1 1 2 3 4 5 TEXAS LOTTERY COMMISSION 6 7 8 COMMISSION MEETING 9 10 11 12 OCTOBER 13, 2016 13 14 10:00 a.m. 15 16 AT 17 18 TEXAS LOTTERY COMMISSION 19 20 611 East 6th Street 21 22 Austin, Texas 78701 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 RETAILER DEVELOPMENT COORDINATOR: Teresa Edwards 11 12 ADMIN. DIVISION DIRECTOR: Michael R. Fernandez 13 SUPPORT SERVICES MANAGER: Toni Erickson 14 15 CONTROLLER: Katheryn J. Pyka 16 ASSISTANT GENERAL COUNSEL: Deanne Rienstra 17 18 McCONNELL JONES LANIER & MURPHY, LLP: Darlene Brown 19 20 PRODUCTS & DRAWINGS MANAGER, LOTTERY OPERATIONS DIVISION: Robert Tirloni 21 22 23 --oo0oo-- 24 25 3 1 TABLE OF CONTENTS 2 Page I The Texas Lottery Commission will call the 3 meeting to order. Pledge of Allegiance to the U.S. and Texas 4 flags.......................................... 7 II Report, possible discussion and/or action on 5 overview of the 2016 Survey of Employee Engagement, presented by Dr. Noel Landuyt, 6 University of Texas Institute for Organizational Excellence...................... 7 7 III Report, possible discussion and/or action on the Commission's award submission to the World 8 Lottery Association for Best Innovation in Responsible Gaming............................. 7 9 IV Report, possible discussion and/or action on agency contracts, including the status of 10 major, prime and operational contracts......... 12 V Report, possible discussion and/or action on 11 agency major contracts, including extension and amendment of the lottery operator contract, and 12 whether discussion relating to the negotiation of the lottery operator contract in an open 13 meeting would have a detrimental effect on the Commission's position in the negotiations....... 13 14 (Commission met in Executive Session on this matter) 21 15 VI Report, possible discussion and/or action on 16 agency prime contracts, including the procurements for the contract for security 17 officer services and document management services........................................ 21 18 VII Report, possible discussion and/or action on agency major contracts, including the 19 procurement for the contract for internal audit services.................................. 22 20 VIII Report, possible discussion and/or action on lottery sales and revenue, game performance, 21 new game opportunities, advertising, promotional activities, market research, 22 trends, and game contracts, agreements, and procedures...................................... 22 23 IX Report, possible discussion and/or action on transfers to the State.......................... 32 24 X Consideration of and possible discussion and/or action, including proposal, on 25 amendments to 16 TAC 401.317 ("Powerball" On-Line Game Rule).............................. 32 4 1 TABLE OF CONTENTS (Continued) 2 Page 3 XI Report, possible discussion and/or action on external and internal audits and/or reviews 4 relating to the Texas Lottery Commission, and/or on Internal Audit activities, including 5 Internal Audit status report, approval of the Fiscal Year 2016 Annual Internal Audit Report, 6 and approval of the Fiscal Year 2017 Internal Audit Plan...................................... 34 7 XII Report by the Charitable Bingo Operations Director and possible discussion and/or action 8 on the Charitable Bingo Operations Division's activities, including update on Docket 9 No. 362-15-5571.B (Habitable Spaces), licensing, accounting and audit activities, 10 pull-tab review, Bingo Advisory Committee, and special projects............................ 38 11 XIII Report by the Executive Director and possible discussion and/or action on the agency's 12 operational status, major contracts, agency procedures, awards, and FTE status.............. 49 13 XIV Consideration of the status and possible approval of orders in enforcement cases......... 51 14 Lottery NSF License Revocation Cases (Default 15 Unless Otherwise Noted) A. Docket No. 362-16-4064 - Sunny's Beverage Zone 16 B. Docket No. 362-16-4065 - Oak Hills Center C. Docket No. 362-16-4066 - Santa Fe Express Mart 17 #2 D. Docket No. 362-16-4234 - Franco's Corner 18 E. Docket No. 362-16-4900 - Bengal Mart F. Docket No. 362-16-4902 - Brother's $ Store 19 G. Docket No. 362-16-5091 - Moon Mart H. Docket No. 362-16-5600 - AM Food Mart 20 I. Docket No. 362-16-5601 - Bellfort CITGO J. Docket No. 362-16-5602 - Price Super Mart 21 Lottery Agreed Orders K. Case No. 2016-179 - J & S Food Mart 22 L. Case No. 2016-658 - Family Grocery M. Case No. 2016-829 - Cedar Park Quick Mart 23 N. Case No. 2016-848 - 7-Eleven #32812 Bingo Commercial Lessor Revocation 24 O. Docket No. 362-16-1513.B - Julam Investments, Inc. 25 XV Public comment.................................. XX 5 1 TABLE OF CONTENTS (Continued) 2 Page 3 XVI Commission may meet in Executive Session........ 62 A. To deliberate personnel matters, 4 including the appointment, employment, evaluation, reassignment, duties, 5 discipline, or dismissal of the Executive Director and/or the 6 Charitable Bingo Operations Director pursuant to Section 551.074 of the 7 Texas Government Code. B. To deliberate the duties of the 8 General Counsel and/or the Human Resources Director pursuant to 9 551.074 of the Texas Government Code. C. To receive legal advice regarding 10 pending or contemplated litigation or settlement offers, or other legal 11 advice, pursuant to 551.071(1) and (2) of the Texas Government Code, 12 including but not limited to legal advice regarding the following items: 13 Pending and potential litigation regarding Fun 5's Scratch Ticket 14 Game #1592, including Travis Co. District Court Cause No. D-1-GN-005114, 15 Third District Court of Appeals Cause No. 03-16-00172-CV (Steele, et al. 16 v. GTECH Corp.); Dallas Co. District Court Cause No. DC-14-14838, Fifth 17 District Court of Appeals Cause No. 05-15-01559-CV (Nettles v. GTECH 18 Corp. and Texas Lottery Commission); and El Paso County Court Cause 19 No. 2014-DCV-4113 (McDonald v. GTECH Corp.), State of Texas v. Equal 20 Employment Opportunity Commission et al. Legal advice regarding Texas Government 21 Code Chapters 466 (State Lottery Act) and 467, the Bingo Enabling Act, the Open 22 Meetings Act, the Public Information Act, the Administrative Procedure Act, 23 employment and personnel law, procurement and contract law, evidentiary and 24 procedural law, ethics laws, and general government law. 25 Legal advice regarding any item on this open meeting agenda. 6 1 TABLE OF CONTENTS (Continued) 2 Page 3 XVII Return to open session for further deliberation and possible action on any 4 matter posted for discussion in Executive Session. Any matter posted for Executive 5 Session also may be subject of discussion and/or action in open session prior to 6 Executive Session............................. 63 XVIII Adjournment................................... 63 7 Reporter's Certificate.............................. 65 8 9 --oo0oo-- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 1 P R O C E E D I N G S 2 AGENDA ITEM I 3 CHAIRMAN KRAUSE: Good morning. I'm 4 Winston Krause, Chairman of the Texas Lottery 5 Commission. I call this meeting to order. It's 6 October 13th, 2016 at 10:01 a.m. and we are missing one 7 commissioner; but we have a quorum and all the other 8 commissioners are here. I've got Commissioner Heeg, 9 Lowe, and Rivera -- and our commissioner is walking in 10 the door. Outstanding. Not only do we now have a 11 quorum, but we have a full panel. 12 And our first order of business is going 13 to be to say the pledge to the flags, and 14 Commissioner Candelaria is going to lead us in that. 15 (Pledge recited.) 16 AGENDA ITEM II 17 CHAIRMAN KRAUSE: We have an agenda item 18 that we are going to pass. Our special guest from UT, 19 Dr. Noel Landuyt. He is not going to be here. 20 AGENDA ITEM III 21 CHAIRMAN KRAUSE: So we're going to move 22 on to Teresa Edwards, who is going to talk about the 23 World Lottery Association for Best Innovation in 24 Responsible Gambling. 25 The floor is yours. 8 1 MS. EDWARDS: Good morning. My name is 2 Teresa Edwards. I'm the Retail Development Coordinator 3 for the Texas Lottery. 4 Commissioners, this morning I'm going to 5 provide you an overview of our entry for the World 6 Lottery Association Responsible Gaming Award. The 7 complete details of our entry are in your notebook. 8 As you know, we are a member of the World 9 Lottery Association, NASPL, and the National Council on 10 Problem Gambling. We actively support responsible 11 gaming initiatives of these organizations, many of those 12 efforts of which are cooperative between organizations. 13 Since 2004 we have actively participated 14 in the NCPG Problem Gambling Awareness Month Campaign, 15 which is in March every year. Historically our 16 involvement has been press releases supporting those 17 activities. 18 In 2014 we expanded our involvement in 19 the campaign to include classroom training for our 20 employees, including claims centers and customer service 21 employees, as well as the IGT sales force. 