0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 AUGUST 15, 2005 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 15TH of AUGUST, 19 2005, from 8:00 a.m. to 3:50 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. Rolando Olvera Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Acting Executive Director: Mr. Gary Grief 9 Charitable Bingo Executive 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.................................. 47 Item Number 3.................................. 82 7 Item Number 4.................................. 90 Item Number 5.................................. 117 8 Item Number 6.................................. 122 Item Number 7.................................. 53 9 Item Number 8.................................. 138 Item Number 9.................................. 178 10 Item Number 10................................. 183 Item Number 11................................. 187 11 Item Number 12................................. 189 Item Number 13................................. 190 12 Item Number 14................................. 195 Item Number 15................................. 196 13 Item Number 16................................. 197 Item Number 17................................. 203 14 Item Number 18................................. 205 Item Number 19................................. 207 15 Item Number 20................................. 208 Item Number 21................................. 43 16 175 Item Number 22................................. 177 17 Item Number 23................................. 4 44 18 215 Item Number 24................................. 218 19 Item Number 25................................. 236 Item Number 26................................. 241 20 Item Number 27................................. 241 21 Reporter's Certificate......................... 242 22 23 24 25 0004 1 AUGUST 15, 2005 2 CHAIRMAN CLOWE: Good morning. It's 3 8:00 a.m., August the 15th, 2005. Commissioner Cox is 4 here. Commissioner Olvera is here. My name is Tom 5 Clowe. We'll call this meeting of the Texas Lottery 6 Commission to order. 7 And we will take up, on the published 8 agenda, item number 23, letter H, Case Number 9 2005-4821, GameTech International, Inc. 10 Commissioners, this is a item and a 11 case that we have deferred, I believe, twice in prior 12 meetings, and at this point in time, if it's ripe for 13 consideration, I would like to have us deal with it. 14 I would like to call on the general counsel to refresh 15 our memories regarding this issue and then, when she 16 has concluded, I'll call on staff -- Billy Atkins, 17 Steve White -- to present what remarks they have. And 18 then those of you who have filed appearance forms, I 19 will call on you. I would like to ask that in the 20 comments that are made by all, we deal with the issue 21 of the settlement. We are not dealing here this 22 morning with all of the issues which brought us to the 23 point of the settlement. We don't want to have a 24 lengthy discussion of all of the merits involved in 25 this issue, but rather, comments about the item which 0005 1 is up for consideration by the Commissioners, which is 2 the settlement. So if you'll hold yourself to that 3 area and those remarks, we'll appreciate it very much. 4 Ms. Kiplin, would you lead off, please. 5 MS. KIPLIN: Yes. Good morning, 6 Commissioners. As you know, this matter was first 7 presented to you for your consideration at your June 8 meeting and then at your July meeting of this year. 9 At the June meeting, you heard from the staff, 10 Mr. Hieronymus, the complainant in this matter, and 11 GameTech, through its counsel. You did not act on 12 that matter at the June meeting and passed it until 13 the July meeting. 14 At the July meeting, GameTech, through 15 its counsel, requested that you pass this item until 16 your next meeting, which you did -- you did do that. 17 And that's why we're here today, in August. 18 Also noticed for this Commission 19 meeting, related to the GameTech matter, is the 20 ability to go into executive session regarding 21 receiving legal advice on the proposed settlement 22 offer, and you may decide that you would like to 23 receive that legal advice in executive session. 24 I know staff, through Mr. White and 25 Mr. Atkins, is here today to present to you for your 0006 1 consideration, and action, this proposed settlement 2 and consent order between the Commission and GameTech. 3 Mr. Chairman, I would like to bring to 4 your attention that you have two witness affirmation 5 forms, one from Ms. Thompson and one from Ms. Scott. 6 The indicated item -- I believe it was 13 H, and, in 7 fact, I was told it's actually on this item, so I 8 would like to make sure that you're aware of that. 9 CHAIRMAN CLOWE: I noted that and 10 mentally corrected it, so I will call on them. And by 11 way of referring to those, before we get into the 12 staff presentations, in the order that I have received 13 them, I'll be calling on Mr. Hieronymus, Mr. Hance, 14 Ms. Thompson, Ms. Scott, and Mr. McNally. 15 Mr. White, if you'll come up -- Billy, 16 do you want to comment before or after his 17 presentation? 18 MR. ATKINS: I am happy to comment 19 after Mr. White brings up the matter. 20 CHAIRMAN CLOWE: All right. Good. 21 Steve, if you'll give us the details of 22 this issue, please. 23 MR. WHITE: Yes, sir. Good morning, 24 Commissioners. For the record, my name is Stephen 25 White. 0007 1 MS. KIPLIN: Are you on the record? I 2 mean, are you on the microphone? Is it on? 3 MR. WHITE: There's a green light on. 4 MS. KIPLIN: Okay. 5 MR. WHITE: Again, my name is Stephen 6 White. I'm the chief of enforcement in the Legal 7 Services division. 8 This case involves a -- there. Is that 9 better? 10 MS. KIPLIN: Yes. 11 MR. WHITE: This case involves a 12 proposed agreed settlement between the Commission and 13 GameTech International. The issues involved several 14 allegations of violations of the Bingo Enabling Act, 15 specifically, unlicensed sales, direct sales from 16 GameTech International, a manufacturer of bingo 17 equipment, directly to a conductor organization. And 18 also, allegations of violations of a price fixing 19 statute. The unlicensed sales provision is section 20 2001. -- I need my glasses -- 553, and that 21 involves -- basically, the essence of the allegations 22 was an employee of GameTech International attempted to 23 induce a conductor organization to enter into a 24 contract directly, without going through a 25 distributor, as required by the Act. The contract was 0008 1 never entered into, but there was certainly there -- 2 the attempt was there. 3 The price fixing allegations is a bit 4 more complicated. The allegations are that they 5 attempted to -- GameTech controlled their distributors 6 and the price they would -- price distributors would 7 enter into contracts with the conductor organizations. 8 The evidence there, again, is -- is much more -- more 9 contested and much more unclear. I think the evidence 10 does show that GameTech was requiring their 11 distributors to submit all their contracts for review 12 prior to being submitted and signed by the conductor 13 organizations. There was a provision in their 14 contract which made this mandatory. There was also a 15 provision in their contract which prohibited their 16 distributors from selling any other products from any 17 other manufacturer. And then, of course, the -- 18 lastly, there is the -- the termination of their -- 19 GameTech's contract with Trend Gaming, based upon a 20 dispute over the price Trend Gaming was placing the -- 21 the devices in the bingo halls. And the allegation 22 is, it was terminated because Trend Gaming was placing 23 the devices too low, and GameTech was concerned that 24 it was below the overall price in the marketplace. 25 So based on that, there was negotiated 0009 1 settlements. We drafted -- we came to an agreement, 2 tentative agreement, which we think is in the best 3 interests of the public. It sends a clear message to 4 the industry that such conduct will not be tolerated. 5 It calls for a substantial administrative penalty. It 6 calls for other safeguards that GameTech has agreed to 7 put into place. And it's the recommendation of the 8 staff that you adopt the agreed order. 9 I'd be happy to answer any questions if 10 you want some more specifics and more detail. 11 CHAIRMAN CLOWE: Any questions at this 12 point? 13 COMMISSIONER COX: I have only one 14 question at this time and it's been covered. 15 CHAIRMAN CLOWE: All right, sir. 16 Billy? 17 MR. ATKINS: Commissioners, I concur 18 what Mr. White has laid out, and he actually covered 19 several of the items that you mentioned. I concur 20 this is an appropriate settlement agreement. 21 Mr. White mentioned this is the largest penalty amount 22 that's ever been assessed by this agency in a bingo 23 related matter. I think that, again, as Mr. White 24 said, I believe this sends a message to the industry. 25 As you may know, we routinely publish our settlement 0010 1 orders in our Bingo Bulletin, which is a publication 2 that goes to all licensees in this state, as well as 3 many other regulators in other jurisdictions. Also, 4 as Mr. White mentioned, this has -- this settlement 5 agreement has several safeguards in it. It addresses 6 the way that this licensee will be dealing with 7 distributors in the future. And one of the things 8 that I think is most important is the fact that it 9 results in immediate action and compliance by 10 GameTech. So for those reasons I would agree with 11 Mr. White and encourage your adoption of the 12 settlement agreement. 13 CHAIRMAN CLOWE: Any questions? 14 Mr. Hieronymus, will you come up and 15 speak to us, please, sir? 16 MR. HIERONYMUS: Good morning. 17 CHAIRMAN CLOWE: Good morning. 18 MR. HIERONYMUS: Just by way of 19 identification, my name is Steven Hieronymus. I'm the 20 managing member of Trend Gaming Systems, 21 distributor -- a licensed distributor here in Texas. 22 A brief amount of background. Trend 23 distributed GameTech product from August 1996 to 24 August of 2002, when Trend's distribution agreement 25 was terminated by GameTech. Trend was terminated 0011 1 because GameTech -- because I refused GameTech's 2 demand that I rescind and amend contracts with my 3 customers and raise the price being charged. GameTech 4 communicated the demand to approve and authorize 5 pricing before Trend offered its pricing to charity 6 customers. GameTech had three distributors, and I, 7 Trend, said, no, and refused to participate. Please 8 don't allow GameTech's representatives to confuse this 9 matter with other proceedings. A trial was held on 10 that, in October of 2004, and Trend prevailed on all 11 the issues. The Arizona jury found that GameTech 12 breached the distribution agreement and then 13 terminated this agreement over a pricing dispute, and 14 awarded a net judgment of somewhat over 3.7 million 15 dollars, which has now been finalized since we last 16 met. GameTech top management testified at this trial 17 and acknowledged and agreed as to the applicability of 18 Texas law to this dispute. They also acknowledged 19 that actions to affect the retail price were -- was a 20 violation of Texas law. So it's troubling to now hear 21 and read that GameTech says the law doesn't apply. If 22 you've read any of the papers, you have seen that. I 23 want to reiterate that the evidence of wrongdoing is 24 overwhelming, and it's compelling. This case is 25 strong. Mr. Atkins was correct when he confirmed to 0012 1 you that there have been ill-gotten gains. Regardless 2 of my opinion or Mr. Hance, who will speak, the staff 3 has determined that there is a violation and GameTech 4 profited from it. We've learned that staff believes 5 the damage to Texas charities total two and a half 6 million dollars, and Mr. Atkins conceded that it could 7 be larger if applied to the greater market. I again 8 submit that the evidence will prove, especially when 9 you get the other case involving the other 10 distributors, that the number is likely to be closer 11 to the seven and a half million dollar range. 12 In the issue that is before you today, 13 the question is whether you should now accept this 14 seemingly large, yet token, payment in light of the 15 range of ill-gotten gain, and allow GameTech to not 16 accept responsibility for its actions, which is -- 17 evidently, one of the issues is they're not accepting 18 that. Your other option is to reject the settlement 19 proposal and direct the matter to an administrative 20 hearing. The SOAH process will allow more a public 21 process, protect the rights of the individuals 22 involved, and ultimately will provide you with a 23 better foundation upon which to make a decision. 24 Sometimes we can and should count the cost of pursuing 25 a litigation strategy, but it's incumbent upon you to 0013 1 assess the real cost to the State and also determine 2 what is being achieved. 3 I have a number of concerns. Does this 4 proposed settlement and fine communicate to the 5 licensee, GameTech, and other licensees that the 6 Commission requires and expects compliance with Texas 7 law? Does the proposed settlement and fine 8 communicate that all licensees will be treated 9 equally? 10 I mean no disrespect. However, staff 11 has testified to you regarding concerns that 12 litigating with GameTech will be resource intensive. 13 I venture to say that no other Texas licensee has the 14 capability to engage the legal and PR resources that 15 GameTech has employed in this matter. Even 16 Mr. Hance's testimony on July 11th was communicating 17 that they would be taking this matter to the Texas 18 Supreme Court, and would budget up to one and a half 19 million dollars in litigating this matter. I suggest 20 he realizes the significance of GameTech's problem. 21 I respectfully suggest that the 22 proposed settlement is not a deterrent, but an 23 invitation. Allowing GameTech to pay a fine with no 24 acceptance of responsibility for violating the 25 price-fixing statute puts the Commission in the 0014 1 position of selling an indulgence. Given the nature 2 and the dollars associated with this offense, the 3 intense effort by GameTech to settle and do so 4 secretly, it should raise a significant level of 5 concern. Would GameTech truly be willing to pay 6 250,000 dollars if it knew it was innocent? As 7 Representative Delwin Jones stated, at the committee 8 hearing, to Mr. Hance's partner, Jay Stewart, quote, 9 us farmers are not that easy to get taken, close 10 quote. A number of other members of the committee 11 expressed significant concerns over the term of the 12 proposed settlement. Sometimes you just know when you 13 should pass on the easy way out. 14 There is a significant public policy 15 issue here. The Texas legislature established this 16 Commission in an act in Section 2001.051, Control and 17 Supervision of Bingo. This provision creates a 18 statutory requirement for the Commission to exercise 19 strict control and supervision of bingo. Enforcement 20 of the law should not be based upon an expectation of 21 how expensive the violator may make the process. 22 How does your decision impact the 23 charitable conductors that actually suffered from the 24 violation of law? This proposal eliminates the 25 possibility that at some future point in the 0015 1 administrative enforcement process GameTech might 2 offer to refund a significant amount of damages back 3 to the charity conductors as part of an appropriate 4 offer to settle. Acceptance of the proposal will also 5 significantly complicate the civil remedies that are 6 available to charitable conductors. 7 I assure you that GameTech will be 8 quick to seize upon this settlement and highlight that 9 the Commission did not require acknowledgment of the 10 violation or acceptance of responsibility. 11 I would request that you reject the 12 proposed order, that the Commission issue a notice of 13 hearing, and allow the administrative procedure to 14 move forward, that staff be directed to pursue the 15 case aggressively, and allow the adversary process to 16 work. This will provide you with an independent 17 recommendation of how to proceed. I've had 18 discussions with Kim, and I know that she is prepared 19 to do so and feels strong. 20 In conclusion, in June of 2002, when I 21 was confronted with GameTech's initial demand to 22 cooperate in their plan to control Texas retail 23 pricing, I could have gone along. I would have made a 24 great deal of money and avoided the hell that they put 25 me through these past three years. But it was wrong, 0016 1 and I refused. This settlement is also wrong. And I 2 hope that you, too, will refuse. Thank you. 3 CHAIRMAN CLOWE: Thank you, 4 Mr. Hieronymus. 5 Any questions? 6 Mr. Hance, would you come up, please, 7 and address us? 8 MR. HANCE: Can I have Mr. McNally come 9 up also? 10 CHAIRMAN CLOWE: By all means. 11 MR. HANCE: We -- we both can -- 12 CHAIRMAN CLOWE: Certainly. 13 MR. HANCE: -- try to get ours out of 14 the way. 15 Mr. Chairman, members of the 16 Commission, we appreciate the opportunity to be here. 17 The prior witness implied that Kim is 18 prepared to go forward on a lawsuit on that, which I 19 am sure is correct, but I think that she and 20 Mr. Atkins will be able to speak for themselves with 21 whether they are recommending this or not. 22 The other thing is that Mr. Hieronymus 23 talked about the case in Arizona where they were found 24 correct on all issues. In that case, there was a 25 breach of contract where he won, which is -- he had 0017 1 lost in -- in Virginia. The Arizona case is on 2 appeal, and it -- in that case, in the case he keeps 3 talking about winning, they did not have any findings 4 whatsoever of price fixing. There has never been a 5 finding by any court or administrative court, SOAH, of 6 any price fixing. And so I think that's an important 7 thing. 8 One other thing he said, that my 9 friend, Delwin Jones, said farmers would fault that. 10 If a farmer were asked, do you want to pay 250,000 or 11 a million five, I just -- I don't know why, but I just 12 think that the farmer would go for 250,000 over a 13 million five. I think that -- that this case -- we 14 negotiated -- and -- and, by the way, settle it 15 secretly. I -- I know the press is here today. They 16 were here last time and the time before that, so I 17 don't see how that y'all entered into anything that's 18 secret. This is open and above board. We negotiated 19 in good faith. Billy negotiated in good faith. We 20 would just as soon pay nothing. But -- we don't think 21 we've done anything wrong. We stand by that. But we 22 are willing to settle this for a large amount of money 23 because, in the long run, it's going to cost us a lot 24 more to -- to litigate this. And as I said last time, 25 one of the things that's happening in -- in the legal 0018 1 profession is that you have to make decisions, the 2 client does, business decisions, on what is best for 3 the company, and move on. We've been -- we've had 4 this thing that's been out there for three -- almost 5 four years. And during that period of time, it takes 6 not only a -- a lot of money for attorneys, but also, 7 it takes the energy of the company and has it focused 8 on things that are really not what they ought to be 9 focused on. 10 I would like for Jamie to address some 11 of the issues that -- that were brought up earlier, 12 and -- and -- if that would be okay at this time. 13 CHAIRMAN CLOWE: Sure. Would you 14 identify yourself? 15 MR. McNALLY: Yes, Chairman. I'm Jamie 16 McNally, from Clark, Thomas & Winters, here today on 17 behalf of GameTech. And I appreciate you, 18 Commissioners, for taking me out of order. 19 I -- I would like to respond to some of 20 the comments that Mr. Hieronymus made. I have heard 21 him make some of these comments now a couple of times, 22 both at legislative hearings and -- and -- and before 23 you. 24 He said that GameTech was fired because 25 he wouldn't go along with -- or -- or he said that 0019 1 GameTech terminated his -- his contract because he 2 wouldn't go along with the -- the price fixing plan. 3 That is incorrect. There were two federal court 4 cases, as -- as Mr. Hance has -- has indicated, 5 that -- that were related and stemmed out of the same 6 pattern of behavior. Those contracts were terminated 7 because Mr. Hieronymus refused to meet his obligations 8 to GameTech with regard to wholesale prices. Those 9 two cases were tried and GameTech prevailed in the 10 Virginia proceedings. It was awarded damages for 11 breach of contract, and it was also awarded punitive 12 damages against Mr. Hieronymus personally. 13 In the Texas matter, GameTech did not 14 prevail in that suit. However, as Mr. Hance 15 indicates, the decision turned on a contract issue and 16 not on price fixing. Those same arguments that -- 17 that Mr. Hieronymus has made before you was -- was 18 made in -- in that suit, and the judge and -- and jury 19 in that case found no evidence of price fixing. And 20 I -- I do think that's important to -- to understand. 21 Secondly, I -- I would like to strongly 22 take exception to the idea that there has been any 23 price fixing at all by -- by GameTech or that 24 charities have been damaged in -- in any way. The -- 25 the amended notice that was provided by staff to 0020 1 GameTech identified a particular individual, the 2 southern regional sales manager, in a particular 3 period of time, and -- and a particular group of 4 halls, where it is alleged that GameTech had attempted 5 to retain some business in these particular halls 6 through some price fixing activity. We absolutely 7 dispute that -- that that actually happened. However, 8 the point is that those transactions were never 9 consummated, and GameTech and its distributor 10 ultimately lost the business. So there has been no 11 evidence at all that -- that charities have been 12 harmed by GameTech. And, in fact, if -- if you look 13 at the market over, you know, the last five years, 14 really, since electronic equipment was -- was 15 introduced, prices have declined steadily. And I 16 think there are other people here that -- that can 17 address that. 18 So, in -- in summary, I would just like 19 to -- to urge you to adopt the settlement. It is a 20 fair and valid settlement. And we would like to put 21 this matter to bed and go on with our business. Thank 22 you, Commissioners. I would be happy to answer any 23 questions. 24 CHAIRMAN CLOWE: Any questions for 25 Mr. Hance or Mr. McNally? 0021 1 Thank you, gentlemen. 2 MR. HANCE: Thank you. 3 CHAIRMAN CLOWE: Ms. Thompson? 4 MS. THOMPSON: Good morning. 5 CHAIRMAN CLOWE: Good morning. 6 MS. THOMPSON: I'm Jane Thompson. I'm 7 president of Thompson Allstate Bingo Supply here in 8 Austin. I'm one of two GameTech distributors in the 9 state of Texas. And -- and I do want to address the 10 issue of the -- the settlement between GameTech and 11 you three Commissioners. 12 I ask that you please accept the 13 settlement. We have -- as you well know, we've 14 been -- we've been going over this for nearly four 15 years, and it's -- it's just been under investigation, 16 it's been ruled on, there has been so much talk about 17 administrative action, and it's just gone on and on. 18 And I just feel like it's time to get it past us 19 and -- and get on with the -- the real meaning of what 20 bingo is all about is helping the charities raise 21 funds for their -- for their -- for their works, their 22 charities. 23 And if I understand it right, if it's 24 not agreed to today, it could be another two or three 25 years before this is taken care of. And I just don't 0022 1 think that the bingo industry needs that black cloud 2 hanging over it for any -- any length of time. We 3 have been through so much, so long. It's time for us 4 to get on down the road with it. I feel like it's 5 drawing our attention away from what needs to be done. 6 We need to try to help the charities. You've -- 7 you've been at some of our -- many of our Bingo 8 Advisory Committee meetings where we've talked about 9 bingo and the -- and the status, and how it seems to 10 be going down year after year. And we need to be able 11 to help them. And I think if -- by settling this 12 agreement, it will enable -- it will enable us to get 13 past that and -- and go on and work more with the 14 charities. 15 Our industry is a very, very price 16 competitive industry. I can't tell you how many times 17 I get -- my customers will call and -- and come to me 18 with -- with pricing that they got from other 19 distributors, a lower pricing, and can you do this, 20 and can you do that. We -- we do that a lot. And I 21 feel like competition is good for the industry. We 22 have to be able to be competitive. And I think that's 23 helped bring the pricing down over these past five or 24 six years. It's -- it's happened, and the -- the good 25 thing about it, as the prices have come down, we have 0023 1 come up with better technology, more advanced 2 equipment, and we're able to -- to help the charities 3 but yet still stay competitive. So I think that the 4 competition has been very good for the charities. 5 If I understand price fixing in my own 6 little brain, it's when two or more businesses get 7 together and they -- they set a price in order to keep 8 that price elevated. And if that is the case, if I'm 9 correct in -- in my understanding of it, that's not 10 what is happening. It couldn't be. It wouldn't work 11 in the bingo industry because of the -- the 12 competitive nature of our business. We have to be 13 able to come down and -- and meet the -- what the 14 price is that is out in the industry. And so I just 15 don't feel like price fixing would work in our 16 industry. And truly, in my heart, I really don't 17 believe that the charities have been -- have been 18 cheated. They've not been overcharged. They -- 19 they -- the price that they pay is determined by what 20 the market will accept. And I am -- I just don't 21 believe that they've been cheated. 22 I -- I have a very fair contract in my 23 business. My -- my agreements that I have with the -- 24 my customers is very fair. I -- I -- I don't expect 25 the -- the customers to be exclusively GameTech. I 0024 1 have customers that have other type of products in 2 their hall alongside the GameTech, and they're not 3 penalized for doing that. They can have more than one 4 type of -- of electronic device if they want it. And 5 I don't -- I don't make my customers purchase all of 6 their supplies from Thompson Allstate in order to get 7 GameTech. They -- they are free to -- to buy what 8 they want from whom they want. 9 And I don't -- I have a contract that 10 is -- it's good for a year. It's an annual contract. 11 But I have a clause in it that allows them to get out 12 in 30 days if they so choose. And, you know, and -- 13 and some of them do. I do lose customers. But I feel 14 like my contract is very fair and -- and open. 15 I've had a -- a great, long-term 16 relationship with a lot of my customers. I would say, 17 you know, over half of them. Some of them I have had 18 for 15 years, the whole time I've been in business. 19 And I feel like if I was -- if I was doing anything 20 unethical, if I was following any kind of price fixing 21 scheme, or doing anything of that sort, I wouldn't -- 22 I wouldn't still have those people today. I have so 23 much pride in the reputation of Thompson Allstate 24 Bingo Supply that I wouldn't do anything to jeopardize 25 that reputation in my business. I -- I am very, very 0025 1 proud of it. 2 I think it's imperative that we write a 3 rule to clarify this -- this part of the Bingo 4 Enabling Act. We have to define what the problem is, 5 find out what -- what was the problem they were trying 6 to address when they put that in the Bingo Act, figure 7 out what -- what is price fixing -- define it, clarify 8 it, write a rule. And I think -- I wish that had been 9 done five years ago. I wouldn't have been sitting 10 here today if we had taken care of that back then. I 11 volunteered to be on the -- the work study group to -- 12 to help clear up this and -- and work on the rules, 13 writing procedure, and I look forward to doing that. 14 I want to get this cleared up so badly, 15 you just have no idea. GameTech is a wonderful 16 product. It's -- it's one of the best. And I'm -- 17 I'm proud to be a distributor for them. 18 I think that because the charities -- 19 they have a choice. If I was -- if I had elevated my 20 prices so high and kept them up there with this price 21 fixing allegation, I don't -- these charities would 22 have left. I think it's just -- it's clear to me that 23 this is -- this is not price fixing. 24 A settlement needs to be agreed upon, 25 and let's get on with it. I -- I truly ask you and 0026 1 almost beg you, please accept this settlement and let 2 us get on down the road. Thank you very much. 3 CHAIRMAN CLOWE: Thank you, 4 Ms. Thompson. 5 Any questions? 6 Ms. Thompson, I have a question. 7 You -- if I understood your remarks correctly, you 8 urged the Commission to accept the settlement? 9 MS. THOMPSON: Right. 10 CHAIRMAN CLOWE: And you said that in 11 your business knowledge, none of the charities have 12 been damaged where you are dealing with them. But 13 your urging of the settlement dealt with some harm 14 that has occurred, I -- I am assuming, and this is my 15 question. What is the effect of the lack of 16 settlement on you and your customers? Can you define 17 that more clearly for me? You -- you said you wanted 18 to get on with -- 19 MS. THOMPSON: I feel like it's -- 20 it's -- the perception of the whole price fixing 21 allegation is -- is bad for bingo. There is -- we've 22 been through so many things over the years, of things 23 that we have to defend. And, to me, this is just 24 another perception of some wrongdoing in the bingo 25 industry. 0027 1 CHAIRMAN CLOWE: So -- so it's an 2 intangible perception? 3 MS. THOMPSON: Yes, sir. 4 CHAIRMAN CLOWE: That's exactly what I 5 wanted to get from you. Thank you very much. 6 And is this Ms. Scott with you? 7 MS. THOMPSON: Yes, it is. 8 CHAIRMAN CLOWE: Ms. Scott, may I call 9 on you? 10 MS. SCOTT: Certainly. Caroline Scott, 11 Gardere, Wynne & Sewell. I'm here on behalf of 12 Thompson Allstate Bingo. And I really have nothing to 13 add to what Jane has to say. I think she has done a 14 great job of summarizing it. It's been a real ordeal 15 for her, and I think it would be really great if this 16 could all be put behind us. Basically, it's a 17 competitive dispute that's been going on all this 18 time. It's cost a huge amount of your staff resource. 19 It's cost a huge amount to Jane and her business, in 20 resources. And we would just appreciate it if you 21 could put it behind us. Thank you. 22 CHAIRMAN CLOWE: Thank you very much. 23 Any questions? Thank you both. 24 Mr. Fenoglio. 25 MR. FENOGLIO: Good morning, 0028 1 Commissioners. For the record, my name is Stephen 2 Fenoglio. I'm here to -- today representing over 950 3 business and charitable organizations. 4 CHAIRMAN CLOWE: Good morning. 5 MR. FENOGLIO: Good morning. 6 The last meeting we had, Mr. Hance made 7 reference to my involvement and that the charities had 8 never shown up and somewhat casting aspersions, I 9 believe, on my clients. And I wanted to set the 10 record straight. The reason the charities haven't 11 been here is that they're in the dark. They don't 12 know what the facts are. They don't know, in many 13 cases, what the true -- how the facts affect the 14 allegations. We have had an opportunity to obtain a 15 copy of the notice of hearing. I have filed an Open 16 Records Request for additional documents, and that has 17 been objected to by GameTech and is now at the 18 Attorney General's Office for further review. 19 I don't lightly engage in litigation, 20 and I have not initiated any litigation on behalf of 21 any of the clients. We're still at the fact-finding 22 stage. But I want to highlight the issue that raises 23 the concern on behalf of the charitable organizations, 24 and those are the organizations that have paid the 25 price for the rental on the GameTech product that is 0029 1 distributed by various distributors. 2 And I want to highlight what Mr. Atkins 3 said at a June 29, 2005, House Licensing Committee 4 meeting. 5 Mr. Atkins: Based on the evidence that 6 was presented to us -- and this is to Representative 7 Delwin Jones' question -- quote, we went about a 8 process to develop an amount that we believe would 9 have been in excess of what organizations should have 10 paid, period, close quotes. 11 What he is talking about is how much, 12 possibly, were nonprofits overcharged as a result of 13 what staff believes is price fixing. And this was a 14 question that Commissioner Cox asked at the last 15 Commission meeting, trying to get to the meat of the 16 issue. 17 And Delwin Jones says, that was the two 18 and a half million -- the two and a half million you 19 claimed, quote/unquote. 20 Mr. Atkins: Yes, sir. 21 So what the staff was saying at that 22 moment, which is the first time I had ever heard any 23 type of number, trying to highlight the issue, was the 24 two and a half million dollar overcharge. 25 Later, Mr. Atkins says: We have 0030 1 evidence where we believe GameTech and a distributor 2 were fixing the price for an organization. We -- I 3 don't know that we have evidence for every 4 organization. 5 And I'm sure that's the case because, 6 as he later states, it would be an intensive 7 fact-finding matter. And that's true. I'm sure it 8 would be. And that's part of the hearing process that 9 you go forward with. You will notice, Mr. Chairman, 10 that my comment was neither for or against. I'm 11 neutral. And I still am neutral because I still don't 12 know what the facts are. I hear what the allegations 13 of Mr. White are, and it's been my experience that 14 when Mr. White says something, he believes he has 15 proof, and he needs to go forward on a hearing. And I 16 hear what the allegations of Mr. Atkins are, and I 17 don't think Mr. Atkins is one that makes light of a 18 comment of price fixing. And I hear what my good 19 friends Kent Hance and Jamie McNally say on behalf of 20 GameTech. And I don't know what the facts are, and 21 perhaps -- and I know y'all have had an opportunity to 22 discuss it with your staff, and so you may have more 23 facts than we do. But the point of the matter is, 24 these are serious allegations. Some of the 25 allegations are going back to the year 2000. And 0031 1 there has been some discussion of a previous hearing 2 process on price fixing allegations, where there was 3 evidence from some charity representatives and 4 distributors, both for and against the price fixing. 5 I just hope you're going to make the right decision, 6 and I don't know what that decision is. But what I 7 have learned is that there is a lot of fog out there 8 that's trying to conceal what the truth is. And I 9 hope you will make sure you make an educated decision 10 and get to the truth of the matter. And as I said in 11 my testimony at the House Licensing Committee, don't 12 lose sight of the fact that if -- if, in fact, there 13 has been price fixing, it's the charities that have 14 paid the price. 