0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, FEBRUARY 21, § 8 9 COMMISSION MEETING 10 WEDNESDAY, FEBRUARY 21, 2007 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 21st day of February 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 4:41 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER C. 18 TOM CLOWE, JR. The following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 9 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chairman, possible 5 discussion and/or action regarding the Bingo Advisory Committee's activities, 6 including the February 7, 2007 Committee meeting and/or information on impact of 7 smoking ban ordinances on bingo ............. 9 8 AGENDA ITEM NO. III - Report, possible discussion and/or action on the 9 implementation of recommendations contained in the Internal Audit Report on bingo audit 10 services, including development of rules .... 28/191 11 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, 12 including proposal of amendments or new rule, on 16 TAC §402.603 relating to bonds 13 or other security ........................... 42 14 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, 15 including adoption of amendments, on 16 TAC §402.400 relating to general 16 licensing provisions ........................ 48 17 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, 18 including proposal, on new rule 16 TAC §402.204 relating to prohibited price 19 fixing ...................................... 51 20 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, 21 including proposal, on new rule 16 TAC §402.505 relating to permissible expense .... 55 22 AGENDA ITEM NO. VIII - Report by the Charitable 23 Bingo Operations Director and possible discussion and/or action on the Charitable 24 Bingo Operations Division's activities ......... 67 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. IX - Consideration of and possible discussion and/or action, 4 including withdrawal and proposal, or adoption, on new rule 16 TAC §401.316 5 relating to "Daily 4" on-line game rule ..... 70 6 AGENDA ITEM NO. X - Consideration of and possible discussion and/or action, 7 including withdrawal and proposal of new rule 16 TAC §401.307, or adoption of 8 repeal of existing 16 TAC §401.307 and adoption of new rule 16 TAC §401.307 9 relating to "Pick 3" on-line game rule ...... 99 10 AGENDA ITEM NO. XI - Report, possible discussion and/or action on lottery 11 sales and revenue, game performance, new game opportunities, market research 12 and trends .................................. 104 13 AGENDA ITEM NO. XII - Report, possible discussion and/or action on transfers 14 to the State ............................... 136 15 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on the FY 16 2008-09 Legislative Appropriation Request ..................................... 140 17 AGENDA ITEM NO. XIV - Report, possible 18 discussion and/or action on the 80th Legislature ............................ 144 19 AGENDA ITEM NO. XV - Consideration of and 20 possible discussion and/or action on the Lotto Texas procedures ..................... 153 21 AGENDA ITEM NO. XVI - Report, possible 22 discussion and/or action on the agency's contracts ................................... 174 23 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on amendments 4 to the statistical consulting services, lottery drawings audit services, drawings 5 studio and production services, and/or security systems services contracts ......... 174 6 AGENDA ITEM NO. XVIII - Report, possible 7 discussion and/or action on an amendment to the agency's instant ticket 8 manufacturing and services contract ......... 175 9 AGENDA ITEM NO. XIX - Report and possible discussion and/or action on the agency's 10 HUB and/or minority business participation, including the agency's Mentor Protégé 11 Program and/or the agency's FY 2006 Minority Business Participation Report ...... 177 12 AGENDA ITEM NO. XX - Consideration of 13 and possible discussion and/or action on external and internal audits and/or 14 reviews relating to the Texas Lottery Commission and/or on the Internal Audit 15 Department's activities ..................... 191 16 AGENDA ITEM NO. XXI - Report, possible discussion and/or action on the Mega 17 Millions game and/or contract ............... 194 18 AGENDA ITEM NO. XXII - Report, possible discussion and/or action on GTECH 19 Corporation ................................. 204/215 20 AGENDA ITEM NO. XXIII - Commission may meet in Executive Session: 21 A. To deliberate the duties and evaluation of the Executive Director 22 and/or Deputy Executive Director pursuant to Section 551.074 of the 23 Texas Government Code. B. To deliberate the duties and 24 evaluation of the Internal Audit Director pursuant to Section 25 551.074 of the Texas Government Code. 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 C. To deliberate the duties, appointment and/or employment of the Charitable 4 Bingo Operations Director pursuant to Section 551.074 of the Texas 5 Government Code. D. To deliberate the duties, appointment 6 and/or employment of an Acting Charitable Bingo Operations Director 7 pursuant to Section 551.074 of the Texas Government Code. 8 E. To deliberate the duties of the General Counsel pursuant to Section 9 551.074 of the Texas Government Code. F. To receive legal advice regarding 10 pending or contemplated litigation and/or to receive legal advice 11 pursuant to Section 551.071(1)(A) or (B) of the Texas Government Code 12 and/or to receive legal advice pursuant to Section 551.071(2) of the 13 Texas Government Code, including but not limited to: 14 Cynthia Suarez v. Texas Lottery Commission 15 Shelton Charles v. Texas Lottery and Gary Grief 16 Stephen Martin vs. Texas Lottery Commission 17 Patsy Henry v. Texas Lottery Commission 18 First State Bank of DeQueen et al. v. Texas Lottery Commission 19 Employment law, personnel law, procurement and contract law, 20 evidentiary and procedural law, and general government 21 law Mega Millions game and/or 22 contract ...................... 150 23 AGENDA ITEM NO. XXIV - Return to open session for further deliberation and 24 possible action on any matter discussed in Executive Session ........................ 152 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXV - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-07-0337 - ARP Food Store 5 B. Docket No. 362-06-3140 - Ashkan Food Mart 6 C. Docket No. 362-07-0712 - U Save Food Market 7 D. Docket No. 362-07-0713 - Sanny's Food Mart 8 E. Docket No. 362-07-0714 - Rose Hill Country Store 9 F. Docket No. 362-07-0763 - Oasis Mart G. Docket No. 362-07-0764 - San Jacinto 10 Shell Food Mart H. Docket No. 362-07-0828 - T and H 11 Food Store I. Docket No. 362-07-0832 - Amarillo USA 12 Travel Center J. Docket No. 362-07-0873 - Roberson 13 Grocery K. Docket No. 362-07-991212 AM.B - In the 14 Matter of the Removal of Certain Respondents from the Texas Lottery 15 Commission's Registry of Approved Bingo Workers: John Anderson, Jr., Eric Arp, 16 Dawn M. Bartnett, Matthew S. Dastillon, Nancy E. Diaz, Robin K. Evans, Robert C. 17 Ferbert, Ann M. Hendricks, Erica A. Hernandez, Kimber L. Jones, Candy Lopez, 18 Ricky L. Manning, Richard R. Navarro, Melody Omberg, Shawn E. Turner, Juanita 19 W. Vergara L. Docket No. 362-07-991212 PM.B - In the 20 Matter of the Denial of Application of Certain Persons from the Texas Lottery 21 Commission's Registry of Approved Bingo Workers: Joseph W. Anderson, Jaime P. 22 Bonifacio, Gregory Byers, Edwardo Omar Escamilla, Romulo Gonzalez, Jr., Matthew 23 Hillbrich, Danny E. Little, Vanessa Saenz, Karen Rodwell, Michelle Shipp- 24 Richeson, Jason Tucker, David Vasquez 25 0008 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 M. Docket No. 362-06-2113.B - In the Matter of the Removal of Michael A. 4 Fite from the Texas Lottery Commission's Registry of Approved 5 Bingo Workers ...................... 207 6 AGENDA ITEM NO. XXVI - Report by the Executive Director and/or possible 7 discussion and/or action on the agency's operational status, activities relating to 8 the Charitable Bingo Operations Division, agency procedures, publicity of winners, 9 and FTE status .............................. 216 10 AGENDA ITEM NO. XXVII - Public Comment ...... 224 11 AGENDA ITEM NO. XXVIII - Adjournment ........ 225 12 REPORTER'S CERTIFICATE ...................... 226 13 14 15 16 17 18 19 20 21 22 23 24 25 0009 1 P R O C E E D I N G S 2 WEDNESDAY, FEBRUARY 21, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. Today is 6 February 21, 2007. It's 9:00 a.m. Commissioner Clowe 7 is here. My name is Jim Cox. We'll call this meeting 8 of the Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 report by the Bingo Advisory Committee Chairman, 12 possible discussion and/or action regarding the Bingo 13 Advisory Committee's activities, including the 14 February 7, 2007 Committee meeting and/or information 15 on impact of smoking ban ordinances on bingo. 16 Ms. Taylor -- and Ms. Rogers. 17 MR. ROGERS: Thank you. 18 MS. TAYLOR: Good morning, 19 Commissioners. Did the report make it into your 20 notebook or -- I know it didn't make it into your 21 notebook. I believe it was e-mailed to you. 22 CHAIRMAN COX: And I am seeing it for 23 the first time right now, as is Commissioner Clowe. 24 MS. TAYLOR: It's rather lengthy. Would 25 you like me to just briefly summarize the main points 0010 1 of the meeting? 2 CHAIRMAN COX: I think that would be 3 good. And part of your report on the smoking ban 4 ordinances, that will be separate and that will be 5 done by Mr. Fenoglio, is my understanding? 6 MS. TAYLOR: That would be awesome. 7 CHAIRMAN COX: Okay. Great. So why 8 don't you just summarize it for us, Suzanne. 9 MS. TAYLOR: Okay. Very briefly, Rule 10 16 TAC 402.603 relating to bonds and other securities, 11 the Bingo Advisory Committee did agree to recommend 12 that to the Commissioners. 13 Rule 16 TAC 402.305 relating to 14 progressive bingo, the Committee felt that another 15 meeting was needed before the rule was ready to go 16 forward, and it was agreed not to recommend the rule 17 to the Commissioners at this time. 18 Amendments to 16 TAC 402.300 relating to 19 pull-tab bingo were discussed. There were some items 20 on there that the committee discussed. But overall we 21 did agree to recommend to the Commissioners the 22 adoption of that rule. 23 On Rule 17 TAC 402.400 relating to 24 general licensing, we did discuss that rule. I did 25 not have it in my notes whether or not we agreed to 0011 1 recommend that to the Commissioners. But if there was 2 a motion, I believe it would have been passed. There 3 was nothing negative said about that particular rule. 4 On 16 TAC 420.603 relating to bonds and 5 other securities, the workgroup has agreed to continue 6 to work on this rule. However, it was agreed to pass 7 this on and recommend it to the Commissioners at this 8 time. 9 16 TAC 402.503, the permissibility of 10 expenses, it was agreed that although we still felt 11 there was some work needed to be done on this rule, 12 that we recommend it to the Commissioners. 13 One interesting thing -- this is not on 14 the rules anymore, since that was the sum total of the 15 rules that we discussed -- but Phil Sanderson had 16 reviewed the third quarter 2006 statistics with us. 17 And once again, of course, we note that attendance has 18 continued to drop, with 145 in 2004, and it's down to 19 133 in 2006. Prize payouts have continued to 20 increase. The payouts have gone from 72.6 to 77.6. 21 And there are currently 1,265 licensed holders, with 22 approximately 50 of those in administrative hold. So 23 that number has significantly dropped also. 24 The nomination workgroup had no 25 recommendation to make to the committee. There are 0012 1 four openings at this time: Commercial lessor, which 2 is my spot; conductor lessor, which is Kim's spot; the 3 charity, which is Larry Whittington; and the general 4 public, which is Jack Dougherty. 5 CHAIRMAN COX: Well, now, I heard Larry 6 say that he wasn't going anywhere. Have y'all made 7 any statements as to your intentions? 8 MS. TAYLOR: Well, as a matter of fact, 9 I put in a nomination form. But because of our rule 10 change that has occurred during the time that I have 11 been serving on the BAC, I'm not eligible to put in a 12 nomination form for the spot which I'm currently 13 holding, because I am on the charities' licenses. 14 I've very involved with all the charities and have 15 been for many years before I got involved with bingo. 16 So I am on the board of directors of 17 four of those charities, and I serve as treasurer on 18 one of them. I am the -- for Camp Fire USA. I serve 19 as the coordinator, the volunteer coordinator for Lost 20 Pet Hotline, and I'm very actively involved with the 21 other two. 22 So to get off the licenses is impossible 23 because it's not a name-only thing. I am an active 24 member of those organizations before they got into 25 bingo. So I actually have put in for the charities 0013 1 spot also, because I am not eligible with the current 2 rules that are in place. 3 MS. KIPLIN: Mr. Chairman, I'm sorry to 4 interrupt, but I'm concerned that this really has to 5 do more with the Advisory Committee of Nominations and 6 Appointments process versus the report of the Bingo 7 Advisory Committee Chair. And I just raise that. In 8 fact, it's not on this agenda. 9 CHAIRMAN COX: Okay. Well, I guess 10 you'll have to tell me that at some other venue. 11 MS. TAYLOR: No problem; no problem. 12 MS. KIPLIN: Sorry. 13 MS. TAYLOR: Yes, I believe Kimberly and 14 I had both put in nomination forms. Larry has put in 15 a nomination form also. 16 CHAIRMAN COX: Okay. Thank you. That 17 was what I needed. 18 MS. TAYLOR: A workgroup has been 19 created to work on the 2006 Bingo Advisory Committee 20 Annual Report. The Bingo Advisory Committee did agree 21 on a work plan for 2007 that I have presented to you. 22 There was just a small change on this one as compared 23 to the previous year. We took off the Caller of the 24 Year Program and added specific recommendations for 25 positive public awareness of charitable bingo. The 0014 1 BAC will review and comment on specific 2 recommendations that would improve charitable bingo 3 through positive public awareness initiatives. And 4 that is really the only change to that work plan from 5 last year 6 CHAIRMAN COX: Okay. Now, as to the 7 work plan, I don't see it on the agenda. 8 MS. TAYLOR: It is not. I wasn't aware 9 that they needed the work plan up here -- 10 CHAIRMAN COX: Okay. 11 MS. TAYLOR: -- to put it on the agenda. 12 CHAIRMAN COX: So what we should do 13 there is refer it to staff for a recommendation for 14 the next meeting, Counsel? 15 MS. KIPLIN: Yes, sir. 16 CHAIRMAN COX: Okay. That's what we'll 17 do with that, then, Suzanne. 18 MS. TAYLOR: And those are the 19 highlights of our meeting. If you have any 20 questions -- you know, let me do go back to the 21 smoking ban also. I'm sorry. Excuse me. We did hear 22 the report of the smoking -- what the smoking ban has 23 done to charitable bingo numbers. And it was 24 unanimously passed to present the smoking ban to the 25 Commissioners at this meeting. 0015 1 CHAIRMAN COX: Okay. Commissioner, any 2 questions? 3 COMM. CLOWE: None. Thank you. 4 CHAIRMAN COX: Okay. So at this point, 5 do you want to have Stephen present the report on the 6 smoking ban? 7 MS. TAYLOR: Yes, please. If that would 8 be okay with you, that would be great. 9 CHAIRMAN COX: Thank you very much for 10 your report. 11 MS. TAYLOR: Thank you. 12 CHAIRMAN COX: Stephen, before you 13 begin, I want to set the context for this report. We 14 had a lengthy discussion on this subject at our 15 meeting in September, as to whether it was appropriate 16 for this agency to spend any money on this kind of 17 thing, given that the smoking ban was a local matter 18 in Dallas and certainly -- and not a matter for the 19 Legislature or state government and certainly not a 20 matter for this agency. 21 And I recall at that time that you 22 offered to do this work without having any cost to the 23 state and that your idea was that we should know this 24 information in the event we were called as a resource 25 and would be able to comment with some knowledge on 0016 1 what the impact might be. 2 So those are the sole reasons that I 3 recall for our saying go ahead and do this and make 4 the report back to us. We have used no agency 5 resources on this. We're going to hear it just so 6 that we have a better understanding of the state of 7 the industry. Is that your understanding as well? 8 MR. FENOGLIO: That is perfectly my 9 understanding, yes. 10 CHAIRMAN COX: Great. 11 MR. FENOGLIO: And to my knowledge, I 12 have discussed calculation of some revenue numbers 13 with Mr. Sanderson. But to my knowledge, no staff 14 have spent time and effort in this matter. This is 15 purely an industry accumulated report. We have, 16 obviously -- the data we have accumulated comes from 17 the Lottery Commission's bank of information that's 18 available on its website. 19 CHAIRMAN COX: Okay. 20 MR. FENOGLIO: As you may recall, 21 Commissioners -- and, for the record, my name is 22 Stephen Fenoglio. I'm an attorney in Austin. And I 23 filed an appearance slip. 24 The City of Dallas enacted a very 25 comprehensive smoking ban within the city limits of 0017 1 the City of Dallas, March 1 of 2003. I believe there 2 are two exceptions to it that do not pertain to bingo 3 or gaming in any way. Those are either a nursing home 4 exception -- I guess three -- a private residence 5 that's not used for daycare, any type of health care, 6 and then a percentage of designated smoking rooms in 7 hotels. 8 What we found in the study and what we 9 did was, we looked at the City of Dallas and in Dallas 10 County and backed out the City of Dallas numbers. 11 Immediately -- and it's unfortunate the city council 12 didn't impose their smoking ban on April 1, because 13 all data is reported to the Commission on a quarterly 14 basis, so it would have matched up the numbers nicely. 15 Nonetheless, we started looking, 16 actually January 1 of 2000, trying to see trends. And 17 what we did, on the first page of the report, which we 18 provided to you through the staff, was an analysis 19 outside the City of Dallas and within the city limits 20 of Dallas, Calendar Year 2002 and 2003. And you see 21 very strikingly numbers falling in the City of Dallas 22 substantially, while almost all category of numbers 23 within Dallas County outside the City of Dallas are 24 up. 25 CHAIRMAN COX: And how big is that area 0018 1 outside the City of Dallas that you're measuring, 2 Stephen? Is that the whole state except for Dallas? 3 MR. FENOGLIO: No, no; no, no. It's 4 just Dallas County -- 5 CHAIRMAN COX: Dallas County? 6 MR. FENOGLIO: -- not including Dallas 7 city limits. You know, I saw the number at one point. 8 I mean, the Mesquite-Garland-Irving, Texas. It's a 9 substantial population. I can't recall the numbers 10 inside Dallas and in Dallas County. But my 11 recollection is, there are more people who live in 12 Dallas County, not including the city limits, than 13 live in the city limits of Dallas. 14 CHAIRMAN COX: Okay. 15 MR. FENOGLIO: In that regard, the City 16 of Dallas is similar to other cities in Texas where 17 there's been an exodus of individuals outside the city 18 limits, to the surrounding neighborhoods, or the rate 19 of growth has certainly increased substantially larger 20 outside the city limits of large -- of metropolitan 21 cities. 22 So again, the trend is striking. The 23 prizes, for example, were down 16.8 percent in the 24 City of Dallas. They were up 5.21 percent within 25 Dallas County, not in the City limits. You see net 0019 1 receipts were down substantially, 28.84 percent, in 2 the City of Dallas. Net receipts were down slightly, 3 4.51 percent. 4 Charitable distributions dropped a 5 whopping 62 percent, or 61.24 percent, while 6 charitable distributions increased in Dallas County, 7 outside the city limits of Dallas, 8.51 percent. 8 These numbers aren't surprising in 9 that -- and it's something that y'all delved into in 10 charitable bingo numbers. In that, you know, the 11 margins are very narrow. And if you suffer a 12 10 percent reduction in net receipts -- forget the 13 gross, for reasons that y'all have already 14 discussed -- if you were to suffer a decline of 15 10 percent, you're all of a sudden under water. 16 And here the decline in net receipts was 17 28.84 percent, so it should come as no surprise that 18 the charities are going to cut back and hold back 19 charitable distributions enough to weather the coming 20 economic fiscal storm. It continued; the storm 21 continued. There was increasing hemorrhage within the 22 City of Dallas. 23 We then go to the second page. It talks 24 about the number of occasions being declined -- or in 25 decline. And then we have a chart that shows the 0020 1 gross receipts, the total prizes, and net receipts. 2 We then go to show the charitable 3 distributions. It is my belief -- and I've spoken 4 with a number of charity reps, lessor reps and 5 manufacturer and distributor reps, that in looking at 6 what happened in the City of Dallas versus Dallas 7 County, that we know that there were four halls that 8 closed in this period of time. I have talked with two 9 of the hall charities and managers, two of the four 10 that closed, and their unanimous agreement was the 11 smoking ban forced them to close. 12 I'm not going to say there weren't other 13 economic decisions that were being made. And, as you 14 know, bingo has been in a steady decline statewide, 15 and part of that did influence their decision. But 16 when you saw -- I mean, there were charitable bingo 17 sessions where they were averaging 150. Within 30 18 days, they were down to 75, to 60 people per session. 19 These were halls where 70 percent of 20 their customers, total customers, were smokers and 21 stayed in the smoking sections. These halls had 22 dedicated, separated ventilation systems for smoking 23 versus non-smoking. And, I mean, the smoking 24 customers left in droves. 25 CHAIRMAN COX: So it wasn't a matter 0021 1 that it became more attractive to the non-smokers, 2 because they were already segregated from smoke? The 3 smokers left? 4 MR. FENOGLIO: Correct. And, again, I 5 have a lot of experience at River City Bingo at I-35 6 and Braker Lane in North Austin. Our average number 7 is roughly 135 people per session; we're a daytime 8 hall there. And if we lose 15 to 20 customers, there 9 is our profit. No question about it. You know, some 10 days it's even less than 15 to 20 is our profit. 11 And you've heard me discuss before 12 that's not surprising. I mean, Wal-Mart. You know, 13 the first 20 days of the month, any Wal-Mart store is 14 not going to make money if they can only operate the 15 first 20 days of the month. It's the last five to 10 16 days is when they cover all of their fixed expenses 17 and then start putting money into the bottom line. 18 And that's the same as it is for any business. 19 So the state of charitable bingo outside 20 the City of Dallas, inside Dallas County, remains 21 healthy and viable. Since the shake-out in the City 22 of Dallas, some halls are getting back on their feet. 23 But in looking at the numbers for charities within the 24 City of Dallas, it is very safe to conclude that none 25 are robust anymore. 0022 1 CHAIRMAN COX: Stephen, let me ask you a 2 question about one chart that I didn't hear you 3 comment on. This is the chart that's headed "City of 4 Dallas Charitable Bingo Trend in Average Player Spend 5 Per Occasion Since Smoking Ban." 6 MR. FENOGLIO: Yes. 7 CHAIRMAN COX: I see a significant 8 increase there. 9 MR. FENOGLIO: Yes. And, Commissioner 10 Cox, that is similar to what we've seen and you've 11 seen and you've commented on before. You're having 12 fewer customers, but you're getting more money out of 13 the customers that remain. And that's not a good 14 long-term strategy. 15 CHAIRMAN COX: Do those numbers -- does 16 that trend look about like things look in similar 17 halls around the state? 18 MR. FENOGLIO: No. These are slightly 19 higher, it's been my experience, than around the 20 state. Again, River City bingo, we track this number 21 every month. And our player spend has increased, not 22 as much as this, but it has tended to trend up. 23 Part of this is a churn. And if you see 24 in the mix of product that customers are consuming at 25 a bingo hall, we've shifted from regular bingo to 0023 1 instant bingo. And, as you know, there are so many -- 2 and it depends on each deal -- small winners. All of 3 the small winners are churned, or almost all of them 4 are just turned right back over. 5 So while it may look like it's a $24 to 6 a $30.73-cent, that's somewhat of a misleading number 7 because a lot of that -- again, the player product mix 8 has increased substantially to instant product, and a 9 lot of that product is being churned back into 10 additional spend in the hall. 11 CHAIRMAN COX: So pull-tabs, you have 12 greater churn, because it's quicker? 13 MR. FENOGLIO: Yes. 14 CHAIRMAN COX: It doesn't take as long 15 to get the money back into the system? 16 MR. FENOGLIO: Yes. And it's also a 17 part of the psychology of that player. I've read 18 several reports that casino operators have looked at 19 what I consider the walk-away number of a customer who 20 plays a game. And it may be for me, if I win $50 at a 21 game, I'm going to walk away with that winnings. I'm 22 not going to play it; I'm not going to churn it. 23 Other customers, it may be several 24 hundred dollars. Perhaps your higher player 25 customers, it may be several thousand. And it could 0024 1 be at a slot machine, at a lottery game, at a gaming 2 wager; you know, card game, roulette, whatever. 3 Most regular bingo is substantially -- 4 it's a substantial number, $250 to $750. Normally 5 most of that money leaves the hall that day. It's a 6 walk-away number. They'll give a tip to the 7 employees. They may play a little of that money, but 8 that's their walk-away number. 9 A pull-tab, because a lot of that 10 winning is 150 or less, those are churned back into. 11 And it's been my experience that if it's $50 or less 12 in a pull-tab winning, 100 percent of that is put 13 right back into the play. 14 CHAIRMAN COX: Sure. 15 MR. FENOGLIO: So, again, when you look 16 at that increased customer spend, it's somewhat of a 17 fiction, because more of that is being churned in the 18 hall. Nonetheless, it's been our experience at River 19 City -- and, again, we've watched that trend; we've 20 talked with our customers and our employees -- we are 21 getting more player -- absolute dollar from each 22 customer. But, again, on a long-term basis, you had 23 rather have more customers coming in than getting more 24 dollars from the same customers. 25 CHAIRMAN COX: Sure. 0025 1 MR. FENOGLIO: The last chart in your 2 book is an error. I calculated the five-year impact, 3 or attempted to calculate the five-year impact of the 4 City of Dallas smoking ban on prize revenues the City 5 collects from charitable bingo. That is not an 6 accurate chart. 7 Years ago when I was in college, 8 Commissioner Cox, I actually thought I would be an 9 accountant. And I went to University of North Texas 10 and got through cost accounting. And in cost 11 accounting, I learned that I have a lazy eye and I 12 transpose numbers like crazy. And I think this is a 13 result of me not being close enough to some numbers 14 and transposing numbers, that I don't have comfort in 15 that chart. 16 CHAIRMAN COX: So you just want me to 17 put an "X" through that? 18 MR. FENOGLIO: I wish you would. 19 CHAIRMAN COX: Okay. 20 MR. FENOGLIO: We will supplement it as 21 appropriate. In any event, I finished cost accounting 22 with a B and made a pledge to the gods that I would 23 never try to practice accounting again. And for the 24 most part, I've been successful in that. 25 CHAIRMAN COX: I know a lot of folks 0026 1 that would have liked to have had a B in cost 2 accounting. 3 MR. FENOGLIO: Well, in any event. 4 So bottom line on this, it's 5 unfortunate, but the City of Dallas gives us an 6 interesting laboratory to review of smoking impacts. 7 I have walked away with, after having interviewed 8 close to 75 people involved intimately in bingo in 9 Dallas and Dallas County, I've also spoken to several 10 operators around the state about their impact. And 11 there have been other ordinances passed. 12 By the way, in the BAC meeting, there 13 was a discussion about the City of Victoria. The city 14 of Victoria imposed a stringent non-smoking ordinance, 15 including on a bingo hall. 16 CHAIRMAN COX: And one of the members of 17 the BAC is from Victoria. 18 MR. FENOGLIO: That is correct. 19 Actually, I don't think they're from Victoria. 20 Mr. Heinlein works for the charities at the Victoria 21 hall, but I don't believe someone from the City of 22 Victoria would be -- 23 CHAIRMAN COX: There is a gentleman who 24 comes up here from time to time and speaks to us, from 25 Victoria, but he is not on that committee. 0027 1 MR. FENOGLIO: And I happen to represent 2 the charities at Victoria in a variety of licensing 3 matters. It's my experience that the City of Victoria 4 is not a good model to review, for two reasons. One, 5 it's a one-horse town. There is only one bingo hall 6 in the City of Victoria; and, two, it's isolated from 7 other halls. 8 CHAIRMAN COX: No place to go? 9 MR. FENOGLIO: Correct. But Dallas is 10 not a one-horse town, and it's certainly not a 11 one-horse bingo hall within the immediate area. 12 You've got a lot of halls within a 15-mile radius of 13 anywhere in the City of Dallas. I think it's close to 14 15 halls within that drive time. So it gives you a 15 good laboratory experiment. 16 I've also heard comments, "Well, but 17 there was expansion of Indian gaming going on in 18 Oklahoma at the time this ordinance was passed." 19 Actually, the expansion of Indian gaming began in 20 about 1999 in the City of Oklahoma when Indian tribes 21 became more and more involved in gaming. There were a 22 number of Class II gaming operations ongoing before 23 the Indian gaming expansion -- gross expansion 24 occurred, including two within a 10-minute drive of 25 the Texas border. 0028 1 I am sure that had some impact on the 2 decline in the City of Dallas. But you can't 3 explain -- if your theory is that that adversely 4 impacted only the City of Dallas, you can't explain 5 Dallas County. 6 CHAIRMAN COX: Right. 7 MR. FENOGLIO: So I will grant you that 8 there was an impact on the City of Dallas, but I think 9 it's fairly negligible. And the best evidence of that 10 is what was going on in other bingo halls in Dallas 11 County but outside the City of Dallas. 12 CHAIRMAN COX: Sure. 13 MR. FENOGLIO: So I'll be happy to 14 answer any further questions. 15 CHAIRMAN COX: Stephen, thank you very 16 much. 17 MR. FENOGLIO: Thank you. 18 AGENDA ITEM NO. III 19 CHAIRMAN COX: Agenda Item No. III, 20 report, possible discussion and/or action on the 21 implementation of recommendations contained in the 22 Internal Audit Report on bingo audit services, 23 including development of rules. 24 Mr. Sanderson. 25 MR. SANDERSON: Good morning, 0029 1 Commissioners. For the record, Phil Sanderson, 2 Assistant Director, Charitable Bingo operations 3 Division. I would like to bring you up to date on the 4 progress of the implementation of the recommendations 5 to the Interval Audit, those performed on the audit 6 activities of the Bingo Division. 