1 1 2 3 4 5 TEXAS LOTTERY COMMISSION 6 7 8 COMMISSION MEETING 9 10 11 12 February 2, 2017 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 5 GENERAL COUNSEL: Bob Biard 6 7 EXECUTIVE DIRECTOR: Gary Grief 8 CHARITABLE BINGO OPERATIONS 9 DIVISION DIRECTOR: Alfonso D. Royal III 10 11 ADMIN. DIVISION DIRECTOR: Michael R. Fernandez 12 CONTROLLER: Katheryn J. Pyka 13 14 WEAVER AND TIDWELL: Kevin Sanford 15 McCONNELL JONES 16 LANIER & MURPHY, LLP: Darlene Brown 17 PRODUCTS & DRAWINGS MANAGER, 18 LOTTERY OPERATIONS DIVISION: Robert Tirloni 19 LOTTERY OPERATIONS DIRECTOR: Michael Anger 20 21 --oo0oo-- 22 23 24 25 3 1 TABLE OF CONTENTS 2 Page 3 I The Texas Lottery Commission will call the 4 meeting to order. Pledge of Allegiance to the U.S. and Texas 5 flags........................................... 6 II Report, possible discussion and/or action on 6 the external audits and/or reviews relating to the Texas Lottery Commission, including FY 2016 7 annual financial audit.......................... 6 III Report, possible discussion and/or action on 8 agency major contracts, including amendment, renewal or extension of the contracts for 9 drawing studio and production services, instant ticket manufacturing and services, 10 and the trademark license and promotional agreement with the Dallas Cowboys............... 10 11 IV Report, possible discussion and/or action on agency prime contracts, including amendment, 12 renewal or extension of the contracts for promotional products and the trademark 13 license and promotional agreement with the Houston Texans.................................. 11 14 V Report, possible discussion and/or action on lottery sales and revenue, game 15 performance, new game opportunities, advertising, promotional activities, market 16 research, trend, and game contracts, agreements, and procedures...................... 12 17 VI Report, possible discussion and/or action on transfers to the State and the agency's 18 budget.......................................... 24 VII Report, possible discussion and/or action 19 on the agency's Legislative Appropriations Request for FY 2018-2019........................ 26 20 VIII Report, possible discussion and/or action on external and internal audits and/or 21 reviews relating to the Texas Lottery Commission, and/or on Internal Audit 22 activities...................................... 47 IX Report by the Charitable Bingo Operations 23 Director and possible discussion and/or action on the Charitable Bingo Operations 24 Division's activities, including licensing, accounting and audit activities, pull-tab 25 review, and special projects.................... 51 4 1 X Report by the Executive Director and possible discussion and/or action on the 2 agency's operational status, major contracts, agency procedures, awards, 3 and FTE status.................................. 51 XI Consideration of the status and possible 4 approval of orders in enforcement cases: Lottery NSF License Revocation Cases (Default) 5 A. Docket No. 362-17-1250 - M Rivas Food Store No. 2 6 B. Docket No. 362-17-0982 - Mainland Texaco C. Docket No. 362-17-0983 - Joy Liquor 7 D. Docket No. 362-17-0984 - BAC Grocery E. Docket No. 362-17-1252 - Home Run Food Mart 8 F. Docket No. 362-17-1013 - Batesville One Stop G. Docket No. 362-17-0985 - Adam's Mini Mart 9 H. Docket No. 362-17-0987 - Bun Penny Food & Wine..................................... 52 10 Other Lottery Revocation Cases I. Docket No. 362-16-4658 - Te-Jo's Drive In 53 11 Lottery Agreed Orders J. Docket No. 2016-723 - Quick Way Foods #2 12 K. Docket No. 2016-1056 - Foods and Energy Corner 13 L. Docket No. 2017-99 - Munchy's M. Docket No. 2017-135 - Greenhouse Citgo 14 N. Docket No. 2017-136 - Bear Creek Food Store.................................... 53 15 Bingo Agreed Orders O. Docket No. 362-16-3511.B - VFW Post 2427 16 Tomball.................................. 56 Bingo Revocation and Denial Cases 17 P. Docket No. 362-16-3679.B - Giorgio Rizzo (Bingo Worker) 18 Q. Docket No. 362-16-5598.B - Kori Clark, Sr. (Bingo Worker) 19 R. Docket No. 362-15-1666.B and 362-15-3696.B - East Plano Bingo, Inc. 20 S. Docket No. 362-16-4456.B - Pilot Club of Tyler Foundation; 362-16-4457.B - VFW Post 21 4002 Longview; 362-16-4458.B - American Legion Post 296; 362-16-4459.B - VFW Post 22 7523; and 362-16-4460.B - Pilot Club of Mineola, Inc............................. 56 23 XII Public Comment.................................. 64 XIII Commission may meet in Executive Session: 24 A. To deliberate personnel matters, including the appointment, employment, 25 evaluation, reassignment, duties, discipline, or dismissal of the 5 1 Executive Director and/or the Charitable Bingo Operations Director pursuant to 2 Section 551.074 of the Texas Government Code. 3 B. To deliberate the duties of the General Counsel and/or the Human resources 4 Director pursuant to 551.074 of the Texas Government Code. 5 C. To receive legal advice regarding pending or contemplated litigation or settlement 6 offers, or other legal advice, pursuant to 551.071(1) and (2) of the Texas Government 7 Code, including but not limited to legal advice regarding the following items: 8 Pending and potential litigation regarding Fun 5's Scratch Ticket Game #1592, 9 including Travis Co. District Court Cause No. D-1-GN-14-005114, Third District 10 Court of Appeals Cause No. 03-16-00172-CV (Steele, et al. V. GTECH Corp.); Dallas Co. 11 District Court Cause No. DC-14-14838, Fifth District Court of Appeals Cause 12 No. 05-15-01559-CV (Nettles v. GTECH Corp. and Texas Lottery Commission); and El Paso 13 County Court Cause No. 2014-DCV-4113 (McDonald v. GTECH Corp.) Julam Investments, 14 Inc. V. Texas Lottery Commission (Travis Co. District Court Cause No. D-1-GN-16-0061241); 15 State of Texas v. Equal Employment Opportunity Commission et al. 16 Legal advice regarding Texas Government Code Chapters 466 (State Lottery Act) and 17 467, the Bingo Enabling Act, the Open Meetings Act, the Public Information Act, 18 the Administrative Procedure Act, employment and personnel law, procurement 19 and contract law, evidentiary and procedural law, ethics laws, and general 20 government law. Legal advice regarding any item on this 21 open meeting agenda...................... XX XIV Return to open session for further deliberation 22 and possible action on any matter posted for discussion in Executive Session. Any matter 23 posted for Executive Session also may be the subject of discussion and/or action in open 24 session prior to Executive Session.............. XX XV Adjournment..................................... 78 25 --oo0oo-- 6 1 P R O C E E D I N G S 2 CHAIRMAN KRAUSE: Good morning. I call 3 this meeting of the Texas Lottery Commission to order. 4 Today is February the 2nd. It is 10:01 a.m. 5 Commissioners Arrieta-Candelaria, Lowe, and Rivera are 6 present. Missing is Commissioner Heeg, but that's okay. 7 We still have a quorum. 8 ITEM I 9 CHAIRMAN KRAUSE: Our first order of 10 business is to say the pledge of allegiance, led by our 11 designated Pledge Commissioner, Commissioner Candelaria. 12 (Pledges recited.) 13 CHAIRMAN KRAUSE: We are known for our 14 efficiency here at the Lottery Commission in conducting 15 our business for the public; and so we're going to start 16 off very quickly with Katheryn Pyka, who is going to 17 come up and give us a report on fiscal year 2016, among 18 other things. 19 ITEM II 20 MS. PYKA: Good morning, Commissioners. 21 My name is Kathy Pyka, Controller for the agency. With 22 me this morning is Kevin Sanford, the engagement partner 23 from the firm, Weaver and Tidwell, who performs our 24 required annual financial audits. 25 Kevin, I'll let you proceed. 7 1 MR. SANFORD: Good morning, 2 Chairman Krause and Commissioners. 3 It's my pleasure to be here this morning. 4 As Kathy mentioned, I'm the partner on the engagement to 5 conduct the audit of the financial statements of the 6 Texas Lottery Commission. We have issued our report 7 that was final as of mid December 2016, and I'm here to 8 present the results of that audit to you today. 9 On page number 4 is our opinion on the 10 financial statements. That opinion is an unmodified 11 opinion; it used to be called an unqualified opinion. 12 It's the highest level of assurance that auditors can 13 give a set of financial statements and states that in 14 all material respects, the Lottery Commission's 15 financials are accurately presented. 16 So to highlight financials briefly, I 17 wanted to just go through the Lottery Fund at a little 18 bit of a high level, which begins on page number 26 for 19 the Statement of Net Position and going into page 27. 20 The Lottery Fund had total assets to end the year of 21 921.4 million, and it had claims on those assets of 22 liabilities of 885.5 million. That does include the net 23 pension liability coming from ERS of Texas of about 24 35.9 million. So the total net position of the Lottery 25 Fund, the amount of assets that exceed liabilities was 8 1 34.3 million at the end of last fiscal year. And the 2 change in that year over year is on page number 29. 3 The total revenues of the Lottery, 4 consisting primarily of (inaudible) was just over 5 $5 billion per year, 5.07 billion. The total operating 6 expenses were 5.06 billion, consisting of about 62 7 percent of revenues in the form of lottery prizes as 8 well as almost 1.4 billion transfers to other 9 intergovernmental entities, primarily the Foundation 10 School Fund, for the available payment. Operating 11 income was just short of $11 million. There was also an 12 11 million, almost 12 million, increase in fair value of 13 investments. So the total net position of the Lottery 14 Fund increased by 22.9 million year over year. 15 And the footnotes to the financials begin 16 after that. I was not going to go through these in 17 detail. There is really only one new change from the 18 year that did not impact any numbers. It's just a new 19 disclosure for fair value. The GASB statement for 20 governmental entities adopted the same or very similar 21 models now used by corporate for-profit entities to 22 report fair value for its disclosure of fair value; but, 23 again, it did not change any numbers in their financial 24 statements. 25 And then the last item in the report I 9 1 think that is worth noting is since our audit of the 2 Lottery's financial statements is conducted in 3 accordance with the government auditing standards, we 4 are required to issue a report on internal control over 5 the lottery financial statements; and that report is the 6 last item in this bound document on pages 79 and 80. 7 And we're also pleased to report that we 8 had no findings over internal control, either 9 significant deficiency or material weakness, and also no 10 items of noncompliance to report to you today. So, 11 really, in all respects it was a clean audit. 12 And I think that's the end of everything 13 we prepared. I'd be happy to answer any questions or go 14 in any more details if anybody would like that. 15 CHAIRMAN KRAUSE: Outstanding. 16 Commissioners? 17 You know, what can we say about having an 18 unmodified report? Thank you. 19 COMMISSIONER LOWE: I have something to 20 add: So I think that that goes to the quality of our 21 staff, the great work that they do, along with the 22 internal auditor we had. So I'm just grateful to have 23 you, Kathy, your group. 