1 CHAIRMAN KRAUSE: Do we have our HUB 2 coordinator? 3 MR. GRIEF: Mr. Chairman, it appears we 4 may need to pass this item for just a few moments. 5 CHAIRMAN KRAUSE: All right. I'm more 6 than happy to come back to it. 7 Ms. Pyka. 8 AGENDA ITEM X 9 MS. PYKA: Good morning, Commissioners. 10 My name is Kathy Pyka. I'm Controller for the 11 Commission; and with me to my right is our Commission 12 Products and Drawings Manager, Robert Tirloni. 13 Commissioners, the first chart that we 14 have for you this morning reflects comparative sales for 15 week ending April 9th, 2016. Total fiscal year 2016 16 sales for this 32-week period are $3,143 million, which 17 is an increase of $346 million as compared to this same 18 period last fiscal year. This is a 12.4 percent 19 increase. 20 Our fiscal year 2016 Scratch sales, 21 which is reflected on the second orange bar, are at 22 $2,264 million. This is a 138.2-million-dollar increase 23 over fiscal year 2015, and our Scratch sales currently 24 are reflected at 72 percent of total sales for the 25 fiscal year. 66 1 Now, Commissioners, while there has been 2 substantial attention focused on our record Powerball 3 jackpot, I think it's important to note that we would 4 still be on a record sales pace for this fiscal year as 5 a result of our Scratch ticket products. As you can 6 see, we're at $2,263 million. That is a 6 1/2 percent 7 year-over-year growth over the previous fiscal year. 8 Our draw tickets are reflected on the 9 second blue bar for $879.4 million. That's a 207.7- 10 million-dollar increase over last fiscal year, or a 11 31 percent growth. 12 With that, Robert will now provide an 13 overview of actual sales by product. 14 MR. TIRLONI: Thank you, Kathy. 15 Commissioners, this next slide is a 16 year-over-year comparison, '16 compared to '15, through 17 the week ending Saturday, April 9th. Our jackpot games 18 are up at the top. Actually, all of our jackpot games 19 September Mega Millions are showing growth this fiscal 20 compared to last. Monopoly is a discontinued game, so 21 I'm not counting that. The majority of growth is, of 22 course, coming from Powerball due to the one-and-a-half- 23 billion-dollar jackpot that we've experienced. Mega 24 Millions, as I said, is in decline. Mega Millions has 25 not experienced a jackpot roll to drive sales for that 67 1 product this fiscal. 2 To the jackpot part of the portfolio, 3 it's up almost $196 million. The daily games, in the 4 middle of the slide in blue, are up a total of 5 12 million. We're seeing growth with our daily game 6 Pick 3 and Daily 4, and we have new sales coming in from 7 the Texas Triple Chance game that started this fiscal. 8 All told, the draw games are up just under $208 million. 9 And, as Kathy mentioned, we've continued 10 to have very, very successful sales weeks on our Scratch 11 tickets product category; and we are realizing a 12 138-million-dollar sales gain this fiscal compared to 13 last. All told, we are up almost 346 million for the 14 fiscal year. 15 Short and sweet, but all good news. And 16 that's the end of the presentation. 17 CHAIRMAN KRAUSE: Outstanding. 18 Commissioners? 19 COMMISSIONER ARRIETA-CANDELARIA: Good 20 job. 21 CHAIRMAN KRAUSE: Really good job. 22 And, Ms. Pyka, you get the next item as 23 well. 24 AGENDA ITEM XI 25 MS. PYKA: Certainly. 68 1 Commissioners, I'll move on to Tab XI of 2 your notebook; and this is our agency transfers. The 3 item in your notebook includes the revenue transfer of 4 allocations to the Foundation School Fund and the Texas 5 Veterans Commission for the period ending February. 6 But because we have wrapped up the March 7 transfer, I wanted to provide the most recent 8 information that takes us through March 31st of this 9 year. Our total accrued revenue transfers now amount to 10 $660.1 million for the first seven months of the fiscal 11 year. Of the 660.1-million-dollar amount, 614.3 million 12 was the amount of revenue transferred to the Foundation 13 School Fund. We have transferred $6.4 million to the 14 Texas Veterans Commission, with a remaining balance of 15 $39.4 million from unclaimed prizes. 