7 The risk factors that are utilized to 8 determine who receives an audit during the process 9 have been developed by the Audit Services staff, and 10 they have been provided to the Internal Audit Staff 11 for comment. There were some discussions that were 12 held with Information Resources relating to automating 13 a program to help create the identifiable risk factors 14 to these organizations. And, additionally, we've 15 discussed with the Internal Audit Director the risk 16 factors, and we're currently making some modifications 17 to incorporate those comments. 18 The Desk Review Program Team continues 19 to conduct research on the desk review processes that 20 are used by other jurisdictions. The researchers 21 reveal that desk reviews conducted by other state 22 agencies where bingo is conducted were typically a 23 review of an opinion audit or an audited financial 24 statements that were submitted by their licensees, 25 based on a requirement in those jurisdictions. 0030 1 Additionally, Minnesota and Nebraska, 2 their staff have been extremely helpful in sending us 3 information, and we've got some more information that 4 they're going to be drafting and sending to us for us 5 to review. 6 The team has drafted the preliminary 7 desk review program and a desk review compliance 8 report, and it's been circulated to the Audit Manager 9 and the regional coordinators for their comment. 10 Currently we have six rules that are 11 moving through the rule process. The rule permissible 12 expenses has been circulated to representatives from 13 the BAC, the bingo industry, and was placed on our 14 website for informal comments. At this time we have 15 not received any significant comments to this rule, 16 and it is placed on today's agenda for your 17 consideration. 18 The minimum internal controls rule has 19 been reviewed by the Internal Audit staff, and we've 20 had two meetings to discuss the rule itself. And 21 we're incorporating the final comments for that rule, 22 hopefully to have it ready for the next Commission 23 meeting. 24 The draft rules for house rules and the 25 fair conduct of bingo and the general audit rule have 0031 1 been forwarded to Internal Audit for their review. 2 Once we've received our input from Internal Audit 3 staff, these two rules, along with the internal 4 control rule, will be sent to an internal committee 5 that is comprised of both bingo and other agency staff 6 from the Internal Audit, the Office of the Controller, 7 Governmental Affairs and the Legal Division for review 8 and comments. 9 Additional rules that are being 10 developed are the books and records rule and a dispute 11 resolution rule. Once I have reviewed these rules, 12 they, too, will be circulated through the internal 13 committee for review and comment. 14 The audit completion letter, the final 15 audit report and a written audit program have been 16 developed and is being reviewed. Additionally, as you 17 may remember, we have contracted with an individual to 18 provide training for the audit staff that's scheduled 19 for March 5th through the 8th. We have provided 20 copies of these documents -- the audit completion 21 letter and the final audit report as well as the 22 written audit program -- for the trainers' review and 23 comment and also, as well, to assist her in developing 24 a training program that is tailored toward our audit 25 activities 0032 1 The audit manager and I are developing a 2 proposal to address the look-back on audits. This 3 look-back period has been initially identified as 4 audit activities that were completed during the period 5 January 1, 2003 through December 31, 2006. 6 A meeting was held with the Internal 7 Auditor and the Controller to discuss the proposed 8 plan and also to see if additional outside resources 9 could be identified to assist with this examination. 10 The committee that is reviewing the 11 organizational structure of the Bingo Division 12 continues to meet, and they should have a draft report 13 with their recommendation within the next several 14 weeks. 15 That concludes my report. I will be 16 glad to answer any questions you may have. 17 COMM. CLOWE: Mr. Chairman, I would like 18 to hear from Director Sadberry and Internal Auditor 19 Melvin about their comments regarding this report and 20 the progress we're making, please. 21 CHAIRMAN COX: And if we could, I would 22 like to add Ms. Pyka to that. 23 COMM. CLOWE: Certainly. 24 MR. SADBERRY: Chairman and 25 Commissioner, I am continually involved in keeping 0033 1 abreast of the progress that is being made and 2 particularly the agency resources that are being 3 dedicated to that effort. 4 The committee addressing the 5 reorganization of the Charitable Bingo Audit Division 6 is comprised of a significant amount of lottery agency 7 staff which serves generally the bingo interest as 8 well as support capacity. Ms. Pyka, I think Toni 9 Erickson, Janine Mays, our HR Director, and Ed Rogers 10 are involved in that effort. 11 I am a member of the committee. I have 12 not met with the committee, but I've kept abreast of 13 the committee's activities through reports and 14 otherwise. And a draft report I understand was 15 prepared. I received legal advice with respect to the 16 direction of that report being received and acted 17 upon. 18 So as Director Sanderson has indicated, 19 that work is coming close to completion, as I 20 understand it. Now, where it proceeds from there, of 21 course, is the next step. But as far as the report of 22 the committee, I understand that to be at a point of 23 near conclusion, if not completion. 24 I have been apprised that as of 25 yesterday on the results of the meeting with 0034 1 Ms. Melvin and Ms. Pyka and Director Sanderson with 2 respect to the look-back audit and who may be involved 3 in that and the process that that might track. And I 4 think that is to be forthcoming, as I understand it. 5 I have conferred with Ms. Pyka regarding 6 available agency funds through lapsed salaries and 7 other sources that might be available for use for 8 outside consultants, if they can be identified and a 9 practical application can be made of services in that 10 regard. We're making the funds available if we can 11 identify the source of support and practical 12 application. 13 As you have indicated earlier, we 14 conferred, at your suggestion, with the State 15 Auditor's office regarding any assistance they may be 16 able to provide. And as of this date, we have not had 17 any identification of assistance, but they remain open 18 to our approach if there can be some assistance being 19 made in that regard. 20 I am concerned and keep abreast of the 21 timing. We continue to make the monthly reports to 22 the House Licensing Committee, which includes an 23 update on the implementation of the lottery audit 24 recommendations, as well as the implementation of the 25 Bingo Division on the Internal Auditor's 0035 1 recommendation. 2 And from reviewing those, I consider 3 that progress is being made. I believe agency staff 4 is committed and dedicated to that effort. I want to 5 be assured that we are moving in the direction that 6 the Commission wishes to see, and I'm always 7 interested in how I may be of assistance and my staff 8 may be of assistance in that ongoing process. 9 MS. MELVIN: For the record, Catherine 10 Melvin, Internal Audit Director. 11 Commissioner, you asked about 12 Mr. Sanderson's report. His report is accurate as it 13 relates to Internal Audit's involvement and assistance 14 to the division. We stand available to him and his 15 staff members, as needed, but we are also providing 16 specific assistance regarding proposed rules and other 17 initiatives that they're undertaking. 18 MS. PYKA: For the record, Kathy Pyka, 19 the Controller for the Commission. 20 And, like Catherine noted, 21 Mr. Sanderson's report is accurate as it relates to 22 our involvement from the Office of the Controller. We 23 have been involved in the Bingo Restructuring 24 Committee. And we are nearing the end of the work 25 there on developing recommendations that we have to 0036 1 have wrapped up in the next several weeks, and then 2 certainly trying to identify any available funding 3 sources via the lapsed salaries that could be used to 4 additionally supplement the work that's being 5 performed on this audit. 6 CHAIRMAN CLOWE: Thank you each for your 7 comments. And, Phil, thank you for stepping up as the 8 Assistant Director and heading up this project. I am 9 happy to see the progress that you're reporting on the 10 one hand. On the other, I always measure effort by 11 results produced. And I am somewhat impatient, in 12 that I would like to see this progress move along and 13 see us get to where we need to be. 14 I am pleased that you have initiated 15 this look-back, because of concern to me is the 16 fairness of the audits, the equity, the uniformity 17 that were conducted. And that situation that you're 18 dealing in right now has changed, evolves regarding 19 current audits and then, of course, the audits that 20 are going to occur in the future. 21 And my sense is, Catherine, that when 22 these changes occur and there is enough of a track 23 record, that you're going to need to go right back in 24 and do another audit to maintain confidence on behalf 25 of the commissioners that we have achieved the results 0037 1 that we want. I don't want us to be happy about 2 everybody thinking we're making progress and go to 3 sleep on this. I want to see some results. 4 MS. MELVIN: Yes, sir. I think a 5 follow-up on it is what you're proposing. It would be 6 very important in this situation, given the extent of 7 changes that the division is undertaking, and then 8 also, as you said, just to measure the progress that 9 they've made. 10 COMM. CLOWE: Thank you, Mr. Chairman. 11 CHAIRMAN COX: Thank you. Catherine, 12 along the lines of that last statement by Commissioner 13 Clowe, do you believe that while you're not actively 14 involved in this, you're staying abreast of what's 15 going on? Will you be in a position, pretty much at 16 the conclusion of Mr. Sanderson's process, to tell us 17 whether you think things are as they should be going 18 forward? 19 MS. MELVIN: I think it's very important 20 to maintain Internal Audit's independence, as you're 21 aware, so I can do just that. It is a very fine line 22 that we walk. You know, we provide recommendations; 23 we provide guidance along the way. It's a balance of 24 what's the best use of Internal Audit in the long run, 25 whether you prefer that Internal Audit's involvement 0038 1 and assistance is on the front end versus being more 2 focused on the tail end, waiting until they're done 3 and then make an assessment, and so we try to balance 4 that. But our eye is still on the ultimate outcome, 5 that at the end of the day we want to be in a position 6 to at least assess the important components of the 7 actions that they've taken. 8 CHAIRMAN COX: So if I understand that, 9 that was a "Yes"? 10 MS. MELVIN: That was a "Yes." 11 CHAIRMAN COX: Okay. Thank you. 12 Now, Phil, again long the lines that 13 Commissioner Clowe was going, when we undertook this 14 program, the schedule seemed to me a little bit 15 leisurely. And I think you're tracking it or maybe a 16 little ahead of it. Would that be a fair assessment? 17 MR. SANDERSON: Yes, sir, I believe we 18 are. 19 CHAIRMAN COX: I wonder if it's time to 20 look at it and say, "Okay. Let's get a little more 21 aggressive with this schedule. We know more about 22 what's in here now. Let's go in and refine those 23 dates and see if we can't move them up," some of them 24 significantly, because there were some out in 2008, if 25 I remember correctly, and I can't see this going to 0039 1 2008. So would you be willing to go in with whatever 2 other resources you need help from and take a look at 3 those dates and see if we can't move them up? 4 MR. SANDERSON: Yes, sir, I would be 5 glad to. 6 CHAIRMAN COX: Good. And, obviously, we 7 do not want the quality of the work to suffer, but I'm 8 really just talking about identifying the slack that's 9 in the schedule and taking some of it out. 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN COX: You mentioned the 12 look-back, and I know you'll be looking for external 13 resources there. It would be wonderful if we could 14 use some of the resources you have. But given that 15 they worked on some of those audits, that's 16 challenging. It would be great if we could use 17 Ms. Melvin's folks -- she doesn't have enough. 18 Is there a source in other state 19 agencies that we might look to for help here or are 20 they just as backed up as we are? 21 MR. SANDERSON: We can certainly look at 22 other state agencies that do regulatory type audits. 23 But my guess is, from the contacts that we've had with 24 them and our research for workpaper documentation in 25 other audit plans, that they are in the same situation 0040 1 similar to we are; they don't have enough staff to 2 perform the jobs that they're required to do. And it 3 may be difficult to cut them loose to help work on 4 ours. 5 CHAIRMAN COX: Have you had a discussion 6 with the State Auditor's office? 7 MR. SANDERSON: I have not personally. 8 Executive Director Sadberry has. 9 MR. SADBERRY: Chairman, I have met with 10 Mike Apperley, and we had I believe a thorough 11 discussion of our needs and the vetting on what their 12 capabilities were at the time. He asked to have some 13 time to think about it. In a meeting in a perhaps 14 different context, but also general discussion with 15 Mr. Keel, John Keel, the State Auditor, we discussed 16 that briefly as well. 17 My sense is that we should not 18 anticipate any time soon that there will be any 19 resources actively available to participate in the 20 look-back audit component of this. I do believe, 21 however, that it's possible that Mr. Apperley or 22 perhaps someone else on his staff might be available 23 to attend some of our meetings or act as a resource to 24 us to provide guidance along the way, particularly 25 with respect to the reorganization committee and other 0041 1 activities of that sort. I have not had confirmation 2 of that, but I'm still hoping that we can get some 3 confirmation and some assistance will be forthcoming. 4 I think we have some other potential 5 agency sources. I am not persuaded we've explored 6 that exhaustively, and I would like to have a chance 7 to look at that further to see if we can't identify 8 some additional agency sources outside of this agency 9 that might be of assistance. 10 CHAIRMAN COX: Thank you. 11 Phil, when do you anticipate that you 12 would be putting out a RFP or RFQ, whatever that might 13 be? 14 MR. SANDERSON: Right now we're 15 developing the list of the organizations or the audits 16 that are in that look-back period. And, of course, 17 then they will be segregated into different categories 18 as to certainly there are some audits where there were 19 no violations noted. Some audits had violations that 20 were just paperwork or reporting type violations, and 21 then others had monetary implications. 22 Once we identify that and look at what 23 that number is that we're looking at, that will help, 24 you know, better draft the RFP or RFQ. And in talking 25 with Ms. Pyka about this the other day, it's something 0042 1 that we would need to be fairly quickly if we wanted 2 to go ahead and use the funds that are available in 3 FY07. 4 CHAIRMAN COX: And do we anticipate that 5 this can be done on a fixed fee basis, or is this 6 probably going to be a time and materials kind of 7 contract? 8 MS. PYKA: I don't know that we've 9 gotten into the details of that. We would certainly 10 want to reach out to our procurement staff under Mike 11 Fernandez and talk about that in further detail. 12 Yesterday was just an initial meeting to talk about 13 the dollar value that we have accumulated to date and 14 wanted to clearly note that if we are -- depending on 15 what type of resource we use, either internal or 16 external, that if we go the external route, we 17 certainly need to get that procurement moving in order 18 to make sure that all services are received by 19 August 31. 20 CHAIRMAN COX: Okay. Thank you very 21 much. 22 AGENDA ITEM NO. IV 23 CHAIRMAN COX: Item IV, consideration of 24 and possible discussion and/or action, including 25 proposal of amendments or new rule, on 16 TAC §402.603 0043 1 relating to bonds or other security. 2 Ms. Joseph? 3 MS. JOSEPH: Good morning, 4 Commissioners. For the record, my names is Sandy 5 Joseph, Assistant General Counsel. 6 Item IV is a draft rule prepared for 7 submission to the Texas Register in order to propose 8 adoption of new rule 16 TAC §402.603 pertaining to 9 bonds or other security. The purpose of the new rule 10 is to set forth requirements for bonds or other 11 security that would provide the maximum opportunity 12 for participation in charitable bingo while protecting 13 the state's interest in timely remittance of prize 14 fees and rental taxes. 15 The submission prepared for the Texas 16 Register includes notice of a public hearing to be 17 held on March 30th at 10:00 a.m. I recommend that the 18 Commission initiate the rulemaking process by 19 publishing the proposed rule in the Texas Register in 20 order to receive public comments. 21 CHAIRMAN COX: And, Sandy, would you 22 just summarize the principal provisions of this rule. 23 MS. JOSEPH: In general, the bond or 24 other security amount required is reduced more than 25 half, from the current requirement. In addition, 0044 1 there are provisions that provide that if an 2 organization or other entity required to file a bond 3 is late and is late to the point that they go to a 4 jeopardy determination, at that time they would be 5 required to file a bond at three times their average 6 required payment for the previous quarters. 7 So what it does is reduce the entry 8 cost, so to speak. But then in the event there is an 9 organization or a lessor that does not pay timely, 10 then they are required to put up more bond or 11 security. 12 CHAIRMAN COX: The rule that we took 13 down, if I recall right, was a mirror of the statute. 14 The statute said we can charge up to three times and 15 the rule said we can charge up to three times. 16 MS. JOSEPH: That's correct. 17 CHAIRMAN COX: So it really provided no 18 guidance as to what might be appropriate in particular 19 circumstances? 20 MS. JOSEPH: Yes. 21 CHAIRMAN COX: Phil, what do you recall 22 our practice being? Were we charging three times? 23 Were we charging one time? Were we appropriately 24 varying it, given the circumstances? 25 MR. SANDERSON: The current rule -- not 0045 1 the proposed rule but the current rule that is being 2 repealed at this point required a three time bond 3 amount. 4 CHAIRMAN COX: It required a three time? 5 MR. SANDERSON: Yes, sir. 6 CHAIRMAN COX: So the statute said up to 7 three times and our rule said three times? 8 MR. SANDERSON: Three times; yes, sir. 9 CHAIRMAN COX: Okay. Thank you for 10 clearing that up. So we were extracting three times 11 from everybody? 12 MR. SANDERSON: Yes, sir. 13 CHAIRMAN COX: And then this one would 14 say when you come in, you get one times. But if you 15 don't pay us, we're going to up it to three times? 16 MR. SANDERSON: Correct. 17 MS. JOSEPH: Correct. 18 CHAIRMAN COX: Ms. Shankle, did you have 19 something you wanted to add to this? 20 MS. SHANKLE: Not on -- 21 MS. JOSEPH: She's available as being a 22 person who knows the details. 23 CHAIRMAN COX: Okay. So what we've done 24 here with this rule is provided people with an 25 opportunity to come in without a large bond. Now, is 0046 1 there ever an opportunity to have that bond refunded? 2 If they perform well for six quarters or the like, do 3 they get the one-time back? 4 MR. SANDERSON: The rule provides for 5 them to have a bond or bond refunded or released after 6 eight quarters of timely tax payments. 7 CHAIRMAN COX: After eight quarters? 8 MR. SANDERSON: Yes, sir. 9 CHAIRMAN COX: So the deal is now, you 10 come in and you get one time. Regardless of what your 11 history with other agencies or other people might be, 12 that's just it? 13 MS. SHANKLE: I would like to clarify 14 something. If you come in as an original organization 15 into a unit that has a taxpaying history and is not 16 required to post a bond, then that organization is not 17 required to post a bond. 18 CHAIRMAN COX: Okay. So a new one can 19 come in within a unit that isn't posting a bond and 20 not be required to post a bond? 21 MS. SHANKLE: That is correct. 22 MS. KIPLIN: Can you identify yourself 23 for the record. 24 MS. SHANKLE: Yes. Terry Shankle. 25 CHAIRMAN COX: All right. Any 0047 1 discussion on this? 2 CHAIRMAN CLOWE: Phil, I want to ask you 3 a question for clarification. Phil, you said, I think 4 in your comment, this rule we're repealing. We're not 5 considering the repealing of any rule at this point. 6 The recommendation is for a rule to be proposed for 7 consideration, is it not? 8 MR. SANDERSON: That is correct. We 9 have published a repeal of the bond rule, but it's 10 still in the comment period. 11 CHAIRMAN CLOWE: Right. 12 MR. SANDERSON: And now we're proposing 13 a new bond rule, that after the comment period has 14 passed on this current proposed, or if you decide to 15 propose this, they'll both come to the meeting at the 16 same time. 17 CHAIRMAN CLOWE: So the repealer would 18 come with the proposal for adoption? 19 MR. SANDERSON: Yes, sir. 20 CHAIRMAN CLOWE: And we are just 21 considering publishing for consideration at the 22 staff's request at this time? 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN CLOWE: Okay. I wanted to make 25 sure we knew where we were in regard to the rule. 0048 1 CHAIRMAN COX: Thank you for that 2 classification. 3 CHAIRMAN CLOWE: Chairman, I'm prepared 4 to make a motion if you want one. 5 CHAIRMAN COX: Please. 6 COMM. CLOWE: Move the adoption of the 7 staff recommendation. 8 CHAIRMAN COX: Second. 9 Motion has been made and seconded. All 10 in favor, say "Aye." 11 COMM. CLOWE: Aye. 12 CHAIRMAN COX: Aye. 13 Opposed? 14 The vote is 2-0. 15 MS. JOSEPH: And, Commissioners, if it's 16 agreeable to y'all, I'll bring up any memos for you to 17 sign at the conclusion of all my presentations. 18 CHAIRMAN COX: Good. 19 AGENDA ITEM NO. V 20 CHAIRMAN COX: So Item V, consideration 21 of and possible discussion and/or action, including 22 adoption of amendments, on 16 TAC §402.400 relating to 23 general licensing provisions. 24 Ms. Joseph. 25 MS. JOSEPH: Yes. Commissioners, this 0049 1 draft rule before you is recommended for adoption. 2 The amendments are contained in new Subsection (r). 3 The purpose of the amendment is to provide new 4 application guidelines that allow an authorized 5 organization to submit an original application to 6 conduct bingo without including the playing location, 7 days, times, starting date and Schedule F, which is 8 part of the application package pertaining to a 9 financial summary, if the authorized organization is 10 requesting a determination of eligibility status for a 11 license to conduct bingo. 12 This rule was published for public 13 comment, and a public hearing was held. All comments 14 received supported adoption of the proposed rule 15 amendments. In response to one comment, the staff did 16 agree that the filling of Schedule F, bingo financial 17 summary, is not necessary if the authorized 18 organization is requesting a determination of 19 eligibility status. Addition of Schedule F to the 20 information that is not required to be filed initially 21 is the only change to the rule as it was proposed. 22 Staff recommends that the Commission 23 adopt the amendments to 16 TAC §402.400, as shown on 24 the draft in your notebook. 25 CHAIRMAN COX: These are amendments to 0050 1 the general licensing provisions that provide for a 2 determination of eligibility for a license before the 3 licensee has its location, a place from which it can 4 operate? 5 MS. JOSEPH: That's correct. 6 CHAIRMAN COX: So this could be seen as 7 streamlining the process so that they can get a 8 determination of eligibility while they're finding a 9 location? 10 MS. JOSEPH: That's right. 11 CHAIRMAN COX: It could be seen as a 12 first step to find out whether they're going to be 13 determined eligible before they incur the expense of 14 finding a location. So this seems to have some good 15 points to it. 16 MS. JOSEPH: I believe it does. 17 CHAIRMAN COX: Okay. Do you have any 18 questions? 19 COMM. CLOWE: And in light of 20 Commissioner Cox's questions, does this cure the 21 complaint that Chairman Flores had, that he brought up 22 at one of the licensing committee hearings? 23 MS. JOSEPH: Staff believes that it 24 does; we believe that it does. 25 CHAIRMAN COX: All right. I move that 0051 1 we adopt the amendments as presented to us. 2 COMM. CLOWE: Second. 3 CHAIRMAN COX: All in favor, say "Aye." 4 COMM. CLOWE: Aye. 5 CHAIRMAN COX: Aye. 6 Opposed? 7 Motion carries 2-0. 8 MS. KIPLIN: Mr. Chairman, I have an 9 order to present to you. There is one thing I want to 10 point out. It will not affect your signature page, 11 but I want to go on the record. The first paragraph, 12 there's two words that need to be added, "be adopted." 13 So with your permission, I'll make that change, but it 14 will not affect your signature page. 15 AGENDA ITEM NO. VI 16 CHAIRMAN COX: Item VI, consideration of 17 and possible discussion and/or action, including 18 proposal, on new rule 16 TAC §402.204 relating to 19 prohibited price fixing. 20 Ms. Joseph. 21 MS. JOSEPH: Before you is a draft rule 22 amendment prepared for submission to the Texas 23 Register in order to propose the adoption of new rule 24 16 TAC §402.204 pertaining to prohibited price fixing. 25 The proposed rule would provide additional information 0052 1 to manufacturers, distributors and authorized 2 organizations relating to Tex. Occ. Code §2001.556 3 pertaining to price fixing. 4 This draft is the result of diligent 5 efforts by a group of stakeholders that appeared 6 before you at the December 13, 2006 Commission meeting 7 and made comments on the draft rule presented at that 8 time. You afforded those stakeholders the opportunity 9 to address their concerns by working with staff to 10 develop a revised draft rule. Since that time, the 11 group dedicated many hours to discussion in drafting 12 the proposed rule recommended to you today. 13 Overall, this proposed rule is more 14 focused and straightforward than the draft presented 15 to you in December. Recognizing that this draft may 16 not be any one person's idea, those who worked on it 17 support its publication for public comment. 18 Individual stakeholders will, of course, be able to 19 offer further comment on sections of the rule that 20 they would like to see modified. 21 I recommend that the Commission initiate 22 the formal rulemaking process by publishing the 23 proposed rule in the Texas Register in order to 24 receive public comments for a period of 30 days. This 25 submission prepared for the Register includes notice 0053 1 of a public hearing to be held on March 30, 2007, at 2 10:00 a.m. 3 I would be happy to answer any 4 questions. 5 CHAIRMAN CLOWE: Ms. Joseph, I remember 6 that meeting in December, and I remember the 7 commitment that the stakeholders made. And although 8 you said this may not represent 100 percent of 9 everyone's desire, you told us there was some degree 10 of unanimity. Is that correct? 11 MS. JOSEPH: Yes, sir. 12 COMM. CLOWE: Can you list those 13 stakeholders for us at this time? 14 MS. JOSEPH: Yes, I believe I can. 15 Danny Moore, represented by Amy Tabor; Jane Thompson, 16 represented by Caroline Scott; Knowles Cornwell, along 17 with Darin Peters who works with him; Stephen 18 Fenoglio; Jim Marcum, who is with Game Tech; Tres 19 Gray, who is another distributor. In addition, 20 although not on the workgroup, Steven Hieronymus 21 provided comments. 22 COMM. CLOWE: I want to express, I think 23 for both of us, our appreciation for this 24 collaborative effort to come up with this rule. And I 25 look forward to making a motion to adopt the staff 0054 1 recommendation and then see the subsequent comments 2 that are made on this proposed rule. 3 CHAIRMAN COX: Just one question before 4 he does that. Sandy, were there any persons who 5 wanted to participate in this that either were 6 excluded or were unable to do so? 7 MS. JOSEPH: I'm not aware of that. We 8 certainly welcomed and accepted comments from anyone. 9 And no one approached me that wanted to participate 10 that was not allowed to do so. 11 CHAIRMAN COX: And I think I remember 12 that in December, Danny Moore and Ms. Tabor were here, 13 and they offered to help. And we invited others to 14 participate. So all-comers were allowed to 15 participate? 16 MS. JOSEPH: Yes. 17 CHAIRMAN COX: Excellent. 18 COMM. CLOWE: Move the adoption of the 19 staff recommendation. 20 CHAIRMAN COX: Second. 21 All in favor, say "Aye." 22 COMM. CLOWE: Aye. 23 CHAIRMAN COX: Aye. 24 Opposed? 25 Motion carries 2-0. 0055 1 2 AGENDA ITEM NO. VII 3 CHAIRMAN COX: Item VII, consideration 4 of and possible discussion and/or action including 5 proposal, on new rule 16 TAC §402.505 relating to 6 permissible expense. 7 MS. JOSEPH: Commissioners, this item is 8 a draft rule prepared for submission to the Texas 9 Register in order to proposed adoption of a new rule, 10 16 TAC §402.505 entitled "Permissible Expense." 11 The purpose of the new rule is to 12 provide licensed authorized organizations with 13 guidance related to the expenditure of funds generated 14 from the conduct of bingo games. This submission also 15 includes notice of a public hearing to be held on 16 March 30, 2007, at 10:00 a.m., in order to receive 17 comments on the proposed rule. 18 I recommend that the Commission initiate 19 the rulemaking process by publishing the attached 20 proposed rule in the Texas Register in order to 21 receive comments for a period of 30 days. 22 COMM. CLOWE: Ms. Joseph, what level of 23 participation have you had from the industry in the 24 drafting of this rule to date? 25 MS. JOSEPH: This rule was drafted by 0056 1 staff and subsequently placed on the website and 2 circulated to certain interested stakeholders of which 3 we were aware, in order to receive comments. 4 Mr. Sanderson circulated the rule. I don't believe he 5 received any negative comments. In fact, any comments 6 received supported publication of the rule. 7 Is that correct? 8 MR. SANDERSON: That is correct. And, 9 additionally, it was an agenda item on the BAC meeting 10 that was February the 7th. And we did not receive any 11 negative comments on the rule, generally in support of 12 publishing it for public comment. 13 COMM. CLOWE: So although you broadcast 14 this widely in the industry, my sense is, you haven't 15 had the depth of participating that you had in the 16 prior recommendation. Is that correct? 17 MR. SANDERSON: If you're comparing it 18 to the price-fixing rule, that is correct. There were 19 not any scheduled meetings of stakeholders to go over 20 this rule. It was published on the website in draft 21 form for informal comment. 22 We received no informal comment from the 23 website posting. And there again, at the BAC meeting, 24 there was discussion amongst the BAC members and other 25 interested individuals discussing this rule. And the 0057 1 comments were not what we feel of a significant nature 2 that could not be addressed in the public comment 3 period. 