24 MS. PYKA: I have a phenomenal team, as 25 well as the support of the entire agency. We are very 10 1 lucky in that way. Thank you, Commissioners. 2 COMMISSIONER ARRIETA-CANDELARIA: Do we 3 need a motion? 4 CHAIRMAN KRAUSE: No. We don't have too 5 many action items. 6 So, anyway, next we're going to hear 7 from -- yes, you know who you are; come on up -- 8 (Laughter.) 9 CHAIRMAN KRAUSE: -- Michael Fernandez, 10 to the hot seat, please. 11 ITEM III 12 MR. FERNANDEZ: Good morning, 13 Mr. Chairman and Commissioners. 14 For the record my name is Mike Fernandez. 15 I'm the Director of Administration. 16 Item III in our agenda is a briefing 17 notice. It's to advise the Commission of staff's intent 18 to amend or extend three major contracts. First, we 19 intend to extend our Drawing Studio and Production 20 Services contract with Elephant Productions for a 21 one-year period; the second, we're amending our 22 Trademark License and Promotional Agreement with Silver 23 Star, Ltd. to provide for a selling presence at AT&T 24 Cowboy Stadium; and we intend to amend our Instant 25 Ticket Manufacturing and Services contract with 11 1 Scientific Games for promotions associated with the 2 Willy Wonka licensed property. 3 Each of the Commissioners have 4 independently confirmed they have no financial interest 5 in Elephant Productions; Pro Silver Star, the Dallas 6 Cowboys; or Scientific Games. 7 If you have any questions, I'd be happy 8 to answer them. 9 CHAIRMAN KRAUSE: Commissioners? 10 (No response.) 11 CHAIRMAN KRAUSE: Well explained. Thank 12 you. 13 Go on. 14 ITEM IV 15 MR. FERNANDEZ: Item IV on your agenda is 16 also a briefing item, Commissioners; and it's to advise 17 the Commission of staff's intent to amend or extend two 18 prime contracts. First, staff intends to extend our 19 current Promotional Products contract with the Beehive 20 Specialty for a one-year period. 21 And staff also intends to extend and 22 amend our Trademark License and Promotional Agreement 23 with Houston NFL Holdings. We intend to extend it for a 24 one-year period and to amend it to provide for a selling 25 presence with the Houston Texans home games. 12 1 Also, the Commissioners have 2 independently confirmed they have no financial interest 3 in either Beehive or with Houston NFL Holdings. 4 If you have any questions, I'd be happy 5 to answer. 6 CHAIRMAN KRAUSE: Commissioners? 7 (No response.) 8 CHAIRMAN KRAUSE: Thank you for those 9 reports. 10 Ms. Pyka. 11 ITEM V 12 MS. PYKA: Good morning, Commissioners. 13 Again, my name is Kathy Pyka, Controller; and with me, 14 to my right, is Robert Tirloni, our Products & Drawings 15 Manager. 16 Commissioners, the first chart that we 17 have for you this morning are our comparative sales for 18 the week ending January 28th, 2017. Our total fiscal 19 year 2017 sales for the 22-week period are now at 20 $1,953,000,000, which is a decrease of 203 million or 21 9.4 percent compared to the last fiscal year for the 22 same period. 23 As Robert and I have discussed at 24 previous meetings, we're now seeing the impact of the 25 record-setting 1.6-billion-dollar Powerball jackpot that 13 1 we had as we compare the year-over-year sales. 2 So as we break this down by product, 2017 3 Scratch Ticket sales, as reflected on the second orange 4 bar, $1,533,000. That's a 50-million-dollar gain over 5 last fiscal year; and right now we're at 78.5 percent of 6 total sales in the scratch product category. 7 And then moving to the blue bar, which 8 are our draw sales, we're at 419.9 million; and that 9 shows we have a 253-million-dollar decrease or 10 38 percent under the $673 million we had last fiscal 11 year. 12 And with that, Robert will now discuss 13 sales by product. 14 MR. TIRLONI: Thank you, Kathy. 15 Commissioners, this is the year-over-year 16 comparison through last Saturday, January 28th, 2017. 17 We'll start with draw games. Draw games as a whole are 18 down $253 and a half million. As Kathy just noted, the 19 bulk of that deficit is due to the decrease in 20 Powerball. 207.4 million is the deficit for the 21 Powerball game. 22 We're also experiencing declines with 23 Lotto Texas and with Mega Millions. Again, that's due 24 to lack of jackpots this year compared to last year. 25 Texas Two Step is one of our smaller 14 1 jackpot games. That game is actually experiencing a 2 surplus in '17 as compared to '16. It's up almost 3 $2 million. 4 If you look in the middle of the screen 5 at our daily draw games, we continue to see good 6 performance from Daily 4. That game is up just under 7 $2 million this year. 8 We continue to see migration of players 9 from Pick 3 to Daily 4 here in Texas. That has been 10 going on not only here but in many other states across 11 the country, and we are seeing declines on the other 12 daily draw games. 13 It's probably good for me to make a note 14 here about draw games as a whole at this point. The 15 daily -- the draw games are the more challenging portion 16 of the portfolio for us to promote and to market and to 17 sell. Unlike Scratch, they're not colorful and 18 preprinted. They don't sit on the counter at retail. 19 They're basically the invisible product in the retail 20 environment. 21 And when we have a lack of large jackpots 22 that are not generating excitement and interest for our 23 players and for our retailers, that challenge just 24 becomes even greater for us. So we have seven months 25 left in the year. We're hoping that with some luck we 15 1 might get some good rolls, and hopefully that will help 2 us erase some of those large deficits that we're facing. 3 Scratch is up almost 51 million year over 4 year. So we continue to see strong gains from the 5 scratch product; and when you combine both products 6 together, we are seeing the just under 203-million- 7 dollar deficit. 8 I do have one update for you today. At 9 the LaFleur's Conference that took place here in Austin 10 back in December, we won an award. It was an event 11 award. La Fleur's gives awards twice a year for 12 advertising and for promotional events, marketing 13 events. We won the event award for Texas Lottery 14 Sound & Cinema. So that took place here in Austin last 15 summer in July and August. 16 And I'm going to play this brief video 17 for you-all. 18 (Video playing.) 19 (Video ended and began to replay.) 20 MR. TIRLONI: We won't watch it a second 21 time. 22 (Laughter.) 23 MR. TIRLONI: I get no credit for this. 24 I'm just the messenger. The real kudos go to 25 LatinWorks, our ad agency, and our in-house advertising 16 1 and marketing team for putting this together; and we 2 wanted to share it with you and let you know that we had 3 won that award. I think it was a good event for us to 4 get really good brand exposure with a different 5 demographic in a different market here in Austin. 6 So that concludes our report, but we're 7 happy to answer questions for you. 8 CHAIRMAN KRAUSE: Commissioners, 9 questions? 10 COMMISSIONER RIVERA: This question may 11 be more so for Gary; but this event was last summer, 12 correct? And this was the first; is that right? Or how 13 many have we had? 14 MR. TIRLONI: This was the first time 15 that we did the Sound & Cinema here in Austin, yes. 16 COMMISSIONER RIVERA: Okay. And then, 17 from that, the bulk of the people who were there, the 18 millennials, are from the greater Austin area; is that 19 correct? 20 MR. TIRLONI: I would guess mostly 21 Austinites, yes. 22 COMMISSIONER RIVERA: Have you seen an 23 increase in sales, whether it's scratch off or lottery, 24 in the Greater Austin area since that event compared to, 25 say, from year to date, looking at previous models? 17 1 MR. TIRLONI: I don't know that we went 2 back and looked at Austin sales. That's something we 3 can do for that time period. 4 COMMISSIONER RIVERA: Yes, I would like 5 to see what the impact would be and if it can be done 6 elsewhere in the state. 7 MR. TIRLONI: Absolutely. We'll pass 8 that on to LatinWorks and our team, and we'll look for 9 further opportunities like that. 10 CHAIRMAN KRAUSE: So surely before the 11 event you had an idea of how you would measure the 12 effectiveness of the event and what you were looking for 13 after? 14 MR. GRIEF: Let me jump in here. 15 You ask a good question, Mr. Chairman. 16 That's always a question that we get, and it's a 17 question we'll be getting very soon as we go through the 18 budget process that you will hear about with the Senate 19 and the House. 20 As you may remember, a few years ago we 21 had a study done by the Mays School of Business at Texas 22 A&M where a doctorate in that field did an analysis of 23 advertising; and so we have that type of data to support 24 the dollars spent on advertising. 25 To Robert Tirloni's point and to 18 1 Commissioner Rivera's point, many times these type of 2 events -- and I stress this with my staff as well -- we 3 are not always doing it to see if we can get a lift in 4 sales in that particular market at that particular time, 5 especially with something where we're trying to connect 6 with millennials. 7 What we're really trying to do with this 8 event -- and you're going to hear about another venture 9 that we're likely undertaking a few months from now, a 10 much more substantial venture in the area of music -- 11 what we're trying to do is become more a part of the 12 fabric of the younger generation, be more of the 13 mainstream, putting more in their consciousness as 14 something that they're getting used to being around and 15 used to buying because, quite frankly, many of the 16 millennials right now feel like the lottery, that's 17 something their parents do or their grandparents do and 18 somewhat old school. 19 These younger kids are on the Internet. 20 They're moving fast. Their lifestyle is completely 21 different. We believe we've found one opportunity in 22 the music area to really connect, where they will stop, 23 they will listen, they will learn about the lottery and 24 we'll become more a part of the mainstream with that 25 group. That's our goal. 19 1 CHAIRMAN KRAUSE: I hear that, but my -- 2 I'm interested in: How do we know that that's working 3 for us, though? I understand it's an aspiration. 4 MR. GRIEF: All our advertising, we 5 believe, works; and the proof is in the results. And 6 when you look at the Texas Lottery over the last several 7 years, we've had no flexibility given to us by the 8 Legislature in the types of products that we can offer 9 to the public. We have the same products, the scratch 10 games and the draw games, and that's it. Yet, sales 11 continue to climb, sales continue to set records; and 12 the revenue we turn back over to the Foundation School 13 Fund and the Fund for Veterans' Assistance continues to 14 grow. 15 One factor -- certainly not the only 16 factor -- one factor that is causing that to happen is 17 our ability to keep improving in the way we're able to 18 deploy our limited advertising dollars and the ideas 19 that we continue to receive from LatinWorks, who has 20 been an outstanding partner of ours and has really 21 helped us do things somewhat out of the box, like this 22 promotion you just saw here. 23 We want to continue, and I want to 24 continue to push the edge of the envelope on that to see 25 where we might get into more of the mainstream of the 20 1 younger generation. We're already putting out a pretty 2 heavy presence in the digital area. 3 For example, I don't know if any of the 4 Commissioners ever listen to Spotify or Pandora. If you 5 do on a regular basis, you're going to see Texas Lottery 6 ads throughout that process. These are avenues that 7 five years ago the Texas Lottery was never entering 8 into. We're trying to be more progressive. 