16 Commissioners, this represents a 15 1/2 17 percent increase or $95.1 million over the amount 18 transferred to the Foundation School Fund for the same 19 period last fiscal year; and our total cumulative 20 transfers to the Foundation School Fund are now over 21 $19 billion, at $19,006 million. 22 That concludes my presentation. I'd be 23 happy to answer any questions. 24 CHAIRMAN KRAUSE: Commissioners? 25 (No response.) 69 1 CHAIRMAN KRAUSE: Outstanding. Thank 2 you, ma'am. 3 We are going to circle back to Item IX, 4 and our HUB Coordinator will give us this report. 5 AGENDA ITEM IX 6 MS. BERTOLACINI: Good morning, Chairman, 7 Commissioners. I apologize for my absence earlier. You 8 were a little speedier than I thought you were going to 9 be. That's always a good thing. 10 For the record, my name is Joyce 11 Bertolacini. I'm the Coordinator of the Texas Lottery 12 Commission Historically Underutilized Business program, 13 or HUB program. 14 The HUB program is a statewide initiative 15 that provides assistance in contracting opportunities to 16 minority women and service disabled veteran owned 17 businesses. So first off, I'm going to provide a very 18 brief update on our program before I speak about the 19 minority business participation report. 20 At the beginning of each fiscal year, the 21 agency sets its annual internal HUB goals, as required 22 by the Comptroller's Rules. This year's goals and 23 summary reports were sent to you last fall; maybe you 24 remember that. 25 As part of our outreach to HUB, the 70 1 Lottery Commission has also implemented a mentor/ 2 protege program. This is an ongoing initiative to match 3 HUB vendors and mentor companies who assist the specific 4 business allotment goals. The TLC currently has two 5 mentor/protege relationships in place; and those are 6 both with IGT as the mentor company and with two 7 different companies as the proteges, Business Assets 8 Enterprises and Computer Supplies, Incorporated. 9 And, finally, the TLC also conducts an 10 annual HUB forum to provide information and networking 11 opportunities to HUB vendors; and in this event is 12 currently in the planning stage. It will be scheduled 13 for either June or July. And that's just a brief update 14 of our program. 15 The main reason I'm here today, of 16 course, is that I'm presenting the agency's finalized 17 Fiscal Year 2015 Minority Business Participation Report; 18 and that should be included in your notebooks today. 19 This is an annual report which is 20 required by Section 466.107 of State Lottery Act. It 21 must be made available to the Governor, Lieutenant 22 Governor, Speaker of the House, and Members of the 23 Legislature; and it does require your formal approval 24 prior to being printed and published on the TLC's 25 website. 71 1 The report documents minority and HUB 2 participation in our agency's contracting activity and 3 also includes information on a number of licensed 4 minority retailers. During fiscal year 2015, the agency 5 achieved an overall participation rate of 14.20 percent 6 in its minority HUB contracting activity. 7 In addition, of the 17 largest city and 8 state agencies, the TLC ranked ninth by overall HUB 9 percentage. During this report period, the agency 10 also had 8,841 minority retailers, which represented 11 50.62 percent of the Texas Lottery total retailer rates. 12 I'd be happy to answer any questions that 13 you have regarding either the program or the report. 14 Again, this is an action item, and I 15 believe Bob has a letter for Chairman Krause to sign. 16 CHAIRMAN KRAUSE: Commissioners? 17 COMMISSIONER LOWE: I was impressed with 18 the ranking of the different agencies about percentage 19 of HUB money -- if I can say it that way -- that we're 20 in the top 10? 21 MS. BERTOLACINI: Again, looking at the 22 agencies that outspent us, the highest spending 23 agencies -- and that's what I do is I rank with us as 24 the cutoff above and look at the agencies that spent 25 more money that we did; and of those 17 agencies, we 72 1 rank Number 9 in terms of our overall HUB percentage. 