15 And I've done one analysis at one bingo 16 hall whereby -- trying to figure out if there was 17 price fixing on card-minding device -- devices alone, 18 how much that price overcharge could have been. We 19 looked at, like I say, one particular hall. 20 Card-minding devices accounted for 25 percent of the 21 gross sales. On a cost-of-goods basis, it was about 22 64 percent. And what that means, if -- if cost of 23 goods had trailed the gross sales, the charities 24 overpaid to the tune of about 65 grand in one calendar 25 year. That's six charities at one hall. Whether or 0032 1 not that equates to true price fixing, we don't know. 2 I don't guess you know yet. 3 It's not an easy decision that you're 4 made with, but that's why you get the big bucks. 5 I'll be happy to answer any questions. 6 COMMISSIONER OLVERA: And those would 7 be what? 8 CHAIRMAN CLOWE: Any questions? 9 Commissioners -- thank you, Mr. Fenoglio. 10 We're at a point now where we can move 11 into executive session to receive legal advice on this 12 issue, or we can stay in the public session and 13 deliberate this issue. One of the things that is, I 14 think, on the table is that the settlement agreement 15 to this point has been a draft, and it has been an 16 agreement that has not been in the public forum. 17 Although the settlement amount has been mentioned 18 numerous times, it's never been confirmed. Well, 19 maybe it has been confirmed one time in the public 20 venue, but I think to get comfortable with this, 21 sooner or later we're going to have to have Mr. White 22 describe the settlement agreement and take it across 23 the line from a draft agreement to a proposed 24 agreement that factually we can consider. I'm going 25 to suggest that at some point in time, but at this 0033 1 time I would like to hear your pleasure on whether you 2 want to go into executive session for legal advice or 3 you want to deliberate this issue here in the public 4 forum. 5 COMMISSIONER OLVERA: Mr. Chairman, 6 I -- I would prefer going into executive session and 7 receiving legal advice and then returning, obviously, 8 and -- and discuss the issue. But I do have one 9 follow-up question to Mr. White before we do that. 10 And it -- it's an issue that -- that I thought was 11 important. I was hoping that some of the parties 12 would -- would touch upon this. And Mr. Fenoglio was 13 the only one who briefly touched upon the issue. 14 It's my understanding, in preparing for 15 this, that there was a prior administrative hearing on 16 facts and issues very similar to what we have before 17 us today on the issue of price fixing. And the 18 administrative law judge found in favor -- that there 19 was no price fixing, I should say. Is that correct? 20 And when was that hearing, and what were those facts? 21 MR. WHITE: Yes, sir, that is correct. 22 The hearing, I believe, was in 2001, and the PFD was 23 issued in early 2002. And the respondents in that 24 case were GameTech and Trend Gaming. What the 25 allegation is they concluded that, between the 0034 1 manufacturer and distributors, had set the prices. 2 And the facts were very similar. You know, it -- in 3 that case, we had another distributor who testified 4 who was once a distributor for -- for GameTech, 5 somewhat in a similar situation as Trend Gaming is 6 now. Testified that, you know, pressure was being put 7 on her by GameTech to, you know, set prices at a 8 certain amount in the retail. Her contract with 9 GameTech had been mutually terminated, I believe, and 10 the hearing officer didn't give her much credibility 11 or much credence to her testimony because the ALJ felt 12 that it -- the testimony was biased because they had 13 contract disputes, similar to GameTech and Trend 14 Gaming now. There was also -- it was the same -- 15 pretty much the same contract, in that you read the 16 terms of the contract, and it seems to be almost price 17 fixing on its face, in a sense. It says -- it is 18 stated that the manufacturer and distributor will -- 19 will set prices, mutually agreeable prices, and that 20 all contracts will be approved by GameTech. The ALJ 21 said, you know -- in fact, yes, he certainly raised 22 his eyebrows, the fact that it had -- that provision 23 of the contract is in there. But that in itself, 24 absent a showing it was actually enforced and 25 actually -- prices were actually set and agreed upon, 0035 1 you know, there is no violation. 2 In this case, I mean, the -- you know, 3 I mean, there is obviously differences. It's a 4 different time period. We now have Trend Gaming 5 testifying somewhat -- quite differently than Trend 6 Gaming testified at that hearing. In that case they 7 were the respondent. In this case, they're the 8 complainant, so there is obviously differences as 9 well. 10 MR. ATKINS: And just -- Commissioner 11 Olvera, the only thing I would point out to what 12 Mr. White said is, it was actually, I believe, January 13 of 2000 when the hearing he is discussing occurred. 14 COMMISSIONER OLVERA: Thank you, 15 Mr. White. 16 That was the only follow-up I have, 17 Mr. Chairman. 18 CHAIRMAN CLOWE: Commissioner Cox, what 19 is your pleasure on this? 20 COMMISSIONER COX: I think that, 21 Mr. Chairman, I would like to -- I understand what 22 Judge Olvera would like to do, and I would like to 23 hear what you would like to do. 24 CHAIRMAN CLOWE: Well, of course, we 25 cannot deliberate this in executive session. We would 0036 1 only go in for legal advice. That's fine with me. 2 I'll be happy to take legal advice in the executive 3 session. I would like to have the settlement 4 agreement brought across the line, as I say, and made 5 public. And I think this might be a good time to do 6 it. Are you open to that? 7 COMMISSIONER COX: Yes. 8 CHAIRMAN CLOWE: Mr. White, would you 9 come forward and -- and describe the settlement 10 agreement in some detail for us? 11 MR. WHITE: Well, it's been a while 12 since I looked at, but the agreement describes and 13 outlines the allegations that were made against 14 GameTech. Basically, again, as -- as I discussed in 15 my first statements, there are really two allegations. 16 First, is the allegation of direct sales, directed to 17 a conductor organization. There was an attempt by 18 their -- one of their sales managers to go directly to 19 an operator. And a contract was actually drafted. If 20 I recall, it was actually signed by one of the 21 parties. However, that contract was never ultimately 22 entered into. But nevertheless, it was clearly a -- 23 an attempt to induce a sale directly with a conductor 24 organization. 25 The second allegation, again, is the 0037 1 price fixing allegation. And, you know, I -- I would 2 like to emphasize, and they're really -- that -- that 3 section of the -- the Bingo Enabling Act, there is -- 4 there is two subsections. The first is -- Subsection 5 A is the more traditional price fixing definition as 6 described to you by Ms. Thompson and her understanding 7 of price fixing, and where prices are actually agreed 8 to and fixed, so the traditional antitrust type 9 allegation. I'm not sure if that occurred in this 10 case, and that's why, you know, in terms of trying to 11 ascertain actual damages, I'm not sure if there really 12 was damages. You know, but what I think, where there 13 is a much more clear violation is the Subsection B, 14 that says -- or discusses the price of bingo supplies 15 and equipment in the competitive marketplace shall be 16 established by the manufacturer, distributor, or 17 supplier, and may not be established in concert with 18 another manufacturer, distributor, or supplier. And 19 as the Attorney General pointed out in his -- his 20 opinion, that goes beyond the traditional definition 21 of price fixing, that is a much more strict regulatory 22 prohibition from manufacturers and distributors 23 getting together and discussing prices, regardless if 24 they're, you know, coming to a mutually agreeable 25 price -- price, regardless if prices are actually 0038 1 fixed and regardless if there is any actual damages. 2 And that is -- that is more of the allegation that's 3 being asserted in this case. And those allegations 4 are outlined in the agreed settlement. GameTech 5 disputes the allegations in the agreed settlement and 6 has not acknowledged that -- that the allegations are 7 true. However, they all set -- they all -- are all 8 set out in the proposed settlement for everyone to 9 look at, and it's out in the open. That was the 10 allegations portion. 11 The -- the actual settlement provision 12 calls for GameTech to pay total payments of 250,000 -- 13 200,000 for -- for the violation and 50,000 for the 14 cost -- to some degree, to repay the cost of the 15 investigation, the administrative costs. There is 16 also a provision there that would require GameTech to 17 hire a full-time compliance officer to be located here 18 in Texas, to ensure full compliance with all Texas 19 bingo laws. That person would be readily available 20 anytime we had any questions, any issues regarding 21 GameTech, which I think goes a long way of assuring a 22 full compliance and the immediate compliance in the 23 future. 24 CHAIRMAN CLOWE: Any questions? 25 MR. ATKINS: Commissioners, if I could, 0039 1 I believe there is one other term of the agreement 2 that requires GameTech to implement a company-wide 3 policy and educate not only their employees but the 4 distributors that they work with that no distributor 5 has to seek or obtain GameTech's approval for any 6 equipment offered in Texas, as well as a requirement 7 that GameTech will cooperate completely with the 8 Commission on any future investigations regarding this 9 matter. 10 CHAIRMAN CLOWE: Very good. 11 Any questions? 12 COMMISSIONER COX: I have -- 13 Mr. Chairman, I have a question, if it's appropriate, 14 on one of the terms of the agreement. 15 CHAIRMAN CLOWE: Certainly. 16 COMMISSIONER COX: Would that be 17 appropriate? 18 CHAIRMAN CLOWE: Yes, sir. 19 COMMISSIONER COX: Mr. White, on page 20 six of eight, item five, it starts off with division 21 and the Commission, in consideration of the foregoing 22 payments, promises to hereby release to GameTech, dot 23 dot dot. And then it goes down to item three, from 24 any matters pertaining to GameTech -- that is, any 25 matter pertaining to GameTech that is currently under 0040 1 investigation by the Commission. 2 It seems to be a blanket release of 3 this and all other matters, and I wonder whether there 4 are other matters that this is taking out with it. 5 MR. WHITE: No, sir. The only two 6 matters that are currently under investigation -- I 7 think it's actually beyond the investigative stage at 8 this point, but -- are the allegations of -- of price 9 fixing and direct sales to an organization. 10 COMMISSIONER COX: So if three were 11 taken out, it would have no effect on the agenda 12 pending before the Commission, the agency? 13 MR. WHITE: I believe that is correct. 14 Yes, sir. 15 COMMISSIONER COX: Thank you, 16 Mr. Chairman. 17 CHAIRMAN CLOWE: Why is it in there? 18 MR. WHITE: GameTech wanted that in 19 there just to be certain that anything currently being 20 investigated is resolved. You know, they obviously 21 want things in writing, and they -- they want to be 22 certain that all matters currently under investigation 23 are resolved with this agreed order, that we don't 24 next week, you know, initiate a new disciplinary 25 action for a similar -- something new. 0041 1 MS. KIPLIN: As to GameTech. 2 MR. WHITE: Yes. 3 CHAIRMAN CLOWE: I have a question. 4 Steve, how did you arrive at the 200,000 dollars of 5 penalty and the 50,000 dollars for expenses? How -- 6 how did you settle on those two numbers? On what 7 basis? How did you -- how did you get those numbers? 8 MR. WHITE: Well, the initial 250,000 9 dollars was based upon an extrapolation -- a very 10 broad extrapolation, based primarily on the one 11 contract, the direct sales allegation, where it was 12 estimated that if this contract had gone through, 13 GameTech -- and exact numbers, I don't recall -- 14 Mr. Atkins may be more accurate -- but, basically, if 15 this contract had gone through, it would have been -- 16 resulted in an extra 25 percent per use per unit to 17 GameTech. And you -- and you say, well, that would 18 have been a total so much, you know. And when you -- 19 other extrapolate that, let's make the assumption that 20 it's not -- it's one -- not only if one contract had 21 gone through -- in place, but let's assume that every 22 contract GameTech had entered into for every device 23 currently on its market for one year had the same 24 provision. And then we multiplied 25 cents per use 25 per unit, across the board, for every -- for the 0042 1 number of units that GameTech had in place for that 2 year. And I think for purposes of settlement 3 negotiations, you know, making those wide, broad 4 extrapolations and assumptions, you know, is 5 reasonable, as far as -- in terms of a guideline for 6 an appropriate settlement amount. I'm not sure if an 7 ALJ would buy into that very broad assumption and 8 extrapolation for -- for any purpose, but I think for 9 settlements, it was a good starting point in terms of, 10 I believe, you know, was -- come up with some sort of 11 reasonable settlement amount. And that amount came to 12 somewhere over two million dollars. And then, 13 ultimately, we negotiated approximately ten percent of 14 that amount, which was approximately 250,000 dollars. 15 And then in terms of dividing up between 200,000 16 for -- for the violation and 50,000 dollars for 17 administrative costs and investigative costs, I think 18 that's just basically -- it was estimated that the 19 investigation so far and administrative costs were 20 somewhere in the area of 50,000 dollars. And that's 21 the best of my recollection. Mr. Atkins might want to 22 help me more with that. 23 MR. ATKINS: No. I believe Mr. -- 24 Mr. White has discussed it. If there is anything you 25 would like me to expand on. 0043 1 CHAIRMAN CLOWE: Thank you, Mr. White. 2 If there are no further questions at 3 this time, at this time I move the Texas Lottery 4 Commission go into executive session to receive legal 5 advice regarding, let's see, case number 2005-4821, 6 GameTech International, Inc. Is there a second? 7 COMMISSIONER OLVERA: Second. 8 CHAIRMAN CLOWE: All in favor, please 9 say aye. Opposed, no. The vote is three/zero. 10 MS. KIPLIN: I'll wait. 11 CHAIRMAN CLOWE: The Texas Lottery 12 Commission will go into executive session. The time 13 is 8:55 a.m. Today is August 15th, 2005. 14 Did you have something, Counselor? 15 MS. KIPLIN: Yes, sir. I need to go 16 ahead and put the statutory cite on which you're 17 relying to go into -- 18 CHAIRMAN CLOWE: Please do. 19 MS. KIPLIN: -- executive session. So 20 it's to receive legal advice regarding pending or 21 contemplated litigation and/or to receive legal advice 22 pursuant to Section 551.071(1)(A) or (B) of the Texas 23 Government Code, and/or to receive legal advice 24 pursuant to Section 551.071(2) of the Texas Government 25 Code. 0044 1 CHAIRMAN CLOWE: Thank you. 2 We'll try to be brief. 3 (EXECUTIVE SESSION.) 4 CHAIRMAN CLOWE: The Texas Lottery 5 Commission is out of executive session. The time is 6 9:21 a.m. Today is August the 15TH, 2005. There is 7 no action to be taken as a result of the executive 8 session. 9 We are still deliberating item 23, 10 letter H, case number 2005-4821, GameTech 11 International, Inc. The Commission has received legal 12 advice, and, Commissioners, I think now it's 13 appropriate for us to determine what action we would 14 like to take in this matter. We have a number of 15 choices. Certainly, we can deliberate this in the 16 public. We can accept the settlement and vote to 17 approve the consent order. We can reject the 18 settlement, direct the staff to proceed with a 19 contested case matter. We can reject the settlement, 20 direct the staff to proceed with the -- pursuing the 21 disciplinary action against GameTech without 22 eliminating the possibility of further settlement 23 negotiations. And we can reject the settlement and 24 direct the staff to close the matter. What is your 25 pleasure? 0045 1 COMMISSIONER OLVERA: That's a pretty 2 broad question, Mr. Chairman. 3 CHAIRMAN CLOWE: Let me start the 4 discussion, if I may. I have studied this proposed 5 settlement agreement and talked with Steve White and 6 general counsel at length. And this case, to me, is 7 full of conflict. I understand both sides have argued 8 passionately and convincingly on their positions, but 9 there are questions in my mind about whether, in fact, 10 GameTech is guilty of anything. And I think I 11 understand the business perspective of wanting to get 12 on with your business life and paying a settlement, 13 but there remains a question in my mind of whether, as 14 I say, GameTech is guilty of anything. There is a 15 question in my mind whether the settlement agreement 16 is proper. Issues have been raised about restitution 17 to others that might or might not be involved. And 18 those are the things that I would like to hear your 19 comments on and perhaps form some consensus in some 20 direction or another. How do you all feel about it? 21 COMMISSIONER OLVERA: I think it's -- 22 I -- I think you touched upon it, Mr. Chairman. I 23 think it's very clear that we have two parties that 24 are very passionate about their positions. It's clear 25 that there is ongoing litigation between the two 0046 1 parties. I think it's important to note that nothing 2 we do here today will affect their rights to continue 3 those civil remedies. But there are numerous 4 variables that I think we need to consider when we 5 hear the recommendations of staff, and that is, number 6 one, we're being asked to prosecute a case that has 7 already been lost at a prior administrative hearing. 8 So we would be starting behind the eight ball. I 9 think this settlement is -- appears to be a fair 10 settlement, based upon that very important fact. 11 The other issue is, there has been a 12 lot of commentary about restitution and whatnot, but I 13 think it's clear that, legally, even if it were to go 14 to the -- the SOAH, there is no right to restitution. 15 This is not a civil case. It -- it would only involve 16 administrative penalties at best, and I seriously 17 doubt that any administrative penalty would reach what 18 is reflected in this settlement -- settlement amount. 19 Based upon that background, I'm inclined to accept 20 this -- this consent order. 21 COMMISSIONER COX: Mr. Chairman, I -- I 22 think Judge Olvera put it very well. And you set the 23 tone very well, also. There are lot of troubling 24 issues here, and yet the fact that a very similar case 25 has already been heard and found that, as I 0047 1 understand, there was no price fixing involved, it 2 looks to me like that this settlement to put this 3 matter behind us is in the best interests of everyone. 4 CHAIRMAN CLOWE: Anything further? 5 Is there a motion? 6 COMMISSIONER OLVERA: And are you now 7 requesting we move to execute the consent order at 8 this time? 9 CHAIRMAN CLOWE: No, I'm asking if 10 there is a motion. 11 COMMISSIONER OLVERA: Well, based upon 12 our deliberations, I -- I hereby move that the 13 Commission consider executing the consent order before 14 us, based upon recommendations of staff. 15 CHAIRMAN CLOWE: Is there a second? 16 COMMISSIONER COX: Second. 17 CHAIRMAN CLOWE: All in favor, please 18 say aye. Opposed no. No. The vote is two/one in 19 favor of accepting the settlement offer. 20 We'll now move on to item number -- 21 MS. KIPLIN: Commissioners, I have an 22 order. 23 CHAIRMAN CLOWE: All right. We'll sign 24 it. 25 We'll move on to item number two, 0048 1 report by the Bingo Advisory Committee Chairman, 2 possible discussion and/or action regarding the Bingo 3 Advisory Committee's activities, including the 4 August 3rd, 2005, committee meeting. 5 Ms. Taylor, if you'll come up. 6 MS. TAYLOR: Good morning. 7 CHAIRMAN CLOWE: Good morning. 8 MS. TAYLOR: My name is Suzanne Taylor. 9 I'm chair of the Bingo Advisory Committee. I will go 10 ahead and just go over this report that I have handed 11 you. If you want to read along, great. Otherwise, 12 I'll read to you. 13 Number one, the Bingo Advisory 14 Committee to the Texas Lottery Commission met on 15 May 25th, 2005, in Austin, at 10:00 o'clock a.m. All 16 members were in attendance. Commissioner Tom Clowe 17 was also in attendance. 18 Two, it was moved, seconded, and passed 19 to approve the May 25th Bingo Advisory Committee 20 meeting minutes with no changes. 21 Three, Sandy Joseph requested names of 22 members for a rulemaking work group to work on a rule 23 pertaining to the prohibition of price fixing for 24 bingo equipment and supplies. Volunteers for the work 25 group consisted of Danny Moore, Larry Whittington, 0049 1 Rosie Lopez, Jamie McNally, Jane Thompson, Steve 2 Fenoglio, Steve Bresnen, and Tres Grey. Public 3 comment was received that perhaps putting together 4 this work group was having, quote, the cart before the 5 horse. The committee should know the facts requiring 6 the rule, and because of a pending case, no facts have 7 been made available. It would be very difficult for 8 the committee to identify a solution when they don't 9 know the facts. Working on a rule at this time would 10 be like working in a vacuum. This could be the most 11 sophisticated subject the BAC may be asked to address. 12 Committee members expressed confusion as to what was 13 being discussed. 14 Tom Clowe left the room at this time. 15 Additional public comment was received, 16 advising the committee that anything affecting the 17 price of bingo supplies to the charities by the 18 manufacturer was price fixing and that the Texas 19 Lottery Commission has determined there was 2.5 20 million in overcharging to charities. Committee 21 members expressed concern that charities have gone out 22 of business because of electronic pricing. Sandy 23 Joseph will set up the meeting date for the work 24 group. And Tom Clowe reentered the room at this time. 25 Item number four, BA -- BAC members 0050 1 were advised that, on July 11, 2005, the Commission 2 voted to initiate rulemaking proceedings to amend 16 3 TAC 402.105(j) to change the abolishment date of the 4 BAC from August 31st, 2005, to August 31st, 2006. The 5 proposed rule was expected to be published in the 6 Texas Register on July 29th, 2005. The comment period 7 will end on August 28th, 2005. Committee members 8 expressed the opinion that the BAC should continue as 9 long as we have bingo in Texas. 10 Billy Atkins -- item number five, Billy 11 Atkins briefed the BAC on the activities relating to 12 Public Service Announcements. Bobby Heith reviewed 13 samples of the PSAs with the committee and requested 14 input from the committee on items that should be 15 included on a PSA for bingo. 16 Item six, Janet -- and I apologize for 17 pronunciation of this name -- Maluschka and Susan 18 Beasley reviewed the gross attendance -- the Gross 19 Receipts and Attendance Analysis for the calendar year 20 2000 through 2004 included in the BAC meeting book. 21 Phil Sanderson reviewed the quarterly financial data 22 for the first quarter 2005 included in the book. 23 Public comment was received that this was good 24 information, and it was nice to get hard data. It was 25 also noted that bingo is a low cost operation after 0051 1 bingos -- bingo prizes are deducted from the gross and 2 that two-thirds of the lessors charge less than 3 one-half the maximum rent. Only eight percent charge 4 between five and 600 dollars on the average. It was 5 requested that the promotion be added to the 6 advertising, and new games are needed to compete with 7 other gaming. Committee members and the public 8 commented on what a great job the Bingo Division had 9 done in putting the information together. 10 Item seven, Nelda Trevino updated BAC 11 members with current legislative activity. 12 Eight, the nomination work group 13 discussed the results from the interview with the 14 applicant for the commercial lessor position on the 15 BAC. It was moved, second, and passed that the BAC 16 would recommend Robert Stoolfire to the Commissioners 17 to fill the commercial lessor position on the BAC. 18 Robert would be replacing Mario Manio on the BAC. 19 Item nine, the BAC Annual Report was 20 tabled at this time and will be ready for presentation 21 to the committee at the next meeting. 22 Commissioner Clowe left at this time, 23 and the committee welcomed Commissioner Cox. 24 Item ten, Billy Atkins reviewed the 25 report on the activities of the Charitable Bingo 0052 1 Operations Division with the committee. It was noted 2 the charitable distribution graph had been updated on 3 the Web site and the beta testing should begin next 4 Monday for the online resource for licensees that will 5 allow organizations to review information specific to 6 their organization and allow public access to 7 information now requiring an Open Record Request. The 8 Bingo Division is still working on the video operator 9 training program and is close to beginning the editing 10 of the program. The goal is to put the program on the 11 Web site. There are also plans to allow conductors to 12 file their quarterly returns electronically and then 13 mail the check with a one-page summary. The plan is 14 to try to have this ready by the first quarter 2006. 15 Item eleven, Public Comment: Carol 16 Lauder congratulated committee members for their 17 interaction, suggested the committee restate 18 suggestions and decide whether to act on them or not, 19 and suggested the committee consider a process to keep 20 the meeting from getting off topic. 21 Item twelve, items for future BAC 22 meetings were discussed, and the next meeting was 23 tentatively scheduled for November 11th, 2005, at 24 10:00 a.m. 25 And the meeting was adjourned at 0053 1 12:20 p.m. 2 And if you have any questions. 3 CHAIRMAN CLOWE: Are there any 4 questions? 5 Thank you, Suzanne. 6 MR. ATKINS: Mr. Chairman? 7 CHAIRMAN CLOWE: Sir? 8 MR. ATKINS: If I could just highlight 9 a couple of things. On item number six on the 10 financial information, I appreciate how well that was 11 received by the BAC, and I also appreciate Suzanne 12 crediting the Bingo Division for that. I just wanted 13 to state on the record that we also had a great deal 14 of assistance from both our Financial Administration 15 Division, as well as Internal Audit, in formatting 16 that information in a way that apparently is very 17 meaningful to the BAC. 18 And another item that I had, looking at 19 the transcript, I show the next meeting being 20 scheduled for November 2nd. 21 MS. TAYLOR: Okay. 22 CHAIRMAN CLOWE: Very good. Thank you. 23 Next we'll move to item number seven, 24 consideration of and possible discussion and/or action 25 on a security study of the lottery. Mr. Grief. 0054 1 MR. GRIEF: Good morning, 2 Commissioners. 3 As stated in the State Lottery Act in 4 Section 466.020(e), at least once every two years the 5 lottery is required to employ an independent firm to 6 conduct a comprehensive study of all aspects of 7 lottery security. And the completed study must be 8 provided to the Commission and then also provided to 9 the Legislature in advance of the convening of each 10 regular legislative session. 11 The last such study that we had 12 conducted was performed by the firm of 13 Jefferson Wells, and that was released in January of 14 2005. And I understand that representatives from 15 Jefferson Wells are in attendance at today's meeting. 16 In Jefferson Wells' report, the firm 17 commented on the reorganization of the agency that 18 took place in November of 2004. And I would like to 19 quote from their report. 20 "The Texas Lottery underwent a major 21 reorganization, effective November 19th, 2004. This 22 reorganization included a reduction in force that may 23 have impacted some security functions. These changes 24 are currently underway, and completion is expected in 25 the first half of 2005. It is not possible to 0055 1 determine the full impact of the organizational 2 changes at this time. We recommend the Texas Lottery 3 Commission conduct an independent post-implementation 4 audit approximately 180 days from the reorganization 5 date. This will help ensure that an effective 6 reorganization is satisfactorily implemented and that 7 appropriate security of the lottery is maintained." 8 Unquote. 9 One approach to this issue is to 10 procure the services that are necessary to conduct an 11 entirely new security study that would be 12 comprehensive in nature and would not be limited to 13 looking only at the impact of the reorganization, but 14 take into account all aspects of our agency's 15 security. 16 This morning, I'm looking for guidance 17 from the Commission regarding how you want to proceed 18 on this issue. And I also understand that there has 19 been some communication between our Internal Audit 20 department and the State Auditor's Office on this 21 matter. And the Commission may want to hear from 22 Catherine Melvin as well. 23 CHAIRMAN CLOWE: Anything further at 24 this time? 25 MR. GRIEF: No, sir. 0056 1 CHAIRMAN CLOWE: Ms. Melvin, please. 2 MS. MELVIN: Good morning, 3 Commissioners. For the record, I'm Catherine Melvin, 4 director of Internal Audit. 5 As Mr. Grief has stated, we have spoken 6 with the State Auditor's Office regarding this topic. 7 The security study is a bi-annual requirement for our 8 agency. And very recently, in the regular session, a 9 bill was passed that changed somewhat the coordination 10 that State agencies have with the State Auditor's 11 Office when they procure audit type services. And in 12 the past we did more of a courtesy notification with 13 the State Auditor's Office. In this recent regular 14 session, that was changed to require State agencies to 15 request a delegation of authority. And in talking 16 with the State Auditor's Office, they have indicated a 17 desire to perform that security study themselves. And 18 our contact manager with the State Auditor's Office, 19 Mr. Mike Apperley, came and visited with the Internal 20 Audit function last week on Thursday. And at that 21 time he indicated that the security study was in their 22 draft audit plan that would be likely submitted to the 23 Legislative Audit Committee for approval. So it has 24 not been formally approved on their plan, but it's 25 under consideration. 0057 1 CHAIRMAN CLOWE: Questions? 2 COMMISSIONER COX: So, Catherine, if I 3 understand correctly, you and you, Gary, would like to 4 do the follow-up study that Jefferson Wells 5 recommended, and yet we're now required to get the 6 approval of the State Auditor. And that approval is 7 not forthcoming. Is that -- is that a fair statement, 8 or am I putting words in your mouth? 9 MR. GRIEF: I might try and clarify. 10 Now that -- now that we understand, at least on the 11 surface, what the intent of the State Auditor's Office 12 is, to actually put the security study in their audit 13 plan for next fiscal year, I would like for the 14 Commission to consider allowing us to reach out to the 15 State Auditor's Office and request permission now to 16 just do a very narrow study on the reorganization in 17 the interest of getting feedback in a more timely 18 manner. If we don't do that, then, obviously, we 19 won't be getting any feedback on this matter until 20 right before the convening of the next regular 21 legislative session. 22 COMMISSIONER COX: Now, Catherine, 23 did -- you have talked to the State Auditor about this 24 matter? 25 MS. MELVIN: Yes, sir. 0058 1 COMMISSIONER COX: Did you talk to the 2 State Auditor about the two alternatives; one, the 3 immediate abbreviated study, and then, later, a 4 complete study? 5 MS. MELVIN: Yes. I haven't heard back 6 on the first alternative. I think they're considering 7 whether that would impact their full review. 8 Regardless, it is correct, your understanding. We 9 would still have to receive that delegation of 10 authority or -- or approval, if you will, from their 11 office. They may come back and say, you know, move 12 forward with that smaller piece, or they may say, you 13 know what, we're intending to do a larger security 14 study. We prefer the Lottery Commission wait until we 15 come in at that time. So I -- I haven't heard back. 16 COMMISSIONER COX: Well, Mr. Chairman, 17 I have -- I have a concern that is somewhat immediate. 18 And I don't know what the best way to address this is, 19 but I would like yours and Judge Olvera's thoughts on 20 it. 21 There has been in the press a statement 22 that in the last security study the consultants 23 entertained a recommendation that we were gutting our 24 security staff and taking great risks and then didn't 25 put that recommendation in their final study. And I 0059 1 had some involvement in that study, and I remember a 2 discussion of something like that. But I would really 3 like to be refreshed on that, and I would like for -- 4 for all of us to hear, if possible, how that shook 5 out, and did it shake out the way the press has 6 indicated or was it different? 7 CHAIRMAN CLOWE: I agree in that. And 8 if it's correct under the notice, I believe Mr. Grief 9 indicated there were members of Jefferson Wells here 10 in attendance this morning. I would like to ask them 11 to come forward and have a discussion on that subject. 12 MS. KIPLIN: Your notice says, the 13 consideration of and possible discussion and/or action 14 on the security study of the lottery. And I think it 15 is sufficiently noticed to allow for you to hear from 16 your vendor who conducted a security study and with an 17 eye towards what we want to do in the future. 18 CHAIRMAN CLOWE: With that 19 confirmation, then, could we ask you gentlemen to come 20 forward, please, and identify yourselves. 21 MR. HOLTZMAN: My name is Al Holtzman. 22 I am director of operations for Jefferson Wells Austin 23 office. And we were responsible for conducting the 24 security audit in 2004. With me today is Carlton 25 Wilkes. Carlton is a member of our internal controls 0060 1 practice. He was a participant in the assessment that 2 we did for the lottery. 3 CHAIRMAN CLOWE: Gentlemen, we really 4 appreciate you all being here, and I understand that 5 it was somewhat of an imposition for you to be in 6 attendance. And we want to thank you for that, and we 7 want to apologize for the delay in coming to this 8 item. So we're grateful. 9 And Commissioner Cox has perfectly 10 stated a concern that I have and, I think, maybe 11 Commissioner Olvera as well. What I have read in the 12 newspaper is that there was some initial draft or 13 ghost draft that was critical of the security 14 reorganization, specifically, and that it was rejected 15 by the management here at the Lottery Commission, and 16 then it was recreated. And -- and I am concerned 17 about that, as Commissioner Cox is. And it is a -- a 18 matter that is properly noticed, and we would like to 19 hear from you on that subject if we may. 20 MR. HOLTZMAN: Fine. Thank you for the 21 opportunity. I have some brief comments that I would 22 like to make and then would be happy to answer any -- 23 that question and any other questions that you might 24 have. 25 I want to start by repeating our 0061 1 firm -- or the comments that we made before the 2 Commission earlier this year, in January, at the 3 conclusion of our security review. And let me read 4 the following two sentences into the record -- or that 5 we read into the record at that time. 6 "As for our overall conclusion, we did 7 not identify any issues that would materially impact 8 the integrity and the overall security of Texas 9 Lottery operations, its gaming services and instant 10 and online ticket production. Due to the sensitive 11 nature of the security review, our detailed 12 recommendations will be provided to you later today in 13 a nonpublic format." 