9 Since we do have a fixed advertising 10 budget, that draws down our traditional dollars of 11 having them going to television, radio. And, you know, 12 that traditional advertising is, quite frankly, not as 13 effective as it used to be. 14 There's so much variety of channels 15 available, not just on broadcast TV but on the Internet; 16 as you know, lots of folks are unplugging from their 17 cable system. They're not even seeing commercials. The 18 only commercials I ever watch are the ones during 19 sporting events and the news. Every other program I 20 watch I DVR, and I don't watch commercials. 21 So we're ever mindful of those kinds of 22 things, and we're trying to find new and creative ways 23 of doing it. So as far as measuring, the proof is in 24 the pudding as far as we're concerned about it. 25 COMMISSIONER LOWE: A question or two: 21 1 Didn't I see a metric in there that we had 1.2 million 2 impressions? So that's a measurement that we have 3 that's -- you know, that we can see on paper. 4 And then would it be possible to have 5 LatinWorks give us a briefing on the strategy, overall 6 strategy that they're looking at so we could have a 7 little bit more direct -- I'm not being insulting -- 8 just a more direct idea of what their theory is on how 9 to handle these issues? 10 MR. TIRLONI: Absolutely. 11 COMMISSIONER LOWE: And then do we have 12 the opportunity for a presence at South by Southwest? 13 Do we usually do that event? 14 MR. TIRLONI: I believe a few years ago 15 we had a presence at South by Southwest. 16 MR. GRIEF: I'm going to ask Michael 17 Anger to come up. It's not really Robert's area. 18 COMMISSIONER LOWE: I'm sorry. 19 MR. ANGER: Good morning, Commissioners. 20 For the record my name is Michael Anger, 21 and I'm the Lottery Operations Director. 22 For about three or four years we were the 23 title sponsor at the South by Southwest Auditorium 24 Shores free concert series that South by Southwest puts 25 together and basically offers as a free open-community 22 1 concert here in the city. 2 And so the Sound & Cinema concept that we 3 did with Do512, which is a local aggregator of kind of 4 all things entertaining in the city, was predicated on 5 that. And we were with South by Southwest as the title 6 sponsor for that event, as I said, for a number of years 7 and we felt like that was successful; but let me tell 8 you, the price tag on that was fairly significant with 9 regard to comparing it to what we did with the Do512 10 opportunity. 11 So this year we felt like that was the 12 better route for us to go, but we have continued to look 13 for those types of opportunities. And you alluded to 14 impressions, which is certainly one of the ways that we 15 measure the effectiveness of our advertising and kind of 16 what we're getting for our money. It's, quite frankly, 17 challenging to tie it back to the actual dollar 18 purchases that are made by consumers in the marketplace 19 because we don't have data on our players. We don't 20 collect personal data on our players when they go into 21 the store to make a purchase. So making that 22 correlation is challenging; one of the measures we do 23 focus on is how many people can we touch, how many 24 people can we reach, and do we think that that was a 25 good value for the money we spent? 23 1 And I don't know if Robert alluded to it, 2 but one of the other things that I will tell you about 3 that's in addition to being recognized in the industry, 4 as was mentioned, at the La Fleur's Conference as one of 5 the best promotions conducted by lotteries around the 6 country, we also were acknowledged on Do512's site as 7 the top event here in the City of Austin this last year 8 by their readers. So millennials, young people, and 9 other people who are kind of plugged into the 10 entertainment avenue of this city actually voted and 11 selected that event as their top event this last year. 12 So that's something we're very proud of 13 and we think, along the lines of what Gary was saying, 14 that we are moving in the right direction, as far as 15 that's concerned, in trying to tap in to those folks and 16 reach people in a way that's kind of not the hard-sell 17 message, but being part of the community, being part of 18 what people are interested in and being a form of 19 entertainment that they can kind of map over and 20 recognize as something that they might identify with. 21 COMMISSIONER LOWE: I just mentioned 22 South by Southwest because that does give you a broader 23 exposure than -- of course, you get the whole nation and 24 the tech world and the movie industry and music; but it 25 is broader than just reaching out to the Austin market. 24 1 MR. ANGER: And we've explored a number 2 of opportunities in this state in this area with regard 3 to music, AEG Live; Texas Lottery Live Scratch Game, 4 they gave away concert opportunities through 5 second-chance drawings with AEG, who is one of the big 6 concert promoters, similar to C3, who does South by 7 Southwest. 8 So what we know from research is that 9 music and sports are things that index highly with 10 lottery players, and there's crossover between people 11 who participate in those activities and participate in 12 lottery or may have an interest in lottery. And so we 13 really do think that's a vehicle where we can improve 14 and continue to grow. 15 CHAIRMAN KRAUSE: Thank you, sir. 16 Kathy, I think you have the next item. 17 ITEM VI 18 MS. PYKA: I do. Thank you, 19 Commissioner. 20 Moving on to Tab VI, this is information 21 related to transfers to the State and the budget status. 22 Your notebook reflects accrued revenue transfers and 23 allocations to the Foundation School Fund, the Texas 24 Veteran's Commission, and qualified unclaimed prizes for 25 the period ending December 31st, 2016. 25 1 Our total revenue transferred to the 2 State amounted to $360.6 million for the first four 3 months of fiscal year 2017; and of that 360.6-million- 4 dollar transfer to the State, $339.7 million was the 5 amount of revenue transferred to the Foundation School 6 Fund. We transferred $7-and-a-half million to the Fund 7 for Veterans’ Assistance. And the balance of 8 $13.4 million was transferred from unclaimed lottery 9 prizes. 10 Commissioners, at this point through the 11 end of December, our total cumulative transfers to the 12 Foundation School Fund have now exceeded the 13 20-billion-dollar mark. 14 And the final item that we have for you 15 in this tab is our fiscal year 2017 method of finance 16 summary for the Commission through the first quarter. 17 The Commission Lottery Account Budget for fiscal year 18 '17 is $232.3 million; and of that amount we have 19 expended and encumbered 69.5 percent of the budget. 20 The bingo operations budget funded by 21 general revenue was $15.4 million; and through the end 22 of the first quarter we had expended 37.8 percent as 23 well as encumbered. 24 Commissioners, this concludes my 25 presentation. I'd be happy to answer any questions. 26 1 CHAIRMAN KRAUSE: Commissioners, do you 2 have questions? 3 (No response.) 4 CHAIRMAN KRAUSE: Thank you, ma'am. 5 Next item. 6 ITEM VII 7 MS. PYKA: We move on to Item Number VII, 8 which is an update related to the Legislative Budget 9 Board's Recommendations for the 85th Legislative 10 Session. 11 Commissioners, unlike previous 12 legislative sessions, the LBB budget recommendations for 13 the introduced budget bills for the Senate and the House 14 reflect different amounts for the session. In summary, 15 the Senate version of the budget includes an 18.1- 16 million-dollar reduction to the lottery dedicated 17 account, while the House version includes a 6-million- 18 dollar reduction. 19 The Commission's advertising budget 20 received the bulk of these reductions, including a 21 14.7-million-dollar reduction in the Senate version of 22 the bill and a 2.6-million-dollar reduction to 23 advertisement in the House version of the bill. 24 One other point is that neither version 25 of the budget bills included the new Scratch Ticket 27 1 Rider that addresses the funding of the Scratch Ticket 2 Production and Services Contract strategy, which we use 3 to pay for the printing of scratch tickets. 4 With regard to funding for Bingo, both 5 introduced versions of the budget include an increase of 6 $1 million to general revenue to restore the 4-percent 7 reduction related to local bingo prize fees. 8 In preparation for our budget hearings 9 before Senate Finance and House Appropriations, the LBB 10 requested that the Agency provide feedback on unfunded 11 items and those that the Commission would like to pursue 12 this session as exceptional item requests. 13 We routed documentation to LBB indicating 14 that we're seeking restoration of all budgetary 15 reductions to the lottery account that impact revenue 16 generation for the Commission. So under Senate Bill 1, 17 our exceptional item request is $16.1 million to 18 partially restore the 18.1-million-dollar budget 19 reduction, as well as funding of the new rider for 20 Scratch Ticket printing. 21 We prioritized the exceptional items to 22 ensure continued revenue generating functions and for 23 restoration of lottery revenue to the Foundation School 24 Fund to include three strategies: Mass media 25 advertising contract services restoration of $14.7 28 1 million; marketing and promotions, a restoration of 2 $627,000; and market research contracts, restoration of 3 $762,000. 4 Commissioners, while the Senate reduction 5 was $16.1 million, we believe it translates into a far 6 greater impact on revenue to our state's beneficiaries 7 and retailers. The economic impact that we've estimated 8 from the 16.1-million-dollar budget reduction includes a 9 sales reduction of almost $400 million, revenue 10 reduction of $108 million to the Foundation School Fund, 11 and a reduction of $20 million to our retailers for 12 their retailer compensation. 13 As a reminder, the new rider that we are 14 requesting addresses the funding mechanism of Scratch 15 Ticket printing. The current funding structure that we 16 have is a fixed-budget structure that doesn't provide 17 for increased sales from Scratch Ticket product growth. 18 We are requesting an estimated funding structure based 19 on percentage of Scratch Ticket sales. 20 Now, moving on to the House version of 21 the budget. Of the 6-million-dollar budget reduction, 22 we are requesting one exceptional item for the lottery 23 account in the amount of $4 million and funding of the 24 Scratch Ticket Rider. 25 The restoration listing is the same on 29 1 the House side as the Senate side, with the exception of 2 advertising. We are seeking $2.6 million in advertising 3 restoration in the House version. 4 The economic impact for the House version 5 4-million-dollar budget restoration, includes a sales 6 reduction of $74.6 million, revenue reduction to the 7 Foundation School Fund of just over $20 million, and 8 retailer compensation reduction of $3.7 million. 9 Commissioners, this concludes my 10 presentation. I'd be happy to answer any questions. 11 CHAIRMAN KRAUSE: Commissioners? 12 All right. Ladies first. 