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 TUESDAY, APRIL 29, 2008 § 8 9 COMMISSION MEETING 10 TUESDAY, APRIL 29, 2008 11 12 BE IT REMEMBERED THAT on Tuesday, 13 the 29th day of April 2008, the Texas Lottery 14 Commission meeting was held from 9:05 a.m. to 15 3:29 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 COMMISSIONERS 18 DAVID SCHENCK and FERNANDO C. REYES, JR. The 19 following proceedings were reported via machine 20 shorthand by Aloma J. Kennedy, a Certified Shorthand 21 Reporter of the State of Texas, and the following 22 proceedings were had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. David Schenck 5 Mr. Fernando C. Reyes, Jr. 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: 8 Mr. Anthony J. Sadberry 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 9 4 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action on 5 recognition of service by former Texas Lottery Commission Chairman C. Tom Clowe, Jr.... 9 6 AGENDA ITEM NO. III - Report, possible 7 discussion and/or action on 4th quarter and calendar year 2007 bingo conductor 8 information..................................... 35 9 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, including 10 adoption, on repeal of 16 TAC §402.705 relating to compliance review................... 47 11 AGENDA ITEM NO. V - Consideration of and 12 possible discussion and/or action, including adoption, on repeal of 16 TAC §402.406 13 relating to exemptions from licensing requirements.................................... 49 14 AGENDA ITEM NO. VI - Consideration of and 15 possible discussion and/or action, including adoption, on new rule 16 TAC §402.210 16 relating to house rules......................... 51 17 AGENDA ITEM NO. VII - Report by the Charitable Bingo Operations Director and 18 possible discussion and/or action on the Charitable Bingo Operations Division’s 19 activities...................................... 53 20 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on lottery sales 21 and revenue, game performance, new game opportunities, advertising, market research, 22 and trends...................................... 55 23 AGENDA ITEM NO. IX - Report, possible discussion and/or action on transfers to 24 the State and the agency’s budget.............. 116 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on Bingo indirect 4 and administrative expenses.................... 118 5 AGENDA ITEM NO. XI - Report, possible discussion and/or action on lottery 6 operations and services contract Amendment No. 8 credit calculation........................ 118 7 AGENDA ITEM NO. XII - Report, possible 8 discussion and/or action on the 80th Legislature.............................. 120/212 9 AGENDA ITEM NO. XIII - Report, possible 10 discussion and/or action on the agency's contracts....................................... 125 11 AGENDA ITEM NO. XIV - Report, possible 12 discussion and/or action, including extension, on the agency’s drawings 13 studio and production services contract......... 131 14 AGENDA ITEM NO. XV - Report, possible discussion and/or action, including 15 extension, on the agency’s contract for drawings audit services......................... 135 16 AGENDA ITEM NO. XVI - Report, possible 17 discussion and/or action, including extension, on the agency’s instant ticket 18 manufacturing and services contract............. 142 19 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action on the 20 lottery operator contract, including whether the negotiation of the lottery operator's 21 contract in an open meeting would have a detrimental effect on the Commission's 22 position in negotiations of the lottery operator contract............................... 149 23 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVIII - Report and possible discussion and/or action on the agency's 4 HUB program and/or minority business participation, including the agency's Mentor 5 Protégé Program................................. 162 6 AGENDA ITEM NO. XIX - Consideration of and possible discussion and/or action on external 7 and internal audits and/or reviews relating to the Texas Lottery Commission and/or on 8 the Internal Audit Department’s activities, including an internal audit report on 9 distribution of live instant tickets used for investigations.............................. 170 10 AGENDA ITEM NO. XX - Report, possible 11 discussion and/or action on the Mega Millions game and/or contract................... 170 12 AGENDA ITEM NO. XXI - Report, possible 13 discussion and/or action on GTECH Corporation..................................... 171 14 AGENDA ITEM NO. XXII - Report by the 15 Executive Director and/or possible discussion and/or action on the agency’s 16 operational status, agency procedures, and FTE status.................................. 173 17 AGENDA ITEM NO. XXIII - Report, possible 18 discussion and/or action on the Ombuds charter, procedure, and/or agency 19 personnel handbook............................ 176/210 20 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXIV - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-08-1909 – Porter Food Store #2 5 B. Docket No. 362-08-1468 – Gainesville Food & Fuel Stop 6 C. Docket No. 362-08-1709 – Discount Cigarette Express 7 D. Docket No. 362-08-0154.B – Veronica Williams 8 E. Docket No. 362-07-2747.B – Jackie Cory Simpson 9 F. Docket No. 362-08-990227PM.B – In the Matter of the Refusal to Add Names of 10 Certain Persons to the Texas Lottery Commission’s Registry of Approved 11 Bingo Workers: James Strickland, Melissa Vaughan, Serena Wainright, 12 Patricia Westpheling, Leisa Whigham, Stephen Woolverton, LaShannon Yarbrough, 13 Mark Zapata, Farrah Hofmann, Orlando Jackson, Jr., Rae Latson, Mialinda 14 Martin, Robert McCullough, Larry Robinson, Sammy Stell, Rosendo Adame, 15 Jr., Blanche Avila, Shantee Collins, Diana DeLaCruz, Linda Dennis, Sharon 16 Finley, Jessica Foller, Michael Frank, Dorran Gilliespie 17 G. Docket No. 362-08-990227AM.B – In the Matter of the Removal of Certain 18 Respondents from the Texas Lottery Commission’s Registry of Approved 19 Bingo Workers: Cynthia Battle, Tina Dilworth, Nisha Fuller, Tonja R. 20 Green, Harley McDonald, Damon Morgan, Roy Riojas, Ruben Ruiz, Darren 21 St. John............................... 201 22 AGENDA ITEM NO. XXV - Public comment............ 