0001 1 2 * * * * * * * * * * * * * * * * * 3 4 5 TEXAS LOTTERY COMMISSION 6 MEETING 7 8 FEBRUARY 28, 2003 9 10 * * * * * * * * * * * * * * * * * 11 12 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 28TH of FEBRUARY, 20 2003, from 8:30 a.m. to 1:05 p.m., before Brenda J. 21 Wright, RPR, CSR in and for the State of Texas, 22 reported by machine shorthand, at the Offices of the 23 Texas Lottery Commission, 611 East Sixth Street, 24 Austin, Texas, whereupon the following proceedings 25 were had: 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Acting Executive Director: Mr. Gary Grief 9 Charitable Bingo Operations Director: 10 Mr. Billy Atkins 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 3 Appearances...................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................... 4 6 Item Number 2.................................... 4 Item Number 3.................................... 8 7 Item Number 4.................................... 9 Item Number 5.................................... 10 8 Item Number 6.................................... 12 Item Number 7.................................... 27 9 Item Number 8.................................... 32 Item Number 9.................................... 67 10 Item Number 10................................... 68 Item Number 11................................... 69 11 Item Number 12................................... 70 Item Number 13................................... 73 12 Item Number 14................................... 99 Item Number 15................................... 76 13 Item Number 16................................... 76 Item Number 17................................... 76 14 Item Number 18................................... 79 Item Number 19................................... 96 15 Item Number 20................................... 99 Item Number 21................................... 81 16 Item Number 22................................... 89 Item Number 23................................... 94 17 Item Number 24................................... 97 Item Number 25................................... 102 18 Reporter's Certificate........................... 103 19 20 21 22 23 24 25 0004 1 FEBRUARY 28, 2003 2 3 CHAIRMAN CLOWE: Good morning. It is 4 8:30 a.m., February the 28th, 2003. My name is Tom 5 Clowe. Commissioner Whitaker and Commissioner Cox are 6 here. I'll call this meeting of the Texas Lottery 7 Commission to order. 8 We'll begin with the agenda item number 9 two, report by the Bingo Advisory Committee Chairman, 10 Virginia Brackett. Good morning, Virginia. 11 MS. BRACKETT: Good morning. 12 CHAIRMAN CLOWE: Would you come up and 13 give us your report, please. 14 MS. BRACKETT: Be glad to. 15 I'm Virginia Brackett. I'm the 16 chairman of the Bingo Advisory Committee, and we met 17 yesterday. Jack Dougherty of Austin attended. He is 18 filling the -- what has been vacant for very long, 19 the seat of the public representative, and we received 20 a resignation from the system service provider 21 position, Saleem Tawil. 22 We worked to be -- spent a lot of time 23 on a work plan. Billy had done a lot of work on that. 24 And I think everybody feels really good about it. 25 It's kind of like having a brand new crispy road map, 0005 1 and we're -- we're ready to roll with it. It was 2 presented; it was accepted; and assignments were made. 3 And I really do think there is a lot of enthusiasm, 4 and there is enthusiasm from Billy, if from no one 5 else on that. But, on the whole, all of the members 6 of the committee are very enthusiastic. 7 We heard public comments on proposed 8 rules 402.544 regarding license fees; 568, 9 distribution of proceeds for the charitable purposes; 10 and 555, the card-minding systems. And those were 11 just first readings. I -- lots of recommendations 12 were made. Lots of things were discussed. And we're 13 still -- that's just the beginning of the road on 14 that. 15 Previously, staff had expressed the 16 need for a questionnaire or a tool to measure bingo 17 players, find out what goes on with them, what they're 18 thinking, who plays, when they play, why they play, 19 and where they play. And Jack Dougherty has already 20 compiled and presented a proposed questionnaire. With 21 a little bit of tuning and making sure that it is 22 something that can be measured -- I can't think of the 23 word I'm looking for, not documented, but -- that 24 the -- the things on it are measurable, and then we 25 will be using it statewide. There will be a plan -- 0006 1 and the members of the Bingo Advisory Committee will 2 be involved in that in their local jurisdictions, so 3 to speak, their local halls. 4 Our next meeting is set for April 24th. 5 And before that time, the group -- the work groups 6 will be together, whether it's by phone or sitting 7 down together across the table. So things are 8 underway there, and I'll be happy to answer any 9 questions. 10 CHAIRMAN CLOWE: Any questions or 11 comments? 12 Virginia, I -- I want to compliment you 13 on your chairing of the meeting yesterday, and I 14 certainly agree with the comments you made about the 15 spirit and the feeling of activity that exists now in 16 the BAC and that group. You'll be, I think with the 17 orientation program that Billy laid out for you 18 yesterday, better equipped to attack the work plan. 19 And I think you're on the right road in appointing the 20 work committees for the different rules and other 21 items that are of interest to the bingo industry. And 22 I believe now we're really headed in the right 23 direction, and I look forward to continued progress 24 and the hope that the BAC will fulfill its role over 25 the next year. 0007 1 MS. BRACKETT: Well, I appreciate those 2 comments. I've made an admission to myself that I 3 have been president of a very large women's group, 4 about 300 members, who are very intelligent, 5 headstrong, and purpose-oriented, and that was much 6 easier than this group. 7 CHAIRMAN CLOWE: I wouldn't touch that 8 with a ten-foot pole. 9 Billy, did you have a comment you 10 wanted to make? 11 MR. ATKINS: Commissioners, I just 12 wanted to compliment and thank Virginia and the 13 members for their work yesterday. It was a long 14 meeting, but we got a lot of things done. They were 15 very responsive to the orientation program and the 16 proposed work plan. They were also very active 17 participants in the meeting and the discussions that 18 were held. It was obvious that they had done their 19 homework on the items that were in the notebook. 20 Additionally, the members of the 21 advisory committee, I thought, were pretty responsive 22 to Virginia's request for volunteers to serve on the 23 subcommittees to address these issues in a little more 24 detail before they report back to the committee. And 25 I hope that, after the next meeting in April, we're 0008 1 able to report back some significant progress on these 2 issues. 3 CHAIRMAN CLOWE: And, Virginia, did I 4 understand you to say your next meeting is March the 5 24th? 6 MS. BRACKETT: No, April. 7 CHAIRMAN CLOWE: April the 24th. And 8 so you're not going to meet in March? 9 MS. BRACKETT: No, sir. 10 CHAIRMAN CLOWE: Okay. That's fine. 11 Thank you, very much. 12 Billy, are you ready to go into items 13 three and four at this time? 14 MR. ATKINS: I was actually -- 15 Commissioners, I think Ms. Kiplin was going to address 16 item three. I have provided you a copy of the 17 resignation letter from Mr. Tawil, so it may actually 18 moot out what she was going to present. 19 MS. KIPLIN: Commissioners, that's 20 correct. You -- you have received a copy of a 21 resignation letter from Saleem Tawil, who represented 22 the position of system service provider on the Bingo 23 Advisory Committee. Based on the agreed order that 24 was entered last commission meeting, the TXTV license 25 was surrendered, and that was what led to having item 0009 1 three put on the agenda. But at this time it's moot, 2 and we can pass that item. 3 CHAIRMAN CLOWE: All right. And then 4 item four. 5 MR. ATKINS: Commissioners, as you 6 know, recommendation 7.2 of the Sunset Advisory 7 Commission report recommended that Section 2001.057(b) 8 be repealed. This is the section of the Bingo 9 Enabling Act that requires one of the members of the 10 BAC to be a system service provider. Both House Bill 11 794 and Senate Bill 270, the agency's Sunset 12 legislation, contain provisions that would repeal that 13 section of the Bingo Enabling Act. Given the fact 14 there is currently only one licensed SSP, and that 15 that licensee doesn't have equipment approved for use 16 in this state, that there are pending legislative 17 proposals to eliminate this position, and, finally, 18 considering the time that it would take to get this 19 position on the committee, oriented to the committee, 20 up to speed on its activities, et cetera, the staff 21 would recommend that the Commission consider delaying 22 filling this position at this time until the final 23 determination is made by the legislature regarding 24 the -- the position. 25 CHAIRMAN CLOWE: Is there any 0010 1 objection? 2 Thank you, Billy. 3 MR. ATKINS: Thank you. 4 CHAIRMAN CLOWE: We'll go on to item 5 number five, consideration of, possible discussion 6 and/or action on a work plan for the Bingo Advisory 7 Committee. 8 MR. ATKINS: Commissioners, as Virginia 9 noted in her report to you, the Advisory Committee did 10 adopt or approve the work plan that was presented to 11 you at your last Commission meeting. The only -- 12 because it was a long meeting yesterday, as Virginia 13 mentioned, they only got around to appointing a 14 subcommittee on one of those items, but, of course, 15 there are other subcommittees that are going to be 16 meeting in the interim. And one of the primary 17 activities, I think, at the next BAC meeting will be 18 to assign subcommittees to the rest of those items. 19 So we would just seek final approval from the 20 Commission on that work plan as submitted for the BAC 21 to move forward on. 22 CHAIRMAN CLOWE: Any questions or 23 comments? 24 Billy, I see the work plan as a work in 25 progress that, although you made an excellent 0011 1 presentation yesterday and I thought it was very 2 comprehensive, it is not all conclusive. And as that 3 develops, items can be added, items can be completed, 4 and the Commission can add to that as they wish. Am I 5 correct in that assumption? 6 MR. ATKINS: You are correct, 7 Mr. Chairman. That's an excellent point, and that's 8 also a point that Virginia raised in the meeting. It 9 is our intent that this would be a living document, if 10 you will, and that, as items come up to be -- they can 11 be added to the work plan. We kind of laid out a 12 process where, if there is a proposal that the 13 Advisory Committee wants to bring forward, they would 14 develop it in a manner consistent with the rest of the 15 program. It would have the statement of the issue, 16 the time line, et cetera; bring that to the 17 Commission, make sure that's something that you want 18 to work with, and then include it in their work plan. 19 Yes, sir. 20 CHAIRMAN CLOWE: Okay. Does this 21 require a motion? 22 MS. KIPLIN: Yes. I think you -- 23 excuse me. I think he is looking for action and 24 approval of a work plan. And I -- if I recall -- I 25 don't have the statute in front of me that governs 0012 1 advisory committees. I think the governing body does 2 need approval of the plan. 3 CHAIRMAN CLOWE: Is there a motion? 4 COMMISSIONER WHITAKER: So moved. 5 COMMISSIONER COX: Second. 6 CHAIRMAN CLOWE: Seconded. All in 7 favor, aye. Opposed, no. The vote is three-zero in 8 favor. 9 Anything further on this item? 10 Then we'll go to item six, report, 11 possible discussion and/or action on work group 12 sessions on "use of proceeds" and/or "unit 13 accounting". 14 MR. ATKINS: Commissioners, 15 fast-framing this forward to you for informational 16 purposes, the unit accounting draft that is in your 17 notebook is the draft language that was presented to 18 the sponsors of our Sunset legislation. This language 19 was developed as a result of meetings that staff held 20 with industry representatives. You'll recall, from my 21 last update, that there is still a question regarding 22 potential negative impact to charities at the federal 23 level from implementing this type of program that 24 continues to be investigated. And, additionally, 25 there appear to be at least two areas where the staff 0013 1 and industry representatives are not able to come to 2 an agreement on at this time. One deals with the 3 concept proposed by staff of a unit manager. Staff's 4 desire would be to license an individual who would be 5 responsible and accountable for the activities of 6 units. If there were any violations of law or rule 7 that were identified for a unit, this individual would 8 be held responsible. And there are some in the 9 industry that have advocated, instead of the unit 10 manager, each organization be held joint and severally 11 liable for any violations. Staff's concern with this 12 suggestion is that it puts us right back in the 13 situation we're in now, where we can take disciplinary 14 action against a licensee, a charitable organization, 15 when it may, in fact, be an individual behind that 16 organization that is responsible for the violations. 17 And that individual is subsequently allowed to move on 18 to another organization, and the pattern repeats 19 itself. 20 Another outstanding issue, although I 21 don't recall this being discussed as much yesterday, 22 deals with what would make up a unit. Some in the 23 industry have advocated that a number of 24 organizations, less than the full number playing at a 25 hall, be allowed to form a unit. For example, if you 0014 1 have a hall with five charities, two of them could 2 form a unit, and then you would have three separate 3 charities at that same location. In staff's opinion, 4 this doesn't seem to be in the spirit of the 5 recommendation and doesn't offer any real benefits in 6 terms of efficiencies to the division. I think it's 7 staff's position that, if there is a going to be a 8 unit at the bingo hall, there should be one unit for 9 that entire hall. This item was discussed yesterday 10 at the BAC meeting, and the staff's concerns were 11 voiced and discussed during that meeting. It's my 12 understanding, and I don't want to -- good, he just 13 walked in -- that Mr. Bresnen and Mr. Fenoglio are 14 working on another draft of the unit accounting 15 legislation. Also, according to Mr. Bresnen's 16 testimony yesterday, and if I misstate it, I know that 17 he will correct me, this new draft contains, I think 18 he said, something like 95 percent of the current 19 draft. But staff has not had the opportunity to 20 review that yet, so we can't really comment on that 21 further. 22 In regards to the use of proceeds 23 rules, there have been several work group meetings on 24 this issue. The copy that is in your notebook is the 25 draft that's been developed to date and the draft that 0015 1 was presented at yesterday's BAC meeting. As Virginia 2 mentioned, there was a subcommittee appointed to work 3 with staff to review the comments that were made at 4 yesterday's meeting, as well as other comments that 5 may be received during this informal comment period. 