22 In 2015 we conducted a gap analysis of 23 our program as a part of our work towards our Level 2 24 certification with the World Lottery Association. The 25 WLA has four levels of certification, and Level 2 is 9 1 focused on identifying responsible gaming gaps and 2 setting priorities in future program development. 3 We are proud to have received our Level 2 4 certification this past October and immediately embarked 5 on our path for achieving Level 3 certification. The 6 Level 3 submission on implementation focuses on 7 implementation planning to address gaps and priorities 8 and on planning for an evaluation of the program's 9 effectiveness. 10 We completed our submission 11 September 28th, and we are awaiting the evaluation of 12 the independent assessment panel and the World Lottery 13 Association. The panel reports to the WLA, and they 14 determine the final certification. 15 In addition to submitting our Level 3 -- 16 our submission for Level 3 certification, we also 17 responded to a call for entries or awards for the 18 upcoming World Lottery Summit to be held in Singapore. 19 We submitted an entry for Level 2 Best Innovation in one 20 element of our Responsible Gaming Program. That was our 21 employee program supporting the March National Problem 22 Gambling Awareness Month Campaign. The award recognizes 23 best practices and innovation in the design of one 24 element of a lottery's Responsible Gaming Program. 25 Our 2016 campaign involved our employees 10 1 and included several new initiatives from the previous 2 years. Classroom training was expanded to also include 3 employees in the Promotions Department and Enforcement, 4 as well as our Customer Service staff. 5 Over the course of the month six 6 different daily news messages were delivered to our 7 employees and IGT sales reps, providing information on 8 the signs of problem gambling and resources for help. A 9 dedicated Internet page featured our training video and 10 the Play Responsibly Brochure, which we also have 11 available in all of our 17,000-plus retail locations. 12 "Have the Conversation" was the theme for 13 the campaign this year; and we had those "Have the 14 Conversation" posters up through all of our headquarters 15 and field offices, as well as the IGT sales offices. 16 Abbreviated messages were delivered via 17 Instagram, Facebook, and Twitter. Also we were the 18 first lottery to conduct a live video stream on Facebook 19 to our 179,000-plus fans/followers; and it featured Gary 20 Grief's message supporting the National Council Problem 21 Gambling Month Awareness Campaign. 22 As I mentioned earlier, the complete 23 details of our entry are in your notebook, including the 24 list of the many people throughout our agency and IGT 25 who work together to implement our Problem Gambling 11 1 Awareness Month activities across the state. 2 Thank you for this opportunity to share a 3 small piece of our vast responsible gambling program. 4 Are there any questions? 5 CHAIRMAN KRAUSE: Commissioners? 6 (No response.) 7 COMMISSIONER LOWE: Good report. 8 COMMISSIONER RIVERA: Okay. So we were 9 nominated, or we submitted for the best innovative... 10 MS. EDWARDS: Best innovation. 11 (Simultaneous speakers.) 12 COMMISSIONER RIVERA: So we're in a pool 13 of those that could potentially win this award. 14 MS. EDWARDS: Yes. 15 COMMISSIONER RIVERA: When is that going 16 to be announced? 17 MS. EDWARDS: At the World Summit in 18 November in Singapore. 19 COMMISSIONER RIVERA: So in a few weeks? 20 MS. EDWARDS: Yes. 21 COMMISSIONER RIVERA: Great. If you 22 will, keep us posted; the best of luck. 23 CHAIRMAN KRAUSE: Any other comments? 24 (No response.) 25 CHAIRMAN KRAUSE: I'm really proud of 12 1 what we're doing in backing organizations that promote 2 responsible gambling. It's important to us. 3 AGENDA ITEM IV 4 CHAIRMAN KRAUSE: Mr. Mike Fernandez is 5 going to give us a contract on the status of agency -- 6 status of agency contracts -- a report on the status of 7 agency contracts. 8 MR. FERNANDEZ: Good morning, 9 Mr. Chairman, Commissioners. 10 For the record, my name is Mike 11 Fernandez. I'm the Director of Administration; and with 12 me this morning I also have Toni Erickson, who is our 13 Support Services Manager. 14 Item IV in your notebook is a briefing 15 under Texas Administrative Code 401.105. It requires 16 that all agency contracts be presented to the Commission 17 and for informational purposes. This requirement was 18 further expanded in the Senate Bill 20 in Texas 19 Government Code 2261.254 by including additional 20 contract reporting requirements regarding compliance 21 with financial provisions, performance issues, and 22 sanctions or liquidated damages. 23 A report detailing all agency contracts 24 was included in your notebooks. And if you have any 25 questions, we would be happy to answer. 13 1 CHAIRMAN KRAUSE: Commissioners, any 2 questions? 3 COMMISSIONER ARRIETA-CANDELARIA: No, 4 sir. 5 AGENDA ITEM V 6 CHAIRMAN KRAUSE: Continue. 7 MR. FERNANDEZ: Commissioners, we're 8 going to switch chairs for a second. 9 (Ms. Pyka joins Mr. Fernandez.) 10 MR. FERNANDEZ: Again, for the record, my 11 name is Michael Fernandez, Director of Administration. 12 Philip, let's leave those lights up if 13 that's okay. I need the light. It's just the way it 14 is. 15 (Laughter.) 16 MR. FERNANDEZ: Item V in your notebooks 17 is an action item, the proposed extension of the lottery 18 operator contract. For the record, on the requirement 19 of Senate Bill 20 regarding disclosure of potential 20 conflicts of interest, all Commissioners have 21 independently confirmed they do not have any financial 22 interests in IGT Global Solutions Corporation. 23 MR. BIARD: And, Commissioners, I'll 24 interject here. I'm Bob Biard, General Counsel. 25 When negotiation of the lottery operator 14 1 contract is a topic of discussion, you have the 2 opportunity for an Executive Session relating to the 3 negotiations. My understanding is that Mike Fernandez 4 and the Commission Staff is not requesting an Executive 5 Session; but after Mike's presentation, I wanted to let 6 you know that if you want to have an Executive Session, 7 that you may do so. 8 And if you do want to have an Executive 9 Session, because it's on the lottery operator contract, 10 that requires two votes: The first needs to be a vote 11 that having a discussion in an open meeting would have a 12 detrimental effect on negotiations. This is similar to 13 what we did back at the April meeting. And once there's 14 a vote on that, if the vote is to approve that, then the 15 Chairman would make his usual motion to go into 16 Executive Session. 17 Thanks. 18 CHAIRMAN KRAUSE: Sounds good. 19 MR. FERNANDEZ: At the April 14, 2016 20 Commission Meeting, Staff requested and received 21 approval to open negotiations with IGT for the potential 22 extension of the current lottery operator contract. We 23 concluded the negotiations with IGT and are here today 24 to present the results. 25 The previous lottery operator procurement 15 1 process, which occurred in 2010, took three years to 2 accomplish at a cost of approximately $2.6 million. At 3 that time a detailed review of all required services was 4 undertaken and associated business cases developed. 5 Requests for information were issued to 6 determine the viability of sourcing select services. 7 Based on the responses, it was determined a single 8 service provider was still the most efficient approach. 9 As required by statute, a copy of the 10 draft Request For Proposal, or RFP, was provided to the 11 state Contract Advisory Team for their review and 12 comment. The Contract Advisory Team is comprised of 13 representatives from the Comptroller of Public Accounts, 14 the Department of Information Resources, Health and 15 Human Services Commission, the Office of the Governor, 16 the Texas Facilities Commission, and one member from a 17 small state agency. And I would be remiss, 18 Mr. Chairman, if I didn't point out that I do not know 19 what that small state agency is -- 20 (Laughter.) 21 CHAIRMAN KRAUSE: It's not us. 22 MR. FERNANDEZ: -- to identify it, but it 23 is not us. 24 An RFP Evaluation Committee was formed, 25 which included division directors, senior Staff, and the 16 1 Director of the Texas Procurement and Support Services 2 for the Comptroller of Public Accounts. The legal team 3 also included representatives from the Attorney 4 General's Office as well as outside Counsel. I want to 5 place special emphasis on the composition of our 6 Evaluation Committee, that it involved consultants and 7 legal counsel. 8 Last month legislative hearings were held 9 by the Senate Finance Committee, the House 10 Appropriations Committee, and the House State Affairs 11 Committee, with much of the focus in these hearings 12 depending on state contracts and some of the recent 13 issues and concerns that have surfaced in certain state 14 contracts. At these committee hearings Legislators 15 emphasized the importance of having the Comptroller of 16 Public Accounts, the Office of the Attorney General, and 17 the Legislative Budget Board be involved in major 18 procurements for the State going forward. 