199 23 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXVI - Commission may meet in Executive Session: 4 A. To deliberate the duties and evaluation of the Executive Director 5 pursuant to Section 551.074 of the Texas Government Code 6 B. To deliberate the duties and evaluation of the Deputy Executive 7 Director pursuant to Section 551.074 of the Texas Government 8 Code C. To deliberate the duties and 9 evaluation of the Internal Audit Director pursuant to Section 10 551.074 of the Texas Government Code 11 D. To deliberate the duties and evaluation of the Charitable Bingo 12 Operations Director pursuant to Section 551.074 of the Texas 13 Government Code E. To deliberate the duties of the 14 General Counsel pursuant to Section 551.074 of the Texas Government Code 15 16 17 18 19 20 21 22 23 24 25 0008 1 TABLE OF CONTENTS (continued) 2 PAGE 3 F. To receive legal advice regarding pending or contemplated litigation 4 pursuant to Section 551.071(1)(A) and/or to receive legal advice 5 regarding settlement offers pursuant to Section 551.071(1)(B) of the 6 Texas Government Code and/or to receive legal advice pursuant to 7 Section 551.071(2) of the Texas Government Code, including but not 8 limited to: Shelton Charles v. Texas Lottery 9 and Gary Grief First State Bank of DeQueen et al. 10 v. Texas Lottery Commission James T. Jongebloed v. Texas 11 Lottery Commission The Lotter Ltd 12 Employment law, personnel law, procurement and contract law, 13 evidentiary and procedural law, and general government law 14 Lottery Operations and Services contract 15 Mega Millions game and/or contract G. To deliberate the negotiation of the 16 lottery operator's contract pursuant to Section 467.030 of the Texas 17 Government Code....................... 199 18 AGENDA ITEM NO. XXVII - Return to open session for further deliberation and possible 19 action on any matter discussed in Executive Session......................................... 201 20 AGENDA ITEM NO. XXVIII - Adjournment............ 215 21 REPORTER'S CERTIFICATE......................... 216 22 23 24 25 0009 1 P R O C E E D I N G S 2 TUESDAY, APRIL 29, 2008 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9:05 a.m., April 29, 2008. Commissioner Schenck is 7 here. Commissioner Reyes is here. I'm Jim Cox. 8 Let's call this meeting of the Texas Lottery 9 Commission to order. 10 AGENDA ITEM NO. II 11 CHAIRMAN COX: Agenda Item No. II is 12 consideration and possible discussion and/or action on 13 recognition of service by former Texas Lottery 14 Commissioner, Chairman C. Tom Clowe, Jr. 15 Tom, would you and Martha be willing to 16 come up and sit up here, please. 17 COMMISSIONER CLOWE: Certainly. 18 CHAIRMAN COX: Certainly everyone here 19 knows Chairman Clowe. Perhaps not as many have had 20 the opportunity to meet Ms. Clowe. Would you like to 21 make a little introduction, Tom. 22 COMMISSIONER CLOWE: Thank you, 23 Mr. Chairman. 24 Martha Clowe, my wife, is here. And I 25 think this is the first Commission meeting she's ever 0010 1 attended. She has put up with me for 53 years. 2 (Applause) 3 You-all have only had to put up with me 4 for 10 years. She and I are delighted to be here. 5 And I think she can tolerate one meeting. 6 CHAIRMAN COX: Good. We're very glad 7 that you're here. 8 MS. CLOWE: Delighted to be here. 9 CHAIRMAN COX: Tom Clowe was appointed 10 Commissioner of the Texas Lottery Commission by 11 Governor George W. Bush on November 13, 1998. He was 12 appointed Chairman of the Commission in the Year 2000. 13 He served as Chairman until the end of 2006, and 14 remained on the Commission until March of 2008. He 15 served over nine years as Commissioner and almost six 16 years as Chairman. 17 During his tenure, sales of the Lottery 18 Commission grew to $3.8 billion, which was a 19 47 percent growth. The transfers to the State of 20 Texas grew to $1.03 billion, which was 23 percent 21 growth. And in the final fiscal year of his service, 22 the cumulative sales -- or during his tenure, the 23 cumulative sales during his service were nearly 24 $29 billion, and the transfers to the state were about 25 $8.5 billion. 0011 1 So if we look just at the numbers, Tom, 2 things went very well under your tenure, but there's a 3 lot more to look at than the numbers. The 4 relationships that we have established, the 5 organizational change that you have presided over, the 6 excellence that this agency has achieved under your 7 direction, those I think are the real measures of what 8 you have done here, and we thank you for those things. 9 (Applause) 10 Now, some of the members of the staff 11 have already shared their thoughts with you; some want 12 to share their thoughts with you today. And so we 13 would like to let folks say a few things at this 14 point, if that's okay with you. 15 COMMISSIONER CLOWE: Is this going to 16 be on the record? 17 (Laughter) 18 CHAIRMAN COX: That question has been 19 raised. And the answer is yes, this is going to be on 20 the record. 21 COMMISSIONER CLOWE: Keep it clean, 22 keep it clean. 23 (Laughter) 24 CHAIRMAN COX: Catherine Melvin. 25 Catherine is our internal auditor. 0012 1 MS. MELVIN: Thank you, Chairman. 2 I can make no promises, Tom. Without a 3 doubt, the people of the State of Texas were well- 4 served by your leadership and guidance during your 5 time here at the Texas Lottery Commission. I feel 6 fortunate that I was able to work both with you and 7 for you during some of that time. Through your 8 example, you have taught me lessons that have 9 benefited me in my role here at the agency as well as 10 in my personal life. Your strong support and 11 understanding of the role of the internal audit 12 function has greatly assisted both me and my staff in 13 the work that we do here. In our opinion, the Texas 14 Department of Public Safety has won the jackpot 15 indeed. 16 (Applause) 17 The lessons you leave behind and the 18 examples you have set will not be forgotten. While 19 you will be indelibly etched in the history of this 20 agency, for me personally, I will remember your 21 personal care and concern for this agency and for its 22 employees. As you move forward, you should know that 23 you can rest assured that you're leaving this agency 24 in the very good hands of this Commission. 25 Thank you. 0013 1 COMMISSIONER CLOWE: Thank you. 2 (Applause) 3 CHAIRMAN COX: Ms. Kiplin. 