2 COMMISSIONER LOWE: And then one of the 3 reasons, though, was LatinWorks graduated to a non-HUB 4 vendor? 5 MS. BERTOLACINI: Yes. Right before 6 fiscal year 2015 began, LatinWorks graduated out of the 7 program because of the amount of gross receipts that 8 they had had over the previous three years, which is a 9 graduation process. At one point if you exceed that 10 over a three-year period, then you're not allowed to be 11 certified by HUB anymore. So, basically, it's a success 12 story. 13 COMMISSIONER LOWE: Right, because that's 14 the way the program was designed? 15 MS. BERTOLACINI: Yes. 16 CHAIRMAN KRAUSE: Do I hear a motion to 17 accept the Minority Business Participation Report? 18 COMMISSIONER RIVERA: So moved. 19 COMMISSIONER ARRIETA-CANDELARIA: Second. 20 CHAIRMAN KRAUSE: All in favor say, 21 "Aye." 22 (Chorus of "Ayes.") 23 CHAIRMAN KRAUSE: The Commission approves 24 it. 25 MS. BERTOLACINI: Thank you, 73 1 Commissioners. 2 CHAIRMAN KRAUSE: Darlene Brown, may we 3 hear from you, please? Do you have a report for us? 4 AGENDA ITEM XII 5 MS. BROWN: Good morning, 6 Commissioners -- or good afternoon, now. My name is 7 Darlene Brown, Internal Auditor for the Texas Lottery 8 Commission. 9 And I actually have two items for you 10 today. The first one is an action item, requesting your 11 approval on the procurement of payment audit report that 12 was issued out in draft format. During this audit we 13 looked at all of the processes involved in the 14 procurement through the payment cycle requisition, the 15 vendor contracting process, the purchase order 16 processes, and the receiving and then the invoicing and 17 payment. 18 We looked at 18 different key business 19 risks related to those processes, and the result was my 20 first ever Best Practices Internal Audit Report. As 21 auditors, we usually do not give a Best Practice Audit 22 Report. So when you look at all the processes that the 23 agency has in place for these contracting and payment 24 processes and you go and compare them to other agencies 25 and to other private entities, they are leading in so 74 1 many ways. So we felt it was due that they get a best 2 practice. 3 We did have one slight finding and that 4 just had to do with the timing of getting statements 5 from new employees and that's already been corrected. 6 And so we felt it was due that they get a best practice. 7 So I'm asking for your approval on that 8 report. 9 CHAIRMAN KRAUSE: Commissioners, 10 questions? 11 COMMISSIONER ARRIETA-CANDELARIA: 12 Darlene, good afternoon. With regards to once the 13 approval -- if the approval is granted by the 14 Commission, then all of these are public, posted on the 15 website? 16 MS. BROWN: Yes. 17 CHAIRMAN KRAUSE: Do we have a motion to 18 approve this particular audit report? 19 COMMISSIONER RIVERA: So moved. 20 COMMISSIONER ARRIETA-CANDELARIA: Second. 21 CHAIRMAN KRAUSE: All in favor say, 22 "Aye." 23 (Chorus of "Ayes.") 24 CHAIRMAN KRAUSE: It's approved. 25 Thank you very much. 75 1 Mr. Executive Director, how do we promote 2 this best practices report, since we've got it? 3 MR. GRIEF: Well, in addition to posting 4 it to our website, we will send letters to appropriate 5 oversight members, leadership. We'll do our best to 6 promote that in person to the leadership offices as 7 well. 8 CHAIRMAN KRAUSE: Outstanding. 9 Thank you, ma'am. 10 Your next item? 11 MS. BROWN: Sure. My next item is our 12 regular status report. During the last period in 13 addition to wrapping up the procurement audit I just 14 reported on, we have wrapped up the jackpot estimation 15 audit. We've also wrapped up the drawings audit and the 16 performance measure audit. Those reports will becoming 17 out to you within the next couple of weeks, and we'll 18 ask for approval at the next Commission meeting. 19 We've also been working on the ledger 20 reconciliation project, and now that will be our primary 21 focus so that we can get that wrapped up. 22 And I'd be happy to answer any questions. 23 CHAIRMAN KRAUSE: Commissioners? 24 COMMISSIONER HEEG: Darlene, the ledger 25 reconciliation, do you thing you'll have that wrapped up 76 1 by the next meeting? 