4 COMM. CLOWE: The reason I ask that is 5 that there has been a lot of controversy around this 6 issue in my recollection, particularly in the area of 7 being able to define what a permissible expense is. 8 And my hope is that this rule will address that and 9 help the industry make those determinations so that 10 they are able to conform with the proposed rule, if 11 that's what the Commission adopts, and provide clarity 12 in those questions that I think are legitimate and are 13 needing to be answered by this rule. 14 So my comment to you at this point in 15 time before the vote is that I really want to see the 16 stakeholders come forward and participate in this as 17 well, because I would like to lay this issue as much 18 as possible to rest in this rule and answer these 19 questions to the industry. 20 MR. SANDERSON: We can certainly do 21 that. This rule, of course, addresses the terms 22 "reasonable" or "necessary." And the research that we 23 performed in preparing this rule, we utilized IRS 24 Circular 122 and the terms that they use in that 25 publication. 0058 1 We did meet with, you know, a couple of 2 the members. We sent an e-mail out with the rule to 3 three industry representatives and three BAC members. 4 There was not really any response from them one way or 5 the other on the rule. But during this comment 6 period, we can definitely, you know, reach out to 7 these other individuals and see if there's any 8 possible changes that we may need to make to this 9 rule. 10 CHAIRMAN CLOWE: Well, I think you 11 should reach out and ask for their comments and get a 12 broad level of activity, if it's possible, because I 13 would like to get this question answered so that it's 14 not continuously coming up, as it's been in the past, 15 if that's possible. It's difficult, I understand. 16 MR. SANDERSON: This rule is very 17 difficult because it does have -- it puts a lot of 18 burden on the organizations to maintain documentation 19 to substantiate and support their justification for 20 either the expenditure or the amount of the 21 expenditure. And that's going to be the key, is going 22 to be the documentation. And this rule, along with 23 the other rules that are being developed, will in the 24 end all work hand-in-hand together to help with that 25 goal. 0059 1 COMM. CLOWE: Thank you, Mr. Chairman. 2 CHAIRMAN COX: Ms. Joseph, this rule -- 3 now, before I comment on the rule, let me ask a 4 question relating to a couple of terms that I've heard 5 used, "reasonable and necessary" and "reasonable or 6 necessary." Can you bring those two different 7 standards into sharp focus for me as to which one 8 applies when and which one applies at another time? 9 MS. JOSEPH: I'll try to do that without 10 my notes. It does take some close, you know, scrutiny 11 of the statutes. But §458 of the Bingo Enabling Act 12 applies to -- and tell me if I'm wrong -- to bingo 13 account. 14 Is that correct? Do you have it there, 15 funds in the bingo account? 16 MR. SANDERSON: 458. 17 MS. JOSEPH: Or am I getting them mixed 18 up? There's 453 and 458, and I want to make sure I -- 19 there we go. Okay. I'm sorry. 20 I wasn't expecting this, so that's fine. 21 But I'm sorry I'm not better prepared for you. 22 CHAIRMAN COX: No hurry. 23 MS. JOSEPH: Okay. And I did have it 24 reversed. §453 of the Act pertains to authorized uses 25 of the bingo account, and it provides that funds from 0060 1 the bingo account can only be used for the payment of 2 necessary and reasonable. 3 CHAIRMAN COX: And reasonable? 4 MS. JOSEPH: And reasonable. So that's 5 funds from the bingo account. 6 458 pertains to expenditures for bingo- 7 related expenses, but it's not limited to expenditures 8 from the bingo account. We see that as being 9 expenditures from other sources. That statute uses 10 the terminology "reasonable or necessary." 11 So our understanding of the statutes, 12 reading them together and recognizing that the 13 Legislature is believed to have understood what it was 14 doing in using different terminology in different 15 sections, our understanding is that in order to spend 16 from the bingo account, the expenditure must be both 17 reasonable and necessary. However, if spending money 18 from other sources on bingo-related expenses, the term 19 "or" is used, so it must be reasonable or necessary. 20 CHAIRMAN COX: Okay. Now, Phil, there 21 is a workgroup right now that Chairman Flores has 22 convened. Are you a part of that workgroup? 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN COX: And is this one of the 25 issues that they're looking at, the potential 0061 1 conflicts between these two sections? 2 MR. SANDERSON: I believe it is. 3 Mr. Fenoglio is also on that workgroup, and he has 4 indicated that they're looking at harmonizing those 5 two statutes. 6 COMM. COX: Okay. Now, before I get 7 into my questions about this, I would like to hear 8 what Mr. Fenoglio has to say. 9 MR. FENOGLIO: Thank you. I filed an 10 appearance slip. For the record, my name is Stephen 11 Fenoglio. 12 We believe the rule is ripe for 13 publication, for comment. This will be probably one 14 of the quickest, if not the quickest rules that has 15 been proposed. And I think Mr. Sanderson sent it 16 around January 28 or 24 or something like that, for 17 informal comment. And I was on the circulation list, 18 and I forwarded it to a number to my clients. 19 Most of my clients are at a point of 20 rule fatigue because of the different rulemakings. 21 And I know your staff are suffering from the same 22 dilemma. But, nonetheless, we think it's a good 23 draft. We think there needs to be some tweaking. 24 I've had informal discussions with Mr. Sanderson about 25 it. If the Commission agrees, there will be a public 0062 1 comment period March 30. At least that's the 2 contemplation in the draft before you. And I 3 anticipate there will be a number of written comments. 4 I don't know of anyone in the 5 industry -- and I've purposely sought out people who 6 have had problems with audits in the past. I know of 7 no one who has a problem with the draft rule. They 8 may want some tweaking going on, but that's why I say 9 it's ready for publication, for public comment. 10 Turning to your last observation and 11 question, yes, it is our intention that this issue of 12 "and" versus "or" will be resolved in this legislative 13 session. As you know, Chairman Cox, it's always 14 difficult to predict what the Legislature may or may 15 not do. But we visited with Chairman Flores and the 16 staff, and his staff about it, and they understand the 17 issue. And it is my understanding that the issue will 18 be resolved to the satisfaction of all parties. 19 I don't agree with Ms. Joseph's 20 conclusion about the use of funds from bingo versus 21 non-bingo account, but I think that's irrelevant. 22 I'll be happy to explain that, but I think for 23 purposes -- 24 CHAIRMAN COX: That one is sufficiently 25 confusing already. 0063 1 MR. FENOGLIO: Okay. I think it's 2 sufficient to -- as far as the publication of the 3 rule, I think if you have the rule in place, the staff 4 wins because there's a lot of clarity given, and the 5 charitable organizations win for the same reason. 6 They now know definitively the type of recordkeeping 7 they should maintain, the type of recordkeeping that 8 the staff is going to look for them to have available 9 to them. 10 It's not a perfect world, and that's the 11 case with IRS. If you're audited by the IRS, you 12 know, there are a lot of records that, "Gee, I wish I 13 had kept." But for the first time in writing, 14 licensed organizations will know the type of record- 15 keeping they need to maintain, the type of 16 documentation they have to have. And so I think 17 that's -- and I think the public's interest is well- 18 served by that. 19 CHAIRMAN COX: Well, that is reassuring 20 to me. My question was, is this definitive enough? 21 And I think I heard you use the word "definitive." 22 MR. FENOGLIO: Yes. 23 CHAIRMAN COX: I was concerned that it 24 might be so general that it didn't provide the kind of 25 guidance that we would like to provide, recognizing, 0064 1 as Sandy and I have discussed how difficult it is to 2 provide guidance that's real specific. 3 MR. FENOGLIO: We had that discussion 4 yesterday with the staff. And I think you have to 5 publish the rule, get the feedback. I don't think it 6 will change much from where it is today. That's my 7 prediction. And then there is going to be a time 8 where the industry and the agency are going to work 9 together to determine on a case-by-case basis. 10 I agree with you; it is general. But I 11 think for today, what we know today, that's where we 12 want it to be. I think that's where the agency wants 13 it to be, and I think that's where the charities want 14 it to be so that once the auditors get ahold of it and 15 once there are a few audits that are occurring, then I 16 think -- and, actually, Ms. Kiplin's role when we were 17 discussing this, it's a series of circles. 18 Within the tightest circle is what 19 clearly you can do with bingo money. The outer circle 20 is the outer, far outer limit of what you cannot do. 21 And there's a lot of difference in the divide. And I 22 think as the agency starts auditing charities -- and 23 we talked about this in the standpoint of advisory 24 opinions as well -- focusing in on that. I think 25 that's where you'll be happy. 0065 1 You know, when I first read, as a 2 business taxpayer, some of the IRS regs that I'm 3 required to follow -- and I would like to think I'm a 4 fairly smart guy -- I got confused in a hurry. 5 They're not a modicum of clarity, some of them, the 6 ordinary and necessary standard for commercial 7 taxpayers. 8 But when you start looking at the 9 history, you understand why those words were chosen, 10 and then you start looking at the agency's experience 11 and what they've been comfortable approving as an 12 ordinary and necessary expense, et cetera. So I think 13 that's where this agency is. It's unfortunate in a 14 sense that we didn't have this discussion five years 15 ago about the necessary of a rule. 16 And I recall Mr. Sanderson raising the 17 issue with me about three years ago about a rule, and 18 I thought, "No, no. Here comes another rule. You're 19 killing the industry with rules." And, by the way, I 20 think that will be one comment some people will make 21 is, "We've got all these new rules. We don't want 22 more rules." It's a rare day when there are fewer 23 rules than more. The challenge for us and for you and 24 for the staff is to get the language that the 25 licensees can work with. 0066 1 CHAIRMAN COX: Yes. And we're right now 2 trying to reshape this regulatory environment. And 3 some of these rules are a part of that. Some of these 4 rules are at the strong suggestion of our oversight 5 committee. So I hope that everyone will bear with us. 6 I think we're headed in the right direction. 7 MR. FENOGLIO: And I agree. 8 MS. KIPLIN: Mr. Chairman, if I might 9 add one comment -- 10 CHAIRMAN COX: Please. 11 MS. KIPLIN: -- to follow up on 12 Mr. Fenoglio. We did have, I thought, a very good 13 discussion on interpretation even beyond, if the 14 Commission elects to adopt this rule, on what these 15 words will mean as we go through. And I do agree, I 16 think, through the request and issuance of the 17 advisory opinions that will be developed, I also think 18 that the Commission has the ability to develop that as 19 their own interpretation, through the issuance of its 20 Commission orders. Not to say that that's the only 21 process available but to make sure that's on the 22 record in terms of an ad hoc rulemaking that has been 23 clearly upheld by courts as being an appropriate 24 exercise of state agencies' authority. 25 CHAIRMAN COX: Okay. Anything further, 0067 1 sir? 2 COMM. CLOWE: No, sir. 3 CHAIRMAN COX: All right. I move that 4 we publish this proposed rule for comment. Second? 5 COMM. CLOWE: Second. 6 CHAIRMAN COX: Motion is made and 7 seconded. All in favor, say "Aye." 8 MS. TAYLOR: Aye. 9 CHAIRMAN COX: Any opposed? 10 The motion passes 2-0. 11 MS. JOSEPH: I have three T-bar memos 12 related to those items that you have approved for 13 publication. 14 AGENDA ITEM NO. VIII 15 CHAIRMAN COX: Item VIII, report by the 16 Charitable Bingo Operations Director and possible 17 discussion and/or action on the Charitable Bingo 18 Operation Division's activities. 19 Mr. Sanderson. 20 MR. SANDERSON: Commissioners, in your 21 notebook is the report from the Charitable Bingo 22 Division, along with the weekly status report of the 23 activities. I would like to point out that the 24 quarterly reports for the fourth quarter were due on 25 January 25th. Allocations are scheduled to be made 0068 1 towards the end of this week or the first part of next 2 week to the local jurisdiction for the prize fees that 3 were collected. 4 And also I believe that, just briefly, 5 the annual gross receipts for the 2006 top 6 $650 million, which is the highest since 1992 in gross 7 receipts. And I would be glad to answer any questions 8 you may have. 9 COMM. CLOWE: Phil, in your role as the 10 Assistant Director and during the time of the search 11 for the director position to be filled, are you 12 getting all the help and the assistance you need to 13 conduct the business of the division correctly and 14 satisfactorily? Do you need any additional support or 15 assistance that the Commissioners need to be aware of? 16 MR. SANDERSON: No, sir, not at this 17 time. Executive Director Sadberry and the other 18 division directors have been very forthcoming in 19 offering their assistance and also the assistance of 20 their staff when needed. 21 COMM. CLOWE: And do you feel that the 22 industry, the public, is being served during this time 23 without any disadvantage as we go through this 24 transition process? 25 MR. SANDERSON: Yes, sir, I believe so. 0069 1 As far as our complaints that are coming in the 2 Enforcement Discussions, Mr. Carney and his staff are 3 continuing to investigate any complaints that we 4 receive. The Audit staff, of course, most of their 5 time has been taken up in research and drafting some 6 of these rules. There are a few audit activities that 7 are being performed at this point in time also. And, 8 of course, the Licensing and the Accounting sections 9 are keeping up on the issuing of the licenses and the 10 monitoring of the quarterly reports that are being 11 submitted. 12 COMM. CLOWE: Thank you, Mr. Chairman. 13 CHAIRMAN COX: Commissioner, I know that 14 at the last Bingo Advisory Committee meeting, you and 15 I were both in attendance for part of it. At the part 16 that I attended, I heard some favorable comment on the 17 activities of the division. I was pleased to haar 18 those things. 19 COMM. CLOWE: Good. 20 CHAIRMAN COX: Phil, thank you very 21 much. 22 MR. SANDERSON: Thank you. 23 CHAIRMAN COX: Commissioner, would this 24 be a good time to take a short break? 25 COMM. CLOWE: Yes, sir. 0070 1 CHAIRMAN COX: Okay. Well, let's break 2 for about 10 minutes. 3 (Off the record: 10:16 a.m. to 10:32 4 a.m.) 5 CHAIRMAN COX: Let's come back to order. 6 AGENDA ITEM NO. IX 7 CHAIRMAN COX: Item No. IX, 8 consideration of and possible discussion and/or 9 action, including withdrawal and proposal, or 10 adoption, on new rule 16 TAC §401.316 relating to 11 "Daily 4" on-line game rule. 12 Ms. Woelk, Mr. Tirloni. 13 MS. WOELK: Thank you. 14 CHAIRMAN COX: This sounds like it's 15 going to be complicated. 16 MS. WOELK: We'll make it very clear and 17 easy. 18 CHAIRMAN COX: Good. 19 MS. WOELK: This item is in regard to 20 the Daily 4 game rule that you voted in December to 21 publish. It appeared in the Texas Register on 22 December 29th, and it allowed the operation of a 23 second daily numbers game, similar in style to Pick 3. 24 We held a public comment hearing on 25 January 11th and received no public comment. We did 0071 1 receive written comments from Dawn Nettles, and she 2 incorporated apparently comments she received from 3 people she communicates with. 4 We are recommending that you adopt the 5 rule, with some changes. The draft that's actually in 6 your notebook still refers to the add-on feature as 7 Lucky Sum, and now we're proposing EZ Sum. So I do 8 have the cleaner versions here. And the adoption 9 order is correct if you want -- but the main change -- 10 I'll review -- the changes that are described in your 11 notebook are the ones we're making. 12 Most of the changes we made at 13 Ms. Nettles' suggestion were changes to the prize 14 charts. She did a good job of looking at them and 15 made some good suggestions for making them clearer and 16 easier to read, so we took her suggestions. 17 She made some other comments that we 18 didn't adopt, and we explained why, or we didn't 19 recommend and explained why. One of these is, she is 20 a comment -- she has made another comment that she 21 believes all prizes should be parimutuel, and this is 22 an all-guaranteed prizes game. So that's just I think 23 a running disagreement. 24 We also received a comment from a 25 Mr. Knowles Cornwell, and his comment is set out 0072 1 completely in the draft at Page 5. The one noteworthy 2 change is that we're recommending that you adopt the 3 rule and refer to the add-on fee through the totals 4 bet, the bet on the total of the numbers chosen, as EZ 5 Sum, not as Lucky Sum. 6 And if you want some background on how 7 we got there, Robert can talk to you about that. And 8 I can talk to you on the issue of what kind of changes 9 you can make in a proposed rule without having to 10 republish it. So whichever of those topics you're 11 more interested in, we can walk through with you. 12 CHAIRMAN COX: Do you have a 13 recommendation among those choices? 14 MS. WOELK: I recommend that you do 15 adopt Daily 4. The legal issue is the change, the 16 kind of change that would require you to do a new 17 round of public notice. And there is a 2004 Supreme 18 Court case on what tests they apply to determine 19 whether you have to republish. And the issue is 20 whether the agency's notice fairly apprises affected 21 parties of the pertinent issues to allow them to 22 comment and participate in the rulemaking process in a 23 meaningful and informed manner. And there's another 24 case earlier that says if the changes affect a new 25 group of people that weren't on notice that they might 0073 1 be interested in this, that's the sort of companion 2 test. 3 I don't think you have to establish game 4 name by rule at all. You use rules when you're 5 affecting private rights and procedures that will 6 affect people. And we take a lot of actions in regard 7 to the actual implementation of a game, designing a 8 logo, writing the scripts for advertising. And we 9 don't include those in the rule because we don't view 10 those as the kind of things that have to be 11 established by rule. 12 And a game name is really similar to 13 those things -- we use a game name in the rule, just 14 because otherwise you would have to refer to it as the 15 game with the features described herein or something 16 ungainly and lawyerly. So it's useful to have a name 17 in the rule. But in my view, a game name is not 18 required to be established by rule. It doesn't affect 19 their party rights. It doesn't establish what you 20 risk while playing the game, what you can claim if you 21 have a winning ticket. Those are the important issues 22 to establish by rule. 23 That doesn't mean you aren't interested 24 in what the public has to say about a name. They 25 might find a name attractive or offputting. And 0074 1 that's clearly a key issue that we do and should 2 address, but it doesn't have to be addressed in a 3 rulemaking process. That's more a marketing kind of 4 issue that you might be interested in knowing how the 5 public reacts to a game name. 6 So I don't believe -- and I think Kim 7 agrees -- that this is not the kind of change that 8 requires republication. And we do recommend that you 9 go ahead and adopt the rule with the changes to the 10 prize charts and the other changes we've recommended. 11 If you do want to republish, we do have 12 the documents available for you to. 13 CHAIRMAN COX: So you're recommending 14 the action under Tab A? 15 MS. WOELK: Which is that you adopt the 16 rule with the changes we've included in the order. 17 CHAIRMAN COX: Commissioner? 18 COMM. CLOWE: Well, I assume both 19 Commissioners have been briefed about the proposed 20 name change? 21 I'm sorry. My mike wasn't on. 22 I suppose that both Commissioners have 23 been briefed about the issue of the name change? 24 MS. WOELK: I believe, yes, that Kim 25 talked to you. And I've talked to Commissioner Cox. 0075 1 COMM. CLOWE: Yes, I know I have. I 2 didn't know whether Chairman -- 3 CHAIRMAN COX: I have as well. 4 COMM. CLOWE: So we understand that 5 issue. 6 I guess there are two areas here. 7 Maybe, Robert, I would like to hear you talk about, 8 for the record, why the change in the name is put up, 9 the difference in Lucky 4 and EZ 4. Is that it? 10 MR. TIRLONI: For the record, my name is 11 Robert Tirloni. I'm the Products Manager for the 12 Commission. 13 The rule as proposed was Lucky Sum. 14 COMM. CLOWE: Lucky Sum. 15 MR. TIRLONI: And due to some 16 intellectual property issues that Sarah could probably 17 speak to in greater detail, but due to some 18 intellectual property issues that were brought to our 19 attention by GTECH after we published the rule, we 20 have been advised that we should not use the name 21 Lucky Sum. And so staff came up with the replacement 22 name for that concept, which we're proposing as 23 EZ Sum. 24 CHAIRMAN CLOWE: EZ Sum? 25 MR. TIRLONI: EZ Sum. And we actually 0076 1 have -- 2 COMM. CLOWE: E-Z? 3 MR. TIRLONI: The letters E-Z sum, yes. 4 COMM. CLOWE: Okay. 5 MR. TIRLONI: And we actually have 6 experience using the letters E-Z in connection with 7 the Pick 3 game, dating back to the nineties when that 8 game was relaunched or reintroduced. I think it was 9 back in '95. The tagline was, "Pick 3 is EZ," and 10 there was a whole statewide campaign that was utilized 11 to try to reinforce that. One of our more complex 12 games was, in fact, pretty EZ to play. And it was 13 very successful as, you know, 10 years later or 12 14 years later, Pick 3 was one of our -- or is our best 15 selling on-line game. 16 COMM. CLOWE: And you like that, along 17 with EZ Pawn and EZ Liquors and -- (laughter)? 18 CHAIRMAN COX: EZ Mart. There's plenty 19 of them out there. None of those people care that we 20 use this name? 21 MR. TIRLONI: I believe we did a -- or 22 GTECH did a search for us, and they have cleared EZ 23 sum for our use. We also did some research on EZ. 24 There's EZ Pass, which is a toll collection system in 25 the northeast, and there is a 1040 E-Z form. 0077 1 CHAIRMAN COX: The IRS probably wouldn't 2 mind our using it? 3 MR. TIRLONI: I don't think they would. 4 So there is -- 5 COMM. CLOWE: The ad agency liked Easy? 6 MR. TIRLONI: The ad agency liked Easy 7 spelled out, E-a-s-y. 8 COMM. CLOWE: Why did they like that, 9 Robert? 10 MR. TIRLONI: They didn't like the use 11 of the letters E-Z. We talked to GTECH Marketing and 12 Sales staff. They support the letters E-Z because 13 they believe, as staff does, that will show up on the 14 ticket, on the actual printed ticket better for space 15 purposes. And there are actually some other states 16 that are using -- specifically Florida -- has an 17 add-on game called EZ Match. 18 COMM. CLOWE: Why did the ad agency like 19 E-a-s-y? 20 MR. TIRLONI: I think they liked E-a-s-y 21 because they did not like the letters E-Z. 22 CHAIRMAN COX: That's circular, isn't 23 it? 24 COMM. CLOWE: It's kind of like making 25 complicated understandable by making it clear, Sarah. 0078 1 You lost me on that curve. 2 MR. TIRLONI: I think they pointed out 3 the example that you gave about EZ Pawn and EZ Mart 4 and other uses of E-Z that they did not feel would be 5 good for the Commission to use for an add-on game. 6 COMM. CLOWE: Because? 7 MR. TIRLONI: Because they feel that it 8 was -- you know, it represented an image that the 9 Commission would not want to be associated with. 10 CHAIRMAN COX: Somehow, I see an orange 11 E and a green Z. 12 MR. TIRLONI: We have not designed the 13 logo yet at this point in time. 14 CHAIRMAN COX: I'm not suggesting that. 15 Believe me. That's just the image -- 16 MR. TIRLONI: No. I understand. 17 CHAIRMAN COX: -- that it conjures up. 18 And I think maybe I'm feeling some of the same pains 19 that -- 20 COMM. CLOWE: He's afraid you're going 21 to design is that way, I think. 22 CHAIRMAN COX: I maybe have some of the 23 same concern that the advertising agency has. 24 What about Florida? Are they going to 25 see the humor in our using the same name they use? 0079 1 MR. TIRLONI: Well, their name is 2 EZ Match. It's a different game. It's not the same 3 game we -- 4 CHAIRMAN COX: Well, there seems to be 5 an infinite number of EZs out there that we can just 6 pick and choose from. 7 MR. TIRLONI: Well, I mean, this is a 8 completely different concept than the Florida game is. 9 CHAIRMAN COX: I see. Okay. Let's talk 10 about Lucky Sum. Who put that on the table? 11 MR. TIRLONI: GTECH put that concept and 12 name on the table. 13 CHAIRMAN COX: Okay. So they countered 14 their own offer when they took it off? 15 MR. TIRLONI: Correct. 16 CHAIRMAN COX: How much money did we 17 spend on Lucky Sum while GTECH had it on the table? 18 MR. TIRLONI: We don't spend any money 19 on any game changes until the rule is adopted. So 20 we've spent no funds whatsoever on anything related to 21 any of these rules: Daily 4, EZ Sum, Lucky Sum. 22 There's been no funds spent. 23 CHAIRMAN COX: Director Sadberry, have 24 we learned anything from this process? 25 MR. SADBERRY: Chairman, it would be my 0080 1 hope -- and I believe so -- the vetting process, one, 2 on the front end is important. The requirement that 3 our vendor perform as the contract requires and as we 4 expect is important. You asked about expenditure 5 fees. To make the record complete, I think there may 6 be legal fees. I think the question was anticipated 7 from a production standpoint. No fees, expenditures 8 have occurred. But I think there may be legal fees 9 that can be attributed to this matter. So there is a 10 cost item there. 11 So I think due diligence, from a due 12 diligence standpoint, I believe we have learned. 13 There is a risk involved in not doing that as 14 sufficiently up front as may be available to us. 15 It could cost -- if delay is required, 16 such as Sarah has mentioned, about if we had to 17 republish, it could cost revenue loss, and we would 18 not want to see that occur. So that's another reason 19 for emphasizing the thoroughness of the due diligence 20 vetting process on the front end. 21 Open discussions with our contract 22 vendor on absolute certainty and absolute importance 23 of these types of things I think has come through in 24 this process. And these things have been 25 communicated, as you are aware, in our meeting with 0081 1 Mr. Turner recently -- and Mr. Rivera is here, who was 2 in that meeting -- that we have communicated those 3 concerns and those observations. And I believe they 4 have had the effect that we had hoped. And I think on 5 a going-forward basis, the learning is that it should 6 not occur again. That would be my expectation. 7 CHAIRMAN COX: Excellent. 8 COMM. CLOWE: Mr. Chairman, I'm a little 9 bit uneasy about publishing a rule and naming a game 10 one thing and then adopting a rule and naming it 11 something else. And I understand Sarah's explanation 12 on that issue, with her assurance and the General 13 Counsel's that it's legal. You know, that removes 14 that concern. But there is a perspective of changing 15 late in the game and doing something that we didn't 16 say we were going to do when we asked for public 17 comment. 18 Sarah, in that regard, have we always 19 correctly named a game when we established it or 20 changed a rule regarding a game? Have we ever done 21 anything like this in the past, to your knowledge? 22 MS. WOELK: Not to my knowledge. Kim 23 might know that better than I do. 24 MS. KIPLIN: To my knowledge, we have 25 not. 0082 1 COMM. CLOWE: I just am a little 2 concerned -- maybe more than a little concerned -- 3 about something happening down the line and some 4 entity coming forward and saying, "Well, you know, you 5 published it this way, and then you changed it at the 6 last minute, and that wasn't fair." 7 And I'm leaning and asking for your 8 advice on the idea of going back and republishing it 9 and getting it the way we want it and then consider it 10 so that we eliminate any possible confusion in 11 anybody's mind or any harm that might perceive to be 12 done to anybody. 13 And I don't know how much revenue we 14 lose, what the detrimental effect of that would be, 15 but that's a question in my mind which I would ask you 16 to comment on and advise me. 17 CHAIRMAN COX: Well, first of all, if 18 it's an important concern for you, it's an important 19 concern for me as well. My thinking about it is that 20 I would almost want to say if we're going to pass it, 21 let's pass it with EZ Sum as a placeholder, because 22 I'm not very impressed with that idea. 23 COMM. CLOWE: I share in that. 24 CHAIRMAN COX: So I'm introducing a 25 different concern but one of the same general nature, 0083 1 I guess. 2 And, Sarah, I would just say, if you 3 have anything that you think would be persuasive to us 4 in our thinking here, that we would sure like for you 5 to present it. 6 MS. WOELK: Well, I don't think you're 7 really arguing the legal analysis. I think you're 8 concerned more about the public reception and -- 9 COMM. CLOWE: Sense of fairness. 10 MS. WOELK: -- sense of fairness. So I 11 do think legally it's okay, but I think maybe Robert 12 is a better person to speak to -- 13 CHAIRMAN COX: One thing I want to ask 14 y'all not to do, at this point at least, is tell us 15 what the revenue impact might be. 16 MS. WOELK: Okay. 17 CHAIRMAN COX: I had rather we talked 18 about it at the theoretical level, if you will, before 19 we get down to the numbers. 20 MS. WOELK: And I do think that if you 21 have a concern about the current name, we would need 22 to write some text in the reproposal, sort of 23 indicating that this may be a placeholder name, and 24 the name is one of the things we would like to receive 25 comment about. 0084 1 I think you want to make that clear; 2 otherwise, you would end up with the same concern at 3 adoption time while we put it out there with EZ and 4 you've decided you want to call it Lone Star Sum, 5 which was one of the other ideas. So I do think we 6 would need to signal that we were specifically 7 interested in public comment on the name if you 8 republished. 9 COMM. COX: So one option is that we 10 would ask staff to address our concern about whether 11 EZ Sum is a good name at all and not bring this back 12 until there's some kind of agreement, maybe consulting 13 with each of us independently or bringing it here for 14 deliberation, before we would agree on a name for the 15 add-on feature. 