6 The subcommittee will then bring it back to the full 7 BAC at a future date for a second reading before it is 8 ultimately presented to you for publication in the 9 Texas Register. 10 And, Mr. Chairman, that's the report I 11 had on those two issues. I wanted to discuss briefly, 12 I think, kind of the experience we've had with the 13 process so far today. I don't know if you want me 14 to -- to go into that now or discuss those two issues. 15 CHAIRMAN CLOWE: I want to ask you a 16 question, and then I think that would be appropriate. 17 My recollection is, both of these items were covered 18 by the Sunset staff report and were adopted by the 19 Sunset Committee, and we owe the legislature 20 recommendations on both of these items. 21 MR. ATKINS: All we -- all we were 22 directed to do by the Sunset recommendation, according 23 to the -- the report, was to study unit accounting, 24 determine if it has merit, and if it would require 25 legislation to implement. I think we've done that. 0016 1 And -- and we've identified what we believe would be 2 the required legislation. 3 CHAIRMAN CLOWE: Have we communicated 4 that? 5 MR. ATKINS: We have provided that 6 draft to the sponsors. 7 CHAIRMAN CLOWE: Okay. I wanted to be 8 timely in our response. 9 MR. ATKINS: Yes, sir. 10 CHAIRMAN CLOWE: And I think there was 11 a determination that use of proceeds should be better 12 defined, wasn't there? 13 MR. ATKINS: That's correct. And -- 14 and -- and that is through rule. So there is -- 15 CHAIRMAN CLOWE: So that's not a 16 response that's owed to them; it's an action on the 17 part of the Commission. 18 MR. ATKINS: Yes, sir. 19 CHAIRMAN CLOWE: And we're moving on 20 that time. 21 MR. ATKINS: Yes, sir. 22 CHAIRMAN CLOWE: Okay. I just wanted 23 to make sure that we were responding to the directions 24 we have from the legislature. 25 MR. ATKINS: Okay. In regards to the 0017 1 process that we're trying to implement on the 2 development of -- of these rules, I just wanted to 3 talk with you real briefly about some -- some 4 frustrations, plus some benefits that we've -- that 5 we've encountered as we've gone through this. There 6 are some folks -- and I think this was particularly 7 evident in yesterday's meeting, too -- they haven't 8 been involved in the process today, or they may not 9 understand what we're doing. For example, you know, 10 the copies in your notebook have written across them 11 in big bold letters, Draft - For Discussion Only. 12 There are some folks, because they haven't had the 13 opportunity, I guess, yet to be involved in this 14 process, seem to think that this is the done language. 15 And instead of approaching it in a way of offering 16 suggested changes or, you know, trying to come to a 17 better understanding why the language prepared has 18 been proposed, they just seem to be gearing up to -- 19 to oppose the rule without offering any kind of 20 meaningful input. We're going to try to continue to 21 educate these people on the value of the process, of 22 the value of -- of providing meaningful input. I'll 23 let you know that going into yesterday's meeting, I 24 was probably one of those who was feeling the most 25 frustration with the process, but as we've talked 0018 1 about earlier, I think that there is a little bit 2 better understanding on everyone's part after 3 yesterday's meeting. And we talked quite a bit in the 4 meeting about the process, how we would like to 5 proceed, and how people can engage meaningfully in a 6 dialogue on these rules as they progress through the 7 process. 8 Now, I would just like to follow that 9 up with the fact that I think there have been some -- 10 some real tangible benefits to this process. First of 11 all, I think there is a better understanding on 12 everybody's part, staff and industry, of each other's 13 position. And the staff often benefits from the real 14 world experiences of our licensees and we're able to 15 incorporate their suggestions in our drafts. And on 16 the other side, the bingo industry is -- gets to hear 17 the situations that we deal with with people who 18 violate the Act or the rules and why we propose the 19 language we do. So it gives them -- it gives all of 20 us a chance to -- to understand that we all face real 21 life situations that we have to deal with. I think 22 probably the biggest benefit, and this was discussed 23 also yesterday, is the fact that, through having these 24 discussions, everyone is starting to come to an 25 understanding that these are not necessarily simple 0019 1 issues that can be handled with just, you know, a 2 change in a word here or a change in a word there. 3 You know, the folks that have really participated in 4 these -- in these sessions now understand that, if 5 these issues aren't carefully reviewed and thought 6 out, they can have serious unintended consequences 7 somewhere down the line. So I think that we're 8 getting a lot of benefit from doing this work up 9 front, as frustrating as it may be at times, but at 10 the end, it will provide us with a much better work 11 product. And I would be happy to answer any question 12 about any of these issues you may have. 13 CHAIRMAN CLOWE: Well, Billy, I agree 14 with your analysis of the process. And -- and I sat 15 through most of it yesterday. It isn't easy. And you 16 are, to a certain extent, required to go beyond 50 17 percent into getting input from the public and helping 18 them understand how they can participate in the 19 process and not be negative, but interface with you on 20 rulemaking and other items where -- where there is a 21 process. You're fortunate to have individuals such as 22 Mr. Fenoglio and Mr. Bresnen, who represent a number 23 of entities in the industry, who will come to these 24 meetings and help you and participate in this process. 25 I heard them compliment you and your staff yesterday 0020 1 on the kind of explanations that were given when rules 2 were offered up. And there is a spirit of cooperation 3 and working together that I haven't seen since I've 4 been on this Commission. I think it's incumbent on 5 you to involve the public so that when you come to us 6 with a proposed rule, there may not be a liking of it, 7 but there is an understanding and a reasonableness to 8 it that we feel gives us the comfort to consider 9 adopting it. And the only way I know to do that is 10 through the hard process of sitting down and -- and 11 hammering out compromises and solutions the way you're 12 doing it. And I think, again, back to Virginia's work 13 groups, involving those people who, obviously, in the 14 comments they made yesterday, some of them have never 15 participated in anything like this. They are business 16 people. They don't have time set aside for this sort 17 of thing, but to get them voluntarily to participate 18 in that makes a better rule and a better decision when 19 you bring it to us. So I think you're on the right 20 road. I'm very pleased with the progress that I've 21 seen. 22 MR. ATKINS: I appreciate that, 23 Mr. Chairman, and we're trying to be as inclusive as 24 we can and provide any number of ways for individuals 25 to comment, besides just coming in here for a meeting. 0021 1 The only thing that I would want to 2 clarify, I guess, on your comment regarding the -- 3 the -- including the public in this process is -- and 4 we talked about this yesterday in the meeting, staff 5 feels that by bringing the rule forward to the 6 advisory committee for -- for one reading, creating 7 this informal comment period, is how we're providing 8 notice to the public that it's out there and available 9 for public comment. What we talked about yesterday in 10 the meeting is that we're a little reluctant to pick 11 and choose people because then someone is going to 12 say, well, why wasn't I included. But we -- yesterday 13 at the meeting for everybody that was there, we 14 provided all the contact information that they may 15 need if they want to be involved in that process 16 again, either by attending a subcommittee meeting, 17 submitting written comment, whatever, we let them know 18 how to do that. 19 CHAIRMAN CLOWE: And -- and there was a 20 good discussion about that relative to the Texas 21 Register, the website, and other means where they 22 might be involved. 23 MR. ATKINS: Yes, sir. 24 CHAIRMAN CLOWE: Let me correct 25 probably an incorrect statement on my part. I 0022 1 mentioned two individuals who are participating in it. 2 I -- to be complete, I should mention all of the other 3 individuals who appeared yesterday, and the problem 4 is, I know most of them by their first names. I can't 5 recall their last names, so I'm unable to do that. 6 But you had a really good group of individuals who 7 represented themselves or a business organization who 8 appeared and gave testimony to Ms. Brackett's group. 9 And -- and I see that as a very healthy process and 10 beneficial to you, trying to formulate these rules. 11 MR. ATKINS: Yes, sir. 12 CHAIRMAN CLOWE: Okay. We'll come out 13 winners on that. Bingo. 14 I believe, then, that concludes the 15 items on the Bingo Division and their business. We're 16 ready to go -- 17 MR. FENOGLIO: Mr. Chairman? 18 CHAIRMAN CLOWE: Oh, I'm sorry. 19 Mr. Fenoglio. I -- I would liked to have run off and 20 left you, but you won't let me, will you? Go ahead, 21 Steve. 22 MR. FENOGLIO: Thank you. For the 23 record, my name is Stephen Fenoglio, and I represent 24 over 950 charitable organizations. 25 The only thing that I want to talk -- 0023 1 and, first, thanks to staff. It is a learning 2 experience on both sides, and having worked in an 3 agency and then on the other side, you always have 4 your eyes opened to the different challenges. And 5 certainly, the work we've done on the charitable 6 distribution rules shows that. I don't think staff 7 understood the frustrations we had, and I know we 8 didn't understand the frustrations that staff has. 9 And we've moved the ball toward the 50-yard line, and 10 we're hoping to both go across the goal line together 11 on that rule. We're close. We're very close. And 12 thank you, Mr. Chairman and Commissioners, for having 13 that process go forward. 14 The unit accounting, we do have a -- a 15 frustration or a challenge, if you will. And it goes 16 to -- and the reason, Billy, we couldn't get it to 17 you, the draft, is the ice storm occurred, and we had 18 clients coming in Wednesday evening. As y'all may 19 know, there was a road between here and Dallas that 20 shut down, I-35, for several hours, and we didn't meet 21 with clients until last night. 22 The unit accounting started out as a 23 very simple concept of accounting for money, expenses 24 and revenues, and reporting once as opposed to up to 25 seven times, seven charities at a bingo hall, cutting 0024 1 seven checks, paychecks, for all your employees, cut 2 one, and then being able to disburse charitable 3 donations equally across the board. The only 4 challenge that we've been able to identify is the -- 5 whether there has to be one person in charge, a unit 6 accounting manager. And the staff draft that went to 7 the legislature says, the only way you can do that is 8 with a new licensee, a unit manager, and that person 9 cannot be a charity rep who is on the license. In 10 thinking through all of the discussion that we had, 11 and the testimony that we presented to you, in 12 connection with, say, River City Bingo Hall in Austin, 13 we always anticipated that one of our charity 14 representatives would be doing the unit accounting and 15 doing the reporting. Under the draft rule, that 16 cannot occur. Parenthetically, an employee of a 17 commercial lessor, who is not on the license, could be 18 the unit accounting manager, and that creates a lot of 19 concern for some charities. 20 We go back to -- and Billy alluded to 21 it -- the joint and several liability concept. The 22 alternative is to make all of the charities, or 23 whichever charities join -- choose to join the unit 24 accounting concept, to be jointly and severally 25 liable. And if you think about that for a moment, 0025 1 that would simplify the paperwork and the enforcement 2 actions by the Lottery Commission. If there is a 3 theft problem or someone is not paying the state fees 4 and taxes, you now have up to seven charities you can 5 go get the money from, as opposed to someone, or one 6 bad apple in the bunch, one charity that doesn't pay 7 those five percent prize fees. And, by the way, those 8 can be huge numbers. In the case of a mature bingo 9 hall, commercial hall, you're talking in terms of 10 $200,000 a year in prize fees. You would now have up 11 to seven charities to get that information from 12 because -- and money from -- because they would be 13 jointly and severally liable. You make the unit 14 manager a licensee, he or she walks, which they might 15 want to do, how are you going to go find that person, 16 and you cannot get, as my granddaddy used to say, 17 blood from a turnip. But you could get the blood from 18 the charities that are continuing to conduct. 19 Related to that is the bonding 20 requirement for that unit manager. Again, if you're 21 talking in terms of $150,000 bond requirement, you 22 know, you've got several options in today's market, 23 and bonds are getting harder to get, if you've ever 24 had to get them recently, as opposed to what it was 25 ten years ago. So our concern is that the unit 0026 1 accounting concept, the laudable goal that it is, 2 might get bogged down in some of these details. We'll 3 present to Mr. Atkins our draft on Monday to address 4 those issues. I'll be happy to answer any questions. 5 MR. ATKINS: And it was not -- 6 Commissioners, it was not my intent to imply that they 7 were withholding it from us. As a matter of fact, 8 they did say they are still working on it. But I just 9 wanted to provide to you the report that was given to 10 the advisory committee. 11 MR. FENOGLIO: And within the unit 12 accounting concept there was discussion in the 13 industry immediately when we read that version that we 14 were concerned about it. 15 One final thing on all of the working 16 groups on the rules. You have a rich communication 17 tool, a website. The concepts that Billy laid out 18 yesterday -- and there are a lot of people who 19 rulemaking is a foreign concept to -- I would suggest, 20 you know, that the staff put on the website, this is 21 what is going on. We've got work groups. Write in. 22 Because some people, even some of my clients I've told 23 over and over, well, the only time we have the 24 opportunity to comment is in one of these meetings, 25 and that's not the case. 0027 1 Thank you, Commissioners. 2 CHAIRMAN CLOWE: Thank you, Steve. 3 We're ready now for item number seven, report, 4 possible discussion and/or action on lottery sales and 5 trends. Good morning, Toni and T.C. 6 MS. SMITH: Good morning, Chair Clowe, 7 Commissioners. For the record, my name is Toni Smith. 8 I'm the marketing director here at the Texas Lottery 9 Commission. 