0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 FRIDAY, FEBRUARY 20, 2009 § 7 8 COMMISSION MEETING 9 FRIDAY, FEBRUARY 20, 2009 10 BE IT REMEMBERED THAT on Friday, 11 the 20th day of February 2009, the Texas Lottery 12 Commission meeting was held from 9:05 a.m. to 13 p.m., at the Offices of the Texas Lottery 14 Commission, 611 East 6th Street, Austin, Texas 78701, 15 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONERS 16 DAVID SCHENCK and MARY ANN WILLIAMSON. The following 17 proceedings were reported via machine shorthand by 18 Aloma J. Kennedy, a Certified Shorthand Reporter of 19 the State of Texas, and the following proceedings were 20 had: 21 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. Philip D. 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 PROCEEDINGS - FRIDAY, FEBRUARY 20, 2009........... 8 4 AGENDA ITEM NO. I - Meeting Called to Order....... 8 5 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action, 6 including proposal, on amendments to 16 TAC §402.402 relating to Registry of Bingo Workers... 59 7 AGENDA ITEM NO. III - Consideration of and 8 possible discussion and/or action, including adoption on new 16 TAC §402.412 relating to 9 Signature Requirements............................ 62 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, including 11 adoption, on new 16 TAC §402.424 relating to Amendment of a License by Telephone or 12 Facsimile........................................ 63 13 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, 14 including adoption, on new 16 TAC §402.409 relating to Amendment for Change of 15 Premises or Occasions due to Lease Termination or Abandonment........................ 65 16 AGENDA ITEM NO. VI - Consideration of and 17 possible discussion and/or action on new rule, 16 TAC §402.104 relating to “Gambling 18 Promoter” and “Professional Gambler”.......... 69/153 19 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, 20 including proposal, on amendments to 16 TAC §401.153 relating to Qualifications for 21 License........................................ 69/153 22 23 24 25 0004 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. VIII - Report by the Charitable Bingo Operations Director and 4 possible discussion and/or action on the Charitable Bingo Operations Division’s 5 Activities, including updates on status of licensees, rulemaking and form revisions, 6 audits, pull-tab review, special projects, and upcoming operator training................... 106 7 AGENDA ITEM NO. IX - Report, possible 8 discussion and/or action on lottery sales and revenue, game performance, new 9 game opportunities, advertising, market research, and trends.............................. 46 10 AGENDA ITEM NO. X - Report, possible 11 discussion and/or action on transfers to the State and the agency’s budget.................... 55 12 AGENDA ITEM NO. XI - Report, possible 13 discussion and/or action on the 81st Legislature...................................... 107 14 AGENDA ITEM NO. XII - Consideration of and 15 possible discussion and/or action on external and internal audits and/or reviews 16 relating to the Texas Lottery Commission, and/or on the Internal Audit Department’s 17 activities, including internal audit report of instant ticket game closing, return and 18 destruction...................................... 113 19 AGENDA ITEM NO. XIII - Consideration of and possible discussion and/or action on the 20 lottery operator contract, including whether the negotiation of the lottery operator's 21 contract in an open meeting would have a detrimental effect on the Commission's 22 position in negotiations of the lottery operator contract................................ 121 23 AGENDA ITEM NO. XIV - Report, possible 24 discussion and/or action on the Mega Millions game and/or contract.................... 57 25 0005 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XV - Report, possible discussion and/or action on GTECH Corporation.... 8 4 AGENDA ITEM NO. XVI - Report by the 5 Executive Director and/or possible discussion and/or action on the agency’s operational 6 status, agency procedures, and FTE status........ 58 7 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action, including 8 repeal and adoption, on 16 TAC §401.101 relating to Lottery Procurement Procedures, 9 16 TAC §401.102 relating to Protests of the Terms of a Formal Solicitation, and/or 10 16 TAC §401.103 relating to Protests of Contract Award................................... 125 11 AGENDA ITEM NO. XVIII - Consideration of the 12 status and possible entry of orders in: A. Docket No. 362-08-2963 – Los Tejanos 13 Meat Market #2 B. Docket No. 362-09-1260 – NPL 14 Investments, Inc. C. Docket No. 362-09-1333 – De La Fuente 15 Enterprises D. Docket No. 362-09-1142 – Red-E-Mart 16 E. Docket No. 362-09-1140 – Utley Services 17 F. Docket No. 362-09-0386 – Brohi Food Mart 18 G. Docket No. 362-09-0384 – El Azteca Market Y Taqueria 19 H. Docket No. 362-09-0383 – One Stop Of Texas 20 I. Docket No. 362-09-0500 – Mike’s Country Store 21 J. Docket No. 362-09-1139 – Fabens 66, L.L.C. 22 K. Docket No. 362-09-1141 – Cool Zone L. Docket No. 362-09-0907 – JR Food Mart 23 #7 M. Docket No. 362-09-0832 – MJ’s Food 24 Mart N. Docket No. 362-09-0833 – Fuel Express 25 0006 1 TABLE OF CONTENTS 2 PAGE 3 O. Docket No. 362-09-0834 – Sabeen Food Mart 4 P. Docket No. 362-09-0828 – Ruben’s Drugs Q. Docket No. 362-09-0829 – Mikes 5 Discount Liquor R. Docket No. 362-09-0831 – Churchill 6 Grocery S. Docket No. 362-09-0830 – Melissa’s 7 Fashions T. Case No. 2008-992 – LULAC Council 4559 8 U. Docket No. 362-08-2515.B – Bnai Brith Youth Organization 9 V. Docket No. 362-08-2516.B – Bnai Brith Mens Club 10 W. Docket No. 362-08-2517.B – Lou Rosenberg Scholarship Fund.............. 145 11 AGENDA ITEM NO. XIX - Public comment............. 152 12 AGENDA ITEM NO. XX - Commission may meet in 13 Executive Session: A. To deliberate the appointment, employment, 14 and duties of the Executive Director pursuant to Section 551.074 of the Texas 15 Government Code. B. To deliberate the duties and evaluation 16 of the Deputy Executive Director pursuant to Section 551.074 of the Texas 17 Government Code. C. To deliberate the duties and evaluation 18 of the Internal Audit Director pursuant to Section 551.074 of the Texas 19 Government Code. D. To deliberate the duties and evaluation 20 of the Charitable Bingo Operations Director pursuant to Section 551.074 of 21 the Texas Government Code. E. To deliberate the duties of the General 22 Counsel pursuant to Section 551.074 of the Texas Government Code. 23 F. To deliberate the duties of the Human Resources Director pursuant to Section 24 551.074 of the Texas Government Code. 25 0007 1 TABLE OF CONTENTS 2 PAGE 3 G. To deliberate the duties and evaluation of the Ombuds pursuant to Section 4 551.074 of the Texas Government Code. H. To receive legal advice regarding 5 pending or contemplated litigation pursuant to Section 551.071 (1) (A) 6 and/or to receive legal advice regarding settlement offers pursuant to 7 Section 551.071 (1) (B) of the Texas Government Code and/or to receive legal 8 advice pursuant to Section 551.071 (2) of the Texas Government Code, including 9 but not limited to: First State Bank of DeQueen et al. 10 v. Texas Lottery Commission James T. Jongebloed v. Texas 11 Lottery Commission USA v. David Crawford and TLC 12 Texas Lottery Commission v. Leslie Warren, Texas Attorney General Child 13 Support Division, Singer Asset Finance Company L.L.C., and Great-West 14 Life & Annuity Insurance Company Employment law, personnel law, 15 procurement and contract law, evidentiary and procedural law, 16 and general government law Lottery Operations and Services 17 contract Mega Millions game and/or contract 18 Request for Attorney General Opinion No. RQ-0771-GA 19 G. To deliberate the negotiation of the lottery operator's contract pursuant 20 to Section 467.030 of the Texas Government's Code........................ 152 21 AGENDA ITEM NO. XXI - Return to open session 22 for further deliberation and possible action on any matter discussed in Executive Session..... 153 23 AGENDA ITEM NO. XXII - Adjournment............... 156 24 25 REPORTER'S CERTIFICATE........................... 157 0008 1 P R O C E E D I N G S 2 FRIDAY, FEBRUARY 20, 2009 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 February 20, 2009, 9:05. Commissioner Schenck is 7 here; Commissioner Williamson is here. Let's call 8 this meeting of the Texas Lottery Commission to order. 9 AGENDA ITEM NO. XV 10 CHAIRMAN COX: To accommodate some 11 various schedule needs, we're going to be taking a 12 number of items out of order here. And I would like 13 to begin with Agenda Item No. XV, report, possible 14 discussion and/or action on GTECH Corporation. 15 Gary Grief. 16 MR. GRIEF: Good morning, Mr. Chairman 17 and Commissioners. In your notebooks today, I have 18 several of the typical articles that we follow up on 19 GTECH. But more importantly today, we have Jaymin 20 Patel, who is the CEO and President of GTECH 21 Corporation, visiting us, and I believe he would like 22 to address the Commission if that's your pleasure. 23 CHAIRMAN COX: Welcome, Mr. Patel. We 24 would love to hear from you. 25 MR. PATEL: Thank you. 0009 1 Well, good morning, Mr. Chairman, 2 Commissioners. First of all, thank you very much for 3 inviting me to speak in front of the Commission today, 4 and I thank you also for taking me out of order. I 5 appreciate the scheduling. 6 It's a great pleasure for me to be here 7 today to address the Texas Lottery Commission. I 8 would like to give you some quick background on 9 myself, for the newer Commissioners, and then I would 10 like to spend some time talking about GTECH's 11 performance in 2008 and our outlook for 2009 and 12 perhaps talk about some of the work that we're doing 13 with the Texas Lottery. 14 So by way of quick background, I have 15 been with the company for approximately 15 years now. 16 I began my career with GTECH in 1994 in our European 17 operation, and then I moved to the United States in 18 '97. And after several positions in finance, I became 19 a senior officer of the company in the Year 2000. And 20 since that time, I have been the company's chief 21 financial officer, chief operating officer and most 22 recently, in January of 2008, I was appointed to the 23 position of President and Chief Executive Officer. So 24 my background with the company is quite long, and I 25 have a lot of experience in the lottery industry, both 0010 1 internationally and in the U.S. market. 2 We are very proud of our association 3 with the Texas Lottery. We have been providing 4 services to the Texas Lottery since 1992, the 5 inception of the lottery, and we are very proud and 6 honored to be of service to you over that time period, 7 and we look forward to a relationship going forward. 8 What I would like to do today is perhaps 9 give you an overview of Lottomatica Group, talk about 10 what has happened since the acquisition of GTECH, as I 11 mentioned before, provide some background on GTECH's 12 performance in 2008 and, at your pleasure, perhaps 13 speak broadly about the industry in 2008, what's been 14 happening and, with that context, how we see the 15 future evolving and some of the work that we are doing 16 at GTECH to really help our customers and the industry 17 shape the future of growth in lottery markets. 18 And I would like to also perhaps spend 19 some time talking about some new strategies that we're 20 working on to help lotteries think about future growth 21 alternatives. Please feel free at any time to stop me 22 and ask questions. I'm happy to stop and respond to 23 questions as you see fit. 24 So starting right at the top here, I 25 think you're probably well aware, as I am, that 2008 0011 1 was a very challenging year for the global economy. 2 The gaming industry had quite a difficult year as 3 well. If you look at some of the leading gaming 4 operators and suppliers, companies such as Harrah's 5 and IGT that supply the gaming industry, they had a 6 very tough year, given the decline in consumer demand 7 for gaming products across the board, and that's been 8 reflected in their stock price performance as well as 9 their outlook for 2009. 10 I'm very pleased to tell you that 11 Lottomatica Group actually had a very good 2008, 12 despite the global weaknesses and the trends that we 13 see. Our business held up very well. We are about to 14 report results. So if you'll excuse me, I won't 15 provide you too much financial detail today. What I 16 can tell you is that our business performed well 17 around the world, and we will demonstrate in our 18 results that we had revenue growth, profit growth and 19 cash flow growth in 2008. So we are fortunate in many 20 respects to be in a fairly stable global industry, 21 being lotteries, where consumers still, you know, are 22 playing games, which has helped our business to hold 23 up quite well. 24 I think you know that since the 25 acquisition by Lottomatica of GTECH, our revenues are 0012 1 well diversified. We have a global portfolio of 2 contracts, in excess of 100 contracts, and 3 approximately 60 percent of our global revenues come 4 from outside the United States. And that's important 5 as I talk about our business and the future in just 6 one moment. 7 We spent quite a bit of time in 2008 8 developing new products and solutions, and I'll talk 9 more about that in the future-looking strategies. Our 10 performance in the Italian market, which represents 11 about 50 percent of our global business, was 12 outstanding. We had over 20 percent sales growth in 13 lotteries and instant tickets in 2008, and that's 14 helped to bolster the overall performance and cash 15 flow of the group. 16 So with that said, we were able to 17 refinance many parts of our business in 2008. During 18 these very difficult credit markets, we were able to 19 secure over 650 million Euros, so close to one billion 20 dollars of refinancing in 2008. And we were able to 21 also renegotiate some of the credit terms on our 22 $2.7 billion credit facility to more attractive terms. 23 Most importantly, a commitment that I 24 made to you, Mr. Chairman, and to the Commission a 25 couple of years ago was that as a business, we would 0013 1 remain an investment grade company, because to be a 2 leader in the lottery industry, we have to give our 3 clients, our customers, confidence that we run our 4 business conservatively, that we have substantial 5 access to capital. We think very clearly about 6 funding future capital expenditures in our business. 7 And I'm pleased to report that despite what's happened 8 in the world, we have recently met with Standard & 9 Poor's and Moody's, two leading credit agencies in the 10 world, and they have reaffirmed our status as an 11 investment grade company, so I hope that is pleasing 12 to the Commission. 13 If you look at GTECH's performance in 14 particular now, GTECH as a business performed very 15 well in 2008. The U.S. -- sorry. Let me step back. 16 The global lottery industry for us grew approximately 17 five to six percent in 2008, driven principally by the 18 international business. The U.S. business in 2008 was 19 fairly flat compared to 2007, which is a fairly 20 unusual trend actually. This is the first time 21 certainly in my history in the industry, 15 years or 22 so, where I have experienced or seen a trend of flat 23 sales in the United States. 24 In fact, for 2008, including jackpot 25 activity, the U.S. sales environment, so U.S. same- 0014 1 store sales, were down approximately one percent, 2 which is fairly unusual. If you go back to the last 3 sort of recessionary period, which was the 2001 to 4 2003 time frame, what we saw was, after a few months 5 of weakness, same-store sales in the United States 6 actually grew by 7 to 8 percent a year for that 7 three-year period, which was approximately two or 8 three times gross domestic product growth, driven 9 principally by many of our customers passing 10 legislation to drive sales to enable states to raise 11 more money for good causes. 12 I think you're well aware that in many 13 jurisdictions, the contribution from lotteries either 14 goes directly to a good cause, such as the school 15 children of Texas here in Texas, or in some cases goes 16 to a general fund. So it's one of the few levers that 17 governments have to quickly raise revenues during 18 economic down-cycles. So in the early 2000's, we saw 19 many states joining a multi-state game, such as Mega 20 Millions and Powerball. We saw several jurisdictions 21 approving keno and several states approving new games 22 very quickly, to be able to raise more money for good 23 causes. 24 That trend really has not occurred in 25 the last 12 months, which has been a bit of a surprise 0015 1 to me, because I haven't seen a downward trend for 2 many, many years. However, what I will say is that 3 there are a handful of jurisdictions around the 4 country, around the United States, that are 5 considering the implementation of legislation or a 6 referendum to introduce new forms of gaming or to 7 expand lotteries. So I am expecting that in 2009 and 8 2010, we are going to see the U.S. sales environment 9 grow again as these jurisdictions seek to raise more 10 money for good causes. 11 Internationally our business did very, 12 very well. We grow by over 10 percent, because 13 there's still a lot of latent growth potential in 14 overseas markets such as Western Europe, Eastern 15 Europe and certain contracts we have in Asia. 16 I'm also pleased to report that during 17 2008, we added some important senior executive depth 18 to our management team. One of the company's original 19 founders, Mr. Don Stanford, came back to the company 20 as the company's chief technology officer. And I'm 21 very pleased with that, because Don is a very, very 22 experienced man who was one of the original founders 23 of our business in the technology field and is 24 instrumental in many of the central system 25 technologies and satellite communication technologies 0016 1 that are used throughout the industry today. 2 We also added Sheri Southern as our 3 Senior Vice President of Human Resources. Sheri comes 4 to us with nearly 30 years of experience, including 5 many years in operations at Safeway stores and 6 Starbucks. So Sheri has been a great addition to our 7 team as well as helping to really build some of the 8 morale and build some training within our business. 9 On the contract front, just to summarize 10 where we stand there, we signed over one billion 11 dollars of new business in 2008. We won a substantial 12 number of new contracts in the United States and 13 overseas, and we were also able to secure extensions 14 with customers such as California, New Jersey, Finland 15 and Morocco. So it was a very, very good year. Over 16 75 percent of business in the industry was won by 17 GTECH in 2008. 18 Not everything was great. We had our 19 challenges as well. I was disappointed that we lost 20 Ohio in the early part of 2008 to a competitor, and we 21 were unable to retain Pennsylvania, which we had won 22 originally from a competitor then subsequently lost 23 because of some terminal issues that we reported in 24 the public environment. 25 We have worked hard to resolve some of 0017 1 those issues. We also had some technology issues that 2 were made public in Kansas, and we have tried very 3 hard during the course of the year to have a more 4 focused technology and operations organization to 5 address some of the problems that we had. So despite 6 a very good overall year, I certainly wouldn't wish to 7 represent that we didn't have our challenges, which we 8 have worked on and will certainly work on in the 9 future as well. 10 I would like to report as well that, 11 Mr. Chairman, at your request over 18 months ago now, 12 you asked us to be more proactive with the Texas 13 Lottery on providing best practices and sharing with 14 Gary Grief's organization practices that are adopted 15 by other lotteries in the United States and around the 16 world. And we've tried very hard to be much more 17 proactive with the Texas Lottery in the last 12 to 18 18 months. 19 We've had several working sessions with 20 Mr. Grief and his organization. We've presented a 21 number of best practices to the lottery, I believe 27 22 types of programs that could be implemented to help 23 drive both on-line and instant ticket growth, 24 including game development plans, including the roll- 25 out of additional self-service terminals within the 0018 1 states and many other programs as well. So I hope 2 that the Texas Lottery and the Commission feel that we 3 are being very responsive and proactive to your 4 requests, and we very much wish to continue the 5 working relationship going forward. 6 I should mention to you that one of our 7 most substantial accomplishments in the last few weeks 8 was the UK conversion. And I mention that because 9 this UK is a very large jurisdiction like Texas, and a 10 very important customer within our portfolio. The UK 11 conversion consisted of converting 30,000 terminals 12 and an enormous central system that manages both 13 instant tickets on-line but also interactive games. 14 In the UK it's legal to sell games to 15 the Internet, so they have quite a big part of their 16 business that manages on-line and instant scratch-off 17 games on the Internet. This was perhaps the most 18 complex project that the company has seen -- "the 19 company" being GTECH -- has seen. And I'm pleased to 20 report to the Commission today that the UK conversion 21 went very smoothly. So we converted 30,000 terminals, 22 the central system and the communications network 23 overnight, after a 20-month project. And everything 24 went very smoothly, and we're selling tickets today 25 without any problems. 0019 1 This was a major project that, you know, 2 we worked on for a long time, and we established a 3 very close relationship with the Audit Committee of 4 Camelot. And I think it was an important milestone, 5 because it was the first time certainly in my history 6 where the customer really put in place a very strong 7 project management organization themselves, along with 8 oversight from the Audit Committee. And given the 9 complexity of the project, it was actually very good 10 for both organizations, both our customer and GTECH, 11 to have strong project management and checks and 12 balances in the system over that 18-month period. 