19 We were gratified that more than six 20 years ago and before recent contracting legislation was 21 enacted, all three of these state entities were involved 22 in the Agency's procurement process for lottery 23 operator. 24 Ultimately, three bids were received in 25 response to our RFP. IGT not only had the lowest 17 1 proposed contract rate at 2.2099 percent of sales but 2 also the highest technical score of the three proposers. 3 I think most notable was no protest 4 regarding the issuance of the RFP or award was received. 5 This, to my knowledge, was at a time when most, if not 6 all, other U.S. lottery bids of this magnitude were 7 being protested. 8 The current contract provides 9 state-of-the-art technology and equipment; has a 10 nine-year initial term through August 31, 2020, with 11 three two-year options; and a reduced rate of 2.2099 12 percent of sales. As compared to the previous contract, 13 it will result in a savings of more than $20 million 14 annually and a projected $200 million over the nine-year 15 initial term. 16 The proposed contract extension addresses 17 three areas. The first is term, which results in the 18 execution of the three two-year options remaining on the 19 contract, for a total of six years. 20 The second is rate, which will be reduced 21 from the current contracted rate of 2.2099 percent of 22 sales in two-year increments for the next six-year 23 extension as follows: For fiscal years 2021 and '22, 24 the rate will be 2.0773 percent of sales; fiscal years 25 2023 and '24, the rate will be 2.0331 percent of sales; 18 1 for fiscal years 2025 and '26, the rate will be reduced 2 again to 1.9889 percent of sales. 3 The third area is the addition of the new 4 contract requirement having to do with changing 5 technology; that is, IGT will be required to notify the 6 agency of any innovations not currently deployed that 7 can potentially increase revenue to the State. If the 8 agency believes there's a value to the State, both the 9 Lottery and IGT would meet and agree upon terms and 10 conditions regarding the deployment of such innovation. 11 I want to emphasis this provision of this 12 new requirement clearly states that all proposed 13 innovations must be authorized by Texas law and do not 14 include video lottery, casino gaming, Internet-based 15 lottery sales, fantasy sports, or any other activities 16 not authorized by law. 17 I will now turn it over to Kathy Pika. 18 MS. PYKA: Thank you, Mike. 19 Commissioners, the table before you 20 includes the amount of estimated contract savings over 21 the six-year extension period. The rate reduction 22 proposed for each fiscal year of the contract renewal is 23 included on the top row, along with the reduced contract 24 rate based on a percentage of sales. 25 To project the lottery sales represented 19 1 for each fiscal year, it was a calculation of 2 compensation paid to the lottery operator at the current 3 rate, as well as the reduced contract rate, to arrive at 4 the estimated contract savings. As an example, in 5 fiscal year 2021, sales were projected at five billion, 6 five hundred seventy-eight million dollars. Using this 7 value of projected sales, compensation to the lottery 8 operator under the current contract rate of 2.2099 9 percent is $123.27 million. Compensation under the 10 reduced contract rate of 2.0773 percent of sales would 11 result in a payment of $115.87 million to the lottery 12 operator. 13 So annual savings in the first year, or 14 fiscal year 2021, is projected at $7.4 million. The 15 calculation is provided for each year of the six-year 16 period, noting the progression and estimated contract 17 savings as the rate reduction increases. 18 Commissioners, the right-hand column of 19 the table reflects total estimated contract savings of 20 $64.94 million to the State over the six-year extension 21 period as a result the reduced contract rate. 22 MR. FERNANDEZ: Commissioners, based on a 23 significant and quantifiable savings to the State, Staff 24 recommends the agency exercise the option to renew the 25 Lottery Operations and Services Contract for the 20 1 proposed six-year period. 2 If you have any questions, we would be 3 happy to address them. 4 CHAIRMAN KRAUSE: I believe that 5 deliberating on this in public is going to be 6 detrimental to our ability to make a decision about it 7 and act on it; therefore, I make a motion that we go 8 into Executive Session. 9 COMMISSIONER RIVERA: Second. 10 CHAIRMAN KRAUSE: All in favor say "Aye." 11 (Chorus of "Ayes.") 12 CHAIRMAN KRAUSE: All opposed? 13 (No response.) 14 CHAIRMAN KRAUSE: The "Ayes" carry. 15 So now, we have our second motion. I 16 move that we go into Executive Session. 17 COMMISSIONER RIVERA: Second. 18 CHAIRMAN KRAUSE: All in favor say "Aye." 19 (Chorus of "Ayes.") 20 MR. BIARD: Commissioners, a point of 21 clarification: You want to go into Executive Session 22 just on this matter or -- 23 CHAIRMAN KRAUSE: Just on this matter. 24 We'll go into Executive Session again at the end. 25 MR. BIARD: Thank you. 21 1 CHAIRMAN KRAUSE: We are going into 2 Executive Session at 10:21. 3 (Off the record from 10:21 to 10:46 a.m.) 4 CHAIRMAN KRAUSE: The Texas Lottery 5 Commission is out of Executive Session at 10:46. We'll 6 resume our public meeting. 7 And so, anyway, is there a motion on the 8 floor for extending the contract based on the Staff's 9 recommendation? 10 COMMISSIONER RIVERA: Move for approval. 11 COMMISSIONER ARRIETA-CANDELARIA: Second. 12 CHAIRMAN KRAUSE: All in favor say "Aye." 13 (Chorus of "Ayes.") 14 CHAIRMAN KRAUSE: All opposed say "Nay." 15 (No response.) 16 CHAIRMAN KRAUSE: Passed by acclamation. 17 MR. FERNANDEZ: Mr. Chairman, Item 18 Number VI is also -- VI and VII are mine. 19 AGENDA ITEM VI 20 MR. FERNANDEZ: Item VI in your notebook 21 is a briefing item and it's to advise the Commission of 22 staff's intent to issue requests for proposals for 23 security officer services and document management 24 services. 25 If you have any questions, I'd be happy 22 1 to answer. 2 CHAIRMAN KRAUSE: Commissioners? 3 No questions. Number VII. 4 AGENDA ITEM VII 5 MR. FERNANDEZ: Item VII in your notebook 6 is an action item. It is to request the Commission's 7 approval to issue the request for proposal for internal 8 auditing services. 9 If you have any questions, I'd also be 10 happy to answer those. 11 COMMISSIONER ARRIETA-CANDELARIA: Move to 12 approve. 13 COMMISSIONER RIVERA: Second. 14 CHAIRMAN KRAUSE: All in favor say "Aye." 15 (Chorus of "Ayes.") 16 CHAIRMAN KRAUSE: Ms. Pyka. 17 AGENDA ITEM VIII 18 MS. PYKA: Good morning, Commissioners. 19 My name is Kathy Pyka, Controller for the agency. With 20 me this morning is our Commission's Products and 21 Drawings Manager, Robert Tirloni. 22 Commissioners this morning we'll be 23 presenting final fiscal year 2016 revenue and sales 24 data, rather than providing you our normal monthly 25 presentation. 23 1 So I'd like to begin this morning with 2 our revenue highlights. The Commission completed the 3 fiscal years with $1,392,000,000 in approved revenue 4 transferred to the State. This is our highest revenue 5 transfer in the Texas Lottery history, breaking a 6 previously record set in fiscal year 2015; and it is our 7 thirteenth year, consecutive year, that we have reached 8 the one-billion-dollar mark in overall revenue 9 transfers. 10 So this represents a 36-percent growth in 11 total transfers to the State since fiscal year 2011; and 12 of that record overall transfer amount, $1,373,000,000 13 went to the Foundation School Fund, which represents an 14 increase of $147 million over last fiscal year or 12 15 percent in Lottery contributions in public education and 16 it is our largest annual transfer to the Foundation 17 School Fund in the history of the Texas Lottery. 18 Additionally, the total revenue transfer 19 of $14.7 million went directly to the Texas Veterans 20 Commission for the sale of Scratch Off Tickets dedicated 21 to the fund for veteran's assistance. This is the 22 largest annual transfer to the Veterans Fund since the 23 designated game began for their fund. 24 Moving on to the next slide, another 25 record that we had was our prizes paid to players, with 24 1 more than $3.2 billion won by players; and this broke 2 the previous record set in 2015. 3 Our retailers were paid more than 4 $253 million in commission payments. This, too, is 5 another record in payments to retailers. 6 Commissioners, we concluded the fiscal 7 year with an administrative expenditure rate of 8 4.4 percent, which is one of the lowest administrative 9 expenditure rates in percentage of gross sales in the 10 country, as well as our lowest rate in the history of 11 the Commission. 12 Now we'll move on to sales data. So for 13 the first time in lottery history our Texas Lottery 14 sales have exceeded the 5-billion-dollar mark, coming in 15 at $5,067,000,000 and surpassing the previous sales 16 record set last year by more than $500 million. 