2 MS. BROWN: Absolutely. We will have it 3 wrapped up by end of May. 4 CHAIRMAN KRAUSE: Any other questions? 5 (No response.) 6 CHAIRMAN KRAUSE: Thank you, ma'am. 7 MS. BROWN: Thank you. 8 CHAIRMAN KRAUSE: Mr. Royal, I promised 9 my Commissioners that we'd be finished by 12:30. So the 10 next item's yours. 11 (Laughter.) 12 MR. ROYAL: I've got 20 minutes. 13 CHAIRMAN KRAUSE: Uh, we've got other 14 items as well. 15 (Laughter.) 16 AGENDA ITEM XIII 17 MR. ROYAL: Commissioners, in addition to 18 what's in your briefing booklets, I just wanted to 19 provide an update on VFW Post 4146, Victoria. At the 20 February Commission meeting you granted a Motion for 21 Rehearing to the VFW due to their violation of the 22 Charitable Bingo Act for failing to amend the Texas 23 bingo quarterly report. 24 You also instructed me to work with the 25 VFW to resolve their reporting issue. I want to report 77 1 that we have resolved the reporting issue with them. 2 However, they let their license expire; and we have been 3 in communication with them. At this point they must 4 submit an original application. As recent as yesterday 5 we reached out to them. They have a meeting scheduled 6 on the 19th of this month, where they will decide if 7 they want to continue with bingo. And we expressed our 8 assistance to them, and we will be more than happy to 9 help them. 10 Regarding the gaming machines, at the 11 representative's admission our auditors went out there 12 twice and the bingo hall looks like they're not 13 conducting bingo. The game room was inside the bingo 14 hall. So they're not even operating the game room at 15 this time. So at this point we have no idea what's 16 going on, but they've closed their doors. 17 The second thing, I want to clarify some 18 items that were addressed earlier today about monies 19 owed in the ledger project. I began reporting on the 20 accounting ledger issue in October of 2014 and have 21 provided regular updates to the Commission and the bingo 22 community. This issue goes back to the BOSS project 23 which included a component to ensure that the overall 24 data integrity and accuracy of the conversion process 25 was there. 78 1 The project team, which included our 2 Internal Auditor, identified a significant number of 3 issues from prior data conversions whereby, due to the 4 age of transactions and the lack of supporting 5 documentation, the ability to verify the accuracy and 6 the trueness of the balances shown was extremely 7 limited. The data was more than ten years old and 8 originally reflected a credit balance of $746,000 that 9 was owed to Texas charities. The bingo community wanted 10 the Division to write a check to the charities for that 11 amount. However, state law prohibits the refunds of 12 overpayments without verification. 13 Now, previous leadership was aware and 14 accepted the risk for incorrect balances but did nothing 15 about it. In fact, they allowed licensees to use those 16 incorrect credit balances to pay for services. Those 17 services, now we're going back through this account 18 ledger and reconciling; and if they owe money, they have 19 to pay. We communicated this to the industry that we 20 were recalculating. 21 Well, our staff, bingo staff here in 22 Austin has already reviewed all of the accounts. Looked 23 at prize fees, rental taxes, and both temporary and 24 regular and license fees; and those have been resolved. 25 They're over with the Internal Auditor now, who is 79 1 providing a secondary review. And once that review is 2 complete, we'll go and update the account ledger for 3 that project. 4 And, Commissioners, with Darlene and her 5 team completing that project by the next meeting, it 6 will take us about 60 days for us to go in and update 7 the ledgers and actually mail those statements out to 8 those licensees. We are no longer holding licenses 9 hostage for the account ledger project. 10 So if the project identified that they 11 owed monies, we have a separate debt collection process 12 for that. Licensees, on renewals, can still get their 13 renewal as long as they pay the current amount and then 14 move on. So we're not stopping bingo operations. 