4 MS. KIPLIN: Mr. Chairman, I would be 5 remiss if I didn't have some comments I wanted to put 6 on the record. And first I want to tell you how much 7 I appreciate everything that you've done for this 8 agency and for the state. Ten years is a long time. 9 I don't think when you agreed to the appointment you 10 thought it was going to be 10 years. But, you know, 11 as we've talked about how vacancies occur, that's the 12 way it goes. 13 I echo what Ms. Melvin said. I think 14 the Department of Public Safety is truly going to 15 benefit from your service and your stewardship, as did 16 the Lottery Commission. We've seen, you know, good 17 times and tough times over 10 years. And I think your 18 stewardship and the leadership that you showed during 19 that time was invaluable to this agency and to the 20 state. 21 I've heard remarks from the bingo 22 industry about your leadership and your insight, and I 23 am sure there are others that want to speak to that, 24 so I'll leave that to them. 25 But for me you were a mentor while you 0014 1 were here at the lottery. I can remember some fairly 2 direct communications that you had with me, and one 3 was, "Just keep it brief." 4 (Laughter) 5 I tried. Not always did I get it 6 right. But I think I'll try to do the best I can to 7 keep it brief and let you know how much I appreciate 8 everything that you've done for me personally and 9 professionally, and this agency and the state. 10 And I understand that you may have a 11 particular type of badge at the Department of Public 12 Safety, but you be careful on those roadways. 13 (Laughter) 14 (Applause) 15 CHAIRMAN COX: Okay. Phil Sanderson. 16 Phil, Martha, is our Charitable Bingo 17 Operations Director. 18 MR. SANDERSON: Good morning, Tom and 19 Martha. First, I would also like to congratulate you 20 on your new appointment to the Public Safety 21 Commission. I believe our loss is their gain also. 22 It's been an honor and a privilege to 23 work with you over the last several years. And I 24 would like to thank you for all that you have done for 25 the Bingo Division and the Commission as well. 0015 1 Through your leadership and direction, I believe that 2 the agency and the bingo industry have what I believe 3 is the best working relationship that there has ever 4 been in the 26 years of bingo. 5 Your appearances during the Bingo 6 Advisory Committee helped forge that relationship. It 7 showed you had a vested interest in the industry, and 8 I believe we're all better for that. In 1994 when 9 bingo transferred from the Texas Alcoholic Beverage 10 Commission to the Lottery, there was a lot of concern 11 that the Lottery would overshadow the bingo industry, 12 and you put that to rest with your leadership. 13 I again would like to thank you in 14 working with you, and also myself and the previous 15 director. And we've continued to grow, and I believe 16 we've had a real good relationship. And I look 17 forward to seeing you in the future somewhere else. 18 Thank you. 19 (Applause) 20 CHAIRMAN COX: Gary Grief. 21 MR. GRIEF: Good morning, 22 Commissioners. And thank you very much for giving me 23 an opportunity to say a few words about Chairman 24 Clowe. 25 When I sat down to put my thoughts 0016 1 together about what I might say today, I began to 2 realize what a tough job it would be to put into words 3 what Tom has meant to the State of Texas, to this 4 agency, to the Lottery Commission management team and 5 also to me personally. 6 When I talk about what Tom's efforts 7 have meant to the state, I echo some of what Chairman 8 Cox said, and I go straight to the bottom line. In 9 our last full fiscal year, FY07, as Chairman Cox 10 mentioned, we contributed once again slightly more 11 than one billion dollars to the Foundation School 12 Fund, and that marked the sixth consecutive year of 13 increased contributions under Tom's leadership. 14 And I attribute that success directly 15 to Tom's entrepreneurial spirit, his business drive 16 and acumen and his unwavering support of the staff's 17 efforts to increase lottery revenue through creative 18 sales and marketing efforts. All the while he's 19 having to make sure that we walk that very fine line 20 of appropriateness, what we call not unduly 21 influencing the public to play lottery games. 22 During Tom's tenure here at the 23 Commission, no fewer than eight significant changes 24 were made to our on-line games, along with the 25 introduction of numerous instant products and ever 0017 1 higher price points for our instant tickets. And 2 every new game introduction brought with it keen 3 scrutiny, criticism, skepticism, all those things that 4 are inherent with operating an almost $4 billion 5 gaming operation here in the State of Texas. Tom was 6 there with staff every step of the way, through 7 Commission meetings, numerous media inquiries and, 8 yes, even several public hearings. 9 Tom came to this agency and he was an 10 agent of change. His arrival first as a Commissioner 11 and then as the Chairman preceded an eventual 12 wholesale turnover of the agency management team. Tom 13 believes that you should hire the very best, let them 14 do their job and then hold them accountable for their 15 performance. That philosophy has influenced every 16 member of the senior management team here in this 17 agency. And, of course, I would suggest that Tom 18 leaves this agency in the hands of one of the best 19 management teams in the State of Texas. 20 And finally for me personally, I want 21 to publicly thank Tom for the opportunities that he's 22 provided me. With Tom's guidance and with his steady 23 counsel, we have navigated some rough waters together, 24 and we had fun doing it. And for that experience, 25 I'll always be very grateful to him. 0018 1 Over the years, spending a few minutes 2 with Tom each week discussing managerial strategy or 3 organizational effectiveness or just life in general 4 has been invaluable. He is a wealth of knowledge. He 5 knows how to run an organization, whether it be a 6 publicly or privately held company, and he knows how 7 to run a state agency. And the fact of the matter is, 8 he has been truly willing to share that knowledge and 9 experience with staff here as the years have gone by. 10 Tom, the time I've shared with you has 11 been a privilege, it's been an honor, and it's been an 12 incredible learning opportunity. And I thank you for 13 your leadership, your service and your friendship, and 14 I wish you the very best of luck in your new position 15 with the Department of Public Safety. 