13 And I mention that again because we're 14 now in the third industry cycle, if you like. Most 15 customers have been on-line for 20 or 30 years. So, 16 you know, as the third rebid cycle comes up, I think 17 it's important that the complexity of systems is 18 recognized and the fact that you have to have so much 19 more from the project management and technology to be 20 able to convert these systems successfully. 21 I think it's important also to note that 22 GTECH has spent much time in the last 18 months 23 developing an instant ticket business. We made a 24 commitment that we were going to be a competitor in 25 the instant ticket printing and content industry. 0020 1 And, as such, we committed to invest $25 million in 2 establishing a state-of-the-art plant in Florida, 3 which we have now done. Our plant is going live at 4 the end of March or beginning of April, and we will 5 now have the capacity to print 13 billion tickets a 6 year. 7 So that makes us a very significant 8 player in the instant ticket industry, and we are now 9 in a position to support our customers around the 10 world in providing a constant supply of instant 11 tickets. We are preparing and, in fact, we have 12 already bid forth some primarily contracts. I think 13 the Commission is well aware that in the instant 14 ticket industry, contracts tend to be of shorter 15 duration than the on-line contract, and there are 16 multiple contracts given to vendors. The investment 17 we've made is going to support us bidding for primary 18 contracts so we can support large customers, perhaps 19 like Texas and other customers going forward. 20 So if I can now perhaps turn to the 21 future, I'll spend a few minutes talking about some of 22 the growth strategies that we are working on that may 23 be of interest to the Texas Lottery Commission. 24 We have invested a lot of time and 25 research and development in thinking about the future 0021 1 of the retail environment for lotteries. And it is 2 certainly my belief and the belief of our company that 3 there is still substantial potential to grow same- 4 store sales in many jurisdictions around the world. 5 We have made a substantial investment in 6 putting science around best practices. So why is it 7 that Georgia sells $7 per capita per week, 8 Massachusetts sells $14 per capital per week, and 9 other states are more or less than that? 10 I mean, there are scientific reasons 11 that start from legislation, how lotteries are enabled 12 to sell, and what the rules are around selling. They 13 span terminal densities, how many terminals per 14 population, per thousand population makes sense, the 15 prize payout structures for on-line and instant ticket 16 games, the number of games you have selling both 17 on-line and instant, the frequency of refreshment. 18 So there is a whole science, you know, 19 that can be developed around best practices to explain 20 why certain lotteries are selling in the first 21 quartile versus the third quartile for individual game 22 performance or for overall performance. And, you 23 know, I really believe that there is tremendous growth 24 potential for lotteries around the world by applying 25 best practices; hence, the investment that we've made. 0022 1 We also believe there is substantial 2 potential for retail expansion through self-service. 3 I think that particularly in the U.S. market where, 4 you know, store clerks are becoming busier and busier 5 people, we see a demand for self-service growing, 6 where consumers can walk up to self-service terminal 7 and buy an instant or on-line ticket. And as you are 8 probably aware, we have programs that started with the 9 Texas Lottery on rolling out self-service terminals. 10 One of the issues that we've dealt with 11 in this case is age verification. We are a very 12 responsible company. We recognize that many of our 13 customers are thinking a lot about responsible gaming 14 and protecting minors in this regard. So there are 15 technologies that we have developed for the U.S. -- 16 more so internationally, because of the environment -- 17 that helps to protect minors and verify age limits 18 before people can play. 19 We have also worked very hard to build 20 up a national chain store strategy. We found that it 21 is difficult for our customers in individual states to 22 contract with Dollar General, HEB, some of the big 23 supermarket stores. So we have taken it upon 24 ourselves to form a group within GTECH to build the 25 expertise in approaching national chain stores so that 0023 1 we can roll out product across the country rather than 2 negotiate with stores in each individual state. And I 3 think that I must say that Texas has been a leader in 4 working with GTECH in helping to establish 5 relationships with several chain stores. And I think 6 we're about to launch some pilots with a couple of 7 those chain stores right here in Texas. 8 So those are the kinds of investments 9 that I think are quite important. I do believe that 10 there is tremendous potential for growth. I think 11 that in this current environment, I really believe 12 that the lottery industry is one of few industries 13 where governments have the ability to change laws or 14 implement new games very quickly to help fill state 15 budget shortfalls. So I'm expecting that we're going 16 to see growth into '09 and 2010 as a result of this 17 financial crisis that we find ourselves in. 18 I think I should perhaps also spend a 19 couple of minutes briefing you on GTECH's indirect 20 strategy. And this is very important, I think will be 21 very applicable to the United States market in the 22 next several years. 23 Over the last 18 months, GTECH has 24 invested approximately $200 million Euros, close to 25 $300 million, in building an interactive business, 0024 1 "interactive" being, you know, a business where 2 consumers can buy games over the Internet. This 3 business for us we have grown in Europe, because it's 4 clearly illegal for consumers to game on the Internet 5 in the United States. But in most parts of Europe and 6 in Asia, several lotteries as well as commercial 7 entities provide interactive games, so lotteries are 8 selling instant games and on-line games on the 9 Internet. 10 Certain lotteries have moved further 11 into providing poker and bingo games on the Internet. 12 And it's fundamentally the strength of the brand, the 13 lottery brand, that attracts consumers to the lottery 14 brand on the Internet, which is extremely powerful. 15 And we believe that the Internet is 16 going to be -- is, in fact, a very powerful 17 acquisition tool for consumers. Because it's 18 difficult -- we're seeing a fall-off in younger 19 consumers playing physical games, so walking into 20 stores and buying instant and on-line tickets. So as 21 the player base becomes mature, we have to find ways, 22 as an industry, to attract younger players to keep 23 play volumes, and I think indirect is the way of the 24 future. 25 It is my belief that with the new U.S. 0025 1 administration, that we are going to see in the next 2 several years -- I would probably say between three 3 years at the low end and five years at the high end -- 4 between that time period, I think we're going to see a 5 liberalized U.S. Internet gaming environment. And I 6 think it's critical that lotteries around the United 7 States prepare for this potential threat and obviously 8 big opportunity. 9 As you are well aware in the U.S. today, 10 there are two pieces of legislation that prevent 11 consumers from gaming. One is the U.S. Wire Wager 12 Act, and the second one is a bill that was passed a 13 couple of years ago that prevents banks from 14 processing financial transactions relating to betting 15 transactions, called the UIGEA Act. And I think that 16 there is sufficient motion taking place in the U.S. 17 today to start by overturning the UIGEA, and I think 18 that it is likely that we'll see pressure to legalize 19 some form of interactive gambling. That will probably 20 start with things like bingo and poker and perhaps may 21 extend to lotteries as well. 22 So I see it as vitally important to 23 prepare GTECH to be able to provide these technologies 24 and services to our customers as the U.S. federal and 25 state governments seek to legalize these forms of 0026 1 games. This business of interactive is fundamentally 2 different from the physical business that we're all 3 used to. Given that it's on the Internet, there is a 4 great deal of complexity involved in reaching 5 consumers, border controls, to make sure that you sell 6 games in a particular state or country. Only people 7 who live in the state or country can access the 8 service. 9 And there is a great deal of technology 10 required behind fraud and collusion management, 11 because people playing on the Internet can play 12 together and can potentially defraud a state or 13 defraud other players. So from my point of view, it's 14 absolutely critical that we build the expertise within 15 our company so that as this becomes legal in the U.S., 16 we are prepared to offer these services. 17 I think that it is important to 18 recognize the power of the Texas Lottery brand, and 19 it's important to recognize the power of all the 20 lottery brands across the United States. Our 21 experience in Europe is such that where lotteries 22 offer these kinds of games in their jurisdictions, 23 consumers flocked to a well-known trusted brand. So I 24 think, from my point of view, it's very important that 25 the brand is protected. And as these games are 0027 1 legalized, you know, you're in a position to be able 2 to offer these games as appropriate. 3 So that gives you an idea as to some of 4 the things that we're thinking about for future 5 growth, both in the retail environment, which is our 6 core business today, and the interactive environment 7 of the future. 8 So I think I've said enough. I'll 9 certainly leave some time for questions. I would like 10 to say in closing that we again have been very proud 11 to have worked with the Texas Lottery Commission since 12 '92. We would very much like to continue providing 13 services to you. 14 We are looking forward to the issuance 15 of the Texas Lottery RFP, whether it be a single RFP 16 or multiple RFPs. We are here to stay, and we are 17 going to bid under any conditions that you see as 18 appropriate. And you can rely upon GTECH to be a 19 partner, a vendor of yours into the future. So thank 20 you very much for listening to my remarks. And I 21 would be happy to take your questions. 22 CHAIRMAN COX: Thank you, Mr. Patel. 23 Commissioner? 24 COMMISSIONER SCHENCK: Mr. Patel, thank 25 you. This is the second time that we've had a chance 0028 1 to meet. And I'll turn on my microphone so you can 2 hear me. 3 I appreciate your coming today. I found 4 your presentation here today useful, as I did the last 5 time you were here. I don't know if you recall, but I 6 have been aggressive I think with GTECH, and I think 7 that's because it's my job. I will say in my year 8 here, more than a year here now on the Commission, 9 I've been impressed with your staff here in Texas. I 10 took a tour of the GTECH facilities probably six 11 months ago. I found that very helpful. 12 Commissioner, I would commend it to you, 13 and I assume that opportunity -- 14 COMMISSIONER WILLIAMSON: I have had 15 that opportunity, and I will echo your comments. It 16 was a very interesting day. 17 COMMISSIONER SCHENCK: And one of the 18 things I think you may recall my addressing with you 19 is my concern about competition. I believe 20 competition is healthy. I don't think there is as 21 much of it in your industry as the world would benefit 22 from seeing, and I think that there is some more of 23 it. And one of the things you mentioned here that I 24 found interesting was your development of, as I 25 understand it, a very large printing facility in 0029 1 Florida. 2 MR. PATEL: Yes, sir. 3 COMMISSIONER SCHENCK: And a question I 4 asked last time of you was whether GTECH had an 5 interest in bidding on our instant contract. And I'll 6 ask again today, do you think the presence of this 7 printing facility in Florida makes it more likely that 8 GTECH will be a participant in the bidding process for 9 that contract? 10 MR. PATEL: Indeed, we have invested, as 11 I mentioned, over $25 million in building what I 12 believe is the best printing plant in the world. It's 13 the most advanced piece of technology in the market 14 today. And we are committed to bid for business in 15 Texas. And, you know, we would very much like the 16 opportunity. So "Yes" is the answer to your question. 17 And, you know, we will certainly look forward to 18 bidding for primary contracts wherever they come up in 19 the industry, and we certainly will be bidding in 20 Texas when the RFP is available. 21 COMMISSIONER SCHENCK: And is it your 22 intention to service the entire United States from 23 that printing facility in Florida? 24 MR. PATEL: Yes, it is. You know, we 25 will be able to print 13 billion tickets, so we'll 0030 1 have plenty of capacity to serve many of our U.S. 2 customers. And as soon as, you know, we have, let me 3 say sufficient orders or sufficient backlog to fill 75 4 percent or so of that capacity, I will have no 5 hesitation in moving to expand the plant into a second 6 and third plant. We are very serious and very 7 committed to this industry. 8 COMMISSIONER SCHENCK: Would you 9 consider a plant physically located here in Texas, for 10 instance? 11 MR. PATEL: We would certainly give that 12 due consideration. There is no reason why Texas would 13 not be a good place for to us invest. I would have to 14 evaluate a business case and see, you know, whether it 15 makes sense for us to have separate plants in Florida 16 and Texas and other states. But that would certainly 17 be a consideration, yes, sir. 18 COMMISSIONER SCHENCK: Where is Florida 19 is the plant? 20 MR. PATEL: I believe it's in Plant 21 City. 22 COMMISSIONER SCHENCK: Plant City. 23 MR. PATEL: Lakeland, Florida, yes. 24 COMMISSIONER SCHENCK: Okay. And is 25 that right on the coast? I'm going to ask this 0031 1 because I'm assuming you have hurricane contingency 2 planning for your facility? 3 MR. PATEL: We do. It's not directly on 4 the coast. I think it's in a -- you know, it's in a 5 fairly hurricane-free zone -- not totally free, of 6 course, given Florida. But I think it's -- you know, 7 I think we're quite safe there. We haven't had any -- 8 we've been in this business now for approximately two 9 and a quarter years, and we've never had any plant 10 down time as a result of weather problems. 11 COMMISSIONER SCHENCK: Obviously, you're 12 professional at running this business. As I'm sure 13 you're aware, the risk of printing, as I understand, 14 13 billion tickets -- 15 MR. PATEL: Yes. 16 COMMISSIONER SCHENCK: -- in a year, 17 servicing the entire United States from one facility 18 on the Gulf Coast. 19 MR. PATEL: Yes. 20 COMMISSIONER SCHENCK: You also 21 mentioned, which I was very intrigued, the financial 22 pressures on other jurisdictions and the inclination 23 there perhaps to expand gaming. And one of the things 24 you mentioned, which I was happy to hear you talk 25 about -- I would like to hear you talk about it a 0032 1 little more -- is the border controls -- 2 MR. PATEL: Yes. 3 COMMISSIONER SCHENCK: -- on these 4 games. Are you aware of, for instance, neighboring 5 states -- let's say Oklahoma, Arkansas, Louisiana -- 6 pushing towards a more aggressive form of gaming? And 7 do you think that if those states are interested in 8 this or if there is an Internet forum, I guess it 9 doesn't matter where it's physically located. How 10 effective do you think these border controls can be in 11 protecting Texas policy to make sure that the gaming 12 activities that are occurring in this state are 13 actually consistent with its laws? 14 MR. PATEL: Absolutely. It's a very 15 good question. I would say first of all that I have 16 not seen any kind of activity or pressure from states 17 around the country trying to expand their lotteries or 18 gaming activities outside of their states. I think 19 all the customers that we deal with are very -- very 20 appropriately recognize the laws that they operate 21 under and, you know, are looking to operate within 22 their state borders. 23 You know, as the U.S. at some point in 24 the future approves interactive gaming, I think the 25 issue of border control will become very significant. 0033 1 It is a matter that we have dealt with very 2 comprehensively in Europe, because in Europe, there 3 are two pressures. There's the general intent of the 4 European Union to allow its consumers to game cross 5 borders. If you live in France, under EU law, in 6 fact, you are allowed to bet against somebody living 7 in Sweden or living in the UK. 8 However, many member countries in the EU 9 have taken the position that their citizens are not 10 allowed to bet cross-border. And if you live in 11 France, you only bet within the borders of France. 12 That's caused companies like GTECH and others to 13 create complex border control software to control, you 14 know, where bets are made and to ensure that bets are 15 not made from outside, outside the jurisdiction. 16 So we have -- there are various levels 17 of controls. It starts, of course, with player -- it 18 starts with making sure that you register players. So 19 in every one of these interactive businesses, we have 20 a database of players where you have to go in first of 21 all, register, submit your details, make sure that you 22 are a qualified, age-verified player and that you are 23 allowed to play within that jurisdiction. 24 COMMISSIONER SCHENCK: But I'm sorry to 25 interrupt you. How does that occur over the Internet? 0034 1 You're asking for self-reporting? 2 MR. PATEL: No. I mean, there are 3 technologies, there are IP address checks submitting 4 credit cards and valid ID before you can play. So 5 there's a whole verification process that you go 6 through before you're allowed to start playing on the 7 Internet. 8 And if you were to log on -- for 9 example, if you lived in Germany and you were to be 10 logging on from the UK, that transaction would be 11 blocked because you're logging on from an IP address 12 not in Germany. So there are -- I can't explain every 13 one to you -- I'm not a technologist -- but we have 14 spent a lot of money and time making sure that 15 effective technology controls and access controls are 16 built into systems to avoid illegal play. 17 That kind of border control technology 18 is what would be adopted in the United States. And, 19 in fact, if I may say so, some U.S. lotteries have 20 begun to think about how interactive games would work 21 in the U.S., by requiring in their RFPs a strategic 22 view and a solution that can be implemented in those 23 states at some point in the future. So when RFPs come 24 out, we're seeing some leading edge states very large 25 states have sections in the RFP that require vendors 0035 1 to provide this point of view. 2 COMMISSIONER SCHENCK: But in your 3 experience, it's been very effective in policing the 4 play to conform it to the local laws? 5 MR. PATEL: In my experience, it's been 6 very effective. And, in fact, as part of the 7 Lottomatica's vision, we say very clearly that we will 8 only operate in regulated gaming markets. And so 9 whenever we look at new customers in Europe in our 10 interactive business, whenever we're looking at 11 acquisitions, we go to ordinary lengths to make sure 12 that we're buying companies or getting into new 13 contracts where we meet the letter of the law and we 14 are operating well within the legal zone. 15 COMMISSIONER SCHENCK: Okay. And I 16 heard you to say and I understand that there is a 17 separate concern competitively of a neighboring 18 jurisdiction offering a more advanced Internet-based 19 form of gaming. Do you have experience with customers 20 in Europe who have not gone on line, let's say, 21 literally on-line to the Internet to tell us what 22 would the impact be to a state like Texas if, for 23 instance, California were to adopt an Internet poker 24 regime? 25 MR. PATEL: What I can say today is, I 0036 1 think one of the reasons that -- I perhaps failed to 2 mention earlier -- one of the reasons why I believe 3 that the interactive gaming environment will be 4 liberalized in the United States is because there is 5 still a substantial volume of illegal play in the 6 United States, people playing poker, bingo and casino 7 games on the Internet. 8 And I think that it makes perfect sense 9 for these markets to be regulated and taxed like any 10 other business. In fact, when the UIGEA Act was 11 passed two years ago, there was a huge decline in the 12 stock prices of many European companies that were 13 offering their services to U.S. consumers. 14 So my view is that if certain 15 jurisdictions begin to offer interactive gaming, I 16 think that it could cause a competitive problem for 17 lotteries if they are not willing to or able to, I 18 should say, offer interactive games themselves. 19 I'm not sure if I'm answering your 20 question very well. 21 COMMISSIONER SCHENCK: You are. I guess 22 my question is really: Well, is it a land rush? You 23 mentioned the brand, the importance of the brand. If 24 the first brand out there is, let's say, Rhode Island 25 or Micronesia or whatever it might be, are we at a 0037 1 loss? If, for instance, Texas decides (a) it just 2 doesn't want to participate in that for of gaming or 3 (b) it comes late to the game? 4 MR. PATEL: I think that -- if I may say 5 so, I think that it is a competitive threat for any 6 jurisdiction where it enables interactive gaming and 7 the strong brands in that state or that country cannot 8 offer those kinds of interactive games. 