10 Commissioners, you have in today's 11 packet updated information on sales. To look at 12 fiscal year 2003 year to date total sales through week 13 ending February 2nd -- February 22nd, 2003, we're at 14 1.4 billion, and this is up 7.8 percent from the 15 previous year. There is additional information in the 16 memos, and T.C. and I would be happy to answer any 17 questions that you might have. 18 CHAIRMAN CLOWE: Counselor, I want to 19 have some information about the public hearing 20 regarding Lotto Texas that was conducted earlier this 21 week and whatever occurred at that meeting and 22 announcements that were made regarding the future. Is 23 this the appropriate item on the agenda to hear about 24 that under? 25 MS. KIPLIN: I think it could be taken 0028 1 up. I also think it could be taken up under item 22. 2 I would not recommend going into any -- any 3 substantive issues regarding that rulemaking because 4 that's not specifically noticed. I think it's fine to 5 talk about what occurred with regard to the rulemaking 6 comment hearing. 7 CHAIRMAN CLOWE: That's what I wanted 8 to hear. 9 MS. KIPLIN: And I'll be glad to -- 10 I'll be glad to address that for you, if you would 11 like. The rulemaking comment hearing was, as you 12 know, set for this past Wednesday. That comment 13 hearing did occur, and there were no commenters. That 14 also was the day where we had icy issues. The agency 15 did open later in the day. 16 CHAIRMAN CLOWE: There were no 17 commenters, but I understand there were people there 18 who were in attendance, such as Mr. Profit. He 19 pointed out to me earlier today that he was in 20 attendance. 21 MS. KIPLIN: Yes. I -- I stand 22 corrected. 23 CHAIRMAN CLOWE: I just wanted him to 24 have credit for coming through the ice. 25 MS. KIPLIN: I do -- I do recall the -- 0029 1 the brief conversation I had with Mr. Profit, and I 2 did not receive a witness affirmation -- 3 CHAIRMAN CLOWE: He did not wish to 4 testify, but he wished to be noticed. 5 MS. KIPLIN: And I would say -- I would 6 say for the record that we have noticed up a second 7 rule-making comment hearing, which is March 7th here 8 at Commission headquarters in the auditorium at 9:00 9 a.m., for those that were kept away due to inclement 10 weather. 11 CHAIRMAN CLOWE: And that will be on 12 our website as well? 13 MS. KIPLIN: It should already be on 14 our website. Yes, sir. 15 CHAIRMAN CLOWE: So we haven't had 16 anybody who wanted to testify Wednesday. And the icy 17 and bad road conditions were probably the reason for 18 that. And you've announced March the 7th, and we hope 19 to receive comment at that time. 20 MS. KIPLIN: Yes, sir. And we pray for 21 a sunny day. 22 CHAIRMAN CLOWE: Thank you, ma'am. 23 Anything further? 24 MS. SMITH: No, sir. 25 CHAIRMAN CLOWE: Any questions? 0030 1 COMMISSIONER COX: I have a question, 2 Mr. Chairman. 3 CHAIRMAN CLOWE: Yes, sir. 4 COMMISSIONER COX: Toni and T.C., I'm 5 looking at the front page of the report that was 6 sitting here that wasn't in our book. And it says 7 that our fiscal year sales to date are up 7.8 percent 8 from '02, and our weekly sales average is up 7.8 9 percent from '02. And then I look over at the last 10 page, and I have taken a couple of these and put three 11 weeks together, and I see that the week ending 12 February 8, sales were 64.9 million; week ending 13 February 15th, they were down to 61.6 million; week 14 ending February 22, they were down to 60.8 million; 15 and the explanation given, the primary factor for this 16 decrease was a decrease in instant ticket sales. Are 17 we seeing a trend here, or is this an aberration 18 that's not really remarkable? 19 MS. SMITH: Personally, Commissioner, 20 I -- I'm not concerned about that right now with the 21 instant product. 22 COMMISSIONER COX: And we're going to 23 keep an eye on that? 24 MS. SMITH: Yes, sir. We are. 25 COMMISSIONER COX: You -- you don't 0031 1 know of any factors might be causing that? You know, 2 if the Lotto is down, I -- I can look at the jackpots 3 and say, well, they're only four million and the Power 4 Ball is a hundred million, So I can kind of understand 5 when Lotto goes down, but instant sales, I don't 6 understand why they would tail off like this. 7 MS. SMITH: Right. And I can also 8 report later on a comparison to last year in those 9 same time frames. 10 COMMISSIONER COX: That would be good. 11 MS. SMITH: And look at the trending 12 for you. 13 COMMISSIONER WHITAKER: Wait a minute. 14 If we look at the column of instant games for the last 15 three weeks, it's 47, 44, 43, but if you look then at 16 earlier weeks, it seems like it's within line. Can 17 you comment on that, Toni? 18 MS. SMITH: We do track the trending, 19 and I think we're pretty much tracking well, as far as 20 where we were this time last year, but at a higher 21 rate. So I think that those slight drops are not 22 unusual for us for this time of year, but sales are 23 just better than they were last year. 24 COMMISSIONER WHITAKER: Well, I don't 25 even know if I would call it a drop because it seems 0032 1 like it's going up and down and up and down. And it 2 just seems to me that -- 3 COMMISSIONER COX: And I just saw three 4 in a row, and I said, is that something or is it not. 5 MS. SMITH: But I can have for you this 6 afternoon a chart or something that will show that 7 we're pretty much in line with where we are with 8 our -- our typical trendings. 9 COMMISSIONER COX: Yeah. It could very 10 well be seasonal and we have still have prior year 11 data to pick that up. 12 CHAIRMAN CLOWE: Thank you. Would you 13 like to comment on item number eight, report, 14 discussion or action on lottery advertising and 15 promotions, including effectiveness of lottery 16 advertising? 17 MS. SMITH: Yes, sir, I would. We are 18 currently running a Texas Two Step bowling bonus ball 19 spot in our general market advertising area, and on TV 20 it's airing from February 17th through March 9th. And 21 radio for this campaign runs from February 10th 22 through February 29th. 23 In our minority market areas, we're 24 running two different campaigns, one called Be A 25 Player, that in the Spanish market has a soccer theme, 0033 1 and in the African-American market has a basketball 2 theme. This TV and radio are airing at the same time 3 frames as the general market. 4 Now, Commissioners, at the Lottery's 5 request, DDB Dallas, our general market advertising 6 agency, has developed a presentation that shows the 7 effectiveness of advertising. In addition to the 8 Texas account, DDB Dallas currently works with other 9 lotteries in New York, Illinois, and Canada. They've 10 also worked with lotteries in Australia, France, 11 Spain, New Zealand, the Netherlands, and Singapore. 12 Doug Walker, a managing partner at DDB Dallas, is here 13 with me today to address the question, do established 14 brands like the Texas Lottery benefit from 15 advertising. And Doug and I will both be happy to 16 answer any questions that you have either during the 17 presentation or after the presentation. 18 CHAIRMAN CLOWE: Good morning. We're 19 glad to have you here. Thank you for coming. 20 MR. WALKER: Thank you very much. For 21 the record, my name is Doug Walker. I'm a managing 22 partner of DDB Dallas, and we handle the general 23 market component of the Texas Lottery's advertising. 24 As Toni said, she asked me to come 25 today to talk about the effectiveness of advertising. 0034 1 It seems that budgets and spendings are always topical 2 issues, and it seemed like a good time to talk about 3 the value that advertising provides the Texas Lottery 4 in their marketing activities. 5 The place we're really going to start 6 today in talking about this is maybe with this 7 perception. I've heard it in the halls many times, 8 and it comes up from time to time in discussions about 9 advertising. And it goes something like this: 10 Everybody knows about the lottery. It's been around 11 for ten years. Why do they need to advertise? Well, 12 as good a job as the Lottery has done in marketing 13 your products -- I mean, today it's a $3 billion 14 business -- not everybody knows about the Texas 15 lottery. This is from the last tracking research that 16 the Lottery conducted. As you can see, top mind 17 awareness of games varies anywhere from 56 percent for 18 Lotto Texas all the way down to 20 percent for Texas 19 Two Step. So, although we've done a good job and been 20 effective marketers, there is certainly room for 21 improvement to familiarize people further with the 22 games of Texas. That is why we at DDB like to 23 subscribe to the thinking of R. J. Wrigley, who was 24 the CEO of the Wrigley Company in Chicago, who said, 25 "I continue to support our large brands with 0035 1 consistent advertising for the same reason that my 2 pilot keeps our plane's engines running, even though 3 we're already in the air." 4 You see, Wrigley knew the value of 5 advertising to grow a brand, but he also recognized 6 the value of advertising to sustain the growth and 7 maintain the growth that the brand had. And that's 8 really the point of view that we bring to the 9 Commission today is that advertising does work, and 10 that it can be a tool for growth that will provide a 11 positive return on investment. 12 Now, here's how I would like to kind of 13 take this topic on, really four areas, if you will. 14 First, we're going to look at how advertising works. 15 It won't be too simplistic, don't worry, but I do want 16 to bring some third-party studies into the equation 17 here. Recognizing that you have an ad man sitting in 18 front of you, it's much like bringing the fox into the 19 hen house, and, of course, things are going to look 20 good. So I've tried to find some more objective 21 third-party insight regarding this topic. 22 Second, I want to look at what other 23 lotteries have said in regard to their experience of 24 advertising, the importance it plays in their 25 business. 0036 1 Third, we're going to look at our own 2 experience. And last, try to tie all this -- this up 3 and talk about what does it mean from an implication 4 standpoint. 5 So how does advertising work? Well, 6 start with a very basic premise, which is important. 7 If you run some advertising, you would tend to see a 8 general curve like this. Sales and demand go up, and 9 when you stop advertising, sales and demand and 10 awareness start to decline. Now, this principle has 11 been confirmed by numerous studies. People have 12 proven this time and time again. And if we accept it, 13 then regardless of exactly how sales respond, which is 14 probably what more people are interested in, we do 15 know that at any time ads will have two effects on 16 sales. First, the current ads will be increasing 17 demand, and the second is that the effects of previous 18 ads will be fading away, which will be reducing 19 demand. 20 So the question is, am I in growth 21 stage? Am I in the equilibrium stage? Or am I in the 22 decline stage? Well, if we assume for a moment that 23 other factors are constant, and, trust me, that is an 24 assumption that, you know, we really -- it's difficult 25 to make because we know that markets aren't void of 0037 1 other activity. In the lottery's case, for example, 2 we know that jackpot amounts and matrix changes and 3 weather and seasonality all have an impact on our 4 sales. But if we put those on the sideline for a 5 moment, then we could really deduce that, if ads run 6 often enough to counter, the demand will be stable. 7 If ads run more often, demand will build and 8 eventually stabilize at a much higher level or a 9 higher lever. And then if ads run less often, then 10 demand will subside and eventually will stabilize our 11 sales at a lower level. In other words, there is a 12 level of ad support that maintains sales equilibrium. 13 And this is important, that you could be advertising 14 and that you're really not growing the brand, You're 15 just kind of holding your own. There is a level of 16 advertising that achieves that for a brand. 17 Now, the other thing, you start 18 changing that, brands that overspend will grow until 19 they eventually reach equilibrium at higher level, and 20 then, as I said, brands that underspend will shrink 21 until they reach a -- a lower equilibrium level and 22 stay there. 23 Now, the question that you would 24 probably ask yourself, given that background knowledge 25 about how advertising works is, so what does a brand 0038 1 need to spend to be at equilibrium or, more important, 2 what does it need to spend to grow? And there has 3 been quite a bit of studies done on this topic, and 4 they reveal that the equilibrium level revolves around 5 the relationship between what's called share voice and 6 market share. And share voice is just an ad term. 7 It's a pretty simple concept, really. It takes your 8 percentage, your brand's percentage of spending as a 9 percent of the total category spending, as defined 10 by people you believe you compete against. A very 11 simple example, if the category spent $100 on 12 advertising, and your brand spent $20, you would have 13 a 20 percent share voice. 14 So what they see through all these 15 studies is that your share voice in the market seems 16 to have a direct correlation to your market share. 17 And the reason we use these two terms or these two 18 factors to measure advertising effectiveness is that 19 market share is usually a good measure of demand, 20 since it factors out a lot of variations in market 21 size, both between markets and over time. And share 22 voice is often a good measure of advertising support, 23 since, again, it can factor out things like median 24 inflation, market size, and it also takes into account 25 the fact that, when competitive spending gets higher, 0039 1 the advertising task is harder. Obviously, if your 2 competitor is spending more and you're not, your share 3 voice is going to decline. 4 So let's take a look at some of these 5 studies. I'll just hit the highlights for you. But 6 let's look at this relationship between share voice 7 and market share. And this study comes from the World 8 Advertising Council. It was published in 2001. And 9 Stephen Buck, who did the study, is a Ph.D. from 10 London University, and he has spent the last 20 years 11 involved in studying advertising and its effects on 12 businesses. And what he did was look at a study that 13 looked at the relationship between share voice and 14 market share across 26 grocery categories from '75 to 15 1999. So what he found was there is a very strong 16 correlation between a brand share voice and their 17 market share. This chart, although initially it might 18 look a bit confusing, is all the different brands that 19 he looked at, plotted in regard to share market along 20 the bottom and then the share voice going in the 21 vertical axis. Don't disregard all the individual 22 brand plottings, but what that line represents is the 23 average of all those brands together. And what you 24 can see is, there is a direct correlation between 25 share market and share voice, and that it increases 0040 1 pretty much proportionately as you go across the 2 chart. 