16 Thank you. 17 COMMISSIONER CLOWE: Thank you. 18 (Applause) 19 CHAIRMAN COX: Director Sadberry. 20 MR. SADBERRY: Good morning, 21 Commissioners. Good morning, Tom and Martha, and to 22 the public. 23 I had the distinct honor of serving 24 with Tom Clowe on the board for several years. My 25 service and that of fellow board members benefited 0019 1 from Tom's leadership and guidance as chair of the 2 board. I recall his comments that he made about me 3 upon by departure as a member of the board. He spoke 4 of the first meeting that he and I had in my office in 5 Houston before he began his service, which he 6 described as setting the keynote of openness in our 7 relationship. 8 These are the same comments that I can 9 now make about Tom as we recognize the end of his 10 service on our board. That same relationship of 11 openness has existed, even as I came back to serve in 12 my current role as Executive Director. In this role, 13 I have continued to benefit from Tom's leadership, his 14 guidance and his support. 15 Between the two of us, we share a 16 certain consistency for long service, long-term 17 service in the agency, and in that service placing the 18 interest of the people of the State of Texas above all 19 else. This service speaks to a fundamental belief 20 that it's the highest honor to be able to serve the 21 people of Texas, a belief that the strongest calling 22 one can have in this context is to render service to 23 an agency of the State of Texas and a belief that such 24 service requires unwavering commitment and purpose 25 that withstands the test of time. 0020 1 Chairman Clowe has borne our beliefs in 2 a singular manner that brings us to this point of 3 recognizing him and his family on this special 4 occasion. Tom, the State of Texas thanks you for your 5 service and dedication. The Commission thanks you for 6 the exemplary manner in which you have conducted your 7 duties. And I thank you for the personal privilege of 8 knowing you as a colleague and a friend now and in the 9 future. 10 (Applause) 11 COMMISSIONER CLOWE: Thank you. 12 CHAIRMAN COX: Commissioner Schenck. 13 COMMISSIONER SCHENCK: Chairman Clowe, 14 it's been my distinct pleasure to serve with you for 15 these last five or six months. And you may not know 16 it, but you were teaching and I was learning slowly, 17 but I was learning nonetheless. You bring a wealth of 18 knowledge about lottery and bingo that I think few, if 19 anyone in this state, can match, including the staff 20 here. 21 And it really has been my pleasure, 22 though constrained by the fact that we can't really 23 communication other than in these open meetings, which 24 is after today I hope going to be brought to an end. 25 But you've been teaching me more than just about the 0021 1 operation of lottery and the bingo rules. 2 I've been watching; I've been watching 3 you. And though you have a few years on me, I have 4 been dealing with people for quite a while myself. 5 I've had the pleasure to work around a lot of very 6 smart, bright people. I've met fewer but quite a few 7 wise people as well, and I've met some people who have 8 a human touch. But it's very rare to find that all 9 three of those qualities are in the same person, as I 10 think they are with you. 11 And I say it's been difficult for me. 12 I'll confess learning a lot about the lottery, but 13 it's been far easier for me than poor Commissioner 14 Reyes. I came into an empty seat. 15 And I think you're getting the sense 16 for the shoes you have to fill here (laughter) which 17 are quite substantial. 18 And I owe you a debt. I know, as 19 others have recognized here, the staff owes you a 20 debt. And I can see that in your dealings with 21 people, that you treat everyone you come across with 22 the same level of respect and dignity, regardless of 23 their station and regardless of their title. And I 24 really appreciate that about you, and I'm sure that 25 they do as well. 0022 1 And lastly, I think the school children 2 of Texas have benefited enormously from your hard work 3 and efforts on their behalf for all these years. And 4 again, I really thank you for your service here, and I 5 thank you for your tutelage. 6 COMMISSIONER CLOWE: Thank you. 7 (Applause) 8 CHAIRMAN COX: Commissioner, I know 9 that you just met Chairman Clowe. Is there anything 10 you would like to say? 11 COMMISSIONER REYES: Yes. I would just 12 like to say that I wish I had had the opportunity to 13 work with you, because I've heard a lot of wonderful 14 things about you. 15 And I just want to congratulate you on 16 your new appointment and just for the wonderful work 17 that you have done for the State of Texas and for this 18 organization, the Lottery Commission. Thank you very 19 much. Good luck. 20 COMMISSIONER CLOWE: Thank you. 21 (Applause) 22 CHAIRMAN COX: And we have some members 23 of the public who would like to comment. Chairman Jim 24 Nugent. 25 MR. NUGENT: I think you can hear me 0023 1 from here. I held state elected office for 38 years. 2 I knew Tom about 30 years ago when he was running a 3 major trucking company and I was Chairman of the 4 Railroad Commission. We had a rule at the Railroad 5 Commission. Three Commissioners had to agree to hire, 6 one could fire. Tom came to the Railroad Commission 7 as Executive Director, the first one in the history of 8 the Commission. He was able to negotiate those 9 troubled waters between three elected commissioners 10 who each thought the other two were dumber. 11 (Laughter) 12 I remember a story about Tom. This 13 fearless public servant had an argument with his wife. 14 And at the end of the argument, Martha walked over and 15 said, "Tom, you come out from under that bed." 16 (Laughter) 17 Of all the employees that I was 18 associated with in 38 years of elected life, I think 19 Tom is the outstanding individual. He was able to 20 work with those three commissioners, make it work, and 21 do an excellent job of reorganizing the staff at the 22 Railroad Commission, under our direction. I think the 23 State of Texas has been exceedingly lucky that he 24 decided to get involved in public service, sort of 25 like Jim Cox. He stuck his neck in the hole also. 0024 1 (Laughter) 2 It's a pleasure to be here with you. 3 Tom, good luck. Be careful with Martha. 