17 We ended the fiscal year with 18 $3,072,000,000 in Scratch Off Ticket sales, as noted on 19 the second orange column. This is a new sales record, 20 marking the best year of Scratch Ticket sales since we 21 began selling tickets; and this reflects a sales 22 increase of more than $230 million above the mark that 23 we set last year. 24 Our draw sales following the record 25 one-and-a-half-billion-dollar Powerball jackpot that 25 1 occurred in January concludes the year with a billion 2 thirty-five million dollars and this is an increase of 3 more than $300 million above last year's sales value of 4 one billion five million dollars. 5 A couple of points that we think are 6 really important to note: Even without that record 7 Powerball jackpot that we had -- and the sales that we 8 saw in Draw, 300 million -- the Commission still would 9 have beat our sales record. Just to kind of restate 10 that five-hundred-million-dollar growth in sales, 43 11 percent of the growth was from Scratch Tickets; and 57 12 percent of the growth was from Draw. 13 And, finally, as we look forward to the 14 current year, fiscal year 2017, we anticipate that sales 15 and revenue for this fiscal year are likely to decline 16 from last fiscal year unless we have the good fortune of 17 experiencing another record jackpot. So we just want to 18 make sure as we look at this on a go-forward basis that 19 it would be tough to reach that sales level unless we 20 have another record in the future. 21 So the next slide was collected as a view 22 of our 25-year history of scratch and draw sales for the 23 Commission. Scratch tickets, noted in the orange bar, 24 began in fiscal year Two Thousand -- or 1992, with 25 $591,000. And as you can see, the wrap-up to over 26 1 $5 billion in fiscal year 2016. 2 With that, Robert will now provide the 3 sales details by product. 4 MR. TIRLONI: Good morning, 5 Commissioners. 6 So this is a complete fiscal year 7 comparison of 2016 to 2015. At the top we have our 8 jackpot games. Jackpot games are up 285 million in '16 9 compared to '15. Of course, the majority of that growth 10 is coming from Powerball due to the record-setting 11 jackpot that we experienced. So almost $251 million of 12 growth in '16 compared to '15 for Powerball. 13 Mega Millions also had a large jackpot 14 in July. So that helped with some growth with the 15 Mega Millions product, and the add-on features for both 16 of those games are realizing growth as well. In the 17 middle of the chart we have our daily games. Those are 18 in blue. Those are up $18.6 million. Most of that 19 growth is coming from the addition of the new game Texas 20 Triple Chance. 21 The good news is two of our very strong 22 daily products, the Pick 3 and Daily 4, are also up and 23 are also experiencing growth. So if we take the Jackpot 24 category and the Daily Game category combined, we're 25 realizing a 303-million-dollar growth year over year. 27 1 As Kathy mentioned, we had a phenomenal 2 sales year for our scratch tickets in '16, 3.7 billion; 3 and that's a 234-million-dollar gain over fiscal '15. 4 And then you see our 5-billion-dollar total with growth 5 of almost $538 million. 6 This next chart just shows you the 7 $5 billion in total sales for the year broken out 8 between the two product categories, scratch and draw, 9 scratch coming in at 73; and draw coming in at almost 10 27. The typical split is about 75/25. Of course, draw 11 is up this year because of the growth from Powerball. 12 This is kind of the same graphic. This 13 is representing draw game sales for the fiscal year. So 14 this represents $1.35 billion in draw game sales. 15 Powerball -- no surprise -- is the best-selling product 16 for fiscal '16 on the draw game side, coming in at just 17 under $505 million. Again, we all know why that 18 happened, the one-and-a-half-billion-dollar jackpot. 19 Pick 3, which was our best-selling game 20 last year, is our second-best-selling game for '16 at 21 $260 million, followed by Mega Millions, which is our 22 third-best-selling game. 23 The same pie chart, this time for our 24 scratch sales. So this represents $3.72 billion worth 25 of scratch sales broken down by price points. The $5 28 1 scratch game continues to be our best-selling game. 2 That's been consistent for many years now. The 20 is 3 our second-best-selling game, followed by the ten. 4 This just shows you the top 15 scratch 5 ticket games for a fiscal year. Our best-selling game 6 for the entire year was a game called Hit $1 Million. 7 It was a 20-dollar game that sold slightly over $143 8 million as part of a family of games. So you will see 9 the other Hit games that were introduced that were part 10 of that family. 11 Our Super Ticket continues to be a strong 12 performer. That's one of our oversized games that we 13 produced. That sold almost 103 million; and some of the 14 other games that you'll notice on this table are some of 15 our core games, our 5-dollar Super Loteria, some of our 16 cash card games at the 3-, the 5-, and the 10-dollar 17 price points. 18 I have a couple of updates for you before 19 we conclude today. I wanted to let you know about a new 20 draw game promotion that we introduced at the end of 21 September. It's called Lone Star Lineup. This player 22 promotion focuses on the portion of the portfolio that 23 is not jackpot driven. So this is the focus on our 24 daily games. It is important for us to focus on these 25 because, as Kathy just mentioned, we have no control 29 1 over jackpots; and so we are focused on trying to drive 2 sales for the portion of the portfolio that is not 3 jackpot driven. So players can get $6 worth of draw 4 games for $5. As I said, this is new. We're going to 5 continue to monitor how this new promotion is 6 performing. As of right now we don't have an end date 7 for this promotion. We do have the ability and the 8 flexibility to change games in and out of this 9 promotional package. So we will continue to look at 10 that. 11 I do have a video that I'm going to show 12 you. 13 (Video playing.) 14 MR. TIRLONI: We just returned from the 15 National Conference -- 16 (Video restarted playing.) 17 (Laughter.) 18 MR. TIRLONI: So, again, we just 19 returned from the National Conference in Atlanta; and 20 I'm happy to report to you that the TV spot that you 21 just watched -- that was our holiday spot from last 22 holiday season -- won an award for the best TV 23 advertising for a scratch game in all of North America. 24 In addition, we were a finalist in five 25 other categories. So being a finalist means that we 30 1 placed in the top three to five positions in all those 2 categories; and, again, this is us competing against all 3 other U.S. and Canadian lotteries. So we're proud of 4 this award; and we thank our ad agency LatinWorks for 5 all of the work that they do on our account and for 6 making this possible for us. 7 Before we close today, there's one more 8 video that we're going to share with you today. This 9 video shows our employee appreciation celebration for 10 reaching the 5-billion-dollar-sales record; and then 11 it's followed by a congratulatory message from some of 12 our business partners and legislators recognizing the 13 Texas Lottery's achievement in reaching the 5-billion- 14 dollar milestone. 15 (Video playing.) 16 MR. TIRLONI: So, Commissioners, that is 17 a graphic of the billboards that are out. Gary 18 mentioned it at the event. These are deployed. There's 19 88 of them across the state. Those are out right now, 20 as we speak. 21 And this concludes our presentation, a 22 wrap-up of fiscal year '16; and we're happy to answer 23 any questions that you might have. 24 CHAIRMAN KRAUSE: Well, I'm going to 25 start off by saying that the record number of prizes 31 1 awarded to our players, that's really key. The lowest 2 administrative cost, ever, that's fantastic, 5 billion. 3 The Scratch Off Tickets, for anybody that 4 doesn't know, those are developed in-house. So we have 5 some geniuses that know what our players like to play; 6 and you saw that that's about 73 percent of all revenue. 7 So in spite of the big Powerball jackpot and all that, 8 the Scratch Offs are a big, big driver; and that comes 9 from inside. 10 And so, anyway, what I'm going to do is 11 I'm going to ask my fellow commissioners to join me in a 12 standing ovation for the partnership of our staff, IGT, 13 and, of course, LatinWorks, who does unbelievably great 14 work for us. So here we go. Keep up the good work, 15 guys. 16 (Applause.) 17 CHAIRMAN KRAUSE: Now, any other 18 commissioners you are welcome to chime in. Who wants to 19 go next? Carmen? Doug? 20 COMMISSIONER LOWE: Great job. 21 COMMISSIONER ARRIETA-CANDELARIA: Great 22 job. 23 CHAIRMAN KRAUSE: Well, come on. I don't 24 need to be the only one here. 25 COMMISSIONER HEEG: I thank the staff for 32 1 the incredible work they do. I am very impressed with 2 the staff. 3 MR. TIRLONI: Thank you so much for your 4 words. We appreciate that very much. 5 CHAIRMAN KRAUSE: So this next action 6 item is going to be equally as stimulating, right? 7 (Laughter.) 