0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 FRIDAY, JANUARY 16, 2009 § 8 9 COMMISSION MEETING 10 FRIDAY, JANUARY 16, 2009 11 12 BE IT REMEMBERED THAT on Friday, the 13 16th day of January 2009, the Texas Lottery Commission 14 meeting was held from 9:00 a.m. to 2:53 p.m., at the 15 Offices of the Texas Lottery Commission, 611 East 6th 16 Street, Austin, Texas 78701, before CHAIRMAN JAMES A. 17 COX, JR., and COMMISSIONERS DAVID SCHENCK and MARY ANN 18 WILLIAMSON; and the following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. David Schenck 5 Ms. Mary Ann Williamson 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 DEPUTY EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on lottery sales 5 and revenue, game performance, new game opportunities, advertising, market 6 research, and trends............................ 27 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on transfers 8 to the State.................................... 63 9 AGENDA ITEM NO. IV - Report, possible discussion and/or action on Lottery 10 Operations and Services Contract Amendment No. 8 credit calculation.............. 67 11 AGENDA ITEM NO. V - Report, possible 12 discussion, and/or action on the Texas Lottery Commission headquarters facility........ 68 13 AGENDA ITEM NO. VI - Report, possible 14 discussion and/or action, including procurement, on the agency’s drawing studio 15 and production services, extension on the agency's audit services contract, extension 16 on the statistical consulting services contract, procurement on the agency's random 17 animated digital drawing system services, and/or procurement on the agency's instant 18 ticket manufacturing and services............... 77 19 AGENDA ITEM NO. VII - Report, possible discussion and/or action on the 20 81st Legislature................................ 87 21 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action on external 22 and internal audits and/or reviews relating to the Texas Lottery Commission, and/or on 23 the Internal Audit Department’s activities, including the security study of the lottery and 24 the FY08 Financial Audit and/or Mega Millions agreed upon procedures.......................... 8 25 0004 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on the Mega 4 Millions game and/or contract................... 91 5 AGENDA ITEM NO. X - Report, possible discussion and/or action on GTECH 6 Corporation..................................... 101 7 AGENDA ITEM NO. XI - Consideration of and possible discussion and/or action, including 8 proposal, on new rule 16 TAC §403.501 regarding custody and use of criminal 9 history information............................. 101 10 AGENDA ITEM NO. XII - Report by the Executive Director and/or possible discussion 11 and/or action on the agency’s operational status, agency procedures, and FTE status....... 133 12 AGENDA ITEM NO. XIII - Consideration of the 13 status and possible entry of orders in: A. Docket No. 362-09-0231 – Qwik Beverage 14 B. Docket No. 362-09-0228 – EZ 4 U Food Mart C. Docket No. 362-09-0063 – Ideal Soul Mart 15 D. Docket No. 362-09-0353 – Rosharon Superette E. Docket No. 362-09-991105.B-D – In the 16 Matter of the Refusal to Add Certain Names to the Texas Lottery Commission’s 17 Registry of Approved Bingo Workers: Ramon Barrera, Judi Beaver, Tracey 18 Bushnell, Luis Duran, Derek Posey, Miguel Rodriguez III, Nancy Rogers, 19 Oscar Solis, Dennis Spraker, Jeannie Stephens, and Tanya Tanner 20 F. Docket No. 362-09-991105.B-R– In the Matter of the Removal of Certain 21 Respondents from the Texas Lottery Commission’s Registry of Approved Bingo 22 Workers: Monica Acevedo G. Case No. 2008-1163 – Deb’s Quick 23 Stop LLC................................ 103 24 25 0005 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XIV - Report, possible discussion and/or action on 3rd quarter 4 calendar year 2008 bingo conductor information..................................... 114 5 AGENDA ITEM NO. XV - Consideration of and 6 possible discussion and/or action, including adoption, on repeal and/or adoption on 7 16 TAC §402.103 relating to Training Program.... 119 8 AGENDA ITEM NO. XVI - Consideration of and possible discussion and/or action, including 9 adoption, on new 16 TAC §402.406 relating to Bingo Chairperson............................... 119 10 AGENDA ITEM NO. XVII - Consideration of and 11 possible discussion and/or action, including adoption, on new 16 TAC §402.604 relating to 12 Delinquent Purchaser.......................... 121/124 13 AGENDA ITEM NO. XVIII - Consideration of and possible discussion and/or action, including 14 adoption, on new 16 TAC §402.410 relating to Amendment of a License – General Provisions..... 122 15 AGENDA ITEM NO. XIX - Consideration of and 16 possible discussion and/or action, including adoption, on new 16 TAC §402.422 relating to 17 Amendment to a Regular License to Conduct Charitable Bingo................................ 128 18 AGENDA ITEM NO. XX - Report by the Charitable 19 Bingo Operations Director and possible discussion and/or action on the Charitable 20 Bingo Operations Division’s activities, including updates on staffing, Bingo Advisory 21 Committee, and Quarterly Reports and Allocations..................................... 130 22 AGENDA ITEM NO. XXI - Public comment............ 133 23 24 25 0006 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XXII - Commission may meet in Executive Session: 4 A. To deliberate the appointment, employment, and duties of the Executive Director 5 pursuant to Section 551.074 of the Texas Government Code. 6 B. To deliberate the duties and evaluation of the Deputy Executive Director pursuant 7 to Section 551.074 of the Texas Government Code. 8 C. To deliberate the duties and evaluation of the Internal Audit Director pursuant 9 to Section 551.074 of the Texas Government Code. 10 D. To deliberate the duties and evaluation of the Charitable Bingo Operations 11 Director pursuant to Section 551.074 of the Texas Government Code. 12 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 13 the Texas Government Code. F. To deliberate the duties of the Human 14 Resources Director pursuant to Section 551.074 of the Texas Government Code. 15 G. To deliberate the duties and evaluation of the Ombuds pursuant to Section 551.074 16 of the Texas Government Code. H. To receive legal advice regarding pending 17 or contemplated litigation pursuant to Section 551.071 (1) (A) and/or to receive 18 legal advice regarding settlement offers pursuant to Section 551.071(1)(B) of the 19 Texas Government Code and/or to receive legal advice pursuant to Section 551.071(2) 20 of the Texas Government Code, including but not limited to: 21 First State Bank of DeQueen et al. v. Texas Lottery Commission 22 James T. Jongebloed v. Texas Lottery Commission 23 USA v. David Crawford and TLC 24 25 0007 1 TABLE OF CONTENTS 2 PAGE 3 Texas Lottery Commission v. Leslie Warren, Texas Attorney General Child 4 Support Division, Singer Asset Finance Company L.L.C., and 5 Great-West Life & Annuity Insurance Company 6 Employment law, personnel law, procurement and contract law, 7 evidentiary and procedural law, and general government law 8 Lottery Operations and Services contract 9 Mega Millions game and/or contract Request for Attorney General 10 Opinion No. RQ-0771-GA............. 145 11 AGENDA ITEM NO. XXIII - Return to open session for further deliberation and possible 12 action on any matter discussed in Executive Session......................................... 147 13 AGENDA ITEM NO. XXIV - Adjournment.............. 147 14 15 REPORTER'S CERTIFICATE.......................... 148 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 FRIDAY, JANUARY 16, 2009 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9 o'clock. Today is January 16, 2009. Commissioner 7 Schenck is here; commissioner Williamson is here. I'm 8 Jim Cox. Let's call this meeting of the Texas Lottery 9 Commission to order. 10 AGENDA ITEM NO. VIII 11 CHAIRMAN COX: And I would like to 12 begin with Agenda Item No. VIII, consideration of and 13 possible discussion and/or action on external and 14 internal audits and/or reviews. 15 Ms. Melvin. 16 MS. MELVIN: Good morning, Chairman. 17 Good morning, Commissioners. For the record, my name 18 is Catherine Melvin, Director of the Internal Audit 19 Division. 20 Commissioners, this morning I would 21 like to present to you the results of two audits. 22 Both audits are required under our State Lottery Act. 23 To begin with, I would like to invite the financial 24 auditors to join me at the table and present the 25 results of their work. 0009 1 MR. KRCHNAK: For the record, Scott 2 Krchank, audit partner with Maxwell Locke & Ritter. 3 MS. LEVENTHAL: And for the record, my 4 name is Kelli Leventhal. I work at Maxwell Locke & 5 Ritter, and I was the audit manager on the Texas 6 Lottery Commission audit. 7 CHAIRMAN COX: Welcome, Scott and 8 Kelly. 9 MS. LEVENTHAL: Thank you. We issued 10 an opinion on the financial statements of the Texas 11 Lottery Commission. It was an unqualified opinion. 12 An unqualified opinion is more commonly referred to 13 sometimes as a clean opinion. 14 We also issued a report on internal 15 controls over financial statement reporting. We did 16 not identify any deficiencies that we would consider 17 to be material deficiencies as they relate to those 18 internal controls over financial reporting. 19 We did note a few matters that we did 20 discuss with and were addressed by management at the 21 end of the audit. We also issued a report on applying 22 agreed-upon procedures over certain Mega Millions 23 procedures. And we did not note any exceptions, 24 noted -- referring you to those procedures. 25 And, lastly, we issued a letter under 0010 1 Statements on Auditing Standards No. 114 which was 2 addressed to the members of the Commission. And in 3 that letter, we noted that in our judgment, none of 4 the adjustments we proposed indicated matters which 5 could have a significant effect on the Commission's 6 financial reporting process. And we also noted that 7 we did not have any disagreements with management. 8 Do you have any questions? 9 CHAIRMAN COX: Commissioner? 10 COMMISSIONER SCHENCK: For the benefit 11 of those who aren't accountants, when you said 12 unqualified or clean opinion, what you're meaning is 13 that you're not reserving from your scrutiny any 14 particular issues or line items or anything of that 15 nature? Can you elaborate on that, please? 16 MR. KRCHNAK: An unqualified opinion or 17 a clean opinion, as Kelli referred to, is the best 18 opinion you can receive on your financial statements. 19 An unqualified opinion also states that in our 20 opinion, the financial statements, the annual 21 financial report, are materially correct as presented. 22 COMMISSIONER SCHENCK: Thank you. So 23 this is not Mr. Madoff's lottery, then. Right? There 24 is real money here and we're really putting it over to 25 the Foundation School Fund. 0011 1 Thank you. 2 CHAIRMAN COX: And, Scott, I think you 3 might elaborate on that a bit. I understood 4 Commissioner Schenck's question to be a little 5 broader; and that was, one, were there any limitations 6 on your scope as well as did you express a clean 7 opinion on the financial statements? 8 MR. KRCHNAK: No limitations on the 9 scope. And, yes, we did express an unqualified 10 opinion on the financial statements. 11 COMMISSIONER SCHENCK: That's 12 excellent. Thank you. 13 COMMISSIONER WILLIAMSON: I just want 14 to compliment the lottery financial staff on a clean 15 opinion. And thank y'all for doing that. 16 MS. MELVIN: Thank you. 17 CHAIRMAN COX: Scott and Kelli, a 18 couple of things that you have enumerated in your 19 report but I want to underscore. One is, you 20 received -- let me put this another way. Did you 21 receive complete cooperation from the management and 22 staff of the Lottery Commission? 23 MS. LEVENTHAL: Yes, I did. 24 CHAIRMAN COX: Okay. And were there 25 any disagreements on accounting matters? Whether or 0012 1 not they were properly resolved or resolved to your 2 satisfaction, were there any things that, starting at 3 the beginning of the day, you would have done 4 differently than we did, but you ultimately resolved 5 them? 6 MS. LEVENTHAL: No, there were not 7 differences. And at the beginning of the day, at the 8 end of the day, we would have come to the same 9 conclusion. 10 CHAIRMAN COX: Okay. And finally, the 11 financial statements that we prepared upon which you 12 expressed your opinion, are they prepared the way you 13 would have prepared them had you been given that 14 assignment? 15 MR. KRCHNAK: The answer to that is 16 yes. And also I wanted to compliment the Controller's 17 office, because the annual financial report that was 18 provided to us that we expressed an unqualified 19 opinion on was very clean. There are just very minor 20 adjustments made to the financial statements given to 21 us, so a compliment to the Controller's office. 22 CHAIRMAN COX: Okay. Now, Scott, when 23 you say "adjustments," as an auditor, I think of one 24 thing; perhaps others think of something else. Are 25 you saying that there were errors in the financial 0013 1 statements that were presented to you that you had to 2 ask us to correct? 3 MR. KRCHNAK: No errors in the 4 financial statements. There were minor wording, 5 formatting type items that we actually suggested some 6 changes to the Controller's office, that they agreed 7 to and made those changes, but no adjustments to the 8 draft presented to us in the financial statements 9 themselves. 10 CHAIRMAN COX: Okay. 11 And, Ms. Pyka, I see you shaking your 12 head in agreement with what they just said. 13 MS. PYKA: That is correct, 14 Mr. Chairman. 15 CHAIRMAN COX: Excellent. Thank you 16 very much. We appreciate the work that you did. And 17 this is -- what? -- I guess your third -- or is it 18 your fourth year to do the audit? 19 MR. KRCHNAK: We actually were engaged 20 for one year. It was an emergency audit. And then 21 the State Auditor's office conducted the audit for two 22 years, and they contracted us to actually perform the 23 majority of the field work. And then we were awarded 24 a three-year contract subsequent to that. And this is 25 our second year under the three-year contract. 0014 1 CHAIRMAN COX: Okay. And, 2 Commissioners, for your benefit, the emergency they 3 referred to was not an emergency audit so much as it 4 was an emergency procurement, because we got off to a 5 couple of false starts. 6 MS. LEVENTHAL: Yes, sir. 7 CHAIRMAN COX: And we have a deadline, 8 of course, on having this audit completed. 9 Does this go to the Governor's office 10 and -- where? -- to the State Auditor? Where all does 11 it go, Catherine? 12 MS. MELVIN: There is a state 13 requirement that this audit be done by a certain time, 14 and it is submitted to the Controller's office, 15 Controller of Public Accounts, and other leadership 16 offices. 17 CHAIRMAN COX: Okay. Thank you. 18 Thank you very much. 19 MR. KRCHNAK: Thank you. 20 MS. MELVIN: Thank you. 21 MS. LEVENTHAL: Thank you. 22 MS. MELVIN: And now, Commissioners, I 23 would like to bring up the Security Study Team. It's 24 the firm Mir Fox & Rodriguez, and I ask that they join 25 me at the table. 0015 1 MR. MIR: Okay. Mr. Chairman and 2 Commissioners, thank you for allowing us to be here 3 this morning. For the record, I'm Gasper Mir, 4 principal with Mir Fox & Rodriguez and the engagement 5 principal on this engagement. 6 MR. CHEMALY: For the record, Douglas 7 Chemaly, manager with Mir Fox & Rodriguez, project 8 manager for the securities study. 9 MR. REZA: Good morning. My name is 10 Ernesto Reza. I was the product executive manager for 11 this study, with Mir Fox & Rodriguez. 12 CHAIRMAN COX: Welcome. 13 MR. MIR: Thank you. Our engagement 14 was performed in response to the Texas Lottery 15 Commission's request for a comprehensive study of all 16 aspects of lottery security for the period of 17 September 1, 2006 through August 31, 2008, as 18 described in the State Lottery Act. And to issue a 19 summary of the security study, that included an 20 overall evaluation based on such study of the lottery 21 security. 22 So we designed an examination that was 23 an attestation engagement that fell within our 24 Generally Accepted Government Auditing Standards. And 25 our examination was prepared in order to issue an 0016 1 opinion on management's assertion that the Texas 2 Lottery Commission provided effective security, 3 including computer security, system security and all 4 aspects of lottery security, as described in the State 5 Lottery Act. 6 So our examination had to include a 7 comprehensive risk assessment of the lottery's 8 relevant security and processing integrity controls. 9 And for purposes of evaluating the Texas Lottery's 10 controls over its information systems, we based our 11 evaluation on the Information Systems Audit and 12 Control Association's -- which is commonly known as 13 COBIT -- standards in order to establish a criteria to 14 base our evaluation. 15 In addition, we, based on that risk 16 assessment, which was done in conjunction with the 17 lottery staff and management, we designed tests and we 18 performed tests in evaluating the effectiveness of all 19 of the controls. 20 In addition, we performed other 21 procedures that we considered necessary in order to 22 complement the test. And I'll bring up here that 23 during the time of our examination, we also became 24 aware of a breach of security that occurred prior to 25 the time of the period that we were covered under our 0017 1 examination. And we did perform additional procedures 2 in order to make sure that we understood the 3 circumstances that arose and the processes and 4 controls around them and what and how it could have 5 affected the period that we were auditing, and came 6 away with some recommendations related to that. 7 At the conclusion of our work, we were 8 able to issue also an unqualified opinion that 9 specifically stated that management of Texas Lottery 10 Commission maintained in all material respects 11 effective security, including computer security, 12 system security and all aspects of lottery security, 13 as is described in the State Lottery Act, to ensure 14 the integrity, honesty and fairness of the Texas 15 Lottery's operations, gaming services, systems and 16 on-line ticket games and products during the period of 17 September 1, 2006 through August 31, 2008. And we 18 issued that opinion that's dated December 19, 2008. 19 In our examination, we found no material deficiencies 20 in any of the processes in the actual systems. 21 We did, however, identify some 22 deficiencies that we considered to be significant and 23 that were of a confidential nature, and we are 24 preparing a separate report to management that will 25 specifically cover those deficiencies and the 0018 1 recommendations related to them. They have been 2 presented in draft form to date to management and been 3 discussed and have received overall general acceptance 4 to them. We still haven't finalized them, and we 5 anticipate getting those finalized within the next 6 week. But again, nothing of a material nature that 7 would have impacted the opinion that we expressed on 8 the system taken as a whole. 9 In our examination, the areas that we 10 considered in our risk assessment to be the areas that 11 we put most of our emphasis of our examination and our 12 testing were lottery operator and vendor security, 13 security of lottery drawings, lottery computer 14 security, security of validation and payment 15 procedures in the Texas Lottery website. And again, 16 based on all of our testing performed, we came away 17 with no material deficiencies. 