4 (Applause) 5 CHAIRMAN COX: Thank you, Chairman 6 Nugent. This is the first witness affirmation form 7 I've ever received that indicates that on Item II, you 8 are for it, against it, and neutral. 9 (Laughter) 10 Steve Bresnen. 11 MR. BRESNEN: Thank you, Mr. Chairman. 12 Now, y'all know how emotional I get sometimes up here. 13 So if I do, I hope you'll pardon me. 14 I really can't believe so many people 15 were referring to you as "Tom." In my life, you're 16 one of three people that I never would have thought 17 calling by their first name. One of them was 18 Commissioner Nugent. 19 (Laughter) 20 And the reason is, he and I don't know 21 each other well, but Governor Bullock dispatched me 22 over to talk to him about trucking deregulation one 23 time, and I got to meet the full fury of Commissioner 24 Nugent and his legendary views on the subject, and 25 he's always been Commissioner Nugent since that time. 0025 1 The other one was Bob Bullock, who I 2 only refer to, now that he's interred up in the State 3 Cemetery, as Bob Bullock. When I met him at the 4 Controllers' office, he was known as Mr. Bullock. 5 Even when he was Governor Bullock, a lot of us still 6 called him Mr. Bullock; we never called his Bob. 7 And although it doesn't reflect the 8 high personal regard I hold you in, you will always be 9 Commissioner Clowe to me in whatever capacity you're 10 serving or when you're not serve, and that's because 11 of the deep respect I have for your service for the 12 State of Texas. 13 I was working for Bullock one day and I 14 was charged to write a letter for him back to a man 15 who had written in some not-too-kind remarks. And I 16 wrote the man back in a block style, which made the 17 Governor's views completely certain. The phone rang 18 within a couple of days and that man was on the phone, 19 and he insisted on talking to someone. If he couldn't 20 talk to Bullock, he wanted to talk to someone, and it 21 fell to me to answer his call. And having known the 22 background, I figured I was fixing to get blistered by 23 a citizen. And instead the man said, "You know, I 24 don't agree with him. I'm never going to agree with 25 him. But he's the only one that ever wrote me back." 0026 1 You started the tradition in this 2 agency of paying attention to bingo and attending the 3 BAC meetings and talking to all these people. And if 4 I could just a minute, I would like for everybody who 5 is here from Charitable Bingo to stand up, please. 6 Some of these folks -- 7 CHAIRMAN CLOWE: Thank y'all for 8 coming. 9 MR. BRESNEN: We kind of did this on 10 short notice, so some of the folks couldn't make it. 11 But you've seen a lot of people here. You're seen 12 people with walkers, you've seen people with VFW, 13 American Legion caps on. All these people, none of 14 those people are getting paid to be here. They're all 15 volunteers and they're all doing what bingo was 16 intended to do. 17 And you're the first person -- I can't 18 believe it's been 10 years. It's amazing to me. I've 19 been involved with charitable bingo for about 12 years 20 now, and I can tell you it's night and day. And these 21 people understand what you've done at a personal level 22 because, in effect, you wrote them back. 23 Thank you very much for your service. 24 If you see me over at the DPS, I'm in deep, deep 25 trouble and I need your help. 0027 1 (Laughter) 2 Thank you very much. And, Ms. Clowe, 3 one of the things that I know is, you loaned him to 4 us, and I appreciate you doing that. I know that 5 meant a lot of time he was away from the house. It 6 might have been better for you. I don't know. 7 MS. CLOWE: It was my pleasure. 8 (Laughter) 9 MR. BRESNEN: Well, it was certainly 10 our pleasure, and I thank you very much for allowing 11 him to spend so much time in the service of Texas. 12 And I think if Bullock was here he would say "God 13 bless Texas and good bless Tom Clowe." Thank you. 14 (Applause) 15 CHAIRMAN COX: And Ronnie Baker 16 representing the bingo industry. 17 MR. BAKER: Commissioner Clowe, first 18 let me thank your wife very much for allowing you to 19 be part of this industry. Without her support, I'm 20 not sure where we would be, because it certainly 21 mirrors the work that you've done here. 22 Melissa Young, who is the Executive 23 Director of the Texas Charity Advocates, could not be 24 here today, and she asked me to stop in and thank you 25 so much for what you've done for this industry. 0028 1 Without your support, I'm not sure exactly where we 2 would be today. 3 On a personal note, some years ago 4 Suzanne Taylor asked me to come and present a product 5 to this industry, which we did -- and without your 6 support, it would never have gone anywhere -- and 7 that's the event ticket that's been so successful and 8 in many minds has turned bingo around. It took a 9 number of years, but I remember we would come in and 10 talk about it. A year went by, two years went by. 11 And then you finally turned to Billy and said, "Billy, 12 why can't we get this done? I want it done," and it 13 was done. 14 And for that, we thank you, the 15 industry thanks you. And, Ms. Clowe, thank you very 16 much. 17 MS. CLOWE: Thank you. 18 (Applause) 19 CHAIRMAN COX: Chairman Clowe, at this 20 time Director Sadberry has a presentation that he 21 would like to make. 22 COMMISSIONER CLOWE: Where would you 23 like me? 24 CHAIRMAN COX: Well, kind of right 25 where you are. 0029 1 COMMISSIONER CLOWE: Okay. 2 MR. SADBERRY: I stand on behalf of the 3 staff for the Texas Lottery Commission. And on their 4 behalf, it's my honor to present to you from them this 5 plaque. I will read the inscription. It says, "C. 6 Tom Clowe, Jr., Chairman. In appreciation of your 7 service, 1998 through 2008." It has the seal and 8 inscription, "Texas Lottery Commission." 9 COMMISSIONER CLOWE: Thank you very 10 much. 11 (Applause) 12 CHAIRMAN COX: And now, Chairman Clowe, 13 I have a little something I want to present to you, 14 but I want to talk a little bit about our relationship 15 first. 16 COMMISSIONER CLOWE: Don't tell it all! 17 (Laughter) 18 CHAIRMAN COX: It has been a very 19 important one to me. I remember getting a call from 20 you back in about 2000 maybe, and you said that Clay 21 Johnson, Governor Bush's Chief of Staff, had told you 22 to call me because maybe I knew a little something 23 about gambling. And we met over at the Holiday House 24 and had breakfast, and that started a series of 25 meetings that we had, mostly over at my favorite steak 0030 1 house, which is no longer there, Ray's Steak House. 