14 Those were our comments then, and we 15 stand by our overall conclusions and the reports as 16 issued. I would like to call upon Mr. Wilkes to 17 discuss, basically, the scope of our audit and the 18 process that we used. 19 MR. WILKES: Good morning, Mr. Chairman 20 and Commissioners. And for the record, my name is 21 Carlton Wilkes. I'm with Jefferson Wells. And I was 22 part of the lottery team that did work for you back in 23 December. 24 I would like to -- very brief comments. 25 The deliverables we provided to you is -- per statute, 0062 1 is we provided the Texas Lottery Commission two 2 reports, a five-page public report, and we also 3 provided a 51-page confidential report. 4 And I also have some comments about our 5 process, which are very -- very brief. All issues, 6 risks, and findings that -- were provided to 7 management in the normal course of our work. 8 Additional information was provided to us, by 9 management, to assess, understand, and evaluate 10 potential risks. Our team assessed the information to 11 determine if the information was reportable. All 12 reportable issues were summarized and reported in a 13 confidential report. The process we used followed 14 accepted industry standards established by ISACA, 15 which is the Information Systems Audit Control 16 Association, as well as the IIA, which is the 17 Institute of Internal Auditors. Our process is the 18 most thorough, and we followed our process. I want to 19 make some comments about the process. I didn't know 20 if you wanted some comments about our -- our firm 21 or -- at this time, or -- 22 MR. HOLTZMAN: Go ahead with the 23 process. 24 MR. WILKES: That concludes my comments 25 about our process and the work that we did. We have 0063 1 got comments about introducing us a little bit more as 2 a firm. We're a professional services firm. We are 3 very experienced and highly specialized professionals 4 in areas such as information technology, financial 5 operations, internal audit of taxes. We have over 6 2200 professionals in over 40 offices worldwide. 7 We're closing in on our ten-year anniversary as a 8 firm. We've been in Austin for about five years. We 9 average over 17 years of experience in our 10 professionals. Our lottery team consisted of a 11 multidisciplinary team having IT, or information 12 technology, security, and controls backgrounds. 13 And those conclude our opening 14 comments. We welcome your questions. I believe you 15 had one on the table. 16 If I -- Mr. Chairman, if I understand 17 your -- your question about the comment made in the 18 article -- and I'll try to repeat your question as 19 best I can -- there were references, I believe, to a 20 draft report or a ghost report which was rejected by 21 management and then recreated. The -- I've read most 22 of the articles that are out there in the press. And 23 I have read nothing that would alter or change or 24 cause us to withdraw our report at this time. In 25 terms of being rejected by management, I would -- I 0064 1 would say to you on the record that in terms of 2 coercion or undue influence or anything inappropriate 3 or untoward like that, absolutely not. That did not 4 occur. So we stand by exactly what we said. So I 5 would -- I would like to counter that comment or 6 statement. 7 CHAIRMAN CLOWE: So, if I might? 8 COMMISSIONER COX: Please. 9 CHAIRMAN CLOWE: This is your subject. 10 COMMISSIONER COX: Please. Go ahead. 11 CHAIRMAN CLOWE: The article I read, I 12 think the reporter said that they had a copy of a 13 ghost report that was critical of the reorganization, 14 if I'm remembering that correctly. 15 MR. WILKES: If I remember that 16 correctly also, Mr. Chairman, the -- the article 17 refers to a quote/unquote draft. 18 CHAIRMAN CLOWE: Yes. 19 MR. WILKES: And as best I can tell, 20 the -- there are comments -- I think the 21 characterization of that as a draft report is 22 inaccurate. It did not rise to the level of a draft 23 report. As I -- 24 MR. HOLTZMAN: Essentially that was a 25 draft work paper, and as Carlton had outlined in our 0065 1 process, the -- the process that we use is to 2 formulate a hypothesis regarding a situation and then 3 review that situation or hypothesis with management 4 for their input. Subsequent to that draft work paper 5 being developed, we had the opportunity to discuss 6 that situation with management. And we were shown 7 evidence of minute meetings or minutes of meetings, 8 rather, for the reorganization team over a span of 9 five months. We were also shown evidence that the 10 reorganization plan had been presented to the 11 Commissioners, that the Commissioners had contemplated 12 that plan before implementation for a period of about 13 six weeks. We were satisfied at that point that 14 reasonable due diligence had been followed in 15 developing the reorganization plan. However, we did 16 suggest that the situation be evaluated in a period of 17 six months time as the reorganization unfolded. 18 CHAIRMAN CLOWE: So let me ascertain 19 that I'm understanding this correctly. The management 20 at the Lottery Commission undertook a reorganization 21 that affected a number of divisions. It impacted the 22 Security division perhaps to a greater extent than any 23 other division. You conducted your audit of the 24 security division and took that subject up as part of 25 your task. 0066 1 MR. HOLTZMAN: Correct. 2 CHAIRMAN CLOWE: It was clear to you 3 that there was a significant change taking place 4 there, and you expressed some thoughts, some issues 5 that you must have had in your mind in a draft at that 6 time. 7 MR. HOLTZMAN: One of our professionals 8 summarized the situation and presented it in a draft 9 work paper, not a draft report. 10 CHAIRMAN CLOWE: And at that time, you 11 discussed that draft paper with management and covered 12 issues which were covered in that draft -- 13 MR. HOLTZMAN: Absolutely. 14 MR. WILKES: Yes, sir, that is correct. 15 COMMISSIONER COX: Mr. Chairman? 16 CHAIRMAN CLOWE: Yes, sir. 17 COMMISSIONER COX: Mr. Holtzman and 18 Mr. Wilkes, is that the same memorandum that you 19 discussed with me, as well, in a meeting that I 20 attended with Ms. Melvin, Counsel, and perhaps 21 management? 22 MR. HOLTZMAN: Yes, it is. 23 COMMISSIONER COX: So we're not talking 24 about something that management suppressed and kept 25 from the board, because I knew about it. 0067 1 MR. HOLTZMAN: Absolutely not. 2 COMMISSIONER COX: In fact, when 3 Ms. Melvin became aware of it, and when Counsel became 4 aware of it, they made sure I got a copy, and we asked 5 you and your staff for a meeting. And we met with you 6 the next day, and we discussed this at great length. 7 And you explained to us that it was a hypothesis put 8 forward by one -- a member of your staff and that 9 after study and discussion with management and with 10 me, you had concluded that it was inappropriate for 11 any conclusion in your report? 12 MR. HOLTZMAN: That is correct, 13 Commissioner Cox. 14 MR. WILKES: And if I might add, there 15 was no suppression. We did -- we did not perceive 16 or -- to be suppressed at all. 17 COMMISSIONER COX: And there was 18 certainly none intended. I was -- I was there for the 19 purpose of -- of trying to find out, hey, what is this 20 concern -- let's be sure that we're moving in the 21 right direction. 22 MR. HOLTZMAN: Correct. And the 23 situation, as you will recall -- and I think we stated 24 this at -- this at that time -- was that we were 25 unable to audit that situation because it basically 0068 1 was unfolding right before our eyes. 2 MR. WILKES: We -- if I might -- might 3 add some comments which I have extracted from the 4 report and summarized here, ever so briefly. We 5 pointed out that the reorganization included a 6 reduction in force that may have impacted some 7 security functions. We pointed out that it was 8 impossible to determine the full impact of the 9 organization changes at the time of our security 10 review. We did recommend that the Texas Lottery 11 Commission conduct an independent post-implementation 12 audit approximately 180 days from the reorg date. 13 This would help ensure that -- that an effective 14 reorganization is satisfactorily implemented and that 15 appropriate security of the lottery is maintained. 16 And that was probably the single most 17 important recommendation regarding the -- the 18 reorganization that we -- we could make to you, and we 19 brought it forward. And those comments were verbatim, 20 not only in the public report, they're in the 21 confidential report as well. 22 CHAIRMAN CLOWE: Okay. I want to -- I 23 want to go back and state again my understanding that 24 no such ghost report, then, that said this was a 25 serious problem or was going to damage the security of 0069 1 the Commission, exists? 2 MR. HOLTZMAN: Correct. 3 CHAIRMAN CLOWE: I would like to 4 reaffirm what Commissioner Cox has said. He has 5 indicated to you that he reviewed the reorganization 6 and a draft of your audit. I, in fact, did not review 7 your draft of the audit you had at the point in time 8 you reviewed it with Commissioner Cox. But, in 9 fact -- and I think you just stated -- you were told 10 that I was aware of the plans to reorganize the 11 divisions in this Commission, and I want to affirm 12 that I was aware of it, that it had been covered with 13 me in some detail, and I approved of it. It was an 14 effort to reduce the expenses of this Commission, and 15 therefore to the State of Texas. And I thought it was 16 a proper move. I expressed concern and interest at 17 the point in time I reviewed it regarding the 18 protection of the security functions of the 19 Commission. Those positions which were eliminated, in 20 my view, were unnecessary, and in many cases they were 21 redundant or not productive. And I expressed that 22 concern. I continue to express that concern. I think 23 I expressed that in the meeting when the organization 24 was -- reorganization was discussed. And I think the 25 idea of a follow-up audit, which you have recommended, 0070 1 is prudent and should be followed. 2 Has anything happened since you 3 performed your audit that has changed your position in 4 regard to this matter? 5 MR. WILKES: I think that's an 6 excellent question, Mr. Chairman, and I would state 7 for the record that even in light of reading what I 8 believe to be most if not all the press reports out 9 there, nothing has come to my attention. Certainly 10 nothing has come to the attention of our team 11 collectively that would change us to alter, withdraw, 12 or change our overall opinions or our report. And for 13 the record, we -- we stand as -- as we did in January. 14 CHAIRMAN CLOWE: Has anyone associated 15 with this Commission contacted you in an effort to 16 influence your audit during or after, in light of the 17 publicity that it has received? 18 MR. WILKES: No, sir, absolutely not. 19 Not to my knowledge, no, sir. 20 MR. HOLTZMAN: Yeah. And -- and I go 21 along with that. There has been no such contact. 22 CHAIRMAN CLOWE: Okay. I just want to 23 make it clear. In my mind, this was an arm's length 24 audit, and it was of an ongoing and unfolding, as you 25 characterized it, organizational change, and that you 0071 1 expressed concern to a point that you thought a 2 follow-up audit would be appropriate. I think that 3 was good advice. But you did not report in your 4 audit, either to us publicly, you haven't had any 5 private conversations with anybody in this agency 6 expressing any concerns. 7 MR. HOLTZMAN: Correct. 8 MR. WILKES: That is correct. 9 CHAIRMAN CLOWE: Well, see, that's not 10 the characterization that I have been reading in the 11 newspaper. And I appreciate, under this notice, the 12 opportunity to delve into this with you and to 13 understand it. 14 Commissioner Olvera, do you have any 15 comments. 16 COMMISSIONER OLVERA: I can only concur 17 that I was adequately informed, prior to the 18 reorganization, as to what was contemplated. Staff 19 kept me up-to-date. And with respect to anything 20 having to do with -- with your firm or the auditing 21 process, I've never had any contact with you 22 whatsoever. And even if I did, it would not be to 23 change your report. As my fellow Commissioner likes 24 to say, let the -- let the light shine in. I think 25 that's what we have. 0072 1 CHAIRMAN CLOWE: Anything further? 2 COMMISSIONER COX: At such time as we 3 get to providing guidance for management, I have some 4 thoughts, but nothing further on the Jefferson Wells 5 report. 6 CHAIRMAN CLOWE: We thank you again for 7 being here. We thank you for your report. You've 8 heard where we are regarding a follow-up audit. And 9 again, we appreciate your attendance and your answers 10 to us here this morning. 11 MR. HOLTZMAN: Thank you for the 12 opportunity to clarify the situation. 13 MR. WILKES: You're very welcome. 14 Thank you, sir. 15 CHAIRMAN CLOWE: Thank you. Thank you, 16 Catherine. 17 Ms. Nettles, you filed a Witness 18 Affirmation Form, and you just said, security. Is 19 this the subject that you wanted to comment on? 20 MS. NETTLES: Yes, sir. 21 Good morning, Commissioners. For the 22 record my name is Dawn Nettles, and I'm with the Lotto 23 Report out of Dallas. 24 And I have just a few comments that I 25 would like to make and questions that I would like to 0073 1 put before the Commission with regard to the security 2 audit and the entire security issue. If you all will 3 recall, back in January, I voiced a very -- I was 4 vocal. I was really opposed to doing away with 5 security. And I was opposed to that because when the 6 lottery was started back in 1992, security was the 7 core of the entire lottery. John Sharp, when he -- 8 when he did this, he told us that under no 9 circumstances would security ever be in jeopardy 10 because it was the most valuable asset that the 11 Commission had. So when they did the reorganization, 12 I was really opposed to no security. And, of course, 13 back then I listed a bunch of reasons on why. If -- 14 there -- there was just recently an employee indicted. 15 Had it not been for security -- she was scamming 16 retailers. Had it not been for security, that 17 wouldn't have been caught. The -- from the company, 18 for Jefferson Wells, who completed this report, as 19 they were talking, I had some questions in my mind, 20 and I was hoping you all would ask them, like, for 21 instance, the -- the notes that their staff compiled, 22 their -- their -- all their notes. One person took 23 all those people's notes to do their report from. And 24 I'm just wondering if those notes are available to the 25 public, if they will open those up to see what was 0074 1 covered. What was the experience of the person who 2 completed that report who took the auditor's findings 3 and compiled them into the report. 4 I would also be interested to know, 5 what review did Jefferson Wells do on the committee -- 6 the security committee. Y'all remember the security 7 committee that was in place a couple of years ago 8 before the reorganization? There was a committee in 9 place. God, I just went blank on everybody who was on 10 it, but there was -- to -- to improve the functions of 11 security. And there was a committee that -- that met 12 every month. And I believe one of you all even -- it 13 was people here, and there was supposed to be an 14 outside person from another agency come in that was to 15 serve on that committee. But I was just wondering 16 what impact the committee had on Jefferson Wells' 17 report. I went back trying to find in Commission 18 meetings where there was ever any testimony given to 19 the Commissioners about -- from the security 20 committee, and I never could find any. So I didn't 21 understand that either. 22 But also, with regard to the security 23 audit, I wonder if Jefferson Wells is aware of the 24 security contract that was signed this year versus 25 last year with Scientific Games, and -- and did a 0075 1 comparison. And I also am curious to know if -- in 2 the security report, if the cost-benefit analysis was 3 reviewed to the savings to the State, which was best, 4 if this was also covered. 5 So these are questions that I have that 6 I would like to just put on the record because 7 security, to me, is the single most important thing 8 here. They had a huge job. They were necessary, and 9 they were needed. And this agency needs it for public 10 integrity for -- you know, if for no other reason but 11 to -- to show. 12 I was opposed to no security being in 13 the drawing center, the drawing studio. I -- I felt 14 like that was just something really bad. But, of 15 course, at the time that this reorg was done, you all 16 were planning to go to computerized draws, so it was 17 going to be a savings to you. 18 But, anyway, I had these questions and 19 comments, and I hope you'll consider them and check 20 into them. 21 CHAIRMAN CLOWE: Thank you, 22 Ms. Nettles. 23 Next, item three, report, possible 24 discussion and/or -- 25 COMMISSIONER COX: May I? 0076 1 CHAIRMAN CLOWE: Yes. Certainly. 2 COMMISSIONER COX: Did -- did we 3 provide guidance to management on their question about 4 what they should do about this delay or -- 5 CHAIRMAN CLOWE: We did not, and I 6 thought that was going to come under the acting 7 executive director's report. Maybe I'm on the wrong 8 track there. 9 MR. GRIEF: I believe I really need 10 that guidance on -- under this item, Mr. Chairman. 11 CHAIRMAN CLOWE: At this time. 12 MR. GRIEF: Yes, sir. 13 COMMISSIONER COX: Okay. Catherine, 14 I -- I guess maybe the right order of things would be 15 for you to hear from the State Auditor as to whether 16 they're going to do anything on an interim basis as to 17 the follow-up, the 180-day follow-up of, was the 18 security reorganization -- did it work out as well as 19 it was planned. 20 MS. MELVIN: I think -- 21 COMMISSIONER COX: Please. 22 MS. MELVIN: I'm sorry. In -- in 23 normal circumstances, I would say, yes, but I think 24 since the passage of this new requirement that 25 agencies, in writing, request the delegation of 0077 1 authority, I think it might be best if we, on 2 record -- if it's the Commissioners' wish that we do 3 this, but that we send a letter to Mr. John Keel, 4 requesting such a review be performed, and that we -- 5 the way the law is worded, we must request a 6 delegation of authority. So that would contemplate 7 that we would actually use our resources and contract 8 for such a review to be performed, and let the State 9 Auditors answer, on record, whether or not they will 10 grant us that delegation of authority, or if they 11 prefer that we hold off until they come and do their 12 formal review. 13 COMMISSIONER COX: Mr. Chairman, I -- I 14 want to say that I share anybody's concern about the 15 adequacy of security, and I don't care who it is. 16 That's a primary issue here. And the integrity of the 17 lottery is all we have. And anytime our security is 18 brought into question, I think we should take whatever 19 action we can to inform ourselves as to whether those 20 questions are appropriate questions that we should be 21 addressing. And I would urge that Catherine or you, 22 as you consider appropriate, ask the State Auditor to 23 consider this 180-day review that was recommended as 24 soon as possible, and either perform it, engage 25 Jefferson Wells to perform it, or engage a third party 0078 1 to perform it. 2 CHAIRMAN CLOWE: Well, now, I -- I 3 think you're exactly right, and I don't think we need 4 anything more than the indication you're getting from 5 all three Commissioners at this time that we want that 6 to proceed. So I don't think it requires a motion or 7 a vote. I think you're getting a strong impression, 8 based on the comments. And, I mean, Commissioner 9 Olvera, I want to give you the opportunity if you want 10 to say anything in addition to what Commissioner Cox 11 has said. 12 COMMISSIONER OLVERA: I -- I concur 13 with what Commissioner Cox has said. Obviously, 14 security is -- is of the utmost priority to this 15 Commission. I think, with respect to some of the 16 comments Ms. Nettles said, I think she and her -- with 17 respect to those comments, I think they in -- in and 18 of themselves answered why we reorganized security. 19 In this day and age, the security has to concentrate 20 on the high technology and administrative issues that 21 are before this agency. And it's not the petty theft 22 of -- of the draw cards that -- that is of the utmost 23 priority. It's the high profile, high technology 24 crimes, which was the main reason, as I recollect, as 25 to why security was reorganized. So any -- any input 0079 1 that we can give to -- to facilitate the expediency of 2 that -- of that audit, I would encourage. 3 CHAIRMAN CLOWE: So there you have it, 4 Catherine, direct from the Commissioners. And, Gary, 5 although I think Catherine is designated as the 6 contact with the State Auditor's Office, you have your 7 direction from the Commissioners as well. 8 MR. GRIEF: Yes, sir. I -- one other 9 question, if I could. 10 Catherine, when does the contract with 11 Jefferson Wells expire? 12 MS. MELVIN: The contract with 13 Jefferson Wells expires at the end of this month, 14 8-31. So I -- I don't think we would -- or I 15 wouldn't -- that might be a question for our counsel, 16 but I -- I don't see that we might be able to utilize 17 that contract. 18 MR. GRIEF: So we would probably be in 19 a situation, if we were to receive delegation of 20 authority from the State Auditor's Office, where we 21 would need to go out on a normal procurement for a 22 firm to do that particular study? 23 CHAIRMAN CLOWE: It would have to be 24 rebid. 25 MR. GRIEF: Yes, sir. 0080 1 CHAIRMAN CLOWE: That's the way it 2 works. 3 MS. MELVIN: That's the way it works. 4 CHAIRMAN CLOWE: But you've gotten the 5 indication you wanted from all three Commissioners? 6 MR. GRIEF: Yes, sir. 7 CHAIRMAN CLOWE: Very good. 8 COMMISSIONER COX: Just one more 9 question -- 10 CHAIRMAN CLOWE: Yes, sir. 11 COMMISSIONER COX: -- Mr. Chairman. 12 I'm sorry. 13 You said that it would have to go 14 through a normal procurement procedure. What would 15 you say if I said I think it's an emergency? Would it 16 fit the definition of emergency, as an emergency 17 procurement? I -- I think it's important that we get 18 this issue -- get input on this issue immediately. 19 CHAIRMAN CLOWE: What -- what is the 20 definition of an emergency? 21 MS. KIPLIN: There is one in the State 22 Lottery Act, and I would request that if you all will 23 listen to Andy Marker, who is the head contract 24 lawyer, he is probably better versed in terms of 25 responding to the question, can we procure this on 0081 1 the -- procure these goods and services on an 2 emergency basis. 3 CHAIRMAN CLOWE: Certainly. 4 MS. KIPLIN: Thank you. 5 MR. MARKER: Good morning, 6 Commissioners. For the record, my name is Andy 7 Marker. I'm deputy general counsel. 8 Commissioner Cox, with regard to your 9 question, the definition of an emergency under our 10 current procurement rules -- there is no specific 11 definition of the word emergency. Emergency is taken 12 in terms of the context. Typically, you think of harm 13 to the State, is there immediate and irrevocable 14 injury to the State. And, again, we would have to 15 look at the circumstances. And I would suggest 16 waiting to get the SAO's response. Typically, we've 17 considered emergencies to be damage to the building, 18 damage to the building and property, security risk, 19 things of that nature. 20 COMMISSIONER COX: Thank you. 21 CHAIRMAN CLOWE: Thank you, Andy. 22 MR. MARKER: Thank you. 23 CHAIRMAN CLOWE: Thank you, Catherine. 24 MS. MELVIN: Thank you. 25 CHAIRMAN CLOWE: Anything further on 0082 1 this item, Gary? 2 MR. GRIEF: No, sir. 3 CHAIRMAN CLOWE: Next, item three, 4 Billy, finally, the report, possible discussion and/or 5 action on the Bingo Services Center. 6 MR. ATKINS: I hope it's everything 7 you've been waiting for, Commissioners. 8 CHAIRMAN CLOWE: Me, too. 9 MR. ATKINS: You have -- we wanted to 10 give you a demonstration today of the Bingo Services 11 Center that we've been in the process of developing. 12 Commissioners, you will recall several months ago, I 13 believe, you received a presentation from Ed Rogers on 14 the Lottery Retailer Services Center. In short, what 15 the Bingo Services Center do, will provide licensees 16 and the general public with 24/7 access to some of the 17 most commonly requested bingo data. Specifically, the 18 Bingo Services Center will allow our licensees to have 19 online access to information specific to their license 20 that they currently have to call in to our office to 21 obtain. The Bingo Services Center will, therefore, 22 result in our licensees having a lot more flexibility 23 in being able to manage their business. It will also 24 allow licensees, as well as the general public, access 25 to commonly requested reports that currently are 0083 1 obtained through our Open Records staff. And, 2 finally, it will provide the public with a charitable 3 bingo hall locator service, using a very robust search 4 feature. 5 We started beta testing with production 6 data and some of our actual licensees on August 1st. 7 We've had about a 50 percent participation rate with 8 our beta testers. We're scheduled to go live with the 9 system on September 1st. We have sent out 10 notification to our licensees that this is coming up, 11 as well as information on how to access the system and 12 how individuals can set up their personal accounts. 13 There are a number of individuals -- say, if we take, 14 for example, a conductor, a charity organization, 15 there are a number of individuals associated with that 16 licensee who will be able to log in and create their 17 own profile and access information for that 18 organization. Those include all of the officers of 19 the organization, all of the directors of the 20 organization, the organization's primary operator. 21 And another feature that we have put into the system, 22 the primary operator is also able to grant access to 23 other individuals that aren't necessarily on the 24 organization's record. Primarily, we anticipate this 25 being used by the bookkeepers. So an organization's 0084 1 bookkeeper will be able to access the -- the 2 information specific to that organization. Again, as 3 a management feature, that access has to be granted 4 specifically by the organization. And also, as 5 another control feature, if that individual should -- 6 should somehow be removed from that organization, it 7 will also remove all of the access that -- that that 8 individual granted. 9 So, for example, effective September 10 1st, this is what we anticipate our bingo home page 11 being like -- looking like. The big difference will 12 be these three icons here on the left. And first I'll 13 go to the Bingo Services Center. This is the log-in 14 screen. It gives information, if you're a first-time 15 user, how to sign up. We have a demo account -- if I 16 can get the user ID and password correct. This is the 17 screen that the licensees, once they log on, will 18 come -- be directed to. The specific information for 19 individuals that log on fall under these two 20 categories here, financial reports and license 21 information. This is information specific to the 22 organizations, the licensees that I've been granted 23 access to. And, for example, I'll just start off with 24 quarterly reports. We have several search features 25 that are consistent to all of the search screens. 0085 1 They can search for an individual quarter. They can 2 search for a date range. In this section here, where 3 it says, select organizations, that would be 4 applicable, again, for those individuals that have 5 access to more than one organization. I will click 6 here, and it will pull up the data as submitted by the 7 organization and entered by our division. And this is 8 from the new quarterly report form that we began using 9 effective the first quarter of this year. Another 10 feature that all of the reports will have is the 11 ability to format the information in a 12 printer-friendly form. Additionally, individuals will 13 have the ability to download this information into an 14 Excel format and -- as they want to develop their own 15 spreadsheets in the future. 16 Just real quickly, another form or 17 another report that individuals will have access to 18 that we think will be very beneficial to them is this 19 temporary license account. Organizations often submit 20 additional monies and establish an escrow account so 21 that we have that money on account. If they want to 22 submit a temporary application for a temporary game, 23 we already have the money. They will be able to go 24 here in this demo account. This organization doesn't 25 have any money, but if they did, they would be able to 0086 1 look, see what their balance is. Again, they have the 2 same options in terms of formatting or downloading, 3 but another feature that the system has is, if they 4 see they do have money and they want to go ahead and 5 submit a temporary application, we have a link to take 6 them directly to that form, which is in an interactive 7 format. And we have the same kind of information 8 available for both temporary licenses as well as 9 amendments. And those are some of the most common 10 contact that we have with licensees having to call in 11 to us and obtain this information, and they'll be able 12 to get it directly off the Internet, off our Web site. 13 Some of the specific license 14 information will provide detailed information that we 15 have on the organizations, on our system. They'll be 16 able to look at it, confirm it's correct. If not, 17 contact us to get that information. Also, something 18 else that they will have -- I'll go back and mention 19 again the temporary licenses. This system will let 20 them know how many temporary licenses they have used 21 in the past and how many that they have left, again, a 22 common question that we get. This demo account would 23 show that this organization has used one temporary 24 license, and, therefore, they have 11 left. 25 If I go back to our home screen and 0087 1 click on the statewide reports, if you had clicked on 2 the icon on the home page that said statewide 3 reports -- I'm going to try and pull that up real 4 quick -- it will take you to a screen that just lists 5 that information that's available through the 6 statewide reports. Again, these are the reports that 7 we most commonly receive through Open Records 8 requests. Again, the general public will have access 9 to this. They will be able to, again, either print 10 out the information or, if they want to, download the 11 information. That way they will have it themselves. 12 Some of the useful reports on there are summary 13 information of quarterly report information that we 14 file. Again, now the organizations will be able to 15 access that directly, whatever time they want, for 16 whatever time period they're interested in. 17 The last thing that I would like to 18 show you, Commissioners, is the bingo hall locator 19 service. I -- I think you may know that we currently 20 have a system whereby individuals can call in to an 21 800 number and enter a zip code and get access to -- 22 or get information on any bingo halls in that area. 23 As I mentioned earlier, this is, I believe, a much 24 more robust search feature that we will be able to 25 make available to the general public. For example, 0088 1 I'll just search for any games in Austin that were 2 being conducted by an organization with "church" in 3 their name that are playing on a Monday. When we 4 execute the search feature, it will bring up all of 5 the organizations that fit that criteria. We'll get 6 the name of the organization conducting, the name of 7 the location where the organization is conducting, a 8 phone number for the location, the address, city. We 9 also get the day and time that they're -- that they're 10 conducting, and this will come with a mapping feature 11 so that, if necessary, the individual can look where 12 the location is, get driving directions, et cetera. 13 We've given this demonstration, 14 Commissioners, to the Bingo Advisory Committee. We -- 15 as I mentioned, we are in the process of beta testing. 16 I believe we're in our last week of beta testing. 17 Everyone that has seen the system and had the 18 opportunity to use it has been very impressed, very 19 complimentary, and is very excited about the system. 20 We're, of course, very excited about getting it up. 21 This represents a lot of work that has been done by 22 the staff in the Charitable Bingo Division, as well as 23 our Information Resources staff. Specifically, I want 24 to mention for the record, Rick Frysinger, Meagan 25 Ahmad, Michelle Bandelman, Beth Mullins, Donna Rose, 0089 1 and Terry Shankle in our office, that have put in a 2 lot of work to identify these reports, get them 3 formatted, and also do a lot of testing that went into 4 this system before we even took it forward to our beta 5 testers. 6 And I would be happy to answer any 7 questions that you may have. 8 COMMISSIONER COX: Mr. Chairman, I 9 don't have a question. It was on my shift at the 10 Bingo Advisory Committee when Billy presented this, 11 and it was very enthusiastically received. 12 CHAIRMAN CLOWE: Very impressive. How 13 many hits a day are you getting on the Web site, 14 Billy? 15 MR. ATKINS: I don't recall that 16 information specifically off the top of my head. I 17 would have to ask Mike Fernandez and our information 18 resources staff to pull that up. 19 CHAIRMAN CLOWE: Do you have that 20 information, Mike? 21 MR. FERNANDEZ: No, sir. I -- I can 22 get it for you. 23 CHAIRMAN CLOWE: If you would, later 24 today perhaps give the Commissioners that information, 25 and let's chart that over a period of time and see 0090 1 what our returns are. 2 MR. ATKINS: I mean, I can tell you, 3 for example, that we do have regular users. Because 4 the one item that comes to mind, when we began the 5 process of developing the bingo forms and applications 6 in an interactive format, we had no longer had our 7 first forms up there for about an hour, then we 8 started getting calls from licensees, complimenting 9 that. 10 CHAIRMAN CLOWE: That's great. Any 11 questions? 12 Thank you, Billy. 13 MR. ATKINS: Thank you, Commissioners. 14 CHAIRMAN CLOWE: Next, we'll move to 15 item number four, consideration, possible discussion 16 and/or action on Lotto Texas on-line game, including 17 proposal of amendments and/or new rule and/or repeal 18 of existing rule and/or procedures. Mr. Grief. 19 MR. GRIEF: Commissioners, today staff 20 is presenting you with a proposed rule amendment for 21 your consideration relating to the Lotto Texas on-line 22 game. At the last Commission meeting, the Commission 23 expressed a desire to provide that the jackpot prize 24 winner would receive at least the amount advertised 25 for all drawings. One approach that was considered 0091 1 was that in the event that sales did not support an 2 advertised jackpot and an apparent winning ticket was 3 sold, any shortfall between the jackpot amount that 4 sales would support and the advertised jackpot would 5 be covered by the direct prize category, the indirect 6 prize category, the prize reserve fund, and if the 7 need arises, from other sources, including the State 8 Lottery Account, which is identified in Section 9 466.355 of the Texas Government Code. 10 There was also direction received from 11 the Commission to take another look at how funding the 12 advertised jackpot could occur in the event that sales 13 were to fall significantly short of the required 14 advertised amount for any reason. And I believe we 15 have resolved those issues by putting into the draft 16 rule in front of you today, clear language that the 17 Commission will pay the advertised jackpot, using 18 available funds from the sources that I previously 19 mentioned, the direct and indirect prize category, the 20 prize reserve fund, and other authorized sources, 21 including the State Lottery Account. 