8 AGENDA ITEM IX 9 MS. PYKA: This is Tab IX. It includes 10 information on the agency transfers to the State; and 11 while we've given you the detailed overview of that in 12 the previous PowerPoint, the only other item that I want 13 to add to that presentation is our cumulative transfer 14 to the Foundation School Fund for now is $19.7 billion. 15 So, Commissioner, with that, I will 16 conclude and be happy to answer any questions. 17 CHAIRMAN KRAUSE: Commissioners? 18 (No response.) 19 MS. PYKA: Thank you, Commissioners. 20 COMMISSIONER ARRIETA-CANDELARIA: Thank 21 you. 22 CHAIRMAN KRAUSE: Ms. Rienstra. 23 AGENDA ITEM X 24 MS. RIENSTRA: Good morning, 25 Commissioners. 33 1 Deanne Rienstra, Assistant General 2 Counsel. I have today another proposed amendment to the 3 Powerball game. The Multi-State Lottery Association has 4 adopted additional changes to the Powerball game rules. 5 These changes do not affect how the game is played, but 6 do require conforming changes to the Texas Powerball 7 game rule. 8 The proposed amendments clarify the prize 9 pool and reserve accounts. They update the rule 10 definitions, clarifying MUSL's use of the MUSL annuity 11 factor, and clarifies player remedies in the event of 12 litigation arising out of any Powerball play. 13 Therefore, in your notebook, there's a 14 draft of the proposed amendment to 16 Texas 15 Administrative Code 401.317, Powerball Online Game 16 Rules, to be published in the Texas Register. 17 The submission to the Texas Register will 18 include a notice of public hearing for November 16th at 19 10:00 a.m. in the auditorium. 20 The staff recommends initiating the rule- 21 making process with the Texas Register publication. 22 I'm happy to answer any questions. 23 CHAIRMAN KRAUSE: Commissioners? 24 (No response.) 25 CHAIRMAN KRAUSE: All right. Do we have 34 1 a motion to approve this proposed rules change? 2 COMMISSIONER RIVERA: Move for approval. 3 COMMISSIONER ARRIETA-CANDELARIA: Second. 4 CHAIRMAN KRAUSE: All in favor say "Aye." 5 (Chorus of "Ayes.") 6 CHAIRMAN KRAUSE: All opposed say "Nay." 7 (No response.) 8 CHAIRMAN KRAUSE: It's unanimous. 9 Thank you, ma'am. 10 Darlene. 11 AGENDA ITEM XI 12 MS. BROWN: Good morning, Commissioners. 13 I'm Darlene Brown, internal auditor. 14 I'll try to do my best to help you understand me. 15 I have three items for you today, 16 informational items and the status report for fiscal 17 year 2016 internal audit plan. 18 We have wrapped up everything on our 19 plan. We are currently in the process of wrapping up 20 the Human Resource audit and the Bingo restructuring and 21 Boss implementation follow-up review. Those reports 22 will be out to you by November. 23 We are conducting the truck seal audit 24 that was requested of us to look into the last 25 Commissioner meeting, and we've also followed up on open 35 1 audit findings; and I'm happy to report that so far we 2 have closed 61 percent of the audit findings that were 3 opened in the past three years. And what we found is 4 that those findings were actually addressed immediately 5 and nobody had really taken the time to look back at 6 those and currently we are still looking at 7 documentation and we will have the rest of the findings 8 closed by December. 9 We also have finalized the Ledger Account 10 Project. When we started that project, the balance was 11 showing $766,000 worth of credits on the accounts. 12 After the reconciliation and adjustments, the data is 13 now clean, which is the most important thing; and it's 14 showing $112,000 worth of credits on the accounts. 15 So that's the end of my status report. 16 I'd be happy to answer any questions. 17 CHAIRMAN KRAUSE: Commissioners? 18 (No response.) 19 CHAIRMAN KRAUSE: You may proceed. 20 MS. BROWN: The next item is an action 21 item. I ask for approval of our proposed FY17 internal 22 audit plan. We plan on conducting 11 audits in addition 23 to conducting training for the lottery staff. 24 One of the audits includes looking at the 25 Bingo audit processes. That was at the request of the 36 1 Bingo Director. We are also going to be looking into 2 the enforcement area and second drawings. So that's 12 3 audits -- 11 audits, plus a training that we will 4 conduct. 5 I'm asking for approval of that plan. 6 CHAIRMAN KRAUSE: Any questions or 7 comments? 8 Yes. 9 COMMISSIONER ARRIETA-CANDELARIA: 10 Darlene, with regards to the retailer management audit, 11 so this is actually an audit that was moved from the '16 12 to the '17 plan, right, because it wasn't completed? 13 MS. BROWN: Correct. 14 COMMISSIONER ARRIETA-CANDELARIA: So are 15 there any other -- other than the ongoing audits, are 16 there any audits that didn't get completed in '16 that 17 rolled to '17 except that one? 18 MS. BROWN: No. 19 COMMISSIONER ARRIETA-CANDELARIA: Okay. 20 That's really good. 21 MS. BROWN: Thank you. 22 COMMISSIONER ARRIETA-CANDELARIA: You 23 know, when you're able to complete all the audits within 24 the plan, that's a good job. 25 MS. BROWN: Thank you. 37 1 CHAIRMAN KRAUSE: Any others, 2 Commissioners? 3 (No response.) 4 CHAIRMAN KRAUSE: All right. Do I have a 5 motion to approve the report and plans? 6 COMMISSIONER ARRIETA-CANDELARIA: So 7 moved. 8 CHAIRMAN KRAUSE: Second? 9 COMMISSIONER RIVERA: Second. 10 CHAIRMAN KRAUSE: All right. All in 11 favor say "Aye." 12 (Chorus of "Ayes.") 13 CHAIRMAN KRAUSE: All opposed say "Nay." 14 (No response.) 15 CHAIRMAN KRAUSE: The "Ayes" have it. 16 Thank you, ma'am. 17 MS. BROWN: Thank you. 18 And the last item will also require your 19 approval. It's a statutory requirement that the 20 internal auditor prepare an Annual Audit Report and 21 summarize the breadth and use of fiscal year 2016 and 22 what we plan to work on in 2017. 23 I'm asking your approval to submit this 24 report. 25 CHAIRMAN KRAUSE: Questions? 38 1 (No response.) 2 CHAIRMAN KRAUSE: All right. Is there a 3 motion? 4 COMMISSIONER RIVERA: Move for approval. 5 CHAIRMAN KRAUSE: Is there a second? 6 COMMISSIONER ARRIETA-CANDELARIA: Second. 7 CHAIRMAN KRAUSE: All in favor say "Aye." 8 (Chorus of "Ayes.") 9 CHAIRMAN KRAUSE: All opposed? 10 (No response.) 11 CHAIRMAN KRAUSE: The "Ayes" have it. 12 MS. BROWN: Thank you. 13 AGENDA ITEM XII 14 CHAIRMAN KRAUSE: Now we'll hear from our 15 esteemed Bingo Director -- 16 MR. ROYAL: Good morning, Commissioners. 17 CHAIRMAN KRAUSE: -- who is looking good 18 today. 19 MR. ROYAL: Thank you very much. 20 (Laughter.) 21 MR. BIARD: I just want to say that we do 22 have a person who is signed up to speak. 23 CHAIRMAN KRAUSE: We're going to let our 24 Bingo Commissioner go ahead -- our Bingo Director go 25 ahead and give his report, and then we're going to hear 39 1 from Mr. Eddie Heinemeier. 2 MR. ROYAL: Commissioners, I just want to 3 highlight one item in your notebook and report on a few 4 others. There's an item behind the blue tab, the 2017 5 Bingo Audit Annual Risk Assessment Plan; and that was 6 prepared in consideration of the House Bill 2197 of the 7 83rd Legislature, the Agency Sunset Bill. 8 And regarding compliance of reviews, 9 financial audits, our goal is to audit the highest-risk 10 licensees within a four-year timeframe and conduct game 11 inspections within a three-year timeframe. The 12 following risk factors were used to identify 13 organizations: Gross receipts, expenses, net proceeds, 14 and charitable distributions, all as a percentage of 15 gross receipts, gross receipts reported for a playing 16 location, and time elapsed since the last game 17 inspection at a playing location, as well as the 18 compliance history. 19 The results of the risk assessment and 20 resource allocation of staff revealed a projection of 21 184 audits and 117 game inspections, which translates 22 into a 10.9 percent coverage of all active licensees, 23 which is a 4.6 percent increase over 2016, as well as a 24 26.6 percent coverage of all active licensees within 25 audit coverage within the past five years, which, again, 40 1 is an increase of 6 percent over 2016; and then we'll 2 have a 33.6 percent coverage of the 348 bingo playing 3 locations. 4 That is our audit plan for the year. 5 We're looking forward to project updates. 6 The Account Ledger Project, you've heard from Darlene we 7 completed that as promised at the end of August. The 8 accounts have all been reconciled by the Bingo Auditors 9 and the results reviewed by Internal Audit. Appropriate 10 adjustments have been made to the ledger accounts so 11 that balances are accurately reflected in order to 12 comply with applicable laws. 13 All licensees have been notified of the 14 licensing-related liabilities or credit balances 15 available to the state. And, additionally, the ledger 16 balances can be identified when a licensee looks onto 17 the Bingo Service Portal. Licensees with expired 18 credits have been notified of the process to seek those 19 reimbursements, and we'll coordinate that with them. 20 This project, again, was initiated in 21 January of 2015 and resolved long-standing, outstanding 22 issues with licensees' ledger balances that were 23 converted to the Division's new Boss Bingo Operating 24 Services System. 