2 And there I learned from you a lot 3 about what was going on at the Lottery Commission and 4 what you were doing there, and we talked about 5 alternatives and industry trends and the like. Then 6 in 2002, I was very honored to be appointed to this 7 Commission by Governor Perry. And I've never known 8 for sure, but I have always suspected that you had 9 something to do with that. 10 And the mark of a good leader is one 11 who has a succession plan and implements it 12 effectively. And I was very honored in December of 13 2006 to be appointed the presiding officer of this 14 Commission by Governor Perry, and somehow I think you 15 had a little something to do with that. And you were 16 willing to stay around for another year and more to 17 provide for an orderly transition and to get these two 18 chairs field by outstanding commissioners. And for 19 all of those things, I want to thank you. 20 And what I have is representative of 21 your leadership. This is -- I picked this up in 22 Ireland. This is a Waterford gavel, and it has -- 23 you'll see "Waterford" is etched right there. And the 24 only ones you get that have "Waterford" etched right 25 there are the ones that are sold at the factory. 0031 1 And Gary tells me that if you would 2 want to, that it would fit pretty nicely right there 3 (gavel placed on plaque). 4 COMMISSIONER CLOWE: Oh, yes. Looks 5 great. That will keep Martha from hitting me with it. 6 (Laughter) 7 But that's a great idea. 8 CHAIRMAN COX: Thank you, sir. 9 COMMISSIONER CLOWE: Thank you. 10 (Applause) 11 CHAIRMAN COX: And now, Tom, it's your 12 turn. Is there anything you would like to say? 13 COMMISSIONER CLOWE: Certainly. You 14 know that. 15 (Laughter) 16 I'm going to come out here so you can 17 see me. I am standing up; I'm not on my knees. You 18 know, when I took this job in November of '98, I was 19 six foot two and had flaming red hair, for those of 20 you that didn't know me then. 21 (Laughter) 22 It's been a great 10 years, and I have 23 really enjoyed it. And this morning, thank you-all 24 very, very much. It's been a taking on my part, not a 25 giving. I've enjoyed you as colleagues. I benefited 0032 1 from your knowledge and your experience, and I take 2 away more than I brought. It has been an enriching 3 period in my life. 4 And first I would like to say to all of 5 you on the staff here, you have done a wonderful job. 6 You run this agency in a way that exemplifies the 7 honesty, the fairness and the straightforwardness that 8 any operation like this, legalized gaming run by a 9 state, must personify. It's hard work. You have to 10 be respectful of those who do not agree with the 11 charter that you have. And in my opinion, you have 12 done, as I say, exemplary work. It would be 13 impossible for me to name all of you, but I want you 14 to know how I value our relationship and the 15 friendship we have, and I look forward to it in the 16 future. 17 To the leadership, these commissioners, 18 I want you to know it's fun to be a commissioner. 19 (Laughter) 20 And I would have to recognize my mentor 21 and the person who taught me how to be a commissioner, 22 Jim Nugent. The story he didn't tell you was that he 23 was opposed to be being the executive director. And 24 Kent Hance and John Sharp overruled him, and he was 25 the Chairman. 0033 1 And I went into his office, and he kind 2 of pitched the job description at me. And he said, 3 "Well, Clowe, this is it. You'll never get a chance 4 to do it all, because we'll probably fire you." And I 5 said, "No, Mr. Chairman, you won't fire me. I'll 6 quit." 7 (Laughter) 8 And at that point, Jim Nugent and Tom 9 Clowe came together, and we formed a relationship and 10 a respect that has endured, as he says -- it's true -- 11 for over 30 years. And I've learned a great deal from 12 Jim, as I have learned a great deal from others. But 13 he did teach me how to be a commissioner. 14 And these commissioners know a lot, but 15 they don't know it all. And they need your help to do 16 the best job that they possibly can. And I learned 17 from you. So I want you to know that a commissioner's 18 job is fun. It is challenging and it is rewarding. 19 And I urge you to give these commissioners your 20 support and your best effort, which I know you will. 21 Now, I am a commissioner over at the 22 DPS. And, you know, I've always said a commissioner's 23 job is policy and oversight. But we reserve the right 24 to meddle. 25 (Laughter) 0034 1 And I learned that from Jim. And so 2 I'm over at the DPS meddling right now. And they 3 haven't quite figured out how to figure me out, and 4 that just suits me fine. As respectful as I am of the 5 DPS and the job that they do, 8,400 employees, 6 marvelous esprit de corps, paramilitary organization 7 that maintains lawful operations on our rural highways 8 in the State of Texas, I'm looking for ways to 9 improve, and there are ways. And that's my business 10 right now at the DPS. 11 Finally, I want to close with what I 12 think is the most important thing that I would like to 13 say to you this morning, and that is on behalf of the 14 people of the State of Texas. I don't think anybody 15 really realizes, of the 23 million citizens of this 16 state, what a great job state employees do every day. 17 And in this agency, the effort that 18 you-all put into the job that you do, the sincerity, 19 again the honesty and the fairness of maintaining a 20 controversial operation that benefits the school 21 children of the State of Texas, you'll never get all 22 of the reward that you're entitled to. But I would 23 like to say on behalf of the people of the State of 24 Texas, thank you. Thank you for your daily efforts. 25 Thank you for the work that you do on behalf of this 0035 1 state, and thank you for what you have done for me 2 these past 10 years. 3 Thank you. 4 (Applause and standing ovation) 5 CHAIRMAN COX: Thank you, Tom. You 6 know, all of us have mentors if we're smart enough. 7 And the wonderful thing about this agency is, I've had 8 you as a mentor, I've had Betsy, I've had David, I've 9 had Anthony, Gary, Kim, everybody here, because these 10 people know more about what they do than I do. And I 11 can learn from every one of them, just as I was able 12 to learn from you and continue to be able to learn 13 from Chairman Nugent, and it's a wonderful process. 