3 Another study done by Jones, who's 4 another academic, he looked at 1,096 brands in 23 5 different countries. He did this back in '87. He 6 looked at -- he found, as well, that the average brand 7 had a share voice roughly equal to the market share 8 that it had. Big brands' share voice tends to be a 9 little bit lower than their market share, while 10 smaller brands' tend to be higher. And here is the 11 curve based on all those brands consolidated. So, for 12 example, if you looked along the bottom of this 13 chart that has market share, it's at, let's say, five 14 percent, the average share of the brand would have 15 been about seven or eight percent. Whereas, larger 16 brands, if you go -- continue across the chart, you 17 might have a share voice of -- or you might have 18 market share of 30 percent, new share voice typically 19 would be in the mid-20s. So I think for these two 20 studies, and there is many more, we see that there is 21 this direct correlation between the share of market 22 and your share voice. 23 It gets more interesting, however, when 24 you say, well, okay, what happens if I start changing 25 this relationship to some significant degree. And 0041 1 most people looked at what -- you know, what are my 2 growth rates if I start to overspend my -- my 3 equilibrium level. Well, brands that overspend in 4 their size tend to do well, people find; whereas, 5 those that underspend tend to suffer. Again, 6 reverting back to what some of the work that Buck did 7 on this 26 grocery categories, he said that brands 8 that spend above their market share have a stronger 9 growth in the short-term over a four-year span, as 10 well as the long term, 24 years. 11 Here you can see the four-year 12 analysis, and he -- then brands are grouped by their 13 change in market share between 1995 and 1999. And 14 then we can look at the average share with the 15 difference between the brand's share voice and their 16 actual market share. And the key point of this chart 17 is that brands that fell two or more percentage points 18 had a negative of minus 1.5 percent. In this case, 19 they were spending 1.5 percent less than their actual 20 market share. And brands that rose two or more points 21 in the marketplace significantly spent over their 22 share of market, in this case, 21.8 percent. And, 23 again, that relationship stays the same when you look 24 at brands from '75 to '99, again falling brands versus 25 rising brands, you can see quite a gap in the 0042 1 difference between what those brands have spent in 2 regard to their share of market. 3 There is another pretty large study 4 done by the Strategic Planning Institute of Boston. 5 They manage the data base for products and financial 6 and marketing data for 3,000 businesses. It's quite 7 remarkable. There's about 400 different elements that 8 they study in regard to each of these companies from 9 an economic standpoint. And not only did they find 10 that sales are positively impacted, but they saw that 11 perceived quality and return on investment correlates 12 with how high the advertising sales ratio is compared 13 to its competitors. Firms that overspend tend to do 14 better than brands that underspend, both in terms of 15 image and financial performance. And, again, if you 16 would like to see the data, the people who spent much 17 less versus their competitors in advertising had -- 18 were perceived much lower in terms of quality, as well 19 as their return on investment, compared to brands that 20 spent much more. You start to see -- and, by the way, 21 this study, as I said, was done with 3,000 firms 22 throughout Europe and the United States. So you start 23 to see a trend here. 24 And the last one that I would like to 25 share with you is a study by IRI. That's Information 0043 1 Resources Incorporated. IRI is a consumer sales 2 tracking company that does business with all of the 3 major consumer packaging companies, things like P&G, 4 Clorox, General Foods, et cetera. If it's -- if 5 you're in the package goods business, you're doing 6 business with IRI, most likely. 7 What they did was look at 15 brands 8 over a three-year period, and they broke people who 9 could see their advertising into two different groups, 10 group A and group B. Group A saw normal television 11 advertising; whereas, group B saw a significantly 12 amount more advertising, in this case, 70 percent 13 more. And they tracked to find out what happened. 14 Well, the group B people who saw more advertising, 15 through year one, sales increased among that group 22 16 percent. In the first post year after the test, where 17 advertising levels reverted back to the base levels 18 before the increase, they still saw an increase of 19 sales, in this case by 17 percent. And even two years 20 after the fact, they continued to see sales increase, 21 in this case, six percent. 22 They also looked at what happens when 23 brands cut spending. Not as much work has been done 24 in this area. People usually look at it as, how can I 25 grow, but, in this case, they did provide data on what 0044 1 happens, in this case, when brands cut their spending 2 by 40 percent. And what they saw was a four percent 3 sales decrease in year one and then an additional nine 4 percent or 13 percent, compared to the base year, drop 5 in sales in the second year. So, again, you see this 6 cause and effect relationship. 7 One other area that we can look at real 8 quickly is, what do people do in tough times? That's 9 usually when we see budget cuts come up most often, 10 when money gets tight. And recessions are probably 11 the best time or the most featured times when this 12 occurs. There has been quite a bit of work done in 13 this area. Just some of the highlights: American 14 Business Press sampled 143 U.S. firms in the '74-'75 15 recession, and they saw that firms that maintained or 16 increased their ad spending, versus those that didn't, 17 saw dramatic increases in sales, as well as net 18 income, over two-year and four years following that 19 recession period. 20 This has also been studied by 21 McGraw-Hill. They looked at the '74-'75 recession, as 22 well as the one in '81 and '82. And, again, we see 23 that firms that maintained or increased ad spending 24 significantly outperformed their rivals in terms of 25 sales. 0045 1 And then, finally, the '91 recession 2 has been studied quite extensively as well. Here is a 3 couple of studies from Taylor Nelson and Market Sense. 4 They both conducted independent studies comprised of 5 127 and 101 fast-moving consumer goods brands, 6 respectively. And both found that brands which 7 increased spending grew at a much faster pace than 8 those that did not. There is mention of specific 9 brands throughout that study, but I think you start 10 seeing the trend. 11 And so from looking at third-party 12 resources in regard to this topic of, does advertising 13 work, well, here is what we -- we found out. There is 14 a clear relationship between ads spent and market 15 share. And if you spend at a more aggressive rate, 16 you grow. And if you spend at a slower rate, you 17 shrink. So that's what the theory and maybe some 18 supporting evidence looks like. 19 Look at what other lotteries are 20 saying. What are they saying about advertising from 21 their experience? From the 1998 Florida TaxWatch 22 Report, California and Connecticut, in their report, 23 indicate experiencing significant declines in sales 24 due to reductions in advertising. The Washington 25 lottery reported that advertising paid off with a 0046 1 return of nine dollars increased -- nine dollars of 2 increased revenue for every dollar of advertising. 3 Further information in that tax report, it -- it 4 stated that the Florida legislators certainly 5 recognized the value of advertising in their 6 investigation. And they wrote a statute on it that 7 said the legislation recognized the need for extensive 8 and effective advertising and promotion of lottery 9 games. 10 What does NASPL in their 1999 11 presentation to state legislators, they got -- 12 addressed this topic, as well, about advertising 13 effectiveness. And they reported that New York said 14 that they received one dollar -- for every one dollar 15 of advertising they spent led to 14 dollars in sales. 16 Newfoundland reported that they had a ban on 17 advertising. It cost the province 4.6 million in year 18 one and 10.5 million in year two. The ban was 19 rescinded. Missouri reported their five million 20 dollar cut in ad spending led to a sales decline of 27 21 million dollars, and then a 3.3 million dollar 22 increase in ad spending led to a 52 million dollar 23 increase in sales. 24 Further, looking at reports -- 25 published reports about spending, Massachusetts, which 0047 1 seems to be the poster boy for "Look what you can do 2 without advertising," did go on record back in 1997 3 that they were disappointed in the sales, the 4 introduction of the Big Game, and that Massachusetts 5 lottery officials were on record where they 6 acknowledged the restriction of advertising hurt 7 sales. The information that we had researched on 8 this, it turned out that people just weren't aware of 9 the game, and that seemed to be a fundamental problem 10 with driving sales. 11 Wisconsin is also down on record on the 12 topic of advertising, and they have attributed a sales 13 decline from about 519 million in '95, down to 407 14 million in 2000, to a number of factors, including 15 advertising restrictions, fewer retailers, and gaming 16 competition. 17 I would like to make a point here about 18 the retailers. Retailer support is incredibly 19 important to the lottery, and I think that they view 20 the advertising that we have in the market as very 21 supportive of their products. But they sense that we 22 are not going to support their products to the 23 aggressive levels that we have in the past. I think 24 we could -- we could risk a bit losing some retailer 25 support. Having just been out on retailer sales calls 0048 1 last week, I can tell you there is a significant 2 difference between retailers who really get behind the 3 lottery and the sales they generate, versus the 4 retailers who just kind of have it in their store and 5 let it run on autopilot. We really need to keep this 6 retailer support, and I think advertising is one of 7 those tools that certainly garners it. 8 And, finally, the New York lottery took 9 one of the tougher tasks on hand. They, in 2001, 10 turned around a three-year lotto sales decline due to 11 advertising. They actually produced a two percent 12 increase over the previous year's sales, and they said 13 that the halo effect of the campaign contributed to a 14 12 percent bump in overall lottery sales. 15 So when we look at other lotteries, or 16 at least the ones that have gone on record on this 17 topic, we see that there is pretty significant values 18 placed on the impact that advertising has on the 19 business. That's fine and dandy. We've seen what the 20 theory says. We've seen what other lotteries say. 21 What about our business? How is 22 advertising impacting it here in Texas? Well, we've 23 been engaged with the lottery since the middle of 24 October, and the first work that we have done for you 25 was in -- was in November, where we got behind instant 0049 1 products. We launched three games in November, one, a 2 five to ten-dollar ticket. And we launched Holiday 3 Million, our first 20-dollar ticket in the state, in 4 December. And we've supported these products with 5 radio and point-of-sale support. 6 How did we do? Well, the Holiday 7 Million produced nearly 26 million dollars in sales 8 during the three weeks that we advertised the game. 9 That's 47 times the 545,000 dollar investment we made 10 in advertising, or roughly two percent of sales. 11 Sales for instants were 55 million dollars higher 12 during the seven-week campaign, compared to the seven 13 weeks prior to the campaign. And instant sales, if 14 you're saying, Well, hey, we just do well with 15 instants in November and December, that that's 16 seasonal, a good time for us, instant sales for -- for 17 that seven-week campaign period were up 15 percent 18 versus the same period a year ago. The other thing, 19 we were running a richer mix of tickets at the time. 20 We sold nearly 1.9 million more tickets during that 21 time frame as well. So about every which way we can 22 cut it, it looked like the advertising had a positive 23 impact. 24 Bucks 'N Trucks II, which was a program 25 that we launched on January 20th of this year with 0050 1 three weeks of support, here is how it did. Bucks 'N 2 Trucks was the top selling two-dollar ticket during 3 the promotional period. It beat Break The Bank, which 4 is a two-dollar game as well, and it's the number one 5 selling instant ticket for the lottery of all instant 6 lottery games this year. And sales for Bucks 'N 7 Trucks were nearly 900,000 dollars more than Break The 8 Bank during the three-week promotional period. And 9 so, again, a pretty positive impact with regard to 10 sales results. 11 We also saw that Bucks 'N Trucks ranked 12 third in overall instant sales during the advertising 13 period. It ranked behind ten and 20-dollar tickets, 14 which you would expect. And then sales for Bucks 'N 15 Trucks had averaged a million dollars more per week 16 during the period that we advertised the game, versus 17 when we weren't. For the three weeks that we 18 advertised the game, we saw average weekly sales of 19 the product to be $3,058,000. In the weeks since 20 we've advertised, the average weekly sales have been 21 2,075,000. 22 So, again, trying to look at this from 23 all different angles, we're seeing positive impacts 24 regarding the products that we're advertising. 25 Finally, we're just launching a new 0051 1 Texas Two Step, as Toni mentioned, program. We're in 2 the very infant stages of it. Sales have been 3 somewhat soft and declining on this product, and so we 4 just launched the campaign with radio on 2/10, last 5 week, with radio to try to turn around this negative 6 sales trend, if we could. It looks like early 7 indications, we may be having some success, but I 8 would say the jury is still out. We have to see what 9 happens over a longer haul, but here is the early 10 returns on this one. We produced the second highest 11 sales week this fiscal year. If you're curious, the 12 highest week was back on October 22nd with a jackpot 13 of 725,000. The week ending 2/22, the jackpot was 14 450. And then we tried to make a comparison and say, 15 well, what did we look like versus another 400,000 16 dollar jackpot week. We had one of those January 4th. 17 Sales were a million three seventeen that week or 18 160,000 dollars less than the week that we just had, 19 ending February 22nd. That jackpot actually was 20 425,000, January 4th. 21 And then, if you're curious, we can 22 look at the prior eight-week average in sales being a 23 million two sixty-six, and you can see how the first 24 two weeks of this program, we're starting to see an 25 uptick. I'm sure some of that's due to the larger 0052 1 jackpot. I also think that maybe we're generating 2 more play, so our (inaudible) is rolling a bit faster 3 than it has in the past. 4 Those, you know, to us are very 5 encouraging signs that advertising is having a 6 positive impact on the business. We've looked at, 7 again, theory, what other package good brands have 8 experienced. We've looked at other lotteries. We've 9 looked at yourself. And there all seem to be positive 10 indications that advertising certainly has a lot of 11 value. 