25 Decisions by prior management due to 41 1 integrity problems, due to Legacy System conversions, 2 and misinterpretations and applications of state laws 3 resulted in incorrect ledger balances that were assessed 4 as unreliable by the Internal Auditor. 5 Moving on to Habitable Spaces, 6 Commissioners, at the July meeting, you directed staff 7 to negotiate a resolution with Habitable Spaces. As you 8 recall, staff recommended denying the organization's 9 application for conductor license, which was upheld by a 10 SOAH judge. And the issue was whether under the bingo 11 act a fraternal organization must maintain a 503C with 12 the Internal Revenue Service for three years to be 13 eligible for a conductor license and an applicant be 14 organized in the state for three years. 15 The Division has been in contact with 16 Mr. Heinemeier, the applicant's designated 17 representative, and is currently working towards a 18 resolution. We hope to bring that back at the December 19 meeting to have some sort of conclusion there. 20 We continue our outreach and interaction 21 with the bingo industry, having moved toward the next 22 round of reforms of Operation Streamlining by observing 23 bingo operations from the conductor perspective for us 24 to gain a firsthand knowledge of what bingo workers and 25 operators go through on a daily basis. 42 1 We observed bingo sessions in Dallas. We 2 were required to complete our own paperwork before the 3 session. We participated in calling the bingo balls in 4 the operation, and I've got to tell you: I left the 5 session answering some questions that why do we have 6 these organizations complete certain forms and what our 7 regulatory objective is. 8 So combined with the work that Internal 9 Audit is going to do, we're going to continue to unravel 10 that and see if we can't get some relief to our bingo 11 conductors to further streamline operations and get them 12 to playing bingo without all the overregulation. 13 We had a stakeholder meeting. We 14 continue to address long-standing issues from second 15 game of chance, illegal eight-liners in the bingo halls, 16 getting charities to become involved in the bingo, as 17 well as some operational issues about bringing pull-tab 18 ticket dispensers into operation, and permitting a 19 license by bingo operators. We will continue these 20 discussions and any related rulemaking, we will come 21 together and consolidate that to a single rulemaking for 22 legislation for the 85th Legislature. 23 Finally, I want to share a portion of a 24 letter that I received last week from Robert Wilkerson, 25 the trustee of VFW 8790, that thanked the Division in 43 1 its role for helping the Unit turn its bingo operation 2 around so that they have positive proceeds every month 3 since December of 2015. They've paid their prizes on 4 time. They've complied with all the regulatory 5 requirements. Most importantly, they received 6 charitable distributions. And "It's been a pleasure to 7 work with you and your team, and we wanted to let you 8 know how very much we appreciate your efforts. In our 9 opinion your Division's work in assistance with our 10 bingo hall are a terrific reflection of the Charitable 11 Bingo Operations Division's mission statement and 12 regulatory objective." 13 This is not the first letter that I've 14 received acknowledging the staff efforts. It happens 15 frequently. This is important because the best way to 16 describe it is that these folks, we audited them about a 17 year ago. They had $5.5 million in gross receipts. 18 They paid out 4.1 million or 74.5 percent in prizes and 19 reported $1.4 million or 24.8 percent expenses, which 20 left less than 1 percent, or $55,000, for five 21 charities. 22 This unit, as a result of our audit and 23 the work we did with them, Desira Glenn and her 24 accounting and licensing team with a solid management 25 team, they turned it around; and they've thanked us for 44 1 turning it around. And that's what we're doing right 2 now. So I appreciate them commenting and acknowledging 3 the work that we're doing. 4 Commissioners, there's one item I believe 5 Commissioner Lowe wants to speak to in my report; and 6 that will conclude my agenda items. 7 Commissioner. 8 COMMISSIONER LOWE: Do you want me to do 9 that now? 10 CHAIRMAN KRAUSE: Well, why don't we let 11 our witness go ahead and testify. 12 All right. I'm ready to call up Eddie 13 Heinemeier. We're going to give you three or four big 14 minutes. 15 MR. HEINEMEIER: Thank you, Chairman, 16 Commissioners. Appreciate it. 17 Now, we're working very much with the 18 team. And I must say they're doing a great job, and we 19 appreciate it. 20 My comment is about the reconciliation 21 going back many years. I know when they were looked at, 22 they said, "No, we don't have records more than four 23 years old." So if there were things before then, they 24 didn't charge the charities. 25 There was a practice back in the past 45 1 that if there was a problem with some temporaries, the 2 Commission -- or the person that worked with the 3 licensing would say, "Well, give us some other dates and 4 we'll put it there and we'll just use those dollars that 5 you've put in." 6 When they did the reconciliation, they 7 went back and said, "No, that's not in compliance with 8 the rules. We now want that money." 9 And it's just the charities are saying, 10 "Hey, this is not right. The Bingo Commission told us 11 we could do this. We did it before, and now they're 12 retroactively going back." 13 And I've samples of a couple. I didn't 14 bring more and I don't know if you even want these; but 15 I did bring them with me, showing where they're going 16 back to 2012 and Two-Thousand -- I think it was -- I 17 forgot. I brought two copies of them with me. It's 18 $500, $600, something like that, that they're going 19 back. It was $25 temporary. They were able to move 20 those to a different date and the reconciliation now is 21 charging for those and we don't feel that's fair. 22 CHAIRMAN KRAUSE: It sounds compelling. 23 Got any thought on that? 24 COMMISSIONER LOWE: Well, I think that 25 there -- 46 1 CHAIRMAN KRAUSE: Let me introduce to 2 you: Commissioner Lowe is our Bingo Commissioner. He's 3 our designated -- 4 (Simultaneous speakers.) 5 COMMISSIONER LOWE: Yeah, we've had -- 6 MR. HEINEMEIER: Appreciate your efforts. 7 COMMISSIONER LOWE: Thank you. 8 I appreciate your thoughts. I think, 9 though, that there's a difference between Commission 10 practice and management practice, in fact, to do with 11 what you're talking about; but they weren't within the 12 rules. 13 And so at some point in time, though, 14 we've got to say, "These are the rules, and we're going 15 to go by them regardless of what was going on in the 16 past." So I think that there are some consequences of 17 doing that that have resulted in what you're talking 18 about; but I think that as we move towards compliance 19 with the rules, this is an action that I approve of 20 taking. 21 And we want your input, we really do; but 22 on this issue I think Alfonso is on the right track. So 23 I do appreciate your thoughts. It may not be fair; but 24 it is the rules, so. 25 MR. HEINEMEIER: But if they told them 47 1 they could do it, they shouldn't come back four years 2 later and then charge them for it. That's my point. 3 COMMISSIONER LOWE: I understand, and I 4 appreciate that. I really do. 5 MR. HEINEMEIER: Thank you. 6 CHAIRMAN KRAUSE: Thank you, sir. 7 Commissioner Lowe, you had... 8 COMMISSIONER LOWE: I wanted to talk 9 briefly about the Bingo Advisory Committee. The statute 10 allows for the employment of a Bingo Advisory Committee; 11 and I think, Chairman, you, in the past, because you 12 were there, there was a Committee that was in place. Is 13 that correct? 14 CHAIRMAN KRAUSE: There was a Bingo 15 Advisory Committee. 16 COMMISSIONER LOWE: All right. And so -- 17 and I don't know the context of what happened, but 18 here's where I am today on this: Over the last year 19 and, I guess, what, four months we've been on the 20 Commission, I've really learned a whole lot more about 21 bingo than I ever thought I would know about it. 22 When I was a kid, Bingo was a card and 23 some pinto beans; but I will say that it's an important 24 business. It's an important way for charities to raise 25 money. 48 1 I feel as far as the usefulness of the 2 committee, though, I think now we are effectively having 3 industry input, sharing input, first of all, through our 4 meetings. We have meetings where we have the 5 opportunity for public comment and challenges or 6 problems with what we are doing. 