15 That is a change that I put in place in 16 July of '15. Now, what others have reported here today, 17 that was an issue and that did happen. However, we've 18 met, and we did resolve those. But on a go-forth basis, 19 that is not occurring. 20 Commissioners, that's all I have for 21 bingo. I can answer any questions. 22 CHAIRMAN KRAUSE: Commissioners? 23 COMMISSIONER HEEG: So you're going to 24 get the ledger project done and be sending out invoices. 25 Will there be invoices for less than a dollar? 80 1 MR. ROYAL: Yes, there will be. 2 COMMISSIONER HEEG: Bob, do we have the 3 discretion to waive any of that? 4 MR. BIARD: To the best of our research 5 that we've done, for an item that is owed that is not a 6 tax, we don't have discretion to waive it or compromise 7 it; we do have that discretion with something that can 8 be characterized as a tax. 9 COMMISSIONER HEEG: And these are for 10 fees? 11 MR. ROYAL: They can be license fees, 12 Commissioners, prize fees that are owed to the State. 13 When we started this project, we did meet 14 with the Comptroller of Public Accounts, the Attorney 15 General's Office. The Legislative Budget Board is aware 16 of this as well as the Comptroller. So they all 17 basically signed off on this project at the start. 18 COMMISSIONER HEEG: Did they say we don't 19 have any discretion? 20 MR. ROYAL: They did not offer any 21 discretion. 22 COMMISSIONER HEEG: Thank you. 23 COMMISSIONER LOWE: So the statement made 24 earlier to the effect that we could establish an amount 25 more expensive to collect than the amount of owed money, 81 1 I mean, we're not allowed to do that. That was an 2 inaccurate statement then, right? 3 MR. ROYAL: There are some 4 interpretations out there, and I'll let Bob get into the 5 legality part of it. 6 MR. BIARD: My understanding -- and it 7 may be incomplete -- is that the Attorney General's 8 Office has separate enforcement authority and the 9 discretion as to whether to go after a case if it costs 10 more to prosecute than the amount that's owed. They 11 have thresholds that they will go after. 12 COMMISSIONER RIVERA: Is it possible -- 13 and, you know, we understand that this is something that 14 to some degree is out of our control; and we're dealing 15 with very nominal amounts. And I'm hopeful that those 16 on the recipient end of this that maintain their license 17 and are moving forward would basically pay, although 18 they may not understand why; and avoid potential 19 litigation. If we could craft a letter to send along 20 with the invoice stating why this is necessary, of our 21 position of really being without authority to change and 22 we understand the ridiculousness of being owed one 23 penny; but because of our inability to change that, 24 let's not go through the extensive brain damage on both 25 parts to figure this thing out and just pay the amount 82 1 and move forward and that's going to be, at the end of 2 the day, much easier than a very labor-intensive 3 struggle. So is that possibly we can craft this; and 4 then if they do want to have this litigious dialogue 5 back and forth, well, at least we've told them what we 6 can and cannot do and just let them figure that out if 7 they really want to, you know, struggle with this is for 8 a dollar fifty. 9 MR. ROYAL: We can do that. And, 10 Commissioners, the amounts that are owed, it's more than 11 these pennies that are owed. The highest amount we've 12 seen thus far is about $24,000. There have been more 13 than the hundred dollars of dollars than these one cent, 14 two cents, three cents we hear about. 15 COMMISSIONER RIVERA: So maybe have a 16 threshold of under a hundred dollars or whatever you 17 feel is viable; but, clearly, we're not going to walk 18 away from, you know, larger amounts owed. But for those 19 that are just nominal, I'll let you set that as I trust 20 you. So that's what I would like to see. 21 MR. ROYAL: Thank you. 22 CHAIRMAN KRAUSE: Commissioners? 