12 What does all this mean? Well, our 13 current spending is about one percent of sales, or 14 roughly, 30 million dollars. To put that into 15 context, to me, it's a heck of a lot of money, but 16 from a competitive standpoint, you -- it might be seen 17 as conservative. Say, compared -- compared to other 18 consumer goods, spending is very low. 19 And this quote is from Rebecca Paul, a 20 former president of NASPL, and this was from her 21 commission address at the 1998 National Gambling 22 Impact Commission. And she said it best, so I'm just 23 going to use her words: Advertising is used to raise 24 awareness or influence selection of any product or 25 service over another. 0053 1 Lottery tickets compete with Mars 2 candy, Frito-Lay, Coca-Cola. It's interesting to note 3 that, on average, a lottery spends only one to two 4 percent of its revenue on advertising its products, 5 while an average consumer product company spends up to 6 eight times that amount. For sugar and confectionary 7 products, in this case, candy, the figure is 17.4 8 percent. 9 I looked at what advertising and sales 10 ratios were last year for some of the products that 11 you compete against, beverages, cookies, crackers, 12 candy. Those things certainly are found in C stores 13 and are discretionary spends, just like lottery 14 tickets. And as you can see, their percentages are 15 significantly higher than the one percent that the 16 lottery currently spends. It -- just eating places 17 and then some staples like soap. So I think you 18 understand that, you know, we're rather conservative 19 in -- in regard to how much we're putting behind our 20 advertising, compared to sales at this time. But, 21 still, it's a lot of money. 22 And if the question does come up from 23 time to time -- it's certainly been asked of us -- 24 what could happen if we cut our ad spending? Well, 25 that's a tough question to answer, but I'll try to. 0054 1 And really, what I've done here is try to use one of 2 the studies that we shared with you earlier from IRI, 3 where they looked at what happened when a brand cut 4 their spending by 40 percent. And I would imagine 5 that any brand sitting there looking for savings on 6 the advertising budget isn't looking for one or two 7 percent decreases. It would be hard to argue that a 8 one or two percent decrease would have any impact. 9 The five, ten, 15, 20 percent, et ceteras, then you 10 would probably expect to see some impact. 11 And what our counsel to this group 12 today would be is that you would risk cutting your 13 most profitable sales. Remember, if we advertise or 14 not, we still have all our fixed costs in this 15 business, and so you can really look at the sales 16 generated through advertising as truly incremental, 17 and that the cost associated with those is the cost of 18 the advertising. And this is typical with any brand 19 that advertises. But using the hypothetical, based on 20 IRI's 40 percent case ad spend cut where, in this 21 case, would be 12 million dollars for the lottery, 22 they saw sales of brands decline four percent. If we 23 saw our sales decline four percent, that would be 120 24 million dollars in one year. In year two, they saw 25 sales decline 13 percent. For the lottery, that would 0055 1 be 360 million dollars a year. Compared to the 12 2 million dollars that we are cutting, certainly there 3 is quite a gap between what we potentially might save 4 versus potentially what we might lose in sales. 5 I'm not here to tell you that this is 6 an exact science and that your sales would behave 7 exactly as this. But I think, given the information 8 that we've looked at in regard to the positive impacts 9 that advertising can have and what happens when you do 10 spend below your -- your equilibrium level, would this 11 be a realistic scenario? It could be. Even if it was 12 half, it would still be significant versus the spend 13 that we would -- the dollars that we save from our 14 spending cuts. 15 And one other thought here on this 16 topic is just to remember that regaining lost volume 17 is a much more expensive proposition than it is to 18 maintain it. When you give up ground, re-earning that 19 share, that core part of your business, takes you 20 longer and costs you more than just maintaining that 21 level of business. 22 I tried to, you know, make this as 23 simple as possible and I asked myself, What's the 24 bottom line here in regard to advertising for the 25 lottery? And really, again, that one percent of 0056 1 sales, at 30 million dollars, if you look at it, if 2 the sales difference between advertising and not 3 advertising is greater than one percent, then 4 advertising will produce a positive return on 5 investment for the Texas Lottery. 6 Now, given the -- the data that we've 7 looked at here and the -- and the wide body of 8 research that has been done on this topic, it 9 certainly seems that the one percent threshold is a 10 relatively conservative low threshold, and that I 11 would suggest that we, you know, certainly have the 12 opportunity to do significantly better than that. And 13 so you kind of ask yourself the question, why would 14 you risk future growth on something that seems so 15 achievable. 16 A couple of summary comments and then a 17 final thought for you. There is a wide body of 18 evidence that shows advertising positively impacts 19 sales. We've seen it for other consumer products. 20 We've seen it for other lotteries. And we've seen it 21 right here for you. And if we're looking to grow, the 22 decision to continue to use advertising as a marketing 23 tool seems to be a real easy one. 24 But I know that probably everybody in 25 this room is sitting here thinking, yeah, but I want 0057 1 to know exactly what advertising does for me. What 2 real impact does just the advertising have on my 3 business? And I've been working with Toni and her 4 team here in trying to get really at that answer. 5 DDB has a consultancy group called DDB 6 Matrix, and it's something that we're evaluating right 7 now and its application to the Lottery. What they do 8 is work with clients in answering this question about 9 what are my marketing communications doing. And they 10 use sophisticated statistical analysis and a lot of 11 econometric modeling. I can't explain it all to you 12 because it's not my strength, but it's a very 13 sophisticated group. They've worked with many, many 14 clients, clients like Dell Computer. They do all 15 their forecasting for them right now. They've worked 16 with Clorox. They've worked with Volkswagen. They've 17 worked with Gatorade. It's a very reputable group. 18 And if we engage with DDB Matrix -- and it's something 19 that we're evaluating as far as, you know, can we 20 really do this for the Lottery, they would be able to 21 really isolate and answer the questions that we really 22 would like to get answers to; for example, what is 23 each element of our marketing and communications fix 24 doing for us? In other words, they would be able to 25 isolate the value of advertising and its impact on 0058 1 sales for the Lottery, versus changes in jackpots, 2 changes in matrices, changes in whatever the factors 3 we thought were most pertinent that impacted our 4 business on the marketing front. They would also be 5 able to do simulations and forecasts for us. They 6 would be able to say, what can we expect from the next 7 year, given our media plan? For example, what can we 8 get for ten percent more or less? It would be able to 9 help us to do forecasting in that area. And then it 10 would also be able to help in optimizing budgets or 11 media vehicles, maybe answering questions about what 12 is the most efficient plan, given our budget. 13 This is not a special black box. It's 14 just a science. It's statistical science that seems 15 to have a heck of a lot of good success in accurately 16 forecasting these types of questions for other 17 clients. And what we would like to be able to do is 18 continue to evaluate its application to the Lottery 19 and see if it makes sense. And if it does, I think in 20 future meetings perhaps we could sit down and have 21 more specific discussions regarding the true impact of 22 different marketing activities in regard to the Texas 23 Lottery. But I would suggest we need to complete our 24 analysis first and its application to the business 25 before we jump on board with it. 0059 1 That's all I had to share today. Thank 2 you for your time. Certainly, I've gone through a lot 3 of information, but, clearly, if you have questions, 4 I'd -- I'd love to address them for you. 5 COMMISSIONER WHITAKER: Have you 6 studied the lotteries that didn't self-report on 7 whether advertising helped or not? 8 MR. WALKER: You know, I have not been 9 able to see a lot of data on that. There just isn't 10 much published about it publicly. It's something, 11 certainly, we could do. 12 COMMISSIONER WHITAKER: And, secondly, 13 it seems to me that comparing sale of candy, which is 14 an intensely competitive market space, is different 15 from selling lottery tickets. 16 MR. WALKER: Well, it's -- 17 COMMISSIONER WHITAKER: Although they 18 are certainly competitive products to a lottery 19 ticket, it's not the same. How do you, therefore, 20 compare with -- what I perceive to be apples and 21 oranges? 22 MR. WALKER: Well, it's -- 23 unfortunately, there is nothing exactly like the 24 lottery games in Texas. Your -- you've got a monopoly 25 over the market. But you do compete, we believe, with 0060 1 discretionary spending. And so, for example, if 2 somebody is thinking about purchasing a lottery 3 ticket, it does compete, in our minds, I guess, with 4 those other consumer goods that are a discretionary 5 spend. I walk into a C store, do I buy a pack of gum 6 and chips, or do I get a lottery ticket for the day? 7 It -- it has a very -- very broad -- it can compete 8 with other entertainment vehicles. Do I go to Six 9 Flags or do I spend money on a lottery ticket? 10 Your competitive set at one level is 11 nothing, and then at another level it seems to be 12 quite broad. And it all has to do with discretionary 13 spending and consumers' pockets and how they choose to 14 allocate it. So we've used packaged goods as maybe 15 the closest thing that we could approximate it. But I 16 would agree, it's not exactly apples to apples, but we 17 think it's certainly directionally the best category 18 we could look at to share information. 19 COMMISSIONER COX: Doug, you've done a 20 good job of addressing the subject, and I'm still 21 frustrated at being unable to get an answer to the 22 object. This is the third answer I've seen from your 23 firm to what I thought was a simple question. And it 24 must not be as simple as I think it is. We spent 30 25 million in advertising. I think about 24 million of 0061 1 that goes to the media. Now, we've got a marketing 2 mix here where we've got a product, we've got a 3 promotion, we've got a channel. And this agency has 4 been criticized for not doing cost benefit analyses. 5 And what I asked Gary for was, we're spending 30 6 million on advertising, what benefit does that get us, 7 versus spending 30 million on product that is 8 increasing the payback to the customers, or spending 9 30 million more on the distribution channel. And I 10 still don't have anything that helps me with that. 11 MR. WALKER: Well, as I said, it's a 12 difficult question to give exact answers to. And I 13 think it would be -- I would be misguiding the 14 Commission if I came in here and made a one-to-one 15 comparison between ad spend and the overall sales 16 increase or decrease, because I recognize that other 17 factors clearly influence the success of the lottery 18 in terms of sales. 19 What we've tried to share today is 20 information that is about as -- particularly, when we 21 looked at your business in regard to sales -- tried to 22 be as exact as possible in regard to isolating what is 23 happening to the products that we're supporting with 24 advertising, and looking at the investment that we've 25 put behind that versus the sales increases, in this 0062 1 case, that we've seen. 2 Recognizing your frustration, clearly, 3 you know, that is why we're working with Toni and her 4 group, trying to bring more sophisticated tools to the 5 table that would allow us to really provide you the 6 exact answer, I think, that would make you feel better 7 about -- truly isolate that 24 million media spend and 8 what impact is it having on my business. We know 9 there is a way to do it. We need to engage those 10 resources to be able to answer that question 11 specifically for you. 12 COMMISSIONER COX: We were fortunate 13 enough to have an excellent presentation that was 14 focused around the Massachusetts experience in the 15 past month. And while you put a couple of anecdotes 16 up there about people who said, not advertising has 17 hurt their business, their per capita sales are many 18 multiples of ours. And they pay back a much larger 19 percentage than we do. So we have to be looking at 20 the issue of where do we put our money, and not just 21 that 30 million. Can we increase our net revenues by 22 spending more on advertising, putting more money into 23 the channel, putting more money back to the players? 24 And we really need data to try to address these 25 things. And when you talk about your consulting group 0063 1 here, the question that comes to me is, what does our 2 contract with you say about your helping us measure 3 the results of the advertising? Is that not part of 4 your contractual responsibility? 5 MR. WALKER: There is the -- we are to 6 report return on investment. And right now, that 7 report would fall in terms of sales and performance 8 versus advertising expenditures. It's a very -- 9 COMMISSIONER COX: Doug, you're talking 10 about a situation there -- you know, you -- you tell 11 me that we've got -- you advertise Trucks 'N Bucks for 12 five weeks and sales are great. Well, good. But what 13 would they have been without advertising? It's a new 14 product. It's a good product. And I think probably 15 the most interesting thing I saw was, you're talking 16 about using advertising to try to revive a tired 17 product, if we can put Texas Two Step in that 18 category, but have you tried advertising a tired 19 instant game to see if it props that baby up, or does 20 it just keep going down because it's a tired game? 21 And I think there are a number of things we could do 22 to gather some data, and I encourage Toni, you and 23 your staff, to continue working to try to bring us 24 some hard data on this information. 