16 Another might be -- and, Commissioner, I 17 would ask how comfortable you might be on this -- 18 doing what you said early on, which was to say all 19 that complicated and ungainly language about this is a 20 placeholder for some name to be determined later and 21 whether that would be an expeditious and an 22 appropriate way to go at this? 23 COMM. CLOWE: Yes. 24 MS. WOELK: And I think those are 25 choices you can make, is anything from adopting it now 0085 1 to passing on everything or some middle ground where 2 we find a way to write the republication where we 3 bracket and say "Name," "Name Here" or something. 4 CHAIRMAN COX: Commissioner, I don't 5 know whether that would get you where you want to be, 6 which I understood to be let's have the name out there 7 for people to object to if they don't like it, rather 8 than having them come back after we've already got the 9 game running and say, "Hey, I sure would have liked to 10 have had a chance to comment on that. I own that 11 name," or X. 12 COMM. CLOWE: Well, and I think there 13 are two issues there. First, we published one name 14 and then we're talking about adopting another. But 15 then we're talking about adopting one of two names as 16 the other. And I guess my question, then, that 17 Chairman Cox has brought to the surface is, what was 18 the depth of discussion about the two EZs? Was the 19 public made aware of any of that? 20 MR. TIRLONI: No, sir, there was no way 21 to make the public aware of the change. 22 COMM. CLOWE: It came too late, didn't 23 it? 24 MR. TIRLONI: Yes, sir, it came too late 25 in the process. 0086 1 CHAIRMAN CLOWE: And I don't know. I 2 share in your comment about and kind of lean towards 3 the E-a-s-y. 4 CHAIRMAN COX: Or something completely 5 different. 6 COMM. CLOWE: Or something completely 7 different. The E-Z is not to me something that is 8 attractive, and that's where I am on this. And, you 9 know, if we're going to consider putting this game in 10 the mix and having a four-drawing game, I want to do 11 it right and we want it to be attractive and we want 12 it to be accepted. And I don't mind waiting to get it 13 right. 14 CHAIRMAN COX: Director Sadberry, do you 15 have anything you would like to add to this? 16 MR. SADBERRY: Well, Commissioners, your 17 concerns are my concerns. If you have a concern about 18 it, then that makes us all have a concern about it. 19 The only thing I will add is in respect 20 to your request that we don't quantify if, I would 21 just say we will not do that if you request we not. 22 But we are prepared to do so, is my understanding. 23 And we can hold on that, but that if you want to be 24 fully informed on the result of the action, we can 25 speak to that if you wish us to. Otherwise, we will 0087 1 not. 2 CHAIRMAN COX: Counsel, do you have 3 anything you would like to add? 4 MS. KIPLIN: No. I think Sarah, her 5 legal analysis is correct. I concur in that. My 6 understanding of the Commission's concern doesn't have 7 to do with legal correctness. It has to do with 8 notice to the public and an opportunity for the public 9 to weigh in. 10 I'm wondering -- this may be flatout 11 rejected -- whether we can go forward on holding this 12 one open and inviting other public comment hearing on 13 a name. That could just be too wacky of a thought in 14 terms of where we are at this time. But we have six 15 months from the date of publication to adopt a rule. 16 I know this is catching Sarah cold. And I'm sorry. I 17 just thought of it. May be that that's not an optimum 18 place to be. 19 MS. WOELK: I think that's a 20 possibility. I mean, the advantage of republishing 21 the current variant is that it has all the other minor 22 changes that we're recommending in it, and they would 23 be out there, so that has that advantage. 24 COMM. CLOWE: That would be the simplest 25 way, wouldn't it, Sarah? 0088 1 MS. WOELK: The draft I prepared for 2 reproposal, of course, uses the name EZ Sum. So if we 3 were focused on that option, the question would be do 4 we want to go ahead and propose it with EZ Sum and 5 include some language in the introductory part saying, 6 "We are particularly interested in a comment on the 7 game name," which I think is good notice. 8 I think it's -- I'm not sure that you 9 can have a rule where you leave -- actually leave text 10 blank. That is not very comfortable to me as a 11 rulemaking idea. So my proposal, if you want to 12 actually repropose today, would be to repropose or 13 publish the draft that we've got today and direct the 14 staff to add some language in the introductory 15 material actually seeking public comment on the name. 16 MS. KIPLIN: And coupled with that, of 17 course, you would withdraw your current rulemaking. 18 COMM. CLOWE: I think where Chairman Cox 19 is, he wants you to take a fresh new look at it. And 20 that would, I think, require us to pass it today and 21 republish it in a different form at a further time. 22 MS. WOELK: My lawyer, Robert, just 23 reminded me that, you know, we have some concern about 24 the public suggesting names and then they're claiming 25 intellectual property rights. So -- 0089 1 CHAIRMAN COX: I didn't have any thought 2 that we would let the public suggest names. 3 MS. WOELK: But we would just let them 4 comment on our suggestion, then? 5 CHAIRMAN COX: We would come up with a 6 suggestion that seems to have wider appeal. Now, I'm 7 personally uncomfortable, but that's just a personal 8 opinion. When DDB is uncomfortable -- and they're 9 subject matter experts in this kind of thing -- then 10 that makes me real uncomfortable. 11 COMM. CLOWE: I share in that. And, you 12 know, I would remind you that we didn't start this 13 problem; GTECH started this problem. And now here we 14 are. "Another fine mess you've gotten me into, 15 Ollie." And, you know, the idea of -- we're not 16 asking the public to comment, but you asked us to 17 comment on the two different names that you brought to 18 our attention. We can only do that in the public and 19 so we're doing it. You're getting the input from your 20 Commissioners now about their concern. 21 MR. TIRLONI: Absolutely. And we'll 22 take all of that under consideration. We'll go back 23 to the drawing board and come up with new options for 24 you. 25 COMM. CLOWE: I think Chairman Cox is 0090 1 dead on. You know, if the ad agency says, "Yes, this 2 is too common. There are too many of these out 3 there," I think we ought to be talking seriously about 4 that. 5 CHAIRMAN COX: You know, the only 6 comparable thing that we have, I think, as an add-on 7 feature is the Megaplier. 8 MR. TIRLONI: That's correct. 9 CHAIRMAN COX: And that's a wonderful 10 name. It suggests exactly what it is. And I would 11 ask you that if we conclude that we need to come up 12 with another name, we try to find some name, invent it 13 if it may be, that suggests exactly what the bet is. 14 Megaplier might have been easy. We 15 might have just gotten lucky. But it's I think a 16 perfect name for the feature. And I ask that we look 17 for something that's more perfect at least, not just 18 something we grab off the shelf and hope the ad agency 19 likes and find out they don't and "Oops, here we are," 20 board meeting time. 21 What's your pleasure here, Commissioner? 22 Do you want to hear the fiscal impact before we go 23 forward or have you pretty well got your mind made up? 24 COMM. CLOWE: I'm happy with where we 25 are if you are happy. 0091 1 CHAIRMAN COX: Okay. Sarah, I would 2 suggest that you take it back, get consensus on a 3 name, bring it to us at the earliest possible date. 4 And I think it would be appropriate to publish it for 5 the shortest possible comment period and let's go from 6 there. 7 Does that work for you, Commissioner? 8 COMM. CLOWE: Yes, sir. 9 MS. WOELK: The one question on the 10 table, I think, is you don't want to withdraw the one 11 that's out there currently? You're just going to pass 12 everything today? 13 CHAIRMAN COX: Tell us what would be 14 most expeditious. 15 MS. WOELK: I'm not sure that makes a 16 difference. I mean, you could vote to withdraw and we 17 would send them notice, the Texas Register notice that 18 it has been withdrawn. There's no reason to do that 19 unless you somehow want to give notice that it's been 20 withdrawn. I'm not seeing any particular value. I 21 just wanted to clarify whether you're taking 22 absolutely no action or you're affirmatively 23 withdrawing that rule. 24 COMM. CLOWE: It's out there published 25 for comment now as Lucky Sum. And I think the sense 0092 1 of the discussion is, we're definitely not going to 2 consider Lucky Sum. So it really might be proper to 3 vote on withdrawal today and then republish when there 4 is a more final proposal from the staff. 5 MS. KIPLIN: And your plan is not to use 6 the current rulemaking as a vehicle, ever, for 7 adoption? 8 COMM. CLOWE: Well, if you wanted to do 9 that and you wanted to change the name, if I 10 understood Sarah, all the modifications are in the 11 current rule that codify good suggestions that have 12 been made. I think the thing we're talking about 13 changing is only the name. So what you would publish 14 would be an amendment to the proposed rule, with the 15 name. 16 Is that correct or not? 17 MS. KIPLIN: Well, this is a new rule. 18 And what we would be doing -- technically what we 19 would be doing is pulling it down, withdrawing it and 20 reproposing a new rule. 21 COMM. CLOWE: Which you could do at the 22 same time? 23 MS. KIPLIN: You could certainly do it 24 at the same time. And when you withdraw this, then 25 you've killed this rulemaking off. My sense is that 0093 1 that's where the Commission is. But I wanted to make 2 sure you knew, once you withdraw it, then there is 3 nothing that you can later adopt on this rulemaking, 4 as amended, if you have second thoughts. 5 COMM. CLOWE: But the sense of the 6 discussion is, everything that's in this rule we want 7 to adopt, because it codifies the good suggestions the 8 staff recommended, with the exception of the name, and 9 you would do that simultaneously. 10 MS. WOELK: I think to clarify, today -- 11 now knowing where you are, the two choices are 12 withdraw what's been published, which is an 13 affirmative way of giving notice that you're not 14 satisfied with the rule out there, or do nothing 15 today, which leaves not the version with the changes 16 I've made pursuant to Ms. Nettles' suggestions. It 17 leaves the very original version out there that was 18 published on December 29th. 19 COMM. CLOWE: It doesn't have the 20 suggestions. 21 MS. WOELK: No. The reproposal, both 22 the adoption order I provided for you -- and this is 23 where it gets confusing -- and the reproposal I 24 provided for you have all the changes. But if you 25 take no action today, what is still out there with 0094 1 legal significance is what was published on 2 December 29th. 3 CHAIRMAN CLOWE: See, that's even more 4 fogged, then, in my mind. I thought Sarah told us -- 5 and I misunderstood -- you see, you made it clear, but 6 it is complicated. 7 MS. WOELK: I know. It wasn't you -- 8 right. 9 COMM. CLOWE: I thought the proposal 10 that's out there now included her changes. And she's 11 telling us now they don't, they're not in it. So to 12 me that's all the more reason to withdraw the current 13 proposed rule and go back with one clean proposal when 14 the time is right. 15 CHAIRMAN COX: And that one clean 16 proposal would be under Tab A, with -- 17 MS. WOELK: With a name change. 18 CHAIRMAN COX: -- with a name change? 19 MS. WOELK: Yes. 20 COMM. COX: Is that your pleasure? 21 COMM. CLOWE: I think Michael wants to 22 play lawyer or something. 23 CHAIRMAN COX: Okay. 24 MR. ANGER: No, sir, I have no intention 25 in that side. 0095 1 COMM. CLOWE: Oh, okay. 2 MR. ANGER: Commissioners, for the 3 record, my name is Michael Anger, and I'm the Lottery 4 Operations Director. 5 And just related to the discussion with 6 regard to the add-on feature name, I just wanted to 7 make you aware of something. Due to what Robert spoke 8 of earlier about the fact that we don't go out and 9 incur any expenses with regard to games until you have 10 reviewed them and until we've received public comment 11 and they're ultimately adopted, we're able to reach 12 out to the advertising agency and get general comment 13 from them with regard to a game name, which is what we 14 did in this case. 15 And they were willing -- and the terms 16 of their contract require that they bill us on an 17 hourly basis for work that they perform, you know. So 18 they didn't conduct research with regard to the game 19 name that we put before them, but they were willing on 20 opine and give us a general comment with regard to 21 their view of that game name. 22 And so I just wanted to clarify that 23 we'll be happy to go back and we will reevaluate 24 names, and we'll conduct some additional analysis. 25 And we'll likely work closely with GTECH on that. And 0096 1 we will certainly seek the input once again of the 2 advertising vendor. But we're limited to some extent 3 to what extent we can kind of put the ball in their 4 court and ask them to go out and conduct some research 5 and do a lot of work on their own with regard to that 6 game name. So I just wanted to make you aware of 7 that. 8 CHAIRMAN COX: And I think that that's 9 what I understood when Robert told us this. And I 10 think that their gut reaction, if that's all it is, is 11 important. I don't know what research would add to 12 that. They're trained in this kind of thing and they 13 don't like it. And research, I don't think, would 14 help them like it or make them like it less. 15 MR. ANGER: Very good. That's exactly 16 the path we'll proceed down. 17 CHAIRMAN COX: Good. 18 COMM. CLOWE: I think Chairman Cox hit 19 the nail on the head, that, you know, here is an 20 opportunity, and let's just not take something that, 21 "Oh, that's great," you know, and use it. Let's be 22 thoughtful about it and careful and get the expertise 23 to bear. 24 And we're not asking the public to name 25 the game. We're asking resources that we have at hand 0097 1 that are professional and should give us good guidance 2 to name this game, if we're going to adopt the name. 3 It's an opportunity. 4 So my sense, Mr. Chairman, is that where 5 we are is, we want to vote to withdraw the current 6 rule and wait for a staff recommendation for 7 publishing a new rule that will codify the changes 8 that our attorney has said she wants in the rule and 9 whatever name staff recommends to us for 10 consideration. 11 CHAIRMAN COX: Okay. Before you make 12 that motion, Commissioner, Sarah, I'm interested in 13 the comment Ms. Nettles offered about making this game 14 parimutuel. My understanding of the traditional 15 numbers game is, it's never been parimutuel anywhere. 16 I think the illegal operators used to pay $600 for one 17 dollar, and we're paying $500 for one dollar. But if 18 777 comes up, they all win. Isn't that the way the 19 game is played everywhere? 20 MR. TIRLONI: Yes, sir, that's correct. 21 Daily numbers games are typically always guaranteed 22 prize amounts, not parimutuel like our Cash 5 games or 23 some of our other on-line games. 24 CHAIRMAN COX: So, Ms. Nettles, I think, 25 just remains consistent in her idea that the state is 0098 1 better served by not taking the risk of 777 come up. 2 And we recognize that if you're going to run a numbers 3 game, it's going to come up once in a while? 4 MR. TIRLONI: That's correct. And when 5 those numbers come up, your payout is typically much 6 higher for that specific drawing. But we've gone back 7 over time and we've looked at the payout on the Pick 3 8 game, back since the game started in the early 9 nineties, and that game is always typically, except 10 for maybe one or two years, had a payout less than 11 50 percent. 12 CHAIRMAN COX: So it's coming in right 13 where it should on a long-term basis? 14 MR. TIRLONI: Yes, sir. And we've had 15 the statistician look at the payout performance as 16 well, and he believes that to be the case also. 17 CHAIRMAN COX: Excellent. 18 Commissioner, do you have a motion? 19 CHAIRMAN CLOWE: I move we withdraw the 20 current rule under 16 TAC 401.316 relating to a Daily 21 4 on-line game rule. 22 CHAIRMAN COX: Second. 23 Motion has been made and seconded. 24 Are you ready to vote? 25 COMM. CLOWE: Yes, sir. 0099 1 CHAIRMAN COX: All in favor, say "Aye." 2 COMM. CLOWE: Aye. 3 CHAIRMAN COX: Aye. 4 Opposed? 5 Passes 2-0. 6 Is this something we need to sign? 7 COMM. CLOWE: Thank you-all very much. 8 CHAIRMAN COX: Appreciate it. 9 MS. WOELK: We're not leaving. We're 10 here for the next one. 11 CHAIRMAN COX: This one looks even more 12 complicated. 13 MS. WOELK: I know, yes. 14 CHAIRMAN COX: Okay. That was No. IX. 15 AGENDA ITEM NO. X 16 CHAIRMAN COX: Item X, consideration of 17 and possible discussion and/or action, including 18 withdrawal and proposal of new rule 16 TAC, §401.307, 19 or, adoption of repeal of existing 16 TAC §401.307 and 20 adoption of new rule 16 TAC §401.307 relating to 21 "Pick 3" on-line game rule. 22 Ms. Woelk? 23 MS. WOELK: Thank you. I am 24 anticipating that if you didn't like EZ Sum in Daily 25 4, you're not going to like it in Pick 3 either. 0100 1 CHAIRMAN COX: I think you're safe in 2 that. 3 MS. WOELK: I think that you did make 4 this one pretty easy, and I think your only logical 5 choice is to make a motion to withdraw the proposed 6 Pick 3 ruling. Now, the proposed repealer is still 7 out there, and that doesn't change, so I would 8 recommend we just leave that live. That makes things 9 a little simpler. 10 MS. KIPLIN: The only issue -- 11 COMM. CLOWE: The repealer is under 12 consideration, so there is no reason to disturb it. 13 MS. WOELK: Right. 14 COMM. CLOWE: Okay. Why do you think 15 we're going to vote the way you said you think we are? 16 Tell us that. 17 MS. WOELK: The significant change 18 proposed in the Pick 3 rule -- this is not a new game 19 rule; this is a current game -- is to authorize the 20 director to -- the Executive Director to add the 21 add-on feature formerly known as Lucky Sum and 22 formerly known as -- briefly known as EZ Sum, and that 23 is the significant change. 24 So we are fine and continue to operate 25 Pick 3 under the current rule, until we're ready for 0101 1 the add-on game. And the proposed rule that has been 2 out there published since December 29th does identify 3 the add-on feature as Lucky Sum. 4 COMM. CLOWE: I think that needed to be 5 on the record. 6 CHAIRMAN COX: Yes. 7 So, Sarah, you're hoping that we can do 8 the same thing twice in a row? 9 MS. WOELK: I think I've made this one 10 easy. 11 MS. KIPLIN: Maybe I'm going to 12 complicate this. 13 MS. WOELK: Okay. All right. 14 MS. KIPLIN: With regard to the proposed 15 repeal that you have on Pick 3, that proposed repeal 16 was published in the December 29th. 17 MS. WOELK: So June 29th it expires. 18 MS. KIPLIN: Right. And so if you don't 19 act on that on or before June 29th, that proposed 20 repeal, which is the current rulemaking, it will 21 expire by operation of law. You will need to -- if 22 you're going to adopt a new rule, you are going to 23 need to repeal the old rule before you can adopt. So 24 it's a matter of just keeping track of the time. 25 MS. WOELK: I will keep track of that. 0102 1 And if it doesn't look like you're ready for action at 2 the next meeting, then we may need to withdraw the 3 repealer. But I think for now, we can leave it out 4 there. 5 COMM. CLOWE: That makes sense. Leave 6 the repealer alive and come back hopefully as quickly 7 as you can. 8 CHAIRMAN COX: Okay. So what motion 9 would you like here, Sarah? 10 MS. WOELK: That you move to withdraw 11 the proposed amendments to Pick 3 published in the 12 December 29th issue of the Texas Register. 13 CHAIRMAN COX: So move. 14 COMM. CLOWE: Second. 15 CHAIRMAN COX: Any further discussion? 16 COMM. CLOWE: No, sir. 17 COMM. COX: All in favor, say "Aye." 18 COMM. CLOWE: Aye. 19 CHAIRMAN COX: Aye. 20 Opposed? 21 Motion passes 2-0. 22 COMM. CLOWE: And then you're coming 23 back on this Pick 3 game with a multiplier that you 24 are going to name similar to that for the Pick 4 game? 25 MS. WOELK: The working assumptions is 0103 1 that they'll have the same name for both names, yes. 2 COMM. CLOWE: And that won't be 3 confusing? 4 MS. WOELK: It's the same feature. It 5 is a bet on the total of the numbers picked. But I 6 leave it to the games people to decide if it's -- 7 COMM. CLOWE: So you've got two 8 different games that are played two different ways, 9 but they've each got exactly the same name feature? 10 MR. TIRLONI: As an add-on game, that's 11 correct. 12 COMM. CLOWE: And that's not confusing? 13 MR. TIRLONI: I don't believe so, based 14 on the great deal of similarity between Pick 3 and the 15 proposed Daily 4. And basically the add-on feature is 16 just summing up the numbers that the player selected 17 versus the sum of the numbers that the Commission 18 draws in the actual game drawing. So I think it's 19 beneficial to have the name the same for the feature 20 on both games. 21 COMM. CLOWE: Do you agree with that? 22 CHAIRMAN COX: I think so. I think it's 23 going to be hard to come up with one good name. 24 COMM. CLOWE: Yes, I do, too. 25 Okay. I just wanted to beat that down 0104 1 and make sure it was a conscious decision or a good 2 discussion at least, no decision being made about that 3 issue. 4 MR. TIRLONI: Yes, sir. 5 COMM. CLOWE: Okay. Thank you, sir. 6 CHAIRMAN COX: Thank you very much. 7 COMM. CLOWE: Thank you, Sarah. You've 8 made it very clear. 9 MS. WOELK: Thank you. 10 COMM. CLOWE: It still ended up being 11 pretty complicated. 12 CHAIRMAN COX: Yes. 13 AGENDA ITEM NO. XI 14 CHAIRMAN COX: Item XI, report, possible 15 discussion and/or action on lottery sales and revenue, 16 game performance, new game opportunities, market 17 research and trends. 18 Ms. Pyka. 19 MS. PYKA: Good morning, Commissioners. 20 My name is Kathy Pyka, Controller for the Lottery 21 Commission. With me to my right this morning is 22 Robert Tirloni, our Products Manager, and Dr. David 23 Sizemore, our Research Coordinator. 24 Our first chart that we have this 25 morning reflects revenue from sales and net revenue to 0105 1 the state for the week ending February 10th of 2007. 2 Total sales for this 24-week period amounted to 3 $1.6 billion, while estimated net revenue to the state 4 for this period was $406.5 million. 5 Fiscal Year 2007 sales to date reflect a 6 $71 million decline from Fiscal Year 2006 sales. The 7 decline includes a 2.1 percent, or $27.1 million 8 decline in instant ticket sales, and a 10.4 percent or 9 $43.9 million decline in on-line sales. 10 Focusing on our on-line sales decline, 11 of the $43.9 million decline, $37.9 million of that, 12 or 86 percent, is attributed to Mega Millions sales. 13 To give you just some background, in 14 Fiscal Year 2006 at this point in time, we had four 15 very large Mega jackpots that amounted to 250, then 16 $315 million, $88 million and 175. In this fiscal 17 year, we've had three large jackpots: $163 million, 18 $122 million and $150 million. So we're definitely 19 seeing lower jackpots in Fiscal Year 2007 as compared 20 to Fiscal Year 2006 on the Mega Millions game. 21 COMM. CLOWE: It would have been a lot 22 larger if Powerball and Mega Millions had been 23 together, wouldn't they? 24 MS. PYKA: Sir, I don't know that I have 25 an opinion on that. 0106 1 CHAIRMAN COX: Ms. Pyka, let me set a 2 context for some of the remarks that I'm going to have 3 on this item. 4 Commissioner, on Monday this agency went 5 before the Senate Finance Committee. And one of the 6 things that Director Sadberry reported in his report 7 was that sales are down this year. And the concern 8 that he was addressing I believe -- and he will 9 certainly correct me if I'm wrong here -- is that the 10 Controller, the State Controller's office, had 11 projected increased revenues for the lottery for this 12 biennium, a -- 13 MS. PYKA: Including 2008. 14 CHAIRMAN COX: -- impact for each year, 15 a compounded increase. 16 MS. PYKA: Right. Three point -- 17 CHAIRMAN COX: And we wanted to put the 18 Senate Finance Committee on notice that not only right 19 now are we not up, we're not flat either, that we're 20 down. And there was a good deal of discussion, 21 primarily led by Sen. West, as to: Is this really a 22 trend in Texas? And what do other states look like? 23 And the staff is in the process right 24 now of responding to seven questions, I believe, that 25 you have identified that Sen. West asked in this area. 0107 1 So part of the things that I'm going to be asking 2 about are to help me understand where we're going in 3 answering Sen. West's questions and trying to drill 4 down on whether this does look like it's an aberration 5 that we might recover from, that it's just bad luck or 6 whether it is a trend if, in fact, we can even do 7 that. 8 But we've got 24 weeks, which is half 9 our year, and we're down. So that doesn't look like 10 we're going to be able to match last year's results, 11 unless something turns around pretty quickly. 12 COMM. CLOWE: I agree. 13 CHAIRMAN COX: Thank you, Ms. Pyka. 14 MS. PYKA: Certainly. 15 COMM. CLOWE: And I would like to add my 16 comments, when you finish making yours, about this 17 trend and what your observation is. 18 CHAIRMAN COX: And I really don't at 19 this point have anything. I know this, that 24 weeks 20 into a year, we're down. We could recover from that. 21 It may be that it's because of the low jackpots that 22 Ms. Pyka described and this year won't be so great, 23 but next year we'll pick right up with our upward 24 trend. And I don't really have anything about where 25 the industry as a whole is going, the lottery 0108 1 industry. And I think Sen. West even addressed a 2 bigger issue; and that was, of course, gambling of all 3 kinds going. That's what I understood his last 4 question to be about. 5 MS. PYKA: That is correct, 6 Mr. Chairman. 7 COMM. CLOWE: Well, thank you for that 8 information. I wasn't there, as you know, and I 9 appreciate you relating that to me. 10 I guess I would say this to the staff: 11 I would be cautious about, in the hope of being 12 responsive to a question from a member of the Senate 13 Committee, to allow yourselves to get put in the 14 position of becoming an authority on gaming in general 15 or other states' activities or anything like that. 16 I think what this agency can do is 17 simply give industry figures that are published and 18 are known to a senator or a member of the House or a 19 member of the leadership. But beyond that, I think if 20 you get into a role of interpretation, that is beyond 21 where this agency should be. This agency should be a 22 resource and not an expert on gaming in the United 23 States or in any other state. 24 Now, having said that, after nine years, 25 I have an opinion about this state. And I think -- 0109 1 and your research will either verify it or disprove it 2 or muddle it -- is that we've got games that are old 3 and tired. We don't have the players we used to. We 4 have fewer players who are playing more per capita -- 5 per person, not per capita. And we've been riding a 6 wave of instant scratch-off tickets' popularity. And 7 the payout on that is lower, and we're now running out 8 of soap. And it's not a surprise to me. I've been 9 commenting on it, Mr. Chairman, for some time. 10 And, you know, as long as we're in where 11 we are and we're old and we're tired and we're not 12 attractive as a gaming opportunity to folks that want 13 to be involved in gaming, we're going to see this 14 trend, I think, continue. And that's just a very 15 personal opinion, Mr. Chairman. And I'm hopeful you 16 didn't say that to the Senate Committee because that 17 would have put you way out there. I'm just expressing 18 this within the scope of this meeting and this issue. 19 But I think it's a mistake not to point 20 it out to the Senate, to the House and to the 21 leadership, that there isn't anything magically going 22 to happen. And this staff, as hard as they work on 23 being innovative and creative -- and I know the effort 24 that's gone into keeping that return to the state at a 25 billion dollars every fiscal year -- that you're 0110 1 trying to swim upstream and you're not going to be 2 able to do it under the current situation. 3 And, Mr. Chairman, that's just my 4 reaction. And if you disagree or have a different 5 opinion, I would really like to hear it, because 6 you're the expert. 7 CHAIRMAN COX: Well, I don't disagree at 8 all. You've been watching this longer than I have. I 9 will tell you that you may be pleased to know that I 10 did not address this question at all. 11 COMM. CLOWE: You are very wise. 12 CHAIRMAN COX: Director Sadberry 13 addressed this question, with some help from Ms. Pyka, 14 and they offered very good answers. And when asked to 15 compare to other states, they pointed out that no two 16 states are alike, that no two states are playing the 17 same games, for instance. They may not have the same 18 rules; they may not have the same mix of different 19 kinds of tickets. 20 And Sen. West made it very clear that -- 21 at least to me. I interpreted what he said is that, 22 "Don't complicate this. I don't want to know all 23 that. I want to know whether lottery sales are up or 24 down across the country." 25 And so at the same time, I will tell you 0111 1 that your caution about our trying to be experts in 2 matters of other states has certainly been discussed 3 by the staff, and they recognize that we have 4 limitations in that area. The discussion we've had 5 thus far is that there are published numbers, and we 6 can report them, and we can appropriately footnote 7 them to explain why they may or may not be comparable. 8 And if they want to read the footnotes, they may. If 9 they don't want to read the footnotes, they may not. 10 As to trends in Texas, however, I think 11 we've concluded, just as you have, that we do need to 12 be experts there. And there I've asked Ms. Pyka and 13 her staff to take a look at things like the 14 demographic study which you alluded to, to look at 15 things like: What are other retail sales doing in the 16 State of Texas? Are all consumer non-durables, if 17 that's the category that we fall into, down over this 18 same period of time? 19 And so to look at things outside of 20 these four walls, to try to find the best information 21 we can for the Senate, I think whether we choose that 22 role or not, we probably are the experts on trends in 23 Texas Lottery and need to provide them with all the 24 assistance that we can. 25 I'm going to be looking over the report 0112 1 that we send to the senators, before it goes out, and 2 I hope you will do the same. 3 COMM. CLOWE: I welcome that 4 opportunity, and I agree with what you said. I have a 5 question of how we relate to consumer durables. 6 CHAIRMAN COX: And I was suggesting 7 non-durables might be better. 8 COMM. CLOWE: Non-durables. You know, I 9 think gaming is unique, and I'm not sure we relate to 10 Coca-Cola or cell phones or anything like that. I 11 think Texas is absolutely a market on its own, with 12 the opposition we have in gaming in this state. And I 13 think it's now about 50-50. When I came on this board 14 nine years ago, I think it was 30-60. 