9 So, for example, if you look at many 10 countries in Europe, lotteries are growing at five, 11 six, seven percent a year; whereas, commercial 12 companies that provide interactive games like poker 13 and bingo are growing at 20 percent a year. So in my 14 mind, there is definitely relative market loss share 15 because of the fact that lotteries cannot offer these 16 games in every instance. 17 So my point of view is that in order for 18 the brand to be fully valued and realized and to 19 protect the brand, I think it's important that 20 lotteries around the country think about how they're 21 going to offer interactive games when they are 22 approved legally in the United States. 23 COMMISSIONER SCHENCK: I appreciate 24 that. You mentioned earlier something I'm intrigued 25 by. You said this experience in the last recession of 0038 1 early 2000 after the dot com bust, that after six 2 months or so, if I'm remembering correctly, you saw an 3 uptake eventually -- 4 MR. PATEL: We did. 5 COMMISSIONER SCHENCK: -- in gaming. 6 And was that in advances of the other sort of broader 7 signs of recovery of the economy? 8 MR. PATEL: It was certainly in advance 9 of the signs of recovery. And I think -- you know, I 10 was quite involved back then. My recollection of 11 events is that as tax revenues declined, there were a 12 number of things states could do very quickly. But 13 there were very few levers, as you well know, that 14 states can pull to be able to raise revenues quickly. 15 Raising taxes is always politically 16 challenging; whereas, perhaps it becomes somewhat 17 easier to adopt gaming legislation or to change rules 18 to allow for lottery sales which contribute 28 to 19 30 percent of gross sales back to the state very 20 quickly. 21 So what was happening back then is that 22 it was fairly obvious that a handful of states had not 23 joined a Mega Millions or Powerball game, which was 24 substantial revenue outside. There were a number of 25 states that for many years had debated the 0039 1 introduction of keno, but politically it just didn't 2 get through. And there were a number of states that 3 had sought to lanch new games that were just taking 4 their time. When the need for additional revenues 5 arose, it was interesting to see how quickly those new 6 games of Powerball and Mega Millions were approved and 7 drove a substantial increase in growth rate. 8 To be fair, the rate of new game 9 launches or approvals slowed down once the economy 10 picked up again and tax revenues picked up. But for 11 the '01 to '03, maybe even '04 period, same-store 12 sales growth rates in the United States were almost 13 two and a half to three times GDP growth over that 14 time period. 15 COMMISSIONER SCHENCK: Well, that's 16 interesting. I mean, that does sort of signal in a 17 way -- well, there are two things that intrigue me 18 about what you are telling me. One is, no matter what 19 the games are, what the additional offerings are, the 20 consumers are ultimately responding to them in advance 21 of other signs of growth in consumer confidence. 22 That could be, I suppose, because at 23 least with respect to lottery or gaming, there is some 24 hope, if not probability, that there is any kind of a 25 financial return on the activity. But I'm intrigued 0040 1 by the idea, which I'm hoping is going to prove to be 2 true this time around, as I hope others are, that the 3 uptake that we've been seeing very recently in our own 4 sales is sort of a signal, a precursor to a broader 5 return of some form of consumer confidence that will 6 turn the industry around or turn the broader economy 7 around. 8 Also, as I gather from the close 9 syllogism of your presentation today, it seems to me 10 that this experience was likely to replicate itself. 11 We're going to see other jurisdictions expanding the 12 offerings or the nature of the gaming that they will 13 allow it to occur within their jurisdictions. And 14 presumably the games will -- the revenues will expand, 15 at least in those states and perhaps not others. 16 MR. PATEL: Yes. It's my expectation 17 that we are going to see an uptake in 2009 and 2010. 18 I do agree with you. In Texas, the last few weeks has 19 been very positive with sales coming back. You know, 20 we have not been able to establish an empirical 21 correlation between consumers playing more and the 22 economic turning around. 23 I think it's much clearer to see a 24 linkage between actions that governments take or 25 states take and a change in sales, a growth in sales. 0041 1 It's much harder to measure that linkage at the 2 consumer level. But my general feeling is that 3 consumers do tend to play more, you know, as a hope, 4 as a way of really feeling the future will get better 5 during economic down cycles. 6 With respect to other jurisdictions, I 7 mean, one example, if I may offer it to you, is 8 California. In California, you may be aware that 9 there is quite a sever restriction on prize payout 10 ratios that was set in the enabling legislation back 11 in 1992, I believe it was. 12 And the Governor of California is 13 proposing to include a referendum measure in a 14 referendum coming up later this year that will 15 restructure the lottery and remove that cap on prize 16 payout ratios that we believe will, you know, result 17 in tremendous growth in sales and increase in net 18 revenues to the State of California. That's one 19 example. 20 COMMISSIONER SCHENCK: Well, I'm 21 impressed with the California governor, but I'm even 22 more impressed with our own. I think Texas will be 23 right there. 24 Lastly, I have one small concern. It's 25 personal to me, which I've mentioned to Ramon Rivera 0042 1 recently. As you may know, I'm a lawyer as a full- 2 time job, and I've made a practice of putting alarms 3 on the firm if there is any effort to engage a client 4 in a matter that relates to gaming. And you mentioned 5 the Ohio matter. 6 MR. PATEL: Yes, sir. 7 COMMISSIONER SCHENCK: I believe our 8 firm is involved in that. My practice in connection 9 with that matter or any other is to screen myself off 10 of it and have no involvement in it, so I don't know 11 what the status of that case is. I don't even know, 12 frankly, who we're representing. I assume it's not 13 you. And I wanted to make sure that you were aware of 14 my practice and, if you had any concerns with it, that 15 I hear about it before we get into the next bid cycle 16 so that we can address whatever those concerns are. 17 And I hope that you'll let me know if you do have any 18 concerns. 19 MR. PATEL: Very good, sir. I'm not 20 aware of any conflict. But given your comments, we 21 will obviously check this out and make sure that we 22 communicate back appropriately. 23 COMMISSIONER SCHENCK: Thank you very 24 much. 25 CHAIRMAN COX: Commissioner? 0043 1 COMMISSIONER WILLIAMSON: I appreciated 2 your presentation. It was most informative. My first 3 question is, is under UK conversion, were you the 4 operator prior to the conversion or were you a new 5 operator coming in for the conversion -- or the 6 upgrade? 7 MR. PATEL: Yes, indeed, we were the 8 provider of technology and services to Camelot in the 9 second license, and we also in the third license. So 10 we have been partnering with Camelot since the 11 inception of the lottery back in 1994. 12 COMMISSIONER WILLIAMSON: Okay. Then my 13 second question is, do you anticipate any new business 14 acquisitions, particularly in the industry in the next 15 two or three years? 16 MR. PATEL: You know, we are constantly 17 looking at acquisition opportunities around the world. 18 As a global public company, we are looking for growth 19 opportunities in our co-lottery business as well as 20 the interactive businesses that I described earlier. 21 What I can say to you, Commissioner, is 22 that from a cash flow planning point of view, we have 23 a very clear philosophy in our company, and that is 24 that our lottery business is our most important 25 business. And when thinking about the use of future 0044 1 free cash flow, we always allocate capital to lottery 2 maintenance first. Maintenance in our nomenclature is 3 the capital required to sustain our existing 4 customers. So when Texas comes up for rebid, or New 5 York or Ohio, for that matter, we always plan the 6 capital for those jurisdictions first, before anything 7 else happens. 8 The second priority of capital in our 9 business is for growing lottery customers so if we see 10 a new U.S. state like Arkansas that may come up for 11 bid, if a foreign country is going to launch an RFP, 12 then we reserve capital for that. And then finally, 13 if there is any excess capital left over, we allocate 14 that capital for acquisitions. That's our priority of 15 allocation. 16 COMMISSIONER WILLIAMSON: All right. 17 Thank you. That's all the questions I have. 18 MR. PATEL: Thank you. 19 CHAIRMAN COX: Mr. Patel, the pattern 20 often is, when a company is acquired, that the new 21 acquiring company either raids the pantry or soaks up 22 the future free cash flows or dumps doggy contracts 23 into the new subsidiary. Have any of those kinds of 24 things taken place in your relationship with 25 Lottomatica? 0045 1 MR. PATEL: I can say without any 2 question, sir, that our relationship with Lottomatica 3 is excellent. There have been -- none of the events 4 that you've described have occurred within our 5 company. I am a main board director of Lottomatica, 6 so I sit, you know, on the board and I get to take 7 part in board discussions about the strategy and the 8 growth of the company. And the experience that we've 9 had has been nothing short of excellent, both from an 10 investment point of view, a development of the 11 industry of our company and our employees. It's been 12 excellent all around. 13 CHAIRMAN COX: Thank you. And I 14 understand that you have assigned Larry King to work 15 with Texas, and we're sure glad to have Larry back. 16 MR. PATEL: Thank you. Larry has been a 17 great member of our team for many, many years. And 18 Larry is working on the very important aspect of 19 retail expansion with Dollar General and HEB and other 20 large national chains. And I'm hoping that Larry and 21 your team will really drive some success here with 22 retail expansion. 23 Thank you. 24 CHAIRMAN COX: Mr. Patel, thank you so 25 much for being here. Appreciate your presentation and 0046 1 appreciate the attention that GTECH pays to us. It's 2 an important relationship for both of us. 3 MR. PATEL: Thank you, Mr. Chairman, 4 Commissioners. Thank you very much for your time, and 5 I appreciate being able to be here today. Thank you. 6 CHAIRMAN COX: Thank you. 7 Gary, now your call is at 10:30? 8 MR. GRIEF: At 10:20. 9 AGENDA ITEM NO. IX 10 CHAIRMAN COX: Okay. Agenda Item No. 11 IX, report, possible discussion or action on lottery 12 sales, et cetera. 13 Ms. Pyka. 14 MS. PYKA: Good morning, Commissioners. 15 My name is Kathy Pyka. I'm the Controller of the 16 Lottery Commission. And with me this morning is our 17 Products Manager, Robert Tirloni. 18 Our first chart that we'll be sharing 19 with you this morning reflects revenue from sales and 20 net revenue to the state through the week ending 21 February 14, 2009. Total sales through this 24-week 22 period amounted to $1.65 billion, with prize expense 23 of $1.05 billion, for a sales contribution of 24 $607.7 million. 25 Net revenue to the state reflects a 0047 1 1.9 percent decrease as compared to the $417 million 2 figure for this same period in Fiscal Year 2008. And 3 the $1.05 billion amount recorded as prize expense as 4 a percentage of sales is 63.3 percent for the current 5 time period as compared to 63.6 percent for the same 6 period last fiscal year. 7 I would like to move to the next slide. 8 CHAIRMAN COX: Kathy, if we could 9 here -- 10 MS. PYKA: Yes. 11 CHAIRMAN COX: If you're going to get to 12 this, tell me. I remember that early on we were down 13 about 7 percent in sales. 14 MS. PYKA: We were. 15 CHAIRMAN COX: And now we're back to 16 three, and that says that, to me I think, more than 17 all of the amount that we're down is attributable to 18 Ike? 19 MS. PYKA: Not that more or all. We're 20 going to look at the next slide which reflects the 21 details on the $56 million sales decline. And we 22 still believe that probably about half of it is 23 attributed to Ike. And then also we've got a one-day 24 difference. Fiscal Year two thousand -- or a two-day 25 difference. Fiscal Year 2009, if you looked at the 0048 1 week-over-week, has a two-day gap which reflects about 2 $18 million in sales which will only recover one of 3 those days by year end, because Fiscal Year 2008 was a 4 leap year. 5 CHAIRMAN COX: Okay. The question I was 6 going to ask is, originally sales were down about 7 7 percent, if I remember correctly. 8 MS. PYKA: Yes. 9 CHAIRMAN COX: How much was estimated 10 net revenue to the state down at its lowest point? 11 MS. PYKA: Mr. Chairman, I'm going to 12 have to go back and look at that. I think at one 13 point, it was down by 5 percent, but I need to go back 14 and look at that. 15 CHAIRMAN COX: If you would, please. 16 MS. PYKA: I certainly will. 17 CHAIRMAN COX: Thank you. 18 MS. PYKA: Our next slide reflects the 19 change in sales by game from Fiscal Year 2008 to 20 Fiscal Year 2009. Again, the total decline from 21 Fiscal Year 2008 is 3.3 percent, or $56.4 million, and 22 that includes $13.4 million for the on-line game 23 difference, or 3.3 percent, followed by the 24 $43 million decline for instant, or 3.3 percent as 25 well. 0049 1 The jackpot games that are portrayed on 2 the slide with the white font, they're currently 3 reflecting a $6.9 million decline, or 3.3 percent 4 again. And as you'll note here, our Mega Millions, 5 Megaplier and Two Step games are all reflecting 6 positive year-over-year gains compared to Fiscal Year 7 2009. 8 At this point in time when we look at 9 our jackpot games, all of the jackpot games are 10 rolling. Mega Millions is right now advertised at 11 $120 million. And we are comparing right now to a 12 $270 million period in February of 2008, so we 13 certainly hope that we can continue rolling Mega 14 Millions. 15 And as we look at our daily games, 16 they're reflected here with the green font, and they 17 reflect an overall decline of $6.5 million. And as 18 we've talked about the instant ticket games, again 19 we've got a $43 million decline. Through February 20 14th, this is a 3.3 percent variance. 21 Only three weeks ago, we were at a 22 4 percent decline, and I wanted to note that we've 23 certainly had a terrific February. We've had two 24 weeks with sales greater than $60 million. We had a 25 $62 million week for the week ending February the 7th. 0050 1 We've not had a $62 million week since February of 2 2006. 3 COMMISSIONER SCHENCK: If I can 4 interrupt you there? 5 CHAIRMAN COX: Please. 6 COMMISSIONER SCHENCK: Do you think this 7 is an experience that's particular to Texas or 8 particular to the Mega Millions roll? Are other 9 states' lotteries -- and I'm asking now because I'm 10 intrigued by Mr. Patel's hopeful comment that the 11 lotteries may lead the way out of recession. 12 MS. PYKA: Well, Commissioner Schenck, 13 I'll begin with, we have historically always had great 14 weeks or great months of February with regard to our 15 instant ticket sales. But we were certainly pleased 16 to have had a $62 million week, knowing that our last 17 $62 million week was in 2006. I don't know how other 18 states are faring in the month of February. But 19 certainly on instant ticket sales, we were certainly 20 pleased to see the return to the $60 million range. 21 Our on-line sales are doing well. I 22 mean, we know we've got Mega back up to $120 million. 23 And we hope that if we continue to roll that game, 24 that we'll build a -- reflect greater on-line 25 increases over Fiscal Year 2008. 0051 1 COMMISSIONER SCHENCK: But even the 2 games that aren't rolling big like, let's say, Lotto 3 Texas right now, is that up as well? 4 MS. PYKA: It is. It's up to 5 $20 million, and Two Step is up to $925,000. So we've 6 got three good jackpot rolls moving right now. 7 MR. TIRLONI: If I can add. For the 8 record, Robert Tirloni, Products Manager. 9 Kathy mentioned this time last year, 10 Mega was at 270. But last year at this time, Two Step 11 was also at 975 and Lotto was also at 26. So not only 12 are we competing against the large Mega Millions 13 jackpot year-over-year but the other two jackpot games 14 were high as well. So it would be great if they all 15 continued to roll for the next few weeks. 16 MR. GRIEF: Well, I think to your point, 17 Commissioner, you asked -- I think I heard you say 18 even the games that aren't rolling. 19 COMMISSIONER SCHENCK: Well, they're all 20 rolling. 21 MR. GRIEF: We've got games like Pick 3, 22 our daily games, and it's showing very strong sales as 23 well on the on-line side. 24 COMMISSIONER SCHENCK: Well, that's 25 interesting, because you would think -- the game is 0052 1 facing competition from our other games with the big 2 roll, so everybody is out and playing. 3 MS. PYKA: That week of February the 4 7th, our Pick 3 had the highest weekly sales we had 5 had since March of last year. And our Daily 4 game 6 for that particular week had had a little bit over a 7 million dollars in sales, and that was the highest 8 level for Daily 4 since we introduced the game. So, I 9 mean, we had tremendous sales for that week. 10 COMMISSIONER SCHENCK: That's good. 11 Well, now hopefully people will start buying 12 Chevrolets, too. 13 COMMISSIONER WILLIAMSON: One question, 14 Kathy. 15 MS. PYKA: Yes. 16 COMMISSIONER WILLIAMSON: Can y'all 17 tell -- and you may not have this information -- is 18 the mix different or the same from the $2.00 ticket to 19 the $10 ticket, to the $20, you know? How does that 20 mix look compared to -- 21 MS. PYKA: And Robert is going to cover 22 that in just a bit. Do you want to address that now 23 and -- 24 COMMISSIONER WILLIAMSON: You can wait 25 to whenever you do it, if you want to do that. 0053 1 MR. TIRLONI: I can tell you, the order 2 or the sequence in terms of best selling tickets, 3 that's not changed and we've not seen any change. 4 What we have seen change, though, over the past few 5 weeks, when looking at year-over-year, this fiscal 6 year to last, our $2.00 price point is now up year- 7 over-year. Prior to that, our $3.00, $5.00 and $20 8 prize points were the price points that were seeing a 9 gain this year over last. 10 Now, our $2.00 price point is also up, 11 and the $1.00 price point is very close to being up as 12 well. It's only down -- it's actually down year-over- 13 year less than $200,000. So we've seen some 14 improvement at the lower price points as well. 15 MS. PYKA: So with that, Robert will now 16 discuss sales by product category. 17 MR. TIRLONI: Commissioners, this next 18 slide shows our total fiscal year to date sales of 19 just under $1.7 billion, broken down by instant and 20 on-line. No change in the percentage. Instant 21 tickets continue to make up 76 percent of our sales, 22 with on-line bringing in the other 24 percent. And 23 again, this has been consistent now for quite 24 sometime. 25 On the on-line side, Pick 3 continues to 0054 1 be our best performing on-line game in terms of sales. 2 And even with the large jackpot that we have right now 3 on Mega Millions, Lotto Texas is our second best 4 performing on-line game, and then Mega Millions is our 5 third best performing game. Of course, there is 6 potential for Mega Millions to surpass Lotto if it 7 continues to roll and if it gets up to that two or 8 $300 million jackpot level, which brings a lot of new 9 people into the game. So we'll continue to watch 10 that. 11 This is our instant ticket sales, broken 12 down by price point year to date, so this represents 13 $1.3 billion in instant ticket sales. And as I just 14 mentioned a moment ago, we've seen new change in terms 15 of sales performance. The five continues to be the 16 best performing gave, followed by the two, and then 17 the 10 and then the three. 18 We have a short presentation for you 19 this month. That's all we have, but we're happy to 20 answer any other questions that you might have. 21 CHAIRMAN COX: Commissioner? 22 COMMISSIONER SCHENCK: No. 23 COMMISSIONER WILLIAMSON: No. 24 CHAIRMAN COX: Thank you very much. 25 MS. PYKA: Thank you. 0055 1 AGENDA ITEM NO. X 2 CHAIRMAN COX: Agenda Item No. X, 3 report, possible discussion and/or action on transfers 4 to the state and the agency's budget. 5 Ms. Pyka. 6 MS. PYKA: Again for the record, Kathy 7 Pyka, Controller for the Lottery Commission. 8 The first report in your notebook 9 reflects the transfers and the allocations to the 10 Foundation School Fund and the allocation of unclaimed 11 prizes for the period ending December 31st of 2008. 12 Total cash transfers to the state amounted to 13 $331.6 million for the first four months of the fiscal 14 year. 15 The second page of your notebook 16 includes the detailed information for the transfers. 17 Of the $331.6 million transfer to the state, 18 $311.5 million was the amount transferred to the 19 Foundation School Fund, with a balance of 20 $20.1 million transferred from unclaimed lottery 21 prizes. 22 Your notebook also includes a document 23 that reflects the report of lottery sales, 24 expenditures and transfers from Fiscal Year 1992 to 25 date. Total cumulative transfers to the Foundation 0056 1 School Fund through December of this year totaled 2 $10.99 billion. 3 And, Commissioners, I wanted to note 4 that we did complete the January transfer to the 5 Foundation School Fund on February the 12th for 6 $75.1 million. This brings our total cumulative 7 transfers to the Foundation School Fund to 8 $11.06 billion, so we've surpassed that $11 billion 9 mark. 10 And then the final item that I have 11 under this tab is the agency's Fiscal Year 2009 method 12 of finance summary for the first quarter ending 13 November 30th. Our Commission's lottery account 14 budget is $193.5 million. Of this amount, 84.4 15 percent was expended and encumbered through the first 16 quarter. And our bingo budget is funded by general 17 revenue, is $15.5 million, with 34.8 percent expended 18 and encumbered through the first quarter. 