25 MS. SMITH: Yes, sir, we will. And -- 0064 1 and what we've asked Doug to do is work with DDB 2 Matrix and see if it would fit into our products, and 3 it could -- and could be a useful tool. The DDB 4 Matrix consultant group is an offered option within 5 the contract, so we've actually sent some papers up to 6 legal to see how we could approach that from a 7 contractual standpoint and even a cost standpoint, 8 because there weren't any costs associated with it in 9 the actual proposal. It was an offered option. So 10 we're looking into those things, and we'll be glad to 11 share with the Commissioners our -- our findings on, 12 you know, whether DDB Matrix can help us to dig a 13 little deeper and hopefully find out some of those 14 answers. And we'll be glad to share those with you as 15 we get the responses. 16 CHAIRMAN CLOWE: We want to thank you 17 for the presentation, and you may be wondering, you 18 know, why we brought you down here and fussing at you. 19 Our comments are not directed at the performance of 20 your firm. We're not displeased with the product. 21 You're doing a good job as far as I know. But you're 22 our third largest expenditure in point of contract 23 size. And advertising is viewed by a number of people 24 as being discretionary. You made the comment, I 25 think, that our purchase of tickets is discretionary. 0065 1 You know, we don't quench thirst, we don't satisfy 2 sugar desire, although we are sold, in many cases, 3 where those items less than a dollar, or a dollar and 4 a half, two dollars, are sold. But it's an 5 interesting product. There is no doubt in my mind 6 that Coca-Cola wouldn't sell as many bottles as they 7 do if they didn't advertise. They don't have a 8 monopoly. Some would say, we have a monopoly. But 9 when you look at the spin parlors around the state 10 that have eight-liners, it appears to me, we're not 11 anywhere near a monopoly. We are equipped with 17,000 12 retailers that have our machines, but there are the 13 casinos, there are the dog tracks, the race tracks, 14 there are the Internet gaming opportunities, and it's 15 a unique product. It's a unique agency. We're the 16 only agency I know that sells something to the public 17 and markets it and yet, at the same time, has to be 18 mindful of the fact that there are a large number of 19 people in this state that don't want it marketed and 20 would rather never see it advertised. And I -- 21 Rebecca Paul comes from a state that is very 22 aggressive in their advertising. They go all out. 23 They're the Coca-Cola of advertising and telling their 24 story. We have been criticized in the past for being 25 overly aggressive with our advertising and having 0066 1 things that were in poor taste as part of our 2 advertising program. Our -- those are all 3 considerations that we have to take into our thinking, 4 and what we're trying to do is to understand what 5 we're getting for the money that we're spending. 6 We understand the games have to be 7 fresh or refreshed. They have to be attractive to the 8 players. And then we look at this advertising dollar, 9 and what are we going to say to our bosses, who ask 10 us, What are you getting for this 30 million dollars? 11 And we've got to come up with something that is in 12 more depth than what you have given us here this 13 morning, in my opinion. And we want your help on 14 that. And the reason that we have asked you to do 15 that is because you're handling our business in this 16 area. And so I think the Commissioners have told you 17 that they want something deeper and more detailed. 18 And we ask you to help us come up with those answers 19 because it's a fair question to ask. And as business 20 people -- and we're in the business of selling lottery 21 opportunities -- we have to answer that question for 22 ourselves and for others that have the right to ask 23 us. 24 MR. WALKER: I agree. I think it is a 25 very fair question to ask. I would suggest that you, 0067 1 along with many other clients, ask that same question. 2 And it's a doggone important one. You have our 3 commitment, DDB's commitment, that we will work with 4 Toni and Gary, and we will get to -- you know, tear 5 this problem apart and try to be as specific as 6 possible where we can provide you more substantive 7 answers than we have today. 8 CHAIRMAN CLOWE: Great. And in light 9 of that, I'm going to ask that this subject be put on 10 the agenda for our next month's meeting so that we 11 keep this before us, not necessarily asking you to 12 come and make another presentation, as you have here 13 today, but to keep this subject warm and express our 14 continued interest on an ongoing basis. So, Toni, 15 we'll ask you what progress you've made in this area 16 next month, and we'll keep this before us. 17 MS. SMITH: Yes, sir. 18 CHAIRMAN CLOWE: Anything further? 19 Thank you all very much. 20 MR. WALKER: Thank you. I appreciate 21 it. 22 CHAIRMAN CLOWE: Next is item nine, 23 consideration of and possible discussion and/or action 24 on the drawings audit services contract. Mr. Bennett. 25 MR. BENNETT: Good morning, 0068 1 Commissioners. For the record, my name is Ridgely 2 Bennett. I'm the deputy general counsel of the Texas 3 Lottery Commission. 4 The current contract with Davila, 5 Schaubhut & Company, P.C. will terminate on August 6 31st, 2003. There are no remaining options to extend 7 this contract. Therefore, staff recommends that we 8 issue an RFP in order to procure drawings audit 9 services. I would be happy to try to answer any 10 questions you may have. 11 CHAIRMAN CLOWE: Does this require a 12 motion? 13 MR. BENNETT: I don't believe so. This 14 is for informational purposes. This is one of the 15 major contracts that the Commission has been asked to 16 be kept informed of. 17 CHAIRMAN CLOWE: Are there any 18 objections? Hearing none, I believe you have the next 19 item. 20 MR. BENNETT: Thank you, Commissioners. 21 This is on the financial audit services contract. The 22 Commission currently has a contract for financial 23 audit services with McConnell & Jones, L.L.P. There 24 still remains one option to extend the contract for an 25 additional one-year period. However, staff recommends 0069 1 that we issue an RFP for financial audit services. 2 Once the procurement process has concluded, staff will 3 evaluate whether to enter into a contract as a result 4 of the RFP or whether to extend the contract with 5 McConnell & Jones. 6 CHAIRMAN CLOWE: Any comments? 7 I believe have you the next item. 8 MR. BENNETT: Thank you. This contract 9 is on instant ticket vending machines. The current 10 contract for instant ticket vending machines with 11 Interlott will terminate on August 31st, 2003. There 12 are no options to extend this contract remaining. We 13 would like to point out that under the lottery 14 operations and services contract with Gtech, the 15 lottery has an option to require Gtech to provide the 16 instant ticket vending machines to the Commission. 17 However, staff recommends that we issue an RFP for 18 instant ticket vending machines and then at the end 19 the procurement process, evaluate whether to enter 20 into a contract as a result of the RFP or whether to 21 exercise the option under the Gtech contract and have 22 them provide instant ticket vending machines to the 23 Commission. 24 CHAIRMAN CLOWE: Are there any 25 objections? Thank you, Mr. Bennett. 0070 1 MS. KIPLIN: Commissioners, if I could 2 just add. On the RFPs that we issue, we generally 3 have standard language that gives the executive 4 director the ability to cancel the RFP if it's in the 5 best interests of the lottery and the state. So 6 the -- the proposals -- proposers, when they submit 7 proposals, know that they submit them at that risk. 8 CHAIRMAN CLOWE: Thank you. The next 9 item, number 12, report, possible discussion and/or 10 action on the legislative appropriations request for 11 fiscal years '04 and '05. Mr. Grief. 12 MR. GRIEF: Commissioners, as you know, 13 we've provided the leadership and the legislative 14 offices with proposals regarding the requested seven 15 percent budget reduction for our agency in FY '03, as 16 well as revised appropriations requests for fiscal 17 years '04 and '05. Several legislative hearings have 18 taken place regarding those two issues, and I would 19 like to give you an overview of what has transpired. 20 On Wednesday, February 12th, we appeared before the 21 general government subcommittee of the House 22 Appropriations Committee. That particular 23 subcommittee is chaired by Representative Joe Pickett 24 from El Paso. And the purpose of that hearing was 25 specifically for agencies to lay out their proposed at 0071 1 least seven percent budget reduction for this fiscal 2 year, FY '03. Based on the 12.7 percent budget 3 reduction that we proposed, and the testimony that we 4 provided in the hearing, along with some feedback that 5 we received from Chairman Pickett himself, it appears 6 that our recommendation for fiscal year 2003 was 7 acceptable to that particular subcommittee. But 8 another hearing before the full appropriations 9 committee is going to take place in early March, on 10 that same subject. 11 On Thursday, February the 20th, we 12 again appeared before Chairman Pickett's subcommittee. 13 And the purpose of this particular hearing was for 14 agencies to lay out their revised budget requests for 15 fiscal years '04 and '05. And Commissioner Cox was 16 also in attendance at this particular hearing. Our 17 testimony went as planned. And while we received 18 several questions about various aspects of our budget, 19 we did not receive any specific direction that 20 additional cuts were needed to our '04-'05 request at 21 this time. There was some public testimony given at 22 that particular hearing by members of the public 23 interested in charitable bingo, but no public 24 testimony was provided regarding lottery activities. 25 Just as with the seven percent 0072 1 reduction issue for FY '03, the '04-'05 revised budget 2 request will be taken up by the full House 3 Appropriations Committee sometime in early March. 4 On Wednesday, February 26th, we 5 appeared before the Senate Finance Committee, chaired 6 by Senator Teel Bivins from Amarillo, and the purpose 7 for that hearing was for agencies to lay out both the 8 seven percent reduction for this fiscal year, '03, and 9 our revised request for '04 and '05. Again, our 10 testimony went as planned, and there were several 11 questions asked about our budget, particularly, about 12 rider four, and I think we clarified that to the 13 satisfaction of the committee members that were 14 present. Again, we received no special directions 15 about additional cuts being needed to either our '03 16 reduction or our revised '04-'05 request. 17 My understanding is that the next step 18 in the process on the Senate side would be what's 19 called budget mark-up hearings. And at those 20 hearings, the agencies will not be asked to testify, 21 but will be available to answer questions if asked. 22 And that concludes my report on those hearings. I'll 23 be happy to answer any questions you might have. 24 CHAIRMAN CLOWE: Gary, I've been kept 25 aware of the excellent job you and Billy, and I 0073 1 believe T.C. Mallett has accompanied you in making 2 those appearances. I think Commissioner Cox appeared 3 on behalf of the Commission at one of the meetings, 4 and because of weather conditions at this last Senate 5 Finance Committee, no Commissioners were available. 6 But I want to compliment you all on the excellent job 7 you've done in your presentations and the positive 8 spirit that this agency has demonstrated in not only 9 meeting the requests from the leadership for cost 10 reduction, but in fact, trying to exceed those 11 reductions. That's the spirit that I think we need to 12 enter into this current session of dealing with the 13 budgetary shortfall, and I think you're doing an 14 excellent job in this -- the spirit of the Commission 15 to meet those requests and go as far as you can to 16 exceed them. 17 MR. GRIEF: Thank you. 18 CHAIRMAN CLOWE: The next item, 19 number 13, is for Ms. Trevino. Report, possible 20 discussion and/or action on the 78th Legislature. 21 Good morning, Nelda. 22 MS. TREVINO: Good morning, 23 Commissioners. For the record, I'm Nelda Trevino, the 24 director for governmental affairs. 25 In your notebooks, we have provided you 0074 1 a tracking report of the bills that we're tracking, 2 and this morning we have provided you an updated copy 3 as things change on a daily basis. And just to give 4 you a very brief summary of our legislative tracking 5 report, as of today, there have been over 2300 bills 6 that have been filed and we're currently tracking 94 7 of them. And I want to highlight just a few of them 8 that directly impact either the Texas Lottery or 9 Charitable Bingo. So in regards to the report that I 10 passed out today, House Bill 209 by Representative 11 Robert Puente that would authorize the lottery to 12 participate in a multi-jurisdiction game. 13 House Bill 794 by Representative Burt 14 Solomons, that is the agency's Sunset bill. 15 House Bill 1215 by Representative Kino 16 Flores, that also would authorize the Lottery 17 Commission -- excuse me. That would authorize the 18 Lottery Commission to operate and administer a keno 19 game. 20 And House Bill 1217, by Representative 21 Kino Flores, is another bill that would authorize the 22 Lottery Commission to participate in a 23 multi-jurisdictional game. 24 House Bill 1241 and 1242, by 25 Representative Mark Homer, those are bills that relate 0075 1 to insurance for retailers for any theft on lottery 2 scratch off tickets. 3 House Bill 1317 by Representative Pat 4 Haggerty, would authorize a progressive bingo game. 5 House Bill 1401 by Representative Tony 6 Goolsby would implement an Amber Alert program that 7 would have the Lottery Commission provide information 8 on Amber Alerts through our retailer network. 9 House Bill 1407 by Representative Hupp 10 would allow amusement redemption machines by certain 11 charitable organizations, and those would be 12 organizations that are licensed to conduct bingo 13 games. 14 HJR 27 by Representative Richard 15 Raymond is a Constitutional amendment that would put 16 into the Constitution the dedication of lottery 17 proceeds going to public education. 18 Senate Bill 178 by Senator Royce West 19 relates to the disposition of unclaimed prize money. 20 Senate Bill 217 by Senator Rodney Ellis 21 relates to the participation in a multi-state lottery 22 game. 23 Senate Bill 270 by Senator Mike Jackson 24 is the companion agency Sunset bill. 25 Senate Bill 499 by Senator Ken 0076 1 Armbrister would authorize the Lottery Commission to 2 operate and administer a keno game. 3 So those are the bills that I wanted to 4 highlighting, again, that directly impact the Texas 5 Lottery or Charitable Bingo, and I'll be happy to 6 answer any questions that you might have. 7 CHAIRMAN CLOWE: Thank you, ma'am. 8 I'm going to defer covering the next 9 two items until after executive session, so we've go 10 to item 16, consideration of, possible discussion 11 and/or action on the State Auditor's Office, external 12 audit reports and/or internal audit reports relating 13 to the Texas Lottery Commission, the audit staff. Is 14 there a report? 