13 COMMISSIONER ARRIETA-CANDELARIA: Thank 14 you. 15 One of the things that I'm really 16 concerned about very early on during our discussion is 17 that, as in the past, to my understanding, we have been 18 exempt from any budget reductions. 19 MS. PYKA: That is correct. 20 COMMISSIONER ARRIETA-CANDELARIA: Because 21 we are a revenue-generating organization, any dollars 22 that we generate directly impact revenue and the State. 23 So we are not taking away any appropriations. We don't 24 receive any appropriations from the State, correct? 25 MS. PYKA: That is correct. We're exempt 30 1 from the budget certification process as the lottery 2 dedicated account is a revenue-generating account and is 3 not a funding item that will cost the appropriation 4 bill. The budget certification process for the lottery 5 dedicated account is that the budget not exceed the 6 12 percent limitation authorized in the statute. 7 COMMISSIONER ARRIETA-CANDELARIA: Okay. 8 So with that in mind, the concern that I have is that if 9 we have a reduction, particularly in the advertising 10 budget, that's going to correlate with a reduction to 11 revenues to the State; and that's really my concern if 12 we don't put dollars into those areas. 13 I think you could do an economic impact 14 model -- I think we may have done one in the past -- to 15 determine what is the economic impact not only of our 16 transfers to the Foundation School Fund but the impact 17 to our retailers and to our economy across Texas. And 18 that, to me, is very concerning. 19 And you mentioned that if we don't invest 20 that money, there is reduction of 400,000 million in 21 projected sales, an $108-million-dollar reduction into 22 our Foundation School Fund, and $20 million for 23 retailers. And that, I think, is very concerning to me 24 that we are, first and foremost, not exempt from the 25 cuts because we don't receive appropriations. We give 31 1 to the State, and I think that's a very important point 2 that we have to make and continue to make as an 3 organization. 4 The other issue that I have is the 5 administration reduction. Part of our extension as far 6 as administration goes is not only to fund the Lottery 7 Commission -- or excuse me -- to support the Lottery 8 Commission but also to support bingo. There's a large 9 amount of money that while, maybe not necessarily 10 reflecting on the books; but we are supporting the 11 charitable bingo site with administrative cost. 12 So you are directly impacting both of the 13 organizations; and I'm very concerned about that $1.3 14 reduction, specifically for computer equipment, 15 programming services, all of those costs that we really 16 need to continue to get in front of, rather than behind. 17 And the way I look at it is: It doesn't cost the State 18 any money to have these reductions. We're not getting 19 any money back; in fact, we're getting less back with 20 the impact of this reduction. 21 So I'm just very concerned about the 22 cuts, and I think that we need to address that as an 23 organization. 24 CHAIRMAN KRAUSE: Isn't there actually a 25 study in the past that quantifies this very thing? Can 32 1 you tell us about that? 2 MS. PYKA: Sure. In 2014, we went out 3 for a procurement and contracted with the Texas A&M Mays 4 Business School to determine the impact of advertising 5 on lottery sales in the state of Texas. The research 6 model that was included in the report suggested that 7 lowering advertising expenditures could lead to a 8 significant decrease in lottery sales; and the report 9 suggests a 10-percent decrease in advertising 10 expenditures would result in a 17-percent decrease from 11 lottery sales. 12 As we quantified the Senate version of 13 the budget, the advertising reduction would result in 14 $106.5 million in lost revenue to the State, while the 15 House reduction to advertising would result in 16 $18.9 million in lost revenue to the State. We have 17 incorporated these results in our documentation back to 18 the Legislative Budget Board. 19 MR. GRIEF: What percentage of the 20 advertising budget is proposed to be cut under the 21 Senate bill? 22 MS. PYKA: Well, in looking at the 23 overall reductions on the Senate side. There is a 23- 24 percent reduction to the total biannual budget of 25 $64 million. The introduced bill is $49.3 million, 33 1 which is a 14.7-million-dollar cut. 2 CHAIRMAN KRAUSE: And that doesn't really 3 save the State anything, does it? 4 MS. PYKA: It does not, again. 5 CHAIRMAN KRAUSE: Because they don't give 6 us anything? 7 MS. PYKA: No. The 14.7-million-dollar 8 budget cut is being viewed as a revenue savings to the 9 State. We view it as lost revenue of $106 million. The 10 decline in overall revenue is much greater than the 11 budget cut. 12 CHAIRMAN KRAUSE: Commissioner Lowe? 13 COMMISSIONER LOWE: I asked you this 14 yesterday. For advertising, the percentage of the 15 sales, I think, is less than a percent? 16 MS. PYKA: I'm prepared today. 17 COMMISSIONER LOWE: Okay. 18 MS. PYKA: In fiscal year 2016, 19 six-tenths of a percent of our lottery sales. Let me 20 back it up and say it different way. Our advertising 21 expenditures in 2016 as a percentage of lottery sales 22 were less than 1 percent or six-tenths of a percentage. 23 COMMISSIONER LOWE: So tell me again the 24 number that was projected loss in revenue. 25 MS. PYKA: Again, in lost revenue, 34 1 106.5 million for advertising alone on the Senate side, 2 and 18.9 million from advertising alone on the House 3 side. 4 COMMISSIONER LOWE: And what is the 5 percentage -- what do you think we'll lose in sales, 6 again? What's the number? 7 MS. PYKA: On the Senate side, just under 8 $400 million. 9 COMMISSIONER LOWE: We're going to lose 10 $400 million. 11 MS. PYKA: And revenue of $106 million on 12 just advertising. 13 COMMISSIONER LOWE: Against 14 million, 14 right? 15 MS. PYKA: Right. 16 COMMISSIONER LOWE: I was just looking at 17 that. The average for corporations, like GM and AT&T, 18 spend about 2 percent; and that's a low number for a big 19 corporation, 2 percent. We're way above -- or way under 20 the average for a corporation; and if we were a publicly 21 traded corporation, I think we'd be around 500, in 22 Fortune 500, right around that mark, right? 23 MR. GRIEF: I'll agree with that, 24 Commissioner; and to that point, the last time I looked, 25 among lotteries, the 44 lotteries in the U.S., we rank 35 1 39th in that percentage of advertising dollars as 2 compared to sales. 3 COMMISSIONER LOWE: So regardless of how 4 you feel about the appropriateness of the lottery, it 5 doesn't really seem to make much business sense that 6 we're having to deal with this issue is my comment. 7 COMMISSIONER ARRIETA-CANDELARIA: My 8 question is: What would be the plan or what is the plan 9 for -- what's Plan B if we only get funded for that 10 amount -- or we're allowed to only spend that amount, I 11 should say? 12 MS. PYKA: We haven't gotten to Plan B 13 because there are a lot of steps between now and the 14 final budget bill. We need to appear before Senate 15 Finance and House Appropriations to get a sense of 16 whether or not we'll get this funding restored. If not, 17 we will definitely go quickly to Plan B. 18 But I'm hopeful that if we can get the 19 data in the proper hands with regard to those that are 20 authorized to make a budget recommendation and the funds 21 will get restored. And that's the part of the process 22 that we're in right now is we'll be appearing before the 23 Senate Finance in a couple of weeks, and that will be 24 followed by the House Appropriations. 25 COMMISSIONER ARRIETA-CANDELARIA: And 36 1 what other agency is similar to us that has this 2 economic issue? What are other revenue-generating 3 entities throughout the state that have this economic 4 issue? 5 MS. PYKA: That's one of the challenges 6 in state government. We are a very unique agency as a 7 revenue generator. I think the closest comparison might 8 be when you look at the advertising concept for tourism 9 that's housed under the Governor's office; and they tie 10 theirs to the tourism return for the State of Texas. 11 I think Parks & Wildlife might be another 12 semi-example, but we're very unique in being a revenue 13 generator. And, again, that is why we are carved out of 14 that budget verification process. 15 COMMISSIONER ARRIETA-CANDELARIA: I think 16 we have some work to do to ensure that the legislators 17 know or understand the model of how we do business. We 18 don't take money away from the State; we give money to 19 the state. It's very different. 20 CHAIRMAN KRAUSE: They're not used to 21 that. 22 COMMISSIONER ARRIETA-CANDELARIA: They're 23 not. 24 (Laughter.) 25 CHAIRMAN KRAUSE: Any other questions for 37 1 this witness before I ask mine? 2 (No response.) 3 CHAIRMAN KRAUSE: What is the impact of 4 the Scratch Ticket Rider if it's not funded? 5 MS. PYKA: That's another challenge 6 because the introduced budget reflects the printing 7 budget at $30 million. Again, that's a fixed budget 8 with a growing product; and y'all are very well aware of 9 the Scratch Ticket growth that we've experienced over 10 the last several years. And I just want to provide a 11 comparative number for you. 12 In fiscal year '17, the current budget 13 that we are in, we are going to be spending over 14 $40 million on Scratch Ticket production; and this 15 budget is introduced as $30 million. So the funding 16 mechanism of a rider funding the budget on a percentage 17 of Scratch Ticket sales is so important to this agency 18 as we move forward in planning for our future revenue 19 growth from Scratch products. 20 CHAIRMAN KRAUSE: Well, that must surely 21 affect our veterans. 22 MS. PYKA: It certainly does. The 23 beneficiaries are impacted, both the school foundation 24 and veterans' assistance. 25 CHAIRMAN KRAUSE: Any insight as to why 38 1 they picked on that? 2 MS. PYKA: My understanding is the 3 Legislative Budget Board elected not to make a budget 4 recommendation on the Rider and hold that over for a 5 policy decision of our legislative body. 6 CHAIRMAN KRAUSE: Okay. 7 MS. PYKA: Again, that will be something 8 we will certainly work through in the next phase of the 9 budget process. 10 CHAIRMAN KRAUSE: Any other questions 11 before we go to our next witness on this? 12 (No response.) 13 CHAIRMAN KRAUSE: Thank you, ma'am. 14 We have another witness on this 15 particular topic, Mr. Bresnen. 16 MR. BRESNAN: Thank you, Mr. Chairman. 17 My name is Steve Bresnen. I'm here on 18 behalf of the Bingo Interest Group and I just want to 19 point out a few things and ask y'all to advocate for 20 charitable bingo as strongly as you advocate for the 21 lottery and the reason is because charitable bingo is a 22 revenue-generating agency or function. Stop and think 23 about that for a minute. 24 I think it's completely wrong and 25 completely unconstitutional; but so far, the Attorney 39 1 General hasn't agreed with us on that. The State of 2 Texas and local governments receive more money from 3 charitable bingo than the charities who put up all the 4 money, incur all the risks, pay all the bills, comply 5 with all the regulations in a market in which they 6 compete with illegal gambling, illegal gambling on the 7 periphery of Texas; and, yet, we are a revenue- 8 generating function of the State of Texas. So I would 9 like to ask y'all to advocate for charitable bingo in 10 the same manner as you would advocate for the lottery. 