19 Commissioners, I would also like to 20 provide just a brief update on the 2.5 percent budget 21 reduction request from the Lt. Governor and the 22 speaker. We received that on January 30th, and we 23 provided responsive information with the Senate 24 Finance material and the Houses Appropriation material 25 that we delivered to each of those subcommittees, or 0057 1 to those committees. Our proposed lottery account 2 reduction included $4.9 million, and that reduction 3 was proposed to the lottery operator contract 4 strategy. We believe, based on our Fiscal Year 2009 5 budgeted amounts and sales to date, that we have 6 sufficient unspent admin funds under this strategy for 7 their consideration as the 2.5 percent budget 8 reduction. 9 Our proposed reduction for general 10 revenue includes $388,000, and it's a reduction to the 11 bingo prize fee allocation strategy. Again, based on 12 the prize fee collections to date, we believe that we 13 have sufficient unspent administrative funds for that 14 to be the proposed two and a half percent budget 15 reduction for general revenue. 16 I would be happy to answer any questions 17 that you might have. 18 COMMISSIONER SCHENCK: I have no 19 questions. Thank you, Kathy. 20 COMMISSIONER WILLIAMSON: Thank you. 21 CHAIRMAN COX: Thank you, Kathy. 22 MS. PYKA: Thank you. 23 AGENDA ITEM NO. XIV 24 CHAIRMAN COX: Agenda Item No. XIV, Mega 25 Millions game. 0058 1 Mr. Grief. 2 MR. GRIEF: Commissioners, I just wanted 3 to report to you that I did attend the meeting in 4 Atlanta, Georgia, on February 9th, with four of my 5 colleagues from the Mega Millions game and five 6 representatives from Powerball. We had a very 7 productive discussion about the potential of doing 8 some type of game together in the future. We're 9 continuing those discussions. Meetings will continue 10 to occur, both via telephone and in person, and I'll 11 continue to keep you informed. 12 COMMISSIONER SCHENCK: Thank you, Gary. 13 Appreciate it. 14 CHAIRMAN COX: Thank you, Gary. 15 AGENDA ITEM NO. XVI 16 CHAIRMAN COX: Agenda Item No. XVI, 17 report of the Executive Director. 18 Mr. Grief. 19 MR. GRIEF: Commissioners -- excuse me, 20 Mr. Chairman. I have nothing to report under this 21 item, other than what is in your notebooks, which is 22 the regular FTE report. 23 COMMISSIONER SCHENCK: Gary, I see that 24 we have nine vacant positions in Lottery and we're 25 recruiting or screening five right now, people. 0059 1 MR. GRIEF: Yes, sir. 2 COMMISSIONER SCHENCK: What's going on 3 with the other positions? Are we not posting them? 4 Are we just waiting for people or -- 5 MR. GRIEF: I would ask if there's 6 particular divisions who have those that there's no 7 way to chart activity. I believe some have been 8 posted, and we went through a process, did not find 9 any applicants. We're re-posted some. Some are in 10 the middle of that process. But I can assure the 11 Commission for the Lottery positions, we are actively 12 engaged in the recruiting and filling of all those 13 positions. 14 COMMISSIONER SCHENCK: That's fine. I 15 appreciate it. That's all I wanted to know about it. 16 CHAIRMAN COX: Thank you, Gary. 17 AGENDA ITEM NO. II 18 CHAIRMAN COX: I think now that we are 19 back to the beginning of the agenda, Agenda Item No. 20 II. 21 Kim, is that correct? 22 MS. KIPLIN: Yes, sir, that is. 23 CHAIRMAN COX: Okay. Consideration of 24 and possible discussion or action, including proposal, 25 on amendments to 16 TAC 402.402 relating to Registry 0060 1 of Bingo Workers. 2 Ms. Joseph. 3 MS. JOSEPH: Good morning, 4 Commissioners. For the record, my name is Sandra 5 Joseph, Special Counsel. 6 Item No. II is draft proposed amendment 7 to 16 TAC §402.402 relating to the Registry of Bingo 8 Workers. 9 The purpose of the proposed amendments 10 is to remove reference to a "primary" operator and to 11 clarify the consequences of failing to renew a 12 worker's registration timely and also submission of an 13 incomplete worker registry application. 14 Additionally, the proposed amendment 15 includes an explanation of when fingerprint cards are 16 required, the option of requesting a hearing when 17 found non-qualified to be listed on the registry, and 18 when a worker whose listing on the registry has been 19 denied or revoked may reapply. 20 These proposed amendments were presented 21 to you at the December 12, 2008, Commission meeting. 22 In response to comments that you made at that meeting, 23 the staff has made changes to the draft proposed 24 amendments. First, a definition has been added for 25 usher and, second, language has been added to 0061 1 Subsection (b) to specify that any person that carries 2 out or performs the functions of a caller, cashier, 3 manager, operator, usher or salesperson, as defined in 4 Subsection (a), must be listed on the Registry of 5 Bingo Workers. 6 The staff recommends that the Commission 7 initiate the rulemaking process by publishing the rule 8 in the Texas Register in order to receive comments for 9 a period of 30 days. 10 CHAIRMAN COX: Commissioner? 11 COMMISSIONER SCHENCK: I thank you were 12 responding to my comments, and I appreciate this. I 13 think this is a much better draft rule. I have no 14 questions. 15 COMMISSIONER WILLIAMSON: I have no 16 questions. 17 CHAIRMAN COX: Okay. Do I have a 18 motion? 19 COMMISSIONER SCHENCK: I move we adopt 20 staff's recommendation and post the rule for public 21 comment. 22 MS. JOSEPH: I have a T-bar for your 23 approval. 24 CHAIRMAN COX: Okay. Do you want us to 25 vote? 0062 1 MS. JOSEPH: I'm sorry. 2 CHAIRMAN COX: No problem. 3 MS. JOSEPH: Yes, please. 4 CHAIRMAN COX: All in favor, say "Aye." 5 COMMISSIONER WILLIAMSON: Aye. 6 COMMISSIONER SCHENCK: Aye. 7 CHAIRMAN COX: Aye. 8 Motion carries 3-0. 9 MS. JOSEPH: All right. And with your 10 permission, I'll bring that to you after I've 11 completed my presentations. 12 CHAIRMAN COX: Sure. 13 AGENDA ITEM NO. III 14 CHAIRMAN COX: Agenda Item No. III, 15 consideration of and possible discussion and/or 16 action, including adoption, on new 16 TAC 402.412 17 relating to signature requirements. 18 Ms. Joseph. 19 MS. JOSEPH: The proposed rule for 16 20 TAC §402.412 was published in the Texas Register for a 21 period of 30 days in order to receive comments. No 22 written comments were received. However, at the 23 public hearing that was held, Steve Bresnen, 24 representing the Bingo Interest Group, did appear and 25 commented in favor of the rule. 0063 1 Staff recommends that the Commission 2 adopt new 16 TAC §402.412. 3 COMMISSIONER SCHENCK: I have no 4 questions. 5 COMMISSIONER WILLIAMSON: I have no 6 questions. 7 CHAIRMAN COX: Okay. Do I hear a 8 motion? 9 COMMISSIONER SCHENCK: I move we adopt 10 staff recommendation and publish the proposed rule for 11 comment. 12 CHAIRMAN COX: I believe this was -- 13 COMMISSIONER SCHENCK: This is for 14 adoption. I'm sorry -- and that we adopt the rule. 15 COMMISSIONER WILLIAMSON: I second. 16 CHAIRMAN COX: All in favor, say "Aye." 17 COMMISSIONER SCHENCK: Aye. 18 COMMISSIONER WILLIAMSON: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 3-0. 21 MS. KIPLIN: Commissioners, I have an 22 order I'll pass to you. 23 AGENDA ITEM NO. IV 24 CHAIRMAN COX: Agenda Item No. IV, 25 consideration of and possible discussion and/or 0064 1 action, including adoption, on new 16 TAC 402.424 2 relating to amendment of a license by telephone or 3 facsimile. Ms. Joseph. 4 MS. JOSEPH: Yes, Commissioners. This 5 rule also has been published for public comment. A 6 public hearing was held. Mr. Bresnen also commented 7 in favor of this rule. No written comments were 8 received. 9 The staff recommends that the Commission 10 adopt this new rule, 16 TAC §402.424. The purpose of 11 the rule is to set forth for licensees the process and 12 timelines to follow when submitting by telephone or 13 facsimile an amendment to a license. 14 COMMISSIONER SCHENCK: No questions. 15 COMMISSIONER WILLIAMSON: No questions. 16 CHAIRMAN COX: Okay. Is there a motion? 17 COMMISSIONER SCHENCK: I move we adopt 18 staff recommendation and adopt the rule. 19 COMMISSIONER WILLIAMSON: Second. 20 CHAIRMAN COX: All in favor, say "Aye." 21 COMMISSIONER SCHENCK: Aye. 22 COMMISSIONER WILLIAMSON: Aye. 23 CHAIRMAN COX: Aye. 24 Motion carries 3-0. 25 MS. KIPLIN: Commissioners, I've 0065 1 provided an order. 2 CHAIRMAN COX: Ms. Kiplin, I showed up 3 with a pencil today. If you could . . . 4 AGENDA ITEM NO. V 5 CHAIRMAN COX: Agenda Item No. V, 6 consideration of and possible discussion and/or 7 action, including adoption, on new 16 TAC 402.409 8 relating to amendment for a change of premises or 9 occasions due to lease termination or abandonment. 10 Ms. Joseph. 11 MS. JOSEPH: This also is a draft rule 12 prepared for submission to the Texas Register in order 13 to adopt new rule 16 TAC §409. 14 No written comments were received on 15 this rule during the public comment period. However, 16 at the hearing, Mr. Bresnen, representing the Bingo 17 Interest Group, did offer a number of comments. Staff 18 agreed with all the comments and made changes 19 accordingly in order to clarify language and to make 20 the language consistent with the statute. 21 There was only one comment that we did 22 not agree with. Mr. Bresnen suggested adding language 23 regarding temporary licenses. But because that topic 24 is already addressed in an existing rule, 402.401, 25 staff does not believe it was necessary to add that 0066 1 language to this rule. 2 Staff recommends that the Commission 3 adopt this new rule amendment for a change of premises 4 or occasions due to lease termination or abandonment. 5 That's No. 16 TAC §402.409. 6 COMMISSIONER SCHENCK: Sandy, can you 7 remind me of the purpose or the need for this? 8 MS. JOSEPH: Yes. The purpose of this 9 is to set out a procedure and process for instances 10 when a lease may have terminated or been abandoned and 11 there is a gap left in the -- an opening left in the 12 bingo playing schedule, for someone to come in and 13 fill that gap rather quickly. I believe -- and 14 Mr. Sanderson can correct me -- I don't believe anyone 15 has ever actually applied for this, however. 16 MR. SANDERSON: This section of the 17 statute was added in 2003 with House Bill 2519. And 18 since its inclusion, it has not been utilized by an 19 organization or a lessor, or it has not actually 20 kicked in to being utilized. We have been able to 21 issue licenses necessary within the 10-day period. So 22 we never had to issue any temporary licenses or 23 proceed with any other of the activities that this 24 rule or that Section 2001.108 covers in the statute. 25 COMMISSIONER SCHENCK: Is this going to 0067 1 help the staff in some way in not having to deal with 2 permanent license applications on this next vetted 3 basis, or is this just a rule that's going to sit 4 there and no one is ever going to invoke in the 5 next -- 6 MR. SANDERSON: Well, and I think also, 7 if I'm not mistaken -- I'll have to go back and look 8 and see -- but I believe there was some requirement in 9 25.19 that we do adopt a rule to implement this 10 section. I'll have to find out for sure on that. I 11 know we had some forms that were required to be 12 developed, and we develop those forms. 13 COMMISSIONER SCHENCK: Well, I think 14 that answers all my questions, Phil. 15 COMMISSIONER WILLIAMSON: No questions. 16 CHAIRMAN COX: Okay. Is there a motion? 17 COMMISSIONER SCHENCK: I move that we 18 adopt -- or I'm sorry -- that we publish -- 19 CHAIRMAN COX: Adopt this -- 20 COMMISSIONER WILLIAMSON: Adopt -- 21 MS. KIPLIN: The recommendation is adopt 22 what you propose but with changes, as reflected in 23 this matter in this document. 24 COMMISSIONER SCHENCK: Prepared for 25 submission. Why does my thing read -- okay. I move 0068 1 we adopt staff's recommendation and adopt the rule. 2 CHAIRMAN COX: Okay. 3 COMMISSIONER WILLIAMSON: Second. 4 CHAIRMAN COX: All in favor, say "Aye." 5 COMMISSIONER SCHENCK: Aye. 6 COMMISSIONER WILLIAMSON: Aye. 7 CHAIRMAN COX: Aye. 8 Motion carries 3-0. 9 And, Commissioners, we're going to pass 10 Items VI and VII until Gary Grief -- 11 MS. KIPLIN: Mr. Chairman, I'm sorry. I 12 should have spoken up. I think Mr. Grief said that he 13 has left Michael Anger here in the audience to take up 14 these two rules, if that's the Commission's desire, 15 because I believe there are people who are here that 16 would want to comment on that. 17 CHAIRMAN COX: Okay. 18 MS. KIPLIN: It's up to the Commission. 19 But, Mr. Anger, that's correct? 20 MR. ANGER: Yes. 21 CHAIRMAN COX: Why don't we take about a 22 15-minute break, and then we'll address Items VI and 23 VII. 24 (Recess: 10:19 a.m. to 10:38 a.m.) 25 CHAIRMAN COX: Let's come back to order. 0069 1 AGENDA ITEM NOS. VI AND VII 2 CHAIRMAN COX: Let's pick up with Agenda 3 Item No. VI, consideration of and possible discussion 4 and/or action on new rule 16 TAC §402.104 relating to 5 "gambling promoter" and "professional gambler." 6 MS. KIPLIN: Mr. Chairman, I think you 7 just called Item VI. With your permission, could we 8 also include Item VII, since it's the same subject? 9 CHAIRMAN COX: You want to do them both? 10 MS. KIPLIN: Would that be okay with 11 you? 12 CHAIRMAN COX: It probably would. 13 Okay. And also Agenda Item No. VII, 14 consideration of and possible discussion and/or 15 action, including proposal, on amendments to 16 TAC 16 401.153 relating to qualifications for license. 17 Mr. Wassdorf. 18 MR. WASSDORF: Thank you, Mr. Chairman. 19 Pete Wassdorf, Legal Services Division. 20 I direct your attention to both Agenda 21 Items Nos. VI and VII for your consideration. Items 22 VI and VII both contain the same definition for 23 "professional gambler." And, therefore, if we can 24 address those at the same time, I would appreciate it. 25 As you know, there has been a proposed 0070 1 rule that was published in the Texas Register on 2 November 14th to adopt a new rule with respect to 3 professional gambler and gambling promoter for the 4 bingo section and to amend the current rule for the 5 definition of "professional gambler" under the Lottery 6 Act. 7 In the currently proposed rule, staff 8 had sought to impose objective criteria on the 9 determination on whether a person was a gambling 10 promoter or a professional gambler. One objective 11 criteria was the number of convictions, with a 12 suggestion that three or more convictions be the 13 determining threshold for establishing that a person 14 was a professional gambler. 15 Commissioner Schenck expressed concerns 16 to staff that if the TLC learned, through 17 investigation or otherwise, that a person was engaged 18 in those criminal activities in Texas generally 19 associated with professional gambling, then we should 20 be able to bar them from licensure whether they had 21 been convicted or not. 22 The essence of the jurisprudence meaning 23 of professional gambler is a person that makes a 24 living off of making illegal gambling available to 25 others. Commissioner Schenck suggested that the 0071 1 criminality and the concept of making a living off of 2 illegal gambling available to others or making illegal 3 gambling available to others might both be components 4 of the decision matrix. 5 Based on this input, we drafted a rule 6 within the criminality can be objectively shown either 7 by evidence of activity or by conviction. Repeated 8 convictions can establish the determinative threshold 9 of professional gambler by itself, or where the Texas 10 Lottery Commission may have evidence of involvement in 11 illicit gambling without a conviction, but in 12 combination with evidence of profit significant enough 13 to be their primary means of -- primary income, that 14 that also could be used as a determinative factor to 15 establish the status of professional gambler. 16 The rule as drafted now, the proposal as 17 drafted allows the occasional miscreant to be barred 18 for the statutory 10 years while the miscreant, 19 repeatedly convicted of gambling offenses are so 20 regularly involved in illegal gambling that he earns 21 his livelihood from the gambling, would both be 22 considered in determining that he was professional and 23 barring him from licensure for life. 24 The Penal Code provision cited in the 25 rule include gambling and -- promotion of gambling, 0072 1 keeping a gambling place and communicating gambling 2 information. Just after we published this proposal to 3 withdraw the current rule and to substitute a new 4 proposal, we also notified a number of interested 5 parties that had asked to be notified with respect to 6 this issue -- by e-mail -- and offered to have a 7 conference telephone call with them. 8 And although it was late in the process, 9 several of them availed themselves of being able to 10 participate in the process. And I think that they're 11 here today and have some comments to make. The staff 12 recommends to withdraw the currently proposed rules 13 with respect to this and to publish this new proposal 14 in its stead and have a 60-day period during which the 15 public can comment and interested parties can give us 16 their thoughts on this issue. 17 And I think that that's our 18 recommendation at this time. 19 CHAIRMAN COX: Commissioner? 20 COMMISSIONER SCHENCK: Pete, I thank you 21 for responding to my concerns. I know that this is a 22 complex area. I appreciated your original 23 presentation on this as well as your very thorough 24 legal research. We don't have much in the way of 25 legislative history here, but I think we have a rule 0073 1 which I'm probably not going to say more about until 2 I've had an opportunity to hear from people who might 3 have still more concerns about it. But I do 4 appreciate your hard work on it. 5 MR. WASSDORF: Thank you. 6 CHAIRMAN COX: We have public comment 7 from -- I have Knowles Cornwell, who is against Item 8 VI, Stephen Fenoglio who is against Item VI and Steven 9 Hieronymus who is against Items VI and VII. 10 Did any of y'all wish to speak? 11 Mr. Fenoglio. 12 MR. FENOGLIO: I did. For the record, 13 my name is Stephen Fenoglio. I'm an attorney. And I 14 filed an appearance slip. 15 I was not able to make the late-noticed 16 conference call. We appreciate staff reaching out to 17 us. But by the time I got it, the meeting was already 18 underway, but -- by the time I got notice. 19 I guess my observations are multi. And 20 I'm not concerned about if someone has been convicted, 21 because I think that's where the statute leaves you, 22 so I'm not concerned and have no comments on the 23 provisions under 402.104(a)(2) or (b)(2). 24 But what I do have a concern is in the 25 reaching out of language where it's alleged an entity 0074 1 has engaged -- that staff, I guess, believes that the 2 entity has engaged in conduct prohibited by the cited 3 provisions, either Section 47.03 of the Texas Penal 4 Code, gambling promotion, or the other provisions Pete 5 mentioned under Subparagraph (b)(1), of gambling 6 promotion, keeping a gambling place, communicating 7 gambling information. 8 And here is the deal: These are penal 9 status. And under a penal or a criminal case, the 10 burden of proof is guilt beyond a reasonable doubt. 11 In an administrative hearing, you would be trying to 12 enforce or reach a determination that someone had 13 engaged in a prohibited criminal conduct but at a far 14 lesser standard, on a preponderance of the evidence. 15 And having fought some of the 1-liner or 16 2-liner, 3-liner, 8-liner battles and won eight and 17 lost two against the Attorney General or prosecutors, 18 what people think of in a criminal case as illegal 19 conduct, juries sometimes don't have a problem with. 20 Yet, in a civil case, the State Office of 21 Administrative Hearings case brought by this agency, 22 if this rule were adopted, the standard would not be a 23 criminal standard under guilt beyond a reasonable 24 doubt. It would be by a preponderance of the 25 evidence. And it seems to me it's unfair, inherently 0075 1 so, that a licensee can have property and livelihood 2 taken under a far lesser standard, when the underlying 3 charge is, you're engaged in this type of criminal 4 activity. 5 I also would observe that there are no 6 defenses given under the draft rule under Section 7 47.09 of the Texas Penal Code, or affirmative defenses 8 under Texas Penal Code, Section 8.03, under your 9 proposed regulatory scheme. 10 Furthermore, the way the rule was 11 drafted, it would prohibit a person from being 12 licensed or working for a manufacturer or a 13 distributor if they had worked at a redemption arcade, 14 be it a Dave & Buster's, a Chuck E. Cheese, a 15 GattiTown, a Peter Piper Pizza, because those 16 individuals would be engaged, under the draft rule, of 17 communicating or engaged in gambling promotion because 18 they are accepting money for people to play a machine 19 where a valuable prize is awarded, $5.00 or less, in 20 some chance pervades. 21 The other observation is -- and 22 Mr. Bresnen had made it to Pete, and I wanted to 23 follow up with it -- it's unclear whether the rule, if 24 it were adopted, would be prospective or retroactive. 25 And we would suggest that if you are going to go down 0076 1 the road, that it should certainly be prospective 2 only. 3 Finally I would observe that under -- 4 and I do not represent multimedia games. But as it's 5 drafted, they would be considered a professional 6 gambler if they legally provided machines in Texas, 7 some of their slot machines, to the Indian 8 reservations in Texas, including the one in South 9 Texas that is recognized under the Indian Gaming 10 Regulatory Act. And so it seems to me that the draft 11 language misses the boat a bit for all of these 12 reasons. 13 I'll be happy to answer any questions. 14 COMMISSIONER SCHENCK: Well, I'm happy 15 to engage you in a conversation. Let's put it that 16 way. I'm not going to oppose you. 17 MR. FENOGLIO: Okay. 18 COMMISSIONER SCHENCK: We've gone around 19 with this quite a bit. I think there is no way that 20 we're going to get to a position that everyone who is 21 going to talk to us today is going to be happy with. 22 And so I think if we end up with everyone being 23 unhappy, we may have arrived at the right answer. 