14 Thank you so much for being here. And 15 what I would like to do now is have a few minute break 16 and have some photo opportunities and give all of you 17 a chance to say hello to Chairman Clowe. 18 (Recess: 9:43 a.m. to 9:53 a.m.) 19 CHAIRMAN COX: It seems that we've 20 already come back to order. Thank you. 21 AGENDA ITEM NO. III 22 CHAIRMAN COX: Item No. III, report, 23 possible discussion and/or action on the 4th quarter 24 and Calendar Year 2007 bingo conductor information. 25 Bruce Miner. 0036 1 MR. MINER: Good morning, 2 Commissioners. For the record, my name is Bruce 3 Miner, and I'm the manager of the Bingo Licensing and 4 Accounting Services Department. I'm here to present 5 to you the 2007 information as reported by our 6 licensed authorized organizations for the charities 7 who conduct bingo to raise funds for their charitable 8 purposes. First for the benefit -- 9 CHAIRMAN COX: Bruce, excuse me just a 10 second. But let me remind you -- and I know you're 11 aware of this -- that this is the first time 12 Commissioner Reyes has seen these numbers and maybe 13 the second time that Commissioner Schenck has seen 14 them. So feel free, if you think there's anything 15 that needs further explanation, other than just making 16 the presentation, please feel free to explain things 17 that you think are important. 18 MR. MINER: Okay. And in that 19 direction, I have a few definitions I want to touch on 20 to begin with. 21 CHAIRMAN COX: Okay. 22 MR. MINER: "Regular bingo" is a term 23 used for traditional bingo games played on paper, hard 24 cards and electronics. And just a quick show and 25 tell. This is traditional bingo, this is the way it 0037 1 used to be, and this is the way it currently is. Up 2 to 66 faces are played on this unit. 3 Regular bingo card sales, which we'll 4 touch on, refers to the actual sales of papers and/or 5 hard cards. And electronic card sales are the 6 receipts from electronic card-minding, so we separate; 7 we capture the difference. 8 Instant bingo is a form of bingo played 9 using these tickets. They have a perforation on the 10 back. You break them open and you find out whether 11 you're an instant winner or not. They're concealed 12 letters, numbers, symbols. And other terms commonly 13 used for these are pull-tab, break open. 14 Related to this -- and Commissioner 15 Clowe touched on it -- the event tickets are 16 pull-tabs, but they're determined also by some 17 subsequent action; you know, a drawing, a spinning 18 wheel or some activity that awards an additional 19 prize. 20 COMMISSIONER REYES: And these are only 21 sold at the bingo -- 22 MR. MINER: At the bingo hall. 23 COMMISSIONER REYES: -- bingo halls? 24 MR. MINER: The charities conduct the 25 games, and the lessors provide the facility where the 0038 1 games are conducted. 2 This first chart shows the prize 3 payouts for regular bingo in 2007 were 76.6 percent of 4 the gross receipts. Prize payout percentage for 5 instant bingo was 71.6 percent of gross receipts. And 6 by administrative rule, the minimum prize payout for 7 instant bingo cannot be less than 65 percent of gross 8 receipts. 9 This pie chart is a graphical 10 representation of what percent each expense is as it 11 relates to the total expenses. These expenses do not 12 include the prize payouts or the charitable 13 distributions. The highest disbursements continue to 14 be the salaries and rent payments. You will see a 15 description there in the blue box that shows the rent 16 and the salaries total 70 percent of the expenses. 17 This pie chart shows the instant bingo 18 sales continues to exceed regular bingo card sales. 19 In 2007, instant sales represented almost 42 percent 20 of the total sales, while regular bingo sales 21 represented 34.7 percent, and electronics was 22 23.5 percent. 23 And I just checked the figures. And 24 2006 was the first time that the instant sales 25 exceeded regular bingo, and that was by $2 million, 0039 1 and this year it exceeded it by $48 million. 2 This chart shows a comparison of gross 3 receipts for each year from 2003 to 2007. As you can 4 see, the gross receipts for the instant bingo sales, 5 as shown by the yellow line, have increased each year 6 since 2003, while at the same time gross receipts for 7 regular bingo, shown here in red, continues to 8 decline. Gross receipts for 2007 are approximately 9 seven-tenths of a percent greater than they were in 10 2006 and 14.8 percent greater than they were in 2003. 11 This chart shows the comparison of net 12 receipts for each year from 2003 to 2007. Net 13 receipts is gross receipts less prizes awarded. And 14 this slide captures the trend of the net receipts. 15 Their total has increased 1.5 percent since 2006 and 16 6.3 percent since 2007 -- I'm sorry -- 2003. 17 This next slide shows the instant bingo 18 has had an increase of $146.5 million in gross 19 receipts over the past five years, and it has 20 increased $104.1 million in prize payouts for that 21 same period. 22 That's the chart I just read. 23 Let me read this one again. This slide 24 charts the prize payout percentage for regular and 25 instant bingo for the past five years. The payout 0040 1 percentage for regular bingo has increased to 2 76.6 percent, while the prize -- the payout percentage 3 for instant bingo rose from 72.3 in 2003, to a high in 4 2005. And it has since declined to a payout 5 percentage of 71.6 for 2007. And the instant bingo 6 numbers here is related to the most popular event 7 tickets today, have the lowest payout percentage. 8 This slide shows a continued decline of 9 the number of occasions per year, as shown in the top 10 line, as compared to the average number of players per 11 occasion, the bottom line, which continues to decline. 12 This next slide shows the average 13 players per occasion as compared to the average spend 14 per player, and it shows that even though the average 15 attendance has declined, 13.4 percent since 2003, 16 there has, however, been a 43.5 percent increase in 17 the average spend rate per player over the same five 18 years. 19 This chart shows the comparison of net 20 receipts and charitable distributions. Total net 21 receipts for 2007 was 27.8 percent, greater than 2003, 22 while the reported charitable distribution increased 23 6.7 percent over the same period. 