18 In our examination, I will also report 19 that we had no disagreements with management regarding 20 any of the matters relating to our examination. We 21 received total cooperation, not only from the lottery 22 staff but in connection with the work that we did with 23 a number of the primary vendors to the lottery and the 24 work that was outsourced to them. 25 There were no serious difficulties 0019 1 encountered in performing our audit. And in our 2 examination, we found no material errors, fraud or 3 illegal acts. And we want to specifically thank the 4 lottery staff for their cooperation and assistance 5 throughout our examination. It was an examination 6 that the we considered to be, for us, somewhat 7 demanding because of the need to express an opinion on 8 this. And it was, I know, one that we went into with 9 some skepticism. 10 But again, I'll say, because of the 11 extensive comprehensive risk assessment that we did in 12 conjunction with the staff and Catherine's staff, we 13 came away satisfied that we had identified all the 14 high risk areas. We were able to perform sufficient 15 testing of those major risk areas and the controls and 16 came away with the necessary comfort level to issue 17 the opinion we did. 18 Thank you. 19 CHAIRMAN COX: Thank you. 20 Commissioner? 21 COMMISSIONER SCHENCK: Thank you. A 22 couple of quick questions. I had the chance to review 23 the version of the report that you put together, which 24 is very thin. This is the public version. And I 25 understand and I appreciate your presentation, which 0020 1 was very thorough. And I understand you have another 2 report -- 3 MR. MIR: Yes, sir. 4 COMMISSIONER SCHENCK: -- with more 5 detailed recommendations with some deficiencies in 6 place. But for the benefit of the members of the 7 public who pay for the Commission and for the study, 8 you can assure us that the recommendations in the 9 study are not in conflict with your overall conclusion 10 in the public document, that the Commission's 11 assertion of the security systems overall are, in 12 fact, effective and in place? 13 MR. MIR: Absolutely, sir. And, in 14 fact, if those deficiencies, although confidential -- 15 because, again, a number of those deficiencies related 16 to systems and processes would be a very confidential 17 nature -- if they would have been material enough that 18 would have affected our opinion, we would not have 19 been able to issue an unqualifying opinion and saying 20 that everything was satisfactory. 21 So the deficiencies that we noted were 22 significant enough to include in the report, but they 23 are fully disclosed and will be reported to 24 management; but, again, of a very confidential 25 perspective. But, again, if they would have been 0021 1 material, either individually or taken in the 2 aggregate, we would not have been able to issue the 3 opinion we did. 4 COMMISSIONER SCHENCK: Well, and just 5 to be clear, when we say "of a confidential nature," 6 it's not that we're concerned about protecting anybody 7 who put a system in place here or has a reputation 8 that we're concerned about. It's just that we don't 9 want to publicly disclose to people how it would be 10 that they could attack our systems or attack something 11 else that would do damage to the lottery or to the 12 state revenue? 13 MR. MIR: You're absolutely right, 14 Commissioner. 15 COMMISSIONER SCHENCK: Okay. And you 16 had, as you indicated, full cooperation from everyone 17 that you have dealt with here. Can you help me to 18 recall the scope. Were you going into GTECH as well 19 and running challenges and testing systems there as 20 well? 21 MR. MIR: Yes, sir. Our study was 22 comprehensive in nature, and so we determined again 23 all the processes, not only of the Lottery Commission 24 but also of your major vendors and your primary 25 vendors. And GTECH and security systems would have 0022 1 been your major ones that we would have done a 2 significant amount of testing in. 3 COMMISSIONER SCHENCK: That would 4 include Scientific Games or -- 5 MR. MIR: Scientific Games, yes, sir. 6 COMMISSIONER SCHENCK: Okay. And you 7 had full cooperation from our vendors as well? 8 MR. CHEMALY: Yes, we did. 9 MR. MIR: Yes, we did. 10 COMMISSIONER SCHENCK: Well, I 11 appreciate that as well. 12 MR. MIR: Douglas was in charge of the 13 field work. Ernesto was, obviously, the project 14 executive manager over it. And I'll let them 15 specifically say that, because they dealt with it 16 directly. But that was my understanding. 17 MR. REZA: Yes. Thank you, Gasper. 18 Just for the benefit of all the people 19 participating in this meeting, the operation and 20 control framework for the lottery operations include 21 Scientific Games and Pollard Banknote as their 22 manufacturer of tickets, GTECH as the operator of the 23 lottery, Sungard Availability Services that is the 24 hosting for the website. And we took a comprehensive 25 auditing and testing procedure over these components. 0023 1 We got full cooperation of all the 2 vendors and we are happy to provide an unqualified 3 report to the agency. 4 COMMISSIONER SCHENCK: Well, thank you. 5 Your work here is very important. I mean, this is 6 critical to our operations and critical to the public 7 confidence in our operations, so we very much 8 appreciate your report, and I'm glad that it worked 9 out as it did. But I look forward to seeing what 10 those recommendations are, and I'm sure that we're 11 going to address them aggressively. 12 COMMISSIONER WILLIAMSON: I have no 13 questions. Thank you, gentlemen. 14 MR. CHEMALY: Thank you. 15 MR. MIR: Thank you. 16 CHAIRMAN COX: A couple of questions. 17 You used a couple of terms that I recognize but I want 18 to be sure that the record is clear. You found no 19 material weaknesses. That's the worst thing we could 20 have. 21 MR. CHEMALY: Yes, sir. 22 CHAIRMAN COX: You did find some 23 significant weaknesses -- that's a level lower -- but 24 they individually or in total were not such to cause 25 you concern that our system did not ensure the 0024 1 integrity, honesty and fairness of the Texas Lottery 2 Operations. 3 MR. MIR: That's exactly right, sir. 4 CHAIRMAN COX: Thank you. 5 Secondly, when you began your audit, we 6 talked at that time about an instance in which there 7 had been misuse of authorized access to sensitive 8 information, and I asked you to specifically look at 9 that matter and to report back to us any general or 10 specific concerns that you have regarding that. I 11 could assume from reading this report that you have no 12 general or specific concerns that we have a material 13 weakness in that area, but I would like for you to 14 address that here if you will. 15 MR. MIR: Yes, sir, we do -- some of 16 the recommendations that are under the confidential 17 report, some of our recommendations would relate to 18 what we believe would improve the processes and 19 controls around that area that are included in the 20 separate confidential report. 21 CHAIRMAN COX: Okay. And, Ms. Melvin, 22 will the board have access to that confidential 23 report? 24 MR. MIR: Absolutely. 25 MS. MELVIN: Yes, sir. 0025 1 CHAIRMAN COX: Okay. Do you have 2 anything further? 3 COMMISSIONER SCHENCK: Yes. 4 But to be clear, you're dealing with 5 risks, and there are some risks that, with reasonable 6 effort, can be avoided and reduced. But there are 7 some risks that just cannot be -- I mean, the risks 8 that are renegade, in general if the National Guard is 9 going to roll a battalion of tanks down 6th Street and 10 blow a hole through that wall and take the balls out 11 of the hopper, is remote I would hope. But there is 12 no way that we could address that. 13 MR. MIR: Right; right. 14 COMMISSIONER SCHENCK: Likewise, there 15 are other risks that are more -- human risks that 16 simply can't be eliminated, which is why you need to 17 make a confidential portion of this report because 18 there is no way to work around some risks without 19 simply dealing with the fact that you have to just 20 reduce them? 21 MR. MIR: Right. 22 COMMISSIONER SCHENCK: So that's why we 23 have these additional components to the report. 24 You're not suggesting that there is any way to run 25 anything in this life risk-free -- 0026 1 MR. MIR: Absolutely. 2 COMMISSIONER SCHENCK: -- but 3 risk-reduced we can get to it. 4 MR. MIR: That's exactly right. You 5 try to put in enough, again, preventive measures and 6 controls and processes and monitoring, segregation of 7 functions and duties to mitigate as much of that as 8 possible. And, obviously, particularly with 9 information systems as we have today, that's why again 10 in our examination we have to identify a criteria, 11 COBIT, which I mentioned earlier, that is very 12 specific and very detailed in identifying the 13 different areas of controls that need to be in place 14 on information systems. 15 Without question, IT security is one of 16 the critical areas that most organizations are faced 17 with and one that, obviously, was a major part of our 18 examination. I will go to say that in our team, our 19 team included -- both of these gentlemen have IT 20 backgrounds, risk management backgrounds, but they 21 were complemented by a team of professionals that had 22 operation security, physical securities, internal 23 audit backgrounds. 24 So it was a comprehensive team, but the 25 IT part was without question -- I'm not an IT person; 0027 1 I'm a financial auditor. And my greatest concern was 2 the IT side. I can handle the other part. But it is 3 one that is of great concern. 4 COMMISSIONER SCHENCK: Thank you. 5 CHAIRMAN COX: Excellent point, 6 Commissioner. 7 Commissioner? 8 COMMISSIONER WILLIAMSON: No questions. 9 Thank you. 10 CHAIRMAN COX: Okay. Thank you very 11 much. 12 MR. MIR: Thank you. 13 MS. MELVIN: Thank you, Commissioners. 14 AGENDA ITEM NO. II 15 CHAIRMAN COX: Agenda Item No. II, 16 report, possible discussion and/or action on lottery 17 sales and revenue, game performance, new game 18 opportunities, advertising, market research and 19 trends. 20 Ms. Pyka, Mr. Tirloni. 21 Dr. Sizemore. 22 DR. SIZEMORE: Good morning. 23 MS. PYKA: Good morning, Commissioners. 24 With me this morning, Robert Tirloni, our Products 25 Manager, and David Sizemore, our Research Coordinator. 0028 1 And for the record, my name is Kathy Pyka. I'm the 2 Controller for the Commission. 3 Our first chart that we have for you 4 this morning reflects revenue from sales and net 5 revenue to the state through the week ending January 6 10, 2009. Total sales through this 19-week period 7 amounted to $1.29 billion, with prize expense of 8 $807.9 million, for a sales contribution of 9 $477.6 million. 10 Net revenue to the state reflects a 2.6 11 decrease, as compared to the $332 million figure for 12 the same period in Fiscal Year 2008. And, 13 Commissioners, the $807.9 million amount recorded as 14 prize expense as a percentage of sales is 62.8 percent 15 for the current time period, as compared to 63.1 16 percent for the same period last fiscal year. 17 Our next slide summarizes the change in 18 sales by game from Fiscal Year 2008 to 2009. The 19 total decline from Fiscal Year 2008 sales is 20 3.5 percent, or $47.2 million, and the overall sales 21 decline includes a $6.3 million, or 2 percent decrease 22 for total online games and $41 million, or 4 percent 23 decline in instant ticket sales. 24 I would like to focus first on the 25 jackpot games -- they're portrayed with a white 0029 1 font -- reflecting a $400,000 decline as compared to 2 Fiscal Year 2008 sales. And as noted on the slide, 3 our Mega Millions game, our Megaplier game and Texas 4 Two Step game are showing year-over-year increases as 5 compared to Fiscal Year 2008. 6 The daily games are presented with a 7 green font and reflect an overall decline of 8 $5.9 million as compared to Fiscal Year 2008 sales. 9 And again, instant sales are down $41 million. 10 Commissioners, our next slide -- 11 CHAIRMAN COX: Kathy, could we go back 12 to the first slide for just a second, please? 13 MS. PYKA: Certainly. 14 CHAIRMAN COX: And back one more, if 15 you would. So revenue to the state at this point is 16 down 2.6 percent from the previous fiscal year. And 17 that takes us right up through last -- 12th. That 18 was -- 19 MS. PYKA: Through Saturday. 20 CHAIRMAN COX: Okay. Now -- the 10th, 21 actually? 22 MS. PYKA: Yes. 23 CHAIRMAN COX: Last time, if I remember 24 right, we were down about 4 percent. And I remember 25 that we were down 7 or 8 or 9 percent earlier in the 0030 1 year where Ike had had a concentrated effect. Have we 2 recovered on Ike? Are we a little better than the -- 3 we're down X for Ike and up more than X for all other 4 operations? 5 MS. PYKA: What I would like to, if I 6 can, I would like to go to one more slide, and I would 7 like to provide you comparative data that I think will 8 address that question and then we can expand on it a 9 bit further, if that's okay. 10 CHAIRMAN COX: Great! Thank you. 11 MS. PYKA: The fifth slide provides the 12 month-over-month totals for Fiscal Year 2009, as 13 compared to Fiscal Year 2008, and presents it in a 14 cumulative fashion. And I think, Mr. Chairman, going 15 back to your point about Hurricane Ike, at the end of 16 September, our cumulative sales total was 17 $260.8 million. So at that point, we were down year- 18 over-year 9.4 percent. 19 That decline was further reduced to 6 20 percent at the end of October when our cumulative 21 sales had reached $551 million, further reduced to 22 3.95 percent at the end of November, and again further 23 reduced to 2 percent at the end of December when our 24 sales had reached almost $1.2 million. 25 And so to address that trend question, 0031 1 certainly we are gaining ground from the original 2 deficit that was caused by Hurricane Ike. And as 3 noted on our previous slide where we focused on 4 individual games, the jackpot games focusing on Mega 5 Millions and Two Step and Megaplier have certainly 6 helped us narrow that deficit gap. 7 In addition to that, we'll speak a bit 8 later about some of the results from our holiday game 9 suite and how that helped us out on the instant ticket 10 product to narrow that definition somewhat. 11 And then going back to your net revenue 12 question, when we talk about transfers under the next 13 item, the transfers at this point in the fiscal year 14 look actually a little bit better than sales, because 15 of that product mix and having a greater mix of 16 on-line than instant, as compared to Fiscal Year 2008 17 right now. So it's the product mix of sales, the 18 prize expense and where we stand with that. We know 19 our prize payout is down a bit right now, and then you 20 add unclaimed prizes to that other mix. 21 CHAIRMAN COX: Is there anything 22 particular you can point to for the improvement in the 23 on-line games? Were there higher jackpots than the 24 comparable period? Is it all jackpot-driven? 25 MS. PYKA: Certainly when we look at 0032 1 the jackpot games, we know that the Mega Millions 2 jackpot that grew in December helped us gain there, in 3 addition to Megaplier sales. And then Two Step has 4 had two large jackpots this fiscal year, as compared 5 to where we were last fiscal year. At this point 6 we've had a jackpot for Two Step go all the way up to 7 $900,000 twice this fiscal year. 8 CHAIRMAN COX: So it seems that had we 9 not had Ike, our sales and net revenue to the state 10 would be slightly up as compared to the previous year, 11 in spite of the economic conditions that we see out 12 there. Do you and your staff have any thoughts about 13 why that might be the case? 14 MS. PYKA: At this point I would not be 15 able to, I think, say that the total deficit of sales 16 of $47 million can be attributed to Ike. I think we 17 believe it's about half of that. But specifics on why 18 we've seen maybe a turn on sales, I don't have another 19 response outside of we did gain some ground with the 20 higher jackpots. And I believe that when we touch on 21 the holiday game suite that we'll visit on in this 22 presentation, that you'll see that that helped us 23 tremendously on our instant ticket sales. 24 MR. TIRLONI: And, Mr. Chairman, for 25 the record, Robert Tirloni, Products Manager for the 0033 1 Commission. 2 Back in late October, early November, 3 the Houston sales district, which was obviously the 4 district most impacted by the hurricane, they were 5 down well over 14 percent, close to 15 percent. And 6 as of the week ending the 10th, which is the period 7 that we have been discussing, they are now down less 8 than 4 percent year-over-year. So the Houston sales 9 district staff has worked very hard to get retailers 10 back up and running again and to, you know, get those 11 retailers back on their feet and selling. And so they 12 deserve a lot of kudos for their efforts to rebound 13 sales in that district. 14 CHAIRMAN COX: Thank you, Robert. 15 MS. PYKA: So with that, Commissioners, 16 our next slide will be a product category slide, and 17 Robert will take over on that slide. 18 MR. TIRLONI: So, Commissioners, this 19 next slide is total fiscal year sales of just under 20 $1.3 billion, and it's the breakdown of that total by 21 product category. And we continue to see instants 22 representing slightly over 76 percent of the total, 23 with on-line making up almost the other 24 percent. 24 This next slide focuses on on-line 25 games, and it represents the $304 million we've 0034 1 realized in sales in our on-line product category 2 through the week ending January 10th. Not much 3 change. Pick 3 continues to be the best selling 4 on-line game, followed by Lotto Texas and then Mega 5 Millions. 6 Last month when we met, we were talking 7 about the fact that we thought Mega Millions was going 8 to take over the second slot in terms of on-line game 9 sales. As Kathy just mentioned, we had climbed up to 10 a $207 million jackpot in December, on the 12th. That 11 I believe was the day of our meeting, actually. That 12 jackpot was hit that night out of state. And since 13 then, the game has not rolled above $46 million. We 14 climbed up to $46 million, and there were a winner on 15 January 2nd. And then we climbed up to $22 million, 16 and there was another out-of-state winner on 17 January 13th. And so we're back to our -- we're back 18 to our starting levels again on Mega Millions right 19 now. 20 COMMISSIONER SCHENCK: Kathy, if I'm 21 remembering right, Lotto Texas, from your first slide, 22 was down about 11 percent year-over-year? 23 MS. PYKA: That is correct. 24 COMMISSIONER SCHENCK: And, yet, it 25 still has not been eclipsed by Mega Millions on a 0035 1 percentage basis on our on-line side? 2 MS. PYKA: That is correct. 3 COMMISSIONER SCHENCK: That is 4 continuing a trend that's been true for several years. 5 Right? 6 MS. PYKA: Right. 7 COMMISSIONER SCHENCK: At some point in 8 the next four or five years, we're going to see Lotto 9 Texas -- I mean, it's running on three cylinders, it 10 seems to me, and smoke is coming out of the exhaust. 11 So is our thinking still that Lotto Texas and Mega 12 Millions are sort of complementary offerings and that 13 every dollar into one isn't necessarily a dollar that 14 would have gone into the other? 15 MR. GRIEF: I believe that's correct, 16 Commissioner. We do have still a loyal player base, 17 especially at the beginning levels, for the Lotto 18 Texas game. That number, if you look at it over the 19 past couple of years, is relatively stable. People 20 that buy their tickets play that game, no matter if 21 the jackpot is at $4 million or if it's at 22 $57 million. 23 I don't believe that we have that type 24 of brand loyalty yet developed with Mega Millions, and 25 we don't know what the future holds for Mega Millions. 0036 1 You'll hear me talk, when we get to that item, that 2 there may be some upcoming developments for Mega 3 Millions. So as time goes on -- I think you're right 4 on point -- we'll need to keep a steady eye on that 5 and make sure that those games, indeed, are 6 complementary to each other. 