15 I think that casino gaming in every 16 state contiguous to the border of Texas and Internet 17 gaming and illegal gaming have taken market share away 18 from the legitimate gaming dollars spent in Texas, and 19 I think that makes us unique to Coca-Cola or Motorola 20 or any other field of potential purchase, because they 21 have more of a level playing field and we don't. 22 There are those influences that are 23 impossible to measure. When I came on this board, 24 there was strong pressure, there was strong influence 25 from entities to not advertise, and there was a cap 0113 1 put on our advertising that's still on there today. 2 And if we were selling Coca-Cola or Motorola cell 3 phones, we would be advertising with every dollar that 4 we thought we got a return on. 5 CHAIRMAN COX: Yes. 6 COMM. CLOWE: So my caution is, be 7 careful about talking to somebody in an answer to a 8 question where you can cover all of these things in 9 your answer because, after nine years, I'm still 10 getting answers all the time about what's driving 11 this. And I'm learning, and I'm learning it's the 12 result not of just the product we have to sell but the 13 environment in which we sell it, and we'll never not 14 be influenced and directed by that environment. And 15 that's not something that I know of that occurs 16 anywhere else. 17 And I appreciate the opportunity to talk 18 about that with you and express those thoughts. And 19 they're worth just what you're paying for them. 20 CHAIRMAN COX: Well, no. I think 21 they're very valuable. And I think that with that, I 22 would say that, Kathy, as you address this thing, 23 we've got micro-factors, like Chairman Clowe is 24 talking about, that affect just us. 25 There may be micro-factors in here that 0114 1 put us in categories with others that may be useful to 2 someone. That doesn't mean that that affects your 3 opinion as to whether this is a trend in Texas or is 4 not a trend, you know. Those things will be the 5 things that are relative to lottery sales, I think, 6 and not sales of other items. 7 And one of the things, Mr. Chairman, 8 that I observed here a couple of weeks ago. I was 9 playing tennis with a very smart guy, a retired 10 investment banker. And he said, "I bet your sales are 11 down." And I said, "Well, for what period?" And he 12 said, "Oh, the last few months." And I said, "Why do 13 you say that?" And he said, "Because the economy is 14 going into recession and all sales are down." 15 Now, I don't know how much studying he 16 does of all the statistics that come out, but he at 17 least said this, without knowing what the numbers 18 were. 19 COMM. CLOWE: He was dead on. 20 CHAIRMAN COX: Yes. 21 COMM. CLOWE: And you can't buck that 22 trend; that's for sure. But the question I would have 23 is, when the bounce comes -- and it always does 24 bounce -- you know, will we get the kind of bounce 25 that any measure of the economy gets or will we get 0115 1 that dead cat bounce that's half or less than the 2 bounce? 3 CHAIRMAN COX: Dead cats don't bounce 4 very high. 5 COMM. CLOWE: Not very high. And my 6 sense is, we're old and we're tired and we're not 7 attractive to the gaming dollar, whatever it is, and 8 we shouldn't kid ourselves about that. I think we're 9 doing a great job, and these instant tickets have been 10 wonderful. And the Mega Millions is either there or 11 it isn't, and Lotto Texas is either there. Pick 3, 12 steady; you know, those are unique. But it's -- well, 13 I think I'll stop right there. 14 CHAIRMAN COX: Okay. And I won't. One 15 of the things that we observed in Las Vegas was that 16 Las Vegas was relatively recession-free, that in good 17 times, people came to Las Vegas to celebrate; and in 18 bad times, they came to get their mind off the bad 19 things. 20 And there may be an extent to which our 21 sales have that same kind of characteristic. So if 22 anybody thinks it's going to be easy, I think they're 23 wrong. The good thing is, we have an excellent staff, 24 and they know their limitations and they know how to 25 describe what they did and what conclusions might or 0116 1 might not be reasonable to draw from it. 2 COMM. CLOWE: And I echo that. I think, 3 you know, there has been great effort, and it's a 4 great source of comfort to me to see the level of 5 professionalism and the thoughtfulness and the 6 professionalism that goes into what's being produced 7 as a product by this staff now, and it is what it is. 8 CHAIRMAN COX: Thank you, Ms. Pyka. 9 MS. PYKA: You're welcome. I'll move on 10 to the net revenue -- 11 COMM. CLOWE: You didn't know you were 12 going to stir that up, did you? 13 CHAIRMAN COX: I had told her I might 14 stir it up a little bit. 15 MS. PYKA: He mentioned it yesterday. 16 COMM. CLOWE: Good for you. 17 MS. PYKA: We'll move along to net 18 revenue to the state. No surprise here. We have a 19 6.3 percent decline from the previous fiscal year, as 20 we compare it to the $433.8 million figure that we had 21 in February at that point in time. Our prize expense 22 as a percentage of sales is reflected at 63.2 percent 23 for the current fiscal year, a slight increase over 24 the same period this last fiscal year. 25 We'll move on to the next slide which is 0117 1 our -- 2 CHAIRMAN COX: Ms. Pyka, before you go 3 on to that, let me be sure that I understand where 4 you're going. You told us that the jackpots for Mega 5 Millions were lower than they were in the comparable 6 period of the previous year. 7 MS. PYKA: Correct. 8 CHAIRMAN COX: Were you able to analyze 9 that in such a way as to conclude that that explains 10 all of the variance, some significance part of the 11 variance, you don't know? Where did you come out on 12 that? 13 MS. PYKA: The Mega variance is 14 86 percent of our overall shortfall right now. But we 15 do have some positives in our on-line games. Texas 16 Two Step is doing quite well this fiscal year, as 17 compared to '06, so that's a gain. And Mega is up as 18 compared to the previous fiscal year. 19 CHAIRMAN COX: Mega? 20 MS. PYKA: I'm sorry. Pick 3. So 21 sorry. Pick 3 is. 22 As we look at Lotto Texas, that one is 23 down about 17 percent from the previous year, about 24 19 million. And similar to Lotto -- or similar to 25 Mega, as we look at Lotto, last fiscal year we were 0118 1 working off of a jackpot that went up to 64 million, 2 and we've not experienced that same level of jackpot 3 in Fiscal Year 2007. We're currently growing. I 4 mean, we're moving along. We're now at $42 million, 5 but we just haven't had the same jackpot levels that 6 we did last fiscal year for Lotto. 7 CHAIRMAN COX: Now. 8 MS. PYKA: So we've got some pluses and 9 minuses. But overall, when you look at the overall 10 decline in on-line sales, Mega Millions definitely 11 makes up the most significant portion of that overall 12 decline. 13 CHAIRMAN COX: And Lotto Texas is 14 second? 15 MS. PYKA: Correct. 16 COMM. COX: And you've told me that 17 jackpots are down in both of them? 18 MS. PYKA: Correct. 19 CHAIRMAN COX: Have you been able to do 20 an analysis that tells you how much of the variance is 21 attributable to the lower jackpots? 22 MS. PYKA: We have not been able to move 23 that far into our analysis, in looking at the on-line 24 games. 25 CHAIRMAN COX: Okay. Do you think 0119 1 you'll be able to? 2 MS. PYKA: I mean, we're certainly 3 working on, you know, looking at all the on-line data. 4 We just haven't been able to complete that analysis. 5 CHAIRMAN COX: So without getting to the 6 part about scratch-off tickets, which I think we're 7 going to get to next, where you are is that almost 8 everything we're down could be attributable to bad 9 luck, or good luck last year, whichever it turns out 10 to be? 11 MS. PYKA: Whichever way you wish to 12 look at it -- 13 CHAIRMAN COX: Okay. 14 MS. PYKA: -- whichever way you 15 definitely look. 16 And then instant, as I had reported, 17 we're looking at a sales decline of 2.1 percent, or 18 $27.1 million, from last year. And when we look at 19 instant, we had really great weeks in the last fiscal 20 year. We had several great weeks in a row that were 21 upwards, in the high fifties and low sixties, and we 22 just haven't had that repeat performance this fiscal 23 year. I don't know the exact reason for that, just 24 looking at sales data, comparing this fiscal year to 25 the prior fiscal year. 0120 1 CHAIRMAN COX: Is it all over the state? 2 MS. PYKA: We have not gone into that 3 level of detailed analysis. We've been able to 4 compare week-by-week for the fiscal years, but we 5 haven't looked at the areas of sale or anything like 6 that. 7 CHAIRMAN COX: Okay. 8 MR. TIRLONI: Chairman, we are working 9 with GTECH management on the instant ticket issue, the 10 instant ticket sales issues, and they are looking at 11 it by region of the state. And as they get that, 12 we'll provide that data to you, Kathy and her staff, 13 so they can look at that and weigh in on it and verify 14 all that data for us. But we are looking into that. 15 CHAIRMAN COX: Okay. I think that there 16 probably are some areas of boom and bust in the State 17 right now, and I think that that may yield something; 18 it may not. 19 MR. TIRLONI: Very good. 20 MS. PYKA: Moving to our next slide, and 21 this provides you the Fiscal Year 2007 year-to-date 22 sales by game, as noted. 76.8 percent of our total 23 sales are from instant tickets; 8.5 percent, or 24 $139.2 million from Pick 3; followed by 5.9 percent 25 and $95.8 million from Lotto Texas; followed by 0121 1 4 percent of total sales, or $65.1 million, from Mega 2 Millions. 3 And the next slide simply provides a 4 graphical presentation of the sales by game, outlined 5 in the $1.6 billion total. 6 And with that, Robert will move on to 7 the next slide. 8 MR. TIRLONI: Commissioners, this next 9 slide represents our year-to-date instant sales, which 10 is $1.3 billion, broken down by price point. There 11 has been no change in terms of which price points are 12 our leaders. The five dollar continues to be the best 13 selling price point, followed by the two and then by 14 the ten. So we've not seen any change in terms of 15 which price point are more popular. 16 Commissioners, we do have information 17 for you today regarding new price points that staff 18 has been working on for quite sometime. Dr. Sizemore 19 is here to talk to you about research that we have 20 been doing on a $50 price point for our scratch-off 21 tickets. 22 MR. SIZEMORE: Thank you, Robert. 23 Good morning Commissioner, Chairman. My 24 name is David Sizemore, the Lottery's Research 25 Coordinator. 0122 1 And I have the opportunity today to 2 present a very brief overview of the research that was 3 conducted by Ipsos Reid on our behalf, with reference 4 to the $50 premium-priced instant tickets. 5 The objectives were fairly straight- 6 forward, and they were three-fold. First, the 7 research attempted to determine interest in and 8 acceptance of a $50 ticket or that price point among 9 higher priced instant ticket players. 10 Second, the research intended to 11 establish the optimal game attributes for this price 12 point. 13 And, finally, a test was conducted with 14 reference to the performance of a premium-priced 15 ticket within the existing game mix. 16 The project started in February 2005, 17 with a series of four focus groups held in Tyler and 18 Dallas. And, again, this is essentially a three- 19 pronged approach, and the first attempt was largely 20 qualitative. 21 Groups were comprised of premium 22 scratch-off players that frequently or occasionally 23 played instant tickets costing $20 or more. And 24 findings from these groups suggested that premium 25 players were, in fact, open to the idea of the $50 0123 1 instant ticket but varied somewhat in terms of the 2 attributes of the ticket they considered most 3 appealing. So there was some variation in terms of 4 what they found interesting. 5 CHAIRMAN COX: David, why don't you 6 share with us why we selected Dallas and Tyler. 7 MR. SIZEMORE: Dallas and Tyler, as I 8 recall, were selected because those are doing pretty 9 well in terms of higher priced point ticket sales. 10 CHAIRMAN COX: Right. 11 MR. SIZEMORE: So $20 and $30 tickets 12 fare rather well. Robert can speak to that issue 13 better. 14 MR. TIRLONI: As David said, both of 15 those markets are very successful for us in terms of 16 higher price points, especially the Tyler area. 17 MR. SIZEMORE: The second research wave, 18 entitled "Phase I" here, occurred between October and 19 November of 2005. And this phase involved 358 20 in-person intercept interviews, with again premium 21 scratch-off players in Dallas, Houston and Austin. 22 CHAIRMAN COX: What is an in-person 23 intercept? 24 MR. SIZEMORE: Essentially where people 25 are stopped at a retailer by an interviewer. 0124 1 CHAIRMAN COX: And we're watching for 2 somebody that's buying big tickets and say, "I noticed 3 that you bought a big ticket. Would you answer a few 4 questions for me"? 5 MR. TIRLONI: Yes, Chairman. Actually, 6 what we did was, we coordinated with GTECH on that, 7 and their sales force, and we identified retail 8 locations that had high sales of high price point 9 games, so the $20, $25 and $30. Those retailers 10 agreed to let Ipsos Reid staff be present in their 11 retail locations. And as people made purchases, they 12 were able to do the in-person intercept and ask them 13 questions and conduct the research on-site with those 14 actual players. 15 MR. SIZEMORE: Once those factors are 16 determined, an intercept is something you might 17 recognize from a mall, where somebody stops you in the 18 mall and asks you, "Do you want to participate?" 19 CHAIRMAN COX: And I say, "Leave me 20 alone." 21 MR. SIZEMORE: You might. 22 (Laughter) 23 CHAIRMAN COX: Scares you to death. 24 MR. SIZEMORE: The results from Phase I 25 provided some information on what we considered or 0125 1 would consider the optimal game attributes for a $50 2 ticket. And some of those features included, for 3 example, top prize, game themes, play styles, 4 merchandise prizes and so on. 5 And this information was used by the 6 Lottery, as well as its instant ticket vendor, to 7 generate three $50 instant ticket concepts which were 8 then tested in the final wave, or here Phase II, 9 between June and July of 2006. 10 And in this phase, 586 premium players 11 took part in a spending exercise and essentially 12 incorporated the three $50 tickets within an existing 13 mix of $10 through $30 tickets. Information from this 14 effort yielded what we could consider a best 15 performing $50 concept, again developed out of the 16 spending exercise. And this concept was the 17 $5 million spectacular that was entitled $5 Million 18 Spectacular. 19 And findings finally provided us an 20 idea, based on the spending exercises, that the launch 21 of a $50 ticket could, in fact, lift premium players' 22 spending in overall scratch sales. 23 That's all. Thank you. If you have any 24 questions. 25 CHAIRMAN COX: Commissioner? 0126 1 MR. TIRLONI: Commissioners, I have a 2 comment. This is an example of the ticket that came 3 out basically as the winner amongst the three $50 4 concepts that David referred to a moment ago. We have 5 made changes to this ticket artwork, based on findings 6 from the research. And so this was the favorite, as I 7 said. But the actual game that we are proposing to 8 launch will look somewhat different, not drastically 9 different but somewhat different from this. 10 Commissioners, this is not an action 11 item, but we are wanting to keep you informed and in 12 the loop on this. And that's why we're bringing this 13 to you today, to let you know about our plans and our 14 intentions with our scratch-off games and this brand 15 new price point. 16 CHAIRMAN COX: Okay. If I go into a 17 casino and go the blackjack pit, I find tables with 18 all different kinds of minimum bets. If I get there 19 early enough in the evening, I might find one that has 20 a $5.00 minimum bet. I might, at the other end, find 21 one that has a $50,000 minimum bet. And if I go 22 upstairs, I might find one that has a $500,000 minimum 23 bet. 24 And I'm not going to see a lot of 25 interchange between those tables. The guy that goes 0127 1 to a $5.00 bet goes there because that's what he's 2 comfortable with, that's the amount of money that he 3 can get excited about winning or losing and, 4 therefore, generate whatever things within himself 5 that gambling generates within people -- and there's 6 differing views on that. 7 The guy at the $500,000 table would 8 never sit at the $5.00 table because he's not 9 interested in $5.00. $5.00 is irrelevant to him. 10 Now, there may come a point where we get 11 to a high enough price point that we become relevant 12 to people that we haven't become relevant to before. 13 There are lots of people out there, I think, who would 14 buy a $50 ticket that would never buy a one-dollar 15 ticket. Have we been able to address any of this kind 16 of thing? 17 I know you're talking about people that 18 are already premium players. Have we been able to 19 reach out or look in some way for those people who we 20 haven't attracted yet, because $30 isn't important to 21 them but $50 or $100 or some other number might be? 22 MR. SIZEMORE: I don't know that there 23 is any way to necessarily compare a ticket that hasn't 24 really been put out to market yet, with what's 25 actually in market. So how this or if this would 0128 1 appeal to an unknown segment of the population or new 2 players, it would only be speculation on my part to 3 comment. 4 CHAIRMAN COX: Okay. So we don't -- you 5 would probably -- let me ask you, do you agree that my 6 premise is well-founded, that people care about -- 7 different people care about different amounts of 8 money? 9 MR. SIZEMORE: Oh, sure. I think that 10 someone who has millions of dollars in their bank 11 account and can throw it around and likes to gamble 12 would probably prefer a higher priced bet or gamble or 13 whatever you might want to call it. 14 CHAIRMAN COX: Like Gary has told me 15 about players he knows of that come in and buy packets 16 of $30 tickets? 17 MR. SIZEMORE: Sure. And, actually, 18 we've done some research in the past with reference to 19 higher income zip codes. In some cases, although not 20 many, higher priced point tickets, the $30 in 21 particular, does perform better in better earning 22 areas. Does that mean that that's the only thing 23 that's driving the sale of that ticket in that area; 24 that is, income? It's hard to say. 25 CHAIRMAN COX: Sure it is. And I'm 0129 1 wondering if we have asked GTECH, "Hey, who is out 2 there betting way more than $30 now?" such as the 3 people Gary talked about who go in and buy a packet of 4 ten $30's? So they're making a minimum $300 bet, six 5 times the size of the bet that we're proposing here. 6 So have we reached out to those people 7 and said -- find out when they come to the store and 8 hang out and try to intercept them and say, "Hey, you 9 know, what would you think of this? And what would 10 you think of even more than this? And how many more 11 of you do you think there are out there"? 12 MR. SIZEMORE: Well, that's a hard 13 population to reach, I think. First, they're -- 14 CHAIRMAN COX: And I didn't say it was 15 going to be -- 16 MR. SIZEMORE: -- relatively small. 17 CHAIRMAN COX: -- easy. 18 MR. SIZEMORE: Right. 19 CHAIRMAN COX: And it's demographical. 20 We do know they exist. 21 MR. TIRLONI: We do know they exist. 22 And I think, maybe based on the intercepts that we've 23 done in the locations we've done, I think our hope is 24 maybe we have captured some of them in those 25 intercepts at those high volume, high price point 0130 1 locations, hopefully. I don't know that we can 2 actually say that we captured that player that makes 3 the purchase that you reference. And we do know there 4 are those players that exist that do make those 5 purchases, where they purchase the entire pack or 6 multiple packs. 7 CHAIRMAN COX: Sure. 8 MR. TIRLONI: The other comment I would 9 make is, we have been -- since this research started, 10 as we go around to meet with our retailer base month- 11 after-month in varying locations around the state -- 12 and in a year, we typically make one whole pass around 13 the state to the different sales districts -- and we 14 ask the retailers, "You know, what would you think 15 about us launching a $50 price point ticket?" 16 And, you know, it goes back, I think, to 17 the point you made, Chairman. I mean, there are some 18 of those retailers that have, in your example, the 19 people that play the $5.00 blackjack table and they 20 say, "No, I wouldn't be able to sell that." 21 But then you do have the retail 22 locations that, maybe because of location or whatever 23 the environment is, they're selling the $20 and the 24 $25's and the $30's, and they sell a lot of them. And 25 they have told us, "We could absolutely sell a $50 0131 1 ticket in our location. We have the player base at 2 our store that would support that type of ticket and 3 above." 4 So I think, you know, your example is a 5 good one. Just as there are players in Vegas that 6 play the $5.00 tables and there are players that, you 7 know, make the $50,000 base wager or base bet, I think 8 we have that same situation in different locations in 9 terms of our player base. 10 COMM. COX: Michael, did you have 11 something? 12 MR. ANGER: I just wanted to add to some 13 of what's been said. For the record, my name is 14 Michael Anger, the Lottery Operations Director. 15 And to your question, Chairman, I think 16 there's two additional things that we're doing with 17 regard to reaching what I'll call as a higher end 18 consumer, someone maybe with a larger level of 19 disposable income. 20 One thing that we've done, in 21 coordination with the research group and also via 22 GTECH -- and it ties in to some of what has already 23 been spoken about -- is to identify areas where there 24 are higher income concentrations and look at our 25 retail licensee concentration levels within those 0132 1 areas. 2 And so our recruitment area is working 3 jointly with GTECH on a plan to identify maybe what 4 would be non-traditional licensees in some of those 5 areas that might be interested in carrying and making 6 available our products, particularly maybe some of 7 these higher price point instant tickets and making 8 those available to their customers. So that's one 9 additional thing we're doing in that regard. 10 And then we're also working with the 11 research group and Ipsos Reid to go out on a consumer 12 behavior habit study that's tied to the annual 13 segmentation study that we do with Ipsos Reid where we 14 identify our players by psychographic clusters. And 15 one of those is a category called -- and I know you're 16 fond of these names, Chairman -- up-scale dabbler, who 17 demographically underlining the psychographics is a 18 somewhat higher income individual who might 19 demonstrate the characteristics that you described. 20 And we believe that via that research, 21 we may learn a little bit more about those 22 individuals, what interests them, what appeals to them 23 and where we might find them. So I think there's a 24 couple of things we're doing in that regard. 25 COMM. COX: Excellent. On the first 0133 1 matter, I had a briefing on some of your efforts 2 toward recruiting some up-scale retailers that are not 3 exactly what we've done before, and I think that's a 4 very good undertaking. And I hope that at some point 5 in the near future, I can get another briefing on 6 where that's going. And certainly if Chairman Clowe 7 wants one of those, I want him to have it, too. 8 Now, I think that the idea of bringing 9 people with higher disposable incomes into our 10 customer base is a very important one. 11 MR. ANGER: As a matter of fact, we have 12 finalized a report with regard to those recruitment 13 efforts that I've submitted today, and I believe that 14 will be forthcoming to you shortly. 15 CHAIRMAN COX: Excellent. 16 Robert, did you have something else? 17 MR. TIRLONI: I just wanted to let you 18 know that as long as -- 19 COMM. CLOWE: Wait a minute. Before you 20 leave this subject, I have a question for Chairman 21 Cox. Let me draw on your knowledge and experience. 22 What is the return to the house relative to the high 23 end and the low end of those different tables? 24 CHAIRMAN COX: It's exactly the same. 25 The $5.00 players are playing the same game that the 0134 1 $50,000 players are playing that the people upstairs 2 are playing. No change whatever. 3 COMM. CLOWE: So if the take is -- 4 what? -- 3 percent? 5 CHAIRMAN COX: Well, the way that's 6 measured in a table game is very difficult to compare 7 to anything that you have seen, because it's a 8 percentage of chips sold, plus markers, loans to 9 players transferred to the cage, so it's really not 10 something that you can compare. Probably if you 11 looked at the absolute chance -- absolute house 12 advantage, it would be somewhere in the neighborhood 13 of 3 percent, as you say. 14 COMM. CLOWE: But in gross dollars, or 15 net dollars, the take is bigger on the high stakes 16 table in just actual dollars? 17 CHAIRMAN COX: In actual dollars. But 18 if it's different as a percentage, it would be only 19 because of different levels of luck or different 20 levels of player skill. 21 COMM. CLOWE: So the risk is -- 22 CHAIRMAN COX: The game is exactly the 23 same. 24 COMM. CLOWE: The game is exactly the 25 same. So the risk to the house is uniform. But in 0135 1 actual dollars, the take is greater -- higher risk, 2 higher reward? 3 CHAIRMAN COX: And I can't tell you 4 that -- well, in absolute dollars, yes. But as a 5 percentage of something, exactly the same. 6 COMM. CLOWE: So it would seem to me 7 that's where you want to go with this discussion on a 8 $50 ticket. 9 MR. TIRLONI: The $50 will have the 10 exact same payout as the current $30 game does. There 11 is not an increased prize payout on this $50 game. 12 COMM. CLOWE: Which is? 13 MR. TIRLONI: 72.5 percent. 14 COMM. CLOWE: Does that make sense to 15 you? 16 CHAIRMAN COX: That's one that I could 17 argue either way. I think the staff has done 18 excellent research, and they've worked carefully with 19 the Controller in reaching that decision. 20 COMM. CLOWE: And that's a business 21 call. 22 MR. TIRLONI: We've also reached out and 23 UT Drs. Jarrett and Huff have also weighed in on this 24 issue and done research on this issue for us that we 25 considered in our recommendation. 0136 1 COMM. CLOWE: And I guess you asked your 2 individuals you intercepted about that as well, didn't 3 you? 4 MR. TIRLONI: I don't believe we 5 actually have gone to the level of discussing prize 6 payout in terms of percentage, with the players. 7 Usually where you see that impact with players is the 8 winning experiences. So, you know, higher payout 9 games have more money going back in prizes, obviously, 10 which can sometimes give you the ability to create a 11 higher top prize or more wins in a game. And that's 12 typically how players respond to payout changes 13 without actually being told, "This game pays out 14 higher than this game." 15 CHAIRMAN COX: Thank you very much. 16 MR. TIRLONI: Commissioners, if there's 17 no other questions, that concludes our presentation. 18 I will let you know that we are aiming for a mid-May 19 launch of the $50 ticket. And we can keep you updated 20 on our progress in future meetings. 21 CHAIRMAN COX: Good luck. 22 MR. TIRLONI: Thank you. 23 AGENDA ITEM NO. XII 24 CHAIRMAN COX: Item No. XII, report and 25 possible discussion and/or action on transfers to the 0137 1 state. 2 Ms. Pyka. 3 MS. PYKA: For the record, my name is 4 Kathy Pyka, Controller. 5 Tab XII includes information on the 6 agency's financial status. The first report reflects 7 our transfers and allocations to the Foundation School 8 Fund as well as the allocation of unclaimed prizes as 9 of January of 2007. Total transfers to the state for 10 this period amounted to $410.1 million through the 11 first five months of the fiscal year. And this 12 represents a 2 percent decline from where we were in 13 January of 2006. 14 The second page of your notebook 15 includes detailed information on the $410.1 million 16 transfer amount. Of the total, $392.4 million was the 17 amount transferred to the Foundation School Fund, with 18 a balance of $17.7 million transferred from unclaimed 19 prizes. 20 And the last document in your notebook 21 includes Report of Lottery Sales, Expenditures and 22 Transfers From Fiscal Year 1992 to the Present. Total 23 cash basis transfers to the Foundation School Fund 24 through January of this year again were 25 $410.1 million, with a cumulative transfer to the 0138 1 Foundation School Fund of $9.05 billion. 2 Commissioners, this concludes my 3 presentation. I would be happy to answer any 4 questions. 5 CHAIRMAN COX: Commissioner? 6 COMM. CLOWE: None. Thank you. 7 CHAIRMAN COX: Kathy, I've got a 8 document here called "Texas Lottery Commission." It's 9 two-pager, Fiscal Sizeup, on '06-07 LBB. 10 MS. PYKA: Yes. 11 CHAIRMAN COX: Now, I have been getting 12 myself confused by looking at this and maybe not 13 looking at your numbers. Now, this says net proceeds, 14 which to me means transfers to the Foundation School 15 Fund, the net proceeds from the operations of the 16 game, but they seem to be referring to all transfers, 17 including unclaimed prizes. 18 MS. PYKA: That is correct. 19 Mr. Chairman, this issue came up when we were before 20 our House Appropriations General Government 21 Subcommittee. One of the members had that document 22 before her and referred to some of the figures on the 23 document. And as we looked at it further and provided 24 her a reconciliation, that document includes both 25 transfers to the Foundation School Fund as well as 0139 1 transfers from unclaimed prizes, whether that be to 2 the multi-categorical teaching and hospital account or 3 to general revenue. 4 CHAIRMAN COX: And when I testified 5 before that committee and indicated that during my 6 tenure on this board, transfers had increased every 7 year, they were looking at a document that said I 8 didn't know what I was talking about. So I guess my 9 only point here is, if I get that question again, I 10 may want to explain that there are these numbers and 11 then there are these numbers. 12 MS. PYKA: Right. Total cash basis 13 transfers to the Foundation School Fund, as you 14 testified, have increased every year since your 15 appointment to the board. But if you add in transfers 16 from unclaimed prizes, there is a year in which we had 17 a decline, because of a change in unclaimed prizes. 18 CHAIRMAN COX: Now, according to this, 19 there were actually two years -- 20 MS. PYKA: Is there two years? 21 CHAIRMAN COX: -- from '02 and '03 and 22 from '05 to '06. 23 MS. PYKA: One is very insignificant, if 24 I recall. 25 CHAIRMAN COX: Yes. They're both very 0140 1 insignificant. 2 Okay. Thank you for that. 3 MS. PYKA: You're welcome. 4 AGENDA ITEM NO. XIII 5 CHAIRMAN COX: Item XIII, report, 6 possible discussion and/or action on the Fiscal year 7 2008-2009 Legislative Appropriations Request. 8 Ms. Pyka. 9 MS. PYKA: Again, Kathy Pyka, for the 10 record. 11 This morning I want to provide a brief 12 report to you on our Fiscal Year 2008-2009 Legislative 13 Appropriations Request. As you're aware, we're in 14 receipt of the LBB's budget recommendation in which 15 they recommended our budget for the two-year period of 16 Fiscal Year 2008 and 2009, at $403.7 million. 