11 Here's what we are asking the Legislature 12 to do: We have four different approaches to the prize 13 fees, and that's the main source of revenue for the 14 State because bingo covers its costs of regulation. So 15 our first one, to coin a phrase, is "repeal and 16 replace." And we want the prize fee repealed; and, 17 instead, we want that 5 percent of every prize to be 18 directly deposited into the general fund of the 19 charities. That will double the amount of money that 20 the charities get to the bottom line each year, only to 21 be used for charitable purposes. We passed that out of 22 the House twice last session, but the State's budget 23 situation is considerably different this interim. 24 If we can't do that, we're asking them to 25 get rid of the State's portion of it and let the locals 40 1 decide whether they're going to keep their portion of 2 it; and if they decide to keep it, let them collect it 3 and remove those collection costs from this agency's 4 budget. Let the locals collect it, and that will cause 5 some downward pressure on licensing fees here because 6 you won't have to perform that function. But needless 7 to say, that has about a 15-million-dollar-a-year-fiscal 8 note for the State attached to it. 9 We're advocating the reverse of that if 10 we can't do it. Let the State keep its money. That 11 produces a zero fiscal note for the State and forget 12 about the locals and put that money into the charities' 13 general funds and add to their bottom lines. That's 14 about a 50-percent increase. 15 If we can't do that, then we'd like for 16 them to get rid of the license fees and fund the 17 regulation of charitable bingo out of the prize fees. 18 That will increase about 3- or $4 million a year the 19 bottom line to the charities, which would be about a 20 10 percent increase, I believe. 21 We're also going to advocate that we 22 eliminate the Charitable Bingo Worker Registry from the 23 agency's functions. When we did that years ago, you 24 could not go out and cheaply get a criminal background 25 check on an employee; and so we centralized that 41 1 function at the State level, authorized the Lottery to 2 go to DPS to get the fingerprint -- or to get the 3 background check done and then approve the workers. 4 So what's happening is very low income 5 people are paying 25 bucks to get a job. The charities 6 on many occasions are eating that money on the front end 7 so the worker can go immediately to work. We're sending 8 a bunch of paperwork back and forth to the Lottery 9 Commission who then sends it to the DPS that then sends 10 it to the Lottery Commission and then somebody puts all 11 that stuff up on a registry. 12 We're advocating the worker and the 13 charity can go now and get a criminal background check 14 locally for about five bucks, and you can do it online 15 at the DPS for about five bucks. They would retain that 16 documentation. The same disqualifying offenses for 17 being a bingo worker would still apply. And those 18 records would remain on file with the charities; and if 19 some of Mr. Royal's people show up and they don't have 20 documentation or they have an employee that's 21 subsequently committed an offense, then they're out. 22 They would have the power to take them out and prohibit 23 them. 24 We're also advocating increasing the 25 licensing fees for distributors and manufacturers from 42 1 the current $1,000 to $10,000. Ironically, that 2 produces about $300,000 in revenue. 3 You have, I assume, before you now a 4 document that was available to us online, thanks to 5 Kathy, that's dated January 24, titled Budget 6 Recommendations 85th Legislature; and on page 5, at the 7 bottom, there are two sentences. "The introduced 8 budgets increase the value of other direct and indirect 9 costs that the Commission will be required to cover via 10 revenue collections by over $300,000 per year from 11 charitable bingo. The increased budgetary amount will 12 require further review to determine if any bingo fees 13 require modification." What do you think? 14 I think they're going to require 15 modification. So that looks to me like another $300,000 16 is going to be taken from the charities' bottom lines 17 while people constantly complain that the charities 18 don't get enough money. That's not right, and we would 19 ask for you to advocate for charitable bingo to the same 20 extent as you will for the Texas Lottery. 21 If I've got that wrong, Ms. Pyka, feel 22 free to correct me. I assume there's some wiggle room 23 in there, again, from the language of the memo. 24 MS. PYKA: Well, the fact that -- 25 (Walking up to the microphone.) 43 1 MR. BRESNEN: I'm not holding you 2 responsible for that, although, I probably sound like it 3 right now. 4 MS. PYKA: Again, for the record, this is 5 Kathy Pyka, Controller Division. 6 So that bingo indirect value that's 7 included in the State's bill by the LBB is for indirect 8 costs of the State of Texas, such as insurance and 9 retirement cost increases, not indirect of this agency. 10 The reason I left that language evasive with regard to 11 whether or not we will be required to increase license 12 fees is because the introduced budget bill for bingo is 13 actually less in '18, '19 than it was in '16, '17 14 because of the 4-percent reduction in which we reduced 15 the budget or were required to reduce the budgets by two 16 FTEs. 17 The other part that I don't know about is 18 the Senate bill includes an article line provision that 19 requires another 1-and-a-half-percent across-the-board 20 reduction. So we'll have to look at exactly what 21 adopted bill gets filed for bingo and what that value of 22 general revenue is appropriated, plus the indirect 23 costs, to see what fee recovery is required. 24 I shared with Alfonso I think it's pretty 25 close, but there might be no fee increase. But I don't 44 1 know. But we also have to factor in reduced fees from 2 any legislation filed that allows for refunds of license 3 fees. 4 So all of that has to be put together to 5 determine whether or not there will be a fee increase. 6 MR. BRESNEN: I understand. And you can 7 understand our concern. This is nothing new. The 8 license fees went up last time in a time of plenty, and 9 so you understand what I'm saying. I'm saying: Be as 10 much an advocate for charitable bingo -- 11 Commissioner Lowe? 12 COMMISSIONER LOWE: Well, let me say 13 this: We have a stakeholders' meeting this month, 14 right? You'll be there? 15 MR. BRESNEN: Well, I don't know. It 16 depends on what the Legislature's doing. 17 COMMISSIONER LOWE: Well, I hope you're 18 there. 19 MR. BRESNEN: There will be people there 20 that will know exactly about this issue, and we won't -- 21 it won't be an empty room. 22 COMMISSIONER LOWE: Where do you think we 23 are as far as the Legislature reaching out to us and 24 thinking what our opinion is because we're apparently 25 not that effective in getting our message across? 45 1 MR. BRESNEN: Well, I take personal 2 responsibility for being ineffective because I've been 3 banging my head against a wall. I did kill the Cook 4 amendment a few years ago with -- I say I killed it; 5 Senator Van de Putte killed it at the time. 6 And I got their attention last time when 7 there was plenty of money in the trough by passing that 8 out of the House a couple of times, but that's why we 9 need y'all. I'm just a paid flack for some people. I 10 know what I'm talking about. And people up there trust 11 me, but I'm just a paid flack about this. A little 12 outrage from some the governor's appointees up there 13 would go a long way, and I know y'all can do that. So 14 I'd very much appreciate it. 15 And, Kathy and Alfonso, I'd appreciate it 16 if you guys would help us make that case, Number 1; and, 17 Number 2, when we come to you with this legislation that 18 moves the registry, that's going to save some money. I 19 don't think it will save $300,000. I don't think it 20 costs you $150,000 to mind the registry. Tell me it 21 does now, and I'll fly out of the room. 22 But I don't think I can get there that 23 way. We have other ideas -- some of which I'll talk to 24 you about later -- that will remove some of those costs 25 and remove some of the downward pressure on it. I don't 46 1 think they're going to give me these fees. I don't 2 think they're going to do that if it's a 16-million- 3 dollar hit to the budget. 4 I don't know who the House Appropriations 5 Chairman is yet, so I don't quite know who to go talk to 6 without being presumptuous. I can talk to the Speaker's 7 office about it. Right now there's probably a thousand 8 people like me up there asking them to get some of the 9 their money back. 10 So, anyway, I won't take any more of your 11 time. I appreciate you letting me make the case. I 12 just ask that you do that and leave your fingerprints on 13 it when you do it so the right people will know it. 14 COMMISSIONER LOWE: Thank you. 15 MR. BRESNAN: Thank you. 16 CHAIRMAN KRAUSE: I think you are 17 attributing to us influence that we may not be aware 18 that we have. 19 (Laughter.) 20 MR. BRESNEN: You may not be aware that 21 you have it, but you do. 22 (Laughter.) 23 CHAIRMAN KRAUSE: Darlene Brown. 24 ITEM VIII 25 MS. BROWN: Good morning, Commissioners. 47 1 My name is Darlene Brown, the Internal 2 Auditor for the Texas Lottery Commission. I have 3 informational items only for you today; no action is 4 required. 5 To give you a status on what we've 6 concluded since the last commission meeting, we've 7 completed the scratch ticket warehouse receiving 8 controls. We've also completed a scratch ticket 9 reconstruction audit. We've completed the enforcement 10 division background check and investigations processes 11 audit. We've completed the bingo audit services process 12 review. 13 We've conducted fraud awareness training 14 a couple weeks ago for our lottery employees right in 15 this room. We've conducted some retail management 16 audits, and we've begun planning for the crisis 17 management audit and time and attendance audit. We've 18 been pretty busy, and we are still on target to complete 19 the audit plan by August 31st. 20 We have given you highlights on the 21 scratch ticket warehouse receiving audit as it was 22 completed. The internal control rating on that is 23 effective. We've had no issues to report. Our overall 24 conclusion was that we believe the scratch ticket 25 manufacturing vendors, along with the Texas Lottery 48 1 Commission, they have adequate controls in place to 2 ensure that scratch tickets, while being transported, 3 they're transported in a secure manner so that 4 contraband cannot be introduced into the truck without 5 lottery officials noticing because the truck seal would 6 be broken. 7 Additionally, that the suppliers that are 8 printing scratch tickets across the border, they have 9 acquired a high level of security from the United States 10 Department of Homeland Security and that, also, we 11 physically went to their facilities in Canada and 12 observed and walked through those processes and met with 13 the security director of that organization. And if 14 there is ever a rare instance that that truck does get 15 stopped at Customs at the border and needs to be opened, 16 that security director is called in; and that truck 17 cannot be opened until he is present. So it's a high 18 level of confidence that the tickets, once they're in 19 the truck, will be secure; and nothing else gets on that 20 truck. 