24 But let me just strike out here and just 25 say that the way I read the statute, which is 0077 1 controlling here, is there are two separate 2 prohibitions on obtaining a license from this 3 Commission to conduct bingo. One is being convicted 4 of a crime; the other is being a professional gambler 5 or gambling promoter. 6 Now, putting aside your concerns for the 7 moment about gambling promoter, which I'm sensitive 8 to, and particularly your suggestion that someone who 9 has worked at a Chuck E. Cheese or another place of 10 that nature would be considered to be a gambling 11 promoter, I'm concerned about that, but let me put 12 that to the one side for one second. 13 And let us assume that we have an 14 individual in Texas who is making his living gambling 15 illegally but has never been convicted. What would 16 you have us do with that person? You would have us 17 give him a license? 18 MR. FENOGLIO: I think the first -- 19 assuming the Commission has unimpeachable evidence -- 20 COMMISSIONER SCHENCK: Well, let's just 21 say we asked him a question. We have a form 22 application and it says, 23 "A. Have you been convicted of a felony 24 of any kind? 25 "B. Are you a professional gambler?" 0078 1 And he says, "Yes, but I've never been 2 convicted of it." Should we give him a license? 3 MR. FENOGLIO: Well, I think under the 4 statutory scheme, if he answers in that way, I think 5 he's barred. 6 COMMISSIONER SCHENCK: Okay. So there 7 is a fact question. Either he is or is not a 8 professional gambler, and that's relevant. But is 9 your suggestion to us that unless he has been 10 convicted, he cannot be a professional gambler? 11 MR. FENOGLIO: No. But therein lies the 12 rub of what standard are you going to employ to make 13 that determination where -- let's say a prosecutor has 14 decided, "There's not enough evidence for us to pursue 15 this action," and prosecutors do that every day. 16 COMMISSIONER SCHENCK: Sure. And as you 17 pointed out, they're subject to a standard of proof 18 beyond a reasonable doubt. And in a jury trial, what 19 you have reminded us of, juries have the right to 20 nullification. They can ignore the law. We don't 21 have that privilege here. 22 The Legislature has told us what the law 23 is, and we have to follow it. They've told us, "If 24 you're a professional gambler, you cannot have a 25 license." So we have to decide what a professional 0079 1 gambler is. And just because it's hard to determine 2 what might constitute a professional gambler, it 3 doesn't mean we can throw our hands up and say, "It's 4 Okay." 5 MR. FENOGLIO: Than at a minimum, add in 6 the standard that you would employ in a criminal case, 7 not a civil case. 8 COMMISSIONER SCHENCK: Why would that -- 9 MR. FENOGLIO: Because you are -- 10 COMMISSIONER SCHENCK: We are not 11 sending anyone to prison; we're just denying them a 12 license. This is a civil proceeding. 13 MR. FENOGLIO: And sometimes denial of a 14 license would be far better than the statutory scheme 15 the Legislature gave prosecutors for conviction of an 16 individual with possession of a gambling device, for 17 example, which is a class ah misdemeanor. 18 Losing one's livelihood could be far 19 worse than under the current regime in Texas. If you 20 have a clean record, conviction of a Class A 21 misdemeanor means you'll serve the time that you've 22 already served. They're not going to put a convicted 23 Class A misdemeanor in the general -- 24 COMMISSIONER SCHENCK: What is the 25 standard of proof that you would have us apply to 0080 1 prove the fact of whether or not a person has ever 2 been convicted of a felony? Would we have proof 3 beyond a reasonable doubt that there is a conviction 4 or would we just prove up the record? 5 MR. FENOGLIO: No. I think you would 6 prove up the record. 7 COMMISSIONER SCHENCK: I agree with you 8 on that. 9 MR. FENOGLIO: Yes. 10 COMMISSIONER SCHENCK: And I think the 11 standard should be the same for the fact question 12 insofar as a person is entitled to the license, not 13 that we're going to tell them that they can go to 14 prison. There are liberty interests and there are 15 property interests, and you're talking about a 16 property interest. Right? 17 MR. FENOGLIO: Yes, we are only talking 18 about a property interest. But for some people, the 19 property interest may be far valuable, given the 20 statutory scheme the Legislature gave for -- 21 COMMISSIONER SCHENCK: Well, you are a 22 lawyer? 23 MR. FENOGLIO: I am. 24 COMMISSIONER SCHENCK: I am a lawyer as 25 well. If our licenses were subject to revocation, 0081 1 would we be looking at a standard of proof of beyond a 2 reasonable doubt for whatever fact issue was involved 3 that led to -- 4 MR. FENOGLIO: In a civil proceeding, 5 no. 6 COMMISSIONER SCHENCK: No. That's why I 7 disagree with you on this point. But I understand 8 that concern, and I'm trying to be sensitive to it. 9 That's why this rule is structured so that we can't 10 ignore the bifurcated nature of the statute that has 11 two components to it. 12 But if someone is, in fact, a 13 professional gambler in Texas, it seems to me we ask 14 the question and we give them a standard, much like 15 you would any other question of fact, and the standard 16 has to be something that reasonable people can 17 understand. And so my question to you is, is the 18 standard that's in there now something that reasonable 19 people cannot understand? 20 MR. FENOGLIO: And I believe it is, in 21 light of the -- most prosecutors would tell you the 22 gambling provisions in Chapter 47 of the Penal Code 23 are vague. There's testimony in the Legislature going 24 back to '97 of how vague it is, from senators, from 25 members of the executive branch, including the 0082 1 Attorney General's office, and the need to clean it 2 up. 3 COMMISSIONER SCHENCK: And, yet, the 4 statutes are there. I mean, I don't have the -- 5 MR. FENOGLIO: They are there, yes. 6 COMMISSIONER SCHENCK: No one has 7 elected me. What would you see as a better 8 alternative, assuming you're with me, that there is 9 such a thing as a professional gambler, at least in 10 the eyes of the Legislature? Who would that person 11 be? 12 MR. FENOGLIO: Well, again, I think if 13 someone has admitted, "I'm a professional gambler," I 14 think the thing is over. They're admitted on a 15 Commission form under oath that, "I'm a professional 16 gambler." So I think in that instance, it's over. If 17 you have the conviction, I think it's over. If you're 18 at a point -- 19 COMMISSIONER SCHENCK: What kind of 20 instruction would you put on the form to help him 21 answer that question truthfully? Let me ask it that 22 way. Let's put an instruction. Is Question 1, "Have 23 you been convicted of a felony?" I assume he doesn't 24 need any advice on that one. 25 Question 2 is, "Are you now or have you 0083 1 ever been a professional gambler? In answering 2 Question 2, please keep in mind that a professional 3 gambler is defined as . . . " 4 Now, if you can complete the sentence 5 for me. 6 MR. FENOGLIO: I would say some sort of 7 net income test would be appropriate. In the case of 8 I believe one state, it was at 70 or 80 percent. 9 Y'all have chosen 50 percent. 10 COMMISSIONER SCHENCK: Well, that's 11 helpful. You say there is a state that's chosen a 12 demonstrably higher -- 13 MR. FENOGLIO: I believe one of the 14 states has, and I don't have the states in front of 15 me. 16 COMMISSIONER SCHENCK: That's okay. If 17 you could -- 18 MR. FENOGLIO: Illinois or -- 19 COMMISSIONER SCHENCK: And you believe 20 that 50 percent is not a reasonable percentage income? 21 If you can help me understand that. 22 MR. FENOGLIO: Sure. 23 COMMISSIONER SCHENCK: I'm certainly 24 open to this viewpoint. I just want to make sure that 25 we're following the law as we go forward here. 0084 1 MR. FENOGLIO: And my suggestion was net 2 income as opposed to income, because income is -- if 3 your model has clarity, is that gross? Is that net of 4 certain expenses or is that a true net income on a -- 5 I don't know which line on the 1040 it would be. I'm 6 guessing Commissioner Cox would know -- Chairman Cox 7 would know. But, I mean, if you just say "income," 8 again it begs the question: It is gross, net, net of 9 certain expenses or total expenses? And I would think 10 it would be more than 50 percent. 11 COMMISSIONER SCHENCK: Okay. Let's get 12 back to gambling promoter. I was concerned -- and 13 first of all, let me thank you for working through 14 this gambling/professional gambler problem. I 15 understand this is a difficult problem. And it's a 16 problem the Legislature has made us deal with, and I 17 think we're dealing with it as best as everyone can. 18 Gambling promoter, you had this concern 19 that a worker at a Chuck E. Cheese or other outlet 20 would be potentially subject to a bar? 21 MR. FENOGLIO: Yes. And I'm looking for 22 my -- 23 COMMISSIONER SCHENCK: Is this coming 24 straight from the Penal Code statute? Are you 25 concerned -- is there -- 0085 1 MR. FENOGLIO: Yes. 2 COMMISSIONER SCHENCK: Is your concern 3 originating with the text of the statute? 4 MR. FENOGLIO: Yes. If you look at the 5 definition of "gambling promotion" under 47.03, it 6 says a person, if they intentionally, by the way, 7 engage in certain conduct. 8 COMMISSIONER SCHENCK: Or knowingly? 9 MR. FENOGLIO: Right. And then it's 10 either participates in the earnings of a gambling 11 place, engages in bookmaking, becomes a custodian of a 12 value bet or offered to be bet, and we can stop there. 13 Under 47.01(1) the definition of "bet" 14 means an agreement to win or lose something of value 15 solely or partially by chance. 16 So again, if you're in Chuck E. Cheese, 17 money is required, or a consideration is required to 18 play the game. A prize is awarded, and chance in part 19 pervades. Then you are accepting bets if you're an 20 employee. 21 COMMISSIONER SCHENCK: Have you heard of 22 a Chuck E. Cheese ever being raided for this purpose? 23 MR. FENOGLIO: No. The forerunner of 24 Dave & Buster's was prosecuted under this statutory 25 regime in '95, '93 time frame. There is an unreported 0086 1 Dallas Court of Appeals case on that, and I can get 2 you the cite for that. But, more importantly, the 3 fact that they haven't been -- I don't have a problem 4 with if a prosecutor but here you're going -- if the 5 rule language were adopted -- and I'll shut up. I 6 think I've -- 7 COMMISSIONER SCHENCK: No. This is 8 helpful. Again, now I have this -- there is an "or" 9 in this statute. I'm looking at 2001.202. The 10 Legislature has passed this, the Governor signed it or 11 let it come into law. And I've gotten to the word 12 "or" there, so I can't ignore the words that come 13 after. And it's gambling promoter. And the 14 Legislature presumably is aware that it's defined the 15 term "gambling promoter" elsewhere, and this is what 16 it means. So what option do we have to ignore it? 17 MR. FENOGLIO: I don't think you can 18 ignore it. Just the fact that an agency decides to 19 take a licensing action where there has been a 20 prosecutor -- and this agency, by the way, many times 21 refers criminal cases to prosecutors. Sometimes they 22 take them and sometimes they don't. 23 But where an agency decides, "We're 24 going to take action against this licensee, because we 25 believe that the licensee was too slick to get in the 0087 1 harm's way of a prosecutor, and so we're going to 2 employ a lower standard and do what the prosecutors 3 should have done." 4 COMMISSIONER SCHENCK: Bus isn't that 5 actually what the Legislature told us to do? It says, 6 "The following persons are not eligible for a 7 license." We don't have -- 8 MR. FENOGLIO: Right. 9 COMMISSIONER SCHENCK: -- this 10 discretion that a prosecutor does. 11 MR. FENOGLIO: And let me approach it a 12 different way. Your rule says if they did it once, 13 it's over. 14 COMMISSIONER SCHENCK: "A person who is 15 or has been a professional gambler or gambling 16 promoter." 17 MR. FENOGLIO: Right. And so the draft 18 rule says if you engaged in conduct one time, it's 19 over, you lose your license. 20 COMMISSIONER SCHENCK: But the statute 21 says that, doesn't it? I mean, you have been a 22 gambling promoter. You're suggesting that the term 23 "gambling promoter," even as understood by the 24 Legislature in the Penal Code, could really mean 25 someone who makes a living out of promoting gambling 0088 1 as opposed to someone who once hung a sign out in 2 front of his house that says, "Cock fight Saturday 3 night. Come all" that guy would not be a gambling 4 promoter in your estimation? 5 MR. FENOGLIO: I think he could be. I 6 think he could be, yes. 7 COMMISSIONER SCHENCK: It's only one 8 time. 9 MR. FENOGLIO: I agree, but -- and I 10 guess if you allege that an individual has worked at a 11 Chuck E. Cheese or GattiTown or Dave & Buster's and 12 has been employed to service the machines or to take 13 the money, act as the cashier, and now under the rule, 14 they're in harm's way, I think that's wrong. 15 Turning to your specific example of 16 someone who puts the sign out that said, "Cock fights 17 on Saturday nights. Come one, come all," I guess I 18 don't think you need a rule for that. You have the 19 statutory regime. My fear is, you put it in a rule 20 and people are going to feel duty bound to go and look 21 under every rock they can to find someone who has done 22 this. 23 And, by the way, I'm unaware -- you 24 asked earlier if Dave & Buster's or anyone had ever 25 been prosecuted for that activity at Chuck E. Cheese. 0089 1 I'm unaware that the agency has ever been faced with 2 someone who has advertised cock fighting and now wants 3 a distributor or a manufacturer's license. 4 But what I do know is, there are 5 complaints that have been filed for competitive 6 advantage, I believe, by other licensed entities 7 against a licensed entity and trying to get the 8 Commission to put that individual out of business when 9 that individual has, for example, under section 8.03, 10 a court case directly on its point, upholding its 11 activity. 12 COMMISSIONER SCHENCK: I don't agree 13 with that; I'm sorry. I mean, if people beat the 14 rap -- right? -- but, you know -- the Rodney King case 15 is all about multiple prosecutions. There is federal 16 prosecution, there is state prosecution, then there's 17 criminal prosecution and there's civil standards. 18 O. J. Simpson was acquitted of killing 19 Nicole Brown Simpson and Ron Goldman. But in a 20 subsequent civil case under a different standard, the 21 jury decided something different. 22 We have a different obligation in front 23 of us. We have a civil standard to apply. We have a 24 factual determination to make about whether or not 25 someone is a gambling promoter. And it seems to me 0090 1 that the Legislature has worked very hard to define 2 that, and I don't understand how we can ignore that. 3 Now, with respect to your Chuck E. 4 Cheese or Dave & Buster's example, I don't think that 5 a person who is working as a cashier is foregained 6 becoming a custodian of anything of value. I think 7 what the Legislature had in mind there was someone 8 literally taking the pot in a crap game or something 9 of that nature. 10 So I appreciate your comments on this. 11 I'm afraid I just can't agree with you that the staff 12 is wrong in basically taking the legislation that's 13 been passed and is already in law and simply appending 14 it on to the definition of the same term for purposes 15 of a rule that we're obliged to make. But I'm happy 16 to hear your comments. 17 MR. FENOGLIO: And that same person at 18 Chuck E. Cheese could be charged with operating a 19 gambling place under 47.03(a)(1). 20 COMMISSIONER SCHENCK: Isn't that -- 21 MR. FENOGLIO: Forget the game aspect. 22 COMMISSIONER SCHENCK: If that's true, 23 then this Legislature needs to consider changing the 24 criminal law. But if the law is stupid, it's stupid. 25 But it's not up to me to call it stupid and say I'm 0091 1 going to ignore it. 2 MR. FENOGLIO: I would submit to you 3 that your agency employees do that every day in 4 exercising good judgment that -- not that I'm 5 suggesting that they discriminate but that they have 6 to make executive decisions on different provisions in 7 both the Lottery Act and the Bingo Enabling Act by 8 saying, "This is what we're going to focus on." 9 COMMISSIONER SCHENCK: I can assure you 10 during my time here on this Commission, no one from 11 the lottery is going to be going to Chuck E. Cheese's 12 and Dave & Buster's to knock these people over. My 13 concern, which I understand that you share, and as do 14 others, is that this is a competitive industry. And 15 anyone who has the opportunity to throw darts at 16 someone else who was in it, using the rules, will 17 potentially attempt to do that, and we're mindful of 18 that. But the legal standard has to be what the 19 Legislature has told us it is. I just don't see an 20 alternative. 21 MR. FENOGLIO: And I would suggest to 22 you that the Legislature hasn't told you what the 23 legal standard is, because we don't know what the 24 Legislature intended -- there is, from my review of 25 the legislative history, of both Section 2001.202 for 0092 1 a manufacturer and 2001.207 for a distributor, no 2 history on that. It appeared in a -- I believe a 3 Senate provision after a bill on something else came 4 over. 5 COMMISSIONER SCHENCK: But it was passed 6 in 1999, post I assume -- 7 MR. FENOGLIO: No. 8 COMMISSIONER SCHENCK: -- the Penal Code 9 provision defining gambling promoter? 10 MR. FENOGLIO: It was rewritten in '99, 11 codified out of the civil statutes into the 12 Occupations Code in '99. There was no substantive 13 change. And as you may know, when they go through a 14 codification, they're specifically prohibited from 15 making any substantive change. 16 COMMISSIONER SCHENCK: Yes. 17 MR. FENOGLIO: I believe it was passed 18 in '83 or '85. 19 COMMISSIONER SCHENCK: Well, my question 20 to you would be, has the definition of "gambling 21 promotion" in the Penal Code been around since the 22 Occupations Code sections? 23 MR. FENOGLIO: Yes. 24 COMMISSIONER SCHENCK: I assume that it 25 has. 0093 1 MR. FENOGLIO: These provisions were 2 passed in -- 3 COMMISSIONER SCHENCK: Well, I think the 4 best that we can do is to follow the law. And if we 5 find, consistent with the law, that we're having 6 difficulties determining terms that are themselves in 7 the Penal Code section that we're addressing, we'll 8 have to adopt another rule. But I don't think we can 9 have the discretion to ignore the Legislature. That's 10 just my view. 11 MR. FENOGLIO: And I respect your 12 decision. I would suggest that if you are going to go 13 down that path, that you give similar protections to 14 licensees that they would avail themselves of if they 15 were in harm's way in a criminal case. 16 Again, there is no defense. The agency 17 would say, "Well, we'll let a SOAH judge decide." And 18 that to me kind of begs the question from the agency's 19 perspective. You shouldn't just throw it to SOAH and 20 say, "The judges, Administrative Law Judges, you 21 decide." 22 And again, on perspective, I would hope 23 that y'all would, if you're going to adopt a rule, it 24 would be prospective only and not retroactive. Thank 25 you. 0094 1 CHAIRMAN COX: Mr. Fenoglio or 2 Commissioner Schenck, I don't understand how 3 Mr. Gatti's and Dave & Buster's got into this act. 4 I've had the understanding that those machines are 5 legal and that they pay less than $5.00 or 10 times 6 the amount wagered and, thus, are bona fide amusement 7 machines. Now, how did these people suddenly become 8 professional gamblers? 9 MR. FENOGLIO: I believe, given your 10 gambling promotion, because they engage in conduct 11 prohibited by 47.03 under the draft rule, 12 Subsection (a)(1) and (2), Lines 11 and 12. The rule, 13 if adopted, would say an individual who owns a Gatti 14 type redemption location is a gambling promoter 15 because they engage in conduct that's prohibited by 16 47.03. It doesn't matter what 47.01(4)(b) says. 17 CHAIRMAN COX: See, I don't know what 18 any of these numbers mean. 19 MR. FENOGLIO: 47.03 is the gambling 20 promotion. And under -- 21 COMMISSIONER SCHENCK: Of the Penal 22 Code -- 23 MR. FENOGLIO: Yes. 24 COMMISSIONER SCHENCK: -- crime, a Class 25 A misdemeanor in the state to be a gambling -- to 0095 1 promote gambling. 2 MR. FENOGLIO: Should be convicted of 3 gambling promotion. And one of the subsets -- 4 COMMISSIONER SCHENCK: It is a crime to 5 do it whether you're convicted or not. It's a matter 6 of advocacy and jury nullification, but the standard 7 is out there. 8 MR. FENOGLIO: Well -- 9 COMMISSIONER SCHENCK: I think I'm with 10 the Chair on this. I don't see how employees at a 11 restaurant, that by coincidence has games that are 12 themselves legal, is promoting illegal gambling. 13 MR. FENOGLIO: Because the language says 14 they're considered a gambling promoter if they've 15 engaged in the conduct as defined under 47.03. And 16 what you break down what constitutes the five 17 different subsets of 47.03, one of those is making and 18 accepting bets. And at a -- 19 COMMISSIONER SCHENCK: But that's not a 20 bet. 21 MR. FENOGLIO: It is under the 22 definition of Penal Code 47.01(1). The only -- 23 MR. WASSDORF: If I could step in for a 24 minute, I think that the situation is, is that there 25 is what has become known as the fuzzy animal exception 0096 1 to the gambling where the proceeds are less than $5.00 2 or 10 times the amount bet, that that's an amusement 3 device and not a gambling endeavor. 4 And, therefore, I think that 5 Mr. Fenoglio is suggesting that because we have not 6 incorporated that exception into this proposed rule, 7 that someone might technically be engaged in gambling 8 or gambling promoting or the promotion of gambling, 9 because we have not incorporated that fuzzy animal 10 exception into that. 11 Is that correct? 12 MR. FENOGLIO: Yes. 13 CHAIRMAN COX: Would that fix your 14 problem? 15 MR. FENOGLIO: In large part, yes, it 16 would. 17 CHAIRMAN COX: Would that be okay with 18 you, Commissioner Schenck? 19 COMMISSIONER SCHENCK: I'm not sure 20 where it comes from. I mean, we're just making up 21 a -- we would be making up a new definition? 