17 In summary, in addition to the 18 $9.3 million reduction in which we returned funds back 19 to the state, the LBB's introduced version of the bill 20 includes an additional $1.4 million reduction. The 21 reduction is across 10 strategies, on the salary line 22 item as well as in overall administrative reduction 23 line item. 24 The LBB's budget does include 25 restoration of the 10 percent budget reduction in 0141 1 which we asked to have restored, but it does not 2 include the funding request we made for our three 3 capital budget items. 4 They also have not included a 5 recommendation for funding of bingo indirect from the 6 proceeds of lottery, nor did they consider 7 recommending approval of the out-of-country and 8 out-of-state rider request that we made nor the 9 unexpended lottery administration rider or the new 10 rider that we requested as it relates to the lottery 11 operator contract. 12 Finally, the LBB's budget 13 recommendations does not name a recommendation with 14 regard to the exempt salary of the Executive Director 15 of the Commission. That's LBB's budget 16 recommendation. 17 And then the Governor's office published 18 their budget recommendation on the 7th of February. 19 And with the exception of our request to restore the 20 $900,000 promotional item, 10 percent budget 21 reduction, their budgets does include the restoration 22 of all the 10 percent budget reduction items and also 23 two of our three capital budget items that we 24 requested. 25 With regard to riders, the Governor's 0142 1 budget includes the elimination on the restriction of 2 transferring funds into our advertising strategy. 3 There's not mention, of course, about the statutory 4 cap, but it does eliminate the transfer restriction. 5 And they've also deleted the restriction 6 on out-of-country and out-of-state travel. The 7 Governor's office budget includes the new rider 8 related to outsourcing the lottery operator contract 9 and also included an additional rider that we did not 10 ask for that relates to hiring a consultant or a 11 vendor to develop an alternative plan to return 12 previously outsourced items to the Commission. 13 And then, finally, the Governor's budget 14 includes funding for our exempt position, up to 15 $139,140. 16 I would be happy to answer any questions 17 about either of those budget documents. 18 CHAIRMAN COX: Kathy, Gary showed me 19 something about increases in the top limits of exempt 20 Salary Grades 5 and 6. 21 MS. PYKA: Within Article IX, I believe, 22 is what y'all were looking at. 23 CHAIRMAN COX: Is that proposed? Is 24 that a done deal or what? 25 MS. PYKA: That is the proposed 0143 1 recommendation, and that's the increases to the cap 2 authorized. Now, that's an Article IX provision that 3 states how high the exempt positions can go. But the 4 actual salary needs to be reflected within the 5 appropriation bill of the individual agency. 6 CHAIRMAN COX: Yes. So there are two 7 constraints on our Executive Director's compensation? 8 MS. PYKA: I would say really there's 9 one. It's really what is included in our own 10 individual appropriation bill. 11 CHAIRMAN COX: Okay. So the top of 12 Exempt Range 5 is one thing; the top of Exempt Range 13 6, which we asked for, is another. The cap that they 14 put on it is all that really matters? 15 MS. PYKA: Right. That's correct. 16 CHAIRMAN COX: Okay. Mr. Chairman, I 17 would tell you that in my testimony before the Senate 18 Finance Committee and before the House Appropriations 19 Subcommittee, I have asked them, explained to them our 20 needs, our spotty experience in the past, our good 21 fortune at this time, the recommendation of the State 22 Auditor, our concurrence in that recommendation, and 23 have asked them for the full range of exempt Grade 6, 24 which would give us the latitude up to $190,000, 25 about, to cover an increase at this point and provide 0144 1 room for future incentive increases as well. 2 COMM. CLOWE: Thank you very much, 3 Mr. Chairman. 4 CHAIRMAN COX: So that is very much at 5 the top of my mind. And I will continue to take that 6 to whoever will listen to me. And I hope you will do 7 the same. 8 COMM. CLOWE: Yes, sir. 9 CHAIRMAN COX: Anything else, Ms. Pyka? 10 MS. PYKA: That concludes my 11 presentation. I will be happy to answer any other 12 questions. 13 CHAIRMAN COX: Thank you. 14 MS. PYKA: Thank you. 15 CHAIRMAN COX: Okay. Commissioner, I 16 think maybe take a couple more items, then we're going 17 to need to take another break. This is going to be a 18 long day. 19 AGENDA ITEM NO. XIV 20 CHAIRMAN COX: Okay. Item XIV, report, 21 possible discussion and/or action the 80th 22 Legislature. 23 Ms. Trevino. 24 MS. TREVINO: Good morning, 25 Commissioners. For the record, I'm Nelda Trevino, the 0145 1 Director of Governmental Affairs. 2 And we have provided you today with an 3 updated legislative tracking report listing bills 4 filed to date with potential impact to the agency. We 5 are currently tracking 58 bills, and I would like to 6 highlight several bills filed since our last 7 Commission meeting with direct impact to either the 8 lottery or to charitable bingo. 9 These include House Bill 1156 by 10 Rep. Kino Flores relating to the operation and 11 regulation of charitable bingo and the use of bingo 12 proceeds, House Bill 1179 by Rep. Kino Flores relating 13 to procurements by the Texas Lottery Commission, House 14 Bill 1180 by Rep. Kino Flores relating to the 15 continuation of the Texas Lottery Commission and 16 certain laws administered by the Commission, House 17 Bill 1181 by Rep. Kino Flores relating to the 18 operation and administration of state lotteries by the 19 Texas Lottery Commission, House Bill 1405 and the 20 accompanying joint resolution H.J.R. 63 also by 21 Rep. Kino Flores relating to the operation of video 22 lottery games, the creation of the Texas Gaming and 23 Boxing Commission and the regulation of gambling 24 activities in the state, House Bill 1670 by 25 Rep. Charlie Geren relating to payment of the lottery 0146 1 prize awarded to a minor, and Senate Bill 770 by 2 Sen. Leticia Van de Putte relating to the creation of 3 a lottery game to benefit the Permanent Fund for 4 Veterans Assistance. 5 The deadline for filing bills is March 6 the 9th, and we will certainly keep you advised of any 7 other legislation impacting the agency that may be 8 filed. 9 With regard to the agency's 10 appropriations for the 2008-2009 biennium, Chairman 11 Cox, as you mentioned, the agency made an appearance 12 before the House Appropriations General Government 13 Subcommittee on February the 8th. And we have 14 provided the subcommittee members with supplemental 15 information responsive to questions that were asked at 16 the hearing. 17 The subcommittee also held a workgroup 18 session on February the 14th to further discuss the 19 agency's appropriations request, and we expect the 20 agency's appropriations to be considered by the full 21 House Appropriations Committee sometimes early next 22 week. 23 The agency also appeared before the 24 Senate Finance Committee on February the 19nth, and we 25 are compiling some responsive information to several 0147 1 requests made at the hearing. And the Finance 2 Committee workgroup that is going to be considering 3 our agency's appropriation will meet tomorrow, 4 February the 22nd, to further discuss our request. 5 The House Licensing and Administrative 6 Procedures Committee hearing that was scheduled to be 7 held yesterday was canceled, and we anticipate that 8 hearing to be rescheduled. 9 And lastly, agency staff continues to be 10 responsive to the work of the Bingo Legislative 11 Workgroup that was formed at the request of Chairman 12 Kino Flores. 13 And this concludes my report, and I'll 14 be happy to answer any questions. 15 COMM. CLOWE: Were we on the agenda for 16 the House Licensing Committee yesterday? 17 MS. TREVINO: Yes, Commissioner Clowe. 18 What Chairman Flores had requested, he had invited all 19 the executive directors from agencies that the 20 committee has jurisdiction over. And so Executive 21 Director Sadberry was prepared to provide some brief 22 remarks. 23 And also what was listed -- there were 24 three bills that the committee was going to consider 25 yesterday, and one of them was House Bill 1180 by 0148 1 Rep. Flores. And this is the bill that changes the 2 Commission's sunset date from 2011 to 2009. 3 COMM. CLOWE: Thank you. 4 CHAIRMAN COX: Do we know when that 5 meeting that was supposed to be yesterday is going to 6 be rescheduled for? 7 MS. TREVINO: Chairman Cox, we haven't 8 received any official notification. The House 9 Licensing Committee, as their standard schedule, will 10 meet on Tuesdays. So it's likely that what they had 11 scheduled to consider yesterday and have the executive 12 directors provide these remarks, that they will likely 13 do that next Tuesday. But, again, we have not been 14 notified officially when that might be rescheduled. 15 CHAIRMAN COX: Okay. So on the 27th. 16 Okay. Thank you. 17 MS. TREVINO: You're welcome. 18 CHAIRMAN COX: Mr. Chairman, I think we 19 need to reconnoiter here and decide how we're going to 20 go forward. We've got a lot left on this agenda. 21 We've got some folks coming over for our executive 22 session. We've got a lot of people here waiting for 23 their agenda items to come up. What are your thoughts 24 on how we should go with this? 25 COMM. CLOWE: Mr. Chairman, whatever you 0149 1 like. I think we're not going to be able to get 2 finished with this and go into executive session 3 within 30 minutes. 4 CHAIRMAN COX: No. 5 COMM. CLOWE: And I just think we have a 6 long agenda. If you would be amenable, I think maybe 7 go on into executive session now if the people are 8 going to be with us at that time or available. We 9 have a number of items in executive session, probably 10 take us at least an hour, hour and a half -- 11 CHAIRMAN COX: At least. 12 COMM. CLOWE: -- at least. And then, 13 you know, for those who are on the agenda for later 14 this afternoon, I can't see us coming out of executive 15 session until 1:30. That will give them a chance to 16 take a break and get some lunch. And then we'll grind 17 on through this afternoon, if that suits you. 18 CHAIRMAN COX: I think that' a good 19 plan. 20 Director Sadberry, are there any members 21 of your staff that have time constraints who are here 22 now that won't be later? 23 MR. SADBERRY: Chairman, none that I'm 24 aware of. I have not been informed of that. I see 25 the Deputy ED indicating that's not a problem for us. 0150 1 CHAIRMAN COX: All right. 2 COMM. CLOWE: I mean, we've going to 3 need the Executive Director, the Deputy, the Assistant 4 Bingo Operations Director, the General Counsel. And I 5 think Lawyer Sarah. 6 Anybody else that we need in executive 7 session? 8 CHAIRMAN COX: And at some point we well 9 need Ms. Melvin. 10 COMM. CLOWE: Ms. Melvin. Pardon me, 11 Ms. Melvin. 12 So, unfortunately, if y'all will be 13 available. 14 You're not practicing law, so you don't 15 have to come, Mr. Tirloni. 16 MR. TIRLONI: Not right now. 17 CHAIRMAN COX: At least not licensed to 18 practice. 19 COMM. CLOWE: That's right. 20 AGENDA ITEM NO. XXIII 21 CHAIRMAN COX: At this time I move the 22 Texas Lottery Commission go into the executive session 23 (A) to deliberate the duties and evaluation of the 24 Executive Director, Deputy Executive Director and 25 Internal Audit Director, to deliberate the duties 0151 1 appointment and/or employment of the Charitable Bingo 2 Operations Director, deliberate the duties, 3 appointment and/or employment of an Acting Charitable 4 Bingo Operations Director and to deliberate the duties 5 of the General Counsel pursuant to Section 551.074 of 6 the Texas Government Code; 7 (B) to receive legal advice regarding 8 pending or contemplated litigation and/or to receive 9 legal advice pursuant to Section 551.071(1)(A) or (B) 10 of the Texas Government Code and/or to receive legal, 11 advice pursuant to Section 551.071(2) of the Texas 12 Government Code, including but not limited to: 13 Cynthia Suarez v. Texas Lottery Commission 14 Shelton Charles v. Texas Lottery Commission and Gary Grief 15 Stephen Martin vs. Texas Lottery Commission 16 Patsy Henry v. Texas Lottery Commission First State Bank of DeQueen, et al., v. 17 Texas Lottery Commission; 18 Employment law, personnel law, 19 procurement and contract law, evidentiary and 20 procedural law, and general government law, Mega 21 Millions game and/or contract. 22 Is there a second? 23 COMM. CLOWE: Second. 24 CHAIRMAN COX: All in favor, say "Aye." 25 COMM. CLOWE: Aye. 0152 1 CHAIRMAN COX: Aye. 2 The vote is 2-0. 3 The Texas Lottery Commission will go 4 into executive session. The time is 12:14 p.m. Today 5 it February 21, 2007. 6 (Off the record: 12:14 p.m. to 3:11 7 p.m.) 8 AGENDA ITEM NO. XXIV 9 CHAIRMAN COX: The Texas Lottery 10 Commission is out of executive session. The time is 11 3:11 p.m. 12 Is there any action to be taken as a 13 result of executive session? 14 I move the approval of the evaluation of 15 the Internal Audit Director. Is there a second? 16 COMM. CLOWE: I second. 17 CHAIRMAN COX: All in favor say "Aye." 18 COMM. CLOWE: Aye. 19 CHAIRMAN COX: Aye. 20 Opposed? 21 The vote is 2-0. 22 COMM. CLOWE: Ms. Melvin will need to 23 sign this. 24 CHAIRMAN COX: Yes. 25 Would you like to sign this now, 0153 1 Catherine? 2 MS. MELVIN: I can. 3 CHAIRMAN COX: Thank you. 4 COMM. CLOWE: And you can give that to 5 Janine. 6 CHAIRMAN COX: I move we approve a merit 7 increase in the Internal Audit Director's annual 8 salary from $108,150 to $120,000, effective 9 February 1, 2007. Is there a second? 10 COMM. CLOWE: Second. 11 CHAIRMAN COX: All in favor say "Aye." 12 COMM. CLOWE: Aye. 13 CHAIRMAN COX: Aye. 14 The vote is 2-0 in favor. 15 Is there any other action to be taken as 16 a result of any item deliberated in executive session? 17 I know of none as well. 18 AGENDA ITEM NO. XV 19 CHAIRMAN COX: If not, let's move on to 20 Item XV in the agenda, consideration of and possible 21 discussion and/or action on the Lotto Texas 22 procedures. 23 Ms. Pyka. 24 MS. PYKA: Thank you. For the record, 25 Kathy Pyka, Controller of the Lottery Commission. 0154 1 Commissioners, this afternoon I'm 2 seeking your approval of three procedures related to 3 Lotto Texas as follows: 4 The first is Procedure OC-JE-002, Lotto 5 Texas jackpot estimation. The second is Procedure 6 OC-WP-003, Lotto Texas jackpot payment and investment. 7 And the third is Procedure OC-WP-001, processing prize 8 payment. 9 The Commission's audit report on Lotto 10 Texas activities performed by the State Auditor's 11 office includes a recommendation noting that 12 procedures affecting Lotto Texas players should be 13 presented at a public Commission meeting for approval. 14 Upon approval of the procedures, the audit report 15 recommended that the agency publish the procedures in 16 the Texas Register as well as on the Commission's 17 website. 18 Each of the procedures that I referenced 19 has been approved by Commission staff, in accordance 20 with Directive Procedure No. ED-001, which is titled 21 "Agency's Policies, Directives and Procedures." 22 And I wanted to note that as a follow-up 23 to our December 13, 2006 Commission meeting, further 24 modifications have been made to Lotto Texas jackpot 25 estimation procedure. The procedure presented in your 0155 1 notebook today provides sole authority to the 2 Commission's Executive Director or their designee to 3 approval a final projected annuitized jackpot to 4 advertise for Lotto Texas drawings. 5 I would also like to highlight 6 additional items that relate to the Lotto Texas 7 jackpot estimation procedure. Section II.4.a outlined 8 on Page 4 of the procedure states that the annuitized 9 jackpot prize amount will automatically be set to 10 $4 million for the first draw following a draw in 11 which at least one jackpot prize ticket is identified. 12 The next item is in Section III.1. It's 13 also on Page 4. It outlines the signatures required 14 for Lotto Texas jackpot estimation. And basically 15 what we've done is, we've updated the procedure to 16 take into consideration informal recommendation from 17 the State Auditor's office in which they suggested we 18 review our procedure and determine if we could reduce 19 the number of signatures on the worksheet. 20 So what we've done is, we've reduced the 21 number of signatures from seven signatures to five. 22 And the two signatures that are being removed include 23 the Commissioner's signature as well as one of the 24 signatures within my office. So with the new 25 procedure, the signatures on the worksheet include the 0156 1 Controller, the Products Manager, the Lottery 2 Operations Director, the Deputy Executive Director and 3 then, finally, the Executive Director. 4 The procedure also identifies who can be 5 authorized as a designee to approve jackpot 6 estimation. This is covered within Paragraphs III.1 7 and III.2 on Pages 4 and 5 of the procedure. And we 8 note that the temporary signature can be granted to 9 appropriate personnel that will be accountable for 10 jackpot estimation, including granting to an 11 individual listed on the authorized listing that's 12 already signing within the procedure. The delegation 13 must be in writing, by e-mail or by pager and should 14 specify the effective length of time, not to exceed 10 15 business days. 16 Section III.1, Paragraphs (a) and (b) on 17 Page 5 describe the determination for jackpot 18 rollover. Paragraph (a) describes that rollovers 19 should typically be based on the low end of sales 20 support at the time of estimation. And then Paragraph 21 (b) notes that in the event that the low end of sales 22 does not support a roll in the currently advertised 23 jackpot, that the Commission will increase the jackpot 24 in $1 million increments. 25 Finally, the other two procedures, 0157 1 Procedure OC-WP-003, Lotto Texas jackpot payment 2 investment, simply outlines the steps to be taken 3 after a Lotto Texas drawing in which a Lotto Texas 4 jackpot ticket sold. And Procedure OC-WP-001 outlines 5 the guidelines within our office for processing prize 6 payments. 7 Commissioners, if you approve the 8 procedures this afternoon, we'll pursue publishing 9 them in the Texas Register as well as on our 10 Commission's website. And this concludes my 11 presentation. I would be happy to answer any 12 questions. 13 COMM. CLOWE: Mr. Chairman, I'm prepared 14 to vote for this, but I would like to add the proviso 15 that because of the history this subject has at this 16 agency, that this policy be reviewed on an annual 17 basis, preferably in January of each year, and 18 codified with a report from the Controller and 19 verified by the Internal Auditor, that the practice is 20 being followed and it continues to be a good practice 21 in a current status. 22 CHAIRMAN COX: I think that's an 23 excellent idea, and I want to ask a question along 24 that same line. 25 Kathy, the state auditor specifically 0158 1 directed -- requested, whatever you might call it; 2 directed is what I call it -- that this procedure be 3 approved by the Commission. 4 MS. PYKA: Yes, sir. 5 CHAIRMAN COX: Do you believe that that 6 extends to amendments of this procedure, that it will 7 be special for all time or is it special just for 8 once? 9 MS. PYKA: I believe that it's special 10 for all times. I believe that their intent is any 11 procedures relating to Lotto Texas players should be 12 approved before the Commission. 13 CHAIRMAN COX: Okay. And I think that's 14 probably the safer interpretation and I believe also 15 the correct one. 16 Now, are there any other procedures that 17 you believe should have this same status, such as 18 other on-line games? 19 MS. PYKA: I mean, certainly we can look 20 at the other on-line games. In particular, I know 21 that there's been a lot of exposure to the Lotto Texas 22 game in the past, and their recommendation did focus 23 on the Lotto Texas game. If it's the will of the 24 Commission, we can certainly review the other 25 procedures. They're all current and updated on the 0159 1 Commission's website today, but they have not been 2 brought to the Commission in a setting such as this. 3 CHAIRMAN COX: Okay. Well, the ones I 4 think of specifically are those where the 5 determination of the advertised jackpot is solely 6 within this agency. Mega Millions doesn't fall into 7 quite the same category because y'all participate with 8 a bunch of other states. 9 MS. PYKA: Right. 10 CHAIRMAN COX: And so there's a control 11 outside these four walls. But there are other games 12 where the jackpot progresses and the determinations 13 are within these four walls. 14 MS. PYKA: The other game would be the 15 Texas Two Step game. 16 CHAIRMAN COX: Yes. So I ask that you 17 confer with the auditor, with the Executive Director 18 and, if appropriate, with the State Auditor as to 19 whether we should be looking at putting any other 20 procedures on the same level with this one. 21 MS. PYKA: Certainly. 22 CHAIRMAN COX: Now, what do we need to 23 do to incorporate Chairman Clowe's suggestion that we 24 look at this every year at a regular time and that you 25 and the auditor come to us and tell us that it either 0160 1 needs to fall in amendments or it's just fine as it 2 is? 3 MS. PYKA: I believe that, if it's okay 4 with y'all, the procedure is fine as it is. And, by 5 practice, we will bring this up every January with a 6 formal report that's been reviewed by the Internal 7 Auditor. Or we could modify the procedure to 8 incorporate -- it's more of a procedure practice issue 9 rather than the mechanics of the Lotto Texas jackpot 10 estimation, how we process prize payments. It's 11 certainly the will of the Commission, but I certainly 12 have received a message and will ensure that it's done 13 every January. 14 CHAIRMAN COX: Okay. Are you okay with 15 that or would you rather formalize it? 16 COMM. CLOWE: I would like to formalize 17 it, and I intend to do that in my motion, if you'll 18 allow me. 19 CHAIRMAN COX: All right. If we may 20 postpone your motion for just a moment, I would like 21 to get Ms. Melvin to come up and get her thoughts on 22 this. 23 MS. PYKA: Mr. Fernandez actually just 24 brought up an outstanding point to me with regard to 25 the Commission's procedure on agency policies and the 0161 1 fact that each agency procedure, policy or directive 2 is reviewed on an annual basis. So as part of that 3 review on an annual basis, with this having a February 4 anniversary date, I mean, it will be coming back up 5 for formal review as part of that overall Commission 6 procedure that's already in place. 7 CHAIRMAN COX: Okay. 8 COMM. CLOWE: That doesn't satisfy me. 9 MS. PYKA: No, I'm not suggesting that 10 you modify your motion. It's just, I thought, good 11 information. 12 COMM. CLOWE: I've been through this 13 fire once, and I don't intend to go through it again. 14 MS. PYKA: I understand. 15 COMM. CLOWE: And if I am allowed by the 16 Chairman to make my motion, it's going to be part of 17 the motion that approves this on a specific basis. 18 MS. PYKA: Very good. 19 COMM. CLOWE: And part of it, 20 Ms. Melvin, will be that you report to us in January 21 in every year, that the prior year we have conformed 22 to this practice. I don't want to walk through this 23 fire a second time. 24 CHAIRMAN COX: Words of wisdom. 25 Catherine, you have had some involvement 0162 1 in this process, in that you have reviewed this for me 2 and then on most Wednesdays and Fridays called me and 3 told me what it says, and then we have conferred and 4 decided whether we wanted to sign up in approving the 5 agency's action or not. 6 MS. MELVIN: Yes, sir. 7 CHAIRMAN COX: So we have had, as a 8 by-product of a Commissioner involved, the auditor 9 involved. 10 MS. MELVIN: Yes, sir. 11 CHAIRMAN COX: And I think we agreed 12 that that was not inappropriate, considering all 13 things in this circumstance. Now, does this procedure 14 call for any ongoing day-to-day kind of Wednesday and 15 Friday involvement on your part or not? And whatever 16 the answer may be, do you consider that to be the 17 appropriate way? 18 MS. MELVIN: I have reviewed the draft 19 procedure. The management team that worked on this 20 procedure also involved me in those discussions in 21 talking about the role with Internal Audit and what's 22 the appropriate use of the Internal Audit function 23 with this. 24 Your question as to whether or not there 25 is Internal Audit involvement on a bi-weekly basis, 0163 1 there won't be. However, there is a provision that 2 Internal Audit will receive the signed completed 3 estimation, so we'll receive that after the fact, and 4 so we will have that to review. And should anything 5 come to our attention, certainly we would alert the 6 Commissioners and also speak wick the Executive 7 Director about that. 8 CHAIRMAN COX: Okay. Director Sadberry, 9 one of the provisions there that we have talked about 10 is the provision that you could delegate -- I guess 11 any of these five designated signers could delegate 12 for up to 10 days, 10 business days, the authority to 13 sign on their behalf. Have you considered to whom you 14 might make such a delegation? 15 MR. SADBERRY: Chairman, first, my 16 consideration is that I would make any delegations of 17 that nature very sparingly and only on exigent 18 circumstances where I felt virtually I had no other 19 choice. So it will not be something that I intend to 20 do on a routine or customary basis. 21 Secondly, I heard Ms. Pyka say the 22 delegation may be among those who are already 23 authorized. Did I hear that correctly? 24 MS. PYKA: It can be to others or to -- 25 MR. SADBERRY: Can it be to others? 0164 1 MS. PYKA: -- or with those on the list. 2 They have to be accountable for the estimation, 3 though. 4 MR. SADBERRY: If it would be 5 permissible for me to do so, I would delegate it to 6 someone that I felt could exercise some oversight 7 capacity. I think it's permissible under the 8 procedure that I might do so with someone on the list 9 that comes up to me, like the Deputy ED. I think, if 10 I'm permitted, a better practice would be that I do 11 instead to someone else. And if it's permissible 12 under those circumstances, maybe a commissioner or 13 someone on the Internal Audit staff, if that's 14 permissible, or counsel, so that the objective 15 oversight purpose is achieved as opposed to having a 16 relook by someone who has already reviewed it. 17 I will tell you that this came to my 18 attention in the formation, and it was different as it 19 reached me. It was kind of open-ended and I was not 20 comfortable with that, and I felt it should be on a 21 limited basis and restricted to a time frame and would 22 expire automatically, so I requested those changes be 23 made. And that applies to all of the signatories on 24 it. 25 I'm sensing there is a pertinence to 0165 1 your interest in this. And I will tell you, it's very 2 important to me and I think -- I can understand the 3 reason for having it. There are occasions when it's 4 appropriate, but I'm hoping and intend myself that it 5 be the exception rather than the rule, if it's 6 exercised at all. And if exercised, whenever 7 exercised, that I make certain that it's someone that 8 I have the confidence that will ensure the purpose for 9 the procedure and the protection of the procedure is 10 carried out. 11 CHAIRMAN COX: And I think that's 12 exactly in the spirit that I was hoping you would 13 answer that. We're talking here about we want five 14 people. It's down from seven. And I think we want 15 five people, not four or three. And should Gary be 16 out, for instance, I would prefer that Gary not 17 delegate his authority to Anthony -- 18 MR. SADBERRY: Right. 19 CHAIRMAN COX: -- that gets us back to 20 four -- but that Gary delegate his to someone who he 21 considers qualified and independent to the process, 22 much as he is, who would give it another look. 23 And, Kathy, to you again, someone from 24 your staff rather than to Michael Anger or to Gary or 25 to Anthony. 0166 1 MS. PYKA: Certainly. 2 CHAIRMAN COX: So I think that if we can 3 keep that as an informal guideline, we probably don't 4 need to make it a formal thing. 5 We have talked about the fact that this 6 procedure now gives us documentation for starting at 7 $4 million. 8 MS. PYKA: That is correct. 9 CHAIRMAN COX: And it gives us 10 documentation for progressing at $1 million whether or 11 not it's supported by sales. 12 MS. PYKA: Correct. 13 CHAIRMAN COX: Now, do you believe that 14 this will take us beyond the possibility of having 15 another Table I in the next Lotto Texas audit, citing 16 instances where sales did not support the jackpot that 17 was advertised? 18 MS. PYKA: Table I definitely referred 19 to that and noted that while we had a Commission 20 practice that was not outlined in procedure. So with 21 it being outlined in procedure, while they may still 22 want to criticize the Commission policy and procedure 23 of rolling when sales do not support the jackpot, they 24 will not be able to criticize us that it's not 25 outlined in procedure. 0167 1 CHAIRMAN COX: Okay. And is this 2 procedure something that they will be sent and have an 3 opportunity to review immediately or will they review 4 it the next time they come in or how do you think that 5 would work? 6 MS. PYKA: We can certainly send it to 7 them now. I mean, we've been in communication with 8 the State Auditor's office throughout the revision to 9 this procedure. He is very well aware of the changes 10 that we've incorporated in the procedure, so we can 11 also send him an electronic copy of it at the same 12 time. 13 CHAIRMAN COX: I think that would be an 14 excellent thing to do. If he asks questions now, 15 well, we'll respond to them; if he has them later, 16 we'll respond to them then. 17 MS. PYKA: I mean, to date he has been 18 fine with the revisions. 19 CHAIRMAN COX: Okay. 20 COMM. CLOWE: And I want to make this 21 comment, Mr. Chairman: I'm not sure that what the 22 State Auditor said was criticism. I think it was a 23 statement of fact. And I think he was fair in that 24 observation that we were establishing jackpots that 25 were beyond what sales supported, and that represented 0168 1 a risk or a hazard to the state in the use of that 2 practice against monies that were available from the 3 sales at that time. 4 MS. PYKA: Right. 5 COMM. CLOWE: And I'm not sure, 6 Mr. Chairman, that, you know, we're going to change 7 that viewpoint at all because I think it's valid. Our 8 response was that we are operating a game of chance 9 and that we are taking that risk in order to make the 10 game attractive, and we think it's a reasonable risk. 11 MS. PYKA: Right. 12 COMM. CLOWE: And by virtue of this 13 policy, we're codifying that position. And we're 14 saying, if adopted, that we'll continue. So in my 15 mind, they're not necessarily being asked to come over 16 and accept our position in this matter, and I don't 17 think we ought to ask them to do that. But I think we 18 just have different views of what's going on here. 19 And, as I recall in the testimony before 20 the House Licensing Committee where this issue was 21 discussed, it was not delved into in great depth. 22 Have you had a different experience on this subject? 23 CHAIRMAN COX: No, I have not had a 24 different experience at all. 25 COMM. CLOWE: Okay. I just want to air 0169 1 that viewpoint of mine and make certain that we're not 2 thinking at all that we're going to make the State 3 Auditor change that position by virtue of this 4 consideration or this rule, because I think they're 5 going to stay with that, and I don't think that's 6 unreasonable. 