22 I understand from our Financial 23 Administration department that the State Lottery 24 Account conservatively maintains a minimum balance of 25 approximately 35 million dollars. And that's based on 0092 1 that point in time each month before and after we make 2 our monthly transfer to the Foundation School Fund. 3 And based on the current interest factor, that balance 4 would cover more than a 50 million dollar shortfall 5 between sales and an advertised jackpot, an amount 6 that should be sufficient. 7 The amendments also clarify the amount 8 actually paid for the jackpot prize as either a 9 winner's share of the advertised jackpot or the 10 winner's share of the jackpot based on sales, 11 determined in part by prevailing market rates. 12 The amendments also require the 13 information associated with each jackpot estimation 14 and any amount that would be paid to a jackpot winner 15 be posted to the agency's Web site. The Commission 16 directed staff to put that information in place 17 immediately after our last Commission meeting, and 18 that has been done. And I want to recognize Ms. Dawn 19 Nettles for her assistance in helping me to format 20 that information appropriately. 21 Another concern expressed by the 22 Commission was that jackpots be estimated in a most 23 conservative manner. In the proposed rule before you 24 today, the amendments require the Commission to 25 develop internal procedures intended to ensure that 0093 1 advertised jackpots are based on a conservative 2 projection of sales. And this is stated in Section 3 401.305(b)(1) of the proposed rule. And I'll have 4 more to say about the matter of conservative jackpot 5 estimation under item number five in the Commission 6 meeting today, regarding procedures. 7 Finally, there is clarification in the 8 amendments that specifies that all information 9 relating to the cost of securities used to pay jackpot 10 prizes is obtained from the Texas Treasury Safekeeping 11 Trust Company. 12 I want to remind the Commission that 13 staff used today's proposed amendment as a short-term 14 solution to the overriding issue of how to eventually 15 change and improve the Lotto Texas game. And we 16 anticipate -- and we anticipate additional proposed 17 changes to the Lotto Texas game in the near future, 18 including addressing any additional concerns that have 19 been raised by the Commission in recent meetings. 20 That concludes my comments, and I would 21 be happy to answer any questions. 22 CHAIRMAN CLOWE: Questions? 23 COMMISSIONER COX: I can't -- 24 MR. GRIEF: Would you like the lights 25 back on? 0094 1 COMMISSIONER COX: Thank you. 2 Well, Gary, I have read the proposed 3 rule, and I must say that you did what we asked you to 4 do, and that was, revise the present rule. If I had 5 realized the magnitude of that task, I would have 6 suggested that you throw it away and rewrite it or 7 write a brand new one. Given that you did follow the 8 instructions that we gave you and you have worked to 9 amend it, I just have a few questions. 10 MR. GRIEF: Certainly. 11 COMMISSIONER COX: The first question I 12 have relates to the conservative projection of sales. 13 Now, I know that you have received guidance from this 14 Commission that as we go forward under the rule as it 15 exists today, not the proposed rule, that you make 16 conservative estimates of sales. And I think that's 17 totally appropriate because, right now, under the 18 existing rule, the public has no protection against 19 our advertising sales that are greater than we can pay 20 and, gosh, we're sorry, but we just couldn't pay it. 21 Now, under the rule as you propose it, 22 the consumer would have that protection because the 23 consumer would be entitled to either the greater of 24 jackpot based on sales or the advertised jackpot. So 25 I think then we get back to a posture of wanting to 0095 1 have a very middle-of-the-road approach because now 2 the consumer has this protection, but the school 3 children of Texas need their protection, and that is 4 that we're not under-advertising what the jackpot is 5 by any significant amount and, thus, minimizing or 6 detracting from the appeal that the prize actually 7 has. So having said all that, I think that in this 8 rule, rather than conservative, something like fair 9 and reasonable would be a more appropriate standard 10 for the estimation process. 11 Now, my second comment relates to a -- 12 a -- a statement about halfway down on page one. And 13 this is a question. I'm just confused here. This 14 sentence starts, additionally, the amendments provide. 15 Do you see that one? 16 MR. GRIEF: Yes. 17 COMMISSIONER COX: It says: 18 Additionally, the amendments provide that if 19 insufficient funds exist to pay the advertised 20 jackpot, the Commission shall include funds from other 21 authorized sources. 22 So that is what you made as one of your 23 points up here, that if there is not enough money 24 generated from a percentage of sales, then it can, in 25 turn, go to reserve funds and even to appropriated 0096 1 money. 2 MR. GRIEF: The State Lottery Account. 3 Yes, sir. 4 COMMISSIONER COX: Okay. And, Counsel, 5 it's your opinion that that is within our authority to 6 make a rule doing that? 7 MS. KIPLIN: Commissioner, I think you 8 had the clear authority to access the funds in the 9 State Lottery Account. But what -- I think an 10 argument could be -- could be raised under the 11 existing rule that you limited your own authority by 12 the way that you draft -- by the way this rule is 13 currently written. The State Lottery Account, all -- 14 all monies go into that, and the first purpose for the 15 account is to pay prizes. 16 COMMISSIONER COX: Then, Gary, I've got 17 a lot of things that we could talk about, but they're 18 not relevant for this discussion. I -- I have one 19 more question. And this is on page eight. The third 20 line says, the indirect prize category contribution, 21 comma, which may be increased by the Executive 22 Director. Now, what authority does that -- precisely, 23 give me a -- tell me a story about what authority that 24 would give you, as Acting Executive Director, to 25 change anything. 0097 1 MR. GRIEF: My understanding of that 2 particular -- particular language, Commissioner, is 3 that, in general, that refers to the use of the prize 4 reserve fund. But it may provide clarification for 5 the Commission if we strike that. I will ask counsel 6 to comment on that, but I believe if we strike that 7 clause that says, which may be increased by the 8 Executive Director, I'm not sure that that puts us in 9 a -- in -- in a dangerous situation. So I'll ask Kim 10 that question. 11 COMMISSIONER COX: And I don't know 12 what it is intended to address, but if it is intended 13 to address the authority to go into the reserve fund 14 and, in turn, appropriated funds, that seems to be set 15 out adequately on page one. And I would hope that we 16 could do what you just said. If that's -- if that's 17 all it does, let's take it out and be sure that 18 somebody doesn't confuse it with doing something else. 19 MR. GRIEF: And our Financial 20 Administration folks may want to -- Ben may want to 21 comment on that as well. 22 MR. NAVARRO: Good morning, 23 Commissioners. For the record, my name is Benito 24 Navarro. I'm the acting Financial Administration 25 manager. 0098 1 I don't -- you know, I concur with the 2 comments. I just -- you -- you asked if -- if there 3 was a story that we -- that could be told, and I think 4 at one time -- and correct me if I'm wrong, Kim -- the 5 executive director had the -- or still has the 6 authority to increase the jackpot amount in -- in 7 special situations. And -- and that could be, you 8 know, if we were running a promotion, you know, a 9 20-year anniversary or a 15-year anniversary, and, you 10 know, we felt like we could, you know, increase the 11 jackpot about 5 million dollars by taking money from 12 the prize reserve fund, you know, that that would be 13 allowed under, you know, this -- that authority would 14 be given under this section. So -- and I believe at 15 one time that was done. I -- I wasn't here when that 16 happened, but I -- I've heard that the jackpots were, 17 in fact, increased by pulling money out of the reserve 18 and saying, well, you know, because it's our 10-year 19 anniversary, we're going to, you know, roll this 20 jackpot to 50 million rather than, you know, 47 21 million for this anniversary roll. So that -- I -- I 22 can see that -- that language, you know, coming into 23 play in that situation. But given that other language 24 has been added to the rule, I don't know see why 25 that -- striking that from -- from the rule would 0099 1 affect anything. 2 COMMISSIONER COX: Okay, Mr. Chairman. 3 CHAIRMAN CLOWE: Gary, there has been 4 some conversation in the past about advertising what 5 the payout would be on a cash basis. Was that 6 considered in these proposed rules? 7 MR. GRIEF: No, sir, it was not. 8 CHAIRMAN CLOWE: What is our position 9 on that, if we have one? 10 MR. GRIEF: Mr. Chairman, I believe 11 that would be a policy issue for the Commission. I 12 will tell you that that would not be the industry 13 standard. The industry standard across the country is 14 to advertise the annuitized jackpot amount. 15 Obviously, there are marketing reasons for doing that, 16 but I will go back and if the Commission feels 17 strongly in -- in that regard, I think that -- that is 18 a policy issue. 19 CHAIRMAN CLOWE: Commissioners, do you 20 have any thought about that? 21 COMMISSIONER COX: My -- my immediate 22 thought, Mr. Chairman, would be that it would be 23 taking a double barrel shotgun and pointing it at both 24 feet, not because it might not have been a good thing 25 to do at the beginning for the industry back in the 0100 1 '60s when this industry began, but because it wasn't. 2 And we didn't take that action initially, and I don't 3 think the public would ever adjust. 4 COMMISSIONER OLVERA: Would it be 5 viable to advertise -- would it be viable or 6 conceivable to advertise two different jackpot 7 amounts, cash value versus... 8 MR. GRIEF: Commissioner, I think that 9 would be confusing at the least. 10 COMMISSIONER OLVERA: It -- it would be 11 difficult, I understand that. 12 MR. GRIEF: Logistically, it would -- 13 I -- I think about our billboards, about the amounts 14 that we put out on the LED read-out terminals at the 15 locations. I think there would be significant 16 logistical issues to overcome in that regard. 17 COMMISSIONER OLVERA: And I can see how 18 that would be. 19 CHAIRMAN CLOWE: I -- I think you're 20 right, Commissioner Cox, and I -- I really want to 21 just raise this issue, or I want to raise this issue 22 so the Commission can think about it and make a 23 determination how they feel about it. 24 You say it's not the industry practice, 25 Gary. Do you have research to that effect? Are there 0101 1 any states doing this? 2 MR. GRIEF: I'm not sure, Mr. Chairman, 3 and we would be happy to do that research and bring 4 that back before the Commission. Anecdotally, I -- 5 I'm not aware, but there may be one out there that 6 does something like that. 7 COMMISSIONER OLVERA: For some reason, 8 Ohio comes to mind, Mr. Chairman. 9 CHAIRMAN CLOWE: Okay. Well, I think 10 it's -- Commissioner Cox, will that be all right with 11 you? 12 COMMISSIONER COX: Yes, sir. 13 MR. TIRLONI: May I make a comment? 14 CHAIRMAN CLOWE: Yes, you may. 15 MR. TIRLONI: For the record, my name 16 is Robert Tirloni. I'm the Products manager for the 17 Texas Lottery. 18 Commissioner Olvera, you are correct. 19 Ohio -- what Ohio does is they provide the cash value 20 amount on their -- on their Web site. And we have 21 started providing the cash value option on our Web 22 site also as part of this new process that Gary talked 23 about, posting our estimation worksheet. There is a 24 page that you go to that you can then link over to our 25 estimation worksheet, and on that page we are 0102 1 providing the -- the cash value option amount at this 2 time. 3 COMMISSIONER COX: So Ohio -- now, Ohio 4 has done away with their lottery game, haven't they? 5 MR. GRIEF: They're in the process. 6 MR. TIRLONI: They're in the process of 7 doing that. 8 COMMISSIONER COX: Okay. But if they 9 still have billboards, they're advertising the future 10 value of the annuity, and there is access only on 11 their Web site for the cash value. And you're telling 12 us, our customers have the same opportunity? 13 MR. TIRLONI: I believe that's correct, 14 yes. 15 COMMISSIONER COX: Thank you. 16 CHAIRMAN CLOWE: Okay. I -- I want to 17 have us look at all the possibilities and make, as I 18 say, a conscious decision in light of the occurrence 19 that took place here a couple of months ago. The 20 spirit is full disclosure and an understanding of the 21 game, eliminate surprises, and be forthcoming with 22 information. And I agree with you, Commissioner Cox, 23 the -- there is a -- certainly an obviously good 24 reason why you don't advertise the smaller number; you 25 advertise the larger number. And that's where I think 0103 1 we are. But I think it would be nice to know, with an 2 affirmation from a study of all the other states. 3 And how is the procedure working, Gary, 4 where we instituted a couple of months ago having a 5 Commissioner sign off on the advertised jackpot, and 6 we have been doing that now with Catherine's 7 involvement. Commissioner Cox is the designated 8 Commissioner. And when he was out of the state for a 9 time, I signed off on it. What is your sense of how 10 that is working? 11 MR. GRIEF: I think the process is 12 working smoothly. I -- I would defer to Catherine, 13 but I don't believe that it's been difficult to obtain 14 Commissioner approval for that. I think we're getting 15 those done in a timely manner, getting that 16 information posted to the Web site, in general, prior 17 to the end of the day each day. 18 CHAIRMAN CLOWE: Do you have anything 19 to add, Catherine? 20 MS. MELVIN: No. 21 CHAIRMAN CLOWE: Commissioner Cox, 22 anything? 23 COMMISSIONER COX: No. I -- I've 24 enjoyed participating in the process. I thought it 25 was going to be a burden, but it turns out that there 0104 1 is a good deal more going on in the estimating process 2 than one might think. An example this last week, 3 between -- Gary will correct me if I get this wrong -- 4 but between Friday and Wednesday, the interest rate 5 went south on us, or the factor did. And then we 6 realized that, you know, it can fluctuate enough in 7 two or three days that we need to not just use the 8 last factor we used on the previous computation. We 9 need to put some windage on that for what has happened 10 in the bond market in the last two or three days since 11 then, which we did in our last estimation. And we're 12 working on a method for formalizing that windage that 13 we're going to put on that interest rate factor. So I 14 think it's been a very productive thing for me. 15 CHAIRMAN CLOWE: Very good. 16 MR. GRIEF: And, Commissioner, I've 17 got -- I'm -- I'm going to give a detailed report on 18 that particular situation under item number five, for 19 the benefit of all. 20 COMMISSIONER OLVERA: And, Gary, does 21 that entail some kind of merit formula, something 22 to -- with respect to what we've addressed in the 23 past? 24 MR. GRIEF: I'm learning, Commissioner. 25 It's not -- I think we have some more work to do, and 0105 1 Commissioner Cox has been gracious enough to -- to 2 help me. And we're working through that process still 3 to try to understand a better way, not just to 4 anticipate sales, which we think we do a pretty good 5 job of, but changes to the interest factor. And 6 that's the -- that's the more complex calculation, at 7 least for me at this point in time. 8 COMMISSIONER COX: And, Commissioner, 9 last week Gary arranged a meeting for a number of 10 members of his staff and a representative of the Texas 11 Treasury Safekeeping Trust Company. And he invited me 12 to attend that meeting, and we got a good presentation 13 on how they purchase the annuity over there, or 14 actually the 25 different strips that they purchase to 15 fund the annuity. He talked about what happens with 16 changes in the yield curve to the factor because, 17 obviously, it's not a single interest rate, it's 25 18 years worth of interest rates. And what Gary and I 19 have talked about is developing a formula, just as you 20 said, that would incorporate perhaps the Treasury bill 21 rates, the ten-year Treasury rate, and the long 22 Treasury rate, and set up a formula that is best fit 23 to a historical matching to this factor that the 24 Comptroller's Office provides us with, so that we 25 could look at changes on a two- or three-day basis and 0106 1 have a good feel for what it's going to do to the 2 factor. 3 CHAIRMAN CLOWE: Very good. 4 Ms. Nettles, did you wish to make a 5 comment on this item? Would you come forward, please. 6 MS. NETTLES: Good morning, 7 Commissioners. Again, I'm Dawn Nettles from the Lotto 8 Report. 9 I just have a few comments that I would 10 like to make. With regard to the rule, this is a 11 suggestion because the way I interpret the way that 12 it's written, it says, the amendments also clarify the 13 amount actually paid from the jackpot prize as either 14 a winner's share of the advertised jackpot or the 15 winner's share of the jackpot based on sales, comma, 16 in part by prevailing market rates. 17 This is an issue that I brought up a 18 number of years ago because, for the life of me, I 19 have no idea what the rates have to do with the 20 percentage in the prize pool. And I wish that it 21 would be made very clear in the rule that the winner 22 will receive the greater of either the advertised 23 amount or the amount in the prize pool. The rates 24 have nothing to do with that 39.104 percent of sales 25 or whatever the figure is. And -- and I -- I really 0107 1 do oppose it that prevailing rates having anything to 2 do with the sales because the sales is just a 3 percentage. I am definitely opposed to this from the 4 standpoint of protecting the State, because I don't 5 think you should ever guarantee something that you 6 don't have. And I just think it's foolish. But 7 that's y'all's choice. I said this years ago. If you 8 choose to do that, then that's yours. I did remember 9 something that -- that came up that has everything to 10 do with this, too. And Gary actually called me on it 11 about a month ago. 12 COMMISSIONER OLVERA: And -- and, 13 Ms. Nettles, let me ask you a question there because 14 I -- I wanted to make sure I -- I understand what you 15 just said. Hypothetically, are you saying that if an 16 advertised amount for a jackpot is ten million and 17 sales only support nine million, that the winner 18 should receive nine million? 19 MS. NETTLES: Yes, sir. I am a firm 20 believer in -- 21 COMMISSIONER OLVERA: That -- that is 22 currently -- obviously, that's currently the law. 23 That -- that -- that is currently the scenario we have 24 in front of us, and it's my recollection that you 25 previously objected to that scenario. 0108 1 MS. NETTLES: No, sir. I've never 2 objected to it. 3 COMMISSIONER OLVERA: All right. 4 MS. NETTLES: What I objected to was 5 false advertising. That's what I objected to. I 6 believe that you have X number of dollars, the winner 7 gets X numbers of dollars, and that's how much he is 8 entitled to, and that's all he is entitled to, no more 9 and no less. I believe in truth in advertising. 10 And -- and the -- the eight million dollar jackpot 11 that you're probably referring to, that was no 12 mistake, sir. They knew they didn't have enough to 13 fund it. Okay? So there is a difference. I believe 14 that the game needs to be straight pari-mutuel, and 15 that's what I was just fixing to say about a comment 16 that Gary made to me that I made last month about the 17 California law. And I did get the answer, but I 18 failed to get back to Gary on that. There is an AG 19 opinion out in California called the -- the bank 20 gaming opinion, and the bank gaming opinion, put out 21 by the AG in the 1980s, was to protect the State of 22 California by forcing all pari-mutuel prizes. And it 23 was done that way to protect California so they would 24 have no liabilities. I feel like Texas needs to do 25 that. That's only if the -- if these games are 0109 1 pari-mutuel, that's the way it needs to be. The 2 people need to receive 50 percent of sales, at least. 3 Okay? 50 percent of the on-line games. They need to 4 receive 50 percent of sales, and we need a guarantee 5 that we are going to receive that 50 percent of sales. 6 We don't have that guarantee. This does not give us 7 the guarantee that we're receiving our share of sales, 8 and that's because they have guaranteed prizes. And 9 now you're trying to guarantee the jackpot amount. 10 That's foolish. You all have overpaid winners by a 11 hundred million dollars by doing exactly this. And 12 I -- I really do oppose it, but if y'all -- I -- I 13 want to make sure that the people receive the amount 14 in the prize pool. And I don't understand why, for 15 the percentage of sales due a winner, it -- I don't 16 understand what it has to do with any rates. So if 17 Kim could just even move that "by prevailing market 18 rates" on the advertised side and not the jackpot 19 based on sales, which is a percentage of sales, I 20 think the rule needs to specify the exact amount, 21 which is 39.104 percent. 22 So -- and I'm also opposed because you 23 haven't made a matrix change, but that's a whole other 24 issue. I'm -- I'm very disappointed that you're not 25 doing that. 0110 1 With regard to the statements that you 2 all were just talking about, about advertising the 3 cash value option, no, Commissioner Clowe, I don't 4 think you ought to advertise that amount. However, I 5 think you need a disclaimer on your billboards and 6 anywhere else that it's ten million if paid out over 7 25 years. That disclaimer is very important because 8 people really do believe that if the jackpot is 9 advertised at 20 million, and you come up here and 10 you've got 20 million to carry off with, and they -- 11 that's not the case. We all know that they -- we are 12 due a percentage of sales. It's always been that way. 13 I covered the bank gaming opinion in 14 California. If you read that, which I do have that. 15 I did not bring it with me. It's a huge, long 16 opinion. And you said something about going to the 17 Comptroller's Office yesterday -- or in the meeting -- 18 I'm sorry -- not yesterday, Commissioner Cox. What I 19 would like to know, and I've asked this Commission 20 before, and I used to get an answer on it. When you 21 win the lottery and you take the annual pay, are you 22 receiving all of the interest earned on the money 23 invested? Did they cover that when they went through 24 the 25 -- 24 strips that they buy, how they get that 25 money paid to them? 0111 1 MR. GRIEF: I can tell you, 2 Ms. Nettles, my understanding is, the prize is bought 3 the very day after a drawing, and there is no interest 4 earned that accumulates over time. If someone waits 5 179 days until that ticket expires, they come in and 6 claim it, it would be the same amount they will win, 7 whether or not they came in the first day or the 179th 8 day. 9 MS. NETTLES: Okay. I'm sorry. I -- I 10 heard you. Let me rephrase my question. I know that 11 the -- the 24 strips are purchased for a set amount 12 and a set guarantee from the zeros. Okay? What I 13 want to know is, all that comes to the Comptroller 14 each year for that security -- 15 CHAIRMAN CLOWE: I -- I'm going to 16 interrupt you at this point. I -- I think this is a 17 good discussion. I would like to have it other than 18 in a Commission meeting. 19 MS. NETTLES: Okay. 20 CHAIRMAN CLOWE: I would ask you to 21 keep your comments to the proposed rule, if we may. 22 MS. NETTLES: Okay. Okay. Well, that 23 was in relation to what Commissioner Cox said. I wish 24 that you -- 25 CHAIRMAN CLOWE: I understand. 0112 1 MS. NETTLES: Okay. My comment on the 2 rule is, I am opposed to the definition on matrix 3 change. I'm opposed to it because it does not clearly 4 state that the jackpot winner's share is a percentage 5 of sales. Okay? And it's so simple to change. If 6 you would please rewrite that to make that very clear 7 that the winner is either going to receive the amount 8 advertised or the amount in the prize pool. That's 9 without any reflection on interest rates, because the 10 amount in the prize pool has nothing to do with 11 interest rates. It's a straight percentage of sales. 12 And that's all I have to say on the rule. 13 CHAIRMAN CLOWE: Thank you, 14 Ms. Nettles. 15 Questions? 16 COMMISSIONER COX: Yes, sir. 17 Mr. Chairman, I asked Mr. Grief and Ms. Kiplin the 18 exact question that Ms. Nettles asked us. Why can't 19 it just say what the rule is. What we want is very 20 simple, and why can't it just say that. And I am 21 assured that because of the present rule and their 22 instructions to amend the present rule to this, that 23 this is about as good as we're going to get, but that 24 they, I believe, understand that we're going to start 25 with a clean sheet of paper and try to say for the 0113 1 next rule, just in plain English, what the deal is. 2 CHAIRMAN CLOWE: Okay. So my sense of 3 your comment is that you don't object to publishing 4 this rule for comment, which is I think the request 5 from staff at this point. But this is a short-term, 6 temporary fix, so to speak, and that you want a more 7 comprehensive rule to be forthcoming? 8 COMMISSIONER COX: Or perhaps a far 9 less comprehensive rule. 10 CHAIRMAN CLOWE: Simply stated. 11 COMMISSIONER COX: I -- I think it 12 could be on one page. There are two amendments that I 13 would suggest, Mr. Chairman. One is replacing 14 "conservative" on page one with "fair and reasonable." 15 And the other would be on page eight, removing the 16 clause "which may be increased by the Executive 17 Director." 18 CHAIRMAN CLOWE: Counsel, I get the 19 sense that you wanted that change in this rule at this 20 time and that the Commissioners don't object to that, 21 and I think Gary has got that message. 22 MS. KIPLIN: On page three is -- I 23 think, Commissioner Cox, what you're looking at was 24 the preamble, and I am thinking that on page three, 25 under subsection (b)(1), the last sentence, it says 0114 1 "conservative." What you prefer is the substitution 2 "fair and reasonable" for the word "conservative." 3 COMMISSIONER COX: Or better words if 4 you have them, Counselor. That's what came to me. 5 MS. KIPLIN: Okay. And then the -- the 6 other one was on page eight, the -- to delete the 7 phrase "which may be increased by the Executive 8 Director." Commissioners, this -- 9 COMMISSIONER OLVERA: Well, and a 10 couple of comments. 11 MS. KIPLIN: Yes, sir. 12 COMMISSIONER OLVERA: I don't disagree 13 with anything that Commissioner Cox has said, but I -- 14 I don't want to entirely delete the message that we 15 have given that we do want conservative estimates. 16 Now, obviously, if we're going to have a numeric 17 formula that addresses that, well, that addresses that 18 issue. So that's my first comment. 19 The second comment is, what kind of 20 time frame are we looking at in terms of a complete 21 overhaul to be drafted of the new rule, as opposed to 22 amendments to the existing rule? 23 MR. GRIEF: A very rapid approach, 24 Commissioner. We've talked internally, Mr. Tirloni 25 and Mr. Navarro and I, and I believe we -- that we 0115 1 believe we can bring forth a recommendation at least 2 by the -- a December Commission meeting. But I think 3 we understand the sense of urgency, and I think we may 4 be able to even push that. So we will do our best in 5 that regard. 6 CHAIRMAN CLOWE: And if it's 7 appropriate, we've been talking about, for some time 8 now, what may even be a larger subject, which is the 9 matrix and the attractiveness of Lotto Texas. Where 10 are we -- you know, I think we were constantly told, 11 this is being studied, and we're looking at it, and 12 we're going to come up with something. But are you 13 going to comment to us on that under these agenda 14 items today? Where are we in that -- 15 MR. GRIEF: My intent is to have the -- 16 any matrix change included in that rule proposal to 17 the Commissioners. 18 CHAIRMAN CLOWE: All right. I hadn't 19 heard that, and -- and I'm glad to hear it. So you're 20 hoping between now and the end of the year to come to 21 us with what would not only be an overhaul of the 22 jackpot-related estimation process, but an 23 improvement, if it's possible, in the format of the 24 game? 25 MR. GRIEF: Correct. 0116 1 CHAIRMAN CLOWE: Very good. 2 MS. KIPLIN: Commissioners, two points. 3 This proposed rulemaking also notices up a public 4 comment hearing, I believe for September 9th. I want 5 to make sure you all were aware of that as per the 6 preamble and were okay with that. 7 CHAIRMAN CLOWE: Yeah. I think that's 8 when we would want Ms. Nettles as well as other 9 members of the public to offer up the kind of comments 10 she was getting into in some of her commentary today. 11 MS. KIPLIN: The second point is that 12 if the staff proceeds more quickly than the rule -- 13 you can't have two rulemakings on the same subject 14 matter, and so I think staff would be recommending 15 that you just withdraw this rulemaking. 16 CHAIRMAN CLOWE: Very good. Any other 17 questions or comments? I think you need a motion on 18 this. 19 MS. KIPLIN: Yes, I do. 20 CHAIRMAN CLOWE: So moved. 21 COMMISSIONER COX: Second. 22 CHAIRMAN CLOWE: All in favor, please 23 say aye. Opposed, no. 24 MS. KIPLIN: So that's to propose 25 the -- 0117 1 CHAIRMAN CLOWE: Well, wait a minute. 2 Let me announce the results. 3 MS. KIPLIN: Oh, I'm sorry. 4 CHAIRMAN CLOWE: The vote is three/zero 5 in favor to publish the rule for public comment. Now. 6 MS. KIPLIN: I'm fine, thank you. 7 CHAIRMAN CLOWE: Okay. We'll have a 8 ten-minute recess. 9 (RECESS.) 10 CHAIRMAN CLOWE: We'll come back to 11 order. The time is 11:06 a.m. 12 I'll now move to item number five, 13 consideration of and possible discussion and/or action 14 on procedures and/or rules related to jackpot 15 estimation and/or -- and/or advertising jackpot 16 amounts for all Texas Lottery games. Mr. Grief. 17 MR. GRIEF: Commissioners, I have -- 18 there is two -- two issues to bring to your attention 19 on this agenda item. One will be -- the second one 20 will be a rehash of the situation that we touched on 21 previously regarding the recent jackpot estimation, 22 but the first one, I wanted to inform you about an 23 approach that staff proposes regarding the estimation 24 of Lotto Texas jackpots in the event that we have a 25 winner and the starting jackpot amount goes back to 0118 1 four million dollars. As you know, under our current 2 rule, the jackpots are only guaranteed for the first 3 four drawings in a roll cycle. And in order to 4 effectively manage the advertised jackpots under that 5 current rule, staff is recommending keeping the 6 starting jackpot amount at four million dollars and 7 not rolling that jackpot amount to a higher amount 8 until such time as sales support another 9 million-dollar increment. If sales and interest 10 factors remain fairly consistent with what they've 11 been in the recent past, we will likely be able to 12 roll the jackpot to five million dollars on the fifth 13 drawing in the roll cycle. That would be the first 14 drawing after we come out of the guaranteed first 15 four. In addition, if at any point during the cycle 16 sales do not support an increase in the advertised 17 jackpot amount, the jackpot will not roll to a higher 18 amount. 19 I would appreciate any guidance that 20 the Commission could give me and the staff today on 21 that issue. 22 COMMISSIONER OLVERA: I concur with 23 those themes, Gary. I think you and I spoke about 24 this briefly, and -- and, hypothetically, I used a 25 scenario that if -- if sales -- the low end of sales 0119 1 was estimated to be 4.99, that we should remain at 2 four. And that was my hypothetical scenario that I -- 3 I proposed to you. And based upon fluctuating rates 4 and interest factors, it may be that that -- even that 5 is incorrect in that it was -- it was brought up 6 that -- you told me that if -- if we're below 5.25, 7 even that may not be enough to -- to bring it up to 8 five million dollars, and -- and that's something that 9 is under study and that's something that I agree with 10 and I concur with. And I just wanted to make those -- 11 those comments public because I know we had that 12 discussion very recently. 13 CHAIRMAN CLOWE: I agree. 14 MR. GRIEF: Okay. Second, I want to 15 follow up with you on that situation that occurred 16 last Wednesday, August 10th, involving the Lotto Texas 17 jackpot estimation. During my review of the jackpot 18 estimation spreadsheet on Wednesday, of the 10th, for 19 the Saturday, August 13th drawing, I noticed that 20 sales support for that day's drawing, Wednesday, 21 August the 10th, for an advertised jackpot of 36 22 million dollars was projected to be short by 23 approximately 44,000 dollars. That's about one-tenth 24 of one percent off of the 36 million. And that was 25 based on actual sales that occurred on Monday, the 0120 1 7th, Tuesday, the 8th, Wednesday -- I'm sorry, Monday, 2 the 8th, Tuesday, the 9th, Wednesday, August 10th, 3 through 4:30. Those were actual sales for that period 4 of time, together with projected sales from Wednesday 5 at 4:30 through the draw break that night. And it's 6 based on an interest factor at the time on that day. 7 I went back and I looked at the estimation spreadsheet 8 that had been prepared and approved the previous 9 Friday, August the 5th, for the drawing on Wednesday, 10 August the 10th, and I noted that, based on the 11 interest factor at the time and projected sales, the 12 low end of the projection was 36,141,157 dollars, and 13 the high end was 36,173,128 dollars. And that's 14 information that led the agency to estimate and 15 advertise a 36 million dollar jackpot. In researching 16 that further, I noticed that there had been a decrease 17 in the interest factor, 1.6352 to 1.6314. Coupling 18 the -- the decrease in the interest factor with 19 slightly lower than projected sales, and that was what 20 was responsible for the 44,000 dollar shortfall. I 21 immediately contacted each Commissioner individually 22 about that situation. Although the estimation that we 23 did on August 5th was reasonable, was conservative, 24 and was done in good faith, that is an excellent 25 example of the inherent problems that exist when we go 0121 1 to do the jackpot estimation. 