7 Also, you know, we had the rulemaking 8 process; and I was involved in that. We had a 9 stakeholder committee that we fleshed out a lot of 10 problem. We negotiated some rule changes, and I think 11 the rules are in better shape as a result of what we did 12 in that. 13 Last week we had a really good meeting, a 14 Stakeholders Committee meeting. I felt like it was a 15 good way to continue the dialogue between industry and 16 regulators. And so we met for about two hours and 17 talked about -- we spent a lot of time talking about 18 illegal gambling. Imagine that. 19 And we talked about some other issues, 20 and my thought is that we will continue those 21 stakeholder meetings to allow for us to respond to the 22 industry and charity issues that come up; and I would 23 prefer to move forward in that direction with 24 stakeholder meetings, as opposed to appointing a formal 25 Bingo Advisory Committee. And as long as it's working 49 1 and everybody's happy with it, I think that's the way to 2 go. 3 You know, I think that with what 4 Alfonso's doing in responding timely -- if a question 5 comes up, he's timely responding to that -- you know, we 6 can't fix the law. That's the Legislature's job. But 7 within the rulemaking and operation of the Bingo 8 Division, I think that a good way to approach this for 9 the foreseeable future is just to continue our 10 stakeholder meetings and industry response through 11 Alfonso. All right? 12 CHAIRMAN KRAUSE: Yes. 13 COMMISSIONER LOWE: That's what I think. 14 CHAIRMAN KRAUSE: Any other comments on 15 bingo in general and Commissioner Lowe's comments? 16 (No response.) 17 CHAIRMAN KRAUSE: All right. Thank you 18 for your report. Thank you for your testimony. 19 The next item is to hear from Executive 20 Director, Gary Grief. 21 AGENDA ITEM XIII 22 MR. GRIEF: Thank you, Mr. Chairman. 23 Commissioners, in addition to what's in your notebook 24 this morning, I do want to report to you about two 25 conferences coming up. 50 1 These are both conferences that I 2 reported to you previously on. The first is going to be 3 the World Lottery Summit in Singapore, November 6th 4 through the 9. This is the conference that Ms. Edwards 5 was referencing in her presentation earlier this 6 morning. 7 The Texas Lottery, we are a member of the 8 WLA, the World Lottery Association and I'm planning to 9 attend that conference representing both the Texas 10 Lottery and the Multi-State Lottery Association, as its 11 president and my travel expenses are going to be covered 12 under our membership with the WLA. 13 Secondly, on December 4th through the 14 7th, I'll remind you that the Texas Lottery will be 15 hosting the LaFleur's Lottery Conclave, a conference 16 that will be held here in Austin at the InterContinental 17 Stephen F. Austin Hotel. We last hosted this conference 18 in 2014, and it was a great success. 19 Now, Terri Markle and Bruce LaFleur are 20 the two organizers of that conference; and they are 21 putting together a terrific program for us. 22 Concurrent with that conference happening 23 that week, I'm going to hold a full Multi-State Lottery 24 Association Board meeting here in Austin as well. So 25 out of the more than 200 attendees that will be at that 51 1 conference, around 25 to 30 of those will be lottery 2 directors from other states. And we'll also have 3 leaders from every part of the lottery industry from all 4 over North America and Canada as well. 5 Commissioners, that concludes my report 6 today. I will be happy to answer any questions that you 7 might have. 8 CHAIRMAN KRAUSE: Any questions for our 9 Executive Director? 10 COMMISSIONER LOWE: No, sir. 11 COMMISSIONER ARRIETA-CANDELARIA: No, 12 sir. 13 CHAIRMAN KRAUSE: Moving on to 14 Mr. Biard -- oh, anybody need a break? 15 AGENDA ITEM XIV 16 MR. BIARD: Commissioners, Tab XIV, 17 Item XIV in your notebook are the enforcement orders; 18 and they contain 15 lottery and bingo enforcement cases. 19 Tabs A through O, these are cases where 20 the commission staff found a violation of the statutes 21 or rules. In most cases either the licensee failed to 22 appear at the hearing and it proceeds by a default or 23 staff and the licensee reached a settlement. 24 Today our last item, Tab O, is a fully 25 litigated bingo case; and the licensee in that case is 52 1 here Mr. Hayward Rigano, and has asked to speak to the 2 Commission. 3 I'll briefly describe the cases, and you 4 can choose to proceed on those as you like: 5 Tabs A through J, the first ten items, 6 are non-sufficient fund lottery retailer license 7 revocations that are handled in a single order. Each 8 case was presented at the State Office of Administrative 9 Hearings for revocation of the retailer license on the 10 grounds the licensee failed to have sufficient funds in 11 their bank account to cover fund transfers to the 12 Lottery Commission's account. In each case the 13 Administrative Law Judge recommended revocation, and the 14 staff recommends you approve the master order revoking 15 the license in each case. 16 Next, we have four lottery agreed orders, 17 Tabs K through N. Tab K is J & S Food Mart in Garrison, 18 which is in Nacogdoches County. In this case the 19 licensee lost a pack of tickets for a scratch ticket 20 game. The IGT sales representative advised the licensee 21 to report the pack as stolen, which he did. A few 22 months later someone, a customer, went to a claims 23 center to claim a prize from a ticket from that stolen 24 pack. It turned out the licensee found it, the pack, 25 after reporting it stolen and started selling the 53 1 tickets. The licensee admitted to a Tyler claims center 2 what he had done and that he had instructed his 3 employees to pay winners from that pack. A licensee may 4 not sell tickets that have been reported as stolen 5 because they've been inactivated on the lottery gaming 6 system. The licensee agreed to a ten-day suspension in 7 that matter. 8 Tab L is for Family Grocery in 9 Pflugerville. In this case the clerk at the licensee's 10 store took a credit card in payment for lottery tickets. 11 The customer had intended to buy one ticket for a 12 Powerball, but someone had previously marked the play 13 slip to purchase six tickets. So the sale rang up as 14 $12 instead of $2, and the customer did not have cash to 15 pay. A second clerk apparently used abusive language, 16 criticizing the customer's inability to pay cash or use 17 a debit card for the purchase. The licensee agreed to a 18 ten-day suspension, and the two clerks involved are no 19 longer employed at the store. 20 Tab M is for Cedar Park Quick Mart in 21 Williamson County. In this case the clerk in the store 22 accepted a credit card in payment for a lottery ticket. 23 The transaction came to light because the credit card 24 had been reported stolen. The clerk admitted to the 25 violation to a Commission investigator, and the store 54 1 owner acknowledged the violation. The licensee agreed 2 to a ten-day suspension. 3 Tab N is for 7-Eleven Number 32812 in 4 Denton. In this case the clerk had told a customer they 5 had to buy an additional unrelated item to use a debit 6 card to purchase lottery tickets. The customer bought a 7 candy bar in order to use the debit card to buy ten 8 Powerball tickets. The store manager and the owner both 9 told a Commission investigator that the store policy was 10 to require additional purchases whenever a customer 11 wanted to use a debit card to buy lottery tickets, which 12 is not allowed. And the licensee agreed to a ten-day 13 suspension. 14 And, finally, Tab O is the fully 15 litigated bingo case, Julam Investments in Forth Worth. 16 Julam is a commercial lessor who was accused of allowing 17 the operation of 64 gaming machines at the Lucky Star 18 Bingo Hall in Fort Worth during bingo occasions. The 19 Bingo Act and Commission Rules prohibit any game of 20 chance other than charitable bingo or a charitable 21 raffle to be conducted or allowed during a bingo 22 occasion. 23 The judge recommends revocation of the 24 license. The licensee did not file exceptions to the 25 judge's proposal. Both parties submitted a one-page 55 1 summary of the case, which is just below the proposed 2 order in your notebooks. 3 In this case the facts were not in 4 dispute. The judge, relying in large part on prior SOAH 5 decisions and court cases, found that the operation of 6 the machines violated the Bingo Act and Commission 7 Rules. These machines awarded points that could be 8 redeemed for bingo products and pull-tabs or for future 9 play on the machines. 10 The judge found that the location of the 11 machines in a separate room to be irrelevant to the 12 analysis, focusing instead on the fact that the 13 activities between the game room and the bingo hall were 14 impermissibly intertwined. The judge also noted that 15 the lessor had been repeatedly notified by the 16 Commission of the illegal gambling devices, but 17 continued operations. The lessor argued that any 18 violation was not willful and that the Commission should 19 just assess a fine. As I already said, the judge 20 recommends revocation of the commercial license. 21 That concludes my presentation. 22 As I said, Counsel for the commercial 23 lessor is present here today. 24 CHAIRMAN KRAUSE: Why don't we go ahead 25 and hear from our witness, Howard Rigano. Did I say 56 1 that right? 2 MR. RIGANO: Hayward Rigano. 3 CHAIRMAN KRAUSE: Hayward Rigano. 