7 COMMISSIONER SCHENCK: On the other 8 hand, it seems to me -- I assume that it's the case 9 that the incremental cost of having Lotto Texas with 10 the terminals involved, since we're selling Mega 11 Millions from the same point, is virtually -- well, 12 it's very small. 13 MR. GRIEF: Virtually negligible; 14 that's correct. 15 COMMISSIONER SCHENCK: Well, and if we 16 have a loyal following, it seems to me we keep it 17 there, and the slides will show what the slides will 18 show. 19 MR. GRIEF: Right. And I would even 20 take that a little step further and look at Cash 5 21 which, you know, in some people's minds only is 22 8.4 percent. Again, the incremental cost to run that 23 game is very insignificant; but, yet, it continues to 24 bring in revenue every week. And at this point we 25 feel it fills a niche, and we don't have a desire to 0037 1 move that game out of the portfolio. 2 COMMISSIONER SCHENCK: And the Pick 3 3 Sum It Up fills a niche as well, at .7 percent? 4 MR. GRIEF: Well, we always knew it 5 would not be as successful as the Daily 4 Sum It Up 6 feature, because we weren't able to introduce it at 7 the time of game launch which, obviously, for Pick 3 8 occurred several years ago. But we do think it's an 9 interesting feature, and we hope over time people 10 develop some type of liking for that game, habitual 11 buying pattern, et cetera. 12 MS. PYKA: Commissioner, to that point, 13 Daily 4 Sum It Up right now is generating about 12 and 14 a half percent of total Daily 4 sales. But to compare 15 that to Pick 3 Sum It Up, it's about 2 percent of 16 Pick 3 sales. So they were introduced within about 17 two months of each other. 18 MR. TIRLONI: Two months of each other. 19 MS. PYKA: But Pick 3 has not generated 20 that same -- 21 COMMISSIONER SCHENCK: Which one came 22 first -- can you remind me? -- 4? 23 MR. TIRLONI: Daily 4 and Daily 4 Sum 24 It Up came first, in September '07. 25 MS. PYKA: And they were introduced 0038 1 together. 2 MR. TIRLONI: And then we launched Sum 3 It Up on Pick 3 in November of '07. 4 COMMISSIONER SCHENCK: Interesting. I 5 don't know what that says about the manner of rollout. 6 But if you do things separately, it seems that once 7 the public soaked up one new offering, their attention 8 span isn't necessarily as eager to follow. So if 9 we're going to do it at once, it may be -- if we're 10 going to do something different, maybe doing it at the 11 same time is of benefit. I don't know. 12 MR. TIRLONI: Commissioners, this next 13 slide is instant ticket sales by price point through 14 the week ending January 10th. So this is a 15 representation of slightly under $981 million in 16 fiscal year sales. Again, no change here. The $5.00 17 price point continues to be our best selling price 18 point, followed by the 2, the 10 and the 3. And 19 that's a pattern we've seen for quite a while now. 20 COMMISSIONER WILLIAMSON: Question, 21 Robert. 22 MR. TIRLONI: Yes, ma'am. 23 COMMISSIONER WILLIAMSON: On the $50 24 price point -- 25 MR. TIRLONI: Yes. 0039 1 COMMISSIONER WILLIAMSON: -- how has 2 that changed from last time, from, you know, the 3 comparison in our last period to this period? Has it 4 stayed static or increased or decreased or -- 5 generally? 6 MR. TIRLONI: I don't have the chart. 7 I would say it's probably stayed pretty much exactly 8 the same. 9 Commissioners, Kathy alluded to this 10 slide a few minutes ago. Last month we talked a 11 little bit about the holiday games, and I told you 12 that we were pleased with the performance of the 13 holiday games. 14 And, Chairman, you asked us to dig in a 15 little deeper and see what we could actually provide 16 in terms of quantifying that. And so I worked with 17 Kathy and her team over the past couple of weeks to 18 work on a comparison for you-all today. 19 So we can start by seeing this current 20 fiscal year, Fiscal Year 2009, we had seven holiday 21 games. Last year, Fiscal Year '08, we had five 22 holiday games. And we looked at a 12-week comparison 23 period, October 19th through January 10th. And we 24 compared our total scratch-off sales for that 12-week 25 period and our holiday game scratch-off sales for that 0040 1 period. 2 And so when we looked at that, our 3 total instant sales during those 12 weeks in this 4 fiscal year compared to last fiscal year reflected a 5 $2.3 million sales decline. However, our holiday game 6 sales for that same period reflected a $44.3 million 7 increase. It's worth noting that even if you remove 8 the sales for the two extra games that we had, we 9 would still have realized this fiscal year a 10 $7.9 million increase over last fiscal year's holiday 11 games sales. 12 So we are pleased with the results of 13 our product planning and our product strategy, the 14 price points that we put out, the different themes 15 that we had associated with the holiday games this 16 year. 17 Of course, we're always learning, and I 18 think we did learn a few things this year that we will 19 certainly use as we start our planning for our next 20 fiscal year. And our holiday games, because they do 21 start in mid-October, believe it or not, we'll already 22 be working on those in about the next two months in 23 terms of our overall plan for Fiscal Year 2010. 24 CHAIRMAN COX: You introduced two more 25 games. What were the denominations of the games, 0041 1 Robert? 2 MR. TIRLONI: For this fiscal year, we 3 had a 1, a 2, a 3. That was a new price point. We 4 had never had a $3.00 holiday game. We had two fives. 5 That was new. We put a second $5.00 holiday game out 6 at the end of November. We had never done that 7 before. And then we had a 10 and a 20. Last year we 8 had a 1, a 2, a 5, a 10 and a 20. 9 CHAIRMAN COX: Okay. Do you have any 10 numbers for convenience stores with gas as to what 11 their sales were like during these same periods? 12 MR. TIRLONI: I don't have that. We 13 can -- 14 CHAIRMAN COX: Are we getting a bigger 15 share or were things just hot all over? 16 MR. TIRLONI: We would have to look at 17 that to provide that. 18 CHAIRMAN COX: That might be a 19 meaningful number to throw at us once in a while, as 20 that is our principal outlet, and take a look at how 21 we're doing versus the other products that are sold 22 there, versus a total of the product mix in those 23 places. 24 The other thing that seems remarkable 25 to me is that -- if I remember the number right. It 0042 1 was released recently -- retail sales in December or 2 overall retail sales nationally were down 23 percent 3 or some such number, as compared to the period in 4 2007; and, yet, we're up. That's remarkable. 5 Okay. 6 MR. TIRLONI: I have one other update 7 for you, Commissioners, related to products. We made 8 two people very happy on Christmas Eve in '08. We 9 sold two jackpot tickets for the Wednesday, December 10 24th Lotto Texas drawing, one in Hurst and one in 11 San Antonio. We were advertising an $8 million 12 annuitized jackpot. Both tickets were cash value 13 option. They're valued at $2.98 million each. The 14 Hurst winner was here the other day. We've already 15 paid that jackpot prize. We are in contact with a 16 potential claimant from San Antonio, and we're working 17 with that claimant right now. And each retailer is 18 eligible for a $40,000 bonus. 19 I did have another note that I wanted 20 to mention. Last month when I talked about Lotto 21 jackpot win, we got into a discussion about annuity 22 payments versus cash payments. And I thought it would 23 be interesting for you-all, when I actually met the 24 winner from the early December drawing, that was the 25 annuity payment winner. And so I inquired as to if 0043 1 that was an intentional purchase or if that was the 2 default, and that was intentional. And that winner 3 expressed to me that she made that choice because it 4 would be one less thing for her to have to worry about 5 and one less thing for her to have to manage. And so 6 she has played Lotto, and she plays a lot of our 7 games. She's played Lotto for a while, and she's 8 always played the annuity payments. 9 COMMISSIONER SCHENCK: For her, free 10 country is a great thing. $2.98 million each is just 11 a hair shy of $6 million reduced to net present value. 12 And how long is this annuity period? 13 MR. TIRLONI: Twenty-five years on 14 Lotto. 15 COMMISSIONER SCHENCK: Okay. So 16 $8 million, the interest rate is what? What are we 17 figuring? 18 MR. TIRLONI: The interest factor that 19 we have been using or that we have been getting from 20 the safekeeping trust, the factor is in the 1.43 21 range. It varies, of course. Some days it's 1.45, 22 1.46. But we have been in the 1.4 range for a couple 23 of weeks now, a few weeks. 24 MS. PYKA: Four weeks. 25 COMMISSIONER SCHENCK: Wow! Okay. 0044 1 Thank you. 2 CHAIRMAN COX: That's one of the 3 reasons for the three-cylinder part, is the annuity 4 factor. 5 MR. TIRLONI: Yes, sir, which really 6 hampers our ability to roll the game, other than the 7 mandatory one-million-dollar rolls we have to make in 8 order to advance the jackpot. But beyond that, when 9 sales would typically in the past have allowed us to 10 roll in a greater increment, the interest factor 11 really prevents us from doing that. 12 COMMISSIONER SCHENCK: I can't get over 13 this lady. Money does not double at one percent for 14 25 years. It doesn't even come close. I mean, I'm 15 used to a rule of 7 and 10. At 7 percent, money 16 doubles every 10 years, 10 percent every 7 years. 17 2.98 over 25 years -- or I'm sorry. Nine point -- or 18 I'm sorry. 6.96. 19 MR. TIRLONI: Well, the pay -- 20 MS. PYKA: Monthly payment. 21 COMMISSIONER SCHENCK: That's net 22 present value. Right? 23 CHAIRMAN COX: Of course, this is an 24 annuity. 25 MS. PYKA: Yes. 0045 1 CHAIRMAN COX: So we're drawing out. 2 That whole amount isn't there for the entire period. 3 COMMISSIONER SCHENCK: No, I'm 4 understanding. I'm saying -- the net present value of 5 that ticket is -- at that interest rate, it's 6 $2.8 million -- 7 CHAIRMAN COX: Right. 8 COMMISSIONER SCHENCK: -- or 2.9. 9 MR. TIRLONI: And, Commissioners, 10 Dr. Sizemore is here today and he has some follow-up 11 on an item that you-all asked for some information on 12 a month or so ago. 13 DR. SIZEMORE: Thanks, Robert. 14 Good morning, Commissioners, Chairman. 15 I am David Sizemore, Research Coordinator for the 16 Commission. And before I actually get to the slide, 17 I'll contexturalize things briefly. 18 In the October meeting of last year, 19 the Commissioners asked for some material dealing with 20 the relationship between our beneficiary campaign, 21 advertising campaign, and tracking responses to the 22 question having to do with how lottery returns are 23 distributed to the state and whether people are aware 24 of what the beneficiary is; in this case, obviously, 25 education. 0046 1 There are three vertical groupings, and 2 each one represents a separate beneficiary campaign 3 over the course of the 36 months or so that are listed 4 up there, or about two years, two and a half years or 5 so. 6 There are three distinct advertising 7 campaign waves. And overall, about six and a half 8 million dollars was spent, just less than six and a 9 half million dollars, across these three waves. With 10 the first wave comprising the largest expenditure, 11 about 74 percent of that, the second about 23 and the 12 final wave, less than 3 percent. 13 And in the first wave, there was a 14 diverse advertising campaign that involved television, 15 radio, print, outdoors, a combination effort. In the 16 second wave -- and I'll go back. The first wave was 17 six weeks, lasted six weeks, from July through August. 18 The second wave was in February and March of '07, and 19 that wave involved pretty much the same elements, 20 except it lacked an outdoor campaign. And the final 21 wave occurred in February of last year and involved 22 only radio exposure. 23 In terms of the tracking questionnaire, 24 we collected -- and the tracking research, we collect 25 data every month and survey about 400 people, with the 0047 1 exception of October, where we surveyed 1,200 people. 2 And the tracking question that we're dealing with here 3 addresses whether people responded -- their first 4 response to a basic question about where the profits 5 from the lottery go is education, and that's what 6 we've marked out with the blue line. The red line 7 indicates sales for the same months, total sales, 8 monthly sales. 9 So again the question asks, "Where do 10 you think profits from the lottery go?" And this is 11 an open-ended question, so they're free to say 12 whatever they want. 13 In terms of the findings, comparing the 14 months, before the campaign emerged, in the month 15 while it was happening or just after with reference to 16 the education response, we see a very large or sharp 17 increase from July '06 to August '06, from roughly 18 39 percent to 55 percent of people saying education as 19 their first response, and this was statistically 20 significant, the difference. 21 The other two comparative frameworks, 22 February-March of '07 and February and March of '08, 23 nothing really happened here with reference to those 24 two campaigns. It's pretty stable, and those 25 differences were not statistically significant. 0048 1 It is interesting to note that prior to 2 the first campaign, the average response rate for 3 first responses being education for the four months 4 prior to that first campaign, the average was about 5 36 percent; that is, 36 percent or so of people would 6 say education as their first response. 7 The six months after that first 8 campaign, however, the average through much of the 9 rest of the year and 2007 was 46 percent. This 10 suggests, relatively speaking, that there may have 11 been a sustained awareness lift associated with the 12 first campaign, and that lasted pretty much through 13 the rest of the time that we had been tracking that 14 question. 15 Thank you. Are there any questions? 16 COMMISSIONER WILLIAMSON: Do you 17 correlate any of that with the sales? I notice when 18 the blue line spikes up after a certain delay, then 19 sales tend to increase. Do you see any correlation 20 between that at all? 21 DR. SIZEMORE: We didn't do any kind of 22 testing. And it's tough to actually make a claim that 23 this affects sales. Particularly with reference to 24 some of the spikes that you do see, those are often 25 months where the jackpots are very large, which drives 0049 1 sales considerably. There are a lot of other things 2 going on as well. 3 MR. GRIEF: Commissioner, if I could 4 give you some background on that. We had watched for 5 several years with great envy the lotteries like the 6 Georgia education lottery and the Tennessee education 7 lottery. And they were able to parlay the fact that 8 they were trumpeting where the money went for 9 education, into some significant sales, as we saw it. 10 And we were never able to advertise the 11 fact of where the money goes, not because of any law 12 or rule but because of guidance that we had received 13 from leadership offices. And in conjunction with 14 Chairman Clowe when he was here, we did a significant 15 reach-out to the leadership offices, showed them our 16 advertising campaigns, even showed it to the 17 Lt. Governor himself during that time, and we got the 18 buy-in to at least attempt this. 19 I think any of the sales spikes that 20 you see on this chart are not related to the 21 education; I think they're related more to jackpots 22 and other things that were occurring at the time. 23 What we did see during the very first campaign, which 24 is where the bulk of our time and money was spent, is 25 a significant lift in the fact that more people seem 0050 1 to know where the money went. 2 However, we also learned that that 3 doesn't necessarily translate into more sales. We've 4 seen that lift, as David said, somewhat continue over 5 time. But again, I don't think it was a worthless 6 endeavor; I think it was worthwhile to educate. I 7 think it's good for the public to understand that. 8 But I don't know that I can sit here and tell you that 9 it translated into additional revenue. I don't think 10 the facts bear that out; I don't think I can support 11 that statement. 12 CHAIRMAN COX: All right. Is that your 13 report? 14 MR. TIRLONI: That is our report for 15 this month. We're happy to answer any other questions 16 y'all may have. 17 COMMISSIONER SCHENCK: I have no 18 questions. Thank you. 19 MR. TIRLONI: Thank you. 20 COMMISSIONER WILLIAMSON: I have none. 21 CHAIRMAN COX: Thank you very much. 22 DR. SIZEMORE: Thank you. 23 CHAIRMAN COX: Ms. Nettles, did you 24 want to comment on this particular item? Come 25 forward, please. 0051 1 MS. NETTLES: Good morning, 2 Commissioners. For the record, my name is Dawn 3 Nettles. I'm with the Lotto Report out of Dallas. 4 And my comment on this is, Robert's 5 slide that he showed a while ago on the $2.98 million 6 for each of the two winners, I was kind of like y'all, 7 I was really baffled by it, and then it finally dawned 8 on me what it was all about. That was an advertised 9 jackpot at $8 million, and it was an annual pay. The 10 real figures are that those people are really 11 receiving $4 million each. And I'm kind of baffled on 12 why the Commission is now showing the net amount, you 13 know, after taxes are taken out. 14 MR. TIRLONI: Annual payments -- 15 CHAIRMAN COX: Robert, if you could 16 come up and -- 17 MS. NETTLES: Is it cash value? 18 MS. KIPLIN: I need to have people, you 19 know, on the record. 20 MR. TIRLONI: The slide that I showed 21 for the December 24 drawing, that's two winners, Hurst 22 and San Antonio, both cash value options. 23 MS. NETTLES: Okay. My apologies. I 24 understand now. 25 CHAIRMAN COX: Okay. 0052 1 MS. NETTLES: I thought y'all were 2 talking about it being annual pay, and I was trying to 3 figure out what that was all about, but now I 4 understand. 5 CHAIRMAN COX: Okay. 6 MS. NETTLES: But I do want y'all to 7 know, too, in case y'all did not know it, you did not 8 have enough money to fund that win, and your reserves 9 for Lotto Texas are dangerously low, because they're 10 now under about $3 million, give or take. 11 CHAIRMAN COX: Ms. Pyka, would you like 12 to address that issue? 13 MS. PYKA: The jackpot that we had 14 included on the slide was the December 24 jackpot. 15 And at the point in time that the jackpot was won, 16 there was not sufficient sales generated to cover the 17 advertised jackpot. And so the Lotto Texas reserve 18 was used to cover the difference between the 19 advertised jackpot and sales that were generated for 20 that jackpot. 21 CHAIRMAN COX: Okay. Does that mean 22 that we finally eliminated the Lotto Texas reserve? 23 MS. PYKA: No, sir. There is still a 24 balance of slightly over $3 million in the Lotto Texas 25 reserve at this point in time. There are no sales 0053 1 contributions going into the reserve, but simply 2 entries to the reserve for any jackpots in which sales 3 are not generated to cover the advertised amount. 4 CHAIRMAN COX: Okay. So within the 5 last couple of years, we have amended our rule so that 6 we no longer have additions to that reserve. But 7 rather than eliminating the reserve, we're playing it 8 out against jackpots that are insufficiently funded, 9 if you will. At such point as it's played out, there 10 will be no more reserves of any kind to cause the 11 confusion that they have caused over the years? 12 MS. PYKA: That is correct, 13 Mr. Chairman. 14 CHAIRMAN COX: We pay jackpots out of 15 lottery revenue, not out of reserves? 16 MS. PYKA: That is correct. The only 17 exception is the balance still remaining in Lotto 18 Texas. 19 CHAIRMAN COX: Right. 20 COMMISSIONER SCHENCK: How short were 21 the sales to cover the advertised jackpot? 22 MS. PYKA: I will need to go back and 23 look at the reserve entry. I can get that and provide 24 that to you before we finish up my next couple of 25 items. 