21 On the Scratch Ticket Reconstruction 22 Audit, the controls around that are also very effective 23 for the whole process, from beginning to requesting a 24 reconstruction of scratch tickets, through the approval 25 process, the monitoring process; and then there's a 49 1 reconciliation process each month that occurs. 2 While we were at the scratch ticket 3 vendor, we also observed their processes for when they 4 receive a request from the lottery to create that 5 reconstruction; and those were also very tight. Within 6 the Lottery Commission and the vendors, there's a very 7 limited number of people that have authorization to the 8 processes and to be able to create that reconstruction 9 of that scratch ticket. 10 So we had no findings in either one of 11 those areas and we will present the final reports to you 12 at the next Commission Meeting, but we have issued a 13 draft report on those. 14 For the bingo services processes, we've 15 completed that; and we have suggested several 16 recommendations to revise the audit process so that 17 audits can get completed in a much quicker timeframe. 18 We're working with the Bingo Director, Alfonso, on a 19 project plan to roll the changes out; and our goal is to 20 have the changes completed and implemented by 21 September 1st of this year. 22 And so that concludes my status update. 23 I'd be happy to answer any questions. 24 CHAIRMAN KRAUSE: Commissioners, 25 questions? 50 1 COMMISSIONER LOWE: So to clarify that, 2 did you actually go up to Canada and see their plant and 3 observe their facilities? 4 MS. BROWN: We did. We watched the 5 ticket production from beginning to end and walked 6 through the process of loading them on the truck. They 7 weren't actually loading that day; we had missed that 8 one. But we walked through the whole process. It was 9 very, very interesting. Very sound controls on 10 preparing the tickets for being printed. Again, limited 11 number of people know that information within the plant 12 themselves. 13 COMMISSIONER LOWE: That's very good. I 14 appreciate your going up there and doing that. 15 MS. BROWN: You're welcome. 16 CHAIRMAN KRAUSE: Commissioners? 17 (No response.) 18 CHAIRMAN KRAUSE: Thank you for your good 19 work. 20 MS. BROWN: Thank you. 21 CHAIRMAN KRAUSE: All right. It is 22 11:01. We're going to take a ten-minute break, and we 23 are going to adjourn in a few minutes. 24 (Off the record from 11:01 to 11:10 a.m.) 25 CHAIRMAN KRAUSE: It's 10 after 11:00, 51 1 and we've got the Bingo Commissioner that's going to be 2 back in a moment; but I'm sure he already knows what our 3 Bingo Director is going to say. 4 So, Alfonso Royal, will you go ahead with 5 your report? 6 ITEM IX 7 MR. ROYAL: Commissioners, I have nothing 8 additional to what's in your notebooks. 9 CHAIRMAN KRAUSE: Man, I like that. 10 All right. Gary Grief, you're up. 11 ITEM X 12 MR. GRIEF: Mr. Chairman, other than 13 what's in your notebook, I just have one very brief 14 item. 15 I want to inform the Commission that I 16 have been invited by the World Lottery Association or 17 the WLA, as it's known, to deliver a keynote address and 18 serve on a panel at the Annual WLA and European 19 Lotteries Conference that will be held next week in 20 London. The conference will be February 8th through the 21 10th. The WLA will be taking care of all my travel 22 expenses, meaning that there will be no cost to the 23 State; and we have sent letters to our legislative 24 oversight committees to that effect, informing them as 25 well. 52 1 That concludes my report. I'll be happy 2 to answer any questions. 3 CHAIRMAN KRAUSE: Commissioners, are 4 there any questions? 5 (No response.) 6 CHAIRMAN KRAUSE: Mr. Biard. 7 ITEM XI 8 MR. BIARD: Good morning, Commissioners. 9 For the record, I'm Bob Biard, General 10 Counsel. 11 In Item XI, we have 19 lottery and bingo 12 enforcement matters, Tabs A through S. These are cases 13 where the Commission staff found a violation of the 14 statute or rule by a licensee; and in many cases either 15 the licensee failed to appear or the staff and the 16 licensee reached a settlement. And today we also have 17 one litigated lottery case and four litigated bingo 18 cases. I'll briefly describe the cases, and you can 19 take them up in a single vote if you like. 20 Tabs A through H, the first eight tabs 21 are license revocations due to non-sufficient funds. 22 The lottery retailer license revocations are handled in 23 a single order. Each case was presented to the State 24 Office of Administrative Hearings for revocation of the 25 retailer license because the licensee failed to have 53 1 sufficient funds in the bank account to cover electronic 2 fund transfers to the Lottery Commission's account. 3 In each case the licensee failed to 4 appear, so it proceeded by default, which means the 5 licensee -- since the licensee failed to appear, the 6 allegations in the Commission's Notice of Hearing are 7 deemed admitted. So your notebook contains a single 8 order to revoke each of these eight licenses. 9 Next, Tab I is a litigated lottery 10 revocation case for Te-Jo's Drive In in Hearne, Texas. 11 In this case the Commission's investigator tried to 12 redeem a 1,000-dollar winning ticket, and the store 13 owner offered the investigator $700 for the ticket. The 14 investigator identified himself and asked the person 15 behind the counter if he was the owner. The owner said, 16 no, he was just a clerk. So there were two violations: 17 Offering to claim a prize for another person and making 18 a false statement to the investigator. The case went to 19 hearing, and the judge recommended revocation. 20 Next, Tabs J through N are Lottery Agreed 21 Orders. Tab J is for Quick Way Foods #2 in Grand 22 Prairie. In this case, the licensee presented a 23 1,000-dollar winning ticket at the Fort Worth Claims 24 Center, signing the claim form, stating that he 25 purchased the ticket from his store and that no one else 54 1 is entitled to any part of the prize. 2 The Commission staff investigated the 3 claim and the licensee admitted it belonged to one of 4 his regular customers who presented the ticket at his 5 store and he paid the customer $1,000 for the ticket as 6 a convenience to the customer. This licensee agreed to 7 a 30-day suspension. 8 Tab K, Foods and Energy Corner in Cedar 9 Park, in this case the Commission staff followed up on 10 information that licensee was purchasing winning tickets 11 from customers. The investigator attempted to redeem a 12 1,000-dollar winning ticket and the owner's husband, who 13 was behind the counter, offered the investigator $550 14 for the ticket. The husband told the investigator the 15 Commission would hold $350 in taxes and that it would 16 cost $100 in gas to travel to the claims office. 17 The licensee agreed to 30-day suspension 18 and agreed to terminate her husband's employment at the 19 store, and the husband is prohibited from any 20 involvement with lottery ticket sales. 21 Tab L is for Munchy's in Carrizo Springs. 22 In this case, there was a complaint the licensee was 23 requiring an additional purchase to redeem a winning 24 ticket. The Commission sent an investigator to the 25 store, and the investigator had a similar experience. 55 1 The investigator spoke to a manager and later the owner 2 about the additional purchase policy. The owner said 3 she did not require an additional purchase, but 4 encouraged the staff to ask customers to buy something 5 else and to explain to customers that they were not 6 allowed to open the cash register just to pay a winning 7 lottery ticket. The licensee agreed to a 10-day 8 suspension. 9 Tabs M and N involve the same store 10 owner. Tab M is Greenhouse Citgo in Houston, and Tab N 11 is Bear Creek Food Store in Katy. In these cases, the 12 licensee activated scratch tickets that were issued to 13 one store and unlawfully sold them at both stores; and 14 this was in an effort to maximize the amount of bonus 15 that the retailer could receive from the Commission's 16 retailer cash incentive program. 17 The Commission staff noticed and 18 contacted the licensee; but a few weeks later, the same 19 thing happened again. The Commission issued a warning 20 letter. Then the same thing happened a third time. So 21 the staff disqualified the licensee from the incentive 22 program and this Agreed Order is for a 30-day suspension 23 for both of these stores. 24 Next, Tab O is a Bingo Agreed Order with 25 VFW Post 2427 in Tomball. You considered this case at 56 1 the last Commission Meeting in December and directed the 2 staff to work with the organization. This was a 3 litigated case where the VFW Post in Tomball failed to 4 have positive net proceeds for the fourth quarter of 5 2014 to the third quarter of 2015 and failed to file a 6 supplement to its quarterly report for the period ending 7 March 31st, 2016. 8 The judge had recommended revoking their 9 license, but today we have an Agreed Order for your 10 consideration that attempts to resolve the matter. It 11 grants a conditional waiver of the net proceeds 12 requirement and allows the VFW Post the opportunity to 13 show positive net proceeds for the first two quarters of 14 2017. 15 Tabs P through S are all litigated bingo 16 cases. Tab P is the removal of Georgio Rizzo from the 17 Bingo Worker Registry. In this case, this person had 18 pleaded guilty to burglary of a building twice within a 19 period of two and a half months in late 2013. These 20 offenses are state jail felonies. This person spent 21 time in the Williamson County and Travis County jails. 22 The Commission has determined that burglary is a crime 23 directly related to being a bingo worker. Because bingo 24 is a cash business, it provides opportunity for a 25 dishonest person to steal. Also the fact these crimes 57 1 occurred within the past five years is a separate basis 2 to remove a person from the Registry. 3 This person did provide a letter from his 4 supervisor at the bingo hall saying that this individual 5 is a changed person; and also, this person stated that 6 he needs this job to pay child support. This person 7 requested a hearing. The judge agreed with the staff 8 and recommends that he be removed from the Bingo Worker 9 Registry. 10 Tab Q is also a denial of the application 11 of Kori Clark, Sr. to be on the Bingo Worker Registry. 12 In this case, this was an individual who had previously 13 been convicted of defrauding another by cashing a forged 14 check in 1997. The Bingo Act prohibits a person who has 15 been convicted of criminal fraud from working at bingo. 16 This is what we call a lifetime ban, regardless of when 17 it occurred. The matter went to hearing, and the judge 18 agreed with staff that the applicant was disqualified 19 because of the criminal fraud conviction and recommended 20 to deny the application. 21 Tab R is East Plano Bingo. 22 CHAIRMAN KRAUSE: Mr. Biard? 23 MR. BIARD: Yes. 24 CHAIRMAN KRAUSE: Since we've got a 25 witness on R in XII, I am proposing that we're just 58 1 going to go ahead and vote on A through Q, to get that 2 out of the way. 3 MR. BIARD: That's great. That's fine. 4 COMMISSIONER LOWE: And we do have the 5 Quartermaster here from the VFW Post. 6 Did you want to say anything? 