2 In light of this event, I'm taking 3 another look at that process. As Commissioner Cox 4 mentioned earlier, we met last week with Mike Samples 5 from the Texas Treasury, and they are that branch of 6 the Comptroller's Office that provides us with 7 interest rate information. And they make all the 8 purchases for securities for those jackpot winners who 9 choose the annuitized payments. That meeting was very 10 helpful to us. It helped us -- it helped me, in 11 particular, to learn more about the dynamics of the 12 interest factor, about how yield curves work. And I'm 13 going to be working with Ben and our folks in 14 Financial Administration to further refine that 15 estimation process. And hopefully we'll do that in a 16 way that will add an additional level of not only 17 conservatism but fairness and reasonableness to the 18 process, insofar as how we apply an interest factor to 19 an advertised jackpot amount, keeping in mind that 20 that interest factor is always three or four days old 21 by the time the jackpot is won. 22 I'll keep the Commission informed of 23 our progress, and I would be happy to try and answer 24 any questions you might have. 25 CHAIRMAN CLOWE: Any questions? Thank 0122 1 you, Gary. 2 Next, we'll take item six, 3 consideration of and possible discussion and/or action 4 on a lottery advisory committee. Mr. Grief. 5 MR. GRIEF: Commissioners, this item 6 was raised to me by one Commissioner, and I asked that 7 it be placed on the agenda to allow the Commission to 8 thoroughly discuss the feasibility of utilizing some 9 type of advisory body relating to the lottery. And I 10 leave it for the Commission to discuss. 11 CHAIRMAN CLOWE: Commissioner Cox, what 12 are your thoughts? 13 COMMISSIONER COX: Well, I asked the 14 question, and it was as simple a process as, you know, 15 we have a Bingo Advisory Committee. I wonder why we 16 don't have a lottery advisory committee. And I don't 17 have much history here, and I just asked Gary the 18 question, and there it is. 19 CHAIRMAN CLOWE: Well, I've been on 20 this board seven years and worked with the Bingo 21 Advisory Committee almost from the beginning. You're 22 the first person who has ever asked that question, and 23 I think it's a good question. It's one that I 24 wouldn't attempt to answer off the cuff. I think that 25 it needs to be studied and a determination made of 0123 1 what the parameters of the formation of an advisory 2 committee would be regarding their duties and their 3 deliverables that would need to be defined, and where 4 their input was received in the Commission structure. 5 The BAC reports directly to the Commissioners. Billy 6 is a part of that entity and is a real factor, but the 7 reports are made, as we saw this morning, by the chair 8 to the three Commissioners. And I don't know whether 9 that's a format that we would want to adopt or whether 10 the -- the lottery advisory committee, if we're going 11 to call it that, would report to the Commissioners or 12 to the Executive Director. It's an interesting 13 thought. 14 Commissioner Olvera, what are your 15 thoughts on that. 16 COMMISSIONER OLVERA: It's an issue of 17 first impression. I -- I've not considered that. I 18 think you worded it very -- very accurately. It's 19 something we have to be careful with, and I want to be 20 cautious in my response. I think it's an issue that 21 we should investigate. By the same token, I'm not 22 ready to say, let's go forward or not go forward with 23 it, I guess. 24 CHAIRMAN CLOWE: My experience in other 25 agencies is that, in some instances, what has been 0124 1 called a blue ribbon committee is formed to study a 2 particular issue or problem. And you draw on people 3 who are interested in that issue or problem, and they 4 convene and meet and try to help the government agency 5 devise solutions on a specific basis. I'm not aware, 6 except with the Bingo Advisory Committee, of -- and 7 I'm certain there must be others, but an advisory 8 group of citizens -- and I guess that's what we're 9 talking about here -- that the Commission or the 10 Executive Director could or would call on. We have 11 experts in the form of Mr. Eubanks or Professor 12 Eubanks, Professor Busald, who, by the way, we've 13 asked to be on the executive director search 14 committee, and we have people who appear before the 15 Commission. Ms. Nettles has appeared here this 16 morning. A fair concern, I think, is if you're on a 17 committee and you're attending meetings, you want to 18 have a voice, and you want your input to be valued in 19 order to feel that it's a worthwhile effort. And I 20 think that takes a commitment on the behalf of the 21 agency to be mindful of that sort of input. We have 22 had here in the past and most recently, I think, last 23 year, a joint Commission and BAC meeting, which I 24 believe the Commissioners felt positive about, and I 25 think the BAC members felt very positive about it. 0125 1 That sort of thing can be very beneficial. And I 2 appreciate you raising the question, Commissioner Cox, 3 particularly in the light of recent events and a 4 desire on behalf, I think, of everyone in the agency 5 to make certain that it is known that this agency is 6 one that is open to communication and open to input of 7 value, while at the same time doing its job. We're 8 not here to try to make everybody happy. We're here 9 to follow the statute as laid out by the legislature 10 and run a gaming operation that benefits the State of 11 Texas, specifically, the Foundation School Fund. And 12 I am just trying to talk this in the broadest terms so 13 that we can create some thinking. I don't want us to 14 get into a situation of forming a group and thinking 15 that, well, everybody is going to be happy on that 16 group, and it's going to make everybody happy that has 17 a -- a way of playing the lottery. I -- as a Lottery 18 Commissioner for seven years, whenever I identify 19 myself in that role, I get a lot of instruction. And 20 I have to say at least 75 percent of it is not based 21 on fact; it's on misinformation or a personal desire. 22 And I'm just trying to be responsive to the issue 23 being raised, and I hope this has created more 24 questions and thoughts in your mind. I don't have a 25 knee jerk reaction for or against, as you say 0126 1 Commissioner Olvera. 2 COMMISSIONER OLVERA: Obviously, 3 there's -- there is pros and cons. When you've 4 been -- but where we do need to be careful is, 5 obviously, we took an oath to serve in this capacity. 6 Mr. Fenoglio joked that we get paid the big bucks, but 7 we're volunteers. And -- but we are here to make 8 decisions and to -- I don't want it implied in any way 9 that we're somehow shirking that responsibility. On 10 the same token, you know, one of my beliefs as a judge 11 and an attorney was from -- Kim may -- may quote me on 12 this. Learned Hand, who was a noted judge, was -- you 13 know, always kept in mind, what if I'm wrong. And -- 14 and I always welcome input, and I -- I concur with 15 the -- Commissioner Cox's numerous statements about 16 letting the light shine on in. And -- and I'm always 17 open to input. So there's -- there's two balances 18 there, and I don't have any strong feelings one way or 19 the other. I -- I think if -- if we were to form one 20 or whatever, obviously, we would have to define the 21 scope of what their duties would be. And -- and they 22 would have to be -- those individuals would have to 23 understand that -- what they were coming into. And it 24 may be frustrating if the Commission views are at odds 25 with the advisory council views. So it could 0127 1 create -- it could create problems as well as solve 2 them. I don't know, I guess, is my answer. 3 COMMISSIONER COX: And -- and, you 4 know, mine wasn't even -- I shouldn't say it might be 5 a bad idea because it wasn't even an idea, it was only 6 a question. But -- 7 CHAIRMAN CLOWE: Well, we've made it an 8 idea now. 9 COMMISSIONER COX: We've made it an 10 idea now. 11 One of the things that I think about is 12 that when I look at issues in this book, I have one 13 perspective, and when I come here and hear staff 14 recommendations and then we deliberate, sometimes my 15 perspective changes, or is better formed, depending on 16 how that process went. Now, we have a lot of public 17 out there -- we have our retailers; we have our 18 vendors; we have our players -- that all provide input 19 to our staff, but some -- does that input come 20 directly to us? And I wonder what it would be like 21 sometime if we had access directly to some of that 22 input and could ask our own questions. Staff asks 23 their questions, and I'm sure they try to think of 24 what we would ask, but they're not there. They don't 25 know what we would ask, and we don't know -- I don't 0128 1 know what I would ask until I hear what y'all ask. So 2 that's kind of the idea that perhaps we could get 3 better information than we could possibly get from 4 staff if we had some sort of direct access to those 5 publics. 6 CHAIRMAN CLOWE: Well, you know, it -- 7 it brings to my mind the issue of full-time 8 Commissioners. This is a big job for volunteers, 9 particularly with the scrutiny that this agency 10 receives. And I think each of you has spent more time 11 as a Commissioner than you anticipated when you took 12 that oath, and certainly this year. It's been 13 intense. And by law, by statute, this Commission only 14 has to meet six times a year, you know. And we have 15 always met once a month. That's a practice that I 16 think needs to be maintained. But to know those 17 different perspectives which you referenced, the 18 question in my mind is, you know, would a full-time 19 commissioner with staff and aides be better suited to 20 have those inputs. Representative Goolsby, I think, 21 in -- in either the current special session or the 22 prior session -- I don't know which one -- introduced 23 a bill calling for the Commissioners to be full-time. 24 And that, I assume, hasn't moved, but it's been 25 introduced as proposed legislation. The Sunset 0129 1 Committee recommended the Commissioners be increased 2 from three to five but did not speak to the issue of 3 appointing or full-time, or whatever you call us, 4 part-time or whatever. I think it's a good 5 discussion. I think it's something that we would like 6 to collectively pursue and make a conscious decision 7 on. Let's discuss how we would do that. I love those 8 IBM consulting ads that are on CNBC. 9 COMMISSIONER COX: Throw money at the 10 problem. 11 CHAIRMAN CLOWE: Throw money at it. My 12 wife says she is getting tired of it, but I -- I think 13 they're great. I don't suggest we hire a consultant 14 and throw money at it. Do -- do either of you have 15 any thoughts on how to proceed on developing a 16 position on this? 17 COMMISSIONER COX: Well, I would bet 18 that Gary and his staff could give us a -- by the next 19 meeting, a two-page discussion of pros and cons and 20 two or three possible approaches that might be a basis 21 for continuing this discussion. 22 CHAIRMAN CLOWE: I -- I reckon he 23 could. Do you think he has a proprietary interest, 24 and we ought to go to somebody else? 25 COMMISSIONER COX: Well, I think Gary's 0130 1 proprietary interest might be in having access for us 2 to those outside publics because it gives him another 3 three sets of eyes to look at the problems. And I 4 think that's the attitude that he looks at his job 5 with. 6 COMMISSIONER OLVERA: I have no 7 objection to Gary investigating the issue and 8 giving -- giving us a report on -- on the idea. The 9 alternative would be an outside source, so -- we don't 10 have any ready volunteers. 11 CHAIRMAN CLOWE: No. And you've got to 12 go through a process that, you know, is time 13 consuming, which is the way it ought to be. 14 Gary, I think we've reached agreement 15 on that. We'll turn to you on this, and my suggestion 16 would be that you contact other agencies and see if 17 there is such an advisory committee active on an 18 ongoing basis. At the Railroad Commission, as I 19 mentioned, we had these blue ribbon committees that 20 were very helpful on specific issues and problems. 21 But my sense is that is not what we're talking about 22 here. Would you follow that with other agencies and 23 get input from, for example, our liaison person with 24 the Governor's Office and other leadership offices, 25 our licensing committee chair's office. Let's hear 0131 1 what comments they might have. Is that all right? 2 COMMISSIONER OLVERA: That's all right. 3 MR. GRIEF: Mr. Chairman, would it be 4 helpful -- I know that -- and Kim, I believe I'm 5 speaking correctly that our legal department has done 6 some research in this regard and does have some 7 information regarding the legality of having such a 8 committee, and the funding of such a committee, if you 9 would like to hear that today, or we can do it all at 10 the next meeting. 11 CHAIRMAN CLOWE: I think we would like 12 to hear it. 13 MS. KIPLIN: Well, I -- I think it's 14 preliminary research. I'll -- I'll characterize it 15 like that because we hadn't heard from the -- the 16 Commission in terms of direction, scope, and tenure. 17 There is a chapter on state agency advisory 18 committees, and as you know, that's come into play 19 with regard to the Bingo Advisory Committee itself. 20 And I -- I really think that to what extent this 21 chapter will apply and -- and then have certain 22 requirements that will have to be met, really I think 23 is going to turn on the scope of the committee. I 24 think if it's an ongoing, standing advisory committee 25 on lottery, just like you have on the bingo, then I 0132 1 think it will apply. But if it's more directed 2 towards a particular issue, Mr. Chairman, as you 3 mentioned, the blue ribbon committee, I'm not so 4 certain that it will apply. If it does apply, then 5 there is, for lack of a better word, a cost-benefit 6 analysis that would need to be conducted. You would 7 have to set the length for the advisory committee -- 8 or duration, I should say, for its existence. And 9 that would be by the rule, unless you want to have it 10 abolished on the fourth anniversary of the date of 11 creation. So there are certain things that will come 12 into play, but I think perhaps what I would like to do 13 is -- is work with Gary and see what they're coming up 14 with in terms of the two or three different possible 15 approaches that I have heard, and I can get a better 16 idea on -- on options and -- and how those facts will 17 flesh out as to what this would -- this will apply to. 18 But I think you're going to -- I would imagine you're 19 going to want this information because it may help you 20 if you decide you want to have some advisory 21 committee, scope of -- of duties with regard to that 22 committee, and so forth. 23 CHAIRMAN CLOWE: And they would be -- I 24 would assume the question needs to be answered -- 25 maybe it's a wrongful assumption -- may be liable to 0133 1 the Open Meetings Act and have to follow the 2 Administrative Procedures Act. And you would have 3 quorum issues, and you would have all of those issues 4 that we have with the BAC. 5 MS. KIPLIN: Well, if I -- if I could 6 follow up on that. The Bingo Advisory Committee -- 7 the -- the nexus to compliance with the Open Meetings 8 Act is because the Commission adopted that as part of 9 its rule, that the Bingo Advisory Committee would, in 10 fact, comply with the Open Meetings Act. I think it 11 really turns on whether -- whether you all just, 12 quote, rubber stamp the recommendations of the 13 advisory committee, and there are Attorney General 14 opinions on that and the fact you are rubber stamping 15 whatever recommendations you're getting from the 16 advisory committee. Then -- then, on its own, by 17 virtue of the Open Meetings Act and not because it's 18 in the rule, the policy making that you would do here, 19 then they wouldn't be required to comply. 20 CHAIRMAN CLOWE: I want to tell you in 21 my mind there is no danger of any Commission rubber 22 stamping any kind of a recommendation at this 23 Commission. And, you know, as it was pointed out to 24 me when I was first named executive director of the 25 Railroad Commission, commissioners have their 0134 1 authority and their responsibility to the public, and 2 that cannot be usurped by anybody. So I -- I don't 3 think you ought to worry about any rubber stamping. 4 MS. KIPLIN: I -- I understand that, 5 and I used that phrase because it's a phrase that's 6 specifically lifted from Attorney General opinions on, 7 does the Open Meetings Act apply or not apply to these 8 kind of committees. My sense from this Commission and 9 other -- other previous members of the Commission is 10 there would be no rubber stamping. 11 CHAIRMAN CLOWE: Well, it's -- it's -- 12 you know, it's kind of one of these things that you -- 13 you really want to be sure that you know what you're 14 doing when you create something like this, because to 15 be on a committee like this and work and try to 16 participate, try to take part and make 17 recommendations, and then not be listened to or paid 18 attention to or -- or voted down over a period of 19 time, can be very frustrating. And these three 20 Commissioners are Commissioners that are unique, and 21 these three Commissioners may not be here at some 22 point in time -- not the rest of the day, but some 23 point in time. And we -- we would want to think about 24 that, I think, as we approach the formation of 25 something like this. Would future Commissioners be 0135 1 open to this kind of input. I think it's fair to say 2 that Commissioner Cox and I, because of our 3 availability, and you're in the Valley, Commissioner 4 Olvera, so it hasn't been possible for you, but we 5 spend a lot of time with the BAC. And that has been a 6 positive factor, I -- I think, in letting them know 7 that we care to have their input and we want them to 8 be active and productive. And I think it would be 9 incumbent on the Commissioners to have that kind of 10 outreach to this group if it wants it. 11 COMMISSIONER COX: I think one other 12 approach, Mr. Chairman, would be the possibility that 13 this group would meet only with the Commission, as we 14 had the joint meeting with the Bingo Advisory 15 Committee and the Commission, and that they would not 16 need a staff at all, but that they might meet once a 17 year, and -- and there might be an agenda that was 18 intended for them to provide us with advice and input 19 on either questions that we wanted specifically input 20 on or they wanted to give us input. 21 CHAIRMAN CLOWE: Okay. 22 COMMISSIONER OLVERA: Well, 23 Mr. Chairman, in -- in your comments now, I am 24 thinking of now, my following comments are in the role 25 of devil's advocate, in the sense that when you 0136 1 brought to mind our Sunset recommendations, my 2 recollection was that -- at least my feelings were, 3 with the recommendation of increasing this board from 4 three to five, is that we had three Commissioners, we 5 had an efficient nucleus that is getting the job done, 6 and I -- I summarily stated in my remarks, as I 7 recall, that if it ain't broke, don't fix it. And so 8 I don't want to now somehow contradict those comments 9 by saying, well, we don't want two extra 10 Commissioners, but we want an advisory committee. So 11 I -- I want to be careful with those comments in the 12 sense that, once again, I -- I haven't thought this 13 out. I -- I think we are at a very crucial point in 14 time, in the sense that for numerous reasons and 15 variables there is a perception that the lottery may 16 be in more -- may be undergoing more difficult 17 situations than it really is. I -- I think the fact 18 is that the lottery is a multibillion dollar business 19 and has -- has done and is doing extremely well to 20 benefit the children of Texas. But -- so I don't want 21 the -- this discussion to mean -- be misconstrued in 22 some kind of negative manner and/or to contradict our 23 prior statements. 24 COMMISSIONER COX: And I -- I am very 25 sensitive of the same thing because I had and have the 0137 1 same position that you did about additional 2 Commissioners. I don't think that will be helpful. 3 But I don't think that any additional Commissioners 4 would come from the ranks that I'm seeking to get 5 advice from, and that would be the retailers that sell 6 our products, the vendors who provide services to us, 7 and our players. 8 COMMISSIONER OLVERA: And I think 9 that's a good point, and -- and I agree with -- I 10 thought that meeting that we had with the Bingo 11 Advisory Council was very productive. And as I said, 12 there is pros and cons to the issue. 13 CHAIRMAN CLOWE: Okay. Gary, I think 14 the sense of this discussion is, the Commissioners, as 15 a group, are open to investigating this, but I think 16 that's the sum of the discussion. I don't think there 17 is a landslide against it or for it, but we've raised, 18 I think, some really good thinking points. And why 19 don't you and your staff see what you can do to flesh 20 this out and come back to us next month, and maybe 21 we'll have some more questions then. 22 MR. GRIEF: Will do. 23 CHAIRMAN CLOWE: Anything further on 24 this item? 25 Then we'll move on to item seven -- I'm 0138 1 sorry -- eight, report, possible discussion and/or 2 action on lottery sales and revenue, game performance, 3 new game opportunities, and trends. 4 MR. NAVARRO: Good morning, 5 Commissioners. For the record, my name is Benito 6 Navarro. I'm the acting Financial Administration 7 manager. 8 MR. TIRLONI: Good morning again, 9 Commissioners. For the record, my name is Robert 10 Tirloni. I am the Products manager for the 11 Commission. 12 MR. NAVARRO: This morning we'll go 13 through our monthly presentation of sales and game 14 product update. We'll start off today with our 15 revenue from sales and net revenue to the State 16 calculation through the week ending August the 6th, 17 2005. Now, as you can see up here, sales for the week 18 ending August the 6th, 2005, total 3.4 billion 19 dollars. Prize expense was at 2.1 million dollars, 20 giving us a net sales contribution of 1.3 billion, or 21 37.4 percent. We've got retailer commissions of 171.7 22 million and administrative costs of approximately 197 23 million dollars, giving us an estimated net revenue to 24 the State of 916.1 million dollars, or 26.7 percent 25 returned to the State. Our prize expense, as a 0139 1 percentage of sales, through the week ending August 2 the 6th, is at 62.6 percent. And this is unadjusted 3 for any unclaimed prizes through that date. 4 Now we have our fiscal year 2005 5 year-to-date sales and revenue by game. Instant 6 tickets sales totaling 2.5 billion dollars, or 72.9 7 percent of our total sales. Revenue from instant 8 ticket sales is at 564 million dollars or 61.6 percent 9 of our total revenue to the State. Lotto Texas sales 10 at 287.5 million or 8.4 percent of sales and revenue 11 of 107.1 million or 11.7 percent of our revenue, 12 followed closely, very closely, by Pick 3. 13 Sales-wise, Pick 3 sales are behind at 7.8 percent, 14 but is generating as much revenue, if not more, than 15 Lotto Texas, at 11.7 percent. But you'll notice the 16 total revenue is 107.5 as opposed to 107.1 by Lotto 17 Texas. Mega Millions sales of 166.1 million or 4.8 18 percent, corresponding revenue of 66.3 million or 7.2 19 percent. Again, total year-to-date sales of 3.4 20 billion and revenue to the State from sales of 916.1 21 million. 22 CHAIRMAN CLOWE: Ben, what is our 23 goal -- pardon me. Go back there to that prior slide. 24 What is our goal for the fiscal year for sales and 25 revenue, please? 0140 1 MR. NAVARRO: We always shoot for the 2 bi-annual revenue estimate as provided by the 3 Comptroller. That revenue estimate from sales totals 4 1.035 billion, and my most current calculation, which 5 was prepared as of last week, we're estimating sales 6 for the year of 3.679 billion dollars, which is 7 slightly short of what we would need to generate the 8 1.035 billion. But I think we had talked at the 9 Commission meeting prior that sales of 3.7 billion 10 would generate approximately the 1.035 that -- that 11 the BRE -- the BRE has noted. So based on -- on that, 12 and the current prize payout as it stands, I'm looking 13 at a billion 27 in revenue to the State from sales, 14 plus any unspent administrative funds. So that will 15 bring us in at about eight million dollars short of 16 the BRE estimate. 17 CHAIRMAN CLOWE: And what was it in the 18 prior fiscal year? 19 MR. NAVARRO: Prior fiscal year was a 20 billion 44, including unspent administrative and 21 sales. So we're looking at a 17 million dollar 22 difference in revenues, total revenue to the State. 23 CHAIRMAN CLOWE: It's pretty -- it's 24 pretty close to staying even two years in a row, huh? 25 MR. NAVARRO: Yes, sir. But, again, 0141 1 you know, this is a very conservative estimate on 2 sales. I don't want to go out on a limb and say we're 3 going to exceed, you know, what we are estimating 4 right now, but -- 5 MR. GRIEF: And, Ben, if I could 6 interrupt -- 7 MR. NAVARRO: Yes, sir. 8 MR. GRIEF: -- for just a moment. I 9 think to add to that comment, Mr. Chairman -- and, 10 Robert, correct me if I'm wrong -- it does appear 11 we're going to exceed the one billion dollar mark in 12 net revenue. We are going to be some few million 13 dollars short of last year's net revenue. I think 14 it's important to know, we did not experience a record 15 jackpot for either the Mega Millions or the Lotto 16 Texas game during the past fiscal year. 17 MR. NAVARRO: That is correct. 18 MR. TIRLONI: That's correct. 19 MR. GRIEF: I think that differs 20 greatly than what we experienced the previous fiscal 21 year. 22 CHAIRMAN CLOWE: That's a good 23 observation, Gary. And the instant tickets have 24 continued to grow and have become a larger percentage 25 of overall sales and revenue in the current fiscal 0142 1 period, and -- than in the prior fiscal, haven't they? 2 MR. NAVARRO: Yes, sir, they have. 3 CHAIRMAN CLOWE: So the mix of our 4 market has changed in addition to the lack of a 5 substantial jackpot in either of the two premiere 6 on-line games. 7 MR. NAVARRO: That's right. 8 COMMISSIONER COX: Or perhaps because 9 of that. 10 CHAIRMAN CLOWE: That's right. 11 MR. NAVARRO: Good point. 12 CHAIRMAN CLOWE: In your opinion, while 13 we're talking about this, and this would just simply 14 be asking for an impression on your part. Since the 15 incident occurred regarding the advertising of a 16 jackpot that was not supported by estimated sales, 17 what has been the impact on sales as a result of that? 18 MR. NAVARRO: I'll share my 19 observations, and Robert here will, I'm sure, add in 20 his two cents worth. But, you know, we did that 21 preliminary analysis that -- that showed that we had 22 a -- a slight decline shortly after the -- the 23 incident hit the -- the news wire. But we have not -- 24 and particularly, you know, as it -- as it relates to 25 that particular incident, seen a decline in sales. 0143 1 You know, we -- we obviously have seen an overall 2 decline in sales, mostly in our Lotto Texas game, but 3 I don't think it's directly attributable to that 4 particular incident. We look at our weekly sales, and 5 we look at our bi-weekly sales when we perform our 6 Lotto Texas jackpot estimation, and up until just this 7 last week we had not seen a decline in sales from week 8 to week as our jackpot has rolled. But as Robert can 9 tell you, I think last Wednesday's sales bucked that 10 trend -- that trend, and so did Saturday's sales buck 11 that trend. Even with a jackpot rolling, we did -- 12 did experience lower sales for last Wednesday and this 13 Saturday as compared to the previous weeks. And that, 14 I think, has been a first. And Robert, you can -- 15 MR. TIRLONI: Yeah. I -- I agree with 16 everything that Ben has said. Since the incident in 17 June, we have not seen a drastic decrease in lotto 18 sales. And, you know, we talked a lot about in June, 19 and I believe in July also, that sales at the lower 20 levels are -- are pretty easy to forecast and -- and 21 to predict. And we've not seen an erosion of those 22 sales since that time. The point that Ben just made, 23 last week we did see an abnormal sales trend for the 24 Wednesday and for the Saturday draw. For the -- 25 CHAIRMAN CLOWE: Can you explain that? 0144 1 MR. TIRLONI: I can explain what 2 happened and give a hypothesis. 3 CHAIRMAN CLOWE: Okay. 4 MR. TIRLONI: Usually, the Saturday 5 draw yields higher sales than the Wednesday draw does. 6 So usually, when you're going from Wednesday to 7 Saturday, you see an increase in draw sales, and then 8 when you go from Saturday to Wednesday, you usually 9 see a decrease, up until you reach probably about, I 10 would say, right now, probably about 50 million or 11 higher. Then you would start to see that decrease 12 from the Saturday draw to the Wednesday draw 13 evaporate, so to speak, and you can see consistent 14 increase from Wednesday to Saturday and Saturday to 15 Wednesday. When we're doing our estimations, we look 16 at that, we look at the percent decrease from Saturday 17 to Wednesday, but we also look what is happening from 18 Wednesday to Wednesday. And for the past few 19 Wednesdays we've seen an increase from one Wednesday 20 to the next, except last Wednesday. And that goes to 21 the issue that Gary spoke about earlier. And then the 22 same thing happened for this past Saturday draw period 23 as well. Hypothesis, could be a lot of things. It is 24 a different -- we have moved into back-to-school 25 season. People experience a lot of costs at that time 0145 1 of year. That's one hypothesis that's been floated 2 around that I have heard from sales staff out in the 3 field. Other than that, I really don't have an 4 explanation for why that's occurred. 5 CHAIRMAN CLOWE: I wonder if the price 6 of gasoline might be affecting it. 7 MR. NAVARRO: I know it's affected me. 8 MR. TIRLONI: It could -- it -- it 9 could, Commissioner, although we're not seeing -- 10 we're not seeing an impact on scratch-off sales, 11 though. 12 CHAIRMAN CLOWE: According to the 13 latest statistics, what percentage of those eligible 14 in the state of Texas are playing these games? 15 MR. TIRLONI: I don't know that number 16 off the top of my head. 17 CHAIRMAN CLOWE: Well, we have that 18 number, and I just -- I can't recall it either. I'm 19 thinking it's dropped from over 60 percent to 20 somewhere closer to 50 percent. 21 MR. TIRLONI: I believe it is close to 22 50. 23 CHAIRMAN CLOWE: Could you -- 24 MR. TIRLONI: I can get that for you, 25 sir. 0146 1 CHAIRMAN CLOWE: Yeah. And -- and let 2 the Commissioners have that current figure. 3 MR. TIRLONI: Absolutely. 4 CHAIRMAN CLOWE: Because all the 5 surveys that you've shown us impresses me with the 6 fact that fewer people are spending more dollars 7 playing the games. 8 MR. TIRLONI: That's correct. I 9 believe that to be true. But I will actually get the 10 percentage for you. 11 CHAIRMAN CLOWE: Thank you. 12 COMMISSIONER OLVERA: This -- this 13 factoid sheet that I keep by my side, Mr. Chairman, 14 has a data -- has -- has a report. 47 percent of 15 adult Texans report playing with -- within the past 16 year. I think it is around that 50 percent mark. 17 CHAIRMAN CLOWE: Are you sleeping with 18 that at night? 19 COMMISSIONER COX: How does -- how does 20 one get a copy of that sheet? 21 COMMISSIONER OLVERA: I've -- I've 22 instructed Mary Beth to keep -- I thought all of you 23 had it. 24 MR. GRIEF: It's in front of you, 25 Commissioners. It should be in -- in your folder. 0147 1 COMMISSIONER COX: Oh, it's in this 2 stack. Okay. When we have some light, I'll find it. 3 CHAIRMAN CLOWE: Continue, please. 4 MR. NAVARRO: Yes, sir. This is a 5 graphical representation of what our sales look like, 6 and, obviously, the biggest chunk of that is our -- 7 again, our instant ticket sales, which make up 73.9 of 8 total sales of 3.4 billion dollars, followed by Lotto 9 Texas at 8.4, Pick 3 at 7.8, and Mega Millions at 4.8 10 percent of sales. 11 Next, we have a corresponding graphical 12 representation of our revenue. And, again, instant 13 ticket's bringing in the biggest part of our revenue 14 at 61.6 percent, followed by both Lotto Texas and 15 Pick 3, which are pretty much neck to neck, Pick 3 16 taking it -- you know, generating about 107.5 million 17 dollars in revenue. And then Mega Millions at 7.2 18 percent. 19 MR. TIRLONI: Continuing our discussion 20 on instant sales, we continue to look at instant sales 21 broken down by price point. And as you can see, the 22 two dollar, followed by the five dollar, and then in 23 third place, the one dollar making up the bulk of our 24 instant ticket sales, which through the week ending 25 last week, 8/6, totaled 2.5 billion. And then when we 0148 1 look at that from a revenue perspective, very little 2 change. Two dollars is bringing in the most revenue, 3 again, followed by the five and by the one, and that's 4 translating to over five hundred and -- 564 million 5 dollars in revenue. 6 Commissioners, I have provided you with 7 a handout of some recent instant game launches. You 8 have a packet in front of you with a variety of 9 tickets. The tickets that are on the top of that 10 stack are a game I just want to take a minute and -- 11 and focus on, and that is our most recent licensed 12 property game that we introduced. It's the I Love 13 Lucy game. That game was introduced in late July, on 14 July 20th. It is a scenes game, meaning there's five 15 different scenes within the game. The game has a 16 20,000 dollar top prize and as a -- a package, when 17 you order a game like this, we have the ability to 18 have the only person authorized by the estate of 19 Lucille Ball -- the only impersonator authorized by 20 the estate of Lucille Ball come and tour Texas with 21 the lottery staff. We did a media tour of five 22 cities, Dallas/Fort Worth, Austin, San Antonio, 23 Houston, and McAllen. In the mornings the personality 24 did news interviews. She then toured retail 25 locations, lottery retail locations. And the events 0149 1 each day ended at a licensed retail location. We went 2 to corporate grocery stores, lottery's -- lottery 3 retailers, obviously -- and we conducted promotional 4 events at those stores. The Lucy game is doing very 5 well. For the week that ended August 6th, it was 6 the -- in the top ten. It was our number seven 7 seller. I don't have final stats for this week. They 8 just ended Saturday night. But from the daily sales 9 reports that I have seen, it will definitely be in the 10 top ten again. 11 Moving ahead, in September what I would 12 like to do is give you an overview of what our first 13 quarter will look like in terms of instant tickets for 14 FY '06. I did want to give you a quick update though. 15 We do have licensed properties scheduled for 16 introduction in that first quarter. It's -- the first 17 one is a reprint of Wheel of Fortune. The second is a 18 Texas Hold 'Em licensed property game. And then the 19 other overview we would like to give you in September 20 is the complete overview of our holiday suite of 21 tickets. That's always proven to be very strong 22 sales. The holiday tickets have proven to be very 23 strong sales performers for us in the past, and so we 24 want to show all of those games to you before they 25 launch. 0150 1 I've also been promising you an update 2 on Mega Millions since California joined, and I have 3 that update for you today. California started in the 4 Mega Millions game on June 22nd, a little over -- a 5 little -- just about two months ago. That was the 6 sixth draw of a 14-draw roll cycle, and when they 7 launched, the jackpot was 42 million dollars. For 8 that first draw, California ranked first in sales. 9 They sold 5.3 million. Now, the overall sales for the 10 group were 20.3 million. Since California has joined, 11 California or New York have ranked either first or 12 second in draw sales. And though they ranked first in 13 sales in terms of draw sales, they ranked fourth in 14 per capita sales for that first draw. And they have, 15 in subsequent draws, dropped down to 9th or 10th. And 16 I've got a graphic that will depict that for you. 17 MR. GRIEF: Robert, Philip tells me 18 that if you close out your Power Point just 19 momentarily and reopen it again, it may help with that 20 flickering. 