0054 1 COMMISSIONER SCHENCK: How often does 2 that happen? 3 MS. PYKA: The most recent Lotto 4 jackpots have been hit at lower levels, and we have 5 used the research to cover the cost of the Lotto Texas 6 jackpot. 7 MR. GRIEF: But I think generally that 8 happens any time we get hit at a level below -- 15, 9 14? 10 MS. PYKA: And right now, with the 11 interest factor declining in the manner that it has, 12 you know, those jackpots at one point in time were 13 funded anywhere at 10, 11, 12, and now that's up more 14 towards the 18, $19 million level with the current 15 interest factor that we are facing. 16 MR. GRIEF: But if I could also 17 supplement something the Chairman said about the 18 change to our rule, what the reserve fund does is, it 19 artificially allows you to maintain a constant prize 20 payout percentage. By eliminating that reserve fund, 21 in effect what we'll be doing is allowing the prize 22 payout percentage to fluctuate based on the fact that 23 if jackpots are hit below the level that causes it to 24 be a 50 percent payout, the payout will rise in that 25 event. 0055 1 COMMISSIONER SCHENCK: But over the 2 long run, if we continue to face this problem, my 3 concern about incremental costs of Lotto Texas are 4 dwarfed by the prospect that we have to get 5 increasingly high jackpots before we don't run a 6 substantial risk of having to fund it out of general 7 receipts. 8 CHAIRMAN COX: Well, one thing, 9 Commissioner, that I would point out is that the 10 reserve was, as Gary referred to, an income-leveling 11 process which really accountants frown on. Income- 12 leveling is not good form; reporting of income as it 13 occurs is good form. And what we are doing now is 14 reporting income as it occurs. 15 Now, when we say that the reserve was 16 used to fund the jackpot -- of course, there is no 17 cash involved there. The cash is coming out of cash. 18 And it doesn't mean we're losing money. It just means 19 that we haven't covered the full 52 percent that we 20 would expect to cover if sales had been sufficient to 21 support the jackpot. We're still making money. We're 22 just not making as much as -- 23 COMMISSIONER SCHENCK: Not making as 24 much as we would have expected? 25 CHAIRMAN COX: Exactly. 0056 1 COMMISSIONER SCHENCK: Yes, I'm fine 2 with the idea of -- and I was fine with the idea of 3 scrapping the reserve. But the sales are not where we 4 would like them to be, and we're not making as much as 5 we would like on particularly these lower draws. 6 We're going to continue to have lower rolls, so it's 7 just a challenge. 8 MS. PYKA: And it's something that we 9 monitor, each jackpot, based on the advertised jackpot 10 and what actual sales are, where we meet the break- 11 even point as well as where we meet the point that 12 sales have covered the advertised jackpot. 13 COMMISSIONER SCHENCK: Well, in the 14 long run, I mean -- at present at least, our 15 advertising budget is determined by our payout 16 percentage. And if we continue to have to call it the 17 reserve, call it under 52 percent of sales, whatever 18 you want. 19 CHAIRMAN COX: That's true. 20 COMMISSIONER SCHENCK: We're forcing up 21 that prize payout and decreasing our ability to 22 advertise that game and others. 23 MS. PYKA: But again, going back to the 24 Chairman's point, the proper accounting treatment is 25 to treat it as a true prize expense rather than -- 0057 1 COMMISSIONER SCHENCK: Right. I agree. 2 I mean, I'm not disagreeing. I'm just saying Lotto 3 Texas is -- 4 CHAIRMAN COX: And a valid observation. 5 COMMISSIONER SCHENCK: It's not just -- 6 MS. PYKA: Right. 7 COMMISSIONER SCHENCK: -- and 8 percentage, but it's throwing an anchor out for the 9 advertising. 10 MR. GRIEF: And I completely agree. 11 And it's a very difficult challenge that we face. You 12 know, we talk about the Lotto game. It brings in -- 13 MS. PYKA: About $3 million in sales a 14 week. 15 MR. GRIEF: And so you're risking that 16 revenue. And Mr. Nettles, she will tell you, she's 17 been a big proponent of lowering the starting jackpot 18 over time. If you do that, then you're going to 19 significantly decrease sales, you're going to push it 20 down to a game more like Texas Two Step, which 21 sometimes has jackpots over a million dollars. 22 COMMISSIONER SCHENCK: If I'm recalling 23 right, she also suggests that we increase the number 24 of winners. Am I remembering that right, Mr. Nettles, 25 that your suggestion to us some time ago was that you 0058 1 thought there weren't enough winners? 2 MS. NETTLES: Well, that's when your 3 sales have declined. 4 COMMISSIONER SCHENCK: Oh! 5 MS. NETTLES: My concern -- used to my 6 concern was for the rights of the players, and it 7 still is. Okay? I mean, fair games from that 8 standpoint. But I also care about the state's 9 revenue. And what I warned, at the time that Lotto 10 Texas went back to 6 in 54 was that they were 11 guaranteeing a jackpot at $4 million. Okay? There is 12 not enough money to fund $4 million. Okay? 13 When they made that change, they came 14 up with a $13 million figure that was in the prize 15 reserve fund. Well, I've always complained about that 16 $13 million. I'm not even sure that I agree with the 17 $13 million. I really think it's more than that. But 18 I never did compute it myself, so I just went with the 19 $13 million and tracked it from there, the figures 20 that the lottery gave me. 21 My concern was that that $13 million 22 should have never been withheld from the players. 23 That's the players' money. That money in reserve, 24 it's not the state's. It comes directly from the 25 prize pool that is supposed to be paid out to those. 0059 1 The prize pool is now 50 percent of sales, though, is 2 supposed to be returned to the players. 3 My concern is that the state is facing 4 a liability with the starting jackpot at $4 million 5 when it can't be funded. What they're not really 6 covering here is that it's taking 15 draws in a roll, 7 in a roll cycle before the jackpot is hit. And 8 nowadays, there is not even enough money after the -- 9 I'm not sure exactly -- but 10, 15 draws, there is 10 still not enough money to fund the jackpot -- okay? -- 11 after increasing it a million dollars each time. 12 I contend that you would get your sales 13 up if you would give the people of Texas a game they 14 wanted, which was the 6 in 50 matrix rather than the 6 15 in 54 that they went with. When they did that, they 16 went against the people, and that's part of what 17 happened on their sales. And you can actually take it 18 and track it and see the decline in sales from when 19 they made that change. 20 So I just want -- I don't want to see 21 the state face a liability. The state is facing a 22 liability on the Two Step as well. In fact, they're 23 already in the hole. And when they said that Two Step 24 sales are up, I would agree with that to a point, but 25 I'm not sure what figures they're including when 0060 1 they're quoting their Two Step sales right now. I 2 don't know if they're including all these free 3 tickets, because there's $1.1 million free tickets 4 somewhere. 5 COMMISSIONER SCHENCK: You did call, I 6 think, and express some concern about the advertised 7 jackpot, which I think we all appreciated that, and I 8 appreciate your point here today. 9 MS. NETTLES: Oh, on the Two Step? 10 COMMISSIONER SCHENCK: Yes. 11 MS. NETTLES: Yes, sir, I did. I just 12 believe in being fair to the players. And they're 13 entitled to what the sales -- 14 COMMISSIONER SCHENCK: I appreciate 15 that, and I know everyone here shares that sentiment 16 as well. 17 MS. NETTLES: Okay. Well, anyway, I 18 understand now about the $2.9 million. I thought they 19 said it was an annual pay. 20 And there was one other thing I wanted 21 to say to you on the issue of sales, and Robert 22 touched on it a while ago -- or not sales -- but about 23 the annual pay versus the cash value option. And I 24 know you said last month or month before last that we 25 needed to check into being able to give the players 0061 1 the opportunity to choose which option or how they 2 wanted to be paid after they won. Well, sir, I don't 3 know -- you weren't here at the time -- but I fought 4 for that for years. And Ms. Kiplin said it could not 5 be done because of IRS tax issues. 6 COMMISSIONER SCHENCK: Yes. I think 7 the concern is that if the player has the option to 8 choose, that they've effectively avoid- -- it's a tax- 9 evasion problem -- 10 MS. NETTLES: Right. 11 COMMISSIONER SCHENCK: -- and I think 12 they treat it as -- was it implied or constructively 13 received income that they're just trying to avoid. 14 MS. NETTLES: Right. 15 COMMISSIONER SCHENCK: It would be 16 great if we could do something like that. 17 MS. NETTLES: Oh, I agree, and I fought 18 for that years ago but was told that it could never be 19 done in Texas. And so, of course, I challenged her on 20 that but never got anywhere. Perhaps you will. I 21 wish you luck on it because I think players should 22 have that choice. 23 CHAIRMAN COX: "Never" is certainly a 24 big word. 25 MS. NETTLES: I'm sorry? 0062 1 CHAIRMAN COX: "Never" is a big word, 2 and we continue to look at our options. 3 MS. NETTLES: Good. Thank you very 4 much. 5 CHAIRMAN COX: Thank you, Ms. Nettles. 6 MS. PYKA: Commissioners, to go back to 7 the question that you asked Commissioner Schenck 8 about, the value that was charged against the reserve 9 for the $8 million jackpot, it's $2.4 million. 10 COMMISSIONER SCHENCK: 2.4 is the net 11 present value of -- 12 MS. PYKA: The entry to the reserve to 13 fund it was $2.4 million. 14 COMMISSIONER SCHENCK: How much -- oh, 15 I see. 2.4 out of 8? 16 MS. PYKA: Right. The advertised 17 jackpot was $8 million. 18 COMMISSIONER SCHENCK: Wow! 19 MS. PYKA: And also to clarify the 20 record, the value of sales that are reported for Texas 21 Two Step are actual sales and do not reflect the 22 promotional tickets. 23 CHAIRMAN COX: I'm sorry? 24 MS. PYKA: The value of sales reported 25 for Texas Two Step -- I think there was a question 0063 1 about that -- is -- 2 COMMISSIONER SCHENCK: I think it was 3 the advertised jackpot. 4 CHAIRMAN COX: Yes. But the free plays 5 are taken into account in determining the amount of 6 the jackpot. 7 MS. PYKA: That's correct. 8 CHAIRMAN COX: Yes, which I think was 9 the point that Mr. Nettles made, and we appreciate her 10 making that point. 11 MS. PYKA: Most definitely. 12 CHAIRMAN COX: Excellent. 13 AGENDA ITEM NO. III 14 CHAIRMAN COX: Okay, Ms. Pyka, Agenda 15 Item No. III, report, possible discussion and/or 16 action on transfers to the state. 17 MS. PYKA: For the record, Kathy Pyka. 18 Tab III includes information on the 19 agency's transfers to the state. The first report in 20 your notebook reflects the transfers and allocations 21 to the Foundation School Fund and the allocation of 22 unclaimed prizes for the period ending November 30th 23 of 2008. Total cash transfers to the state amounted 24 to $249.3 million for the first three months of Fiscal 25 Year 2009. 0064 1 The second page of your notebook 2 reflects the detailed information for the monthly 3 transfers. Of the $249.3 million transferred to the 4 state, $229.2 million was the amount transferred to 5 the Foundation School Fund, with a balance of 6 $20.1 million transferred from unclaimed prizes. 7 Commissioners, this represents less than one percent 8 of a decrease from the amount transferred to the 9 Foundation School Fund in November of 2007. 10 And the next document in your notebook 11 includes a report of lottery sales, expenditures and 12 transfers from Fiscal Year 1992 to date. Total 13 cumulative transfers to the Foundation School Fund 14 through November of this year totaled $10.9 billion. 15 And Commissioners, before I leave this, 16 item, I -- 17 CHAIRMAN COX: Kathy, when will we pass 18 the $11 billion mark? 19 MS. PYKA: The transfer for February 20 should pass the $11 billion mark. 21 CHAIRMAN COX: Thank you. 22 MS. PYKA: Okay. Commissioners, at 23 this time I would also like to provide you an update 24 on the biennial revenue estimate that was issued by 25 the Comptroller of Public Accounts on Monday of this 0065 1 week. The estimate included by Comptroller Combs 2 estimated that $959.6 million will be transferred to 3 the Foundation School Fund for Fiscal Year 2009. And 4 for comparison purposes, the Commission projects that 5 $952.3 million would be transferred for Fiscal Year 6 2009 in our legislative appropriation request. 7 CHAIRMAN COX: And what were those two 8 numbers again, Kathy? 9 MS. PYKA: Certainly. The 10 Comptroller's estimate for Fiscal Year 2009 is 11 $959.6 million. And our projection in our LAR is 12 $952.3 million. So their projection is actually just 13 less than a percent from what our projection is in the 14 legislative appropriation request for Fiscal Year '09. 15 CHAIRMAN COX: Now, that is much closer 16 than we've been in the past. Is that correct? 17 MS. PYKA: Significantly. And then 18 moving to Fiscal Year 2010 and Fiscal Years 2011, the 19 Comptroller's biennial revenue estimate projected a 20 gradual decline in transfers. They're reflecting 21 about a percent decline in those years, and that 22 amounts to $949.4 million in Fiscal Year 2010 and 23 $932.4 million in Fiscal Year 2011. 24 Commissioners, while they showed a 25 percent decline, our LAR shows approximately three to 0066 1 four percent in those years is our decline on 2 transfers to the Foundation School Fund. We continue 3 to show declines in the out years of the legislative 4 appropriation request. 5 CHAIRMAN COX: What are our numbers for 6 the '10 and '11 fiscal years? 7 MS. PYKA: Our numbers for Fiscal Year 8 2010, our number is $910.7 million. Theirs is 949.4, 9 so it's a $38 million variance, or about 4.2 percent. 10 And then in Fiscal Year 2011, we project $877 million. 11 Theirs is $932.4 million, which is about a 6.3 percent 12 difference. 13 CHAIRMAN COX: It looks like a range in 14 which reasonable people could differ? 15 MS. PYKA: Definitely. 16 CHAIRMAN COX: Excellent. 17 MS. PYKA: And then I also wanted to 18 note, I also looked at the bingo revenue estimate 19 included in the biennial revenue estimate. And the 20 projection that we included for bingo prize fees for 21 all years, Fiscal Years '09, '10 and '11, is 22 $25 million. The Comptroller finding of revenue 23 estimate ranges anywhere from $24.9 million to 24 $25.6 million. So again, the variance between those 25 numbers, anywhere from negative three-tenths of a 0067 1 percent to 2.6 percent again, and that's closer to our 2 estimate than in years past. 3 CHAIRMAN COX: Excellent. 4 MS. PYKA: So I wanted to give that 5 update before we leave this item. And, Commissioners, 6 that concludes my presentation. I would be happy to 7 answer any questions. 8 COMMISSIONER SCHENCK: No questions 9 from me, Kathy. Thank you. 10 MS. PYKA: Thank you. 11 COMMISSIONER WILLIAMSON: I would like 12 a copy of all of those numbers, please. 13 MS. PYKA: Most definitely. I have a 14 spreadsheet that I will pass off to you. 15 COMMISSIONER WILLIAMSON: Okay. 16 AGENDA ITEM NO. IV 17 CHAIRMAN COX: Agenda Item No. IV, 18 report, possible discussion and/or action on Lottery 19 Operations and Services Contract Amendment No. 8 20 credit calculation. 21 Ms. Pyka. 22 MS. PYKA: Again for the record, my 23 name is Kathy Pyka, Controller for the Lottery 24 Commission. 25 This morning I wanted to provide you an 0068 1 update on Amendment No. 8 of the Lottery Operations 2 and Services Contract and the amount due to the 3 Commission for the first quarter of Fiscal Year 2009. 4 The Commission will not be receiving a credit for the 5 first quarter under either Section 10.3.3 or Section 6 10.3.4 of the contract as, Commissioners, there was a 7 decline in prize payout percentage from Fiscal Year 8 2008 to Fiscal Year 2009. A copy of the credit 9 calculation computation is included in your notebook 10 for your reference. 11 And I would be happy to answer any 12 questions that you might have. 13 COMMISSIONER WILLIAMSON: No. 14 CHAIRMAN COX: Thank you, Ms. Pyka. 15 MS. PYKA: Thank you, Commissioners. 16 AGENDA ITEM NO. V 17 CHAIRMAN COX: Agenda Item No. V, 18 report, possible discussion and/or action on the Texas 19 Lottery Commission headquarters facility. 20 Mr. Fernandez and Ms. Erickson. 21 MR. FERNANDEZ: Good morning. 22 Mr. Chairman, Commissioners. My name is Mike 23 Fernandez. I'm the Director of Administration. With 24 me this morning I have Toni Erickson who is our 25 Support Services Manager. 0069 1 As I know you recall, at our last 2 Commission meeting, there was some discussion about 3 the headquarters facility and the facility lease. And 4 at that time the Commission asked that we prepare an 5 overview of our current lease and what we intend to 6 pursue, I believe, in the future. 7 After that meeting, I had asked 8 Ms. Erickson if she would put together some 9 information that we might provide to the Commission as 10 an overview addressing that topic. Toni's group has 11 direct purview for facilities leases and facilities 12 operations and maintenance here at the agency. 13 And with that, I'm going to ask 14 Ms. Erickson if she would go over that overview with 15 you. 16 MS. ERICKSON: Good morning, 17 Commissioners. I have prepared a presentation for 18 you. The first slide is a summary of our lease, the 19 actual lease term. The original lease was executed 20 January 7, 1997. It included a three-year initial 21 term. We've since done two extensions to the lease. 22 The current lease expires May 7, 2010. There is one 23 remaining five-year term on this lease, if we execute 24 that, will take us through May 7, 2015. 25 Just to note, the lease rates for the 0070 1 final lease term are to be negotiated yet. So I can 2 tell you that we are working on a cost benefit 3 analysis. We are working closely with the Texas 4 Facilities Commission to develop our cost benefit 5 analysis and get some market rates for the Austin area 6 so that we can go into those negotiations with the 7 most current information for the agency. 8 The next slide is just an overview of 9 the facility itself. There's 75,578 square feet for 10 this headquarters facility. It includes this four- 11 story main building and the two-story adjacent 12 building that's used for our drawing studio and 13 security. It also includes the surface parking that 14 surrounds the building and the underground parking 15 lot. 16 This is a full service lease. It 17 includes all of our utilities: Electric, gas, water 18 and wastewater. That said, we do pay for certain 19 meters and for after hours usage. The certain meters 20 are for our computer room and for our drawing studio. 21 Those are meters that we elected to pay. 22 This lease also includes full-time 23 janitorial services where we have janitorial staff 24 on-site during the workday to respond to any issues 25 that we have and also take care of the janitorial for 0071 1 the building. It also includes a full-time building 2 engineer that responds to any maintenance issues that 3 we have. And they deal with things like our HVAC 4 systems, et cetera. And just to note, the lessor does 5 pay all of the taxes and the insurance for these 6 buildings. 7 On the next slide, I wanted to give you 8 just a quick cost comparison. The space is designated 9 as Class B space, and it's located in the central 10 business district of Austin. Our current TLC annual 11 lease rate is $30.22 per square foot. The central 12 business district -- this is information that we got 13 from the Grubb & Ellis report for Q3 2008. The 14 current per square foot for the central business 15 district is $28.04. That is comparing full service 16 leases for this period of time. So we will be 17 working, obviously, on that annual rate when we go 18 into lease negotiation. 19 COMMISSIONER SCHENCK: It seems to 20 me -- we have a larger than average, I'm betting, 21 square footage footprint. That Grubb & Ellis report, 22 I have not seen it. I don't know what it's including. 