4 MR. RIGANO: Commissioner Krause, 5 Commissioners, I'd like to address a couple of things 6 just to make sure y'all are aware of this before you 7 make your ultimate ruling on this. 8 This bingo hall opened in August of 2005, 9 and the scenario that was present is that there was a 10 separate room where the games were at. Then there was 11 another room where the bingo was conducted. There's a 12 wall in between the two of them. This scenario of how 13 the bingo hall was set up was present in 2005 when it 14 opened; and it was present in 2015, in September, when 15 it closed. 16 The reason I think that's important is 17 because in this ten-year period of time that this bingo 18 hall was in operation, numerous official auditors and 19 inspectors from the Bingo Division had been in this 20 location; and it was not until August 3rd of 2015 that 21 Julam Investments received a letter stating, "You're 22 doing something wrong." 23 In 2012 Mr. Ayuma did an inspection and 24 prepared, I think they call it a game machine report, 25 which sets out exactly what Investigator Brannon found 57 1 in November of 2014, that the games were here; they were 2 being operated in this manner and this is the process of 3 what's going on. 4 Nobody ever informed the owner, Ms. Ruby 5 Morgan, that she was doing something incorrect. Had she 6 been informed, I'm almost certain that she would have 7 corrected the problem and stopped doing whatever the 8 offensive conduct was. She was not ever given that 9 chance. 10 And I think based upon that, that now, 11 ten years later, they want to say, "Well, you've been 12 given numerous chances," that's not true. There was one 13 letter that was delivered to her. That's it. And that 14 was in August of 2015. There are no other letters. 15 There are no other official statements that: What 16 you're doing is incorrect. But now to then say that 17 what she was doing deserves what I refer to as the death 18 penalty -- she's going to have her license revoked -- is 19 unfair. And that's our statement. 20 Any questions? 21 COMMISSIONER LOWE: So at the ALJ 22 hearing, you fleshed out all of these points, right? 23 MR. RIGANO: Yes, we did. 24 COMMISSIONER LOWE: And I think that the 25 ALJ at the hearing was relying the AG's opinion from 58 1 2010 wherein that the AG determined that you cannot swap 2 bingo -- I don't know the word -- bingo paraphernalia, 3 whatever -- 4 MR. RIGANO: They didn't want you to 5 exchange something from the game for bingo products. 6 COMMISSIONER LOWE: From the illegal 7 eight-liners that were in her -- that was all fleshed 8 out, right? You had a full and complete hearing before 9 the ALJ, and he ruled against you on all these points? 10 MR. RIGANO: He found that there were 11 other instances of -- and I believe, Mr. Biard mentioned 12 it -- notification to her; but what those notifications 13 were, such as, you just mentioned, the Attorney General 14 Opinion from 2010, which there's no evidence to suggest 15 that she ever saw that or was made aware of that AG 16 opinion. 17 COMMISSIONER LOWE: So does she have the 18 machines, still, in her bingo hall? 19 MR. RIGANO: The bingo hall was closed in 20 September of 2015. 21 COMMISSIONER LOWE: When did she take the 22 machines out? 23 MR. RIGANO: August 3rd, when they 24 received the letter, the machines were shut down. 25 COMMISSIONER LOWE: She apparently had an 59 1 interest in those eight-liners, right, with her son; is 2 that correct? 3 MR. RIGANO: Her son was operating the 4 bingo side of the operation, and she was doing the 5 games. 6 COMMISSIONER LOWE: So she -- they were 7 her machines, right? 8 MR. RIGANO: They were owned by a vendor; 9 but, yes, she was receiving part of the income from the 10 games, yes. 11 COMMISSIONER LOWE: And you made the 12 comment to the ALJ that the real problem is that you've 13 got new commissioners that are on the Commission that 14 take offense to this and are trying to change the way 15 things are done, right? You made that comment to the 16 ALJ? 17 MR. RIGANO: That's my belief, yes. 18 COMMISSIONER LOWE: All right. Well, I'm 19 the guy that's causing the problems. 20 MR. RIGANO: I realize that. 21 COMMISSIONER LOWE: You're looking at 22 him. And so I think there was -- just from what I 23 looked at, the ALJ looked at all the evidence. There's 24 a notebook full of exhibits that were offered into the 25 case and the evidence and I'm prepared to stand by the 60 1 ALJ's decision and recommend that we make it our 2 decision, but I appreciate your input. But I will tell 3 you it's my effort that we're going to do -- we're going 4 to have legal bingo, and illegal gambling in bingo halls 5 is not part of that. 6 MR. RIGANO: I understand, and I 7 appreciate that. 8 CHAIRMAN KRAUSE: Is you client willing 9 to play bingo, do bingo but forego the illegal games? 10 MR. RIGANO: Absolutely. And Ms. Morgan, 11 the reason she's not here this morning is because she's 12 in the hospital. She has been in ill health for 13 probably the last two or three years, and that might 14 have been some of the issue because I think that 15 Mr. Royal had mentioned that they sent out a bulletin by 16 e-mail in -- I can't remember the exact year -- I want 17 to say it as maybe 2012 or '13, one of those dates, 18 informing people that, you know, "You need to stop this 19 activity." She never received it; or if she did receive 20 it, she didn't read it. And part of the problem was 21 because she was not really taking care of her business 22 as she probably should have, and that's one of the 23 reasons they closed the bingo hall. 24 And we had actually made a proposal that 25 all she wants to do is transfer the license to somebody 61 1 who would be a better custodian of it. She doesn't have 2 any intention of conducting bingo. As a matter of fact, 3 if she tried to do something in that regard, I'm certain 4 that the people at the Charitable Bingo Division would 5 probably deny her the right to use that bingo license. 6 But what she would like to do is be in a position to 7 transfer it to somebody else. 8 She's not in physical or health condition 9 to do this anymore. And she's aware now that the games 10 she had were objectionable, but that wasn't the case in 11 the ten years that they were operating. And that's why 12 I just feel that -- and I understand Commissioner Lowe 13 wants to make changes, and changes need to be made. But 14 I don't know if this is the right example to make those 15 changes. 16 That's all we've got. 17 CHAIRMAN KRAUSE: Thank you, sir. 18 MR. RIGANO: Thank you. 19 COMMISSIONER LOWE: So I move that we 20 adopt the ALJ's opinions and revoke the license. 21 CHAIRMAN KRAUSE: All right. Would you 22 like to amend that to adopt staff recommendation in all 23 the cases? 24 COMMISSIONER LOWE: Yes. I'm sorry. 25 CHAIRMAN KRAUSE: No, that's A-okay. 62 1 Is that going to work for us? 2 MR. BIARD: That's fine. 3 CHAIRMAN KRAUSE: Okay. Second? 4 COMMISSIONER RIVERA: Second. 5 CHAIRMAN KRAUSE: All in favor say "Aye." 6 (Chorus of "Ayes.") 7 CHAIRMAN KRAUSE: Any opposed? 8 (No response.) 9 CHAIRMAN KRAUSE: There are none opposed. 10 It carries. 11 AGENDA ITEM XVI 12 CHAIRMAN KRAUSE: We are now going to go 13 into Executive Session. I guess I need a motion for 14 that. 15 COMMISSIONER RIVERA: So moved. 16 CHAIRMAN KRAUSE: All right. And I 17 second that. 18 We are going to deliberate personnel 19 matters and seek legal advice if we need it. 20 MR. BIARD: It's 10:41 -- it's 11:41. 21 I'm sorry. 22 (Off the record 11:41 a.m. to 12:16 p.m.) 23 AGENDA ITEM XVII 24 CHAIRMAN KRAUSE: The Texas Lottery 25 Commission is out of Executive Session at 12:16 p.m. Is 63 1 there any action to be taken as a result of the 2 Executive Session? 3 Commissioner Lowe. 4 COMMISSIONER LOWE: Chairman, thank you 5 for recognizing me. I apologize to the Commission and 6 to our Charitable Bingo Director for not being on top of 7 this earlier in my tenure, but one of the things that we 8 need to do periodically are employee evaluations. And 9 so I am prepared to move that we approve the employee 10 evaluation and then also set his annual salary in the 11 amount of 152,659.68 effective November 1st, 2016. 12 CHAIRMAN KRAUSE: Second? 13 COMMISSION HEEG: Second. 14 CHAIRMAN KRAUSE: All in favor say "Aye." 15 (Chorus of "Ayes.") 16 CHAIRMAN KRAUSE: All opposed say "Nay." 17 (No response.) 18 CHAIRMAN KRAUSE: Congratulations. 19 MR. ROYAL: Thank you, Commissioners. 20 AGENDA ITEM XVIII 21 CHAIRMAN KRAUSE: I'm going to make my 22 own motion -- I expect four seconds -- to adjourn this 23 meeting. 24 COMMISSIONER RIVERA: Second. 25 CHAIRMAN KRAUSE: Four seconds. I want 64 1 four seconds. 2 COMMISSIONER LOWE: Second. 3 COMMISSIONER ARRIETA-CANDELARIA: Second. 4 COMMISSIONER HEEG: Second. 5 CHAIRMAN KRAUSE: All right. The meeting 6 is adjourned. 7 (Adjournment at 12:15 p.m.) 8 --oo0oo-- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 65 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 an excerpt of the 12 above-referenced meeting to be included in the 13 transcript of said meeting, and was 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 31st day of October, 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