21 MR. TIRLONI: Okay. We can try that. 22 Commissioners, this is a breakdown of 23 all the states' draw sales of -- it's a snapshot in 24 time. It's for the 170 million dollar jackpot drawing 25 that took place on July 22nd. And as you can see, New 0151 1 York had the greatest draw sales; California was 2 ranked second in terms of draw sales; Texas was 3 eighth. California sold over 6.1 for that drawing. 4 Then you observe, California sees a very similar 5 experience to Texas when we look at per capita sales, 6 and that's for the same -- for the same exact drawing. 7 You can actually do a comparison now 8 that we have some historical -- some history, I should 9 say, with California actually participating in the 10 game. The blue line is the roll cycle, the previous 11 roll cycle that we were in. And that was before 12 California was in the game. The red line compares the 13 same amount of drawings, the first five drawings, and 14 this is the current roll cycle that we're in now. And 15 you can see the difference. Of course, once 16 California joined the game, the -- the starting 17 jackpot increased from 10 million to 12 million, but 18 you can see by the fifth drawing of the current roll 19 cycle, the jackpot is 32 percent higher with 20 California in the game. And that translates to about 21 a 10 million dollar increase in jackpot amounts. So 22 what does that mean to Texas? Again, same 23 comparisons, first five draws before California joined 24 compared to the current roll cycle with California, 25 and these are Texas's draw sales. And you can see 0152 1 throughout the whole first five drawings, we are 2 seeing higher draw sales. And that's most likely a 3 direct correlation to the fact that the jackpots are 4 higher. And just looking at a point in time for that 5 fifth draw period, draw sales for the fifth draw, the 6 current roll cycle, are about eight percent higher 7 with California than in the last one, in which 8 California was not participating. 9 I referenced that 170 million dollar 10 drawing on July 22nd. That ticket was sold in Ohio. 11 It was won by a pool of seven workers from a machine 12 shop. The cash value option was over 103.3 million 13 dollars, and our contribution to that jackpot prize 14 was over 7.7 million dollars. 15 We are currently advertising a 61 16 million dollar jackpot for tonight's -- I'm sorry -- 17 excuse me -- for tomorrow night's Mega Millions 18 drawing. And we believe that if California were not 19 in the game contributing their sales, which has been 20 helping the jackpot amount, we would be at 21 approximately 46 for tomorrow night. 22 I do have an update for you on 23 Megaplier. This is from the time Texas joined Mega 24 Millions in December of '03. We've had just under two 25 million winners who have Megaplied, and we've paid out 0153 1 over 35 million dollars in Megaplier prizes. We still 2 have two jackpot winners in Texas, 126 second-tier 3 winners. Twenty-three of those have Megaplied. And 4 just at the end of last month, we had our first 5 second-tier Mega Millions winner, who Megaplied his 6 prize, and because the Megaplier number was four, that 7 prize was one million dollars. Mr. Walcott from 8 Arlington came and claimed his prize. He and his wife 9 were here last Thursday. They claimed that one 10 million dollar prize. An interesting story they 11 relayed to me when I met them, that they did not -- 12 they've always played Mega Millions since it came to 13 Texas, but they did not always play Megaplier. And 14 after studying it, as Mr. Walcott put it, he realized 15 that he was missing the boat. And after the drawing 16 on the 29th, I'm sure he is very happy that he -- he 17 did switch and start playing Megaplier. 18 This slide has a lot of information on 19 it, and I would like to walk you through it because I 20 think it paints a very good picture. You know, when 21 we made the change to Mega Millions in June, the Texas 22 Lottery made a -- a decision to focus on the Megaplier 23 feature of the game. And that change took place here 24 in June. This was the first drawing, on June 24th. 25 So the red bars -- and the flickering seems to be 0154 1 getting worse. I apologize. The red bars are 2 Megaplier draw sales by jackpot amounts. The blue 3 line is the Megaplier as a percentage of Mega Millions 4 sales. And in the past we have talked about, in these 5 meetings, that as the jackpot increases and it climbs 6 above that triple digit amount, we start to -- we see 7 that the sales are going down on Megaplier as a 8 percentage because people are taking that dollar and 9 spending it on the base game. They're taking that 10 dollar and spending it on the chance to win the triple 11 digit multi -- multi-multi-million dollar jackpot 12 that's available. So you see that there was a jackpot 13 won in -- in early June, and you see we start our roll 14 cycle over at ten. And you see again, here is the 15 Megaplier trend line. And then we started our 16 Megaplier focus. And when I say our Megaplier focus, 17 we had a lot of different things going at the same 18 time. We had TV and radio advertising. We had 19 outdoor billboards, in-store POFs. We began running a 20 clerk promotion, and the sales staff was also 21 participating in a contest, based on the increase in 22 Megaplier sales that they realized with their group of 23 retailers. And I think we've seen some positive 24 results. Like I said, this would have been the trend 25 line. And I think once that focus began, you see we 0155 1 kind of bucked the trend. And in terms of percentage 2 and in terms of dollars, this was 500,000 dollars, 3 approximately, in draw sales for about a hundred, 106 4 million dollar jackpot. And then you see, for about a 5 hundred million dollar jackpot, after the focus began, 6 we realized about 592,000. So we wanted to share that 7 with you. We're happy with the efforts that were put 8 forth, and during future game changes or game 9 enhancements, we're going to work very closely again 10 with our contracted ad agencies, and GTECH, and the 11 sales force to make that focus their main priority so 12 that everybody is working in concert towards the same 13 goal. 14 Yes. And Mr. Navarro just reminded me. 15 Thank you. After we did get hit at this last jackpot 16 amount at 170, you notice that the Megaplier, as a 17 percentage, is -- is higher than the previous -- than 18 when it started on the previous roll cycle. 19 Thank you, Ben. 20 Commissioners, that's all we have for 21 you this morning. We would be happy to answer 22 questions that you may have. 23 CHAIRMAN CLOWE: Any questions? 24 COMMISSIONER COX: Gary? 25 MR. GRIEF: Yes, sir. 0156 1 COMMISSIONER COX: What I think I just 2 saw was that sales are up, revenues are down. Is that 3 correct? 4 MR. GRIEF: Are we looking at Mega 5 Millions? 6 COMMISSIONER COX: No. 7 MR. GRIEF: In -- in the initial slot? 8 COMMISSIONER COX: The Texas Lottery. 9 MR. GRIEF: Our return to the State 10 percentage has dropped. 11 COMMISSIONER COX: Okay. So sales are 12 up. GTECH is making more money. Revenues are down. 13 The school children of Texas are getting less. 14 MR. GRIEF: That would be accurate. 15 COMMISSIONER COX: Okay. Now, we've 16 got a larger mix of instant tickets as compared to 17 on-line games. The primary driver of the increase in 18 instant ticket sales is higher denomination tickets, 19 which pay back a larger percentage to the player. 20 MR. GRIEF: Would you agree with that, 21 Robert? 22 MR. TIRLONI: Yes, sir, I would agree 23 with that, sir. 24 COMMISSIONER COX: How do we know that 25 we are optimizing revenue, which is our job, and not 0157 1 optimizing sales, which is not our job. If I've got a 2 21 bit, and I've got five-dollar tables and I've got 3 5,000-dollar tables, if they're choosing five-dollar 4 tables and they're choosing 5,000-dollar tables, but 5 they're all playing the same game with the same 6 odds -- we talked months, if not years ago, about we 7 need an independent study to tell us whether we really 8 need to be paying back more on the higher denomination 9 tickets, and if so, how much more. How are we on 10 that? 11 MR. GRIEF: At your direction, 12 Commissioner Cox, I initiated those discussions, and 13 I've talked to Ramon Rivera of GTECH, who is here 14 today. And on a broader scale, we've been in 15 discussions about the net versus gross issue, and how 16 GTECH is compensated. Ramon has preliminarily 17 indicated to me that GTECH is willing, as a part of 18 those discussions, to procure the services of an 19 independent consultant, group or individual, who would 20 come in and do an analysis of the prize payout 21 percentage and how effective it is when we raise the 22 prize payout percentage at the higher price points or 23 not. So we are working on that. 24 COMMISSIONER COX: So when -- have we 25 identified who the pool of such experts might be and 0158 1 be -- and begun the procurement process? 2 MR. GRIEF: I -- I don't know about 3 that. I can ask Mr. Rivera to come forward and -- and 4 talk about that, but he has not communicated that to 5 me yet. 6 CHAIRMAN CLOWE: Sure. Robert, I sure 7 hope you can get your machine fixed. 8 MR. TIRLONI: I do, too, sir. 9 CHAIRMAN CLOWE: That is very 10 disconcerting. It takes away from the presentation. 11 MR. TIRLONI: I agree with you. 12 CHAIRMAN CLOWE: Turn it off. 13 MR. RIVERA: Good morning, 14 Commissioners. Ramon Rivera, account general manager 15 for GTECH in Texas. 16 Commissioner, could you repeat the 17 question, sir. I may have missed it. 18 COMMISSIONER COX: Well, there was a 19 series of questions and statements, Ramon, but I think 20 it boiled down to, Gary has indicated that GTECH may 21 be willing to pay for an independent study of this 22 issue of paybacks on various denominations of instant 23 tickets. And the question I asked him was, has the 24 pool of qualified consultants been identified and the 25 procurement process begun. And at that point he said 0159 1 you had -- he would ask you that question. 2 MR. RIVERA: Yes, sir. With respect to 3 your -- the first part of your question, would GTECH 4 be willing to -- to procure and pay for that sort of a 5 study. The answer to that question, Commissioner, is 6 yes. I have -- Gary and I have engaged in those 7 discussions, and -- and we have committed to pay for 8 that -- that sort of a study. 9 With respect to who would be most 10 qualified to conduct that study, I have had some -- 11 several discussions with people internal to GTECH, and 12 there are a number of options that are available to 13 us. We do have, within GTECH itself, some -- some 14 knowledge with respect to the impact of payouts and so 15 forth. There may be the opportunity to engage with -- 16 because of the highly specialized nature of this -- 17 this type of study -- an organization that is industry 18 specific to the lottery. And there -- there may be a 19 couple of options there. The third option could be 20 perhaps someone from the University of Texas or a 21 similar institution that has the resources to conduct 22 this sort of a study, even though there may be some 23 learning curve attendant to that. So we're looking 24 at -- at those -- at those three options. And I will 25 certainly keep Gary informed as we -- as we proceed, 0160 1 but I wouldn't anticipate us studying this for more 2 than a couple of weeks before we -- we could come back 3 with a -- with a proposed plan to you or -- or to -- 4 to Mr. Grief. 5 MR. GRIEF: And, Commissioner, 6 internally I've asked our research folks, David 7 Veselka and David Sizemore, to go out and try to 8 search the universe to find if there are already any 9 such studies that exist, not just on instant tickets, 10 but I think it would be also be interesting to look at 11 any studies on slot machines to see if there are 12 similar studies to that nature. And they started 13 that -- I want to say, ten days, two weeks ago, they 14 started that. 15 COMMISSIONER COX: Two places that you 16 might look -- and I believe I have the states right -- 17 Massachusetts and Missouri. I think both legislatures 18 have raised this exact question, are you optimizing 19 sales or are you optimizing revenues. And so there 20 may have been some studies that those legislators had 21 access to. 22 MR. RIVERA: We will look into that, 23 Commissioner. Thank you. 24 CHAIRMAN CLOWE: We can discuss this 25 under this agenda item. Commissioner Cox, I think 0161 1 you're right on target. I -- I'll give you an 2 off-the-cuff opinion, which may be dead wrong, but I 3 think, you know, we're optimizing revenue in instant 4 tickets because we can. And it's effective. We're 5 changing the games and making them attractive. You've 6 got I Love Lucy impersonators going around, and nobody 7 is doing that for any of the on-line games. I think, 8 except for the special group that I think Pick 3 9 applies to, our -- our on-line games are old hat. And 10 the only thing that brings any life into them is that 11 big jackpot. And it used to be 20 million for 12 Lotto Texas. Now it -- it's fluttering along at 36, 13 37 million. And, you know, I think we're selling a 14 product because we can sell it, and we've got a lower 15 return on it, and we're spinning our wheels. 16 COMMISSIONER COX: And I think you have 17 put your finger right on my concern, which is that we 18 have a product that we can make much more attractive 19 in a lot of ways, only one of which is increasing the 20 payback. We're going into more licensed properties. 21 That is good. They make more attractive products. In 22 slot machines, the licensed properties have proven to 23 be very valuable in generating additional revenue. 24 We're going to higher price points. That makes it 25 more convenient for the player who wants to bet 25 0162 1 dollars but doesn't want to scratch 25 one-dollar 2 tickets. That doesn't mean we have to pay him back a 3 larger percentage. He may be happy just to be able to 4 scratch only one ticket rather than 25. We don't 5 know. 6 COMMISSIONER OLVERA: That's right. 7 CHAIRMAN CLOWE: And that's where I 8 think the Commissioners have always said, we need more 9 marketing information. We need to know our player 10 better than we do. 11 I have a concern that is coupled with 12 this subject, Gary. When we had a reorganization, the 13 former executive director, who was very sales and 14 marketing oriented, was a part of that reorganization, 15 and we did away with a head of the sales and marketing 16 or the marketing department. And my recollection of 17 the conversation about that reorganization was there 18 was a dotted line from the executive director that 19 went out around the organization to the sales and 20 marketing or marketing department. And that was a 21 special accommodation to that individual because of 22 his bent toward sales and marketing. And in my view, 23 he possessed and does possess a talent in that area. 24 He constantly, in conversations I had with him, talked 25 about the development of instant tickets and was very 0163 1 much involved in that and spent time and effort in 2 that area. Now, that individual is no longer with the 3 Commission, and my question is, you know, who is -- 4 who is in charge of that? In my mind, clearly, the 5 executive director was in charge of that when he was 6 here. Now that he is no longer here, you're the 7 acting executive director. My sense is, you're more 8 operating inclined, and you are running the agency on 9 a day-to-day basis. I -- I am afraid we may be asleep 10 at the switch, not having the kind of high level 11 attention to the development of sales and marketing 12 issues that we had up until the change in the 13 organization, change in the executive directors. What 14 would your answer be in that regard? 15 MR. GRIEF: Well, I might be more 16 marketing inclined than you give me credit for. 17 CHAIRMAN CLOWE: I would like to hear 18 about that. How many -- how many talks have you made 19 within the last two months with the retailers -- 20 MR. GRIEF: Not -- not many. Not many. 21 CHAIRMAN CLOWE: -- or to the players? 22 MR. GRIEF: How many. 23 CHAIRMAN CLOWE: How many new instant 24 ticket games have you been involved in and approved 25 and rejected? 0164 1 MR. GRIEF: Well, I'll -- I'll tell you 2 about my involvement in that. I want to go back to 3 how it might have been perceived in the past, how that 4 used to be done, because I was involved to a certain 5 degree, and especially understanding the instant 6 ticket process, and -- and even more towards the end 7 of our former executive director's time here. I 8 believe that that process was a collaborative effort, 9 that there was a team of folks, including Mr. Tirloni 10 and Dale Bowersock and other people on the instant 11 staff. And it's with input from our instant ticket 12 vendor, as well, and from GTECH. And the way I 13 perceived that process was that they would come up 14 with a game plan for an entire fiscal year, and that 15 game plan was laid out in front of the executive 16 director, and it was a thumbs up or thumbs down on 17 each game. And I would probably want Mr. Tirloni to 18 comment more about that, but I'm giving that the same 19 review. We do have our plan already in place for this 20 fiscal year, but as an example, we did not have a 21 Texas Hold 'Em game in the plan for this fiscal year. 22 And just within the last couple of weeks, on my own, 23 have I insisted that we take a look at that game and 24 work with GTECH, and we do now have that game in our 25 game. I think that particular game is riding a high 0165 1 crescendo right now of popularity, and I think it was 2 being contemplated for perhaps being done in FY '07, 3 if I remember correctly. Am I saying that right, 4 Robert? Which I -- I don't know where Texas Hold 'Em 5 will be in -- in 2007. So we're doing that sooner. 6 So that being said -- 7 CHAIRMAN CLOWE: What is the prize 8 payout on that game? 9 MR. GRIEF: It's going to come in at a 10 ten-dollar price point, which will mean -- 11 MR. TIRLONI: 70 percent. 12 CHAIRMAN CLOWE: See, there is a 13 perfect example of what Commissioner Cox is talking 14 about. We're giving away the store. 15 MR. GRIEF: You know, I -- I am not 16 sure about that. 17 COMMISSIONER COX: But you need to be 18 sure. 19 MR. GRIEF: I understand. I 20 understand. We're going to do that research that you 21 asked about. 22 CHAIRMAN CLOWE: See, we're -- we're 23 sitting back at a level where we get to throw these 24 lightning bolts. You understand that's our job. 25 MR. GRIEF: Yes, sir. 0166 1 CHAIRMAN CLOWE: And, you know, if I 2 owned this thing, if I was the sole shareholder, I 3 wouldn't like the way I see it's going. We're working 4 hard and we're wearing out our equipment and our 5 people, we're selling a lot, we're moving a lot of 6 dollars. But the bottom line is receivables. You 7 know, the Big 3 auto makers now are giving away their 8 cars to get rid of inventory. When they get that 9 inventory, what are they going to do next? And that's 10 what we're faced with. We're running harder and we're 11 covering less ground. 12 MR. GRIEF: And I -- I worry constantly 13 about the balance, where that balance is on the prize 14 payout percentage. We could cut the prize payout for 15 instant tickets to 50 percent -- 16 COMMISSIONER COX: Well, let's get you 17 some help so that you don't have to worry about that. 18 Let's get some people up here that know that and can 19 give us solid, databased advice on where to go with 20 that. 21 CHAIRMAN CLOWE: And we're not asking 22 you to make that call all on your own, but we keep 23 pounding on this. And I think it's fair to say, I'm 24 not being critical, but I don't think the 25 Commissioners are hearing anything new. We're -- 0167 1 we're working on it. We're concerned about it. We 2 see the trend. If we're going to do something about 3 this, we've got to take some decisive action. 4 Ramon, while we've got you at the 5 table, surely Texas is not unique. Aren't other 6 states faced with this kind of problem, or are we 7 unique? 8 MR. RIVERA: We are not unique. 9 CHAIRMAN CLOWE: To your knowledge. 10 MR. RIVERA: To my knowledge, 11 Mr. Chair, we are not unique in that regard. A number 12 of states are feeling the -- the same phenomenon; that 13 is, increased sales and a decrease in revenue. 14 And since I have the chair -- the table 15 for just a moment, I -- I would just like to talk 16 and -- and maybe give some balance to -- and -- and 17 maybe some support to the -- to the efforts by your 18 staff -- 19 CHAIRMAN CLOWE: I think they would 20 welcome that. 21 MR. GRIEF: Yes, we would. 22 MR. RIVERA: -- to overcome a -- a very 23 dangerous curve. And as an outsider looking in, I 24 believe that what the staff has done has been a 25 magnificent job of overcoming a period. If you look 0168 1 at -- compare fiscal year to fiscal year, at this time 2 last year, we were basking in the glory of the highest 3 jackpots ever in the state of Texas. Well, if you -- 4 if you correlate that to sales, it's somewhere in 5 the -- in the neighborhood of 80 to a hundred million 6 dollars in sales. This is just rough numbers off the 7 top of my head. 8 CHAIRMAN CLOWE: But that -- those 9 jackpots made that difference. 10 MR. RIVERA: Yes, sir. So if you were 11 going -- if you -- if you took the effort to try to 12 equalize the sales, to equalize for those jackpots, a 13 number of things would happen. The revenue to the 14 State would be greater, and the -- and the proportion 15 of instant ticket sales to online sales would be less. 16 So as -- as we all know, the -- the fortune of 17 jackpots happen or they don't happen. And last fiscal 18 year we had a fortunate period where two jackpots, 19 all-time record for the state, happened to hit. And 20 so when we compare this fiscal year to last fiscal 21 year, we need to take that into account. 22 CHAIRMAN CLOWE: That's a very fair 23 observation. 24 COMMISSIONER COX: Yet it obscures the 25 issue that I'm trying to bring into sharp focus, which 0169 1 is, that we're selling more instant tickets and 2 returning less in margin to the State. 3 MR. RIVERA: Yes, sir. 4 COMMISSIONER COX: Just on instant 5 tickets. 6 MR. RIVERA: I am not -- I am not at 7 all trying to sidestep or deflect that issue. That is 8 also, to my knowledge, something that's occurring in 9 every state in -- not every state -- in a number of 10 states in the U.S., and for the reasons that -- for 11 some of the reasons that Chair Clowe mentioned. 12 Online tickets, in general, are declining and -- in 13 the country, with the exception of Texas and Pick 3, 14 which has shown an increase year over year since that 15 game was introduced. So -- and -- and I was not at 16 all trying to deflect from that issue. All I was 17 pointing out was that your staff has done a -- a 18 remarkable job of performing and -- and meeting their 19 obligation of revenue to the State. That -- that was 20 my sole observation. 21 CHAIRMAN CLOWE: Well, I don't think 22 anybody said that they weren't. I have -- I have been 23 defending this agency every chance I got for the last 24 two months, saying, there are a lot of good people 25 here, doing a lot of good work. I don't think that's 0170 1 really what we're talking about. I think we're 2 talking about dealing with a marketing problem and 3 zeroing in on it. You know, to make it more complex, 4 now, between a third and half of the people in this 5 state don't play the games. Commissioner Olvera had 6 that bit of information at his fingertips. I would 7 say, between 25 percent and 30 some-odd percent don't 8 like the fact that gaming is -- is conducted in this 9 state. And so anything that comes up, you know, they 10 latch onto that and say, that -- told you. And 11 clearly, when fewer people buy more tickets, that's 12 not good. And those that are opposed to the gaming 13 seize on an ethnic group or an economic group and say 14 they're being pinpointed or targeted, and that's bad. 15 So we -- you know, we've really got to do a premium 16 first class sales and marketing job to see this thing, 17 as it goes through its various maturities, do what the 18 legislature has told us they wanted to do for the 19 schools. It's not easy. We -- we understand that. 20 And again, nobody is saying the staff is not doing 21 everything they can and a very good job. We want to 22 talk about a better job. And we're not asking people 23 to work 16 hours for eight hours pay. We're talking 24 about brain power that will identify where the 25 opportunities are in this market. We want to do what 0171 1 apparently Toyota and Honda have done and not what 2 General Motors and Ford and Chrysler have done. We're 3 not making any clunkers, are we? 4 COMMISSIONER COX: No, sir, I hope not. 5 CHAIRMAN CLOWE: Not knowingly. 6 MR. GRIEF: Mr. Chairman, one -- one 7 point I -- I don't want to -- I don't want to leave 8 anyone with the impression -- because we have 9 mentioned General Motors -- we haven't raised our 10 prize payout percentage on our instant tickets. We're 11 not cutting the price, making them more attractive by 12 raising the prize payout. That is not what has 13 occurred. Those have remained fairly constant over 14 the past at least two fiscal years and perhaps longer. 15 What has happened is the shift of the sales. It's 16 moved from the online product, for whatever reason, to 17 the instant product. We haven't made those instant 18 products more attractive. They are just as attractive 19 or not just as attractive as they were previously. 20 It's just there is an increase in the number of people 21 who are buying those tickets, versus our on-line 22 games. 23 CHAIRMAN CLOWE: Why is it increasing? 24 MR. GRIEF: I believe people are bored 25 with the online product. I truly believe that, 0172 1 coupled with the fact that here in Texas, at least, 2 we've had more of a focus on licensed property games, 3 the higher price point games, which offer more 4 attractive payouts, as Commissioner Cox said, and 5 bigger prizes. 6 CHAIRMAN CLOWE: Well, you know, we've 7 got an opportunity in the lottery side that we don't 8 have in the bingo side. You heard folks this morning 9 talking about their problems in the bingo operation. 10 They are so locked in with the Bingo Enabling Act, 11 it's difficult to -- when you talk to the BAC or you 12 talk to people in that industry -- make suggestions 13 that might be helpful to them. I think the 14 Commissioners' concern in this area is, isn't there 15 something else we can do that is creative and 16 innovative and will get a higher per capita 17 involvement. And I think even the opponents of gaming 18 would not object to that as much if it were spread 19 over a larger percentage of players. But my concern 20 is, we keep going back to the same players and asking 21 them to spend more money. And I don't think that is a 22 healthy trend. That's a question. 23 MR. GRIEF: I don't either. One -- one 24 thing, and -- and I want to -- this -- this is -- 25 somewhat sits in the background from time to time. We 0173 1 do have a very comprehensive marketing study being 2 performed by the University of Texas at the current 3 time. And they're getting to the end of that study. 4 And I would like to have a chance to, when -- when 5 that study is completed, bring those results to the 6 Commission and have the Commission be privy to the 7 same briefing that the staff receives. And, 8 Mr. Chairman, I'm very mindful, because I recall, when 9 we did the reorganization, your concern about the 10 marketing aspect. 11 CHAIRMAN CLOWE: Do you remember that? 12 MR. GRIEF: You told me that this might 13 be the best fit today, but it might not be the best 14 fit tomorrow, as people come and go. 15 CHAIRMAN CLOWE: Thank you for 16 remembering that. 17 MR. GRIEF: Yes, sir. And I would like 18 to be able to go back and take another look at that. 19 I think it might be premature before we can hire 20 another executive director, but at the right time, I 21 think that would be something that we would want to 22 look at and consider how we're structured relative to 23 the skills people are bringing to the organization. 24 CHAIRMAN CLOWE: And I think it's fair 25 to call that to your attention because, Gary, I really 0174 1 mean this in the purest way. I think your skills and 2 abilities are in the operating side of the company, 3 and I think sales and marketing is a thing that is 4 less science and more art. And people who have a 5 flare for that and have a -- I have always been an 6 operating guy. And I never quite understood sales and 7 marketing people, but I realize their value and the 8 necessity to have them to create innovative appeals to 9 the customers. And now that we don't have that 10 residing in an individual like we did when we made 11 that organizational chart, I don't want us to be 12 oblivious to that and think, well, everything is just 13 going to go along, because those trends take time to 14 develop. By the time you see it in the numbers, it 15 can be a year or two in the making, and then you've 16 got another year or two to turn it around and get it 17 headed the other way. 18 MR. GRIEF: I take that as a 19 compliment. 20 CHAIRMAN CLOWE: What do you think, 21 Commissioner Olvera? 22 COMMISSIONER OLVERA: I need a break, 23 and I don't mean to cut the discussion short. 24 CHAIRMAN CLOWE: Anything further? 25 Thank you, gentlemen. 0175 1 Would you like to break for executive 2 session at this time? 3 COMMISSIONER OLVERA: Oh, I was just 4 going to take a short ten-minute break. 5 CHAIRMAN CLOWE: Well, if we're going 6 to break, then let's -- let's -- 7 COMMISSIONER OLVERA: That's fine, too. 8 CHAIRMAN CLOWE: We have some folks out 9 here from outside the agency that want to have some 10 time with us. This might be a good time. 11 Robert, can we defer your item that's 12 next until after executive session? 13 MR. TIRLONI: Certainly. 14 CHAIRMAN CLOWE: Is that all right with 15 you, Commissioner? 16 COMMISSIONER COX: Yes, sir. 17 CHAIRMAN CLOWE: At this time I move 18 the Texas Lottery Commission go into executive session 19 to deliberate the appointment and employment and 20 duties of the executive director and/or deputy 21 executive director, pursuant to Section 551.074 of the 22 Texas Government Code; to deliberate the duties of the 23 acting executive director, pursuant to Section 551.074 24 of the Texas Government Code; to deliberate the duties 25 and evaluation of the internal audit director and 0176 1 charitable bingo operations director, pursuant to 2 Section 551.074 of the Texas Government Code; to 3 deliberate the duties of the general counsel, pursuant 4 to Section 551.074 of the Texas Government Code; to 5 receive legal advice regarding pending or contemplated 6 litigation and/or to receive legal advice, pursuant to 7 Section 551.071 (1) (A), or (B) of the Texas 8 Government Code; and/or to receive legal advice, 9 pursuant to Section 551.071, (2), or -- of the Texas 10 Government Code, including but not limited to: 11 Patsy Henry versus Texas Lottery Commission 12 Sandy Surber et al. versus GTECH Corporation 13 Linda Cloud versus Mike McKinney, et al. 14 James T. Jongebloed versus Texas Lottery Commission 15 Russell Vierney versus Carol Keeton Strayhorn, et al. 16 Michael McDaniel, et al. versus Northstar Bank of 17 Texas, et al. versus Elite M & S, et al. 18 Re -- In re Matter Involving the Assignment of Lottery 19 Prize of Walter Gonzalez 20 Michele Sanchez, et al. versus Texas Lottery 21 Commission, et al. 22 Employment law, personnel law, procurement and 23 contract law, evidentiary and procedural law, and 24 general government law. 25 Is there a second? 0177 1 COMMISSIONER COX: Second. 2 CHAIRMAN CLOWE: All in favor, please 3 say aye. The vote is three/zero in favor. The Texas 4 Lottery Commission will go into executive session. 5 The time is 12:30 p.m. Today is August 15th, 2005. 6 MS. KIPLIN: Mr. Chairman, there was 7 one piece of litigation, not the settlement on 8 GameTech International, but the lawsuit between 9 GameTech International and Greg Abbott, et al. 10 CHAIRMAN CLOWE: Do we need that? I 11 skipped over that intentionally. 12 MS. KIPLIN: Yes, sir. I think -- 13 again, there is an AG here to provide you with advice 14 on that matter. 15 CHAIRMAN CLOWE: All right. Then, I 16 would like to include that item in the motion to go 17 into executive session. Is there a second? 18 COMMISSIONER COX: Second. 19 CHAIRMAN CLOWE: All in favor, please 20 say aye. The vote is three/zero in favor. Thank you. 21 (EXECUTIVE SESSION) 22 CHAIRMAN CLOWE: The Texas Lottery 23 Commission is out of executive session. The time is 24 2:19 p.m. Is there any action to be taken as a result 25 of executive session? 0178 1 If not, let's move to item number nine, 2 report and possible discussion and/or action on the 3 lottery terminal functionality, including the quick 4 pick feature for all games and/or impact to players. 5 Robert. 6 MR. TIRLONI: Good afternoon, again, 7 Commissioners. 8 Commissioners, I'm here this afternoon 9 to give you an update on the agency's progress related 10 to the review of the GTECH terminal functionality 11 issue that impacted Pick 3 sales on June 16th of this 12 year. The agency has requested additional analysis of 13 this matter, and I would like to give you an update on 14 the status of actions that are being taken. 15 GTECH has contracted with Deloitte & 16 Touche to conduct an independent third party review of 17 the Pick 3 matter at the request of the agency. 18 Internal Audit division and agency management staff 19 have coordinated to finalize the full scope of 20 services to ensure a comprehensive review of the quick 21 pick functionality for all of Texas' on-line games. 22 GTECH has informed agency staff this morning that 23 Deloitte & Touche is beginning work on this engagement 24 today. 25 GTECH was also asked to engage a third 0179 1 party to conduct an independent statistical review of 2 the quick pick functionality for all Texas on-line 3 games. This testing was requested by the agency over 4 and above the standard statistical randomness testing, 5 called GRAD, that is conducted by GTECH. GTECH 6 reported to the agency that it had engaged a company 7 called Gaming Laboratories Incorporated, or GLI, to 8 conduct this testing and analysis. However, GTECH 9 Texas staff later reported to the agency that the 10 agreement had not been finalized and that GLI had 11 indicated it would only contract with the Commission, 12 who is the end user, and not GTECH, the manufacturer 13 of the equipment. 14 Based on this information, agency staff 15 determined it would be more appropriate to engage 16 Doctor Randall Eubank, the agency's statistical 17 consultant, to complete this review and this analysis. 18 Doctor Eubank had already been engaged to conduct a 19 review of the Pick 3 quick pick data for the period 20 prior to June 16th, to review and report to the agency 21 on the impact of the quick pick functionality issue. 22 Elements have now been added to the Deloitte & Touche 23 engagement to allow them to oversee GTECH's capture 24 and retrieval of data for Doctor Eubank's analysis. 