23 But my understanding is, the more acres you buy, the 24 lower the price per acre. And the more square footage 25 you're buying, I would think the lower the price per 0072 1 square foot ought to be -- or lease. 2 MR. FERNANDEZ: Well, I think that 3 probably is true to a degree. And I think that the 4 differences then become the type of square footage, 5 whether it's A space or B space, and I think that's 6 where the delta -- where the difference starts to 7 begin. But I do agree. I know that in warehouse 8 space, the more warehouse space that you acquire, 9 generally the better the square foot rate you get. 10 But I think that that starts to erode as you get to A 11 space in a central business district. 12 MS. ERICKSON: And I also think 13 availability plays into that. And obviously, you 14 know -- 15 COMMISSIONER SCHENCK: Well, I'm 16 guessing there will be some availability. 17 MS. ERICKSON: As more space becomes 18 available and there is more competition for space, 19 then it does impact the rate. 20 COMMISSIONER SCHENCK: Well, let the 21 word go forth, I am for looking at other options. I 22 think that we're paying a lot for this space. And 23 maybe I'll leave it there. 24 MR. FERNANDEZ: And we know 25 historically there is an ebb and flow and that as 0073 1 space is used up and there's more spaces going to come 2 on-line. And we know that there is a large inventory 3 of space getting ready to come on in 2010. So, you 4 know, our intent is to look and also open negotiations 5 here in early spring. 6 COMMISSIONER SCHENCK: Do we have a 7 sense of where employees live? Are they living -- are 8 90 percent of them living north of town or west or 9 east or south, because -- 10 MS. ERICKSON: No. And typically 11 that's not taken into consideration as a rule. I 12 mean -- 13 COMMISSIONER SCHENCK: Oh, I 14 understand. 15 MS. ERICKSON: -- when we go and 16 assume -- I understand that for RFP for space, we 17 develop the specs for the space that we're looking 18 for, as an agency, you know, for the usage of what 19 it's going to be used for. If you're going to require 20 people to come to your space, you're looking for it to 21 be available on bus lines. 22 COMMISSIONER SCHENCK: I haven't seen a 23 whole lot of -- well, we have people visiting, which 24 is great. But it seems to me they could -- if we were 25 close to the airport, they could visit there, too. 0074 1 That's where our people work and come every day. 2 MR. GRIEF: Well, I will say, 3 Commissioner, that the leadership looks -- if you 4 can't locate within the Capitol Complex, they look to 5 state agencies. And it's beneficial for us to be as 6 close to the Capitol as we can be and not pay some 7 exorbitant type Class A space rent. 8 COMMISSIONER SCHENCK: Well, I 9 understand that. We can work with the leadership as 10 well. If we can show them that we can save a lot of 11 money by being somewhere else, maybe they'll let us 12 talk to another landlord. 13 MR. FERNANDEZ: Absolutely. 14 COMMISSIONER WILLIAMSON: My specific 15 question is, is who is responsible for fixing that 16 gate down there that's not working? 17 (Laughter) 18 MS. ERICKSON: The automatic gate? 19 MR. FERNANDEZ: Toni. 20 (Laughter) 21 COMMISSIONER WILLIAMSON: Is that the 22 Lottery? 23 MS. ERICKSON: That's my 24 responsibility. 25 COMMISSIONER WILLIAMSON: Okay. 0075 1 MS. ERICKSON: And I can tell you that 2 we are working on that, and it should be fixed next 3 week. 4 COMMISSIONER WILLIAMSON: Okay. 5 MS. ERICKSON: The last slide that I 6 have for you -- and this helps in the overall 7 discussion when we talk about possibly looking at 8 moving to new spaces -- what we call or consider sunk 9 costs. And what we do know is that we do have. 10 $3 million worth of lease improvements in the 11 building, and that includes the build-out for the 12 initial occupation to get into the building and then 13 subsequent modifications that we've done such as our 14 raised floor in the computer room, our drawing studio 15 next door, the security area and this auditorium. 16 It's just everything that we've done to make this 17 building ours and functional for us and the usage. 18 COMMISSIONER WILLIAMSON: Are we the 19 only tenants the owner -- in this building? 20 MS. ERICKSON: This complex includes 21 one other two-story building right outside the 22 courtyards here, and there are other tenants in that 23 one. We do not have that space. 24 COMMISSIONER WILLIAMSON: Was there a 25 tenant in here before we leased this building? 0076 1 MR. GRIEF: Yes. It was the Social 2 Security Administration. 3 COMMISSIONER WILLIAMSON: Okay. 4 MS. ERICKSON: So just for that, we do 5 have -- just on the $3 million, we have the tenant 6 improvement allowance which was included as part of 7 our lease cost, and then we've also paid $1.9 million, 8 roughly, improvements for that. So those would have 9 to be taken into consideration for any move, because 10 moving somewhere would be a significant cost to the 11 agency. 12 MR. GRIEF: And just to elaborate on 13 that, Toni. And I think what Toni is saying is, that 14 would be a challenge for us, because we would have to 15 make that a capital item in our legislation 16 appropriations request and ask for -- which probably 17 that $3 million sunk costs would probably be more like 18 five or $6 million today. 19 MR. FERNANDEZ: Today's market. 20 MS. ERICKSON: Absolutely. 21 MR. GRIEF: Yes. 22 MS. ERICKSON: And that is improvement 23 costs, the building. The Texas Facilities Commission 24 has a formula of what you would include. It's like 25 $7.00 per square foot to calculate moving costs and 0077 1 other incidental expenses associated with any 2 relocation. 3 COMMISSIONER SCHENCK: Sobeit. 4 COMMISSIONER WILLIAMSON: I have no 5 more questions. 6 CHAIRMAN COX: Is that -- 7 MS. ERICKSON: That's the last slide 8 from this presentation. 9 CHAIRMAN COX: I think that the message 10 that I hear from Commissioner Schenck -- and I 11 certainly echo -- is that we are a strong tenant and 12 anyone should be pleased to have us. And let's don't 13 go into this negotiation with any feeling of weakness 14 or with any concern that the consequence needs to be 15 controlled. Let's get the best deal for the state and 16 go from there. 17 MR. FERNANDEZ: Absolutely. 18 MS. ERICKSON: Absolutely. That's our 19 intent. 20 CHAIRMAN COX: Are you next, Mike? 21 MR. FERNANDEZ: Yes, sir. 22 CHAIRMAN COX: Okay. Yes. 23 AGENDA ITEM NO. VI 24 CHAIRMAN COX: Agenda Item No. VI, 25 report, possible discussion and/or action, including 0078 1 procurement on the agency's drawing studio and 2 production services, extension on the agency's audit 3 services contract, statistical consulting services 4 contract, procurement on the agency's random animated 5 digital drawing systems services, and/or procurement 6 of the agency's instant ticket manufacturing and 7 services. 8 MR. FERNANDEZ: Again, thank you very 9 much, Commissioner. For the record, my name is Mike 10 Fernandez. I'm the Director of Administration. I 11 also have with me Mr. Erickson, Support Services 12 Manager. 13 As you know, we bring before the 14 Commission any changes or proposed changes to prime 15 contracts. And what you have in front of you this 16 morning are proposed changes to five prime contracts. 17 Historically we have noticed these separately, but we 18 have asked our counsel to notice them up under one 19 item, since they are directly related to that item. 20 We have five different pieces of 21 information that we wanted to share with you. And 22 again, as you recall, these are not action items; 23 they're briefing items. But we would like any input 24 that you might want to share or any guidance that you 25 might want to give to us. 0079 1 The first is our studio production 2 services. 3 CHAIRMAN COX: Let me enlarge on 4 that -- 5 MR. FERNANDEZ: Yes, sir. 6 CHAIRMAN COX: -- for just a moment, 7 Mike. The Texas Lottery Act provides that the 8 Executive Director has all authority for procurement. 9 MR. FERNANDEZ: That's correct. 10 CHAIRMAN COX: In the 2005 legislative 11 session, I believe the legislative -- or the Sunset 12 Commission recommended that that authority be spread a 13 little more evenly between the Executive Director and 14 the board. The Legislature did not take action on 15 that; and, thus, the full authority for procurement 16 remains with the Executive Director. The Executive 17 Director, however, has indicated an openness to 18 guidance and our thoughts and has indicated that he 19 will keep us well informed on negotiations of major 20 contracts as they proceed. 21 Gary, is that a fair statement? 22 MR. GRIEF: Absolutely. Yes, sir. 23 CHAIRMAN COX: Thank you. 24 Excuse me, Mike. 25 MR. FERNANDEZ: Oh, that's quite all 0080 1 right. 2 The first item has to do with our 3 drawing studio/production services, which is M&S 4 Works. That contract expires 8/31/09. It's our 5 intent to go out with a Request For Proposal for those 6 services, and we wanted to advise you of that. 7 Item No. 2, Maxwell Locke & Ritter 8 provides our annual financial audit. We have two 9 one-year extensions remaining on that contract. And 10 this is to advise you that the staff intends to extend 11 that contract for a one-year period. 12 The third item is Eubank -- 13 CHAIRMAN COX: Mike, let me stop you 14 there. 15 MR. FERNANDEZ: Yes, sir. 16 CHAIRMAN COX: One of the issues that 17 is in the forefront when you talk about retention of 18 auditors is the rotation idea, that after a certain 19 period of time, there becomes a familiarity that just 20 says to you, "Maybe we ought to get a new look." Have 21 you and Ms. Melvin looked at the issue of rotation of 22 the auditor assignment? 23 MR. FERNANDEZ: Well, we discussed with 24 both Ms. Melvin and Ms. Pyka any ideas or concerns 25 that they might have, prior to issuing an extension or 0081 1 issuing an RFP. 2 CHAIRMAN COX: Good. 3 MR. FERNANDEZ: And I certainly, you 4 know, welcome and are open in those discussions to any 5 guidance or advice in terms of that procurement or 6 extension, so yes, sir. 7 The third item is Eubank & Young 8 Statistical Consulting. As you know, Dr. Eubank 9 provides statistical support and consulting to Michael 10 Anger's group, Operations, and Mr. Tirloni, and that 11 contract has three one-year extensions on it. And 12 this is to advise you that we had planned to extend 13 that contract for another year. 14 The fourth item -- 15 CHAIRMAN COX: Has Dr. Eubank's move to 16 Arizona impeded his effectiveness at all? 17 MR. FERNANDEZ: No, sir, it has not. 18 To my knowledge, in our discussions with Robert, we 19 have heard of no concerns. As you know, he was 20 with -- he was a professor at Texas A&M, and I believe 21 he is now the chair of a department at the University 22 of Arizona. 23 Is that correct? 24 CHAIRMAN COX: Arizona State. 25 MR. FERNANDEZ: He's not the chair? 0082 1 Oh, I'm sorry. I spoke wrong. 2 CHAIRMAN COX: I believe he's a 3 professor at Arizona State. 4 MR. FERNANDEZ: At Arizona State. But 5 we do speak with him -- I suspect Robert does 6 frequently. I know we do from time to time. But we 7 intend to extend that contract for another year. 8 The fourth item is the random animated 9 digital drawing system, and that is currently a 10 SciGames International product. The contract on that 11 expires, and we tend to re-procure that software that 12 runs our random number generator for the Megaplier. 13 And we will open conversations with that company in 14 terms of software licensing and maintenance contract. 15 The fifth item is the ticket printers. 16 And currently we have SciGames and Pollard Banknote 17 under contract to provide ticket printing services. 18 And what the staff intends to do is to go out with a 19 request for proposal to identify and procure 20 additional printing services. That would give us more 21 flexibility, give Michael, the Operations staff more 22 flexibility in terms of ticket-printing operations, 23 and that would be a request For proposal, so we wanted 24 to advise you of that also. 25 CHAIRMAN COX: Mike, about what 0083 1 percentage of those contracts go to SciGames and what 2 percentage go to Pollard at this time? 3 MR. FERNANDEZ: Well, I would defer to 4 Robert, but I would say 90 percent, 90 percent or 5 more -- greater. 6 MR. TIRLONI: For the record, Robert 7 Tirloni, Products Manager. SciGames is doing the bulk 8 of our printing. We're printing about one to two 9 games a year with Pollard -- SciGames is doing the 10 rest. 11 CHAIRMAN COX: So let's put that into 12 terms of percentages Mike did. Would that be 95? 13 MR. TIRLONI: 98 or 99 percent is 14 through SciGames. 15 CHAIRMAN COX: Is that a healthy 16 percentage for the second vendor? I'm accustomed to 17 seeing second vendors more in the 10 to 20 percent 18 kind of range. 19 MR. TIRLONI: There's been press 20 issues, which is in the past in terms of capacity with 21 both printers, which is why Mike just talked about our 22 desire to put out an RFP for an additional printer in 23 addition to SciGames and Pollard in case we run into 24 those press capacity issues in the future. 25 The facts are that the pricing that we 0084 1 get from SciGames pretty much across the board is far 2 less than Pollard can offer us, so we have been giving 3 Pollard about one or two games where they are cheaper 4 per thousand. But SciGames does have the better 5 pricing, and that's why we are printing the bulk of 6 our tickets through Scientific Games. 7 CHAIRMAN COX: And if I recall 8 correctly, there is no reason why we shouldn't have 9 three or more? 10 MR. FERNANDEZ: Absolutely. 11 CHAIRMAN COX: Because this is not a 12 commitment to buy; it's access to the capacity of the 13 vendors. Is that correct? 14 MR. FERNANDEZ: That's correct. 15 CHAIRMAN COX: So we have no minimum 16 commitment to any of these particular vendors? 17 MR. FERNANDEZ: Well, it's my 18 recollection that we do have a minimum commitment to 19 Pollard, and that is a minimum of one ticket per 20 year -- 21 MS. ERICKSON: One game. 22 MR. FERNANDEZ: -- one game per year. 23 CHAIRMAN COX: One game per year. 24 COMMISSIONER SCHENCK: I think we can 25 swing that. 0085 1 CHAIRMAN COX: Okay. Now, when we 2 visited Scientific Games in Atlanta, they indicated 3 that China was really pressing their capacity. Have 4 we found any difficulties with getting timely 5 deliveries from Scientific Games? 6 MR. TIRLONI: We had some press 7 capacity issues with Scientific Games in the summer of 8 last year. We didn't have any delivery issues. It 9 meant juggling some things around on our side, getting 10 some working papers in and executed quicker than we 11 normally do. 12 This current fiscal year that we're in 13 now, we have had absolutely -- no issues were executed 14 all the way through the end of Fiscal Year 2009, right 15 now in terms of working papers, and we did that so we 16 could lock in our time on their presses and be 17 guaranteed to get our games exactly when we need them. 18 CHAIRMAN COX: Excellent. Does that 19 conclude your report, Mike? 20 MR. FERNANDEZ: Yes, sir. 21 CHAIRMAN COX: Questions, Commissioner? 22 COMMISSIONER SCHENCK: Yes, two quick 23 reports. 24 Mike, how big is that Eubank contract? 25 Do you remember -- or a ballpark? 0086 1 MR. FERNANDEZ: Yes, sir. Hold on just 2 one second. Let me find it for you. It's $155,000, a 3 little over $155,000 annually. 4 COMMISSIONER SCHENCK: Annually. 5 MR. TIRLONI: The majority of that is 6 utilized by the drawings section where Eubank and his 7 partner, Dr. Young, are doing statistical analysis on 8 the actual draw results, so that's where the bulk of 9 those funds are allocated. 10 My department has funds allocated for 11 that contract for statistical consulting in terms of 12 looking at new games or new matrices or when we need 13 any type of answer to a statistical question posed by 14 a member of the public or somebody else. 15 COMMISSIONER SCHENCK: And on the 16 printing contracts for tickets, we could have multiple 17 vendors, but each vendor we add adds another layer or 18 sort of security and auditing concerns, doesn't it? 19 MR. FERNANDEZ: It will. Based on the 20 audit standards or the change in audit standards and 21 what they're looking at now, it will add another 22 layer. We will have the same review of that printer 23 as we've had in this audit that we just -- absolutely. 24 COMMISSIONER SCHENCK: I assume we're 25 going to bear that in mind? 0087 1 MR. FERNANDEZ: Absolutely. 2 COMMISSIONER SCHENCK: Thank you. 3 CHAIRMAN COX: Commissioner? 4 COMMISSIONER WILLIAMSON: I have no 5 questions. 6 CHAIRMAN COX: Thank you very much. 7 AGENDA ITEM NO. VII 8 CHAIRMAN COX: Agenda Item No. VII, 9 report, possible discussion and/or action on the 81st 10 Legislature. Ms. Trevino. 11 MS. TREVINO: Good morning, 12 Commissioners. For the record, I'll Nelda Trevino. 13 I'm the Director of Governmental Affairs, and I have a 14 few updates to provide for you today. 15 The Legislature convened its regular 16 session this past Tuesday, January the 13th, and it 17 will run through June the 1st. We have provided you 18 today with an updated legislative tracking report 19 listing the bills filed to date with potential impact 20 to the agency. We are currently tracking 42 bills, 21 and I would like to highlight bills filed since our 22 last Commission meeting, specifically related to the 23 agency. 24 These include House Joint Resolution 37 25 by Rep. Richard Raymond. This joint resolution would 0088 1 amend the constitution to dedicate lottery proceeds to 2 fund public education and would prohibit any 3 advertising that would promote the purchase of tickets 4 for the purpose of supporting public education. 5 Senate Bill 421 -- 6 CHAIRMAN COX: Nelda, let me stop you 7 there. 8 MS. TREVINO: Yes, sir. 9 CHAIRMAN COX: I remember I believe 10 that Rep. Geren expressed concern in a hearing of the 11 House Licensing and Regulatory Committee on 12 beneficiary advertising, and now we get a joint 13 resolution from someone who would like to see it 14 stopped as well. Is this a wrongly based concern or 15 how do you -- and, Gary, feel free to weigh in. 16 MR. GRIEF: Sure. 17 CHAIRMAN COX: How do y'all see this 18 concern? 19 MS. TREVINO: Chairman Cox, I guess one 20 thing I would want to put on the record is that. 21 Rep. Raymond has filed this resolution in the past, so 22 I think certainly there's some consistency that he 23 certainly believes this is a proper course of action. 24 As far as, you know, whether that's the 25 sentiment of the majority of the members of the 0089 1 Legislature, I think you're going to run the gamut of 2 people's opinions on that. The other comment I would 3 make in regards to Rep. Raymond's resolution, again 4 going on past history, that bill has not moved through 5 the legislative process in the past. Of course, today 6 is a new day. We never know what might be in the 7 future. 8 CHAIRMAN COX: And I know you will 9 watch that and try to observe what kinds of support 10 it's getting and the like and what kind of specific 11 concerns are being expressed about the beneficiary 12 advertising. 13 MS. TREVINO: Absolutely. 14 CHAIRMAN COX: Gary, did you have 15 anything you wanted to add to that? 16 MR. GRIEF: Other than we have no plans 17 for any other beneficiary advertising at this time. I 18 would offer that. And I don't believe we've done any 19 since the three that were identified on the chart that 20 you saw earlier today. 21 CHAIRMAN COX: Thank you. 22 Thank you, Nelda. 23 MS. TREVINO: You bet. 24 The other bill that I wanted to 25 mention, again that's been filed since our last 0090 1 Commission meeting, is Senate Bill 421 by Sen. 2 Leticia Van de Putte, and this bill would require the 3 Lottery Commission to create and market a scratch-off 4 game to benefit the Veterans Assistance Fund. 5 We will continue to provide you bill- 6 tracking reports on a regular basis throughout the 7 legislative session, and we'll also provide you 8 separate notifications on bills that are filed with 9 specific interest to the agency. 