7 CHAIRMAN COX: I totally agree with 8 that. I guess to say my question another way, have we 9 told the State Auditor that we agreed with all of his 10 findings and would implement them? 11 MS. PYKA: Yes, we did. 12 CHAIRMAN COX: Do you believe that with 13 this procedure, we are showing that we agreed and that 14 we have, to the best of our possible ability, 15 implemented his recommendations? 16 MS. PYKA: Yes. And in particular on 17 that item, it was that we document our practice in the 18 procedure, which we have done. So we have met that 19 audit recommendation as well as our response to that. 20 CHAIRMAN COX: Director Sadberry, 21 anything you want to add to that? 22 MR. SADBERRY: Chairman, I will just say 23 that I think this echoes what Ms. Melvin has said, 24 that a lot of work has gone in on this by the 25 workgroup, most of whom are in the room now, and gave 0170 1 a lot of thought and reflection on this. And we have 2 coordinated with the State Auditor's office, as 3 Ms. Pyka has said. 4 And I am satisfied with it, that it 5 achieves the requirements of our commitment to make 6 these changes and that it embraces, as Commissioner 7 Clowe has said, the fact that what we do. And I 8 concur that the auditor has said he may not agree with 9 the practice of the roll-forward, but he also did not 10 feel that his office, that to be his office to do, 11 merely that we document what we do as opposed to him 12 forming a judgment on what we do. 13 Now, you may recall -- and I believe it 14 was either in a Commission meeting or before the 15 Licensing Committee -- that I stated that I intended 16 to exercise in my own analysis and evaluation of 17 whether we should revisit that issue of $1 million 18 roll-forward. I believe that was a commission 19 meeting. 20 Also, Chairman, as you know, you have 21 given us some informal direction on building in the 22 consideration of a bar where the low end sales is 23 close to the $1 million mark, the lower end tier, 24 where we are moving forward more than $1 million. And 25 I can tell you I shared that information with the 0171 1 members signatory to this procedure, in 201, I 2 believe. They all concurred that in their practice, 3 they would follow that guide so that we will continue 4 to have the conservative and responsible approach. 5 And with that, I think we are in 6 compliance. The other matter is the publication, just 7 to be clear on the record, in the Register and other 8 sources. We cannot mandate that, and we do not have 9 the absolute right to that. We will do everything we 10 can to have it done. But in some instances, is the 11 space available or priority of what is published? But 12 we'll do our part to see that it is published. But if 13 it does not occur, it may not be something we have 14 control over. 15 CHAIRMAN COX: And we can't just take 16 out space? 17 MR. SADBERRY: We can't take an ad in 18 the Register. 19 CHAIRMAN COX: Okay. And, Kathy, one 20 further thing on this annual review that Chairman 21 Clowe is going to propose. I think it's not only 22 appropriate that we look at the words; I think it's 23 appropriate that we look at the numbers. This game is 24 not as healthy as it once was. It's taking us longer 25 to break even, or to cover, than it used to. 0172 1 MS. PYKA: Certainly. 2 CHAIRMAN COX: We're covering at maybe 3 12 now, where we used to cover at 10, let's say. So 4 there may come a time that we can't start at three and 5 we can't progress at one and still be prudent with the 6 state's money. So I ask that as you review this 7 thing, you review every aspect, including the prudence 8 of going forward with the $4 million starting point 9 and the $1 million progression. 10 MS. PYKA: We will certainly do that as 11 well. 12 CHAIRMAN COX: Are you ready to make the 13 motion? 14 COMM. CLOWE: Yes. I move the adoption 15 of the staff recommendation, with the additional 16 direction to the staff that this practice and policy 17 be reviewed as to form and substance regarding 18 compliance by the Controller, on an annual basis as to 19 the current status, in January of each year, and then 20 by the Internal Auditor insofar as the prior year and 21 whether their good practice has been followed, and 22 report to the Commissioners in a timely manner. 23 CHAIRMAN COX: Second. 24 Motion has been made and seconded. Is 25 there any further discussion? 0173 1 MS. KIPLIN: Mr. Chairman, I've got one 2 thing. There is one outstanding item that occurred at 3 the last Commission meeting. And Commissioner Clowe 4 had requested that an historical overview regarding 5 the advertised jackpot and jackpot payment on Lotto 6 Texas be prepared so that you would have that. And 7 Sarah Woelk has done that, and I wanted to make sure 8 that you had that and we were able to address that 9 issue for you. 10 CHAIRMAN COX: Would you like to hear 11 that now? 12 MS. KIPLIN: It's just a document -- 13 CHAIRMAN COX: Oh, okay. 14 MS. KIPLIN: -- that doesn't require any 15 presentation. And certainly if there is a need for 16 follow-up, we will be glad to do that. 17 CHAIRMAN COX: What you've presented at 18 this particular time, does that mean you think we 19 should read it before we vote? 20 MS. KIPLIN: No. I'm sorry if I 21 interrupted you. 22 CHAIRMAN COX: Okay. 23 MS. KIPLIN: It was an inopportune 24 moment. 25 CHAIRMAN COX: All in favor say "Aye." 0174 1 COMM. CLOWE: Aye. 2 CHAIRMAN COX: Aye. 3 Opposed? 4 Motion carries 2-0. 5 MS. PYKA: Thank you, Commissioners. 6 CHAIRMAN COX: Thank you. 7 COMM. CLOWE: Thank you, ladies. Thank 8 you, Sarah -- Lawyer Sarah. 9 AGENDA ITEM NO. XVI 10 CHAIRMAN COX: Item XVI, report, 11 possible discussion and/or action on the agency's 12 contracts. 13 Mr. Jackson. 14 MR. JACKSON: Good afternoon, 15 Commissioners. For the record, my name is Tom 16 Jackson, Purchasing and Contracts Manager for the 17 Texas Lottery Commission. 18 Commissioners, in your notebooks at Tab 19 No. XVI is a report on prime contracts that has been 20 updated for your review. The contract for Scientific 21 Games has been extended for one year, from 22 September 1, 2007, through August 31, 2008. If you 23 have any questions, I would be happy to respond 24 COMM. COX: Thank you, Mr. Jackson. 25 AGENDA ITEM NO. XVII 0175 1 CHAIRMAN COX: Item XVII, report, 2 possible discussion and/or action on amendments to the 3 statistical consulting services, lottery drawings 4 audit services, drawings studio and production 5 services and/or security systems services contracts. 6 Mr. Jackson. 7 MR. JACKSON: Commissioners, earlier 8 today you did not approve adoption of the Daily 4 9 on-line game rule. Therefore, this item can be passed 10 if that's your will. 11 CHAIRMAN COX: Okay. So this was to 12 indicate that appropriate amendments would be made to 13 accommodate those. And at such time as they clear 14 this place, then they will be made? 15 MR. JACKSON: That's correct. 16 CHAIRMAN COX: Okay. Thank you, Tom. 17 Any questions? 18 COMM. CLOWE: No, sir. 19 AGENDA ITEM NO. XVIII 20 CHAIRMAN COX: Okay. Item No. XVIII, 21 report, possible discussion and/or action on an 22 amendment to the agency's instant ticket manufacturing 23 and services contract. 24 Mr. Jackson. 25 MR. JACKSON: Commissioners, Amendment 0176 1 No. 3 to the contract with Pollard Banknote Limited 2 has been completed and will further enhance the 3 services provided by Pollard. This amendment will 4 improve efficiencies, increase the level of security 5 and integrity of the instant games, resulting in a 6 better value to the Texas Lottery Commission. 7 In addition, the current contract with 8 Pollard expires on August 31, 2007. This contract may 9 be extended for an additional five-year period or five 10 one-year periods. We are recommending that it 11 currently be extended be one additional year, which 12 would be August 31st of two thousand -- or 13 September 1, 2007, through August 31, 2008. 14 I would be happy to answer any 15 questions. 16 CHAIRMAN COX: That does not require our 17 approval? That's within the authority of the 18 Executive Director? 19 MR. JACKSON: No, it's just information 20 for you. As we discussed in the past, SciGames, we 21 gave them the opportunity to provide us some better 22 service. They did that. You asked at that time if 23 Pollard was given the same opportunity. They have 24 been. The amendment is in your book and it's 25 virtually the same upgrades that we received from 0177 1 SciGames. Both of them presented us with a very nice 2 amendment and additional options. 3 CHAIRMAN COX: Good work. 4 MR. JACKSON: Thanks. 5 CHAIRMAN COX: Thank you. 6 AGENDA ITEM NO. XIX 7 CHAIRMAN COX: Item XIX, report and 8 possible discussion and/or action on the agency's HUB 9 and/or minority business participation, including the 10 agency's Mentor Protégé Program and/or the agency's 11 Fiscal Year 2006 Minority Business Participation 12 Report. 13 Ms. Bertolacini. 14 MS. BERTOLACINI: Good afternoon, 15 Chairman Cox and Commissioner Clowe. For the record, 16 my name is Joyce Bertolacini, coordinator of the Texas 17 Lottery Commission's Historically Underutilized 18 Business Program. 19 Because the due date for subcontracting 20 reports is the 10th of each month, it is not always 21 possible to complete a monthly HUB report in time to 22 submit it into the meeting notebook. And for this 23 reason, a copy of the agency's January HUB Minority 24 Contracting and Activity Report has been provided to 25 you today. 0178 1 This report includes all Fiscal Year 2 2007 expenditures paid from September 1st of 2006 3 through January 31st of 2007. Our total qualifying 4 expenditures as of January 31, 2007, were 5 $64.7 million. And our estimated HUB minority 6 utilization was approximately $16 million, which 7 equates to 24.79 percent. And it may not be in your 8 notebook. I laid it up there earlier. I am not sure 9 if you have it included behind the tab or not. I 10 apologize for that. 11 CHAIRMAN COX: No problem. 12 MS. BERTOLACINI: In addition, a copy of 13 the agency's finalized Fiscal Year 2006 Minority 14 Business Participation Report has been included in 15 your notebooks today. This report, which is required 16 by Section 466.107 of the State Lottery Act must be 17 made available annually to the Governor, Lt. Governor, 18 Speaker of the House and members of the Legislature. 19 The report requires your formal approval prior to 20 being printed and published on our website. 21 I would be happy to answer any questions 22 or entertain any suggested revisions to the report at 23 this time, from you. And this is an action item, so 24 it would require a motion to approve it. 25 Do you have any questions for me? 0179 1 COMM. CLOWE: I don't. 2 CHAIRMAN COX: If I remember from 3 reading this report, this year we are 11th out of the 4 state agencies in total spending of this nature. Is 5 that correct? 6 MS. BERTOLACINI: That is correct. We 7 were the 11th largest spending agency in total dollars 8 captured by the HUB report. 9 CHAIRMAN COX: But we are nowhere near 10 the 11th largest agency? 11 MS. BERTOLACINI: No, not in numbers 12 of employees -- 13 CHAIRMAN COX: Typically our percentage 14 has been significant, among the very top, first or 15 second. Where is our percentage of spending as 16 compared with other agencies? I don't think that's in 17 this report, but I'm interested in it. 18 MS. BERTOLACINI: The Texas Building and 19 Procurement Commission publishes several different 20 lists as part of the report, the annual and the 21 semi-annual report. And there is another list that is 22 the top 25 agencies with the largest spending 23 percentage with HUBs. 24 CHAIRMAN COX: And where are we on that 25 list? 0180 1 MS. BERTOLACINI: And we are not on the 2 top 25; we are not in the top 25. 3 CHAIRMAN COX: Wait a minute. We're 4 11th in absolute dollars spent, and we're not a big 5 agency; and, yet, we're not in the top 25 in 6 percentage. How does that work? 7 MS. BERTOLACINI: Well, let me explain. 8 The top 10 list, as it used to exist, was actually the 9 list of the 10 agencies that had the largest overall 10 expenditures. It was not ranked by HUB percentage; it 11 was ranked by total expenditures. That was then 12 expanded to be the top 50 list, so the 50 agencies 13 that spend the most money overall. And then within 14 that group of 50 agencies that spend the most money, 15 what are their HUB percentages and how do they rank? 16 And we are not -- 17 CHAIRMAN COX: So we're not big enough 18 to get on the list? 19 MS. BERTOLACINI: Well, we were No. 2 by 20 our percentage of HUB spending. 21 CHAIRMAN COX: That's the number I 22 wanted right there. 23 MS. BERTOLACINI: Yes. We were No. 2 24 from -- if we cut off that list at 11, which is where 25 we fell, yes. But, again, it's an artificial division 0181 1 in some way because if we just cut it off at 10, we 2 wouldn't be on that list either, because we didn't 3 spend enough money to rank among the top 10 largest 4 spending agencies. 5 CHAIRMAN COX: Okay. And I understand 6 that Texas Building and Procurement has their rules 7 and we have our concerns. 8 And help me if you choose, Mr. Chairman. 9 But I know that we're better than 11th 10 in what really counts, and that's what I'm asking you 11 to help me find. And that is, we did the best we 12 could with what we had to spend? 13 MS. BERTOLACINI: Well, I'm not sure 14 what your question is at this point. I'm sorry, 15 Chairman. 16 CHAIRMAN COX: Mike, can you help me? 17 MR. FERNANDEZ: I'll try. 18 CHAIRMAN COX: We've got absolute 19 dollars and we've got relative dollars. And I'm 20 asking, relative to other agencies, how was our 21 percentage? 22 MR. FERNANDEZ: Good afternoon, 23 Mr. Chairman, Commissioner. My name is Mike 24 Fernandez. I'm the Director of Administration. 25 I think what you're referring to is 0182 1 Table B, and this is in the report. 2 MS. BERTOLACINI: Yes. 3 MR. FERNANDEZ: And what that table is, 4 is the largest spending agencies ranked by overall HUB 5 percentage. 6 CHAIRMAN COX: Yes. 7 MR. FERNANDEZ: And I believe that. And 8 what that shows is the top 11. And it shows the 9 Texas -- 10 CHAIRMAN COX: What page are we on, 11 Mike? 12 MS. BERTOLACINI: Page 12. 13 MR. FERNANDEZ: Page 12. I apologize. 14 CHAIRMAN COX: Okay. I'm there. 15 MR. FERNANDEZ: Mr. Chairman, I believe 16 this is what you're referring to when you read through 17 our report. 18 CHAIRMAN COX: Okay. 19 MR. FERNANDEZ: And what you see there 20 again is the largest spending agencies ranked by 21 overall HUB percentage. 22 CHAIRMAN COX: Okay. 23 MR. FERNANDEZ: And as you can see by 24 this report, or by their report, is that the Texas 25 Lottery Commission is ranked No. 2, with a HUB 0183 1 percentage of 23.46 percent. 2 CHAIRMAN COX: Thank you. That's where 3 I was trying to get. 4 MR. FERNANDEZ: So I think that's -- I 5 believe that that's what you're referring to. And 6 what I would say, in my 32 years' experience, is that 7 this agency has done a very, very good job in this 8 area of HUB participation. And I attribute a lot of 9 that, or certainly my four and a half years, to the 10 work that Joyce has done and focused on and the events 11 that she has been involved in and the events that we 12 have held here in the agency. 13 So I think that, you know, there's an 14 ebb and flow in HUB spending. It's because of the 15 projects that we undertake during the year, just the 16 commodities that we buy during the year. It can be 17 the shift in the market; it can be pricing; it can be 18 how fast we can get products delivered. And, as all 19 of us know, there is an ebb and flow to that. 20 But what I've seen in my four and a half 21 years, with my involvement in HUB and non-involvement 22 prior to my current position, is that we continue to 23 rank very high in participation and we continue to 24 focus on that. And I know that Director Sadberry has 25 emphasized that in meetings with our staff and our 0184 1 purchasers, and we will continue to do that. So I 2 think we're doing -- we're focused. 3 CHAIRMAN COX: And you helped us get to 4 the point I was trying to make, which is 11th may go 5 on the record, but second is the number I think of. 6 MR. FERNANDEZ: Yes, sir; yes, sir. 7 CHAIRMAN COX: Excellent. 8 Now, what is needed here, Counsel? Is 9 this an authorization for me to sign this letter 10 transmitting this report to the leadership offices and 11 to the Legislature? 12 MS. KIPLIN: Yes, sir, this is an action 13 item that's the Commission's report on minority 14 business. It's a minority business report required by 15 the State Lottery Act that you-all need to approve to 16 be able to issue to the enumerated entities in the 17 statute. And that will be a transmittal letter that's 18 being signed by you in your capacity as Chairman after 19 you-all, if you decide to vote to approve it, do 20 approve it. 21 CHAIRMAN COX: Okay. 22 COMM. CLOWE: Move the adoption of the 23 report. 24 CHAIRMAN COX: Second. 25 The motion has been made and seconded. 0185 1 Any further discussion? 2 All in favor say "Aye." 3 COMM. CLOWE: Aye. 4 COMM. COX: Aye. 5 All opposed? 6 Motion approved 2-0. I'm going to sign 7 that report. 8 Now, Joyce, I'm going to ask you one 9 question here that is a follow-up to something 10 Chairman Clowe asked at a previous meeting which was 11 about a report on the protégé program. 12 MS. BERTOLACINI: Yes. 13 CHAIRMAN COX: Are you prepared to talk 14 about that at this time? 15 MS. BERTOLACINI: Yes, sir. 16 CHAIRMAN COX: Excellent. 17 MS. BERTOLACINI: That was my next item. 18 I would like to provide you with an update on the 19 agency's Mentor Protégé Program today. Commissioners, 20 the agency is moving forward and working diligently to 21 establish new mentor protégé relationships. I have 22 recently resolved a number of questions about the 23 program by contacting the Texas Building and 24 Procurement Commission, or TBPC, which is the state 25 agency that has oversight of this program. 0186 1 As a result, we've made some revisions 2 to our internal Mentor Protégé Program procedure. For 3 example, when the program was first implemented, the 4 TLC procedure restricted relationships to a period of 5 no more than two years. And you may have remembered 6 that in some of our agreements that we previously had. 7 We have now discovered that this is not a TBPC 8 requirement. Removing this time limit will allow us 9 to continue renewing the relationships that vendors 10 wish to continue for a longer period of time. Prior 11 to this, we were unable to renew a relationship once 12 the two-year limit was reached. 13 And we've also made the decision to 14 change to a mentor protégé application form that was 15 developed by TBPC for state agency use. This new form 16 has been sent to potential mentors for completion, 17 which will allow those who have previously 18 participated in the program to update and refresh 19 their information. 20 I have made direct contact with several 21 of the potential mentor companies, and so far we have 22 received three mentor applications from that group. 23 And we're now in the process of also updating the 24 agency's web page to include a link to the new 25 application form. In fact, that's already been 0187 1 completed, so we have the application out there on our 2 website. 3 Increasing the pool of interested 4 protégé companies will now be a key priority. And I 5 have already begun this initiative by focusing on 6 finding new potential protégés as part of the agency's 7 outreach efforts. The process of matching new 8 protégés with mentors will begin as soon as possible. 9 I also wanted to point out that there 10 are a number of factors that can affect the agency's 11 ability to establish and to retain these mentor 12 protégé relationships. First, participation in the 13 program by both the mentor and the protégé company is 14 voluntary. We cannot require any vendor to 15 participate in the program. 16 And, secondly, the protégé company must 17 be certified as an historically underutilized business 18 with the State of Texas. If, once a relationship has 19 been established, the protégé company loses its HUB 20 certification, it is no longer able to participate in 21 the program. And, in fact, that has occurred with one 22 of our relationships in the past. 23 A company may lose its certification due 24 to a business structure change, a buy-out by a non-HUB 25 company or by simply choosing not to become 0188 1 recertified. So I just wanted to point out that those 2 are some of the limitations that we are working under. 3 However, I do understand that you have a keen interest 4 in this program, and I will be keeping you informed of 5 the agency's progress on a monthly basis from this 6 point forward. 7 Did you have any other further questions 8 about that particular portion of the report? 9 COMM. CLOWE: Joyce, I think the numbers 10 are great, but I think a lot of that is opportunities 11 that are easy to accomplish. And we're fortunate in 12 that our expenditures allow us to achieve some of the 13 results that we achieve. On the other hand, I think 14 the mentor protégé program is a harder piece of work 15 and it requires a lot of effort to get the mentors and 16 then find the protégés and get that relationship in 17 place and grow these normally smaller business 18 entities and nurture them and get them in the stream, 19 so to speak. And then, as you pointed out, they grow 20 out of it or they fall out of it. 21 But that's really to me the input for 22 these small entities that we're trying to reach out to 23 with this government work. So I would like to see a 24 continued focus on that. 25 And it does ebb and flow, Mike, as you 0189 1 pointed out, on the revenue side of these entities. 2 But this is the harder task in my mind. 3 So this was started, I think, some years 4 ago by Robert Hall, who was in charge of this at one 5 time. Some of you may remember him. And I think he's 6 the one who started this program. And he worked these 7 job fairs and really went out and snared a lot of 8 people into this program. And I would like to see us 9 put that kind of effort into this, because I think 10 that's where you really bring these people up into the 11 system of government contracting. 12 MS. BERTOLACINI: Yes, sir. And I do 13 agree. It is a little bit more of a challenge, 14 especially working within the framework. This program 15 came in originally I believe with Senate Bill 178, and 16 then it was modified a little bit after that. And so 17 when Robert came in and was implementing all of the 18 new provisions, that was a part of it. And I was 19 involved at that time as well. 20 COMM. CLOWE: So you have that 21 institutional experience? 22 MS. BERTOLACINI: Yes. I think I 23 probably did a lot of the footwork. 24 COMM. CLOWE: That's great. 25 MS. BERTOLACINI: So I appreciate your 0190 1 interest and your level of concern about this. And 2 I'll be definitely concentrating some efforts on this 3 and, again, keeping you informed as much as possible 4 on a monthly basis. 5 COMM. CLOWE: I'll never forget 6 Sen. Barrientos. He always asked the good tough 7 questions. You want to be able to answer those in an 8 affirmative way. 9 MS. BERTOLACINI: Right. 10 MR. FERNANDEZ: And Chairman Cavasos, 11 when he was in the Legislature, also was another one 12 that was focused on this also. 13 MS. BERTOLACINI: I'm sorry. I have one 14 final point I wanted to bring to you today. I wanted 15 to report to you that our agency participated in the 16 8th Annual Texas Association of African American 17 Chambers of Commerce last week in Houston. And as 18 part of the conference, our agency assisted in 19 organizing a state government roundtable event that 20 was very well-received. And, in addition, the Texas 21 Lottery Commission was recognized by the association 22 for being one of the top five state agencies spending 23 the highest number of dollars with African-American 24 HUBs during Fiscal Year 2006. And we were also among 25 the top five agencies with the highest percentage of 0191 1 total HUB dollars paid to African-American companies. 2 And so I wanted to show you our 3 recognitions that we received last week. Here they 4 are, such that they are. And I would be happy to 5 answer any additional questions that you might have 6 regarding any of the issues. 7 CHAIRMAN COX: That's excellent, Joyce. 8 Thank you so much for your good work in this very 9 important area. 10 MS. BERTOLACINI: Thank you. 11 AGENDA ITEM NO. XX 12 CHAIRMAN COX: Item XX, consideration 13 and possible discussion and/or action on external and 14 internal audits and/or reviews relating to the Texas 15 Lottery Commission and/or on the Internal Audit 16 Department's activities. 17 Ms. Melvin. 18 MS. MELVIN: Good afternoon, 19 Commissioners. Again, for the record, Catherine 20 Melvin. I have no items of update this afternoon, but 21 I'm happy to answer any question you might have. 22 AGENDA ITEM NO. III (continued) 23 COMM. CLOWE: Ms. Melvin, did you have 24 an issue that you wanted to bring to the Commission's 25 attention from a prior item? 0192 1 MS. MELVIN: I did. This is related to, 2 I believe, prior Agenda Item No. III, in that 3 Mr. Sanderson was presenting his division's updates on 4 the Internal Audit recommendations, and I wanted to 5 discuss a particular proposal with you, if that's 6 appropriate at this time. 7 In discussing the look-back -- quote, 8 look-back audits -- Mr. Sanderson I believe laid out a 9 period of those audits conducted from January 1, 2003, 10 through December 31, 2006. And his report to me of 11 his initial review of audits conducted during that 12 time amounted to approximately 600-plus audits of 13 licensed, authorized organizations which cited a 14 violation or a non-compliance of some kind. 15 And so we discussed the best way to 16 handle that. And we met with the Controller, 17 Ms. Pyka, regarding the use of external resources to 18 help the agency in performing that look-back. In our 19 discussions, it seemed to me that it's incumbent upon 20 the agency to provide the appropriate guidance to any 21 contractor if you're considering utilizing some 22 outside resource for that. And I realize that the 23 Bingo Division is in a somewhat compromised position 24 because I don't think it would be necessarily 25 appropriate to ask the auditors to go back and review 0193 1 their own work. I think you have a bit of an 2 independence issue. 3 And what I propose is, is that perhaps 4 Internal Audit might do that initial review of those 5 600-plus audit reports and at least conduct an 6 assessment cataloging of sorts of those different 7 audits that they completed. 8 What I would like to do first is make an 9 assessment of how many man-hours that might take of my 10 staff and perhaps visit with you, Chairman, as to what 11 we're thinking that might take and see if that meets 12 with your approval. And, if so, we would progress to 13 cataloging those different audit reports into logical 14 groupings and prepare a recommendation for management 15 as to a course of action to take with each of the 16 different groupings. 17 And as an example, I think a large 18 number of audit reports might be simple violations of 19 unallowable expenditures. That's a pretty common 20 violation. Particularly the type of auditing that 21 they were doing, they looked at the use of those bingo 22 funds. And the typical recommendation or direction 23 given to licensees for that type of violation was that 24 they redeposit or reimburse the bingo account. And so 25 for that, that might be one logical grouping that we 0194 1 would look at and make a recommendation as to how best 2 to handle those that were conducted during that three- 3 or four-year period 4 COMM. CLOWE: Sounds good to me. 5 CHAIRMAN COX: The demands on your time 6 and that of your staff, the fact that you are one 7 person short, cause me concern that you might be 8 taking on something that somebody else could do. But 9 go ahead and take a look, and we'll go over it and see 10 if it looks like it's the best use of your staff's 11 time. 12 But I think that your continued audit 13 work in the other areas of charitable bingo are very 14 important and things that your people are uniquely 15 qualified to do; whereas, perhaps other resources 16 could do this about as well as you could. So think 17 about those things as you put that together, and we'll 18 take a look at it. 19 MS. MELVIN: Okay. We'll do that. 20 CHAIRMAN COX: Great. Thank you, 21 Catherine. 22 MS. MELVIN: Thank you. 23 AGENDA ITEM NO. XXI 24 CHAIRMAN COX: Item XXI, report, 25 possible discussion and/or action on the Mega Millions 0195 1 game and/or contract. 2 Director Sadberry. 3 MR. SADBERRY: Chairman, Commissioner, 4 in your notebook you should have a memorandum from me 5 that basically summarizes the current activities of 6 the Mega Millions and MSLA, Multi-State Lottery 7 Association, or Powerball's joint meeting and their 8 initiative focusing on the possibility of a joint or 9 mutual undertaking. That is for your consideration. 10 I won't read it unless you wish me to discuss the 11 particular aspects of it. 12 However, if you look at the first 13 sentence in the second paragraph regarding what 14 appears to be now the major focus -- the primary 15 focus, I should say -- of what the group might be 16 considering in the nature of a raffle style game, I 17 want to inform you of a very recent development. And 18 that is, as of this morning, I received an e-mail from 19 the California lottery director -- who, by the way, 20 was just recently appointed as a permanent director by 21 the Governor of California -- and her e-mail states 22 that the State of California or the California lottery 23 will not entertain any participation in that raffle 24 game. 25 And I bring that to your attention to 0196 1 alert you that this could be an impact on that 2 initiative. And I think we will hopefully know more 3 about that as we have our Mega Millions directors 4 meeting in Detroit on March 21, which I plan to 5 attend. And I can update you if I have interim 6 reports, or certainly the results of that meeting. 7 CHAIRMAN COX: Do you have any 8 indication whether California's non-participation was 9 statutory or whether it was a choice? 10 MR. SADBERRY: It could be choice. And 11 I'm projecting, based on knowledge here, not on 12 personal knowledge but on past experience knowledge. 13 It could be choice or it could be a result of some 14 activities stemming from the litigation that they have 15 been in and I believe may still be in in some fashion. 16 The issue of sovereignty, which of 17 course was one of the concerns we had with what we 18 referred to as the entireties clause; that is, the 19 unanimous consent requirement so that Texas never 20 loses control over certain aspects of its operation by 21 virtue of a vote of other states that might outvote 22 us. That issue is part of I think their litigation. 23 And the courts -- the result of one of 24 the opinions of that court action is that California 25 is required by that court to seek return of funds that 0197 1 have been placed for payment of the purchase of the 2 annuity for winning tickets that have not been claimed 3 within the 180-day time period that California state 4 law has with regard to its lottery. 5 There have been recent occurrences where 6 the State of New York had a winning ticket, and their 7 claim time is longer than 180 days. And the demand 8 was made by California for return of those funds, 9 which were unclaimed as of the 180 days, which New 10 York declined. 