15 FROM THE AUDIENCE: No, sir. 16 CHAIRMAN CLOWE: Thank you very much. 17 MS. KIPLIN: Let the record reflect 18 that one of the internal audit staff is in the 19 audience and indicated no. 20 CHAIRMAN CLOWE: Thank you. 21 The next item is 17, report, possible 22 discussion and/or action on the HUB and/or minority 23 business status or contract management. Mr. Hall. 24 Good morning, Robert. 25 MR. HALL: Good morning, Mr. Chairman 0077 1 and good morning, Commissioners. For the record, my 2 name is Robert Hall, director of business development 3 and compliance. 4 Commissioners, I have four reports for 5 you as it relates to business development and 6 compliance this morning. The first relates to monthly 7 HUB slash minority contract activity report, from 8 September 1 through January 31st, the first five 9 months of fiscal year 2003. I'm happy to report that 10 the agency's expenditures have exceeded 60.1 million 11 dollars, and we've spent over eight million dollars 12 with HUB and minority businesses, and our total 13 utilization equates to 13.44 percent at this time. 14 The second report I have for you is in 15 relationship to the mentor-protege program. And I 16 have no action to report, but I want to inform you 17 that the Commission held annual -- excuse me. A 18 financial auditing services HUB fair on February the 19 18th, and we shared information regarding the 20 mentor-protege program and potential proteges and 21 mentors. As a result of those several meetings, as 22 well as the outreach efforts that we've had within the 23 past two months, we have received several applications 24 from mentors and proteges that are very interested in 25 our program, and we hope to bring those to your 0078 1 attention very soon. 2 The third report I have for you is in 3 relationship to the contract planning process. As you 4 are aware, the business development compliance 5 division is continuing to facilitate contract planning 6 meetings, and the objective of those meetings is to 7 identify the tasks and responsibilities associated 8 with the Commission's procurements to effectively 9 release all procurements in a timely manner. In 10 addition to what has previously been reported at the 11 last Commission meeting, we have scheduled two 12 additional meetings, and I want to correct something 13 that's in your notebook. On March the 5th and March 14 the 11th, to finalize our efforts, and also at which 15 time, we will develop a report and also a 16 recommendation for the Commissioners. 17 And the last report that I have for you 18 is in relationship to a draft contract activity report 19 as it relates to our procurements and ongoing 20 procurements. And we have included in your notebook a 21 draft of a report that the business development and 22 compliance division is recommending to you as a 23 reporting mechanism. This attempt is -- this template 24 is designed to keep you informed as well as our 25 division directors and staff of all the good -- of all 0079 1 the contract activities associated with the goods and 2 services that are trying to procure that are estimated 3 to be over 25,000 dollars. As a side note, we are -- 4 the directors of the agency have concurred and agreed 5 that we will conduct cost benefit analysis for all 6 contracts over 25,000 dollars. 7 That concludes my reports for you this 8 morning. I will be happy to any questions that you 9 may have with any of the four reports that I've given. 10 CHAIRMAN CLOWE: Good work, Robert. 11 Thank you. 12 MR. HALL: You're welcome, sir. Thank 13 you. 14 CHAIRMAN CLOWE: The next item is 18, 15 consideration of and possible discussion and/or action 16 on the agency's business plan. Mr. Anger. Good 17 morning, Mike. 18 MR. ANGER: Good morning, Mr. Chairman, 19 Commissioners. For the record, my name is Mike Anger, 20 and I am the acting director of lottery operations. 21 I'm here this morning to give you a brief progress 22 report on the status of the business plan. As you're 23 aware, we've begun evaluating the agency's mission 24 statements. I'm currently holding meetings with a 25 small task force to work on proposed changes to our 0080 1 existing mission statements. I plan to finalize this 2 proposal and submit it for evaluation and a second 3 round of meetings with the agency directors. On 4 completion of the final draft, I would like to submit 5 the revised mission statement language to you for 6 consideration and possible approval. 7 In my initial planning for the 8 development of the business plan, I did not 9 contemplate the need to evaluate our mission 10 statements. However, I believe this is a critical 11 part of the process to ensure an alignment of our 12 mission strategies and objectives. I'm revising my 13 original planning document and extending the time line 14 to reflect this portion of the project. I'm also 15 evaluating sections of the business plan that are not 16 directly impacted by the agency mission. I will soon 17 begin committee and project assignments to these 18 sections to ensure that the project continues on 19 schedule. 20 I have reviewed House Bill 794 from 21 Representative Burt Solomons and Senate Bill 270 from 22 Senator Mike Jackson, containing the initial Sunset 23 bill legislation for the Commission, and I've reviewed 24 the language specific to the business plan and 25 appreciate the guidance that was provided there. 0081 1 The bills require that the Commission 2 adopt a comprehensive business plan no later than 3 September 1st, 2004. However, we will continue to 4 pursue an aggressive schedule for the business plan 5 and I expect that we will be completed sometime well 6 before that deadline. This concludes my report and 7 I'll be glad to answer any questions or receive any 8 feedback that you have. 9 COMMISSIONER COX: Michael, do you have 10 all the resources you need working on this project? 11 MR. ANGER: I believe so at this time. 12 And as I move into setting up the committee 13 assignments and really begin drafting the plan itself, 14 I think I'll have a clearer picture for you in another 15 month or two with regard to that question, 16 Commissioner. 17 COMMISSIONER COX: Okay. 18 CHAIRMAN CLOWE: Very good. Thank you, 19 Michael. I would like to defer the next item and go 20 to item 21, consideration of the status and possible 21 entry of orders in cases numbered letter A through T. 22 MS. KIPLIN: Commissioners, if I could 23 take up A through Q at one time. These are all 24 Lottery cases that were heard before State Office of 25 Administrative Hearings administrative law judge. In 0082 1 each of these cases, the staff recommended revocation 2 of the lottery license for failure to pay the funds 3 that were owed the State at the time that the lottery 4 swept the account. The administrative law judge 5 recommended revocation of the license in each of those 6 cases, and the staff obviously is recommending that 7 you adopt the recommendation of the administrative law 8 judge and enter an order in those cases. 9 CHAIRMAN CLOWE: So moved. Is there a 10 second? 11 COMMISSIONER WHITAKER: Second. 12 CHAIRMAN CLOWE: All in favor, please 13 say aye. Opposed, no. The vote is three-zero 14 adopting the recommended orders on cases lettered A 15 through Q. 16 MS. KIPLIN: Commissioners, if I could 17 take up letter R, Doctor Number 362-03-0694.B, Heart 18 of Texas Black Chamber of Commerce. Commissioner 19 Clowe, you have recused yourself from this matter. 20 CHAIRMAN CLOWE: Yes. 21 Commissioner Whitaker, would you serve 22 as chair. 23 MS. KIPLIN: Commissioners, I have a 24 document that's been filed by the respondent in this 25 matter, and I would like to hand it to you. 0083 1 COMMISSIONER WHITAKER: Is it the one 2 that's in our packet? 3 MS. KIPLIN: Commissioners, this is a 4 document that's entitled Motion For Hearing, but -- 5 Motion For Rehearing, but in my review of the document 6 that is also entitled Exceptions that were in your 7 notebook, it's identical to that with the exception of 8 the certificate of service date, and the fact that 9 it's labeled Motion For Rehearing versus Exceptions. 10 This is not a timely motion for 11 rehearing because no order, as you know, has been 12 entered in this matter. Under the Administrative 13 Procedures Act, a motion for rehearing is a document 14 that is filed after a party gets notice of the order 15 and the purpose of the motion for rehearing is to 16 request that the Commission consider the order based 17 on the issues that the respondent or the aggrieved 18 party would have with the aspects of the order. No 19 order has been signed and therefore this document is 20 moot. But just to make sure, full disclosure, that 21 you know that it's been filed. 22 I would like to move forward now with 23 the Heart of Texas matter. As you know, at the last 24 Commission meeting, you did enter an order in another 25 docket involving the Heart of Texas -- Heart of Texas 0084 1 organization. And that matter is not before you 2 today. I will tell you procedurally that there has 3 been a motion for rehearing that has been filed in 4 that matter. This is the matter that you passed. And 5 the staff is prepared at this time to request your 6 consideration and adoption of the order -- the 7 proposed order that the State Office of Administrative 8 Hearings administrative law judge recommended in that 9 matter. Ms. Penny Wilkov, an assistant general 10 counsel, represented the Charitable Bingo Division in 11 that matter and she is prepared to come forward today 12 to you. I will say that in the exceptions that were 13 filed -- by the way, they were not timely filed, but 14 in an abundance of caution and making sure that we put 15 documents in front of you, that is in your notebook. 16 It's my understanding, the respondent 17 did not concede the issues of notice or of 18 jurisdiction and simply was looking for the Commission 19 not to take, as they put it, a harsh penalty of 20 revocation of that license. The allegations that were 21 before the State Office of Administrative Hearings was 22 a failure to timely file the bingo operator's 23 quarterly reports for four quarters, the failure to 24 remit the estimated prize fee and penalty for quarter 25 ending June 30th in the amount of over 6,000 dollars, 0085 1 for failing to submit a bond in the amount of almost 2 16,000 dollars, and for failing to distribute the 3 required charitable distribution in the amount of 4 7,400 dollars. 5 Ms. Wilkov is here if you have any 6 questions, but the staff is prepared for you to vote 7 to adopt the administrative law judge's decision. I 8 will indicate to you that Ms. Wilkov did communicate 9 with Ms. Ida Pinkard, who is the representative of 10 this organization, yesterday to make sure that she did 11 know that this matter is being taken up today. 12 COMMISSIONER WHITAKER: And did you 13 talk to Ms. Pinkard herself? 14 MS. WILKOV: Yes, Commissioner. For 15 the record, my name is Penny Wilkov. And, yes, I did 16 speak to Ms. Pinkard yesterday and made her aware that 17 this Commission meeting would be considering the entry 18 of this order and told her the time that it began 19 and -- 20 COMMISSIONER WHITAKER: And is there no 21 one from the Heart of Texas Black Chamber of Commerce 22 here today? 23 MS. WILKOV: Not that I can tell. I 24 don't see anybody here. 25 COMMISSIONER WHITAKER: Commissioner 0086 1 Cox, do you want to ask any questions or make any 2 comments? 3 COMMISSIONER COX: The only one I have, 4 Commissioner, is how is this different from what we 5 did last time? 6 MS. KIPLIN: Commissioners, the issues 7 that were in the other docket, which is not before you 8 today, were not issues that were in this docket. And 9 the action that you took -- and Ms. Wilkov can keep me 10 straight on that -- was entering an order that adopted 11 the recommendation by the ALJ in that matter, which 12 was denying the renewal license application. And I'm 13 told that these are subsequent violations. So the 14 matter that was before you was -- that -- violations 15 that had occurred, that was a -- procedurally that 16 case came before the Commission and it was remanded 17 back for additional evidence. Additional evidence was 18 taken, and the recommendation remained unchanged by 19 the State Office of Administrative Hearings, 20 administrative law judge. Meanwhile, these -- the 21 existing allegations and violations occurred. 22 COMMISSIONER WHITAKER: Would you state 23 the motion for us? 24 MS. KIPLIN: Yes. The motion would be 25 that you would adopt the administrative law judge's 0087 1 proposal for decision and proposed order, which would 2 revoke this respondent's license. 3 COMMISSIONER WHITAKER: I'll go ahead 4 and move. Any seconds? 5 COMMISSIONER COX: Second. 6 COMMISSIONER WHITAKER: All in favor, 7 say aye. All opposed say no. Let the record reflect 8 it's two to zero. 9 MS. KIPLIN: With Commissioner Clowe 10 entering a recusal. 11 Commissioners, we have two remaining 12 letters. The next one -- Commissioners, the next item 13 is item S, Case Number 2002-1210, Bettina Corporation. 14 This is an agreed settlement between the parties, 15 Bettina Corporation and the Charitable Bingo Division. 16 And staff is recommending that you adopt the consent 17 order in this case. The underlying allegations in the 18 matter was a failure to timely disclose information 19 that was contained as part of the license application. 20 And there were issues regarding ownership interests 21 that would present a conflict of interest. The matter 22 was in controversy; the parties have settled the 23 dispute. And the staff does recommend that you adopt 24 the agreed order. 25 COMMISSIONER WHITAKER: So moved. 0088 1 CHAIRMAN CLOWE: Second. All in favor, 2 please say aye. Opposed, no. The vote is three-zero 3 in favor. 4 MS. KIPLIN: And lastly, Commissioners, 5 on to letter T, which is a Nunc Pro Tunc Order 6 Adoption of Rule 16 Texas Administrative Code, Section 7 402.558. As you will recall, the November 22nd 8 Commission meeting, you adopted the rule. This is a 9 bingo rule and it has to do with bingo card, bingo 10 paper. Subsequent to your rule adoption and the 11 filing of that rule with the Texas Register, there 12 were extraneous, nonsubstantive clerical errors that 13 were contained in that rule adoption. Those 14 extraneous, stray clerical nonsubstantive errors were 15 not actual text that was in the document that was 16 proposed for public comment. It's just a matter of 17 working on large documents and a few -- and multiple 18 reviewers, and a few words just not being picked up 19 that were there really more for editorial comment or 20 analytical reasoning. 21 So at this point, there is a motion 22 that's been filed on behalf of the staff that you do 23 approve the order nunc pro tunc on the adoption of 24 this particular rule. And if you do approve that, 25 then we will file the rule without the clerical errors 0089 1 with the Texas Register. 