10 And this concludes my report today, and 11 I'll be glad to answer any questions that you might 12 have. 13 CHAIRMAN COX: As to the Van de Putte 14 bill, have we ever had an instance in which the 15 proceeds of a given ticket were sent to a cause other 16 than education, since Foundation for Education was 17 designated our beneficiary? 18 MS. TREVINO: No, Mr. Chairman. I'm 19 thinking -- maybe Colin and Melissa can help me out. 20 I believe maybe in the past, for some reason 21 Sen. Ellis comes to mind. And I think there might 22 have been -- I don't remember if he actually filed 23 legislation, but I think in some years past, if he 24 didn't actually file a piece of legislation, he at 25 least considered filing something not to fund this 0091 1 particular fund but some other sort of specific cause. 2 But actual legislation having passed to authorize or 3 to mandate that the Commission dedicate a game to 4 another fund, no, it's never gone into play. 5 CHAIRMAN COX: Okay. That would 6 probably create a challenge for the Cost Accounting 7 Department. I bet they could manage it. 8 Commissioner, did you have any 9 questions? 10 COMMISSIONER SCHENCK: No. Thank you. 11 COMMISSIONER WILLIAMSON: No, I don't 12 have any. 13 CHAIRMAN COX: Thank you very much, 14 Nelda. 15 Why don't we take about a 15-minute 16 break. 17 (Recess: 10:40 a.m. to 10:50 a.m.) 18 CHAIRMAN COX: Let's come back to 19 order, please. 20 21 AGENDA ITEM NO. IX 22 CHAIRMAN COX: Agenda Item No. IX. 23 Kim, am I on the correct number? 24 MS. KIPLIN: Yes, sir. 25 CHAIRMAN COX: Okay. Report, possible 0092 1 discussion and/or action on the Mega Millions game 2 and/or contract. 3 Mr. Grief. 4 MR. GRIEF: Commissioners, I have a 5 couple of items to report to you today on. One, I 6 want to make you aware of a meeting that I'll be 7 attending in Atlanta, Georgia, on February the 9th 8 which will be hosted by the Georgia Lottery 9 Corporation. Representatives from both the Mega 10 Millions and the Powerball consortiums will be in 11 attendance, and we'll be discussing a variety of 12 options for a game or games that could involve both 13 groups. And I'll continue to keep you posted as 14 further developments arise from that meeting. 15 The other item I wanted to comment 16 on -- and I hadn't planned on talking about this. But 17 after the discussion we had this morning on Lotto 18 Texas, I thought it was appropriate. Time rolls on 19 and new commissioners come on board, and I think it's 20 important that we bring things up from time to time. 21 This has to do with the Mega Millions 22 game and the jackpot estimation process. The Mega 23 Millions jackpots, the advertised jackpot is 24 guaranteed in all of those jackpots. And per the 25 agreement, the starting jackpot is defined as 0093 1 $12 million. However, over the last year, last 2 several months, as the interest factor has continued 3 to drop, Texas continues to be usually the lone 4 dissenting vote as we roll up to the next jackpot 5 level. 6 Today is a great example. Kathy Pyka 7 represented me on the telephone call today of Mega 8 Millions directors where tonight's jackpot is 9 $12 million, and we're three and a half million short, 10 if I remember correctly, Kathy, for tonight's 11 $12 million jackpot, which means the 12 states are on 12 the hook for the three and a half million dollars in 13 the event that it's hit. 14 In the vote to roll the jackpot, which 15 typically rolls to 16, although Texas has been voting 16 at 15 in the recent past, because that's all that's 17 funded by the estimates that are made -- tonight we're 18 only funded at 13 -- I'm sorry. For the next jackpot, 19 we would only be funded for 13. 20 And I just want to make you aware in 21 that roll call today, Texas voted for 13. A couple of 22 other states voted for 15, but the majority voted for 23 16, and so it will be rolling for 16. That's not 24 atypical of the mentality of the consortium as they 25 vote. 0094 1 I want to assure you that Texas 2 continues to be conservative, continues to vote only 3 for jackpots that can be supported by reasonable 4 estimates, and those votes are recorded and made an 5 official part of our Mega Millions record. I thought 6 that would be appropriate to let you know. 7 CHAIRMAN COX: Only. Now, Gary, again 8 we're talking about numbers that are not fully funded 9 but they are partially funded? 10 MR. GRIEF: Correct. 11 CHAIRMAN COX: So we wouldn't be losing 12 money but we wouldn't be making our full percentage at 13 that level? 14 MR. GRIEF: Your observation is exactly 15 correct, just as it was earlier today. 16 CHAIRMAN COX: And so what seems to be 17 the idea of your counterparts in other states is, 18 "Let's advertise more and hope that the sales might 19 somehow support it." Is that a fair description? 20 MR. GRIEF: Yes, it is. 21 CHAIRMAN COX: Or do they not even have 22 hope, they just want to advertise more? 23 MR. GRIEF: It's a mixed bag. I think 24 some do want to have hope. I do believe that some -- 25 for example, I know there were some proxies given 0095 1 today, and they didn't even look at the estimate. 2 They just gave their proxy for 16 and said, "That's 3 what we're rolling to because that's what we always 4 roll to." 5 CHAIRMAN COX: Commissioner, do you 6 have any thoughts on this? 7 COMMISSIONER SCHENCK: No. Gary, I 8 believe we had a pretty detailed discussion of this 9 about six months ago. I agree that it's a good idea. 10 I need to walk through this again. But I don't know 11 if the other states suffer from the same concerns 12 which I'm assuming are affected by Mega Millions as 13 well as any other game, of prize payout percentage 14 impacting the ability to advertise on a generic across 15 game basis. I mean, this is a significant issue for 16 us, it seems. 17 MR. GRIEF: It certainly is. And my 18 thought is that we give that some keen attention and 19 thought that perhaps some other states don't. That 20 just seems to be my impression. 21 COMMISSIONER SCHENCK: Well, it seems 22 to me if it gets to the point where it's becoming a 23 recurring problem, we have to consider our options. 24 COMMISSIONER WILLIAMSON: What's our 25 exposure from a liability perspective if we're short? 0096 1 What is Texas' -- 2 MR. GRIEF: I'll ask Kathy to come up, 3 Commissioner Williamson. 4 COMMISSIONER WILLIAMSON: Exposure 5 there specifically? 6 MS. PYKA: For the record, Kathy Pyka. 7 The exposure is actually shared amongst 8 the states, based on their contribution of sales. And 9 so tonight, if we are hit at $12 million and the 10 actual sales come in that we forecasted, we're short 11 about $3.5 million, and we would be allocated our 12 share of that deficit, based on the sales contribution 13 we made in relation to the other 11 states. 14 CHAIRMAN COX: Could -- 15 COMMISSIONER SCHENCK: Well -- 16 CHAIRMAN COX: Please. I'm sorry. 17 COMMISSIONER SCHENCK: Quick question. 18 I remember asking this before and I can't remember the 19 answer. We're going one state, one vote, though on 20 the roll. We're not doing a weighted vote? 21 MS. PYKA: No, we're not. 22 COMMISSIONER SCHENCK: So to put this 23 delicately -- 24 COMMISSIONER WILLIAMSON: You don't 25 have to. 0097 1 COMMISSIONER SCHENCK: -- the states 2 that shouldn't get two senators get one vote still 3 (laughter) when we're talking about this roll, even 4 though they're contributing disproportionately little 5 to the analysis, which might explain why they throw 6 their proxy around so loosely. 7 MR. GRIEF: That's a very keen 8 observation. 9 COMMISSIONER SCHENCK: So perhaps 10 that's the first issue we should be debating with 11 them, is how we weight or whether we should be 12 weighting these votes, because we have got to be one 13 of the biggest contributors, from a sales percentage, 14 to the Mega Millions. 15 CHAIRMAN COX: We're really not. 16 MS. PYKA: We're actually further down 17 the line. And I'm using today's sales as an indicator 18 for today's jackpot. And the highest sales 19 contribution is New York at 17.4 percent, followed by 20 California at 13.8 percent, and then New Jersey is at 21 10 percent. And that's generally the 1, 2, 3 order 22 that we see. Texas is ranked further down, with 23 8.7 percent of total sales. 24 COMMISSIONER SCHENCK: And how many 25 states total are in this? 0098 1 MS. PYKA: Twelve. 2 COMMISSIONER SCHENCK: Okay. 3 CHAIRMAN COX: What is our position out 4 of 12? 5 MR. GRIEF: It's like four or five, if 6 I'm reading it right, Kathy. 7 MS. PYKA: Yes. 8 COMMISSIONER SCHENCK: What is the 9 smallest? What is the last one? 10 MS. PYKA: Generally the smallest is 11 normally Washington, the State of Washington. 12 COMMISSIONER SCHENCK: The State of 13 Washington? 14 MS. PYKA: Yes. 15 COMMISSIONER SCHENCK: Okay. Well, I 16 would give them two senators, so I have to take that 17 back. 18 COMMISSIONER WILLIAMSON: So what do 19 I -- just assume 8 percent more or less -- 20 MS. PYKA: Correct. 21 COMMISSIONER WILLIAMSON: -- of the 22 $3 million? 23 MS. PYKA: Yes, ma'am. 24 COMMISSIONER WILLIAMSON: Okay. 25 CHAIRMAN COX: And again, Kathy, it's 0099 1 not that we would be sent a bill, it's just that our 2 return would not be the full 50 percent or 52 percent, 3 whatever our take normally is? 4 MS. PYKA: Correct. What we do is, we 5 monitor the due to or the due from for any shortfalls 6 and then on a routine basis pay any differences of due 7 to. Virginia is kind of our clearing house on that, 8 where we send our funds to them. But to go back to 9 your comment, that is correct. Our contribution as a 10 total percentage of sales simply goes down as a result 11 of getting hit earlier. 12 COMMISSIONER WILLIAMSON: I guess the 13 next obvious question is, of the top three, which ones 14 always roll at the 16 or what they normally do? 15 MS. PYKA: My observation has been that 16 of the top three, California is generally fiscally 17 conservative and follows a lead more like ours. I 18 have an example from earlier this month in which we 19 voted for 15 and California followed that same exact 20 vote. 21 MR. GRIEF: And I think there's 22 pressure that's been brought to bear recently with 23 Florida's entry into the Powerball game. That's 24 changed their starting jackpot from 12 to 15, Robert. 25 Is that right? 0100 1 MR. TIRLONI: I think they're starting 2 at 20. 3 MS. PYKA: Twenty. 4 MR. GRIEF: Twenty. So there's 5 chatter -- when you get on the telephone calls with 6 the other directors, there's a lot of chatter about 7 that discussion about where we must go in order to be 8 competitive with that game, so that's another added 9 factor that comes into play. 10 CHAIRMAN COX: Has there been 11 discussion of increasing the starting point -- wasn't 12 the starting point 10 at one time before we -- 13 MS. PYKA: You predate me. 14 MR. GRIEF: Before California? 15 MR. TIRLONI: Yes, that's right. 16 CHAIRMAN COX: Okay. Twelve was 17 California. And notwithstanding the increase at 18 Powerball, there has been no activity to increase the 19 beginning? 20 MR. GRIEF: Well, I'll say the activity 21 is now -- there is recognition that this is a problem 22 and a concern. And the activity that you're seeing is 23 culminating in these discussions with the Powerball 24 states. And hopefully some resolution, good 25 resolution may come out of this. 0101 1 CHAIRMAN COX: Okay. 2 COMMISSIONER WILLIAMSON: Well, I would 3 think the top three states certainly are more impacted 4 by the economy now that we are. This would ultimately 5 be a concern at some point. 6 CHAIRMAN COX: Gary, does that complete 7 your report on Mega Millions? 8 MR. GRIEF: Yes, sir, it does. 9 CHAIRMAN COX: Okay. 10 AGENDA ITEM NO. X 11 CHAIRMAN COX: And then Item X, report, 12 possible discussion and/or action on GTECH. 13 Gary again. 14 MR. GRIEF: Commissioners, other than 15 the documents that are in your Commission meeting 16 notebook, I have no further items to report. 17 CHAIRMAN COX: Okay. 18 AGENDA ITEM NO. XI 19 CHAIRMAN COX: Item No. XI, 20 consideration of and possible discussion and/or 21 action, including proposal, on new Rule 16 TAC 22 §403.501 regarding custody and use of criminal history 23 information. 24 Mr. Wassdorf. 25 MR. WASSDORF: Good morning, 0102 1 Commissioners. I bring to you a recommendation on 2 adopting a rule for the use and custody of criminal 3 history information. This is a requirement of the 4 Lottery Act in Section 466.205(b), has required us to 5 do that. It's recently brought to our attention that 6 we had not done so, and so we have prepared a 7 recommended rule for your consideration. 8 The rule is fashioned after other 9 agencies' rules that have been required to or have 10 adopted rules on the use and custody of criminal 11 record history information. It's been modified to 12 meet the needs of the Lottery Commission. 13 And essentially it provides that we 14 will use the criminal record history -- criminal 15 history record information only for the purposes of 16 meeting the statutory requirements of the Lottery and 17 Bingo Act and that it will be treated as confidential 18 information and will only be disclosed upon court 19 order and will be -- the rule specifies that it will 20 be made available as necessary or needed to the 21 Commissioners, the Executive Director or Deputy 22 Executive Director, the attorneys of the agency, the 23 Enforcement Division, which accumulates that 24 information, and the Division Director and employees 25 of the divisions authorized to make approvals or 0103 1 disapprovals based on criminal history information. 2 And that's pretty much it. Do you have 3 any questions? 4 COMMISSIONER SCHENCK: No questions. 5 COMMISSIONER WILLIAMSON: No. 6 MR. WASSDORF: I have a T-bar. 7 CHAIRMAN COX: Okay. I move approval 8 of the staff recommendation to expose this rule. 9 COMMISSIONER SCHENCK: Second the 10 motion. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMMISSIONER SCHENCK: Aye. 13 COMMISSIONER WILLIAMSON: Aye. 14 CHAIRMAN COX: Aye. 15 Were you voting, Commissioner? 16 COMMISSIONER WILLIAMSON: Yes, I did. 17 Aye. 18 CHAIRMAN COX: Okay. Motion carries 19 3-0. 20 Thank you, Pete. 21 AGENDA ITEM NO. XIII 22 CHAIRMAN COX: Okay. Agenda Item No. 23 XIII, consideration of the status and possible entry 24 of orders. 25 Ms. Kiplin. 0104 1 MS. KIPLIN: Commissioners, Items A, B 2 and C are SOAH contested case proceedings in which the 3 Administrative Law Judge has recommended revocation of 4 the license for insufficient funds being available at 5 the time we swept. Staff does recommend that you 6 adopt the Administrative Law Judge's recommendation in 7 each of those cases. 8 CHAIRMAN COX: Move approval of the 9 staff recommendation for Agenda Items A through C. 10 COMMISSIONER SCHENCK: Second the 11 motion. 12 CHAIRMAN COX: All in favor, say "Aye." 13 COMMISSIONER WILLIAMSON: Aye. 14 COMMISSIONER SCHENCK: Aye. 15 CHAIRMAN COX: Aye. 16 The motion carries 3-0. 17 MS. KIPLIN: Item D is also a State 18 Office of Administrative Hearings Administrative Law 19 Judge recommendation to revoke a license. This is 20 based on a disqualifying criminal conviction. Staff 21 recommends that you adopt the ALJ's proposed 22 recommendation. 23 CHAIRMAN COX: Okay. Let's take a look 24 at this one, Ms. Kiplin. What was the timing on the 25 violation? Did we note it timely and suspend timely 0105 1 or was there a lapse there? 2 MS. KIPLIN: Well, we had the criminal 3 conviction in 2008, and there was a hearing that was 4 held October 15, 2008. So in my view, this was 5 timely. 6 CHAIRMAN COX: Excellent. 7 Move approval of the staff 8 recommendation on Agenda Item D. 9 COMMISSIONER SCHENCK: I second the 10 motion. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMMISSIONER SCHENCK: Aye. 13 COMMISSIONER WILLIAMSON: Aye. 14 CHAIRMAN COX: Motion carries 3-0. 15 MS. KIPLIN: Commissioners, Items E and 16 F are bingo registry worker matters. Item E is the 17 matter of refusing to add names to the bingo registry 18 worker, and Item F is removing people from the 19 registry of approved bingo workers. In each of those, 20 it's because of a disqualifying criminal conviction. 21 These were matters that were presented 22 to the State Office of Administrative Hearings, and 23 the Administrative Law Judge recommended in the first 24 category refusing to add and in the second category 25 removing for disqualifying criminal convictions. 0106 1 Staff recommends that you adopt the Administrative Law 2 Judge's proposal. 3 CHAIRMAN COX: Move approval of the 4 staff recommendation. 5 COMMISSIONER SCHENCK: I second the 6 motion. 7 CHAIRMAN COX: All in favor, say "Aye." 8 COMMISSIONER WILLIAMSON: Aye. 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 Motion carries 3-0. 12 MS. KIPLIN: Commissioners, the 13 remaining item, Item G, is a settlement agreement, an 14 agreement and a proposed consent order between the 15 Lottery Operations Division and the respondent. This 16 is Deb's Quick Stop, a limited liability corporation. 17 The underlying facts relate to the licensee accepting 18 coupons not issued by the Lottery Commission in 19 exchange for a lottery ticket. 20 It's notable that the coupons were as a 21 result of play of an 8-liner. And Deb, the principal, 22 did plead nolo to a criminal conviction arising from 23 the State Lottery Act. I believe the staff's position 24 is that the 30-day suspension conforms to the standard 25 penalty chart guidelines that you've set out by rule, 0107 1 and the staff does recommend that you vote to suspend 2 the license for our licensee for 30 days. 3 CHAIRMAN COX: Where did this take 4 place, Ms. Kiplin? 5 MS. KIPLIN: Let's see if I can't find 6 that in the . . . Gray County. 7 CHAIRMAN COX: Where would Gray County 8 be? 9 MS. KIPLIN: Okay. You've got me 10 there. I'll ask for Mr. Anger to come forward. I've 11 got the -- 12 COMMISSIONER SCHENCK: We have 254 13 counties in Texas, for the record. 14 MR. ANGER: For the record, my name is 15 Michael Anger, and I'm the Lottery Operations 16 Director. 17 Commissioners, to be quite honest, I 18 can't remember exactly, but it is a West Texas county. 19 And I'm thinking -- 20 MS. KIPLIN: It looks like Pampa, 21 Pampa, Texas. 22 CHAIRMAN COX: Pampa. Way it there. 23 MS. KIPLIN: Yes, in the Panhandle. 24 MR. ANGER: Yes. 25 CHAIRMAN COX: Now, was this action the 0108 1 result of a complaint? 2 MS. KIPLIN: Yes, it was a result of a 3 complaint. 4 CHAIRMAN COX: And apparently more than 5 one complaint? 6 MS. KIPLIN: And we did investigate. 7 CHAIRMAN COX: Okay. So we 8 investigated and we found that, by golly, they were 9 just doing that? 10 MS. KIPLIN: Right. And -- 11 CHAIRMAN COX: Do they think they're 12 far enough away from Austin that we're not going to 13 find them or -- 14 MS. KIPLIN: No. I think Deb -- Deb's 15 position is, she didn't know -- Deb, that would be of 16 Deb's Quick Stop -- she did not know and related that 17 a retailer who had that particular location under a 18 different license was engaging in the same conduct. 19 We, obviously, investigated the 20 complaint we received. We sent investigators in. In 21 fact, Deb did accept coupons from an 8-liner machine 22 in exchange for a lottery ticket. And that was 23 brought to Deb's attention at the time. She did 24 cooperate and was very responsive, once it was called 25 to her attention, and stopped that conduct. 0109 1 COMMISSIONER SCHENCK: Now, I'm 2 confused. Was there any connection between the 3 8-liners and the point of sale for the Lottery? Was 4 it in the same building? 