25 And Doctor Eubank is going to conduct a 0180 1 three-phase analysis. The first phase will be for him 2 to review and -- and analyze the degree of bias 3 reported by GTECH, related to the quick pick 4 functionality for the Pick 3 game prior to the report 5 of the issue on June 16th. The second phase will be 6 for Eubank to review and analyze the quick pick 7 functionality for the Pick 3 game following the 8 implementation of the code fix implemented by GTECH in 9 June. And then the third and the biggest phase of 10 Eubank's review and analysis will be to review and 11 analyze the quick pick functionality for all of Texas' 12 on-line games. So that would include Lotto Texas, 13 Mega Millions, Cash Five, and Texas Two Step. 14 Phases one and two related to Pick 3 15 should be completed no later than the first week of 16 September, and phase three, because of its size and 17 its scope, is expected to be completed no later than 18 mid October. And we do hope to -- if scheduling 19 permits, to have Doctor Eubank here at a September 20 Commission meeting to actually present his -- the -- 21 the findings of his review and analysis of phases one 22 and phases two. 23 There is one additional follow-up item 24 that I have. Staff had asked Doctor Eubank to review 25 and validate the GRAD tests utilized by GTECH to 0181 1 determine if they were a valid statistical testing 2 method for random quick pick ticket generation. And 3 we asked that the analysis should validate whether the 4 test would be appropriate for testing and validating 5 results related to quick pick generation for Texas' 6 on-line games. I know Michael Anger supplied you with 7 Doctor Eubank's letter regarding that analysis. I 8 would be happy to read parts of that letter into the 9 record, Mr. Chairman, or I leave it up to you how you 10 want me to proceed on that matter. I can tell you, 11 briefly, that Doctor Eubank, in his letter, did give 12 his opinion that the GRAD test framework is 13 statistically valid and appropriate for assessing the 14 performance of quick pick generation. 15 CHAIRMAN CLOWE: I think the 16 Commissioners have received that letter. Would you 17 give a copy to the reporter? 18 MR. TIRLONI: I certainly will. 19 CHAIRMAN CLOWE: Any questions? 20 COMMISSIONER COX: Has Professor Eubank 21 moved? 22 MR. TIRLONI: Doctor Eubank has left 23 Texas A&M University. He is now in Arizona, and it's 24 either Arizona State or the University of Arizona. 25 COMMISSIONER COX: Mine says Arizona 0182 1 State. So does that affect the status of our contract 2 with him in any way? 3 MR. TIRLONI: I don't believe so. Most 4 of the work that Doctor Eubank performs for us for the 5 validations and drawings department and for the 6 products department -- most of our exchange is handled 7 via phone and e-mail, sometimes fax. The only -- 8 COMMISSIONER COX: No, my question, 9 Robert, related -- I'm sorry -- to was this an 10 interagency contract with Texas A&M that he is working 11 under? 12 MR. TIRLONI: No. 13 COMMISSIONER COX: It is directly with 14 him? 15 MR. TIRLONI: It is directly with him, 16 yes. 17 COMMISSIONER COX: And Texas A&M was 18 not part of the picture when we hired him? We were 19 looking solely to him and not to other resources that 20 Texas A&M might provide that he brought along with 21 him? 22 MR. TIRLONI: Yes, that's correct. 23 Solely to Doctor Eubank. Texas A&M was not -- it was 24 not an interagency agreement. There were no resources 25 from Texas A&M that were part of his contract with the 0183 1 Lottery. 2 COMMISSIONER COX: Okay. 3 CHAIRMAN CLOWE: Thank you, Robert. 4 MR. TIRLONI: Thank you. 5 CHAIRMAN CLOWE: Next we'll go to item 6 number ten, report, possible discussion and/or action 7 on the lottery advertising and promotions. 8 MS. McCULLOUGH: Good afternoon, 9 Mr. Chairman, Commissioners. 10 CHAIRMAN CLOWE: Chelsea. 11 MS. McCULLOUGH: For the record, my 12 name is Chelsea McCullough, Creative Coordinator for 13 the Texas Lottery. 14 In regard to current advertising 15 initiatives, both DDB and The King Group are running 16 campaigns to support the I Love Lucy instant game. TV 17 and radio will run through August 21st in the general 18 market, August 28th in the minority market. 19 Live reads are currently at 100 percent 20 Lotto Texas and will continue unless the Mega Millions 21 jackpot reaches one hundred million. In regards to 22 current promotions, eight promotions are being held 23 across the state in the month of August, and more 24 details are available in the packet. 25 At this time I would like to provide an 0184 1 update with regard to the dual billboard pilot test 2 that was referred to in the April Commission meeting. 3 I -- I think we've lost our -- our AV equipment, but 4 we do have a sample of an actual board. Three 5 boards -- I'm sorry -- four boards are currently 6 installed in Amarillo. Construction is underway for 7 an additional board in Seminole and three other boards 8 in Corpus Christi. Staff is -- is working with 9 IPSOS-Reid to measure the awareness and the 10 effectiveness of these boards, as opposed to the 11 single message boards, Lotto Texas or Mega Millions, 12 and we're expecting a three-stage research survey. 13 If there are no questions at this time, 14 this concludes my presentation. 15 COMMISSIONER COX: At the time that we 16 went into Mega Millions, the idea of splitting the 17 boards between Lotto Texas and Mega Millions was 18 considered. And as I remember, it was determined at 19 that time that it would make the message too small, 20 and they wouldn't be able -- they wouldn't be able to 21 read it, and therefore, we went to either/or, rather 22 than both. What came up, Chelsea -- maybe you told us 23 this last time, and I just forgot -- that caused us to 24 reopen that issue? 25 MS. McCULLOUGH: Several other states 0185 1 have gone forward with the dual message boards, and 2 there is that concern, we simply don't have the 3 information to make the determination one way or the 4 other if that -- if the -- by splitting the -- the 5 message, if it would be most effective. That's the 6 reason why we're doing it in two market -- well, 7 essentially, three markets to test this. If it is 8 effective, then perhaps we would implement that in a 9 larger scale. 10 COMMISSIONER COX: So what I think I 11 hear you saying is that when the determination was 12 made back when we went into Mega Millions not to have 13 the two jackpots share the same thing, it was made 14 intuitively rather than databased, and now we're 15 gathering data to actually make a decision based on 16 that kind of data? 17 MS. McCULLOUGH: I would probably have 18 to refer to staff who was here at that time, because 19 I -- I wasn't employed with the Commission at that 20 time. But I know at -- at this point I can speak to 21 that point that, yeah, it will be absolutely 22 databased. 23 MR. GRIEF: Mr. Tirloni might be able 24 to shed some light on that, Commissioner. 25 MR. TIRLONI: At the time that we were 0186 1 going into Mega Millions, I was not involved in that 2 decision-making process. I -- I understand, after the 3 fact, that the -- at the time the marketing director 4 and at the time the advertising manager felt that the 5 cost outweighed the benefit of splitting -- splitting 6 boards and putting both jackpots on the outdoor 7 boards. And so the decision at that time was made to 8 take 100 some-odd boards and split -- pretty much 9 split them 50/50 -- Lotto Texas half and Mega Millions 10 half. 11 COMMISSIONER COX: So to your 12 knowledge, it was made based on someone's intuition? 13 MR. TIRLONI: Intuition and -- and 14 looking at costs at that time, without doing databased 15 tests and -- and erecting one of those boards and 16 measuring sales results in that area. 17 COMMISSIONER COX: Well, Gary, my 18 compliments on gathering data to make a decision. 19 MR. GRIEF: Very good. I believe you 20 had a lot of input in helping us reach that decision, 21 but I'll take the compliments, nonetheless. 22 CHAIRMAN CLOWE: Thank you, Chelsea. 23 MS. McCULLOUGH: Thank you. 24 CHAIRMAN CLOWE: Thank you, Robert. 25 MR. TIRLONI: Thank you. 0187 1 CHAIRMAN CLOWE: Next, item 11, report, 2 possible discussion and/or action on HUB and/or 3 minority business participation, including the 4 agency's mentor/protege program. 5 MS. BERTOLACINI: Good afternoon, 6 Commissioners. For the record, my name is Joyce 7 Bertolacini, and I'm the coordinator of the TLC's 8 Historically Underutilized Business program. 9 The TLC's subcontracting report 10 submission deadline did not allow time to complete the 11 July report for you today, but in your notebooks you 12 should have the June monthly HUB minority contracting 13 activity report, which includes all fiscal year 2005 14 expenditures paid from September 1st of 2004, through 15 June 30th of 2005. During this time, our total 16 qualifying expenditures were 127.4 million, and our 17 estimated HUB minority utilization was 30.9 million, 18 which equates to 24.28 percent. 19 And I have no updates for you today on 20 the mentor/protege program, but I would be happy to 21 answer any questions. 22 CHAIRMAN CLOWE: Thank you, Joyce. 23 MS. BERTOLACINI: Thank you. 24 CHAIRMAN CLOWE: Do you have a new 25 employee identification badge on? 0188 1 MS. BERTOLACINI: Yes, sir, I do. I 2 look very official, I think. 3 CHAIRMAN CLOWE: Yeah. 4 MS. BERTOLACINI: It's kind of a 5 generic State of Texas looking badge that we just got 6 all converted, I think, within the last couple of 7 weeks. 8 CHAIRMAN CLOWE: Oh. Well... 9 MS. BERTOLACINI: Well, apparently I 10 was the first one that you noticed it on, so... 11 CHAIRMAN CLOWE: Well, I've been seeing 12 it, but you -- it's better looking than mine. 13 COMMISSIONER OLVERA: It is somewhat 14 updated. You're right, Commissioner. 15 MS. BERTOLACINI: Do you still have the 16 one with the hat being thrown in the air? 17 COMMISSIONER COX: You've got a cowboy 18 hat on yours, Mr. Chairman. 19 CHAIRMAN CLOWE: I do. You don't have 20 it? 21 COMMISSIONER OLVERA: I lost my cowboy 22 hat that day. 23 CHAIRMAN CLOWE: Oh, okay. Well, thank 24 you, Joyce. 25 MS. BERTOLACINI: You're welcome. 0189 1 CHAIRMAN CLOWE: Next, item number 12, 2 report, possible discussion and/or action on the 3 agency's contracts. 4 MR. GRIEF: Mr. Chairman, if I could, I 5 believe this is Tom Jackson's first opportunity to 6 testify before the Commission. I would like to 7 introduce Tom. We hired Tom on February 28th, as our 8 Purchasing and Contracts manager. Tom's previous 9 employment included 11 years with the Texas Department 10 of Public Safety as the purchasing and contracts 11 manager at that agency, and over 15 years of 12 purchasing and contracts manager for Conoco/Vista 13 Research and Development Corporation. And Tom is 14 certified by the Texas Building and Procurement 15 Commission as a certified Texas purchasing manager. 16 CHAIRMAN CLOWE: Thank you, Gary. 17 Tom, welcome to the agency. We're glad 18 to have you associated. 19 MR. JACKSON: Thank you. Good 20 afternoon, Commissioners. As you said, my name is Tom 21 Jackson, Purchasing and Contract Manager for the 22 agency. 23 In your notebooks, under agenda item 24 number 12, is a report that has been updated for 25 your -- for your review. If you have any questions, I 0190 1 would happy to respond to them. 2 CHAIRMAN CLOWE: Thank you, Tom. I'd 3 say that was a successful first appearance. Line them 4 up and keep them coming. 5 Next, item 13, report, possible 6 discussion and/or action on the procurement of 7 advertising services and/or extension of existing 8 contracts. Mr. Grief? 9 MR. GRIEF: Commissioners, at the 10 April 6th Commission meeting, Michael Anger gave a 11 presentation to the Commission on the agency's 12 advertising contracts, including the past models that 13 have been used to -- as the operating models for the 14 advertising used by the agency, and he gave you an 15 overview of the contract terms. And I just want to 16 refresh that discussion briefly. 17 The general market advertising contract 18 is with DDB Dallas, and we're in the first of two 19 one-year renewal options that are available in that 20 contract. The current option expires on October 7th 21 of 2005. We do have one more additional one-year 22 option available. The minority market advertising 23 contract is with The King Group. And that contract is 24 also in the first of one one-year renewable option. 25 There is one additional one-year renewable option 0191 1 available. And that contract expires on October 24th. 2 During that presentation in April, the 3 staff notified the Commissioners of the staff's 4 interest in obtaining the help of a professional 5 consulting service to assist us in the review and 6 evaluation of the current advertising contract 7 structure and to assist the agency in the potential 8 drafting of a request for proposal to measure value in 9 the marketplace for the agency's advertising needs. 10 Since that time, the agency has engaged the services 11 of the University of Texas advertising department and 12 a team headed by Doctor Neal Burns, who is the 13 director of the center for brand research at the 14 university. Doctor Burns' team has been working with 15 our staff and has preliminarily recommended that the 16 agency pursue the development of a new RFP or RFPs for 17 advertising services as soon as practicable. Based on 18 that information from Doctor Burns' team, the staff is 19 recommending today that the final one-year renewal 20 options for both vendors, DDB and The King Group, be 21 amended to six-month renewals and have both terms run 22 through April 30th, 2006, if mutually agreed upon by 23 all the parties. We have initiated discussions with 24 both DDB and The King Group on that matter, and this 25 action will allow the agency to continue our current 0192 1 advertising efforts without interruption while we 2 continue to work with the consultant to develop an RFP 3 or RFPs for advertising services. Doctor Burns' team 4 is planning on making a final recommendation to the 5 Commission by August 31st, and I intend to share that 6 report with the Commission and have a -- a 7 presentation made by Doctor Burns at a future 8 Commission meeting. And you'll hear the 9 recommendations from his team, as well as 10 recommendations from staff in that regard as well. 11 And I would be happy to answer any 12 questions at this time. 13 COMMISSIONER COX: Let me see if I 14 understand, Gary. This Doctor Burns has made 15 recommendations to staff that we rewrite the RFP. And 16 I didn't hear you say with what kinds of changes it 17 would be rewritten, and that at some point in the 18 future somebody is going to tell us what he 19 recommended in detail. So what are you asking us for? 20 I hear you saying that you're going ahead and 21 rewriting the RFP under your statutory authority 22 without telling us why. So what is -- what is the 23 report? 24 MR. GRIEF: No, sir. I'm -- I'm -- I 25 must not have been clear. We're not rewriting any 0193 1 RFP. What I'm asking today is for approval from the 2 Commission to negotiate, instead of a one-year renewal 3 with both advertising vendors, a six-month renewal, 4 which we believe, by exercising that six-month 5 renewal, will give us the time to, first of all, 6 absorb what the information is that is going to be 7 contained in Doctor Burns' report, and then put 8 together the procurement process with the blessing 9 from the Commission to go out for new advertising 10 services. 11 COMMISSIONER COX: Well, it seems to me 12 that we've got the cart before the horse. If you need 13 our approval or want our approval to go ahead with 14 this, it seems like you would be asking for that 15 before you ask for the authority to go renegotiate a 16 bunch of contracts that if we didn't agree with your 17 approach, wouldn't need to be renegotiated. 18 MR. GRIEF: We have a unilateral 19 authority to exercise one-year renewals. If it were 20 not for the fact that we had procured the services of 21 Doctor Burns to come in and give us advice on this 22 matter, I would probably be sitting here today asking 23 approval from the Commission to go forward and renew 24 both advertising contracts for a one-year term. 25 COMMISSIONER COX: So -- 0194 1 MR. GRIEF: We're -- we're in a 2 situation -- 3 COMMISSIONER COX: We're -- we're up to 4 the time where we've got to make a decision. 5 MR. GRIEF: Correct. That's probably 6 what -- 7 COMMISSIONER COX: So what you're 8 asking us -- it must be getting late because now I'm 9 starting to get it. What you're asking for is, can 10 you negotiate this for only six months to protect 11 yourself against there being a recommendation that 12 would make us wish we had done that. 13 MR. GRIEF: You said it better than I 14 could. Yes, sir. 15 COMMISSIONER COX: I'm sorry, 16 Mr. Chairman. It just took me a while. 17 CHAIRMAN CLOWE: Commissioner Olvera 18 and I enjoyed seeing you get there. I told him it was 19 more fun in the afternoon. 20 COMMISSIONER OLVERA: I'm enjoying 21 myself. 22 CHAIRMAN CLOWE: Anything further? 23 COMMISSIONER COX: No, sir. 24 CHAIRMAN CLOWE: Thank you, Gary. I 25 think you have received approval. 0195 1 MR. GRIEF: Thank you. 2 CHAIRMAN CLOWE: There were no 3 objections to that. 4 Next -- well, Mr. Jackson, you get up 5 again. Item number 14, report, possible discussion 6 and/or action on the audit services procurement. 7 Welcome back, Tom. 8 MR. JACKSON: Thank you. Once again, 9 for the record, my name is Tom Jackson. 10 In your notebook, under agenda item 11 number 14, is a report that has been updated for your 12 review. Catherine Melvin will go into a little more 13 details to give you a further review on that item. 14 MS. MELVIN: I think, as I spoke 15 earlier, Commissioners, there was some legislation 16 passed during the regular session that now requires 17 agencies to seek a formal delegation of authority 18 before they contract for any type of audit services. 19 Our upcoming financial audit is subject to that same 20 provision. The Lottery Commission sent a letter to 21 the State Auditor, requesting that delegation of 22 authority. In this case, the State Auditor expressed 23 their desire to manage a contract, and so what they 24 have requested is that they will themselves contract 25 with an external auditor to perform the services. 0196 1 They're in discussions right now with Maxwell, Locke & 2 Ritter, who was our last year's vendor of these 3 services. And then we will have an interagency 4 agreement between the Lottery Commission and the State 5 Auditor's Office. 6 CHAIRMAN CLOWE: Very good. 7 Any questions? 8 Thank you. Thank you, Tom. 9 Catherine, I think the next item number 10 15 is yours. 11 MS. MELVIN: Sure. And this -- 12 CHAIRMAN CLOWE: Report, possible 13 discussion and/or action on the Drawings Audit 14 Services contract. 15 MS. MELVIN: This is a very similar 16 situation. The agency, of course, sent a letter to 17 the State Auditor's Office, requesting that delegation 18 of authority. In this instance, the State Auditor's 19 Office has granted that delegation and has advised 20 that the agency can move forward. So I'll let Tom 21 speak on the status. 22 MR. JACKSON: Yes. That contract has 23 been extended through August 31st, 2006. 24 CHAIRMAN CLOWE: Very good. 25 Any questions? 0197 1 And then item 16, consideration of and 2 possible discussion and/or action on the Broadcast 3 Studio and Production Services procurement. 4 MR. JACKSON: Okay. The Broadcast 5 Studio and Production Services RFP evaluation 6 committee has prepared a report with recommendations 7 on this proposal. These documents will be submitted 8 to Executive for their review probably sometime this 9 afternoon. 10 I'll be happy to answer any questions. 11 COMMISSIONER COX: Mr. Chairman, this 12 is a subject that I know absolutely nothing about, and 13 yet every time somebody gets mad at us, it comes up. 14 Can you just give me a little bit of background on 15 this issue? 16 CHAIRMAN CLOWE: I would love to try. 17 Counselor, can I do this without 18 getting into a lawsuit? 19 MS. KIPLIN: Your question is -- 20 Commissioner Cox, your question has to do with wanting 21 some kind of background information on the Broadcast 22 Studio and Production Services -- 23 CHAIRMAN CLOWE: The history. 24 MS. KIPLIN: The history of those 25 services -- 0198 1 CHAIRMAN CLOWE: And why there is an 2 adverse reaction. 3 COMMISSIONER COX: This seems to be the 4 hottest of all potatoes, and I would like to 5 understand why. 6 MS. KIPLIN: And what -- and what's 7 noticed is the procurement, but I guess, for you to 8 really understand the procurement, it would be helpful 9 to have a little bit of history, is what I'm thinking 10 in terms of -- 11 COMMISSIONER COX: It might be 12 applicable. 13 CHAIRMAN CLOWE: My -- my recollection 14 of the history, very briefly, Commissioner, is that 15 from the outset of the lottery and for a great number 16 of years, the broadcast studio and the drawings 17 activity was done off-site by an outside vendor. And 18 at a point in time, the question was raised as to 19 whether or not the agency could reduce costs and save 20 money by bringing the studio on-site and having it 21 done by an outside vendor. I personally visited the 22 original studio to observe the drawings, and my 23 personal opinion is that it was conducted in an old 24 building that was across the east side of I-35. It 25 was at night, which is when the drawings are 0199 1 conducted. Not a good area for individuals to be 2 moving in and out of the building or between there and 3 their cars. I thought that individuals, men or women, 4 were subject, in that area, to activities that would 5 not be a problem on these premises, as well protected 6 as they are. 7 Inside the studio, there were cables on 8 the floor as you walked around and you were a party to 9 what was going on there. There were hazards. There 10 were backdrops that were hanging from the ceiling that 11 were cosmetic in nature and represented a less than 12 attractive and perhaps even safe environment. The 13 ball machines themselves -- you didn't know I knew 14 this much about it, did you? 15 COMMISSIONER COX: I didn't know there 16 was this much to know about it. 17 CHAIRMAN CLOWE: You asked for it. The 18 ball machines had to be moved in and out of a secure, 19 locked area every night. And the ball machines 20 themselves, as they are moved about, are -- like any 21 other technical piece of equipment, they may not 22 necessarily fault, but they are subject to fault. And 23 although our record, in my recollection, was perfect 24 when we left that facility, there was that exposure to 25 a technical fault. 0200 1 The executive director at the time 2 requested bids and received bids for the conducting of 3 those operations in a facility which you now know as 4 our drawing studio, and there was -- I'll just have to 5 give you a general recollection on this -- a 6 substantial savings to the State of Texas as a result 7 of the new contract relative to the drawing 8 operations. The build-out of this studio -- I cannot 9 accurately recall whether it was fully covered by the 10 landlord's allowance or partially covered, or 11 whatever, but that is an -- an issue that if you want 12 to get precise details on, you could. It was a -- it 13 was a hot topic of discussion because there was, at 14 the time, a change of the vendors. The State's 15 culture is to sub out rather than bring in. And we 16 had questions from the legislature and from various 17 committees about, you know, you're -- you -- you're 18 going in the wrong direction. You're turning into 19 doing more things instead of subbing things out. I 20 was on this board at that time, and in my opinion, I 21 can't remember what the savings was exactly, but it 22 was a good move for the State to bring that drawing 23 studio in-house and the State saved money. 24 I cannot for the life of me tell you 25 why Ms. Nettles said she was against it this morning. 0201 1 And I'm sure that that is one of the things that stuck 2 in your mind. You know, from my viewpoint, as a 3 Commissioner, it was the right thing to do, and it has 4 saved the State money. And I might also point out to 5 you that this facility is so much nicer. The cameras 6 are all stationary. They're in place. They don't 7 move an inch. The ball machines are much better 8 protected and are less subject to failure. We have a 9 very nice viewing area for people who want to come in 10 and sit down and watch the drawings. On Saturday 11 nights, they open those windows and -- open the 12 shutters, and that's bulletproof glass that protects 13 the operations. And you can view that from Sixth 14 Street. There is a plasma TV that can be watched. 15 You know, it was just a quantum leap 16 forward and, additionally, we changed the whole format 17 of the drawings and modernized it and updated it. So 18 the answer to your question is, I don't know why. But 19 I think it was a good move for the State, and I think 20 it was a very positive thing. 21 COMMISSIONER COX: So would it -- did I 22 sleep through the meeting where we decided to automate 23 our draws? 24 CHAIRMAN CLOWE: No, you didn't. That 25 statement -- 0202 1 MS. KIPLIN: I'm thinking that might be 2 off the agenda. Drawing automation? Let me just see. 3 COMMISSIONER COX: Well, I'm thinking, 4 why would we be doing this procurement if we have 5 decided to automate our drawings? 6 MS. KIPLIN: I don't believe that those 7 are the same two issues. I'll defer to Mr. Grief on 8 the production studio. 9 CHAIRMAN CLOWE: No, they're not the 10 same two issues. She's right. 11 MS. KIPLIN: Automated drawings. 12 CHAIRMAN CLOWE: And let me suggest -- 13 I -- I can sense that you have a question about that. 14 And let me direct you to either Gary or Kim, regarding 15 what you heard this morning. I think that was a 16 person misspeaking. And it was a comment that caught 17 my attention. But I don't think it's on our agenda, 18 and I don't think we can discuss it properly at this 19 time. But I think Gary has some information for you 20 on it. 21 COMMISSIONER COX: Well, if -- I guess 22 I'd just say if -- if we have made such a decision, at 23 the next meeting, could you repeat the details of it 24 with me. 25 MR. GRIEF: I certainly will if we have 0203 1 made such a decision. 2 COMMISSIONER COX: Thank you. 3 CHAIRMAN CLOWE: See, Tom, you never 4 know what you bring up, do you? 5 MR. JACKSON: Are there any other 6 questions? 7 CHAIRMAN CLOWE: Thank you. 8 COMMISSIONER OLVERA: Well answered, 9 Tom. 10 CHAIRMAN CLOWE: Next, item 17, report, 11 possible discussion and/or action on the agency's 12 financial status. Ben? 13 MR. NAVARRO: Good afternoon again, 14 Commissioners. For the record, my name is Benito 15 Navarro. I'm the acting Financial Administration 16 manager. 17 Please refer to the materials contained 18 under tab 17, entitled Agency's Financial Status. 19 Under this tab, we find several reports. The first 20 report is a report on transfers made to the Foundation 21 School Fund and allocations of unclaimed prize monies. 22 July's lottery sales, revenue, and other amounts 23 transferred to the Foundation School Fund in the month 24 of August amounted to 85.8 million dollars. Behind 25 the transfer report, you'll find a report of lottery 0204 1 sales, expenditures, and transfers from fiscal year 2 1992 to date. Total cash basis transfers to the State 3 for the month of July totaled 12.8 billion dollars. 4 Of this amount, 7.5 billion has been transferred 5 directly to the Foundation School Fund. Behind the 6 divider page, you'll find the Texas Lottery 7 Commission's budget reports for the period 8 September 1st, 2004, through July 31st, 2005. Both 9 lottery and charitable bingo operations expenditures 10 and commitments are tracking as expected, with the 11 exception, again, of the lottery operator contract. 12 This contract is running at over 100 percent of its 13 original budget amount. This is due to higher than 14 expected lottery sales thus far in fiscal year 2005. 15 Because the agency has appropriated 16 additional funds in the event of higher sales, there 17 are no budget concerns to report at this time. I 18 would like to note, however, that for the month of 19 July the Commission has received an additional 28.8 20 million dollars in Rider 4 funding. Of that amount, 21 18.6 million has been allocated to the lottery 22 operator contract to pay for increased sales. 23 Finally, Commissioners, today I would 24 like to bring you up to speed on the status of the 25 agency's fiscal year '06 operating budget. The 0205 1 operating budget was developed over a period of 2 several weeks with divisions working very closely with 3 Financial Administration staff to meet targets 4 established by executive management. After many 5 discussions and adjustments, the budget was approved 6 for distribution to the TLC divisions by executive 7 management on August the 10th. The amounts requested 8 by divisions totaled 181.6 million dollars. This 9 amount is approximately 800,000 dollars below the 10 adjusted base appropriations of 182.4 million dollars 11 that currently existed under Article 7. 12 And that concludes my report, and I'll 13 be glad to answer any questions you may have. 14 CHAIRMAN CLOWE: Thank you, Ben. 15 MR. NAVARRO: Thank you, Commissioners. 16 CHAIRMAN CLOWE: Next, item 18, report, 17 possible discussion and/or action on the 79th 18 Legislature. 19 MS. TREVINO: Good afternoon, 20 Commissioners. For the record, I'm Nelda Trevino, the 21 Director of Governmental Affairs. 22 Progress with the agency's legislative 23 implementation project in the regular legislative 24 session continues. Based on the review from each of 25 the bill committees, necessary actions are being 0206 1 implemented in order to be in compliance with enacted 2 legislation. It is my understanding, under a separate 3 agenda item, Diane Morris will be providing a report 4 on the implementation of some of the provisions 5 contained in the General Appropriations Act. 6 The first called special session of the 7 79th Legislature concluded on July the 20th. While 8 there was legislation filed during the first called 9 session which impacts the agency, none of these bills 10 were enacted. 11 The second called special session 12 convened on July the 21st. There have been over a 13 hundred bills that have been filed this special 14 session, and in your notebook there is a legislative 15 tracking report. And I would like to mention three 16 bills noted on the report. These include House Bill 17 22, by Representative Kino Flores. And this relates 18 to an exception for certain employees of the Lottery 19 Commission from the application of the employment 20 at-will doctrine. House Bill 37, by Representative 21 Tony Goolsby, which authorizes the agency's 22 Commissioners to be full-time compensated positions 23 rather than unpaid volunteer positions. And Senate 24 Bill 34, by Senator Armbrister, which relates to 25 authorizing the operation of video lottery at race 0207 1 tracks and on Indian tribes. And I would like to 2 point out that there has been no action on any of 3 these bills that I have just mentioned. 4 This concludes my report, and I'll be 5 happy to answer any questions. 6 CHAIRMAN CLOWE: Are there any 7 questions? 8 Thank you, Nelda. 9 MS. TREVINO: Thank you. 10 CHAIRMAN CLOWE: Next, item 19, 11 consideration of and possible discussion and/or action 12 on external and internal audits and/or reviews 13 relating to the Texas Lottery Commission and/or the 14 Internal Audit Department's activities. Ms. Melvin. 15 MS. MELVIN: Good afternoon, again, 16 Commissioners. I just have two items to update you on 17 regarding this. 18 Regarding external audits, I think I 19 have mentioned in the prior Commission meetings that 20 there is a Comptroller's post-payment audit that is 21 still outstanding, and as of today it is still 22 outstanding. We have not received our final list of 23 issues from them nor a draft report. So just be aware 24 that we're anticipating a report sometime soon. 25 Regarding the internal audit function, 0208 1 I just want to mention today that the internal audit 2 members are in the planning stages for FY '06 internal 3 audit. 4 That's all I have. 5 CHAIRMAN CLOWE: Any questions? 6 Thank you, ma'am. 7 Next, item 20, consideration of and 8 possible action on the appointment and employment of 9 an executive director. Ms. Morris, will you step up? 10 MS. MORRIS: Good afternoon. 11 CHAIRMAN CLOWE: Good afternoon. Will 12 you give the Commissioners a report on the status of 13 your work in this area. 14 MS. MORRIS: Initially, the posting for 15 the new executive director was posted earlier last 16 month, July 7th. It was posted on the agency's Web 17 site. There have been advertisements in the Austin 18 paper, Dallas, Houston, and San Antonio newspapers, as 19 well as, if you will, a second wave of advertisements, 20 also in the Dallas/Fort Worth, Houston, Austin papers, 21 and, in addition, El Paso, Corpus Christi, the Valley 22 Morning Star, and the Midland/Odessa papers. We've 23 also decided and have proceeded to publicize the 24 posting in The Wall Street Journal, the national 25 edition. 0209 1 To date, we have approximately 40 2 applications that have been filed. I have been 3 working in facilitating the applications going to the 4 search committee for the executive director. There is 5 a -- an extensive discussion of the role of the search 6 committee in the posting, but for purposes right now, 7 to remind you, that the search committee will be 8 receiving applications, and at some point they will be 9 identifying about 10 or 12 names. And of those names, 10 the search committee would be asked to identify the 11 two or three or four top candidates, in their view. 12 Those names will be forwarded to the Commissioners. 13 Obviously, the final decision rests in the three 14 Commissioners. The members -- or the individuals 15 identified by the search committee will be given 16 strong consideration by the Commissioners, but again, 17 the Commissioners are free to interview others and to 18 proceed at that point. 19 I'm very hopeful, as we continue, that 20 the process is -- is working. It's not sometimes as 21 fast as I wished it would go. But, hopefully, we'll 22 be getting more and more applications and have a very 23 strong applicant pool. 24 CHAIRMAN CLOWE: And, Diane, would you 25 name the members of the search committee, please? 0210 1 MS. MORRIS: Oh, I'm sorry. I don't 2 have their -- the precise list with me, but I will do 3 my best right now. The two former Commissioners, 4 that's Anthony Sadberry and Elizabeth, Becky, 5 Whitaker; the employee of the agency present, as a 6 member of the committee, is Leticia Vasquez; 7 Doctor Busald of San Antonio College; Mr. Edwards, 8 with the State Bar of Texas; David Heinlein, with 9 bingo interests and some kind of -- I would say, bingo 10 involvement, if you will, to -- to bring that to the 11 presence for the search committee's interests; 12 Commissioner Francisco Hernandez with the Texas Ethics 13 Commission. 14 CHAIRMAN CLOWE: And the retailer 15 presence. 16 MS. MORRIS: I'm sorry. You're right. 17 Rick Johnson. And -- 18 CHAIRMAN CLOWE: That's -- that's eight 19 individuals and -- 20 MS. MORRIS: Well, I'm sorry I 21 interrupted you, but I was going to say, of course, 22 you -- you, Commissioner. You're serving as the 23 chair. Tom Clowe is serving as the chair. There was 24 a tenth individual that was requested to join, 25 Ms. Nettles. And I -- as I understood, Ms. Nettles 0211 1 had originally agreed to join, but I received a 2 communication from Ms. Nettles that she was unable to 3 participate and would like to withdraw. 4 CHAIRMAN CLOWE: That's correct. And 5 that committee, hopefully, will rank the applicants 6 and move towards an interview date, if possible, late 7 in September, making recommendations to the three 8 Commissioners as a result of those interviews. 