22 MR. FENOGLIO: No. There is a statutory 23 definition in 47.01(4) of the Texas Penal Code, is 24 what Pete referred to as loosely defined as, quote, 25 the fuzzy animal exception. 0097 1 COMMISSIONER SCHENCK: That will be 2 fine. And I think you made another point which we 3 haven't addressed, which is there are affirmative 4 defenses also to some of these things which, 5 obviously, if it's legal in Texas, I think the 6 person is -- we're not trying to -- 7 MR. FENOGLIO: That's my point, yes. 8 COMMISSIONER SCHENCK: -- we're not 9 trying to outlaw. But if it is illegal, we don't have 10 an alternative. 11 MR. WASSDORF: Yes. Even though 12 Mr. Fenoglio was not able to make the conference 13 yesterday, I did call him yesterday afternoon, and we 14 did discuss this. And I told him that I thought that 15 there was every likelihood that the Commission would 16 be willing to incorporate those things in some manner, 17 because that the intention was to address things that 18 were illegal. 19 COMMISSIONER SCHENCK: Either Kim or 20 Pete, do we have any tools in our cabinet for dealing 21 with the pernicious competitive attacks on people for 22 the sake of just a nuisance? Assume there is a 23 competitor that has information leading you to believe 24 that there is some -- that the colorable but not 25 ultimately meritorious attack on someone else's 0098 1 license, is there anything we can do to discourage 2 that, assuming, of course, that ultimately we conclude 3 that there is not a legal justification for 4 withdrawing a license? 5 MS. KIPLIN: Well, I'm not sure off the 6 top of my head there is anything the agency can do to 7 discourage that. I think the agency intakes its 8 complaints and evaluates one if they're jurisdictional 9 and then, two, determines whether they can be 10 substantiated. 11 In terms of the motivation for somebody 12 to file a complaint, you know, I don't know that 13 that's necessarily on the face of the complaint but 14 during the investigation of the complaint. You know, 15 we assign -- consistent with the Commission's decision 16 on priority, we obviously assign different priorities 17 to it. 18 But to answer your question, do we have 19 anything in our tool kit to discourage what I would 20 call bad faith -- you know, maybe that's too harsh -- 21 but bad faith filing of complaints, we can certainly 22 take a look at that and see. There might be 23 something -- and, Steve, you might know something in 24 terms of, you know, bad faith complaints are filed on 25 an agency. There might be a statute -- I'm thinking 0099 1 in the Government Code after the Administrative 2 Procedure Act. I'm just not clear right now on that. 3 MR. FENOGLIO: I think there is some -- 4 MS. KIPLIN: In terms of attorneys, you 5 know, costs of recovery and things like that. 6 MR. FENOGLIO: Attorneys fees, yes, 7 under 2001.00- -- 8 MS. KIPLIN: To answer your question, 9 we'll certainly take a look at that and we'll address 10 the question that you've posed much more specifically 11 than I'm using on the record. 12 CHAIRMAN COX: Mr. Cornwell, do you have 13 additional testimony or -- 14 MR. CORNWELL: I do, sir. 15 CHAIRMAN COX: Okay. 16 MR. CORNWELL: I am very concerned that 17 in the definition of a gambling promoter, that the 18 Legislature did not extend -- want that to -- 19 MS. KIPLIN: Get that mike in front of 20 you. 21 COMMISSIONER SCHENCK: Microphone. 22 MS. KIPLIN: Thank you. 23 MR. CORNWELL: Let me start over. My 24 name is Knowles Cornwell. I'm a distributor here in 25 the State of Texas. I want "gambling promoter" to 0100 1 understand that every day, as a distributor, I'm 2 working for profit. I'm out working with Texas 3 charities to help them with their fund-raising needs. 4 And I have a fear that under 47.03, under the Penal 5 Code, that a distributor in itself, working with 6 charities to make more money, could be considered a 7 gambling promoter. We have the fuzzy animal 8 exception. We also ought to have an exception where a 9 distributor is not considered a gambling promoter when 10 they're working with the charities to help them raise 11 money. 12 COMMISSIONER SCHENCK: As long as it's 13 legal. 14 MR. CORNWELL: Well, is bingo legal? As 15 long as it's legal, there's plenty of other provisions 16 out there. If I'm doing something illegal, they'll -- 17 but a professional gambling promoter, no. Could it be 18 defined? Yes, it can be defined under 47.03. I don't 19 think it was the Legislature's intent to go right to 20 47.03. 21 CHAIRMAN COX: Mr. Wassdorf, does this 22 work -- can you fix his problem like you fixed 23 Mr. Fenoglio's problem? 24 MR. WASSDORF: I hope that we can fix 25 it. I think that our intention certainly was that the 0101 1 promotion of gambling would apply to people that are 2 promoting illegal gambling and to the extent that 3 bingo is lawful and the promotion of a lawful activity 4 was not intended to be covered by our rule. And I 5 don't think that it's intended to be covered by the 6 Penal Code either. 7 CHAIRMAN COX: Does that work for you, 8 Commissioner? 9 COMMISSIONER SCHENCK: I certainly agree 10 with that. I think -- it will probably not end this 11 controversy, because I think there are, let's say, 12 perhaps gray areas that people are dancing in 13 deliberately or otherwise, and they should understand 14 that they are doing so at their peril, which includes 15 criminal consequences and includes licensure 16 consequences. 17 MS. KIPLIN: If I could, I think the 18 same affirmative defenses that Mr. Fenoglio is 19 referring to, we could simply lift those, and those 20 are for conduct under the Bingo Enabling Act, for 21 conduct under the State Lottery Act -- for charitable 22 raffles I believe is also -- and just lift that and 23 make it clear that conduct that's occurring lawfully 24 under those acts is certainly not included within the 25 definitions of either "gambling promoter" or 0102 1 "professional gambler." 2 CHAIRMAN COX: Okay. So, Mr. Fenoglio, 3 are you okay? 4 MR. FENOGLIO: Yes. And just so the 5 record is clear, Mr. Cornwell is employed by K&B 6 Sales, Inc. d/b/a Goodtime Action Games, as a licensed 7 distributor. He said he was a distributor. I didn't 8 want the record to be unclear. 9 CHAIRMAN COX: Okay. Are you okay now, 10 Mr. Cornwell? 11 MR. CORNWELL: I'm good. Thank you, 12 Mr. Chairman. 13 MR. FENOGLIO: Thank you. 14 CHAIRMAN COX: Mr. Hieronymus, did you 15 want to speak? 16 MR. HIERONYMUS: Yes, sir. For the 17 record, my name is Steven Hieronymus, and I represent 18 Trend Gaming, a licensed distributor. 19 I want to take a slightly different tack 20 in that I believe if you look at 2001.202 or .207, 21 which is the eligibility issue, manufacturer and 22 distributor, respectively, there's nine different 23 criteria there saying people who are not eligible. 24 And I believe Item No. 1 deals with the 25 criminality issue. And then you go on to another list 0103 1 of criteria. I was thinking, actually, as I was 2 driving over here this morning, in 1995 when I was 3 under my initial investigation as a distributor, the 4 question was raised -- and, actually, it took a great 5 deal of engagement, because my wife is a public school 6 teacher -- that I would not be eligible for a license 7 under Paragraph (3) there. It was subsequently 8 determined, because she worked for an independent 9 school district, that she was not a public employee. 10 Now, my wife teaches with great conviction, but she 11 has never been convicted of teaching third-graders. 12 The point being here is that I believe 13 that it's a different criteria. You know, this may 14 need legislative clarification, and I don't believe 15 it's appropriate at the rule level. I know that there 16 is a pending Attorney General's opinion after the 17 publication of the last -- the first was October or 18 November when these were originally adopted or 19 proposed. An Attorney General opinion was requested. 20 It's been on file or on record since December 3. 21 And so what I would encourage -- I think 22 it would behoove all of us to take a step back, see 23 what opinion comes down as to the authority, and then 24 take another look at this. But this may well -- the 25 Legislature is in session. Something could be filed 0104 1 even yet to deal with this. I think it's more of a 2 legislative issue than a rule issue, and that's really 3 all I have to say. 4 CHAIRMAN COX: Okay. Thank you very 5 much. 6 Okay. Pete, let's circle back around to 7 you. How do you want to propose action for us? 8 MR. WASSDORF: We propose that you go 9 ahead and withdraw the currently proposed rules that 10 have been published in the Texas Register for comment. 11 And I recommend that we go ahead and propose these 12 rules that are before you. And the staff will work 13 during the 60-day comment period to incorporate some 14 of the suggestions brought up by the interested 15 parties here and see if we can't come up with 16 something that will meet most of the objections. 17 CHAIRMAN COX: Okay. Now, help me 18 understand the procedure. You said you would like 19 this published for a 60-day comment period? 20 MR. WASSDORF: Well, that would give us 21 ample opportunity to make sure that all of the 22 interested parties get input and that we can draft 23 proposals and go back and forth with them a couple of 24 times during that period. 25 CHAIRMAN COX: Well, wouldn't it be 0105 1 important to incorporate those proposals before you 2 publish? 3 MR. WASSDORF: We can do that. 4 CHAIRMAN COX: It seems to me that would 5 be the better way. 6 COMMISSIONER SCHENCK: Well, I think, 7 frankly, these are pretty small changes to incorporate 8 the affirmative defense and make clear that if it's 9 lawful under these other provisions of the statute, 10 that it's not affected. We could probably do that 11 today, couldn't we -- 12 MR. WASSDORF: I think so. 13 COMMISSIONER SCHENCK: -- by the end of 14 the meeting even? And then -- 15 CHAIRMAN COX: Would you like to do 16 that, to see the wording that would be prepared and 17 then vote to -- 18 COMMISSIONER SCHENCK: Yes, because I 19 think getting it out there is -- we're overdue as far 20 as I'm concerned on this rule. 21 CHAIRMAN COX: Right. 22 COMMISSIONER SCHENCK: I will like to 23 get that clock running. 24 CHAIRMAN COX: I like all of that. 25 And, Pete, if that works for you -- 0106 1 MR. WASSDORF: Yes, sir. 2 CHAIRMAN COX: -- let's take it to that 3 point and go from there. 4 MR. WASSDORF: Okay. 5 CHAIRMAN COX: Now, that's Agenda Item 6 Nos. VI and VII. 7 AGENDA ITEM NO. VIII 8 CHAIRMAN COX: And let's see. No. VIII, 9 report of the Charitable Bingo Operations Director. 10 Mr. Sanderson? 11 MR. SANDERSON: Good morning, 12 Commissioners. In your notebook is the report of 13 bingo activities of the division for the month of 14 January. And I'll be glad to answer any questions 15 that you may have. 16 CHAIRMAN COX: Okay. Commissioners, 17 Phil has a new form that he's developed in there that 18 reports the activity of his division. If you have any 19 thoughts on that, I'm sure he would appreciate those. 20 I believe -- Phil, correct me if I'm wrong -- this is 21 the first time we have seen that? 22 MR. SANDERSON: Yes, sir. This format 23 is new. And the information is a little bit more 24 information than we've previously included in the 25 report at the Commission meeting. I think it gives a 0107 1 better overall picture of the activities that we 2 perform on a day-to-day routine basis for your 3 information. 4 CHAIRMAN COX: And I asked Mr. Sanderson 5 specifically, "Does this take a lot of time to 6 prepare?" because it does look quite detailed, and he 7 assured me that this does not take a lot of time. And 8 he would be pleased to produce it for us either each 9 month or quarterly or whatever is your pleasure. 10 COMMISSIONER WILLIAMSON: Yes. I saw 11 this and I had commented to Phil, "I like seeing this 12 style. I think it's very informative." And certainly 13 we should have it monthly with our Commission meeting. 14 CHAIRMAN COX: Okay. Commissioner? 15 COMMISSIONER SCHENCK: I agree. I think 16 it's very helpful, Phil. 17 CHAIRMAN COX: Thank you, Phil; thank 18 you very much. 19 MR. SANDERSON: Thank you. 20 AGENDA ITEM NO. XI 21 CHAIRMAN COX: Okay. Kim, I show that 22 we're on Item XI. 23 MS. KIPLIN: I show the same thing, 24 Mr. Chairman. 25 CHAIRMAN COX: Okay. Great! Report, 0108 1 possible discussion and/or action on the 81st 2 Legislature. 3 Ms. Trevino. 4 MS. TREVINO: Good morning, 5 Commissioners. For the record, I'm Nelda Trevino, the 6 Director of Governmental Affairs. 7 We provided you today with an updated 8 legislative tracking report listing bills filed to 9 date with potential impact to the agency. We are 10 currently tracking 72 bills, and I would like to 11 highlight bills filed since our last Commission 12 meeting specifically related to the agency. 13 These include House Bill 1279 by 14 Rep. Ruth Jones McClendon, and this bill dedicates a 15 portion of unclaimed lottery prizes to the Texas Rail 16 Relocation and Improvement Fund; 17 House Bill 1299 by Rep. Chris Turner. 18 This is the companion bill to Senate Bill 421 by 19 Sen. Leticia Van de Putte. And this is the bill that 20 requires the Lottery Commission to create and market a 21 scratch-off game to benefit the Veteran's Assistance 22 Fund. 23 House Bill 1474 by Rep. Charlie Geren 24 was filed yesterday, and this bill includes some 25 general provisions related to the regulation of bingo 0109 1 and also includes provisions to streamline the 2 licensing process. 3 Additionally, we provided you a listing 4 of the membership for each of the House and Senate 5 committees and agency budgets, and appropriations will 6 be considered by the Senate Finance Committee and the 7 House Appropriations Committee. 8 The House Committee on Licensing and 9 Administrative Procedures continues to have 10 jurisdiction over the Lottery Commission and gaming 11 industries, and the Senate Committee on State Affairs 12 will continue to oversee all matters concerning state 13 policy and the general administration of state 14 government. 15 Also for the record, the agency has 16 Commissioners who will be going through the Senate 17 confirmation process, and they will be considered by 18 the Senate Nominations Committee prior to the full 19 Senate's consideration of their confirmation. 20 The agency appeared before the Senate 21 Finance Committee on Monday, February the 16th, to 22 present the agency's appropriations request for the 23 2010-2011 biennium. Workgroups made up of members of 24 the Finance Committee have been formed to further 25 consider agency's request. 0110 1 The House Appropriations Committee 2 formed their subcommittees earlier this week, and the 3 Lottery Commission falls under the jurisdiction of the 4 Business and Economic Development Subcommittee. The 5 agency appeared before this subcommittee yesterday, 6 February the 19th, to also present the agency's 7 appropriations request for the 2010-2011 biennium. 8 The House Licensing and Administrative 9 Procedures Committee will hold two organizational 10 meetings where agencies under the committee's 11 jurisdiction have been invited to provide an overview 12 of their agency. Our agency has been requested to 13 make its presentation at a hearing scheduled for next 14 week, on Thursday, February the 26th. 15 Lastly, we will continue to provide each 16 of you updates regarding bills filed and any committee 17 actions. This concludes my report, and I'll be glad 18 to answers any questions. 19 COMMISSIONER SCHENCK: Just as a 20 reminder, the Commission itself is not in a position 21 to lobby on any legislation. And we will at some 22 point I assume be asked to give revenue impact 23 assessments on some of this draft legislation. Have 24 we got people in place and prepared to respond 25 properly to those requests? 0111 1 MS. TREVINO: Absolutely, Commissioner 2 Schenck. In fact, we have already received what's 3 referred to as fiscal note request from the 4 Legislative Budget Board, particularly again on those 5 bills that are directly related to the agency and even 6 some other bills. And so we respond to those and we 7 receive those. And we have provided some fiscal note 8 responses not only to the bill authors but also to the 9 Legislative Budget Board. 10 COMMISSIONER SCHENCK: Do we from time 11 to time get requests from individual legislators for 12 information that's either relating to a bill that 13 they're proposing, separate and apart from the fiscal 14 note requests? 15 MS. TREVINO: Certainly. Yes, we do. 16 COMMISSIONER SCHENCK: We respond to 17 those, I assume, promptly, regardless of whether it's 18 a committee chair or an individual? 19 MS. TREVINO: Absolutely. We make every 20 effort to be as responsive as quickly as we possibly 21 can. 22 COMMISSIONER SCHENCK: Okay. Thank you. 23 CHAIRMAN COX: Commissioner? 24 COMMISSIONER WILLIAMSON: Just one 25 question, Nelda. 0112 1 MS. TREVINO: Yes. 2 COMMISSIONER WILLIAMSON: Did Sen. Hegar 3 file his bill today? 4 MS. TREVINO: He has not. 5 COMMISSIONER WILLIAMSON: Okay. And to 6 your comment about lobbying the Legislature, 7 Commissioners can go and talk to them. I believe 8 that's correct? 9 MS. TREVINO: That's correct. 10 COMMISSIONER WILLIAMSON: We are not 11 bound by the same rules that the staff is? 12 MS. TREVINO: You're not agency 13 employees. 14 COMMISSIONER SCHENCK: Since we are not 15 paid, we cannot be spending government money. 16 COMMISSIONER WILLIAMSON: Exactly. 17 We're not paid. That's correct. 18 CHAIRMAN COX: Okay. Nelda, thank you 19 very much. 20 MS. TREVINO: You're welcome. 21 CHAIRMAN COX: Commissioner Williamson 22 and I went to the Senate Finance hearing, and our 23 staff was very professional. And the preparation that 24 the members had clearly received from our Legislative 25 Affairs staff was clearly effective. 0113 1 MS. TREVINO: Thank you very much for 2 saying that, Mr. Chairman. And I think the same 3 occurred yesterday at the Appropriations subcommittee 4 hearing. 5 CHAIRMAN COX: Excellent. I've heard 6 good reports on that one as well. 7 MS. TREVINO: Good. 8 AGENDA ITEM NO. XII 9 CHAIRMAN COX: Okay. Item XII, 10 consideration of and possible discussion and/or action 11 on external and internal audits and/or reviews related 12 to the Texas Lottery Commission. 13 Ms. Melvin and Ms. Oballe. 14 MS. MELVIN: Thank you, Commissioners. 15 Catherine Melvin, Internal Audit Division director. 16 This morning, Commissioners, we have 17 really just one item for your attention. Earlier this 18 month we issued the internal audit of instant ticket 19 game closing, return and destruction. And with me at 20 the table is Ms. Susan Oballe. And she, of course, is 21 a member of the Internal Audit team but was the lead 22 auditor on this project. So I'll ask her to lay out 23 that report. 24 MS. OBALLE: Good morning, 25 Commissioners. For the record, I'm Susan Oballe with 0114 1 the Internal Audit Division. 2 The objective of this audit was to 3 ensure instant ticket games are closed in accordance 4 with the Commission policies and procedures and that 5 tickets are returned and destroyed in accordance with 6 the Commission policies and procedures as well as the 7 lottery operator contract. 8 We focused our audit on the closing of 9 games where all top level prizes have been claimed. 10 Based on the results of our review, we concluded that 11 controls provide reasonable assurance that instant 12 ticket games are closed and tickets are returned and 13 destroyed in accordance with Commission policies and 14 procedures. 15 Our testing showed that 99.2 percent of 16 tickets returned were returned within the 45-day 17 requirement, and 93.8 percent of those tickets were 18 returned within 30 days of the game being called. We 19 do, however, recognize a limitation that in practice 20 prevents complete assurance of the end of ticket sales 21 after the close of a game. This limitation is due to 22 the accounting of instant tickets or retract the 23 settlement of packs of tickets as opposed to the 24 individual sale of tickets. 25 This limitation presents an inherent 0115 1 risk that tickets for closed games that have been 2 settled to a retailer's account, which means they're 3 no longer on our books, may still be -- or actually 4 tracked in our system, may still be available for sale 5 after the close of the game. The Lottery Commission 6 is reliant upon visual inspection by the lottery 7 operator's sales representatives to retrieve the pack 8 of tickets that has been settled to the retailer's 9 account and is also relying upon the retailer to 10 return all tickets and no longer provide closed games 11 for sale. 12 While we found controls do provide 13 reasonable assurance for the closing and returning of 14 instant tickets, we did note a few opportunities to 15 strengthen the current processes, and our report 16 outlines some recommendations for management's 17 consideration. 18 We would like to express our 19 appreciation to the Lottery Operations Division and 20 the Information Resources Department for their 21 cooperation and assistance during this engagement. 22 Management has expressed agreement with the 23 recommendations and has provided their responses as 24 well as corrective action plans to implement the 25 recommendation. 0116 1 This concludes my report. And I would 2 be happy to answer any questions you may have. 3 COMMISSIONER SCHENCK: Well, just to be 4 clear, this relatively small -- as I understand it, 5 7 percent or so -- of games that have been settled to 6 retailers or otherwise are still out. 7 MS. OBALLE: Sure. 8 COMMISSIONER SCHENCK: We're not talking 9 about players being sold tickets that don't have a 10 chance of winning at this point? 11 MS. OBALLE: Correct. It's just the top 12 level, that top prize -- 13 COMMISSIONER SCHENCK: Top level prize 14 is gone. And for that reason, we are moving, to the 15 advantage of the players, to sweep up the game at that 16 point. And at no point are we having packs in the 17 retailer location that don't have any winners in them? 18 MS. OBALLE: Correct, because this would 19 be -- 20 COMMISSIONER WILLIAMSON: Just for 21 edification -- and I know Michael may want to answer 22 this -- when you're talking about closing a game, how 23 many retailers are we physically talking about that 24 you have to go pick up the tickets? 