23 COMMISSIONER ARRIETA-CANDELARIA: As I 24 recall, there was a similar issue we dealt with in the 25 city of El Paso. And Bob if you could kind of help me 83 1 walk through my question here. As I understand it, if 2 there's a debt to the State, it basically never goes 3 away, correct? That's what I think that you're running 4 into with regards to the Attorney General and the Texas 5 Comptroller. However, I do think that while it's not 6 written off, it is also -- there may be some opportunity 7 to say that we don't have to collect or we don't have to 8 strive to collect, and so we set a bar of like $5. 9 Anything less than $5, we would not pursue collection. 10 So in theory, you're not necessarily waiving; you're 11 just choosing not to pursue collection. 12 And so I don't know if we could look at, 13 maybe, something like that instead of saying: You know, 14 we're going to collect 100 percent and having you deal 15 with these penny issues. Maybe there's a way that we 16 can look at that instead of -- I'm saying we understand 17 there's balances owed; but if it's a de minimis amount, 18 less than $5 or $10 or whatever that number is, but that 19 we just choose not to collect. 20 And so is there that possibility and then 21 we can just move forward and really go after the 22 majority of the accounts that do owe the 24,000 or 23 whatever? Because I think that's where the holdup is 24 and I don't know if that question was asked during your 25 conversations, but that's what I think we ended up 84 1 resolving at the city level. 2 MR. BIARD: There certainly is a legal 3 concept in state law for prosecutorial discretion. The 4 agency is not obligated to go after every single 5 violation. There may be some special concerns for 6 monies owed. We'll look into that and see if there's 7 some way we can fashion a way out of this. 8 COMMISSIONER ARRIETA-CANDELARIA: Yeah, 9 because I don't think it makes prudent sense. Just 10 approaching it from a prudent standpoint, it doesn't 11 make sense to go after somebody for a penny when it 12 costs you, what, to mail it, not to mention staff time 13 and all that. There are studies out there that it costs 14 anywhere -- processing time, anywhere from 24 to $32 to 15 process a check by the time you issue it, it's go 16 through the process and reconciling it going through 17 that bank and all that. 18 So there has to be some happy medium 19 there that I think that we could reach. Maybe if we 20 pursued it in that framework to say if it's a de minimus 21 amount that we just choose not to collect, then we can 22 maybe get around that position, just my thoughts. 23 MR. BIARD: We'll explore that. 24 COMMISSIONER ARRIETA-CANDELARIA: Thank 25 you so much. 85 1 CHAIRMAN KRAUSE: Mr. Grief? 2 AGENDA ITEM XIV 3 MR. GRIEF: Commissioner's other than 4 what's in your notebooks, I have nothing to report 5 today. 6 CHAIRMAN KRAUSE: Thank you. 7 Mr. Biard. 8 AGENDA ITEM XV 9 MR. BIARD: Thank you. 10 Commissioners, now we are on Tab XV, 11 Enforcement Orders. There only six enforcement matters 12 today. The matters are all lottery, no bingo, Tabs A 13 through F. The first three cases are the non-sufficient 14 funds lottery license revocations that are handled in a 15 single order. Each of these cases was presented at the 16 State Office of Administrative Hearings for revocation 17 of the retailer license on the grounds the licensee 18 failed to have sufficient funds in their bank account to 19 cover electronic fund transfers to the Lottery 20 Commission's account. In each case the Administrative 21 Law Judge recommends revocation. And staff also 22 recommends that you approve the order in each case 23 revoking the licenses. 24 Next, Tabs D, E, and F are three separate 25 Lottery Agreed Orders. Tab D involves NAT 24 #1, a 86 1 licensee in Greenville, Hunt County. In this case an 2 employee of the retailer charged a player a 5-dollar fee 3 for purchasing lottery tickets with a debit card. The 4 parties have agreed to a ten-day suspension. 