2 COMMISSIONER WHITAKER: Do we re-move 3 or adopt your motion or -- 4 MS. KIPLIN: Well, what you'll do is 5 adopt -- you'll vote to approve the order nunc pro 6 tunc, and the order without -- basically adopts what 7 you did before, but without the clerical records. 8 COMMISSIONER WHITAKER: So moved. 9 COMMISSIONER COX: Second. 10 CHAIRMAN CLOWE: All in favor say aye. 11 Opposed, no. The vote is three-zero in favor. We'll 12 sign these orders now. 13 Following the execution of these 14 orders, Mr. Grief, I'm going to call on you for your 15 report. And Mr. Atkins, I'll ask you to follow him. 16 We'll consider the report by the acting 17 executive director and/or possible discussion and/or 18 action on the agency's financial and operational 19 status, FTE status, and retailer forums. Mr. Grief. 20 MR. GRIEF: Commissioners, I'll ask 21 T.C. Mallett and Jim Richardson and Toni Smith to come 22 forward and brief you on those items and answer any 23 questions you might have. 24 T.C., if you would start, please, sir. 25 CHAIRMAN CLOWE: Good morning. 0090 1 MR. MALLETT: Good morning. I'm T.C. 2 Mallett, the fiscal management and development 3 director, and also, for the last couple of weeks, 4 serving as the acting director of financial 5 administrative. 6 I don't have specific items to bring to 7 you today. The staff in financial administration have 8 been very involved in the budget reduction exercise 9 that has been presented to the legislature, as well as 10 completely redeveloping and presenting a new format on 11 the 2004-05 budget, that was also being presented to 12 the legislature. I have no particular issues to bring 13 to your attention, but I'll be glad to respond to any 14 questions and provide additional information. 15 CHAIRMAN CLOWE: I've made my comments 16 earlier. 17 MR. GRIEF: Jim. 18 MR. RICHARDSON: Commissioners, I have 19 provided the FTE report for your notebooks. If you 20 have any questions, I'll be happy to answer that. I 21 would point out to you that -- some additional 22 information on the internal audit director. We have 23 received 11 applications to date, and the financial 24 director that went up on 2/1, we have received five 25 applications for that position. 0091 1 CHAIRMAN CLOWE: I have particular 2 interest in that posting, Jim. My recollection was 3 that although I reviewed the posting before it went 4 up, I just want to make certain I recall it correctly. 5 We did not require a CPA in that posting. Am I 6 remembering that correctly? 7 MR. RICHARDSON: That's correct. It 8 was a preferred qualification. 9 CHAIRMAN CLOWE: And how many of the 10 11 -- well, that's not a correct question. 11 How long is the posting going to be 12 open? 13 MR. RICHARDSON: It's open until 14 filled. Both positions are. 15 CHAIRMAN CLOWE: Commissioner Cox has 16 been involved in this, I think, and been very helpful. 17 Do you have any comments on this position, 18 Commissioner? 19 COMMISSIONER COX: No. I'm very 20 pleased with the job description that was developed, 21 Mr. Chairman, and I have looked at the candidates and 22 it looks like we've got some strong candidates in 23 there. 24 CHAIRMAN CLOWE: Great. 25 MR. RICHARDSON: And I want to make 0092 1 sure that I'm understanding. Your question was, for 2 the financial administration, we preferred a CPA. On 3 the internal audit, it was a requirement. 4 CHAIRMAN CLOWE: Okay. That clarifies 5 it. 6 COMMISSIONER COX: And, Jim, is it -- 7 is it specifically a CPA, or was there an alternative 8 certification -- 9 MR. RICHARDSON: It was a CIA or a CPA, 10 or you could substitute experience for either of 11 those. 12 CHAIRMAN CLOWE: Now, what is our plan 13 for moving ahead? 14 COMMISSIONER COX: I don't know, 15 Mr. Chairman. 16 MR. RICHARDSON: That is y'all's 17 option. 18 CHAIRMAN CLOWE: Let's develop one. 19 What is your pleasure, Commissioner? 20 COMMISSIONER COX: Well, I would like, 21 if we are able to, to look at the applicants that we 22 have, the applications that we have, perhaps, and to 23 see if we think we've got enough strong candidates in 24 there to go ahead and begin interviews, as to the 25 auditor. 0093 1 CHAIRMAN CLOWE: Sounds great. And we 2 can do that individually, Jim, with your help. You 3 can forward that information to Commissioners. 4 Commissioner Cox indicates he has reviewed the 5 applicants. I have not. I don't know whether 6 Commissioner Whitaker has or not. If you'll help us 7 in that, and then we can communicate to you about our 8 reactions, and we can use you as a committee of one to 9 help us move forward on that. 10 MR. RICHARDSON: We have those 11 applications already copied and ready for your review. 12 CHAIRMAN CLOWE: Great. And 13 Commissioner Cox, we really appreciate your oversight 14 in this matter. It's very, very comforting. 15 MS. SMITH: Commissioners, yesterday we 16 conducted our second of our smaller retailer 17 partnership meetings in the El Paso district. Frank 18 Coniglio, who is our marketing sales manager, met with 19 18 retailers and the district sales manager for that 20 district yesterday. And from the report he gave me 21 yesterday afternoon, it was a very lively discussion 22 about marketing topics and things that they felt could 23 help them increase their sales and other issues that 24 have had an impact on their sales more recently. 25 I would also like to report that we 0094 1 have a tentative date for the first of our retailer 2 forums, which will replace the monthly town meetings 3 that we used to have. As I had mentioned in the past, 4 these will take place on a quarterly basis, and our 5 tentative date is Thursday, April 3rd, in San Antonio, 6 with registration for the retailers beginning from 7 3:00 to 4:00 p.m. and the meeting taking place from 8 4:00 to 6:00 p.m. And as we have that locked in, I'll 9 make sure the Commissioners get that information. If 10 you would like to attend, we'll make sure that we can 11 work that out. And that's all I have. 12 MR. GRIEF: Commissioners, that 13 concludes my report. I'd be happy to answer any 14 questions. 15 CHAIRMAN CLOWE: Thank you, sir. 16 Next, Mr. Atkins, the report and 17 possible discussion and/or action on Charitable Bingo 18 Operations Division's activities. 19 MR. ATKINS: Thank you, Commissioners. 20 We have posted for an audit position in 21 our Houston regional office, and I wanted to let you 22 know our reasoning behind that. On average, our 23 auditors throughout the state have approximately 111 24 accounts that they're responsible for. Without 25 filling this position in the Houston region, that 0095 1 would bump the average in that region up to 181, and 2 we think that's too many in order to adequately cover 3 that area. So we -- I made the decision at this time 4 to go ahead and post for that position and get it 5 filled so that we can cover those licensees in that 6 region. 7 On the charitable bingo system 8 redesign, I had reported that we've begun testing on 9 the system. We expect to complete the testing of 10 license set one today. License set one, as it was 11 explained to me in very technical terms, is the 12 backbone of the system. It's the bulk of the system. 13 That's why so much time has been spent testing that. 14 While we're testing that, we're moving forward and 15 we've started testing the system in the accounting 16 services section and the audit section, also. So that 17 testing is moving forward. I can't remember if I 18 mentioned in my last report that we did have the 19 successful mock conversion at the beginning of this 20 month. So that continues to move forward, and we 21 still look forward to the completion of that system by 22 early to mid May of this year. 23 I did want to let you know that given 24 the state's current financial position, as Mr. Grief 25 mentioned earlier, you know, the agency has made cuts 0096 1 in certain areas. One of the things that the division 2 has done is we have cut our travel expenses, and part 3 of that has resulted in, we've reduced fairly 4 significantly the number of operator training programs 5 that we've been offering. Those training programs, 6 for the remainder of this fiscal year, will be held 7 primarily in the cities where our regional offices are 8 located to reduce those costs. I am sure that it will 9 be an inconvenience for some of our licensees, but 10 given the state's current fiscal situation, I just 11 don't know what else we could do. It may be that in 12 the future, we're able to have the funds to carry 13 those programs out to the area. We have also been 14 exploring the possibility for organizations interested 15 in doing this, if there are enough organizations 16 interested and willing of their own free will to 17 reimburse us the cost, taking that program out to -- 18 out to those areas where the interest exists. And 19 that is pretty much my report. I'd be happy to answer 20 any questions you might have. 21 CHAIRMAN CLOWE: Thank you, Billy. 22 Now I would like to return to item 19, 23 and at this I am move the Texas Lottery Commission go 24 into executive session -- just before a minute. 25 Before I do that, I skipped over a public comment 0097 1 item. Is there anyone here who wishes to make comment 2 to the Commission? Seeing no one, then I will move at 3 this time the Texas Lottery Commission go into 4 executive session: 5 To deliberate the appointment, 6 employment, and duties of the Executive Director 7 and/or Deputy Executive Director pursuant to Section 8 551.074 of Texas Government Code. 9 To deliberate the duties of the Acting 10 Executive Director pursuant Section 551.074 of the 11 Texas Government Code. 12 To deliberate the appointment, 13 employment, and duties of the Internal Audit Director 14 pursuant to Section 551.074 of the Texas Government 15 Code. 16 To deliberate the duties and 17 reassignment of the Internal Audit Division Senior 18 Auditor and/or Auditor VI pursuant to Section 551.074 19 of the Texas Government Code. 20 To deliberate the duties of the 21 Charitable Bingo Operations Director pursuant to 22 Section 551.074 of the Texas Government Code. 23 To deliberate the duties of the General 24 Counsel pursuant to Section 551.074 of the Texas 25 Government Code. 0098 1 To deliberate the duties of the 2 Security Director pursuant to Section 551.074 of the 3 Texas Government Code. 4 To receive legal advice regarding 5 pending or contemplated litigation and/or to receive 6 legal advice pursuant to Section 551.071 (1)(A) or (B) 7 of the Texas Government Code and/or to receive legal 8 advice pursuant to Section 551.071 (2) of the Texas 9 Government Code, including but not limited to: 10 TPFV Group, Inc. versus Texas Lottery Commission 11 Retired Sergeant Majors' Association et al versus 12 Texas Lottery Commission et al. 13 Loretta Hawkins versus Texas Lottery Commission 14 Scientific Games and Pollard Banknote versus Texas 15 Lottery Commission and Linda Cloud, Executive Director 16 TXTV versus the Texas Lottery Commission 17 Keane versus Texas Lottery Commission 18 Patsy Henry versus Texas Lottery Commission 19 Contract regarding the charitable bingo system 20 Employment law, personnel law, procurement and 21 contract law, and general government law. 22 Is there a second? 23 COMMISSIONER WHITAKER: Second. 24 CHAIRMAN CLOWE: All in favor, please 25 say aye. The vote is three-zero in favor. The Texas 0099 1 Lottery Commission will go into executive session. 2 The time is 10:30 a.m. Today is February the 28th, 3 2003. 4 (EXECUTIVE SESSION.) 5 COMMISSIONER CLOWE: We're back. The 6 Texas Lottery Commission is out of executive session. 7 The time is 1:00 p.m. There is action to be taken as 8 a result of the executive session. 9 Commissioners, I want to return to two 10 items that I asked be deferred until after executive 11 session. First, item 14 on the agenda, consideration 12 of and possible action on the appointment and 13 employment of an Executive Director. And I am 14 prepared to make a motion to offer employment as the 15 Executive Director to Reagan Greer, at the annual 16 salary of 110,000 dollars, effective immediately. 17 Is there any discussion or any comment 18 anybody would like to make? Is there a second? 19 COMMISSIONER COX: Second. 20 COMMISSIONER CLOWE: All in favor, say 21 aye. Opposed, no. The vote is three-zero in favor. 22 Mr. Greer, would you come forward and 23 tell us whether you will accept that offer of 24 employment, and anything else you would like to say? 25 MR. GREER: Commissioner, I accept your 0100 1 offer. I am humbled and honored to be able to 2 continue in this venue here at the Lottery Commission. 3 I'm excited about the opportunity. I'm excited to be 4 able to put the leadership and management experience 5 that I've had in government and in the corporate 6 sector to work for the people of Texas in this 7 capacity and really appreciate your confidence in me 8 today. 9 COMMISSIONER CLOWE: Very good. We 10 wish you all good luck. And in any case where we can 11 help you and be of support to you, you let us know. 12 MR. GREER: Thank you. 13 COMMISSIONER CLOWE: Now I'm going to 14 call, Commissioners, for a second motion, which would 15 be the offer of employment as Deputy Executive 16 Director to Gary Grief, at the salary of 105,000 17 dollars a year, effectively immediately or as soon as 18 possible. 19 Is there any discussion about that? Is 20 there a second? 21 COMMISSIONER COX: Second. 22 COMMISSIONER CLOWE: All in favor, 23 please say aye. Opposed, no. The vote is three-zero 24 in favor. 25 Mr. Grief, would you come forward 0101 1 and -- yeah, you had better come out here in front. 2 Take a different chair. And tell us if you will 3 accept that offer of employment and any other comments 4 you wish to make. 5 MR. GRIEF: A couple of comments I 6 would like to make, Commissioners. Number one, I 7 wanted to thank the Commissioners for the confidence 8 and the opportunity that you have given me to serve as 9 the Acting Executive Director. And it's been a 10 learning experience for me, and I hope I've done a 11 good job by you. 12 The second thing is, I want to 13 wholeheartedly accept your offer as the Deputy 14 Executive Director. I look forward to helping this 15 agency move forward and look forward to working with 16 Mr. Greer and helping him as he comes into his new 17 position. Thank you very much. 18 COMMISSIONER CLOWE: Thank you for the 19 great job you've done, Gary. And one of the first 20 things, then, I would like to ask you to do is 21 introduce Reagan Greer to the employees of the 22 Commission and show him around and make that a first 23 priority project, if you will. 24 MR. GRIEF: Yes, sir. 25 COMMISSIONER CLOWE: Thank you. 0102 1 We have now concluded with the agenda 2 that was set up for today's meeting. Is there any 3 other business to come before the Commission? I 4 believe not. Therefore, we will stand adjourned at 5 1:04 p.m., on February the 28th. Thank you all very 6 much. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0103 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 20TH day of 16 MARCH, 2003. 17 18 19 20 BRENDA J. WRIGHT, RPR, 21 Texas CSR No. 1780 Expiration Date: 12-31-04 22 WRIGHT WATSON STEN-TEL Registration No. 225 23 1609 Shoal Creek Boulevard, Suite 202 Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 030228BJW