7 MR. ISAAC: No, sir. I just came to hear 8 what was being said. 9 CHAIRMAN KRAUSE: He didn't have a 10 Witness Affirmation Form, but I am looking for a motion 11 to accept the staff's recommendations on Items A 12 through Q. 13 COMMISSIONER RIVERA: Move to approve. 14 COMMISSIONER ARRIETA-CANDELARIA: Second. 15 CHAIRMAN KRAUSE: All in favor say aye. 16 (Chorus of "Ayes.") 17 CHAIRMAN KRAUSE: All opposed say nay. 18 (No response.) 19 CHAIRMAN KRAUSE: Passed by acclimation. 20 All right. R and S. 21 MR. BIARD: I'm going to go ahead and 22 hand you some of these orders if you want to start 23 signing these. 24 All right. We do have a witness on 25 Tabs R and S. Mr. Fenoglio, counsel for the licensee, 59 1 is present. Tab R is East Plano Bingo, and you may 2 recall this case from last year. At the February 2016 3 Commission Meeting, we brought you an Agreed Order which 4 you did not approve; and that resulted in a litigated 5 hearing at SOAH. 6 This case involved a grandfathered 7 corporate commercial lessor, East Plano Bingo, Inc. 8 Mr. Ed Branom is the sole officer, director, and 9 shareholder. In 2005 Mr. Branom pleaded guilty to 10 keeping a gambling place and received deferred 11 adjudication; and in 2010 he again pleaded guilty to an 12 indictment for a similar offense and received deferred 13 adjudication. But these deferred adjudications of 14 Mr. Branom's do not disqualify the corporation from 15 holding a lessor license. 16 So the case went to hearing on the issue 17 of whether East Plano Bingo allowed unauthorized games 18 of chance during a bingo occasion. The gaming machines 19 associated with this hall awarded bingo product prizes, 20 and these are prizes that can only be claimed at the 21 bingo hall during a bingo occasion. 22 During the period in question, East Plano 23 bingo was at two different locations. The judge found 24 there was no violation at the first location because, 25 she said, the machines were at a separate address, not 60 1 at the hall, the Corporation did not exercise control 2 over it. 3 The judge did find a violation at the 4 second location, which was one address that had been a 5 skating rink. The Corporation had constructed a wall, 6 but the judge determined that the machines were on the 7 bingo premises. Staff recommended only a five-year 8 probated suspension under conditions set by the 9 Commission and a 600-dollar fine, which was the 10 recommended penalty under the Commission's rules at the 11 time that the violation occurred, back in 2007 or so, I 12 believe. 13 The Order in your notebook accepts the 14 judge's recommended 600-dollar penalty and five-year 15 probation, which the Bingo Director also recommends; but 16 it changes one finding of fact and two conclusions of 17 law to reflect the Commission's prior decisions that a 18 game that awards a bingo product is a violation of the 19 prohibition of other games of chance because the prize 20 can only be claimed at a bingo hall during a bingo 21 occasion. The Order also provides for East Plano Bingo 22 to pay for two unscheduled inspections each year during 23 the five-year probation period. 24 I provided each of you a letter that 25 Mr. Fenoglio, the attorney for East Plano Bingo, filed 61 1 yesterday -- or a couple of days ago, objecting to the 2 Proposed Order in your notebooks. And that is my 3 summary of Tab R. 4 I would like to go on to Tab S if you'd 5 like, or would you just like Mr. Fenoglio to address 6 Tab R? 7 CHAIRMAN KRAUSE: Why don't you go ahead 8 and describe both cases, and then we'll get Mr. Fenoglio 9 to talk about both cases. 10 MR. BIARD: Sure. Tab S is a net 11 proceeds bingo case involving a bingo accounting unit 12 made up of five charities. As a unit, they failed to 13 generate positive net proceeds for four quarters in 14 2015. That's required by the Bingo Act and Commissions 15 Rules. The members filed a Request for a Waiver, which 16 the Bingo Division denied; and the case went to hearing. 17 The judge found the organizations' 18 licenses should be revoked for failure to generate 19 positive net proceeds and that they failed to prove they 20 were entitled to the waiver. The judge noted the 21 organizations presented testimony that eight-liner 22 machines were at least a part of the source of the 23 income problems, but they offered no business plan 24 specifically to deal with the machines. 25 The witness who was the commercial 62 1 license lessor testified that he owned some of the 2 eight-liners that apparently were causing net proceed 3 problems for the hall. The judge also questioned the 4 reliability of the lessor's testimony that he can absorb 5 rent and other costs for an extended period of time and 6 found that the Bingo Division reasonably concluded that 7 the Unit's business plan was not credible. 8 And it's my understanding from Mr. Royal 9 that since the hearing, the Unit has dissolved. And 10 that concludes my presentation. 11 CHAIRMAN KRAUSE: Mr. Lowe? 12 COMMISSIONER LOWE: Sir? 13 CHAIRMAN KRAUSE: Do you have any 14 specific questions you would like to put to Mr. Biard 15 about this before we call up Mr. Fenoglio? 16 COMMISSIONER LOWE: We spent a lot of 17 energy on this case with Mr. Branom, I think, is his 18 name. And just so I'm understanding, where we are is 19 that the penalty that's been assessed is a 600-dollar 20 fine, right? 21 MR. BIARD: Correct, which was the 22 recommended penalty under the Commission's rules as they 23 existed at the time of the violation. 24 COMMISSIONER LOWE: When we originally 25 looked at it, we were looking at something more severe, 63 1 such as revocation; but that's not available, right? 2 CHAIRMAN KRAUSE: At least that's not 3 what we're doing today. 4 COMMISSIONER LOWE: All we're doing today 5 is we want to clarify -- that's not a good word -- but 6 correct the wording of the Order so it complies with 7 what we believe is the law? 8 MR. BIARD: Yes. I believe the judge did 9 not agree with our analysis that gaming machines that 10 offer bingo products as prizes are a violation of the 11 other-games-of-chance prohibition, and the Commission 12 had previously decided in the Golden Belle and in the 13 Julam case that their policy is those types of machines 14 that award those types of products do violate the 15 prohibition. And the corrections being made to the 16 Order clarify that, but they don't change the penalty 17 that the judge recommended. 18 COMMISSIONER LOWE: So the Commission 19 does have the authority to do that? 20 MR. BIARD: Yes, the Administrative 21 Procedure Act provides a specific provision, 22 2001.058(e), that authorizes governing boards to change 23 the findings of fact and the conclusions of law for 24 specified purposes. 25 COMMISSIONER LOWE: So in summary, then, 64 1 it sounds like Mr. Fenoglio won or got a much less harsh 2 remedy than we sought; but we're arguing over the 3 language of the Order? 4 MR. BIARD: I think that's a fair 5 assessment. 6 COMMISSIONER LOWE: Those are my 7 questions. 8 CHAIRMAN KRAUSE: All right. Well, we 9 have a witness; and we're going to hear from the witness 10 now. And he's going to be eloquent and concise. 11 (Laughter.) 12 ITEM XII 13 MR. FENOGLIO: Thank you, Mr. Chairman 14 and Commissioners. 15 For the record, my name is Stephen 16 Fenoglio; and I represent East Plano Bingo. 17 East Plano Bingo spent in excess of 18 $60,000 in legal fees and expenses, costs in this case. 19 So I don't know that we can say that we won. 20 COMMISSIONER LOWE: It sounds like it was 21 well worth it, though. 22 (Laughter.) 23 CHAIRMAN KRAUSE: Good help is expensive. 24 MR. FENOGLIO: And so it seems to me 25 you're left with the penalty matrix that applied at the 65 1 time; as you are aware, y'all changed that matrix. So 2 on a go-forward basis, revocation the first time is 3 fully available; and the licensing public is aware. 4 So we won. And then, as I indicated in 5 my letter, we had a drive-by filing by the Commission, 6 some Commission staff, wanting to change some of the 7 language in the Order and -- 8 COMMISSIONER LOWE: I'm not sure what a 9 drive-by filing is. Is it a term of art? 10 MR. FENOGLIO: Well, I think it's an apt 11 description because the ALJ issues her ruling. The 12 parties file exceptions and replies. The ALJ issues a 13 letter that says, "I don't change anything." 14 Effectively, five business days before this Commission 15 someone drafts a Proposed Order for your consideration. 16 Why they did it then as opposed to earlier, I don't 17 know. So I'm in trial at the time. So I do not have 18 time to file. 19 Here's where the rubber meets the road. 20 You've adopted -- this Commission adopted a rule 21 defining where prohibited games of chance are prohibited 22 from occurring. You have a statutory regime that says 23 an eight-liner, if it's legal, awarding Dave & Buster's 24 style merchandise or Chuck E Cheese, can be operated in 25 a bingo hall on bingo premises during a bingo occasion. 66 1 Everyone here, I think, agrees on that. 2 So the question is: Is it legal or not? 3 And if it's illegal, then where can that game of chance 4 be operated and not call into question a licensee's 5 license? And think about it for just a moment. 6 When I go to Oklahoma and play the slot 7 machines in Oklahoma legally, that's a game of chance 8 under your rule that staff cites, 402.211. And the 9 reason it's a game of chance is because of the statutory 10 definition; you're winning a prize that's based in part 11 on chance. Or I if buy a lottery ticket in Texas, 12 that's a game of chance under the Game of Chance Rule. 13 If you read just the statutory provision 14 in the Bingo Enabling Act, the allowance of those games 15 of chance are triggered by -- the charities are at risk 16 because that's a game of chance occurring at a bingo 17 occasion during a bingo session. It doesn't decide 18 where. 19 So you adopted a rule that said the where 20 is on the bingo premises, and the bingo premises is 21 defined in the statute. We cited that. The ALJ cited 22 that. I even brought handouts, if you want, on what the 23 definition of premises is. It's the area subject to 24 direct control and actual use by a licensed authorized 25 organization -- think charity -- to conduct bingo. So 67 1 it's an area subject to their direct control and use. 2 In this case we had a separate game room 3 where, as it turns out, eight-liners were illegal being 4 operated. Mr. Branom entered a plea of guilty. He 5 didn't think so at the time, but he cut a deal. 6 Okay. That's 2504 14th Street. The 7 bingo hall is 2502 14th Street. There's no evidence in 8 the record that any of those eight-liners were ever in 9 the bingo premises as defined in the statute. There's 10 no evidence that any customers came to the game room to 11 play bingo. As a matter of fact, the evidence shows 12 that never occurred. 13 The way the Order is drafted now is we're 14 going to say because -- and then they took the tickets 15 at 2504 that they won from playing the machines over to 16 the bingo hall and got bingo product. Now, we have two 17 AG opinions that say that's illegal. Fine. But the 18 issue is: Can you now make, under your rule, 2504 part 19 of the bingo premises? And your rule that you adopted 20 says no. It's on the bingo premises. That's why the 21 ALJ rejected the Commission's exceptions. These 22 Findings of Facts 5 and Conclusions of Law 6 and 7, what 23 you have in your notebook, is exactly what they said the 24 ALJ got wrong. And the ALJ looked at all of it and 25 said, "No, it's right." 