5 Tab E involves Zambala Enterprises, LLC, 6 which operates Massey's Convenience Store in Sulphur 7 Springs, Hopkins County. In this case the retailer's 8 employee accepted a ticket that was issued by an 9 eight-liner gambling device located in the store as 10 payment for two lottery tickets. In that case the 11 parties agreed to a 30-day suspension. 12 Tab F involves Super K Corner Store in 13 Houston. In this case a regular customer of the store 14 presented a ticket with a 1,000-dollar prize to the 15 retailer. The retailer apparently told the customer 16 he'd won $600. There was some mutual confusion involved 17 there. The retailer paid 300 in cash and 300 in a money 18 order to the player. 19 The customer came back next day, 20 realizing that he'd won a thousand dollars, not $600. 21 And the retailer said, "Yeah, that's right. I have the 22 ticket for you, and you need to go to the Claim Center 23 to collect your prize." 24 So when the player came to the Claim 25 Center, the ticket had some stray markings that the 87 1 retailer had apparently made on the back of the ticket 2 which caused our staff to investigate. And they went 3 out and interviewed the retailer, who, after going 4 through the process, our staff was convinced that the 5 retailer did not have an intent to cheat the player out 6 of anything. It was a long-time customer who he thought 7 he was helping out. There was some misunderstanding 8 about how much was owed. 9 But as a result of the investigation, it 10 was clear that the retailer had -- for whatever reason, 11 had violated the statutes and rules governing the 12 payment of prizes and collecting prizes. So the parties 13 agreed to a 30-day suspension in that case. 14 If you have any more detailed questions 15 about the sort of convoluted fact pattern, Michael Anger 16 can probably fill you in on that. And those are reports 17 for the four orders. 18 That concludes my presentation. If you 19 approve the proposed resolutions, you can take that up 20 in a single motion. 21 CHAIRMAN KRAUSE: I'm looking for a 22 motion to approve the orders proposed by staff, Tabs A 23 through F, Agenda Item XV. Do I hear a motion? 24 COMMISSIONER RIVERA: So moved. 25 CHAIRMAN KRAUSE: Second? 88 1 COMMISSIONER HEEG: Second. 2 CHAIRMAN KRAUSE: All in favor say, 3 "Aye." 4 (Chorus of "Ayes.") 5 CHAIRMAN KRAUSE: Any opposed say, "No." 6 COMMISSIONER LOWE: Yes, "no." 7 CHAIRMAN KRAUSE: By acclamation. 8 COMMISSIONER LOWE: I just want to make 9 it clear, you were taking these up -- that was also a 10 motion take them up as... 11 MR. BIARD: All of the orders. That was 12 a vote on all the others. 13 COMMISSIONER LOWE: So I'm voting "no" on 14 Commissioner Order 16-0030. 15 CHAIRMAN KRAUSE: So noted. 16 MR. BIARD: Just to be clear that is the 17 Zambala Enterprises, LLC case? 18 COMMISSIONER LOWE: It's a respectful 19 "no." 20 MR. BIARD: Commissioner Lowe votes "no" 21 on Zambala Enterprises which operates Massey's 22 Convenience Store in Sulphur Springs. 23 AGENDA ITEM XIX 24 CHAIRMAN KRAUSE: All right. It is 25 12:26, and I'm keeping my promise to my Commissioners. 89 1 Is there a motion to adjourn? 2 COMMISSIONER RIVERA: So moved. 3 COMMISSIONER ARRIETA-CANDELARIA: Second. 4 CHAIRMAN KRAUSE: Let's vote on it. All 5 in favor say, "Aye." 6 (Chorus of "Ayes.") 7 CHAIRMAN KRAUSE: We are adjourned. 8 (Proceedings adjourned at 12:26 p.m.) 9 --oo0oo-- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 90 1 STATE OF TEXAS) 2 3 **************************** 4 REPORTER'S CERTIFICATE 5 **************************** 6 7 8 I, DEBBIE D. CUNNINGHAM, CSR, Certified 9 Shorthand Reporter in and for the State of Texas, do 10 hereby certify that the above and foregoing contains a 11 true and correct transcription of all portions of the 12 above-referenced meeting to be included in the 13 transcript of said meeting, and were reported by me to 14 the best of my ability. 15 16 SUBSCRIBED AND SWORN TO under my hand and 17 seal of office on this the 25th day of April, 2016. 18 19 ______________________________ 20 DEBBIE D. CUNNINGHAM, Texas CSR 2065 Expiration Date: 12/31/2016 21 Kim Tindall & Associates 16414 San Pedro Avenue, Suite #900 22 San Antonio, Texas 78232 (210) 697-3400 23 24 25