25 MR. ANGER: For the record, my name is 0117 1 Michael Anger, and I'm the Lottery Operations 2 Director. 3 Commissioner Williamson, that depends. 4 When we're closing a game based on all the top prizes 5 remaining, it's usually earlier in the life of a 6 typical game than what we would normally have, because 7 we typically move a game through. And if it's selling 8 well, we start to look to close that game after it's 9 about 85 percent sold. 10 So when we close for top prizes, 11 sometimes that's earlier in the life so the widespread 12 availability of that game can be increased, because 13 it's at the peak of its selling potential basically. 14 So we're talking in many cases about several thousand 15 retail locations, you know, six to 8,000 retail 16 locations possibly. It could be more, but typically 17 it's probably in that range, between, you know, five 18 to 8,000 retailers if it's closed early for top prize. 19 COMMISSIONER WILLIAMSON: And I guess my 20 observation was, I was just impressed with the 21 percentage, knowing the logistics of physically 22 picking those up. I think that they've done a good 23 job with that. 24 And the other question which is kind of 25 an aside: What are your other reasons for closing a 0118 1 game, besides the top prizes being won? 2 MR. ANGER: We may close a game -- we 3 close it for the other reason that I just noted, if 4 the game has substantially sold through. So we'll 5 begin to look to close a game when we've sold through 6 the majority of the inventory for that game. 7 We may look to look to close a game if 8 it's a poor-performing game. We have a process 9 through our procedure and we have a review process 10 that the Office of the Controller does for us where we 11 look at similar games, similar print quantities, 12 similar price points, and we kind of know the average 13 sell-through of a game and its performance in the 14 marketplace. 15 And so we'll compare a particular game 16 against that benchmark. And if it's falling 17 substantially below that benchmark, we may make the 18 decision to close that game so we don't have a product 19 out there in the marketplace that isn't appealing to 20 the consumer that is basically taking up bin space in 21 the retail location, the retailer can't move the 22 product, it's settling and costing them money, and 23 it's not giving the players what they want. So we may 24 close for that reason as well. 25 We could also close for a business 0119 1 reason. We may make a decision to close a game for a 2 reason other than those that we outlined. Our 3 procedures specifically call for us to particularly 4 document the actual reason and the justification and 5 the thought process behind why we've made the decision 6 to close that game, and so we may act on that. But 7 we're very careful to make sure that that process is 8 transparent and open and available, you know, should 9 anybody have any questions about that process. 10 COMMISSIONER WILLIAMSON: Okay. Thank 11 you. 12 MR. ANGER: Thank you. 13 CHAIRMAN COX: Thank you, Michael. 14 Gary, we have a rule relating to closing 15 games. My recollection was, in the last Legislature 16 Sen. Patrick introduced legislation relating to the 17 closing of games. Is that correct? 18 MR. GRIEF: Yes. 19 CHAIRMAN COX: And I can't recall 20 whether that legislation passed. Do you recall? 21 MR. GRIEF: I don't believe it did. 22 CHAIRMAN COX: But I do believe that we 23 incorporated Sen. Patrick's language into the rule 24 that we adopted. Is that correct? 25 MR. GRIEF: I don't know if it's exactly 0120 1 the same language but certainly the spirit of his 2 bill. And if I recall correctly, the Commissioners 3 early on at a Commission meeting set a policy and gave 4 direction to staff to make sure that we closed games 5 when all top prizes were claimed. Then we moved 6 forward with the rule process, to make sure that that 7 was what we were going to follow in rule from that 8 point forward as well. 9 CHAIRMAN COX: Okay. Now, did I 10 understand you correctly, that there has been 11 legislation introduced on this subject this year? 12 MR. GRIEF: Not yet. We have been given 13 indications that there may be a bill filed that would 14 require us to close all instant -- or would not allow 15 us to close instant ticket games until 85 percent of 16 the inventory is sold through. But again, no such 17 bill has been filed. That's just through our contacts 18 with staff. And so we're just awaiting to see if that 19 type of legislation actually does get filed. 20 CHAIRMAN COX: Okay. And some of the 21 considerations, I guess, if that were involved and if 22 they were introduced and we were asked to serve as a 23 resource, would be some of the reasons that Michael 24 expressed why we sometimes close a game much earlier 25 than we would close other games -- it's not selling, 0121 1 just taking up shelf space. It's gotten so old that 2 the tickets are maybe past their useful life. Would 3 those be the kinds of things that would be a concern 4 if that were introduced? 5 MR. GRIEF: It could be. The list could 6 go on and on. It could be there might be a defect in 7 the game, a scratching problem perhaps, something with 8 latex. It could be a sensitivity issue. Nothing has 9 happened like that to us in many years. But in years 10 gone by, we have had a game or maybe two -- I can't 11 recall -- where inadvertently it caused some 12 sensitivity issues in the market and we needed to 13 close that game quickly. So I'm not sure it would be 14 easy to come up with a laundry list of those types of 15 issues, but certainly they exist. 16 CHAIRMAN COX: Thank you very much. Is 17 that your full report, Catherine? 18 MS. MELVIN: That is. Thank you. 19 AGENDA ITEM NO. XIII 20 CHAIRMAN COX: Okay. Consideration of 21 and possible discussion and/or action on the lottery 22 operator contract, including whether the negotiation 23 of the lottery operator's contract on an open meeting 24 would have a detrimental effect on the Commission's 25 position in negotiation of the lottery operator 0122 1 consider. 2 Mr. Fernandez. 3 MR. FERNANDEZ: Let me defer, 4 Mr. Chairman, to our counsel. 5 CHAIRMAN COX: Right. That would be as 6 to the latter matter as to whether we want to take 7 this up in public or private? 8 MS. KIPLIN: Yes, sir, that's correct. 9 Under Section 46.030 of the Texas Government Code, 10 which is the body of law, Chapter 467 for the Texas 11 Lottery Commission, we have a specific exemption that 12 allows the Commission to go into a closed meeting if 13 the Commission beforehand, before going into that 14 closed meeting, determines and puts in writing that an 15 open meeting would have a detrimental effect on the 16 Commission's position in the negotiations. 17 It's something that you're authorized to 18 do. Historically the Commission has not taken 19 advantage of this on each occasion in which a proposed 20 amendment has come to the Commission's attention. But 21 it's up to the Commission if you want to do that. 22 I've got a written determination prepared if that's 23 where the Commission wants to be. 24 CHAIRMAN COX: Mr. Fernandez, do you see 25 any reason why we would be disadvantaged if we didn't 0123 1 do this in public? 2 MR. FERNANDEZ: No, sir, I do not. 3 CHAIRMAN COX: Okay. So do we need a 4 motion, Kim, or do we just sign off on your paper? 5 MS. KIPLIN: You need to do nothing. 6 You only have to take action if you want to go into 7 closed meeting. And so since you don't, then we move 8 on with the presentation. 9 CHAIRMAN COX: I don't. 10 Commissioner, is that okay with you? 11 COMMISSIONER SCHENCK: No, I prefer that 12 we be public if there's an opportunity. 13 COMMISSIONER WILLIAMSON: That's fine 14 with me. 15 CHAIRMAN COX: Fire way, Mike. 16 MR. FERNANDEZ: Yes, sir. Good morning. 17 My name is Mike Fernandez. I'm the Director of 18 Administration. 19 Item No. XIII in your agenda is to 20 advise you of the staff's intent to amend the GTECH 21 contract. Amendment No. 12 revises the payment 22 requirement from the contract compliance review 23 process. 24 As you may recall, our current contract 25 requires that GTECH provide a contract compliance 0124 1 monitor and that in response to an audit finding, the 2 State Auditor's office, the State Auditor had 3 recommended that the contract oversight be under the 4 purview of the Lottery. And we had brought an 5 amendment to you to address the payment of that, and 6 we are currently revising the payment process in this 7 amendment. 8 So if you have any questions, I would be 9 happy to answer them. 10 COMMISSIONER SCHENCK: I do not, Mike. 11 Thank you. 12 COMMISSIONER WILLIAMSON: No, I have no 13 questions. 14 CHAIRMAN COX: Okay. So what would you 15 like from us, Mike? 16 MR. FERNANDEZ: Nothing. This is 17 just -- unless you have any guidance you would like 18 to -- 19 CHAIRMAN COX: This is within the 20 staff's authority to negotiate and execute this 21 contract? 22 MR. FERNANDEZ: Yes, sir. 23 CHAIRMAN COX: And you're providing it 24 to us for information before that execution takes 25 place? 0125 1 MR. FERNANDEZ: That's correct, 2 Mr. Chairman. 3 CHAIRMAN COX: Thank you very much, 4 Mike. 5 MR. FERNANDEZ: Yes, sir. 6 AGENDA ITEM NO. XVII 7 CHAIRMAN COX: Okay. Kim, if I'm on the 8 right page, I see that we're at Item XVII. 9 MS. KIPLIN: That's correct. 10 CHAIRMAN COX: And is Mr. Wassdorf off 11 working on the revision? 12 MS. KIPLIN: And I'm happy to present 13 those for you-all. 14 CHAIRMAN COX: Okay. So it would be 15 consideration of and possible discussion and/or 16 action, including repeal and adoption -- oh, this is 17 the one that's got the 3-by-3 matrix in it, where he's 18 combined nine items into one. 19 MS. KIPLIN: Well, we were trying to 20 make efficient use. 21 CHAIRMAN COX: Very efficient. Okay. 22 Lottery procurements, 16 TAC 401 and 402 relating -- 23 .102 relating to protests of the terms of a former 24 solicitation and/or 16 TAC 401.103 relating to 25 protests of contract awards. 0126 1 Now, Ms. Kiplin, if I remember right, as 2 I spoke to you about this item before, I got confused 3 more than once. So if you'll walk us through this 4 carefully. 5 MS. KIPLIN: Really, I'm looking for 6 four actions from the Commission, four votes today. 7 The first one would be to adopt the repeal of the 8 existing rules. And we've combined them into one 9 order. They're all repeal. We received no comment 10 during the comment period on any of this rulemaking 11 matter. They were published in the December 26, 2008. 12 And so the staff would recommend that 13 you adopt the repeal of the three existing rules. One 14 is the substantive procurement rule. That's .101. 15 The other one is 401.102, and that is the protest 16 procedure for a solicitation. 17 And then it's 401.103, which is the 18 protest procedure on a contract award. So I can put 19 that aside and then we can go through the other three 20 if you would like, which are the adoption of the 21 substantive rules, and then we can do it all at one 22 time if that's the Commission's -- 23 CHAIRMAN COX: That works for me. 24 MS. KIPLIN: Okay. 25 CHAIRMAN COX: So on the table now we 0127 1 have the repeal of the three -- 2 MS. KIPLIN: Yes. 3 CHAIRMAN COX: -- rules that are being 4 superseded, provided we adopt these new rules? 5 MS. KIPLIN: That's correct. So if I 6 could bring your attention to now the adoption of 7 401.101, and that's on the lottery procurement 8 procedures. And the point of proposing this rule was 9 to expand the different types of methods that goods 10 and services could be procured by the agency. 11 The substantive part of this really was 12 driven by the Administration Division, particularly 13 mike Fernandez and Toni Erickson. Now, when we met 14 with each one of you individually and briefed you, at 15 that time I think we indicated that we were going to 16 recommend adopting without changes. We caught one 17 typo, and it was a word that was left out. And we 18 thought, "Well, we might as well take care of it now." 19 So what it read was on IFBs, on 20 invitation for bids, it could be lowest and best 21 value. And, really, the more precise phrase would be 22 lowest bid and best value. So that you would take 23 into consideration the lowest bid but also the best 24 value. And that was something that we talked with, 25 that particular inclusion, with Ms. Erickson. 0128 1 Mr. Fernandez I don't think was in the office that 2 day. And so we are recommending that we adopt that 3 with that change. We received no comment. 4 CHAIRMAN COX: Okay. Now, would you 5 point -- lead me to that change. 6 MS. KIPLIN: Sure. Let me see if I 7 can't -- I can't just pick it up right off the bat. 8 It's in Subsection (e)(5) of your rule. 9 CHAIRMAN COX: What page would that be? 10 MS. KIPLIN: Okay. Let me see if I 11 can't flip through. I'm looking at the order, so that 12 may not be helpful to you, but we will find that. 13 COMMISSIONER SCHENCK: I think it's 7. 14 CHAIRMAN COX: Page 7. (e) -- 15 MS. KIPLIN: (e)(5). 16 CHAIRMAN COX: -- (5). 17 MS. KIPLIN: Thank you, Commissioner. 18 So if I can -- 19 CHAIRMAN COX: Must be the wrong rule -- 20 thank you. 21 Okay. So we don't want the lowest 22 value, we want the lowest bid and the best value? 23 MS. KIPLIN: That's correct. 24 CHAIRMAN COX: I like that. 25 MS. KIPLIN: That may not seem that 0129 1 critical, but we thought we better just put that in to 2 make sure that it's very clear. 3 CHAIRMAN COX: Okay. 4 MS. KIPLIN: We're looking -- we will 5 take into consideration the lowest bid, but equally 6 important is best value. 7 CHAIRMAN COX: Okay. Mr. Fernandez, 8 could you come up just a minute. I know that best 9 value is what we want. I get confused when it says 10 lowest bid and best value, because it may be one but 11 not the other. When it says "and," it seems to 12 require that it be both the lowest bid and the best 13 value. Does it really mean the lowest bid consistent 14 with the best value or -- would you say it this way? 15 MR. FERNANDEZ: Well, I would say that 16 we're taking into consideration, obviously, the best 17 economic picture that the state can get, but the 18 overriding factor is the best value. 19 COMMISSIONER SCHENCK: You might say 20 like it's the lowest, comma, best value bid -- 21 MR. FERNANDEZ: That's correct. 22 COMMISSIONER SCHENCK: -- the lowest bid 23 that is a best value. 24 MR. FERNANDEZ: That's correct. That's 25 probably a better way to phrase that. 0130 1 CHAIRMAN COX: Okay. Are we going to 2 get in trouble down the line? Does anybody foresee 3 any trouble down the line with this "and," someone 4 saying, "Well, it means this," and -- 5 MR. FERNANDEZ: Something else? 6 CHAIRMAN COX: -- somebody else saying, 7 "No it means that," and somebody else says -- and we 8 say, "But it really means both"? 9 MR. FERNANDEZ: Well, I think 10 Commissioner Schenck's suggested phraseology would be 11 better as far as I'm concerned. 12 MS. KIPLIN: Okay. So what I would 13 propose to do, if it's permissible with the Commission 14 is, what I heard was lowest, comma, best value bid. 15 And so we will rework that, and I'll bring an order 16 for your signature. But if I can -- if it's okay with 17 the Commission to go ahead and vote on it and then 18 we'll sync up the document now because we'll take it 19 up all at 3:00, if that's where the Commissions lands, 20 plans on -- 21 CHAIRMAN COX: That would say, then, 22 that you believe this is not a substantive change that 23 would require re-exposure of the rule? 24 MS. KIPLIN: Yes. Absolutely. This is 25 not, okay. 0131 1 CHAIRMAN COX: Okay. 2 COMMISSIONER WILLIAMSON: Kim, one other 3 question, since we're wordsmithing here. What happens 4 if you change it to "lowest bid or best value"? 5 MS. KIPLIN: Well, I have to tell you 6 that under state law, you have to take into 7 consideration best value. It's not a disjunctive. 8 Best value is now required. 9 CHAIRMAN COX: Okay. Having said that, 10 Ms. Kiplin, do we even need the words in here about 11 the lowest bid? 12 MS. KIPLIN: Well, I see Ms. Erickson 13 here. So I don't know if she wants to come -- 14 Ms. Erickson, we were discussing the lowest bid and 15 best value. I think with IFBs, you -- really, the 16 framework is that you're getting bids, you're getting 17 bids. This has to do with the lowest bid and best 18 value. What's on the table now is Commissioner 19 Schenck's suggestion of lowest, comma, best value bed 20 versus the lowest bid and best value. And then 21 Commissioner Williamson has raised the issue, "Well, 22 do you even need the word "bid?" I think you-all are 23 looking to bids -- oh, I'm sorry. 24 COMMISSIONER SCHENCK: Chairman Cox? 25 CHAIRMAN COX: Mine was, do we really 0132 1 need -- 2 MS. KIPLIN: Oh, okay. 3 CHAIRMAN COX: -- lowest bid? 4 MS. KIPLIN: Do you even need "bid"? 5 And my understanding is that the process is that you- 6 all are receiving bids and you are looking at those 7 bids. And that is what is responsive to the 8 invitation for bid, is the bid. So the bid -- the 9 adjectives before would be lowest, comma, best value. 10 But the bid is what you're actually receiving in 11 response to the invitation for the bid, the acronym 12 IFB. 13 CHAIRMAN COX: Okay. You got me real 14 confused now, or I am real confused right now. Pardon 15 me. I attributed it to you. 16 MS. KIPLIN: That's okay. And I take 17 that on. 18 COMMISSIONER SCHENCK: Let me walk 19 through this with you. When you get bids, I'm 20 guessing you go to the lowest bid and start looking 21 upwards to see which ones are going to be the best 22 value. 23 MS. ERICKSON: Not necessarily. It all 24 hinges -- and for the record, Toni Erickson, Support 25 Services Manager. 0133 1 It all hinges on the evaluation criteria 2 that's established in that bid document that is put 3 out there. So if you are -- if the cost, the criteria 4 for the cost is set so high that really and truly cost 5 is going to win it, it is your bid, whatever your bid 6 is. So if you set -- 7 COMMISSIONER SCHENCK: Then there must 8 be subjective factors that go into the rest of, you 9 know, the -- 10 MS. ERICKSON: There are factors that 11 are set by -- 12 MR. GRIEF: Could I just offer up a 13 comment? I just want to keep this in reference. This 14 rule is just the overarching guideline for our 15 procurement process. Each individual procurement will 16 be looked at individually, and there will be different 17 sets and different weights of criteria given to cost 18 versus quality, technology, et cetera. So I don't 19 want to leave the Commission with the impression that 20 this rule defines how every procurement is done. It's 21 just the broad general overarching guide to it. 22 CHAIRMAN COX: Okay. Let me ask a 23 question here. Last Friday I sat with some other 24 folks and helped another agency evaluate some 25 proposals that they had gotten. And we didn't even 0134 1 look -- there was a cost proposal, and it was weighted 2 at less than 50 percent. We didn't even see the cost 3 proposal. We just evaluated the proposal. Now, is it 4 possible that we might put a bid out or an RFP out 5 that accorded more than 50 percent to the cost? 6 MS. ERICKSON: Certainly. If you expect 7 the services and the goods to be pretty much the same 8 across the board and you really wanted to award based 9 on the price, you certainly could. 10 CHAIRMAN COX: Okay. So it could be -- 11 if we have put it in there at more than 50 percent, it 12 is lowest bid. 13 MS. ERICKSON: Effectively, yes. But 14 what Gary said is true. Every procurement, before it 15 goes out, the determination is made up front of what 16 the scoring criteria is going to be and the basis for 17 that and whether cost is going to be, you know, 18 50 percent or greater or 20 percent, and that helps 19 set that determination. 20 Are you really, truly going to award 21 based on bid or is it their bid which is factored into 22 and part of the evaluation? But we also want best 23 value which is, you know, we're looking at the goods 24 and the services and applying different criteria to 25 that, or we want very specifically certain services or 0135 1 goods that may have a higher quality or better 2 services. And so the cost does play into it. That is 3 the bid part. And then the best value is the goods 4 and the services that you're getting. 5 CHAIRMAN COX: Well, Gary, I'm sensitive 6 to your statement. And it seems that, since the bid 7 may go out either way, that we want to make this 8 language broad enough to give staff discretion to go 9 for either the lowest bid or best value or make it 10 50/50, which will be a combination of the two. 11 MR. GRIEF: And we believe -- and I'll 12 ask Kim to chime in -- I think staff, along with the 13 legal team, believe that the rule as it is gives us 14 that flexibility. 15 MS. KIPLIN: And if I could direct your 16 attention, what we're talking about under this 17 particular Subdivision (5) is where the competitive 18 solicitation is an invitation for bid, and so what 19 you're getting back is a bid. 20 This isn't the request for proposal 21 where you're getting back a proposal. And so going 22 back to, "Do we even need the word 'bid,'?" my answer 23 to that is yes, you do, because that's what you're 24 getting back. And we are required under law to take 25 into consideration best value. 0136 1 So what we're looking at is the 2 qualified bidder who submits the lowest best value 3 bid. That goes back to, "Do you need the word 'bid'?" 4 Yes. My answer is, "We need the word 'bid'" because 5 that's what we're asking for them to submit in 6 response to the invitation for bids. 7 And I support and agree with what 8 Mr. Grief said. This procurement rule is a framework 9 for different types of procurement processes that can 10 be used. The particular solicitation document that is 11 issued sets out with more specificity based on the 12 nature of the goods or the services that are being 13 procured what that matrix will look at: 14 Do you put 90 percent on cost, 15 10 percent on value, you know, where you know that 16 we're looking for pencils, No. 2 pencils. And really 17 what we're looking for is the low bidder. But, gee, 18 you know, if the eraser doesn't erase, what good is 19 that pencil, that kind of issue, versus something -- 20 and I'll go all the way to the extreme, which is the 21 lottery operator contract where we're looking for the 22 overall best value. And, yes, cost is important but 23 it's not the most important thing to the proposal that 24 that particular proposer is submitting as a solution. 