5 MR. ANGER: No. There were 8-liners in 6 the business -- and this is my understanding of it -- 7 and I have had verbal conversations with Ms. Stapleton 8 since we took the action that we took and proceeded 9 down the path that we have. My understanding is, is 10 that she bought this business from another business 11 owner. This previous business owner had deployed 12 8-liners in the business and had operated the business 13 in this manner and had allowed the exchange of coupons 14 for lottery tickets. 15 And certainly ignorance of the law is 16 no excuse for violation of the law. But the fact is, 17 she purchased the business and continued the practice 18 of the previous owner. And her position is, is that, 19 you know, she wasn't aware that it was a violation. 20 She had made some inquiries at least with her GTECH 21 sales representative in some capacity -- this is her 22 position -- as to whether, you know, she was 23 conducting her business appropriately. And she didn't 24 get, you know, any guidance or indication that that 25 was not the case, according to her. 0110 1 And so until we came forward and 2 investigated the matter, following the complaint, you 3 know, she indicates that she wasn't aware that she was 4 violating any rules. She's indicated that, you know, 5 she's committed to having her lottery license, 6 conducting her lottery business in accordance with the 7 rules and guidelines of the state and has indicated 8 she's intending to -- you know, that she's ceased that 9 practice. 10 COMMISSIONER SCHENCK: Well, I wonder 11 how many more people around West Texas are running 12 businesses of the type this woman bought. I mean, 13 having the 8-liner business at all is questionable. I 14 believe there was a legal proceeding recently that 15 concluded that any process that results in winning 16 anything other than a de minimis prize is problematic, 17 including this coupon technique, and combining them 18 with a lottery outlet is problematic. And I wouldn't 19 expect GTECH to operate as counsel for anybody, but I 20 would hope that they're aware of that problem as well. 21 MR. ANGER: We have since, since that 22 discussion with Ms. Stapleton and the representations 23 that she made, we have met directly with GTECH 24 executive management, you know, with regard to this 25 matter. And certainly GTECH is not the regulatory 0111 1 body for the lottery. However, you know, they have 2 representatives that visit licensed locations and have 3 an opportunity to know things about those businesses 4 or become aware of things about those businesses, and 5 they understand the regulatory relationship that we 6 have with these licensees. And we have reiterated our 7 expectations with regard to, you know, their reporting 8 and being aware and cognizant of concerns that may 9 arise with regard to violations of licensee 10 administrative rules. 11 CHAIRMAN COX: Well, the suspension is 12 for 30 days. 13 MR. ANGER: Yes, sir. 14 CHAIRMAN COX: Ms. Stapleton is 15 probably going to open up with a full cadre of 16 8-liners, standing tall, probably never close them 17 down, would be my guess, and we have no authority to 18 require that she close them down. She's maybe going 19 to quit letting people buy lottery tickets with 20 coupons, but they will still be able to buy lottery 21 tickets with the cash proceeds that they ultimately 22 convert those 8-liner payouts to. And that's where we 23 are. 24 COMMISSIONER SCHENCK: It's a bad -- 25 this is a bad situation. I think it's illustrative of 0112 1 many problems. I think this is a perfect case to 2 prove the point. But we've got basically what, as far 3 as I'm concerned, is an illegal activity going on, and 4 it is a point of sale for our business, and I think 5 that that's problematic. 6 Now, whether in Gray County, Texas, the 7 district attorney wants to pursue the question of 8 8-liners or not is something that's up to him. But we 9 have a right, I think, to determine who our retailers, 10 are. Now, the problem, obviously, from a financial 11 perspective is, I suspect, I would guess that these 12 8-liners are generating a lot more revenue for her 13 than her lottery activities are. So given a pure 14 financial decision for her to make, she would make 15 some other one. But I'm not comfortable, long-term, 16 having a lot of -- even one, frankly -- 8-liner hall 17 also by coincidence happen to have a Texas Lottery 18 sales point. 19 CHAIRMAN COX: Well, when I came on 20 this board seven years ago, I asked how many 8-liners 21 were out there in our 17,000 sales outlets, and GTECH 22 was asked to count those. And if I remember 23 correctly, at that time the count was, machines in 24 plain sight, not in the back room, not in an adjacent 25 building but in plain sight, about 6,000 machines. 0113 1 COMMISSIONER SCHENCK: That's 2 problematic. 3 CHAIRMAN COX: It is. 4 COMMISSIONER SCHENCK: It associates us 5 with that business. 6 CHAIRMAN COX: Yes, it does. 7 And for this kind of violation, a 8 30-day spending is typical? 9 MR. ANGER: We focused on the 10 acceptance of a payment form other than cash or other 11 than another accepted payment form -- debit -- for 12 lottery tickets, because we don't have specific 13 authority over 8-liners as equipment. 14 And, Commissioner, to your point, the 15 direction that local jurisdictions might take with 16 regard to the legality or illegality of 8-liners 17 operating businesses in a particular business. 18 CHAIRMAN COX: Well, I guess I'll move 19 approval of the staff recommendation. 20 COMMISSIONER SCHENCK: I second the 21 motion. 22 CHAIRMAN COX: All in favor, say "Aye." 23 COMMISSIONER SCHENCK: Aye. 24 COMMISSIONER WILLIAMSON: Aye. 25 CHAIRMAN COX: Aye. 0114 1 Motion carries 3-0. 2 Thank you, Michael. 3 MR. ANGER: Thank you. 4 CHAIRMAN COX: Okay. Now we're to the 5 bingo agenda, Mr. Sanderson has returned from his 6 doctor visit. 7 AGENDA ITEM NO. XIV 8 CHAIRMAN COX: Agenda Item No. XIV, 9 report, possible discussion and/or action on third 10 quarter calendar year 2009 bingo conductor 11 information. 12 Bruce, you're going to make that 13 report? 14 MR. MINER: Yes, Chairman Cox, I will. 15 Good morning. For the record, my name 16 is Bruce Miner, Manager, Taxpayer Services Department, 17 and I'm here to present to you the third quarter 18 information for 2008 as reported by our licensed 19 authorized organizations. All of the information 20 presented to you today will be the year to date for 21 the period January to September 2008, and the same 22 period for comparisons for 2005, 2006 and 2007. 23 You see in this slide prize payout for 24 regular bingo for the third quarter year to date 2008 25 was 76.6 percent of gross receipts. As a reminder, 0115 1 regular bingo consists of paper and electronic bingo. 2 The prize payout percentage for instant bingo was 3 72.3 percent of gross receipts. 4 This pie chart reflects the percentage 5 each disbursement category represents as it relates to 6 the total disbursements. Disbursements do not include 7 prize payouts. You can see salaries account for over 8 32 percent of the total disbursements, while rent 9 payments account for just over 23 percent and cost of 10 goods sold and charitable distributions around 11 19 percent. 12 This pie chart shows that instant bingo 13 sales continue to exceed regular bingo card sales. 14 For the year to date for 2008, instant sales 15 represented almost 45 percent of the total sales, 16 while regular card sales represented 32 percent, and 17 electronic bingo was 23 percent. 18 This chart shows a comparison of gross 19 receipts for regular card sales, electronic card sales 20 and instant bingo for the third quarter year to date 21 for each year from 2005 through 2008. As you can see, 22 the decline of regular card sales is offset by the 23 slight increase in electronic card sales and the 24 continued increase in instant bingo. The net result 25 is that the overall gross receipts have shown an 0116 1 8 percent increase for this four-year period. 2 This chart shows a comparison of net 3 receipts, which is gross receipts minus prizes 4 awarded, for the third quarter year to date for each 5 year, 2005 through 2008. As you can see, net receipts 6 for instant bingo indicated by the yellow line have 7 increased each successive year from 2005 to present, 8 while the net receipts for regular bingo, the red 9 line, continue to decease for the same time period. 10 The result is that the overall net receipts are up 11 almost 7 percent over the past four years. 12 This slide compares the gross receipts 13 for regular bingo, the prize payouts reported and net 14 receipts for each of the past four years. You can see 15 the downward trend of gross receipts here in red, a 16 similar decline for prize payout for regular bingo 17 shown in yellow. The gross receipts for regular bingo 18 have dropped $23.6 million, or 7.6 percent, and prize 19 payouts have dropped $12.1 million, or 5.2 percent. 20 This results in a decline in net receipts of 11 and a 21 half million, or 14.7 percent. 22 This next slide shows the same 23 information for instant bingo. Gross receipts has 24 increased $63.8 million, or 38.4 percent. Prize 25 payout has increased $44.2 million, or 36.2 percent, 0117 1 resulting in an increase of net receipts of 2 $19.6 million, or 44 percent. 3 This slide charts the prize payout 4 percentage for regular and instant bingo for the past 5 four years. The payout percentage for regular bingo 6 has increased from 74.7 percent to 76.7 percent, while 7 the payout percentage for instant bingo has dropped 8 slightly, from 73.5 to the current 72.3 percent. 9 This chart shows the average number of 10 players per occasion and the average spend per player. 11 This shows that even though average attendance has 12 declined since 2005, there has, however, been a 22.7 13 percent increase in the average spending rate per 14 player over that same period. 15 This slide illustrates a comparison 16 between what the organizations reported as charitable 17 distributions as opposed to what the Bingo Enabling 18 Act requires as a minimum required to be distributed. 19 The required distributions have consistently been 20 around $8 million, while the organizations are 21 reporting -- distributing around $24 million, or 22 approximately three times the required distributions 23 amount. 24 And finally, this slide illustrates the 25 comparison between reported charitable distributions 0118 1 and the total net proceeds for each of the last four 2 years. Net proceeds is the gross receipts less prizes 3 awarded and all expenses. 4 One reason the net proceeds are higher 5 than the charitable distributions is that the 6 organizations are holing on to more funds in their 7 bingo accounts. For example, the reported 8 undistributed proceeds in January 1, 2008, was 9 $29.3 million. And on September 30, 2008, it was 10 $33.6 million. 11 In your notebook is information from 12 the third quarter year to date for 2008 and another 13 spreadsheet comparing the third quarter year to date 14 information for the Years 2005 through 2008. 15 That concludes my report on this agenda 16 item, and I'll be glad to answer any questions. 17 COMMISSIONER SCHENCK: No, thank you, 18 Bruce. I have no questions. 19 COMMISSIONER WILLIAMSON: Phil, how old 20 can they hang on to those undistributed funds? 21 MR. SANDERSON: Currently there is no 22 requirement that they have to direct those funds. 23 There is some language in a bill that has been filed 24 the last two years -- last two sessions, I guess -- 25 that was going to require them to deplete those funds 0119 1 out of their bingo accounts and not hold on to as 2 much. But currently they -- as long as they meet the 3 minimum required distribution, then they can keep the 4 rest of it in their bingo account. 5 CHAIRMAN COX: Thank you, Bruce. 6 MR. MINER: Thank you, sir. 7 AGENDA ITEM NOS. XI AND XVI 8 CHAIRMAN COX: Agenda Item No. XV, 9 consideration of and possible discussion and/or 10 action, including adoption, on repeal and/or adoption 11 on 16 TAC 402.103 relating to training program. 12 Ms. Joseph. 13 MS. JOSEPH: For the record, my name is 14 Sandra Joseph, Special Counsel. 15 This Item XV is the first of five items 16 concerning a recommendation of adoption of proposed 17 rulemaking. On all of these items, there was a public 18 comment period of 30 days. A public hearing was held. 19 Mr. Steve Bresnen, representing the Bingo Interest 20 Group, was the only person offering comments on any of 21 the rules. 22 Item XV concerns Bingo Rule 402.103, 23 training program. It includes both the recommended 24 proposed -- it includes that staff recommendation that 25 the repeal of the existing training rule be adopted 0120 1 and also that a new Rule 103 be adopted. 2 Several comments were made by 3 Mr. Bresnen on this rule. The staff has considered 4 those and made changes for two of those. His first 5 comment was that Subsection (f) be clarified if it was 6 the Commission's intention that each operator complete 7 training. That was the intention of the proposed 8 rule, so the word "each" was substituted for the word 9 "any" in that subsection. 10 Secondly, he suggested that the 11 Commission should allow some time period for people to 12 come into compliance with the rule. And staff agreed 13 and added language to Subsection (f), giving 60 days 14 for persons to come into compliance with the 15 requirement for training. 16 He also suggested that there be a 17 change in the proposed rule which would allow the 18 bingo chairperson to designate another person to take 19 the training for the bingo chairperson. The staff 20 disagreed with that suggestion and did not make a 21 change. 22 The staff recommends adoption of both 23 the repeal and the adoption of the new training Rule 24 103. 25 COMMISSIONER SCHENCK: Thank you. 0121 1 Sandy. 2 COMMISSIONER WILLIAMSON: I have no 3 questions. 4 CHAIRMAN COX: Move approval of the 5 staff recommendation. 6 COMMISSIONER SCHENCK: I second the 7 motion. 8 CHAIRMAN COX: All in favor, say "Aye." 9 COMMISSIONER SCHENCK: Aye. 10 COMMISSIONER WILLIAMSON: Aye. 11 CHAIRMAN COX: Aye. 12 Motion carries 3-0. 13 MS. KIPLIN: Commissioner, I'm handing 14 you two orders, one adopting the repeal and one 15 adopting the new rule. 16 CHAIRMAN COX: Okay. 17 AGENDA ITEM NO. XVII 18 CHAIRMAN COX: And Agenda Item No. 19 XVII, consideration of and possible discussion and/or 20 action, including adoption, on new 16 TAC §402.604 21 relating to delinquent purchaser. 22 Ms. Joseph. 23 MS. JOSEPH: Yes. This rule concerns 24 adoption of the new Rule 406 which would require 25 organizations to designate a bingo chairperson. 0122 1 Mr. Bresnen commented in support of this rule. No 2 changes are recommended. The staff recommends 3 adoption of the rule as proposed. 4 CHAIRMAN COX: Questions? 5 COMMISSIONER WILLIAMSON: I have no 6 questions. 7 CHAIRMAN COX: Move approval of the 8 staff recommendation. 9 COMMISSIONER SCHENCK: I second the 10 motion. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMMISSIONER WILLIAMSON: Aye. 13 COMMISSIONER SCHENCK: Aye. 14 CHAIRMAN COX: Aye. 15 Motion carries 3-0. 16 17 AGENDA ITEM NO. XVIII 18 CHAIRMAN COX: Agenda Item No. XVIII, 19 consideration of and possible discussion and/or 20 action, including adoption, on new 16 TAC §402.410 21 relating to amendment of a license - general 22 provisions. 23 Ms. Joseph. 24 MS. JOSEPH: I believe we skipped 25 No. XVII. 0123 1 CHAIRMAN COX: Okay. Let's do XVIII -- 2 MS. JOSEPH: All right. 3 CHAIRMAN COX: -- and then we'll come 4 back to XVII. 5 MS. JOSEPH: All right. 6 CHAIRMAN COX: Thank you. 7 MS. JOSEPH: Yes. Rule 402.410 8 concerns amendment of a license - general provisions. 9 This rule sets out requirements that are applicable to 10 all license requirements. Mr. Bresnen commented on 11 this rule. He was generally in favor of the rule but 12 suggested limiting Subsection (e) concerning 13 submission of information for proof of authorization. 14 The staff agreed with his comment and recommends 15 deleting Subsection (e). Those requirements are being 16 addressed in another proposed rule which is not before 17 you today but will be brought to you in the future. 18 Staff recommends that this rule be 19 adopted, with changes as shown on the draft in your 20 notebook. 21 COMMISSIONER WILLIAMSON: I have no 22 questions. 23 CHAIRMAN COX: Move approval of the 24 staff recommendation on Agenda Item No. XVIII. All in 25 favor, say "Aye" -- did I get a second? 0124 1 COMMISSIONER SCHENCK: I'm sorry. Yes, 2 I second the motion. 3 CHAIRMAN COX: All in favor, say "Aye." 4 COMMISSIONER SCHENCK: Aye. 5 COMMISSIONER WILLIAMSON: Aye. 6 CHAIRMAN COX: Aye. 7 Motion carries 3-0. 8 Now, Ms. Kiplin, I'm not clear on 9 whether I skipped XVI or XVII. 10 MS. KIPLIN: You took action on the 11 training program. I believe you took action on the 12 bingo chairperson. 13 Is that correct, Ms. Joseph? 14 MS. JOSEPH: Yes. 15 MS. KIPLIN: And you just now took 16 action on amendment of a license - general provisions. 17 So I think it's delinquent purchaser -- 18 CHAIRMAN COX: Okay. 19 MS. KIPLIN: -- that we need to go back 20 to, Mr. Chair. 21 AGENDA ITEM NO. XVII 22 CHAIRMAN COX: Agenda Item VII, 23 consideration of and possible discussion and/or 24 action, including adoption, on new 16 TAC §402.604 25 relating to delinquent purchaser. 0125 1 MS. JOSEPH: This rule, 402.604, sets 2 forth for licensees the process and timelines to 3 follow related to late payments for bingo equipment 4 and supplies. 5 Mr. Bresnen did appear in support of 6 this rule but had two suggestions. First of all, he 7 suggested that it seemed unfair to consider all units 8 managed by a single unit manager to be delinquent 9 because one of the units is delinquent. The staff 10 considered that and agrees with Mr. Bresnen and has 11 deleted the language that was of concern in proposed 12 Subsection (b). 13 In addition, Mr. Bresnen requested that 14 the rule be modified to recognize the fact that at 15 times there are disputes about whether an invoice was 16 correct, whether payment was made correctly based on 17 what was received. The staff agrees with that and 18 added language to the definition of a delinquent 19 purchaser in Subsection (a) to clarify that a 20 purchaser is delinquent who has not timely paid or 21 notified the Commission and the manufacturer or 22 distributor of a dispute. 23 The staff recommends adoption of 24 402.604, with changes as presented to you in your 25 draft. 0126 1 COMMISSIONER SCHENCK: Sandy, two quick 2 questions. Did we get any comments on this from 3 distributors or manufacturers? 4 MS. JOSEPH: Mr. Bresnen represents the 5 Bingo Interest Group which is -- 6 COMMISSIONER SCHENCK: A host of 7 different interest groups. 8 MS. JOSEPH: Yes. 9 MR. SANDERSON: I believe there are a 10 few manufacturers and distributors in that group. But 11 predominantly his clientele is -- 12 COMMISSIONER SCHENCK: This just went 13 through the BAC, as I recall. 14 MR. SANDERSON: Yes, sir. 15 MS. JOSEPH: Yes, it did. 16 COMMISSIONER SCHENCK: All right. And 17 I'm sorry, I didn't see it in the rule. With respect 18 to the disputes, whether an invoice is disputed, do we 19 have a bona fide limitation on there? Is any dispute 20 going to be enough? 21 MS. JOSEPH: At this point, we did not 22 qualify it. 23 COMMISSIONER SCHENCK: Okay. Well, 24 presumably we'll be able to work that out on the back 25 end if we conclude that somebody is just throwing out 0127 1 a series of frivolous disputes, and we'll be able to 2 deal with it -- 3 MS. JOSEPH: Yes. And if there are 4 problems, we'll certainly come back, and if we need to 5 modify the rule. 6 COMMISSIONER SCHENCK: All right. 7 MR. SANDERSON: May I -- the statutory 8 language requires that the payment be made 30 days 9 from the actual delivery. And I think what 10 Mr. Bresnen was referring to was: Well, they get the 11 delivery on January 1st, they get the statement on 12 January the 20th that has a different amount. And so 13 we're saying that they've got the opportunity to 14 dispute that there is a different amount, but they've 15 still got that 30 days -- 16 COMMISSIONER SCHENCK: Well, I'll just 17 say for the benefit of a licensee, that if that's the 18 nature of the dispute, I would expect them to tender 19 payment in the amount they're claiming they owe -- 20 MR. SANDERSON: Yes. 21 COMMISSIONER SCHENCK: -- and go ahead 22 and dispute the balance. But just throwing up 23 disputes for the sake of -- 24 MR. SANDERSON: That's our intent. 