9 MS. MORRIS: Yes, sir. 10 CHAIRMAN CLOWE: And in the meantime, 11 Commissioners, Ms. Morris is serving as a support 12 liaison person to the search group and furnishing them 13 with support and information that they need to perform 14 their task. And I think that Diane would like to ask, 15 at this point in time, beyond the job posting, which 16 we think is well done, is there any verbalization of 17 what the Commissioners would like to see in the 18 process of selecting an executive director that you 19 would like to give her and give the search committee 20 at this time? 21 COMMISSIONER OLVERA: I have nothing 22 beyond what is on the notice. 23 COMMISSIONER COX: I have nothing 24 beyond that I guess maybe, by way of emphasis, Diane, 25 there are a lot of objective criteria that we can 0212 1 pretty much discern from a review of a resume and 2 certainly from an interview, but the one that I think 3 that is the most important to me and probably the most 4 difficult to ascertain is that this person exemplify 5 the core values of the Texas Lottery Commission. And 6 however we ultimately go about determining whether 7 that's the case, I think that is critical to the 8 success of the decision that we make. 9 COMMISSIONER OLVERA: And it's my 10 understanding that those core values are reiterated 11 on -- on the notice. Is that correct? 12 MS. MORRIS: Yes, they are. I'll -- 13 I'll repeat them for y'all's purposes if you care to 14 develop those further. Integrity, responsibility, 15 innovation, fiscal accountability, customer 16 responsiveness, teamwork, excellence in ensuring those 17 values are incorporated in all aspects of the agency's 18 decision making. 19 CHAIRMAN CLOWE: Thank you, 20 Commissioners. 21 I would like to make two points in this 22 regard to you, Diane, and I think it's important that 23 we cover this with the search committee. 24 The first is, we do not want to paint 25 this position to them in any other form than it is. 0213 1 And I see it as an extremely difficult task to balance 2 all of the forces that are at play here and assume a 3 leadership role of this agency to take us through the 4 challenges that we have. We have experienced 5 criticisms regarding activities within the last few 6 months. And I think that there is a need for strong, 7 positive leadership at this time in regard to the 8 selection of that individual. That says nothing to 9 reflect on Gary in his role as acting executive 10 director. In my opinion, he is fulfilling that role 11 and performing very well. 12 The second point I want to make is that 13 with the recent action of the legislature, the 14 compensation for this position is capped at 115,000 15 dollars. I have expressed, I think, not only my 16 feelings but the Commissioners' feelings to the Sunset 17 committee, to the chairman of the Senate Finance 18 Committee, to just about anybody in the legislature 19 that I've had the opportunity to chat with, that this 20 is compensation for the task that is not in balance. 21 And I think we may see this as an obstacle that 22 applicants have to deal with as we seek the best 23 qualified candidate. And I am regretful that the 24 legislature capped this at 115,000, up from 110, but 25 in their wisdom that's what they decided to do. I 0214 1 would like to point out, for the record, that Gary 2 Grief took a pay cut when he agreed to be the acting 3 executive director, from the deputy -- deputy 4 executive director's position, which is a sacrifice 5 for him and for his family in the way of income, to 6 step in at the Commissioners' request and perform this 7 duty. 8 To run a three and a half billion 9 dollar a year business and face the challenges that I 10 have laid out that exist for this position, this is -- 11 this is a task for the search committee. So I'm 12 appreciative, and I want to express that appreciation 13 to those members, those -- what was it, eight members? 14 MS. MORRIS: Nine, including yourself. 15 CHAIRMAN CLOWE: Yeah. Well, I'm -- 16 I'm the one getting the big bucks. And I want to 17 express my appreciation to those eight members. And 18 by the way, they will do this work, they will travel 19 to Austin for the interview meeting date, they will do 20 all of this at totally their own expense. This agency 21 has no means to compensate them, so this is true 22 public service. We are running against a six months 23 limitation on Acting Director Gary Grief's term, so we 24 need to move ahead on this as orderly and as rapidly 25 as possible. 0215 1 Anything further, Commissioners? I 2 want to get all of this out in the open so everybody 3 knows what is going on. 4 Anything further, Diane. 5 MS. MORRIS: No. 6 CHAIRMAN CLOWE: Thank you, ma'am. 7 Commissioners, we're ready now to go to 8 item 23, which is the consideration of the status and 9 possible entry of orders in the cases represented by 10 the letters A through G. 11 Mr. White, will you present those to 12 us. 13 MR. WHITE: Yes, sir. For the record, 14 my name is Stephen White. I'm the Chief of 15 Enforcement, Legal Services Division. 16 Commissioners, you have before you 17 today, on the bingo side, three proposals for 18 decisions and three agreed orders, and on the lottery 19 side, one PFD, proposal for decision. And I'd like to 20 start with that one first. That's the case of 21 Margie's Grocery. Margie Grocery -- in the case of 22 Margie's Grocery, this case involved a request by 23 Margie's Grocery -- 24 CHAIRMAN CLOWE: Steve, let me just 25 interrupt you and tell you that we've got these in our 0216 1 book and we've read them. And unless the 2 Commissioners have questions, we might be ready to act 3 on these. 4 MR. WHITE: Yes, sir. In this one 5 case, if you're ready to proceed on Margie's Grocery, 6 that was the case where the staff is asking you to do 7 something -- not to approve the ALJ's findings of fact 8 and conclusions of law in their entirety, just the 9 majority of them. 10 CHAIRMAN CLOWE: Let's see if the 11 Commissioners have any questions. 12 Do you want -- do you want more 13 information on that or any other case? 14 COMMISSIONER COX: I'm okay. 15 CHAIRMAN CLOWE: Judge, how about you? 16 COMMISSIONER OLVERA: No, I -- I have 17 no questions at this time. 18 MS. KIPLIN: So he has a -- he has an 19 order, just to be clear, that does not adopt all 20 findings and conclusions proposed by the State Office 21 of Administrative Hearings administrative law judge, 22 and instead has a drafted order that sets out the 23 reasons for rejection of fully two conclusions of law, 24 one finding of fact, and sets out the legal reasons 25 and the policy for that. 0217 1 CHAIRMAN CLOWE: Okay. Any questions? 2 Do you want to cover any of the other 3 cases, specifically? 4 MR. WHITE: Just -- no, sir. In the 5 other -- in the bingo side, the three PFDs, we 6 recommend that you adopt the findings of fact and 7 conclusions in law and recommendations of the ALJ. 8 Those are three conductors who failed to timely submit 9 their quarterly reports and prize fees three times in 10 one year. And the judge recommended revocation of the 11 license, and the staff recommends that you follow the 12 ALJ's recommendations in those cases. 13 And then there are also three agreed 14 orders, negotiated by the staff, with the three 15 conductors -- excuse me -- one conductor, one 16 commercial lessor, and one bingo worker. And we also 17 recommend that you adopt those negotiated agreed 18 orders. 19 MS. KIPLIN: And in two of those 20 negotiated agreed orders, Bingo Management and Kris 21 Keller, they were represented by counsel. 22 CHAIRMAN CLOWE: Commissioners, I move 23 the adoption of the staff's recommendation in dockets 24 are represented on the agenda by letters A through D 25 and cases represented by letters E through G. Is 0218 1 there a second? 2 COMMISSIONER COX: Second. 3 CHAIRMAN CLOWE: All in favor, please 4 say aye. Opposed, no. The vote is three/zero. We'll 5 sign the orders. 6 MS. KIPLIN: Mr. White has the order on 7 Margie's Grocery, and Mark and I have the other 8 orders. 9 CHAIRMAN CLOWE: And, Mr. Grief, as 10 soon as we sign these records, we'll be calling on you 11 under item number 24, report by the Acting Executive 12 Director or possible discussion and/or action on the 13 agency's operational status and FTE status. 14 Mr. Grief. 15 MR. GRIEF: Commissioners, I'm going to 16 have some help from staff today on a couple of items 17 as part of my report today. I'd first ask Diane 18 Morris, our Director of Human Resources, to come 19 forward and brief you on several HR issues that are 20 impacting the agency at the current time, relative to 21 the FTE cap and things of that nature. Diane. 22 MS. MORRIS: Good afternoon. 23 With the topic of the agency FTE cap, 24 currently the Texas Lottery Commission is authorized 25 325 full-time equivalent positions, FTEs. This limit 0219 1 is set in the General Appropriations Act in our bill 2 pattern. However, effective September 1, 2005, this 3 limit was effectively reduced by two percent, bringing 4 our cap to 318.5. 5 By way of background, we have -- the 6 agency has consistently monitored its FTE cap for a 7 while now on a weekly basis. On a weekly basis, we 8 report the positions as they are filled, positions 9 that are vacant, and positions that are posted. 10 Generally, our weekly monitoring of the FTE cap shows 11 a number between the numbers of 299 and about 312. 12 For instance, the last report I saw last week, our FTE 13 number was 299. 14 At this time, for the agency to meet 15 the reduction in the FTE cap, in other words, to go 16 from 325 to 318.5, our plan is that we will be meeting 17 that through attrition and through managing some of 18 the restructuring and some of the vacancy jobs, 19 restructuring some job duties. But ultimately, the 20 meeting of the reduction in the FTE cap will be 21 accomplished most likely through attrition. 22 MR. GRIEF: Any questions about that 23 item? 24 CHAIRMAN CLOWE: Questions? Thank you. 25 MS. MORRIS: I think I was also asked 0220 1 to visit more on the State classifications system and, 2 in particular, it's referred to as the 2006 3 conversion. Every other year the State Auditor's 4 Office reviews the State job descriptions. Those are 5 set in law for the classified positions. And the 6 State Auditor's Office has reviewed the State job 7 descriptions. And for approximately 100 of our 8 employees, their job descriptions are changing as the 9 State Auditor's Office has written those job 10 descriptions and defined those. Now, granted, the 11 State Auditor's job descriptions are general job 12 descriptions, and we are free to refine them for our 13 particular jobs, but as far as what you will hear 14 called the conversion, there are approximately a 15 hundred jobs that are being reclassified or retitled. 16 As part of our staff meeting a few 17 weeks ago, the staff was invited to visit with their 18 managers on the conversion. If they had any concerns 19 about their particular job, their job title, their job 20 description, to please visit with their managers. 21 Human Resources has separately visited with the 22 managers of the agency regarding the conversion and so 23 that this can be accomplished in an orderly fashion. 24 It will be beginning, effective September 1, 2005. 25 And along that date, another date 0221 1 that's September 1, 2005, is, of course, the employee 2 pay raise. The employees of the agency will receive 3 at least a hundred dollars a month or a four percent 4 increase, September 1. 5 MR. GRIEF: Any questions about that 6 information, Commissioners? 7 CHAIRMAN CLOWE: Yeah, yeah, yeah. 8 Any questions? Thank you. 9 MR. GRIEF: Thank you, Diane. 10 I have several other items I need to 11 make the Commission aware of. First, we are actively 12 recruiting for a new chief financial officer for the 13 agency. The job posting for that position, which 14 we're now calling a controller, went up on July 25th, 15 and we anticipate starting our interview process very 16 shortly. This position has a new requirement of a 17 certified public accountant license. And to improve 18 the direct communication between this position and 19 executive management, this position will report 20 directly to the deputy executive director. 21 Also, I want to make the Commission 22 aware that I have worked closely with Commissioner Cox 23 to further enhance the checks and balances in the 24 financial department. The function of reviewing all 25 payments released by the agency for any reason, 0222 1 something that we call the treasury function, has been 2 temporarily transferred to me from Financial 3 Administration. And I am better familiarizing myself 4 with all the types of payments that are made by this 5 agency, and I'm doing that down to a detailed level. 6 And I'll continue to do that until I'm satisfied that 7 I have gone through an entire monthly cycle of 8 payments. I anticipate that that will take me about 9 45 days until I'm comfortable with that project. At 10 the end of that time, I'm planning on transferring 11 that treasury function to Mike Fernandez, our Director 12 of Administration. And once the new controller is 13 brought on board, we will bring this topic up again 14 for discussion and think about the best location for 15 that function on a long-term basis. 16 Also, I wanted to -- 17 CHAIRMAN CLOWE: What is the range of 18 that posting for compensation, Gary? 19 MR. GRIEF: I don't have that in front 20 of me, Commissioner, but -- do you remember, Diane? 21 MS. MORRIS: No, I don't, Gary. 22 CHAIRMAN CLOWE: Give that to the 23 Commissioners when you can get it, would you, please? 24 MR. GRIEF: We'll do that. 25 I also want to again recognize Ms. Dawn 0223 1 Nettles of the Lotto Report for her continued 2 assistance. As I mentioned earlier, Ms. Nettles and I 3 went back and forth several times on the posting of 4 the jackpot estimation information on the agency's Web 5 site. She was very helpful in that regard. Due to 6 her interest in the lottery and her attention to 7 detail, I have continued to reach out to her to 8 communicate on those types of matters. I've also had 9 productive discussions with Ms. Nettles recently 10 regarding the future of the Lotto Texas game, and I 11 hope to continue to keep that dialogue open. 12 I also want to make you aware of the 13 upcoming National Association -- National State and 14 Provincial Lottery conference taking place in 15 Minneapolis, Minnesota, September 14th through the 16 16th. That organization is typically -- goes by its 17 acronym, NASPL. And the agency is going to be well 18 represented at that conference. Robert Tirloni, our 19 Products Manager, will be in attendance, as well as 20 Julie Terrell, our new Online Product Coordinator; 21 Research Specialist David Veselka; our Creative 22 Coordinator, Chelsea McCullough; and our Retailer 23 Development Coordinator, Theresa Edwards. That 24 conference brings together delegates from more than 50 25 lottery jurisdictions in North America. 0224 1 Some of the breakout sessions are 2 particularly interesting at this particular 3 conference. They'll include problem gambling, 4 effective lottery websites, the optimization of the 5 product mix, how to evaluate the success of 6 advertising, how lotteries have responded to radical 7 organizational change, how to best respond to a 8 crisis, and others. I'm excited about our opportunity 9 to send those staff members to that particular 10 conference, and I look forward to hearing on them on 11 their return. 12 Any questions on that item? 13 COMMISSIONER COX: Why aren't you 14 going? 15 MR. GRIEF: I thought that question 16 might come, Commissioner. I think, in light of the 17 fact that we don't have a deputy executive director 18 right now and all the activity that's going around our 19 agency right now, I think can best serve the agency 20 here. 21 COMMISSIONER COX: It sounds like some 22 things that you or various members of your staff could 23 benefit from. 24 MR. GRIEF: I agree, and I believe we 25 have the right people in attendance at that meeting. 0225 1 Any other questions on that. 2 CHAIRMAN CLOWE: Thank you. 3 MR. GRIEF: I also want to tell you 4 about some recent developments with Scientific Games, 5 our primary instant ticket vendor. Michael Chambrello 6 has recently joined Scientific Games as the president 7 and chief operating officer. That took effect 8 July 1st, 2005. Lorne Weil will continue as chairman 9 of the board. Mr. Chambrello previously served as the 10 president of GTECH Corporation. And several members 11 of our current staff, including myself, had an 12 opportunity to work with Mr. Chambrello several years 13 ago during the time that he was with GTECH. I have 14 asked Mr. Chambrello to come in and visit with the 15 staff and talk to us about his outlook for the Texas 16 account. And we will have that meeting with him 17 tomorrow morning at 11:00 o'clock. I've also asked 18 Mr. Chambrello to be available at a future Commission 19 meeting to come in and give the Commission a broader 20 overview, the state of the company address, if you 21 will. And I'll keep you informed how our meeting goes 22 with Mr. Chambrello tomorrow, as well as what his 23 schedule allows him to do in the near future. 24 Commissioners, in light of the recent 25 questions that have been raised regarding our agency 0226 1 personnel policies and the recent request that the 2 agency made to the State Auditor's Office to have a 3 full review of our personnel policies done, we have 4 implemented several measures related to our agency's 5 personnel policies and practices. And I want to make 6 you aware of those. 7 Effective since July 21st, 2005, any 8 employment actions that may result in the involuntary 9 separation of an employee here in the agency must go 10 across my desk and be approved by me before those can 11 take place. Involuntary terminations of employment 12 would include reductions in force, terminations for 13 cause, at will terminations, and resignations in lieu 14 of terminations. 15 I've also requested HR to review and 16 revise the agency's personnel policy manual as 17 necessary. HR has obtained copies of several policy 18 manuals from different agencies, including the Office 19 of the Attorney General, the General Land Office, the 20 Comptroller of Public Accounts, and the State Bar of 21 Texas. The HR department is going to use those 22 manuals as a model or a guide to see how we can make 23 improvements to our manual, including the development 24 of a formal employee grievance policy. In addition, 25 agency staff are going to be invited to participate in 0227 1 open work sessions about that personnel policy manual, 2 including the development of the employee grievance 3 policy. 4 At the July 11th Commission meeting, in 5 which Chairman Kino Flores was in attendance, Chairman 6 Flores and members of the Commission expressed a 7 desire to work closely together in this regard. And 8 we are going to look to Chairman Flores' office for 9 guidance as to the level of involvement that his 10 office will participate in with us and look forward to 11 working with his office in that regard. 12 We're also going to seek assistance 13 from the Office of the Attorney General and the State 14 Auditor's Office as we look to revise our personnel 15 policy manual. 16 And concurrent at the same time as we 17 roll out the agency policy manual, management staff is 18 also going to undergo mandatory supervisory refresher 19 training, as well as we're going to offer orientation 20 training for all agency staff on the revised manual. 21 In conjunction with the employees 22 assistance program, we've scheduled employee training 23 in the areas of cultural diversity, personal and 24 professional resilience, customer service, conflict 25 resolution, and creating opportunities for change. We 0228 1 continue to seek out any additional training that 2 might be helpful to us in that regard. 3 I want the Commission to know that I 4 sent a message to agency staff in writing in our July 5 issue of the internal employee newsletter and 6 personally in two different all staff meetings that 7 have recently been held regarding the fact that agency 8 management should be held -- should be held 9 accountable by staff for conforming to our agency core 10 values. The core values should be a part of 11 everything that we do in this agency. And if the 12 staff sees management falling short of those core 13 values, I have asked staff to let me know or let 14 whoever they're comfortable know about such 15 activities. In addition, I'm working to put together 16 a team of employees to review our core values once 17 again, to make sure that they are appropriate. And I 18 will keep the Commission informed as to our progress 19 in that regard. 20 Staff access to agency management has 21 been improved, and I have made a concerted effort to 22 make myself available to staff, both in my office and 23 in their work areas. 24 We mentioned the core values earlier. 25 I believe Diane just went over those. And one of 0229 1 those that she touched on was customer responsiveness, 2 and I want the Commission to know that I view the 3 employees of this agency as the customers of 4 management, and that is going to be my approach in 5 dealing with staff. 6 And perhaps most importantly, I 7 recognize the credibility of this agency, including 8 its personnel policies and practices, has been called 9 into question. The culture of the agency can always 10 be improved. And I recognize this fact, and I have 11 asked other members of the agency management team to 12 be sensitive to this issue, to critically examine the 13 way we do business, and to make any necessary changes 14 to improve that culture. In addition, I am looking 15 forward to the review by the State Auditor's Office of 16 these matters and I anticipate embracing any 17 recommendations that that agency might make that can 18 help us improve our policies, practices, or the 19 culture of the agency. 20 Any questions in that regard? 21 CHAIRMAN CLOWE: Thank you, Gary. 22 MR. GRIEF: I also have Ms. Karen 23 Blizzard here today. Ms. Blizzard is playing a role 24 in our survey of organizational excellence in the work 25 we have done in response to the last survey. Several 0230 1 members of the staff recently served on various 2 subcommittees, work committees that were put together, 3 focusing on those areas of the survey where we felt we 4 can make improvements. I've been very impressed with 5 the work done by those committees and the many ideas 6 that they put forward, and we put all those out on the 7 agency intranet for all staff to review. 8 We have a couple of committees that are 9 still working, that are still active, and they have 10 been assigned some special projects. And one of those 11 committees is being headed by Karen Blizzard of our 12 Administration Division. And I've asked Karen to be 13 available today to tell you about the progress of her 14 committee. The other committee is being headed by 15 Bobby Barnett from Lottery Operations, and Bobby is 16 unable to be here today. But Karen has indicated that 17 she will be able to comment on the work of Bobby's 18 committee as well. So I would like to turn it over to 19 Karen for a moment. 20 MS. BLIZZARD: Good afternoon, 21 Commissioners. For the record, I'm Karen Blizzard, 22 Publications and Graphics Coordinator for the Texas 23 Lottery Commission. 24 As Gary mentioned, I'm here today to 25 update you on the progress of the two SOE committees, 0231 1 as we are referring to them. 2 The first of these committees is the 3 SOE performance evaluation committee, which is 4 facilitated by Validations and Drawings Manager, Bobby 5 Barnett. This committee includes members of the 6 former fair pay work group, and they are focusing on 7 implementing the recommendations developed by that 8 group. The performance evaluation committee has met 9 once and discussed the agenda for upcoming meetings. 10 The committee plans to have a draft performance 11 evaluation form ready for review by September 15th. 12 The second committee is the SOE 13 implementation committee, which I am facilitating. 14 This committee includes members of the former internal 15 communications work group, with additional members 16 added to ensure fair representation for each division. 17 We are reviewing the other work group recommendations 18 in order to come up with a top ten list of 19 recommendations to implement in the immediate future, 20 possibly with other actions to follow later. We have 21 met twice and plan to present our recommendations by 22 September 15th. 23 That concludes my report, and if you 24 have any questions, I'll be happy to answer them. 25 CHAIRMAN CLOWE: Thank you, Karen. Any 0232 1 questions? 2 MS. BLIZZARD: Thank you. 3 MR. GRIEF: You had asked about the 4 controller salary. That is posted at a range of 5 73,920 to 119,160 annually. 6 And I'm down to my last item. I have 7 received, as you heard today, some preliminary numbers 8 from Financial Administration, indicating that the 9 Lottery Commission should once again finish the fiscal 10 year out by contributing approximately one billion 11 dollars to the Foundation School Fund. As I said 12 earlier, this is a noteworthy accomplishment, 13 especially given that we saw no record jackpots in 14 either the Mega Millions or the Lotto Texas game in 15 the last year. This revenue generation is the reason 16 the lottery exists, and to that end, I've asked staff 17 to work on the development of a beneficiary 18 advertising campaign that is focusing on the purpose 19 and accomplishments of the Texas Lottery. I look 20 forward to sharing the final numbers with you for FY 21 '05 in the very future, and I will keep you informed 22 as we further develop our advertising message in that 23 regard. 24 Commissioners, that concludes my 25 report. 0233 1 COMMISSIONER COX: Mr. Chairman, I have 2 an observation, I guess it would be. 3 Gary, I -- I know a little bit about 4 what some of the other agencies' officials make. And 5 I had occasion to talk recently with the chief 6 financial officer of an important agency. His present 7 salary is 130,000 a year. He is dealing with a 8 fraction of the amount of money that our controller 9 will be dealing with. Are -- is the fact that our 10 executive director's salary is limited by the 11 legislature at 115 creating a phenomenon known as 12 compression, which is the natural tendency to keep 13 everybody below the boss even if the boss isn't making 14 enough? Are our people's jobs being appropriately 15 evaluated based on what they do, and is that both 16 internal and external equity being considered, or is 17 compression making those decisions for us? Gary, I 18 ask you or Diane or I or -- or it could be a subject 19 for a future report if you don't want to answer it 20 right now. 21 MR. GRIEF: Well, I'll -- I'll take a 22 stab at it from just -- just my perspective. I think 23 that definitely does play a role, the -- the salary of 24 the executive director. I think there is awkwardness, 25 at least, when you have the top person in an 0234 1 organization who makes anything less, but especially 2 if it's significantly less than others in the 3 organization. I -- I think that happens sometimes in 4 State government. I don't think it's a frequent 5 occurrence, but I do know it exists in some agencies. 6 But I think naturally that that does cause us some 7 problems in that regard, and we have to try to balance 8 that to some degree. I think this particular salary, 9 this salary range, is the same salary range as the 10 deputy executive director's position, and I think it's 11 the same as the general counsel's position, if I'm not 12 mistaken. So we try to keep things in perspective and 13 bring some balance to the various positions and types 14 of responsibilities that individuals have to try to 15 create some sense of fairness, if you will, in that 16 regard. That's my take on it. 17 COMMISSIONER COX: So I hear you say 18 that internal equity, if you will, is a very important 19 consideration, and that might preclude our people from 20 having external equity; that is, making the same kind 21 of compensation that somebody in another agency with 22 similar responsibilities makes. That might be a 23 secondary consideration, given the push me/pull you 24 that we're faced with. 25 MR. GRIEF: Yes, sir. I think that's a 0235 1 fair statement. 2 COMMISSIONER COX: Diane, there is a 3 state classification office. It used to be in the 4 State Auditor's Office. Is -- is that still floating 5 around? 6 MS. MORRIS: Yes. 7 COMMISSIONER COX: Is there -- have 8 their resources been brought to bear on this issue? 9 Have we asked them to look at that question for us? 10 Is it appropriate to ask them to look at that question 11 for us? 12 MS. MORRIS: They have not been asked 13 to look at the question for us. It may be appropriate 14 to make sure that we are properly identifying the job 15 and the job class, and as we post it with the job 16 descriptions and the level of responsibility that, if 17 you will, are we properly classifying the position. 18 So I think there is room to ask the SAO to assist us. 19 COMMISSIONER COX: Okay. Well, I -- I 20 would like for us to consider that, Mr. Chairman, and 21 see if that's an appropriate thing to do. 22 MS. MORRIS: If you're asking about the 23 other positions as well, we could ask the SAO to 24 assist us in looking to the other job positions, are 25 they appropriately classed. 0236 1 COMMISSIONER COX: Well, I -- I'd 2 certainly think that it would be inappropriate to have 3 them look at just one position, because if the 4 phenomenon that -- that we're talking about here, 5 compression, exists as a factor within our 6 decision-making process, it may exist across the 7 board. 8 MS. MORRIS: Yes, sir. 9 COMMISSIONER COX: Okay. 10 CHAIRMAN CLOWE: Very good. Will you 11 do that, Diane? 12 MS. MORRIS: Yes. 13 CHAIRMAN CLOWE: Thank you. 14 Anything further, Commissioner Olvera? 15 COMMISSIONER OLVERA: No. 16 CHAIRMAN CLOWE: Thank you, Gary. 17 Did we miss one? 18 MS. KIPLIN: No, sir. We had an 19 incorrect amount on the Margie's Grocery, on the order 20 on -- with the request for refunding that dollar 21 amount would be denied. Mr. White has corrected that 22 order, and I would like to present it to you. 23 CHAIRMAN CLOWE: After we sign this 24 order, I'll call on you, Billy. Number 25, report by 25 the Charitable Bingo Operations Director and possible 0237 1 discussion and/or action on the Charitable Bingo 2 Operations Division's activities. 3 MS. KIPLIN: With your permission, I'll 4 line out the other signature page. 5 CHAIRMAN CLOWE: Please do. 6 MR. ATKINS: Thank you, Commissioners. 7 Just a couple of items that I would like to call your 8 attention to in your notebook. 9 Under Web site enhancements, you'll 10 notice we've included a copy of our graphic that we 11 now place on the Web site, showing total charitable 12 distributions. It's our plan to update that on a 13 quarterly basis as additional charitable distributions 14 are made. 15 Also, if you haven't had a chance to 16 see it, we've also placed in the lobby a signage that 17 is very similar to this graphic, and it's been 18 constructed in such a way that we can update that sign 19 on a quarterly basis, as additional charitable 20 distributions are made. 21 Also there is a feature on the Web site 22 called our spotlight section. That's a section that 23 changes routinely as there is new information that we 24 want to call our licensees' attention to. It has had 25 information in there on the vacant commercial lessor 0238 1 position. Ms. Taylor reported to you that they have 2 made a recommendation to you. 3 We now have in there our media guide, 4 which is something that we developed with the BAC's 5 input, as well as input from our media relations 6 staff. 7 Under special projects, something that 8 we're working on is an operations manual, and I'm 9 advised that an additional draft will be available to 10 go back to the BAC work group for their review on 11 August 19th. 12 And Suzanne Taylor mentioned the Bingo 13 Advisory Committee tentatively scheduled for November 14 2nd. 15 Quarterly reports were due on July 25th 16 for the second quarter of 2005. If you've looked at 17 the bingo activity report that's contained in your 18 notebook, you'll see quite a significant spike in 19 activity for the Accounting Services section. That's 20 why. We are currently planning on making allocations 21 on August 19th. 22 Also, staff from our Audit Services 23 section presented a bingo operator training program at 24 the VFW annual officer training conference in the 25 latter part of July -- July 29th. That was here in 0239 1 Austin and was attended by approximately 43 2 individuals. 3 Just quickly some information we didn't 4 have take time to get in the notebook. We are 5 finalizing the construction in the Bingo Operations 6 division and hope to have that completed within the 7 next several weeks. 8 Because of the second quarter 2005 9 information that we have received, we have started 10 working with media relations on the appropriate press 11 releases regarding the financial information that was 12 submitted for the second quarter of 2005. 13 Additionally, we've been working with 14 media relations on filming our operator training 15 program. They finished their filming last week, and I 16 believe they're in the process to be able to start 17 editing that. Therefore, we'll be able to make it 18 available to our licensees by video. We're also 19 looking at working with our Web site host to be -- to 20 make it available via the Web site. 21 And then, finally, something we've been 22 working with media relations on are revising our 23 frequently asked questions on our Web site. Media 24 relations took the initiative to go out there and 25 review it themselves, and they indicated from their 0240 1 point of view that it looks like those questions were 2 developed and directed primarily towards organizations 3 already licensed to conduct bingo. They were correct. 4 And they have suggested that we develop a new series 5 of frequently asked questions for organizations that 6 may not be familiar with bingo and would be interested 7 in knowing how to go about getting a license, what is 8 required to conduct, et cetera. So we appreciate 9 their assistance on that and are currently working on 10 our second draft of those questions. 11 Finally, Commissioner Clowe, you had 12 asked earlier for some information on the number of 13 visits the bingo Web site has had, and Mike Fernandez 14 gave me some numbers. These numbers are for July 1st 15 through midnight last night, for a total of just over 16 5300 visits to the bingo Web site. And they viewed a 17 total of approximately 28,000 pages. 18 CHAIRMAN CLOWE: And is that number 19 ascending, or is it static, or what is the trend? 20 MR. ATKINS: I don't know, 21 Commissioner, that we've been tracking it. Based on 22 this now, we will start to. 23 CHAIRMAN CLOWE: Okay. Good. Maybe 24 you can report that to us next month. 25 MR. ATKINS: Will do. 0241 1 CHAIRMAN CLOWE: Thank you, Billy. 2 Any questions for Billy. 3 Is there anyone wishing to make public 4 comment to the Commission under item number 26? 5 Seeing no one, Commissioners, with your approval, we 6 will adjourn this meeting at 3:43 p.m. Thank you all 7 very much. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0242 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 31ST day of 16 AUGUST, 2005. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 Expiration Date: 12-31-05 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 050815BJW