11 If I had to make a conjecture, it's 12 probably either a directive that says until we can get 13 this resolved, don't risk any further expenditures or 14 exposure of California's state's monies. I would 15 think that's probably a logical and reasonable 16 conclusion to reach. 17 And all the states, including Texas, 18 have been called upon to attempt to come up with a 19 resolution or solution to that problem. And we have 20 members of our staff who are participating in that 21 effort, to see if we can get the California situation 22 resolved. It may well be that pending that 23 resolution, California will have to be very careful, 24 if not decide whether they can participate even in the 25 Mega Millions games on a further basis. I can't speak 0198 1 for them, and I have not spoken with their director. 2 But the knowledge that I do have adds up to that 3 conclusion on my part. 4 CHAIRMAN COX: So as I heard you 5 describe it, California didn't say, "We veto the 6 idea," they just said, "We won't be able to 7 participate"? 8 MR. SADBERRY: That's correct. And the 9 concern is what impact that may have on the ability 10 for us to move forward in a joint initiative when a 11 major state lottery declines to participate. We have 12 had other initiatives that were under consideration, 13 NASCAR sponsorships and other things of that nature 14 where, when one or two major state lotteries decline 15 to express an interest in them, then they fall by the 16 wayside by virtue of that. 17 This is the concern we would have of 18 what the practical impact might be on this joint 19 initiative going forward. So I wanted to bring that 20 to your attention. It's a very recent development, 21 and I'm not sure if it's been vetted by the directors. 22 I would imagine there's a lot of consideration that's 23 going into this as to what that might mean and where 24 we might be as an entity and as well as a potential 25 venture partner. 0199 1 CHAIRMAN COX: Do you have legal 2 research as to our participating in a raffle? 3 MR. SADBERRY: That's in the work in 4 progress. 5 Sarah, did you have an update on that? 6 MS. WOELK: I e-mailed you. Did you not 7 get that? 8 CHAIRMAN COX: You may have, Sarah. 9 MR. SADBERRY: Lawyer Sarah. 10 MS. WOELK: Yes. 11 MR. SADBERRY: Chairman, we are on top 12 of that issue. If you have not already been presented 13 with it, we anticipate you will be presented with 14 where we believe we have to take that for resolution 15 on Texas posture with respect to the raffle game, both 16 for Texas as well as potential for this group 17 initiative. 18 CHAIRMAN COX: Excellent. 19 COMM. CLOWE: It's my favorite subject. 20 COMM. COX: Go ahead. 21 COMM. CLOWE: You know, Sirius and XM 22 Radio just announced that they're going to merge and 23 they will be one satellite radio system now if the FCC 24 approves it in the United States. And up until now, 25 they have been hammer and tong after each other. 0200 1 The raffle appears to me to be an 2 attempted first step to some kind of joint activity. 3 And I thank you for your thoughtful answer to Chairman 4 Cox's question. You're probably right on target, but 5 maybe not in my lifetime. But I think at some point 6 in time, you're going to see economics get the better 7 of these emotional decisions and pride of independence 8 and drive these entities together. And then we'll 9 have virtually a national lottery, which will be the 10 kind of dollars now that everybody is looking for in a 11 big lottery. 12 MR. SADBERRY: I think that's right. 13 COMM. CLOWE: And I think you're doing 14 the right thing. You're staying right on top of it. 15 And I think people are turning to you, as I understand 16 it, and Texas is being more respected and looked to as 17 a voice of, if not moderation, reason. It's a 18 complicated subject, but we try to be clear about it. 19 MR. SADBERRY: And, Commissioner, I 20 agree with you in terms of our role, and I appreciate 21 the staff, because their work is excellent on that. 22 CHAIRMAN COX: Anything else? 23 COMM. CLOWE: Sir? 24 CHAIRMAN COX: Any more on that one? 25 COMM. CLOWE: No, sir, no more. 0201 1 CHAIRMAN COX: You don't want to ask why 2 we don't have Powerball down here already? 3 COMM. CLOWE: No. I took my shot. 4 CHAIRMAN COX: Okay. Director Sadberry, 5 I think I should pick this one up, since Chairman 6 Clowe doesn't want to pick it up. Do you see any 7 prospect that we could have both the Mega Millions and 8 the Powerball games in Texas? 9 MR. SADBERRY: Well, we vetted that 10 earlier. And I think Andy Marker is here. I 11 understood that we don't have the limitations in our 12 enabling statute that some of the other states have. 13 We probably have the potential for joint 14 participation. It's the impact it would have on our 15 membership and the perception of the Mega Millions 16 directors if we were to pursue that option as to what 17 that might do in terms of our commitment to the Mega 18 Millions group. 19 CHAIRMAN COX: Now, the perception that 20 they might have of us is going to improve if we drop 21 this, do you think? 22 (Laughter) 23 MR. SADBERRY: Well, it's an evolving 24 situation. I know each time we meet how we are 25 perceived. 0202 1 CHAIRMAN COX: I understand. And for 2 those of you who may not know why we are laughing, 3 Texas is performing in its own exemplary manner in 4 these things, and some of the other states just don't 5 look at things the same way we do. 6 Andy. 7 MR. MARKER: Good afternoon, 8 Commissioners. My name is Andy Marker. I'm an 9 attorney with Texas Lottery Commission. 10 I'm just here to answer any questions 11 you may have. With regard to the Mega Millions 12 agreement itself, there is no prohibition against -- 13 or there is not exclusivity in the agreement. Party 14 lotteries commonly join or participate in one 15 multi-jurisdiction game that would be governed by each 16 state's laws. 17 There is no restriction under Texas law 18 in terms of the Commission participating in more than 19 one multi-jurisdiction game. In the past, as you're 20 aware, some of the other Mega Millions party lotteries 21 have expressed concerns and reservations about Texas 22 or any other state, party lottery participating in 23 more than one multi-jurisdiction game. But, again, 24 there is no exclusivity provision in the agreement 25 that would bar participation. 0203 1 COMM. CLOWE: Time is on our side. 2 CHAIRMAN COX: And, Director Sadberry, 3 what I perceive here is that you knew all that and you 4 also know that they would like to kick us out if we do 5 it. And you're balancing all those things and taking 6 it forward as best you can? 7 MR. SADBERRY: That's exactly right. 8 For at least two years now, I think when Gary attended 9 a meeting and initiated the subject and we got certain 10 reactions. But a little less than a year ago, I 11 attended a meeting and there was a follow-up to that. 12 And I sense it has come forward significantly since 13 that time. So it's a matter of timing, judgment and 14 keeping an eye on it. And ultimately I think it will 15 be a very timely topic and probably will have momentum 16 on our side when it does. 17 CHAIRMAN COX: Excellent. 18 Okay. Item XXII, report, possible 19 discussion and/or action on GTECH Corporation. 20 Director Sadberry. 21 MR. SADBERRY: General Counsel got my 22 ear. Did you need to clear something up? 23 MS. KIPLIN: If you don't mind. If I 24 could go back to the Mega Millions, I would want to 25 make it clear on the record that if Texas were to 0204 1 decide to join another multi-state or multi- 2 jurisdiction game, our interpretation of the Mega 3 Millions contract is not that that would be grounds 4 for any kind of breach on our part that would then 5 allow them to kick us out of the game, because there 6 is no exclusivity. So I want to make sure we're 7 clear. We don't interpret that contract that way. 8 And, frankly, I think it would be very difficult to 9 construe that contract in such a way. 10 CHAIRMAN COX: Okay. And I guess my 11 point was that while they may not have a basis for 12 disagreeing, there are people out there who disagree 13 with that or think the practical result may be 14 different than what you contemplated. 15 MR. SADBERRY: I think we can safely say 16 it would be a contested issue. 17 MS. KIPLIN: Yes. We take the position 18 it's a very clear and unambiguous provision. 19 CHAIRMAN COX: And I'm sure it is. 20 AGENDA ITEM NO. XXII 21 CHAIRMAN COX: Okay. GTECH Corporation. 22 Director Sadberry. 23 MR. SADBERRY: Chairman, I wanted to 24 inform the Commissioners about recent events involving 25 GTECH which have come to the attention of the Texas 0205 1 Lottery Commission. The first matter concerns the 2 status of GTECH's international government relations 3 consultants. In their monthly consultant report for 4 February 2007, GTECH reported the termination of 5 services with three international consulting firms, 6 effective December 31, 2006. 7 The second matter concerns information 8 received regarding GTECH activities in Brazil. 9 The third issue deals with a recent 10 series of newspaper articles concerning GTECH's 11 business practices. 12 Due to the nature of the news articles 13 and the information received, I felt it prudent to 14 convene a meeting of the GTECH Oversight Committee to 15 examine the matter more thoroughly. As you might 16 recall, that committee is comprised of representatives 17 from the Department of Public Safety, the Office of 18 the Attorney General and the Texas Lottery staff. 19 And on February 20th, that committee did 20 meet. In attendance at the meeting was David Mattax 21 and Gaston Broyles of the Attorney General's office; 22 Gary Stone of the Department of Public Safety; Jim 23 Carney, Enforcement Division Director; Kim Kiplin, 24 General Counsel; Gary Grief, Deputy Executive 25 Director; and myself. 0206 1 The meeting was productive in my 2 estimation, and we have agreed on a continuing 3 protocol. And we will meet no less than every six 4 months in order to compare our collective thoughts on 5 the information being received and to be in a position 6 to report to the Commission as we deem appropriate. 7 Jim Carney, our Enforcement Division Director, is our 8 representative of the agency on that committee as 9 well. 10 February 13, 2007, Chairman Cox and I 11 met with Bruce Turner and Ramon Rivera. The following 12 points were discussed: The incomplete or retried 13 transactions, the confidentiality of information 14 contained in the GTECH monthly consulting contract 15 reports to the Lottery Commission, certain 16 intellectual property concerns, a significant portion 17 of which you heard this morning with respect to the 18 Pick 3 and the Pick 4 add-on game features and the 19 names issues and other matters of IP concerns. 20 In addition, Mr. Turner, at our request, 21 has made a commitment to appear at the Commission's 22 March meeting, and we expect that he will attend at 23 that time. He also has made a commitment to have a 24 certain number of face-to-face meetings with Chairman 25 Cox and myself on an ongoing basis so that we continue 0207 1 to have consultation and meetings to discuss matters 2 of importance to our respective firms and companies. 3 CHAIRMAN COX: And as to the latter 4 point, Director Sadberry, I would ask you to -- and 5 perhaps you've already done this -- make available the 6 opportunity to Chairman Clowe to have a meeting, you 7 and him with Bruce, parallel to ours if that's 8 something that he would like to do. 9 MR. SADBERRY: We will do so. 10 CHAIRMAN COX: And further to his 11 attendance, I think we were talking about the 21st, 12 and we've talked about the possibility we may 13 reschedule. So it may be that he isn't able to make 14 March if we reschedule that meeting. But, hopefully, 15 he will be able to make an early meeting. 16 MR. SADBERRY: I have asked my staff 17 already do make contact with him to see what his 18 availability is so that when we consider rescheduling 19 the March meeting, if we do so, that we can take that 20 into account. 21 CHAIRMAN COX: Excellent. 22 AGENDA ITEM NO. XXV 23 CHAIRMAN COX: Item XXV, consideration 24 and status and possible entry of orders in -- Counsel, 25 do I need to read all of this? 0208 1 MS. KIPLIN: No. I think it's 2 sufficient that you -- 3 CHAIRMAN COX: I think you say Items A 4 through M? 5 MS. KIPLIN: Yes. 6 CHAIRMAN COX: And you break them down 7 into whatever subsets you would like to break them 8 down into? 9 MS. KIPLIN: Yes, sir, that's correct. 10 CHAIRMAN COX: Excellent. 11 MS. KIPLIN: And today I would like to, 12 if I could, take Item A individually and then Item B 13 individually and then group the lottery and then the 14 bingo, if that's the pleasure of the Commission. 15 Item A is a redetermination case. This 16 is an interesting case. This case, Commissioners, is 17 a matter in which the respondent, ARP Food Store, 18 challenged a notice on a jeopardy determination of an 19 amount of money that was owed to the Texas Lottery 20 Commission, because of the sale of lottery tickets and 21 the receipt by this retailer of lottery tickets. 22 The reason that I wanted to take this 23 item up separately is because the Administrative Law 24 Judge at the State Office of Administrative Hearings 25 was very, very thorough in his analysis of the 0209 1 different stages and phases of the life of a pack of 2 tickets and at what point are there charges against a 3 retailer and at what point a retailer can get a refund 4 for tickets that are either lost or stolen. 5 And so I wanted to point this out to 6 you. The respondent did appear at the hearing. It 7 was a full evidentiary hearing, a very comprehensive 8 analysis and very detailed findings of fact. And at 9 the end of the hearing, the Administrative Law Judge 10 did issue a proposal for a decision, finding that the 11 respondent did owe the Commission $4,039.40 and that 12 the jeopardy determination that was issued to this 13 respondent is correct 14 At this time the staff would recommend 15 that you would adopt all of the findings and 16 conclusions and enter an order to the effect that the 17 determination that was issued to this respondent is 18 correct and that, in fact, this respondent does owe 19 the Commission the amount of money that I just 20 previously mentioned. 21 COMM. CLOWE: Move the adoption of the 22 staff recommendation. 23 CHAIRMAN COX: Second. 24 All in favor say "Aye." 25 COMM. CLOWE: Aye. 0210 1 CHAIRMAN COX: Aye. 2 Opposed? 3 Passes 2-0. 4 MS. KIPLIN: Mr. Chairman, I have an 5 order. 6 If I can turn now then to Item B under 7 XXV, this is the Ashkam Foot Mart case. 8 Commissioners, this is a matter that was a criminal 9 history. It's a Class C misdemeanor assault, man on 10 woman. It's a family violence case. 11 The reason that I'm taking this out 12 separately is because the proposal for a decision that 13 was issued by the State Office of Administrative Law 14 Judge contained a recommendation, notwithstanding the 15 fact that there was a finding that this was a 16 misdemeanor involving moral turpitude, contained a 17 recommendation on a disposition on the licensing 18 matter as a conclusion of law. 19 And it is very clear that a 20 recommendation, one, is not a conclusion of law; it's 21 not a proper subject matter. And, two, it's an 22 improper delegation of authority or assumption of 23 authority on the part of the State Office of 24 Administrative Law Judge, Hearings Law Judge. 25 In this case the ALJ recommended a 0211 1 suspension of a license for six months, 2 notwithstanding the fact that this isn't, in fact, a 3 misdemeanor of moral turpitude. The staff did file 4 exceptions to this PFD, and the Administrative Law 5 Judge opted not to amend his proposal for a decision. 6 Not only did the staff take exception to 7 the conclusion of law that we believe is improper but 8 also took exception to a finding of fact in which the 9 Administrative Law Judge, as the finding of fact 10 indicated there was no propensity to assault others. 11 There is no reasoning within the decision itself to 12 support that finding, and that is an incorrect 13 application of law. And so as a result, we took 14 exception to that, as staff did. 15 At this time staff is recommending that 16 you adopt all the findings and the conclusions, with 17 the exception of Finding of Fact No. 7 and Conclusion 18 of Law No. 6, and is recommending that you revoke this 19 license. 20 The Commission's position on criminal 21 convictions is a flat-out revocation. And if you were 22 to not revoke, then it would be a deviation from your 23 past practice as a governing body. 24 COMM. CLOWE: Move adoption of the staff 25 recommendations. 0212 1 CHAIRMAN COX: It's baffling. 2 MS. KIPLIN: Yes. 3 CHAIRMAN COX: Second. 4 All in favor say "Aye." 5 COMM. CLOWE: Aye. 6 CHAIRMAN COX: Aye. 7 Motion passes 2-0. 8 Okay. So next you want to take as a 9 group Items C through J? 10 MS. KIPLIN: Yes, I do. Commissioners, 11 these are all lottery cases. In each one of these 12 cases, there were insufficient funds. And the staff 13 is recommending that you adopt all the findings and 14 conclusions and that you do revoke all the licenses in 15 these respective letters. 16 COMM. CLOWE: Move adoption of the staff 17 recommendation in dockets listed, Letters C through J. 18 CHAIRMAN COX: Second. 19 All in favor say "Aye." 20 COMM. CLOWE: Aye. 21 CHAIRMAN COX: Aye. 22 Motion carries 2-0. 23 Okay. Ms. Kiplin, Items K through M are 24 all bingo matters. How do you want to handle them? 25 MS. KIPLIN: If I could, I would like to 0213 1 take K and L together. Commissioners, these are mass 2 docket cases. And what this means is that we present 3 these in a mass docket. All of the ones under Item K 4 are removal cases, and we are presented for each one 5 of these respondents disqualifying criminal histories. 6 And the SOAH judge found that they were, in fact, 7 disqualifying criminal convictions and has entered 8 proposed findings and conclusions in each one of these 9 cases. The staff does recommend entering an order 10 that would remove each one of these respondents from 11 the registry. 12 Item L is a similar case, with the 13 exception the action is not removal; it's refusal to 14 add or denial of their application to go onto the 15 registry, because of the disqualifying criminal 16 history. Staff is recommending that you take those 17 actions in each of these cases. 18 COMM. CLOWE: Move the adoption of the 19 staff recommendation. 20 CHAIRMAN COX: Second. 21 All in favor say "Aye." 22 COMM. CLOWE: Aye. 23 CHAIRMAN COX: Aye. 24 Motion carries 2-0. 25 MS. KIPLIN: And the last one is Item M, 0214 1 and this is a matter of removing a respondent from the 2 registry. The reason that I wanted to take this one 3 up separately is because this case does discuss the 4 interplay between two statutes. One is the registry 5 where it does say that the Commission may remove or 6 refuse to add somebody to the registry in the event 7 that there is an enumerated disqualifying criminal 8 conviction. 9 In this case the SOAH judge also asked 10 for briefing and information from staff on the 11 application of another statute, and that statute is 12 one that says that if you are a conductor licensed -- 13 if you are an entity who is licensed to conduct bingo, 14 you may not use a worker who has a disqualifying 15 criminal conviction. And if you do, then your license 16 is in jeopardy itself, and you cannot get a license to 17 conduct bingo. 18 So, as a result, the Judge's discussion 19 and findings are that even though the statute on the 20 bingo registry workers that says "may," because of the 21 other statute, can't mean "may, it must mean "shall." 22 And I'm bringing this to your attention so that you 23 know about the way that these two statutes would be 24 read in harmony from this point forward. 25 And the staff recommends that you do 0215 1 enter the order that would remove this gentleman from 2 the registry of workers. 3 COMM. CLOWE: Move the adoption of the 4 staff recommendation. 5 CHAIRMAN COX: Second. 6 All in favor say "Aye." 7 COMM. CLOWE: Aye. 8 CHAIRMAN COX: Aye. 9 The vote is 2-0 in favor. 10 MS. KIPLIN: Commissioners, that 11 concludes the presentation of orders. 12 CHAIRMAN COX: Thank you, Ms. Kiplin. 13 Item XXVI, report by the Executive 14 Director and/or possible discussion and/or action on 15 the agency's operational status, activities relating 16 to the Charitable Bingo Operations Division, agency 17 procedures, publicity of winners and FTE status. 18 Director Sadberry. 19 AGENDA ITEM NO. XXII (continued) 20 MR. SADBERRY: Chairman, may I have your 21 permission to go back and provide one additional item 22 of information with respect to Agenda Item No. XXII on 23 GTECH? 24 CHAIRMAN COX: Please. 25 MR. SADBERRY: I'm reminded that in 0216 1 addition to what I previously stated, a comment was 2 made by Gary Stone of the Department of Public Safety 3 that some states are now coming under review by their 4 legislatures and otherwise concerning the sufficiency 5 of their investigative efforts with respect to the 6 Lottomatica transaction. 7 Mr. Stone indicates that Texas is being 8 recognized, not only in these articles but also in 9 practice, for the thoroughness of its review process. 10 And, in fact, 20-plus states, according to Mr. Stone, 11 have come to the State of Texas in connection with 12 seeking information and guidance with respect to their 13 own investigations. And I think that notes the 14 acknowledgment of the nature and methodology of our 15 state's investigative approach to this matter, and I 16 wanted to share that with you. 17 CHAIRMAN COX: Thank you. That's an 18 excellent report. 19 AGENDA ITEM NO. XXVI 20 MR. SADBERRY: I would like to report 21 that Chairman Cox and I, as you've heard already this 22 morning, appeared before the Senate Finance Committee 23 on Monday, February 19, 2007, and we stayed consistent 24 with comments made by Commissioner Clowe at the 25 January 30, 2007 Commission meeting regarding our 0217 1 revenue reporting. 2 I would like to turn now to the winner 3 publicly part of my report. Chairman Cox, the next 4 topic of my report will address your request for staff 5 to review agency policy on minimal publicity and to 6 determine whether claimant should be allowed to make a 7 claim anonymously. 8 However, after further discussions, this 9 brief report will address only your concern regarding 10 publicity rather than anonymity. The difference 11 between minimal publicity and full publicity is as 12 follows: Full publicity is a news release which would 13 be issued with quotes from the claimants, the 14 Executive Director or designated representatives, and 15 a description of the game and the prize amount 16 claimed. 17 It could be a news conference with 18 notification to the local media, which would be held 19 with video and photos from the news conference made 20 available to all media sources. Minimal publicity, at 21 a minimum, would be a news release which would be 22 issued and would include the name of the claimant, 23 their hometown, a description of the game won and the 24 prize amount. It may or may not include quotes from 25 the claimants and the ED or his designated 0218 1 representative. 2 During the course of the validation 3 process, claimants are asked if they would like to 4 take part in full publicity. If full publicity is 5 declined, then a short news release as described above 6 is issued to the claimants' local media, stating that 7 the claimants requested minimal publicity. 8 Once the validation process is completed 9 and the claimant has been deemed a winner, they have 10 the opportunity to approve the news release regardless 11 of the type of publicity they choose. 12 In pursuing this matter, I asked the 13 Legal Services Division to perform a full legal 14 analysis on this issue. That analysis was provided to 15 you in an interoffice memo. However, the short 16 answer, as provided in the same memos, stated that as 17 determined under Texas law, a winner's name and 18 hometown cannot be withheld from someone who requests 19 the information. 20 Nothing in the law requires that the 21 Texas Lottery Commission release any information on 22 its own. The decision about whether to issue a press 23 release and what the press release might include is a 24 matter of agency policy. The Media Relations Division 25 also replied by stating that there is no written media 0219 1 procedure, policy or guideline that is applied by the 2 staff of the Media Relations Division in issuing a 3 winner's news release. 4 However, the Media Relations Division 5 strives to provide information to media sources in a 6 reasonable amount of time whenever possible. Since 7 the name and hometown of the prize winners is a public 8 record, outside media sources may obtain that 9 information through an open records request or the 10 Media Relations Division can release this public 11 information through a news release. 12 There is a strong concern that if this 13 agency takes the position that outside media sources 14 must make an open records request for this type of 15 information, it will create a negative environment 16 with interested parties such as representatives of the 17 outside media. 18 This concludes my summary of this 19 matter. And I have asked Deanne Rienstra with the 20 Legal Services Division, and Bobby Heath, Director of 21 Media Relations, to be available for questions, if 22 needed. 23 COMM. CLOWE: So what you've said is 24 that it's within policy to release the name and 25 hometown? 0220 1 MR. SADBERRY: Yes, sir. And that is 2 our practice -- 3 CHAIRMAN COX: That is our practice? 4 MR. SADBERRY: -- to do so by a news 5 release. 6 CHAIRMAN COX: If someone wants to -- 7 chooses to and is advised to claim as a family limited 8 partnership or a trust or whatever, then that's the 9 name that would be released, I guess? 10 MS. RIENSTRA: That, and the name of the 11 trustee. 12 CHAIRMAN COX: And the name of the 13 trustee, which might be X National Bank? 14 COMM. CLOWE: Or the general partner. 15 MS. RIENSTRA: I'm sorry? 16 CHAIRMAN COX: Or the general partner, 17 which might or might not be the beneficial owner of 18 the trust. 19 MS. RIENSTRA: Correct. And we have 20 often had times where there might be a limited 21 partnership that has a corporate general parter, and 22 then the name of the president of the corporate 23 general partner is also released. 24 CHAIRMAN COX: Okay. Is there a 25 mechanism by which someone who wants to pay the 0221 1 lawyers enough can be anonymous through that kind of 2 process or is the Secretary of State always going to 3 have a record that somebody can trace it through to? 4 MS. RIENSTRA: Certain entities are not 5 required to file with the Secretary of State, such as 6 a general partnership. 7 CHAIRMAN COX: So there is a mechanism 8 out there -- and I'm not asking you to describe it to 9 me -- that would allow someone who really wanted to be 10 anonymous to be anonymous? 11 MS. RIENSTRA: A general partnership, 12 according to the decisions, the rulings that we've had 13 from the Open Records Division, those documents, once 14 they're provided to us, are open records. 15 CHAIRMAN COX: Okay. 16 MS. RIENSTRA: It is different for a 17 trust. 18 CHAIRMAN COX: Okay. Let me try again. 19 Is there a way that someone with a good enough lawyer 20 can be anonymous if that person, as an individual, 21 chooses? 22 MS. RIENSTRA: We have procedures, 23 procedures in place that require us to receive the 24 names and social security numbers of any legal and 25 beneficial interest owners. 0222 1 CHAIRMAN COX: Okay. 2 MS. RIENSTRA: You request those. Those 3 names go into our paperwork. 4 CHAIRMAN COX: So because of the 5 requirements that we have from the Internal Revenue 6 Service, what I hear you saying is, "There just ain't 7 no way"? 8 MS. RIENSTRA: That's not a requirement 9 from the Internal Revenue Service. That's an internal 10 procedure in which we request that information in 11 order to check for state debts such as child support 12 or -- 13 CHAIRMAN COX: Okay. 14 MS. RIENSTRA: -- student loans or 15 things like that. It doesn't have anything to do with 16 the IRS. 17 CHAIRMAN COX: Okay. So the Internal 18 Revenue Service may have its rules and it may get to 19 step in at some point. But this is done pursuant to 20 the statutory requirements that child support, any 21 debts to the state, et cetera, must be cleared before 22 we can pay the winners? 23 MS. RIENSTRA: Yes, sir. 24 CHAIRMAN COX: So I think what I'm 25 hearing, Director Sadberry, is what I was asking about 0223 1 really can't be done. 2 MR. SADBERRY: In a practical 3 conclusion, I believe that to be accurate, Chairman. 4 I don't know that there is not any conceivable way, 5 but it does not appear, within the scope of anything 6 we could anticipate or we could come up with, how it 7 could be done. 8 CHAIRMAN COX: Thank you very much for 9 pursuing that matter for us. 10 MS. KIPLIN: Mr. Chairman, this may be a 11 bit off track, but I want to make sure the record is 12 clear on an entity and trying to identify those behind 13 the entity in terms of whether they owe child support 14 or not. 15 And so, Ms. Rienstra, I'll ask you to 16 join in to correct me if I'm wrong. But it's the 17 entity that's the prize winner, and it's the entity 18 that will owe -- statutorily, you know, will owe the 19 debt set off, if you will, on child support, 20 delinquent tax and so forth. 21 The agency, as a matter of policy, takes 22 the position that if there are folks who are trying to 23 create an entity to try to avoid that kind of 24 delinquency, that's one of the reasons that we are 25 asking for that individual information. 0224 1 If push comes to shove, I don't know 2 that we could enforce it. But what we do is encourage 3 them to clear that debt. Even though they're not the 4 entity claiming the prize, we encourage them to clear 5 that debt with the state or with child support. 6 Correct me if I'm wrong on that. But I 7 don't want to leave an impression that we go behind 8 the entity and we have the force and effect of law to 9 compel them to clear that debt, as an individual. 10 CHAIRMAN COX: Okay. Thank you. 11 MS. RIENSTRA: Correct. 12 CHAIRMAN COX: Thank you. 13 MR. SADBERRY: Finally, Commissioners, 14 you'll find in your package information concerning the 15 FTE status report. That concludes my report. I'll be 16 happy to answer any questions. 17 COMM. COX: Excellent report. Thank 18 you, Director Sadberry. 19 AGENDA ITEM NO. XXVII 20 CHAIRMAN COX: Item -- these numbers are 21 getting hard to need. Do these have to be Roman? 22 MS. KIPLIN: I don't think so. 23 CHAIRMAN COX: When they get up to this 24 high, I start getting challenged. 25 MS. KIPLIN: Mr. Chairman, I'll do it 0225 1 any way you want. 2 CHAIRMAN COX: I believe that's a XXVII, 3 public comments. Okay. 4 AGENDA ITEM NO. XXVIII 5 CHAIRMAN COX: Item XXVIII, adjournment. 6 Do you think we ought to get out of 7 here? 8 COMM. CLOWE: I'm ready when you are, 9 Mr. Chairman. 10 CHAIRMAN COX: Okay. The meeting is 11 adjourned. The time is 4:41 p.m. Thank all of you 12 very much. 13 (Meeting adjourned: 4:41 p.m.) 14 15 16 17 18 19 20 21 22 23 24 25 0226 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 7th day of March 2007. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25