25 CHAIRMAN COX: Okay. Having said all of 0137 1 that, do we want to leave it exactly as it is, 2 lowest -- insert "bid" -- and best value or do we want 3 more modifying language? Commissioner, how are you on 4 that? 5 COMMISSIONER SCHENCK: I think that 6 language is broad enough that I think it would behoove 7 us to stay that broad. 8 CHAIRMAN COX: Okay. 9 MS. ERICKSON: I agree. 10 CHAIRMAN COX: Okay. Thank you for 11 indulging me. 12 MS. KIPLIN: So with that, we would stay 13 with the language "lowest bid and best value," yes. 14 And I wrote on the original order, because I wanted to 15 make sure I had it. But that won't change the 16 signature page if the Commission does decide that they 17 want to adopt this proposed rule with that one change. 18 And then on the record, I'll tell you that I'll clean 19 that up and we won't have my chicken scratch on there. 20 CHAIRMAN COX: Okay. 21 MS. KIPLIN: If I could now go to the 22 other matters. Don't go too far. 23 So what we're looking at now is the 24 staff's recommendation that you adopt the protest in 25 the terms of a formal competitive solicitation rule 0138 1 but with changes as it was published in the Texas 2 Register. I will tell you that we received no comment 3 on any of this rulemaking, including this proposed 4 rule. The reason that we're recommending the adoption 5 with changes is that because after we proposed that, 6 we went back and reviewed the language and we also 7 received more feedback from the Financial Litigation 8 Division of the Office of the Attorney General, who 9 has been assisting us with this rulemaking through the 10 process. 11 And, Mr. Jack Hohengarten, who is the 12 Deputy Division Chief of that division, was assigned 13 to this project on our behalf, and he offered we 14 thought pretty good input. And so we want to request 15 that the Commission adopt that change. And then the 16 language that's being changed is on the very first 17 paragraph. If you would like, I will be glad to walk 18 you through that or I'll be -- 19 COMMISSIONER SCHENCK: To be clear, Kim, 20 we're talking now 401.102? 21 MS. KIPLIN: Yes, sir, that's correct. 22 CHAIRMAN COX: What page are you on, 23 Ms. Kiplin? 24 COMMISSIONER SCHENCK: Page 1 of the 25 same -- 0139 1 MS. KIPLIN: Page 1. It's the very 2 first paragraph. 3 COMMISSIONER WILLIAMSON: Behind one of 4 your red line tabs. 5 MS. KIPLIN: You do not have under 6 that -- I'm sorry. You do not have the parenthetical 7 that sets that out. 8 CHAIRMAN COX: I'm looking at under a 9 red line tab. Okay. I'm on the right page, but I 10 don't see any changes marked. 11 MS. KIPLIN: It's going to be 12 throughout. I'm sorry. I'm going to -- 13 COMMISSIONER SCHENCK: There's only 14 small changes later in the -- 15 CHAIRMAN COX: Okay. Here I see some 16 now on (2) and -- thank you. 17 MS. KIPLIN: What's changed should be 18 underlined -- 19 CHAIRMAN COX: Right. 20 MS. KIPLIN: -- so that you can see 21 that. 22 COMMISSIONER SCHENCK: Kim, when we have 23 one of these protest proceedings, who will be -- will 24 the Executive Director be presenting to us? Assuming 25 we have oral argument on something, will the Executive 0140 1 Director be presenting a position or will you be 2 acting as counsel on behalf -- how will -- 3 MS. KIPLIN: Yes. Can I talk off the 4 rule but in response to that specifically? The way 5 that this rule, along with the protest of the contract 6 award rule is set out is that there's going to be a 7 couple of different layers. On the administration 8 director's level, that can be referred to his office 9 and he can take the first cut at it. 10 It could go to the Executive Director to 11 take the first cut at it. Or if it's something that 12 we recognize internally is of such a significant -- 13 raises such a significant level, we don't think it's a 14 good use of everyone's time and resources to go 15 through three different layers, we would immediately 16 just refer that over to the Commission. I'll go back 17 to the statute, and the statute says that anybody who 18 is aggrieved by the Executive Director's action may 19 appeal that to the Commission. 20 Now, what we envision in this is that 21 there's going to be -- let's take, for example, the 22 Executive Director appeal of that to the Commission. 23 There will be an opportunity for oral argument so that 24 the person who was awarded the contract, the 25 protestant will have the opportunity for argument. 0141 1 The Executive Director's determination and any 2 reasoning will be before you. 3 The Executive Director will be prepared 4 to present the Executive Director's position on that 5 determination, and you-all will have independent 6 counsel that will assist you in reviewing the record 7 and creating -- if it's the Commission's, you know, 8 request, creating the document, will be assisting you 9 with that every step of the way. 10 COMMISSIONER SCHENCK: The assumption 11 then at that point is that you as General Counsel, and 12 your staff, are working for Gary? 13 MS. KIPLIN: Yes, that's right. We've 14 had this on a couple of occasions. And at the 15 Commission meeting, I sit more in terms of the keeper 16 of the process, trying to keep up with the record. We 17 have a right to sue, if you will. The Legislature has 18 granted the legislative consent to sue. And so we're 19 seeing that that would ultimately, potentially end up 20 in district court. 21 So in terms of the oral argument, who is 22 going to be here, making sure you have your documents. 23 And then you would have independent counsel. We have 24 Special Counsel, Sandy Joseph, who provides that 25 independent counsel to the Commission, and so she 0142 1 would be carved out on any of these protests to be 2 available for you-all. 3 COMMISSIONER SCHENCK: Okay. I'm sorry 4 my questions got us a -- 5 MS. KIPLIN: No. That's all right. 6 COMMISSIONER SCHENCK: But I know we've 7 talked about that in the past. Thank you. 8 MS. KIPLIN: Any further questions on 9 this? 10 CHAIRMAN COX: Where are we? 11 MS. KIPLIN: Well, I didn't know if you 12 had any questions on the protest of the solicitation 13 document. If you don't, with your permission, I would 14 like to go to the protest of the contract award rule. 15 CHAIRMAN COX: Okay. 401.103? 16 MS. KIPLIN: Yes, sir. And the staff, 17 once again for the same reasons, would request that 18 you adopt this proposal, proposed rule, but with 19 changes from what you published for public comment. 20 We received no comment on any of these rules, but we 21 did receive input from the Office of the Attorney 22 General after publication of the rule and wanted to go 23 ahead and incorporate that at this time. 24 We do not believe that any of the 25 changes that have been requested or have been offered 0143 1 or suggested would require a re-publication of these 2 rules. There would be no additional group of folks 3 who would not otherwise have been provided notice of 4 the rulemaking, and we don't believe that there are 5 substantive changes. 6 So with that, the staff would recommend 7 that you adopt the repeals and adopt each of the three 8 rules, with changes that are contained within each one 9 of these rulemakings. 10 CHAIRMAN COX: Okay. Commissioner? 11 COMMISSIONER SCHENCK: I have only one 12 question with respect to the protest procedures. 13 MS. KIPLIN: Yes. 14 COMMISSIONER SCHENCK: I assume that 15 we're gathering -- the aggrieved party is going to be 16 smart enough to read down the rule to know that, I 17 guess, his protest comes to your office? 18 MS. KIPLIN: Yes. Never had an issue 19 with that. I believe it's also included in the 20 solicitation documents that go out. And we have -- 21 staff, you know, know when the contract award notice 22 went out, and we're tracking the 72-hour clock and the 23 receipt -- 24 COMMISSIONER SCHENCK: I assume if 25 somebody just doesn't read the rules close enough, 0144 1 either because they don't understand them or for 2 whatever reason, serves their protest on Gary or the 3 Executive Director or somebody else, that it 4 immediately would come to you and we would treat their 5 filing as effective, notwithstanding their confusion? 6 MS. KIPLIN: Well, and, of course, if it 7 was timely filed, assuming timely filed within the 8 agency, yes. As a matter of fact, we had one where it 9 went to the mail room, and it came to our attention. 10 The staff is attuned on contract awards to be on, if 11 you will, on alert for those protests. 12 COMMISSIONER SCHENCK: Okay. Thank you. 13 CHAIRMAN COX: Okay, Kim. You have 14 recommended that we repeal three old rules and replace 15 them with the three new rules which have minor changes 16 that you believe do not need re-publication? 17 MS. KIPLIN: That is correct. 18 CHAIRMAN COX: Move approval of the 19 staff recommendation. 20 COMMISSIONER SCHENCK: Second the 21 motion. 22 CHAIRMAN COX: All in favor, say "Aye." 23 COMMISSIONER SCHENCK: Aye. 24 COMMISSIONER WILLIAMSON: Aye. 25 CHAIRMAN COX: Aye. 0145 1 Motion carries 3-07. 2 MS. KIPLIN: Commissioners, I have four 3 orders, one incorporating all the repeals and then the 4 other three are on each of the rules. 5 AGENDA ITEM NO. XVIII 6 CHAIRMAN COX: Ms. Kiplin, I'm now on 7 Item No. XVIII. Is that where you are? 8 MS. KIPLIN: Yes, that's where I am. 9 CHAIRMAN COX: My recollection is that 10 we have -- Items A through S are a long list of 11 virtually identical items. Those are NSF situations. 12 Item T will be an agenda item we will take separately. 13 And you want to pass Items U, V and W for this 14 meeting, because the counsel that has represented the 15 agency is on military active duty for two weeks? 16 MS. KIPLIN: Yes. And while we had an 17 attorney -- the other enforcement attorney who I 18 believe had a pretty good command of the record, my 19 concern was that she wouldn't have the background in 20 terms of actually having this be her case. And while 21 she was more than happy to step up, I made the 22 decision that we should pass this until Mr. White is 23 back. 24 CHAIRMAN COX: Okay. Well, why don't 25 you figure out a nice way to do Agenda Item Nos. A 0146 1 through S. 2 MS. KIPLIN: Commissioners, in each one 3 of these cases, these State Office of Administrative 4 Hearings Administrative Law Judges recommended 5 revocation of the license for each one of these 6 licensees, and it's for the same reason, insufficient 7 funds available at the time that the lottery swept 8 their accounts. And there is the rule of three times, 9 more than three times and we move to revocation. 10 So the staff does recommend that you 11 adopt each one of these recommendations by the ALJ. 12 CHAIRMAN COX: Okay. Move approval of 13 the staff recommendation. 14 COMMISSIONER SCHENCK: I second the 15 motion. 16 CHAIRMAN COX: All in favor, say "Aye." 17 COMMISSIONER SCHENCK: Aye. 18 COMMISSIONER WILLIAMSON: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 3-0. 21 Okay. Ms. Kiplin, while we're signing 22 those, do you want to take Agenda Item T? 23 MS. KIPLIN: Yes, sir, I'll be happy to. 24 Commissioners, this is a memorandum of 25 agreement and a proposed agreed order in a bingo 0147 1 matter, in the matter of LULAC Council 4559. It's a 2 bingo conductor's license. And it had to do with the 3 LULAC Council, the conductor failing to have required 4 information imprinted on each of its bingo gift 5 certificates. The information that was required to be 6 printed is set out in the proposed agreed order. 7 This is essentially a warning that we 8 want to have in the form of an agreed order so that if 9 it occurs again, that we would be able to have a 10 history of recidivism. They've agreed to provide the 11 required information on each of their gift 12 certificates in the future, and the staff recommends 13 that you adopt this agreed order. 14 CHAIRMAN COX: Okay. Mr. Sanderson, how 15 serious do you consider this violation? 16 MR. SANDERSON: This violation is 17 probably not one of a very serious nature. It's more 18 just a recordkeeping to ensure that they have the 19 correct information on a gift certificate. And I 20 believe this one here, they're missing the names of 21 the organizations. 22 CHAIRMAN COX: That would be pretty 23 important if someone doesn't want to honor it, 24 couldn't it? 25 MR. SANDERSON: In some cases they have 0148 1 the bingo hall on there. 2 CHAIRMAN COX: Yes. 3 MR. SANDERSON: And so they would know 4 which location it was purchased at or sold from. 5 CHAIRMAN COX: Oh! But they don't know 6 which charity? 7 MR. SANDERSON: But which charity. 8 CHAIRMAN COX: All right. 9 MR. SANDERSON: And so the cases that 10 we've had with this violation have historically 11 started with a warning on the first violation, to get 12 them into compliance. 13 CHAIRMAN COX: Okay. Move approval of 14 the staff recommendation. 15 COMMISSIONER SCHENCK: Second the 16 motion. 17 CHAIRMAN COX: All in favor, say "Aye. 18 COMMISSIONER WILLIAMSON: Aye. 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 3-0. 22 COMMISSIONER SCHENCK: Kim, running you 23 back to Agenda Items A through S, I believe it was, 24 the NSF cases, for my edification and Commissioner 25 Williamson's, my understanding is, there are two 0149 1 things that will happen. One is that the principals 2 of these organizations have all, by virtue of their 3 original application to be a retailer, made themselves 4 personally liable for the deficiencies in the sweep 5 and that they've sold lottery tickets and they are not 6 turning over the revenues that are owned to the school 7 children of Texas, and they are personally liable. I 8 believe there is a court matter on that. 9 And second, I have the view, which has 10 gone nowhere, that these people should not be selling 11 cigarettes, alcohol or anything else that is requiring 12 a license of the state while they're in arrears to the 13 state and the School Foundation Fund in the meanwhile. 14 And I think we've signed all the orders 15 now, so on to the next agenda item. 16 CHAIRMAN COX: Kim, just again, with the 17 same kind of clarification, when we revoke a license 18 for NSF, that means we've gone against all the 19 personal guarantees that we can find and -- 20 MS. KIPLIN: No, sir, I don't think at 21 that time. What we're looking at is the fact that, 22 "When we swept your account, the account had 23 insufficient funds." 24 CHAIRMAN COX: Several times? 25 MS. KIPLIN: Right, several times. 0150 1 There's actually two triggers. One is, "You did it 2 three times in a 12-month period." And so, you know, 3 from our administrative perspective, it's just not 4 effective for us to continue to have a licensing 5 relationship with you. So we will proceed after that 6 trigger. 7 The other trigger is, "We swept your 8 account once and you did not come through after the 9 NSF. You did not provide the money that you were to 10 provide." 11 On the three, "NSF, you paid; NSF, you 12 paid; NSF you paid." 13 CHAIRMAN COX: Sorry. 14 MS. KIPLIN: Yes. The other one is, 15 "NSF, you didn't pay." 16 CHAIRMAN COX: Okay. What do we do 17 then? 18 MS. KIPLIN: So then we'll move forward 19 to revoke your license. The Lottery Operations 20 Division has a very effective collections unit that 21 will immediately move forward to identify any kind of 22 account -- any accounts, whether it's in the name -- 23 for example, corporate name, an officer or director or 24 I believe it's an owner, to satisfy the debt that's 25 owed to the Lottery. And that can be in the forms of 0151 1 liens, levies and so forth. 2 MR. GRIEF: In other words, we have all 3 the collection tools available to the Controller of 4 Public Accounts at our disposal as well. 5 COMMISSIONER SCHENCK: That's being 6 handled by our staff, by attorneys on our staff doing 7 writs of garnishment or whatever else they need to do 8 to grab those accounts or is that going to the 9 Comptroller or somebody else? 10 MR. GRIEF: I don't believe garnishment 11 is one of the items that's in our tool box, but bank 12 account freezes, levies, cash register seizures, those 13 types of things, yes, those are handled by our staff. 14 COMMISSIONER SCHENCK: If a cash 15 register seizure doesn't get their attention, I don't 16 know what will. 17 MS. KIPLIN: It can be fairly effective. 18 To answer your question, that's handled primarily and 19 I would say predominant by the Lottery Operations 20 Division. If they need the assistance of one of the 21 attorneys on my staff, we certainly provide that. I 22 think that they've got a pretty good, pretty effective 23 track record. So we haven't had much occasion for 24 them to need our assistance. But where they do, we 25 certainly offer that assistance. 0152 1 AGENDA ITEM NO. XIX 2 CHAIRMAN COX: Okay, Commissioners. 3 Agenda Item No. XIX is public comment. I don't have 4 any requests here, any witness affirmation forms. Is 5 there any public comment? 6 (No response) 7 AGENDA ITEM NO. XX 8 CHAIRMAN COX: Okay. Agenda Item No. 9 XX. At this time I move the Texas Lottery Commission 10 go into executive session: 11 A, to deliberate the appointment, 12 employment and duties of the Executive Director, the 13 duties and evaluation of the Deputy Executive 14 Director, Internal Audit Director, Charitable Bingo 15 Operations Director and ombuds and to deliberate the 16 duties of the General Counsel and Human Resources 17 Director pursuant to Section 551.074 of the Texas 18 Government Code; 19 B, to receive legal advice regarding 20 pending or contemplated litigation pursuant to 21 Section 551.071(1)(A) and/or to receive legal advice 22 regarding settlement offers pursuant to Section 23 551.071(1)(B) of the Texas Government Code and/or to 24 receive legal advice pursuant to Section 551.071(2) of 25 the Texas Government Code, including but not limited 0153 1 to those items posted on the open meetings notice for 2 purposes of receiving legal advice. 3 Is there a second? 4 COMMISSIONER SCHENCK: I second the 5 motion. 6 CHAIRMAN COX: All in favor, say "Aye." 7 COMMISSIONER SCHENCK: Aye. 8 COMMISSIONER WILLIAMSON: Aye. 9 CHAIRMAN COX: Aye. 10 The vote is 3-0. The texas Lottery 11 Commission will go executive second. The time is 12 12:20 p.m. Today is February 20, 2009. 13 (Recess: 12:20 p.m. to 2:55 p.m.) 14 AGENDA ITEM NO. XXI 15 CHAIRMAN COX: The Texas Lottery 16 Commission is out of executive session. The time is 17 2:55 p.m. 18 Is there any action to be taken as a 19 result of executive session? 20 AGENDA ITEM NOS. VI AND VII (continued) 21 CHAIRMAN COX: Okay. So let's move back 22 to -- Pete, what is your agenda item? Is it VI and 23 VII? 24 MR. WASSDORF: These are Agenda Items 25 No. VI and VII. 0154 1 CHAIRMAN COX: Okay. All right, sir. 2 MR. WASSDORF: Okay. I've given you 3 three handouts. One of the handouts that I have given 4 you that has some color on it is just a copy of 5 Chapter 47 of the Penal Code dealing with gambling. 6 And I wanted to provide that to you because some of 7 the changes are going to be referring to things in 8 that Act. 9 In 47.01, it is a definition section. 10 And there are a number of definitions there that are 11 used in the prosecution of criminal cases, and there 12 are some exceptions that are noted in those 13 definitions. And so we're going to be referring to 14 those exceptions in the changes that we made to these 15 rules. 16 And if you turn to Page 8 of that 17 handout, there are also some affirmative defenses set 18 forth with respect to gambling prosecution, and we 19 will be referring to those also. 20 Directing your attention to one of the 21 other handouts -- I'll take 402.104, the one that is 22 proposing to define professional gambler and gambling 23 promoter in the Bingo Enabling Act -- if you will turn 24 to Page 3, you will see that we have added two new 25 paragraphs, a Paragraph (c) and (d). 0155 1 And those sections now read, "In 2 adopting the definitions in Subsection (a) and (b) of 3 this section, the conduct proscribed by the Penal Code 4 does not include any conduct for which an exception to 5 criminal prosecution applies, or any conduct for which 6 a person may be entitled to an affirmative defense, 7 including, but not limited to those affirmative 8 defenses allowed under Section 47.09 of the Penal 9 Code." 10 And Paragraph (d) reads, "In adopting 11 the definition is Subsections (a) and (b) of this 12 section, the conduct proscribed by the Penal Code does 13 not include any conduct which would be excepted from 14 prosecution because the conduct was excepted from a 15 definition under the Penal Code Section 47.01, which 16 is essential to the prosecution." 17 And I have not had an opportunity to 18 show this to any of the interested parties, but I 19 think that both of those in combination will address 20 the concerns of Mr. Fenoglio. 21 COMMISSIONER SCHENCK: Well, I think 22 I've heard from him today; I know we have. So I think 23 these changes are beneficial, and I move that we adopt 24 staff recommendation and publish this proposed rule 25 for comment. 0156 1 COMMISSIONER WILLIAMSON: Second. 2 CHAIRMAN COX: All in favor, say "Aye." 3 COMMISSIONER SCHENCK: Aye. 4 COMMISSIONER WILLIAMSON: Aye. 5 CHAIRMAN COX: Aye. 6 Motion carries 3-0. 7 Thank you, Mr. Wassdorf. 8 MR. WASSDORF: Thank you, sir. 9 MS. KIPLIN: And so just for the record, 10 those are to withdraw what is already published and to 11 propose both the rule on bingo and the rule -- or the 12 amendment on the Lottery side. 13 CHAIRMAN COX: And expose them for 60 14 days? 15 MS. KIPLIN: Yes, 60-day public comment 16 period. 17 CHAIRMAN COX: Excellent. 18 AGENDA ITEM NO. XXII 19 CHAIRMAN COX: Okay. If there is no 20 other business, let's adjourn. 21 COMMISSIONER SCHENCK: Thank you. 22 (Meeting adjourned: 2:57 p.m.) 23 24 25 0157 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 3rd day of March 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