25 COMMISSIONER SCHENCK: -- process, it 0128 1 has been known to occur, maybe not in this industry 2 but it does in some. 3 CHAIRMAN COX: Questions? 4 COMMISSIONER WILLIAMSON: No, I have no 5 questions. 6 CHAIRMAN COX: Okay. Move approval of 7 the staff recommendation. 8 COMMISSIONER SCHENCK: Second the 9 motion. 10 CHAIRMAN COX: All in favor, say "Aye." 11 COMMISSIONER SCHENCK: Aye. 12 COMMISSIONER WILLIAMSON: Aye. 13 CHAIRMAN COX: Aye. 14 Motion carries 3-0. 15 Agenda Item No. XIX -- is that correct, 16 Ms. Kiplin? 17 MS. KIPLIN: Yes. You're on amendment 18 to regular license to conduct bingo. 19 AGENDA ITEM NO. XIX 20 CHAIRMAN COX: Okay. Agenda Item No. 21 XIX, amendment to a regular license to conduct 22 charitable bingo. 23 Ms. Joseph. 24 MS. JOSEPH: Yes, sir. Staff 25 recommends approval of this rule as proposed, with one 0129 1 change. That change would be to correct an incorrect 2 reference that was made in the rule. Mr. Bresnen did 3 not offer any comments on this rule and no other 4 comments were received. We recommend adoption of the 5 rule, with the single change. 6 COMMISSIONER SCHENCK: If all the world 7 assents to it, I don't know who we are to question it. 8 Apparently we got it right when we published it. I 9 don't have any questions. 10 CHAIRMAN COX: Commissioner? 11 COMMISSIONER WILLIAMSON: No, I have 12 none. 13 CHAIRMAN COX: Move approval of the 14 staff recommendation. 15 COMMISSIONER SCHENCK: I second the 16 motion. 17 CHAIRMAN COX: All in favor, say "Aye." 18 COMMISSIONER SCHENCK: Aye. 19 COMMISSIONER WILLIAMSON: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 3-0. 22 MS. KIPLIN: Mr. Chairman, I need to 23 bring to your attention that there was a skip on the 24 Executive Director's report. 25 CHAIRMAN COX: I was going to ask you. 0130 1 I believe that that is exactly right. So what we'll 2 do now is, we'll do the report of the Charitable Bingo 3 Operations Director, and then we'll do the report of 4 the Executive Director. 5 MR. SANDERSON: Good morning, 6 Commissioners. 7 AGENDA ITEM NO. XX 8 CHAIRMAN COX: Item No. XX. 9 Mr. Sanderson. 10 MR. SANDERSON: Good morning, 11 Commissioners. In your notebook is the report of the 12 Bingo Operations Division. I would like to point out 13 that we have filled the Audit Manager position. She 14 is with us today for our introduction. And I would 15 like to introduce Ms. Debbie Parpounas as the Audit 16 Manager. And I don't know if you have any particular 17 questions or comments you would like to make, but -- 18 CHAIRMAN COX: Debbie, why don't you 19 come on up, if you will. 20 Debbie, we're very glad to have you in 21 this position. And why don't you introduce yourself 22 and tell us a little bit about yourself. 23 MS. PARPOUNAS: Great. Good morning 24 Chairman, Commissioners. For the record, my name is 25 Debbie Parpounas, the Audit Manager, and I started on 0131 1 Monday. 2 Well, I'm born and raised in Austin, 3 Texas, and I come to the table here with an experience 4 in auditing, finance, consulting, teaching. I'm 5 looking forward to working with the board, and I see 6 that there is an opportunity here to help streamline 7 the audit service process. 8 And I will have to say, this has been a 9 very fast week for me, as I am trying to get 10 acclimated with the bingo language, the tools, the 11 systems, et cetera, but I am happy to be here. 12 CHAIRMAN COX: Excellent. 13 Commissioner? 14 COMMISSIONER SCHENCK: Well, you're not 15 alone. Bingo regulation is a very complex, perhaps 16 more-complex-than-it-ought-to-be process. But your 17 role here is going to be very important, and we're 18 really glad to have you with us. 19 MS. PARPOUNAS: Thank you. 20 COMMISSIONER WILLIAMSON: I feel your 21 pain; I know what you're going through. We're 22 extremely happy that you're here. 23 MS. PARPOUNAS: Thank you. 24 CHAIRMAN COX: You know the background 25 of the change in this position. It was the result of 0132 1 an audit done by our internal auditors. It was an 2 excellent report, and Mr. Sanderson and his people 3 have done an excellent job responding to it, but now 4 the responsibility falls to you. And we recognize the 5 difficulty of the challenge you're taking on and we 6 appreciate your taking it on and we commit you our 7 support. 8 MS. PARPOUNAS: Thank you. I think 9 right now time is my worst enemy, but I hope to 10 shorten that and quickly address the internal audit 11 report and provide you a draft model for approval. 12 CHAIRMAN COX: Excellent. Thank you. 13 MS. PARPOUNAS: Thank you. 14 MR. SANDERSON: Commissioners, the only 15 other thing I would like to point out is, the BAC 16 meeting is scheduled for February the 4th on a 17 Wednesday. 18 Commissioner Williamson, we'll work 19 with you on your schedule to see if you can attend 20 that meeting on the 4th. And then we'll let 21 Commissioner Schenck know when he can join us. 22 And, Chairman Cox, you, too, if time 23 permits. 24 CHAIRMAN COX: Thank you. 25 0133 1 AGENDA ITEM NO. XII 2 CHAIRMAN COX: Okay. Now, Gary, the 3 long-awaited report of the Executive Director, Agenda 4 Item No. XII. 5 MR. GRIEF: Mr. Chairman, other than 6 the items in your notebook, I have just one item. I 7 wanted to let you know you had asked back in the 8 October Commission meeting that the next quarterly 9 report that Ipsos Reid was going to be giving to us of 10 their monthly tracking reports, that we make that 11 invitation to the other two commissioners, to be a 12 part of that meeting. And I want you to know I did 13 talk to Commissioner Schenck, and he is going to try 14 to make himself available later this month via webcast 15 and participate in that meeting. And at the next 16 opportunity, I'll make that available to Commissioner 17 Williamson as well. 18 CHAIRMAN COX: Excellent. 19 MR. GRIEF: That's all I have. 20 CHAIRMAN COX: That concludes your 21 report. 22 Okay. Ms. Kiplin, if your records and 23 mine coincide, we have remaining Agenda Item No. XXI, 24 public comment. 25 MS. KIPLIN: Yes, that's correct, 0134 1 before going into executive session. 2 AGENDA ITEM NO. XXI 3 CHAIRMAN COX: Okay. And, Ms. Nettles, 4 I have a witness affirmation form from you. Did you 5 have additional comment? 6 MS. NETTLES: Yes. 7 CHAIRMAN COX: Okay. 8 MS. NETTLES: Good morning again, 9 Commissioners. I'm Dawn Nettles with the Lotto Report 10 out of Dallas. 11 I would like to take this opportunity 12 to show you-all something. I'm going to call it kind 13 of a demonstration. I don't know if you-all will 14 permit it or not. But what I would like to do is to 15 give you-all a scratch ticket and have you scratch it 16 off. Will you-all allow me to do that? 17 CHAIRMAN COX: Ms. Kiplin? 18 MS. KIPLIN: This is an item for public 19 comment; it's to receive public comment. You're 20 limited in terms of deliberations. You can respond to 21 questions that have to do with policy, and you can 22 also deliberate to put it on a future agenda item. I 23 think if you're inclined to accommodate her request 24 that you scratch a ticket, you can do that. But in 25 terms of any kind of response, you're very much 0135 1 limited in what you can do. 2 CHAIRMAN COX: Okay. So why don't we 3 scratch the tickets, and then you be sure that you 4 help us with our responses, and we can do that. 5 MS. NETTLES: Will you-all do that? 6 CHAIRMAN COX: Sure. 7 MS. NETTLES: Okay. 8 COMMISSIONER SCHENCK: These aren't -- 9 are these live tickets? 10 MS. KIPLIN: I have no idea. I don't 11 know what she -- 12 MS. NETTLES: Okay. 13 MS. KIPLIN: -- is planning. 14 MS. NETTLES: First of all -- 15 COMMISSIONER SCHENCK: Who wins -- 16 MS. NETTLES: -- it's not a gift. 17 COMMISSIONER SCHENCK: -- this money? 18 MS. NETTLES: It's not a gift. 19 COMMISSIONER SCHENCK: Okay. 20 MS. NETTLES: It's a demonstration 21 only. Okay? I'm going to provide you-all with a 22 scratch ticket, and all I want you to do is read the 23 directions on the scratch ticket, scratch it off. The 24 ticket is mine, though. I'm not giving it to you as a 25 gift. There is no gift, there is no trick, there is 0136 1 no nothing. 2 CHAIRMAN COX: Okay. 3 MS. NETTLES: The Texas Lottery scratch 4 ticket -- 5 CHAIRMAN COX: Is this an IQ test? 6 MS. NETTLES: Probably so. 7 CHAIRMAN COX: I hate those. 8 MS. NETTLES: It is an IQ test. 9 Coins -- does anybody have a coin? I mean, I have -- 10 COMMISSIONER SCHENCK: I have cash. 11 CHAIRMAN COX: I don't remember the 12 last time I had a coin. 13 COMMISSIONER SCHENCK: I have coins. 14 MS. NETTLES: Well, I have two -- 15 COMMISSIONER SCHENCK: I have coins. 16 MS. NETTLES: But do you have a Texas 17 Lottery scratch? I only have two. They work better 18 than coins. May I? 19 CHAIRMAN COX: Sure. 20 COMMISSIONER SCHENCK: I didn't realize 21 there was an official scratch tool. 22 COMMISSIONER WILLIAMSON: I didn't know 23 there was either. 24 CHAIRMAN COX: Oh, thank you. 25 MS. NETTLES: Can we come up with one 0137 1 more? 2 COMMISSIONER SCHENCK: I've got a 3 quarter. 4 MS. NETTLES: Just read the ticket. 5 MS. KIPLIN: I'll remind you guys 6 you're on the record. And so I need you to go back to 7 the microphone, Ms. Nettles, if you won't mind, so we 8 can keep a record. 9 MS. NETTLES: Kim, would you like to 10 scratch a ticket, too? 11 MS. KIPLIN: No, thanks. 12 (Commissioners scratching tickets) 13 COMMISSIONER WILLIAMSON: Mine is 14 already scratched at the top one. 15 MS. NETTLES: That's fine. 16 COMMISSIONER WILLIAMSON: Oh, okay. 17 MS. NETTLES: Yes, that's okay. 18 CHAIRMAN COX: Commissioner Schenck is 19 eating this up, isn't he? You sure you don't have 20 experience? 21 COMMISSIONER SCHENCK: This is like the 22 LSAT. 23 (Laughter) 24 COMMISSIONER WILLIAMSON: I'm not going 25 to tell you what I did on the G (phonetic) map. 0138 1 MS. NETTLES: And when you finish 2 scratching, I would like to come and pick up your 3 ticket. 4 CHAIRMAN COX: Okay. Game 2. If I had 5 known you were going to do this, I would have brought 6 my glasses. 7 MS. NETTLES: I'm sorry. Look at it 8 this way: Y'all get to have a fun experience, 9 experience what the players experience. 10 COMMISSIONER SCHENCK: Oh, you didn't 11 win. 12 MS. NETTLES: Are you finished? 13 COMMISSIONER SCHENCK: Yes. 14 MS. NETTLES: May I come get it? 15 COMMISSIONER SCHENCK: Yes -- well, I 16 can't respond. 17 MS. KIPLIN: I know. 18 MS. NETTLES: He doesn't have to, but 19 I'm going to leave the tickets with him. 20 COMMISSIONER SCHENCK: Actually, let me 21 look at it. 22 MS. NETTLES: Now, don't touch it 23 again. You've already scratched it. 24 COMMISSIONER SCHENCK: I won't scratch 25 it. 0139 1 MS. NETTLES: You already did. 2 COMMISSIONER SCHENCK: I've touched it. 3 I can't order myself to win, huh? 4 MS. KIPLIN: It is a statutory 5 prohibition. 6 COMMISSIONER SCHENCK: I would think; I 7 would hope. 8 CHAIRMAN COX: Okay. 9 COMMISSIONER SCHENCK: Oh, wait. Did I 10 win one? 11 CHAIRMAN COX: Okay. In between. 12 COMMISSIONER WILLIAMSON: Am I the last 13 one? 14 CHAIRMAN COX: No. I'm still 15 deliberating. 16 COMMISSIONER WILLIAMSON: Okay. 17 CHAIRMAN COX: You don't have to turn 18 in your paper until time is up. 19 COMMISSIONER WILLIAMSON: Oh, good. 20 COMMISSIONER SCHENCK: Pencils down. 21 COMMISSIONER WILLIAMSON: It's not a -- 22 CHAIRMAN COX: Well, I think I'm 23 finished. 24 MS. NETTLES: Are you finished, 25 Commissioner Cox? 0140 1 CHAIRMAN COX: I believe I am. 2 COMMISSIONER WILLIAMSON: I think so. 3 I've never played that one before. 4 MS. NETTLES: Commissioners, I would 5 like to congratulate you. You all three unscratched 6 your tickets exactly the way that all Texas Lottery 7 players are uncovering them. The problem is, you 8 didn't uncover it all. 9 COMMISSIONER SCHENCK: Is that right? 10 MS. NETTLES: Now, if I may, I'm going 11 to bring you three more tickets and you can see where 12 you missed a play. If you'll look right here -- 13 MS. KIPLIN: On the record. You can 14 share his mike if you want. 15 MS. NETTLES: Put yours side-by-side. 16 Let me get you one that's . . . 17 COMMISSIONER WILLIAMSON: Yes. 18 COMMISSIONER SCHENCK: Ms. Nettles, if 19 you want to use my microphone. 20 MS. KIPLIN: That's why I said -- 21 MS. NETTLES: Okay. Commissioners, you 22 now have a ticket that you scratched and you now have 23 a ticket that has not been scratched. I would like to 24 call your attention to Game No. 4, the lower left 25 corner. You-all followed the directions. It said 0141 1 prize, prize, prize, prize, and you uncovered those 2 four areas. 3 What you don't know is that that's not 4 where one of the plays is. If you will now scratch, 5 which you might need your coins back, underneath where 6 it says "Slots, Game 4," that's where the other game 7 is. 8 CHAIRMAN COX: Where is it? 9 MS. NETTLES: At the top. 10 CHAIRMAN COX: I still didn't win -- or 11 pardon me -- you still didn't win. 12 MS. NETTLES: Well, the truth is, is 13 those are tickets that were bought by players and 14 discarded as losing tickets. They were scanned. I 15 took the liberty yesterday of stopping at four 16 stores -- two in Austin, two in Dallas. And all I was 17 looking for were the Hot Hand tickets. I mean, I 18 picked up whatever. But what I went through last 19 night from my hotel room were these Hot Hand tickets. 20 Out of four stores -- and I haven't 21 counted these tickets -- every one of these are 22 potential winners, all trashed. And I have not 23 uncovered them yet to see if they're winners or not. 24 When I told you-all a couple of months 25 ago that we had a problem with the scratch tickets and 0142 1 that there was what I call trick tickets, deceiving 2 tickets, this is what I'm referring to. 3 I also picked up -- and this is a 4 brand-new ticket, just hit the streets last week. And 5 people are throwing these away left and right, and I 6 will see how many of these are winners. And I'll bet 7 you that there will be a winner in there. 8 You have another game that started 9 called Fortune Cookie. And I don't know -- it's a 10 month or two old maybe, and I'm sorry I didn't bring 11 you some for you to scratch on it, too. But players 12 are throwing these away left and right as well, and 13 that is -- and if you'll let me come up there, I'll 14 show you what I'm talking about. This is straight out 15 of yesterday's trash can, too. 16 COMMISSIONER SCHENCK: Well, that's 17 fine, of course. Ms. Nettles, you can use my 18 microphone. 19 MS. NETTLES: Okay. There is you a 20 ticket. This is how players uncover their tickets. 21 If you would read the directions and see if you can 22 find their mistake. Maybe you will; maybe you won't. 23 CHAIRMAN COX: Is it under "Lucky 24 Fortune"? 25 MS. NETTLES: Bingo! Nobody knows 0143 1 that, though. 2 CHAIRMAN COX: So what I've just 3 learned is that you scratch everything you can scratch 4 and see if anything comes off? 5 MS. NETTLES: Well, that would be 6 advisable. However, you cannot get -- what? -- 7 15 million people to do that, because it's not how 8 they do it. 9 MS. KIPLIN: Y'all -- 10 COMMISSIONER SCHENCK: We're not 11 supposed to -- 12 MS. KIPLIN: You're not supposed to -- 13 yes. 14 MS. NETTLES: Okay. It's fine. You 15 don't have to talk to me. That's okay. You-all 16 have -- I have shown you exactly what I'm talking 17 about. And I want to tell you-all that 50, 60 percent 18 of every Texas Lottery scratch ticket is -- I would 19 have this complaint on. 20 That Fortune Cookie game -- look at 21 your Hot Hand game. And what you're going to notice 22 is that it tells you, "Here is Game 1, Game 2, Game 3, 23 Game 4, Game 5." Your Lucky Fortune ticket does not 24 give you an indication that that's a game to uncover. 25 If staff would like a further 0144 1 explanation on these tickets that I could easily give, 2 if next month they would give me a copy of every 3 ticket done in the past year and a half, I could go 4 into your conference room and pull out the tickets and 5 show you just how many of them are like this. 6 This is why the unclaimed prize fund 7 stands what it is, and this is also why your scratch 8 ticket sales are going to go down, because people are 9 not winning, and that's what every retailer will tell 10 you, is that they are not selling as much because 11 they're not winning. Well, they're not winning 12 because they're not catching them. 13 So I appreciate your taking and 14 allowing me to do this today. I would like to see 15 some major changes made, not only for the players but 16 for the state, because y'all are going to continue to 17 lose as long as people throw away winning tickets. 18 And I thank you, and I will pick that 19 stuff up. 20 CHAIRMAN COX: Thank you very much, 21 Ms. Nettles. 22 COMMISSIONER SCHENCK: Yes. Thank you. 23 I'm sorry you didn't win on these, by the way. 24 MS. NETTLES: Oh, I knew they were 25 losers. They were in the trash can. Players, they 0145 1 don't really buy these games for fun. Most people buy 2 it simply to see if they win, and they're using the 3 ticket checkers, uncovering the scan, so they were 4 never unscratched in the first place. I wasn't sure, 5 though, that they weren't winners. 6 COMMISSIONER WILLIAMSON: I think one 7 of mine is a $15 winner. You might want to look -- 8 that's all I can say. 9 CHAIRMAN COX: Okay. Thank you very 10 much, Ms. Nettles. 11 MS. KIPLIN: If I can just put on the 12 record for purposes of the transcript, Ms. Nettles did 13 get back all of the tickets that she provided to the 14 Commissioners that were live tickets. 15 CHAIRMAN COX: Okay. 16 (Coin rolled on floor) 17 MS. KIPLIN: It's right here. 18 MS. NETTLES: Okay. 19 MS. KIPLIN: It took a weird bounce. 20 AGENDA ITEM NO. XXII 21 CHAIRMAN COX: Okay. Commissioners, 22 with your permission, we'll go into executive session. 23 At this time I move the Texas Lottery Commission go 24 into executive session: 25 A, to deliberate the appointment, 0146 1 employment and duties of the Executive Director, the 2 duties and evaluation the Deputy Executive Director, 3 Internal Audit Director, Charitable Bingo Operations 4 Director and Ombuds and to deliberate the duties of 5 the General Counsel and Human Resources Director 6 pursuant to Section 551.074 of the Texas Government 7 Code; 8 B, to receive legal advice regarding 9 pending or contemplated litigation pursuant to Section 10 551.071(1)(A) and/or to receive legal advice regarding 11 settlement offers pursuant to Section 551.071(1)(B) of 12 the Texas Government Code and/or to receive legal 13 advice pursuant to Section 551.071(2) of the Texas 14 Government Code, including but not limited to those 15 items posted on the open meeting notice for purposes 16 of receiving legal advice. 17 Is there a second? 18 COMMISSIONER SCHENCK: I second. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER SCHENCK: Aye. 21 MS. NETTLES: Aye. 22 CHAIRMAN COX: Aye. 23 The motion carries. The vote is 3-0. 24 The Texas Lottery Commission will go into executive 25 session. The time it 11.59 a m. Today is January 16, 0147 1 2009. 2 (Off the record for executive session: 3 11:59 a.m. to 2:53 p.m.) 4 AGENDA ITEM NO. XXIII 5 CHAIRMAN COX: The Texas Lottery 6 Commission is out of executive session. The time is 7 2:53 p.m. 8 Is there any action to be taken as a 9 result of executive session? 10 COMMISSIONER SCHENCK: No. 11 AGENDA ITEM NO. XXIV 12 CHAIRMAN COX: If not, the meeting is 13 adjourned. 14 COMMISSIONER SCHENCK: Thank you. 15 (Meeting adjourned: 2:53 p.m.) 16 17 18 19 20 21 22 23 24 25 0148 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 27th day of January 2009. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/10 20 Firm Certification No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25