68 1 Not only that, but -- and the staff says, 2 "But they're conclusions of law." 3 Au contraire. Where the location of 4 these machines is located is a conclusion law? It's 5 purely a fact. So the bottom line: You should reject 6 this Proposed Order and adopt exactly what the ALJ 7 recommended, and let's all go home. 8 I'll be happy to answer any questions. 9 COMMISSIONER LOWE: So, Bob, tell me your 10 response to that. 11 MR. BIARD: Well, Mr. Fenoglio is a very 12 effective and zealous representative of his client. I 13 think our position is that, as Mr. Fenoglio said, a game 14 of chance consists of consideration, chance, and a 15 prize. Staff is not saying that these machines were in 16 the bingo hall. Staff is saying that the prize, which 17 is an essential element of the game of chance, can only 18 be claimed at a bingo hall during a bingo occasion, 19 which makes it fall within the prohibition. 20 That matter has been litigated; and we've 21 had on two prior occasions an ALJ that did agree with 22 this interpretation, which is why the staff's 23 recommendation is to change the findings and conclusions 24 in this case. 25 COMMISSIONER LOWE: I guess I thought 69 1 that the tie between the awarding of the bingo prizes, 2 bingo paraphernalia tied to that particular hall was a 3 connecting factor to deciding what the premises was; is 4 that right? 5 MR. BIARD: Well, you know, I don't think 6 that our analysis really depends on that. What I think 7 the facts are -- yes, in both of these cases there were 8 interconnections between the hall and the game room; 9 they were adjacent to each other. But that's not what 10 our theory of liability is premised on. 11 COMMISSIONER LOWE: So explain to me 12 where we are now, Mr. Fenoglio, the significance of this 13 to your client other than just to be right. I mean, is 14 there a significance? And this is a corporation; is 15 that right? This is a corporation? 16 MR. FENOGLIO: Well, we want to get the 17 facts and the law right; and, by the way, this client's 18 not looking to operate any of these machines at any 19 time. I mean, y'all are going to come and inspect; and 20 that isn't why we are arguing about it. 21 And, by the way, of the two cases that 22 Mr. Biard cited and the Commission cited, one of them I 23 was involved with. You hadn't defined where the 24 prohibited game of chance has to be located before. 25 That rule wasn't in existence. 70 1 In the other case, no one raised -- I've 2 read the record; I've read everything that's in there. 3 No one raised the definition in your rule, which we 4 quote, of where those machines have to be located to 5 trigger the Prohibited Game of Chance Rule. And the ALJ 6 quoted that same thing. You answered that. The 7 Commission answered that when they said "on the bingo 8 premises." 9 So the machines are not on the bingo 10 premises. Go back to this card. I go to Oklahoma and 11 legally gamble. It's a game of chance under your rule. 12 I walk into the bingo hall and say, "I just won $500 at 13 the slots in Oklahoma. I'm going to buy bingo product." 14 Wait a minute. That's a game of chance. You're 15 bringing it to the bingo hall. Licensees are at risk. 16 I asked the Bingo Director. This issue 17 came up in the hearing. He said it does not matter 18 where the premises, so to speak, are where the 19 eight-liners are located. It doesn't really matter 20 where they are located, and they could include a 21 location in Oklahoma or Canada. That's on the record. 22 So it's a slippery slope you're getting 23 on when I can take this, under your rule, if you adopt 24 the staff and, all of a sudden, bingo premises are at 25 risk because someone came in with a card with winnings 71 1 from what was clearly a prohibited game of chance and 2 uses that money to play -- to buy bingo. We're not 3 talking about eight-liners next door. It's much broader 4 than this, the premise y'all are establishing; and that 5 shouldn't be the law. And it's not under your rule. 6 CHAIRMAN KRAUSE: Question. 7 MR. FENOGLIO: Yes, sir. 8 CHAIRMAN KRAUSE: Okay. So over at one 9 location a customer wins some cash and then he takes the 10 cash over to the bingo hall and says, "Here's my cash." 11 Is that what happens? We're talking about cash, or are 12 we talking about something else? What did they win? 13 MR. FENOGLIO: Oh, they did not take 14 cash. There's no evidence that the eight-liners awarded 15 cash. They got script or a ticket that they brought 16 from 2504 14th Street into 2502 14th Street and obtained 17 bingo product; but, again, the premise of what y'all are 18 doing if you adopt the staff's wording is: I won $500 19 on a lottery scratch off. That's a game of chance under 20 your rule. No question about it. It's legal. I take 21 that $500 into the bingo hall. That's foolish to even 22 suggest that that would somehow subject a licensee to 23 any form of sanction, but that's where -- 24 CHAIRMAN KRAUSE: So Mr. Biard -- 25 COMMISSIONER ARRIETA-CANDELARIA: Let me 72 1 ask this question. So as I understand the facts that 2 you're presenting is that you're leading me to believe 3 there's no correlation whatsoever between 2504 and 2502. 4 So can you tell me that there is no connection 5 physically between those two locations? Do you actually 6 go into 2504, come back out of 2504 and go into 2502? 7 There's no adjoining wall or opening space? 8 MR. FENOGLIO: There's an adjacent wall, 9 and there was some evidence that at some time they had a 10 fire door that they would open up and customers could go 11 without going outside on the sidewalk. There's also 12 evidence that said we had those doors locked. They had 13 to be there because the fire department required them. 14 This goes back to the 2005 timeframe. 15 COMMISSIONER ARRIETA-CANDELARIA: But, to 16 your knowledge, there was never any -- there's a door 17 there; but, to your knowledge, people don't cross the 18 door to go from one place to the other? They have to go 19 outside physically to go from 2504 to 2502, correct? 20 MR. FENOGLIO: There's evidence that goes 21 both ways. There's evidence that says those doors were 22 there, but no one ever used them. There was some 23 evidence that said you could not go outside onto the 24 sidewalk and come around from 04 to 02. 25 COMMISSIONER ARRIETA-CANDELARIA: Okay. 73 1 So my second question has to do with: At 2504 you get a 2 ticket from -- a winning ticket that you're going to be 3 able to use for bingo. So that ticket, does that say 4 you can cash it in; you can use it at 2502, and that's 5 the only place you can use it? 6 MR. FENOGLIO: The evidence was that that 7 ticket was used only at the bingo hall, yes, 8 Commissioner. 9 COMMISSIONER ARRIETA-CANDELARIA: Well, I 10 think that's my answer. For me, I mean, if you have 11 access and you have the free flow, the ability to free 12 flow from 2504 to 2502, I don't know that I would 13 consider that adjacent. I think it's on the premises. 14 It's on the premises, to me. 15 Secondly, if you have a ticket that says 16 you can only use it at 2502, I don't know if there's 17 value in the example that you cite, that is, that card 18 that you demonstrated is almost like cash. And if you 19 flow from one area to the other without any kind of 20 condition but the 2504 ticket or the ticket that was 21 given as part of the winnings from 2504 could only be 22 used at 2502, making those two locations codependent, I 23 don't know if I agree with your argument that you're 24 making today. 25 MR. FENOGLIO: Well, I believe you're 74 1 left with your own rule that defines; and specifically 2 it says, "Except as provided by Subsection C, a person 3 may not conduct or allow a game of chance at a bingo 4 premises during a bingo occasion at the premises." And, 5 again, the statutory definition of premises is where you 6 use that for the conduct of bingo; and in the facts in 7 the case, 04 was never used for any bingo activity 8 whatsoever. 9 MR. BIARD: And I'd just like to clarify 10 a little bit that the rule on the other games of chance, 11 there's another section, F, which states that a game of 12 chance may not award bingo equipment or entry into a 13 bingo game as a prize; and just to confirm, the only 14 cases that the staff has pursued the violation on this 15 basis are cases where there are underlying facts that 16 there's been -- that the activities that are going on in 17 the game room are inextricably intertwined with the 18 activities in the bingo hall. We're not going to pursue 19 cases where someone's buying a lottery ticket across the 20 state or someone coming in from Oklahoma. 21 COMMISSIONER ARRIETA-CANDELARIA: I 22 agree. 23 COMMISSIONER LOWE: I'm prepared to make 24 a motion on this that we adopt the Commission staff's 25 Proposed Order. 75 1 And I apologize for the drive-by shooting 2 if that happened. 3 MR. FENOGLIO: I said "filing," not 4 "shooting," to be clear on that. 5 (Laughter.) 6 COMMISSIONER ARRIETA-CANDELARIA: I'll 7 second. 8 COMMISSIONER LOWE: Thank you for your 9 time, though. 10 COMMISSIONER ARRIETA-CANDELARIA: Yes, 11 thank you so much. 12 CHAIRMAN KRAUSE: All right. We've got a 13 motion and a second, and I'm personally going to defer 14 to our Bingo Commissioner on this. So all in favor say 15 aye. 16 (Chorus of "Ayes.") 17 CHAIRMAN KRAUSE: All opposed say nay. 18 (No response.) 19 CHAIRMAN KRAUSE: There are no nays. 20 Passed by acclamation. 21 MR. BIARD: We are left with Tab S. I'm 22 unsure if Mr. Fenoglio wanted to say something on this. 23 CHAIRMAN KRAUSE: He said he wanted to. 24 MR. FENOGLIO: We only filed a letter. 25 The PFD -- my clients ran out of money, and so we're not 76 1 contesting the result. They've already closed the bingo 2 hall. They didn't have to. They could have kept it 3 open, but they made the decision to go ahead and close 4 their hall. There was a nuance in the PFD, but not in 5 the findings of fact and conclusions of law of what my 6 client operated machine-wise. The record was not as 7 crystal clear as I would have hoped it was; but be that 8 as it may, we don't quarrel with what the PFD -- or the 9 findings of fact and conclusions of law. 10 CHAIRMAN KRAUSE: Thank you, sir. 11 So now I'm looking for a motion on S. 12 COMMISSIONER LOWE: I move to adopt the 13 staff's recommendation. 14 COMMISSIONER ARRIETA-CANDELARIA: Second. 15 CHAIRMAN KRAUSE: All in favor say aye. 16 (Chorus of "Ayes.") 17 CHAIRMAN KRAUSE: It's passed. 18 MR. BIARD: That's all I have for you 19 today, Commissioners. 20 ITEM XV 21 CHAIRMAN KRAUSE: On my own motion, 22 because I can, I am moving that we are going to adjourn 23 this meeting. Anybody want to join me on that? 24 COMMISSIONER ARRIETA-CANDELARIA: Second. 25 CHAIRMAN KRAUSE: All right. We are 77 1 adjourned. It is a quarter to twelve. 2 (Meeting adjourned at 11:45 a.m.) 3 --oo0oo-- 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 78 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 the above-referenced 12 meeting and was reported by me to the best of my 13 ability. 14 15 SUBSCRIBED AND SWORN TO under my hand and 16 seal of office on this the 13th day of February, 2017. 17 18 ______________________________ 19 DEBBIE D. CUNNINGHAM, Texas CSR 2065 Expiration Date: 12/31/2018 20 Kim Tindall & Associates 16414 San Pedro Avenue, Suite #900 21 San Antonio, Texas 78232 (210) 697-3400 22 23 24 25