24 And finally, this slide illustrates the 25 comparison between the reported charitable 0041 1 distributions as opposed to the minimum amount 2 required to be distributed by the Bingo Enabling Act. 3 As you can see, the actual reported charitable 4 distributions have consistently been two to three 5 times above the required distribution amount. 6 In your notebook is additional 7 information of an analysis performed by Susan Beasley, 8 Program Specialist for the Office of the Controller, 9 and includes some additional spreadsheets. 10 And this concludes my presentation. If 11 you have any questions, I'll be glad to take them now. 12 CHAIRMAN COX: Commissioner? 13 COMMISSIONER SCHENCK: Yes, I have a 14 couple of questions. 15 The slide you showed us a minute ago 16 about number of occasions and number of -- average 17 number of players, seems to be in a study decline. 18 Now, it's not the first time we've heard that. And 19 I'm wondering what we understand to be accounting for 20 this decline, both -- well, the first one is the 21 number of occasions, I'm assuming, is declining, to 22 keep track with the averages. In other words, the 23 conductors are, I assume, holding few occasions when 24 the turnout is lower. 25 MR. MINER: There's fewer conductors. 0042 1 The numbers themselves are declining. The number of 2 events are declining. 3 COMMISSIONER SCHENCK: And yet, 4 charitable distributions are up? 5 MR. SANDERSON: Charitable 6 distributions are up slightly, yes. And I think, as 7 Bruce mentioned, the conductors, the number of 8 conductors has decreased over the last several years. 9 It's leveled off over the last year. I think at one 10 point we had a slide I believe that showed the average 11 number of occasions per conductor, and that number 12 stayed fairly consistent, between 24 and 27 averaging 13 per conductor, so that fewer conductors was fewer 14 occasions. 15 The attendance has been decreasing. 16 And, you know, the continued decline there I think is 17 the player spend is up. And so they may be spending 18 more at each occasion that they go to, instead of -- 19 instead of playing seven nights a week, they're now 20 playing four nights a week or five nights a week. So 21 I believe that's part of the decline as far as 22 attendance goes. 23 COMMISSIONER SCHENCK: But some of the 24 spend you would attribute -- some, not all -- to just 25 regular inflation at some point. Over four or five 0043 1 years, you would expect maybe five percent. 2 MR. SANDERSON: I don't really see -- I 3 don't see anyone that's left over from the bingo 4 industry sitting in the auditorium. But my 5 recollection of the cost to participate in bingo has 6 probably not changed a whole lot over the years as far 7 as how much it costs to buy in. I believe the 8 increase in player spend has a lot to do with the 9 increase in instant ticket sales, because there are a 10 lot of dollar and $5.00, what they call playbacks. 11 COMMISSIONER SCHENCK: And they're 12 faster games. 13 MR. SANDERSON: And they tend to 14 re-spend that dollar. And so it's not an actual hold 15 that's being calculated. 16 COMMISSIONER SCHENCK: I guess, to jump 17 a little ahead here for the benefit of Commissioner 18 Reyes, do you think there is a broader issue that is 19 at play here, that fewer people are coming less often? 20 Are there other events like 8-liners that you think 21 are probably draining off -- 22 MR. SANDERSON: There's other 23 activities that individuals are spending their funds 24 on. In fact, I believe yesterday there was another 25 raid in -- I want to say in Bay City on some 8-liner 0044 1 machines. That was in the Victoria Advocate 2 newspaper. And I believe Montgomery County had a raid 3 not too long ago. So there's some competition out 4 there from that industry. 5 COMMISSIONER SCHENCK: What kind of 6 money are they seizing when they conduct these raids? 7 MR. SANDERSON: The one yesterday, I 8 think they seized 40 machines and $16,000. And that 9 one there is probably fairly small compared to the 10 ones that were around October, November of last year 11 up in Abilene, was a substantial amount of money. 12 COMMISSIONER SCHENCK: So aggregated 13 over the state, if those people were, instead of 14 playing illegal gaming devices like 8-liners but they 15 were going to bingo, as apparently they used to, that 16 number we saw in terms of charitable distributions you 17 would assume would be up -- 18 MR. SANDERSON: Yes, sir. 19 COMMISSIONER SCHENCK: -- substantially 20 from the $31.9 million that's currently going to the 21 Elks Lodges and the Catholic churches and the like? 22 MR. SANDERSON: I believe it would, 23 yes, sir. 24 COMMISSIONER SCHENCK: Thank you. 25 COMMISSIONER REYES: Do you see your 0045 1 expenses staying the same, going up? Because it takes 2 a pretty good chunk of money. 3 MR. MINER: The expenses -- 4 COMMISSIONER REYES: For like the 5 cashiers and the rent and all of that, is there a 6 percentage that they have to pay or how is that done? 7 MR. MINER: It's hard to measure, 8 because it's regional. I mean, the salaries would be 9 higher in the big cities than the small cities. And 10 we have such a mix of charities located throughout the 11 state. There are more expenses related to card- 12 minders, these hand-helds, because that's a rent that 13 they have. You know, it's a lot more expensive than 14 buying a box of paper. So unless they start using 15 less of these, I can see the expenses continuing to go 16 up. 17 CHAIRMAN COX: Bruce, I know that David 18 Heinlein has done some analysis whereby he looks at 19 closings -- raids, if you will -- on the 8-liners 20 palaces and the subsequent change in bingo sales in 21 nearby halls. Have you done any of that kind of work 22 in your department? Do you have a figure? 23 MR. MINER: I'm not aware of us doing 24 anything related to that. I do know that in the past 25 when they were going into Texarkana, we did some 0046 1 review a number of years back that was showing an 2 impact. 3 CHAIRMAN COX: Okay. 4 MR. MINER: But I don't think we have 5 anything -- 6 MR. SANDERSON: We haven't conduct any 7 recent analysis or research on those. 8 CHAIRMAN COX: Okay. Well, Phil, 9 coordinate with Gary -- I've asked Gary to do the same 10 thing on the lottery side -- to see if when one of 11 these things closes down, lottery sales go up, or 12 whether we just can't conclude anything from it. You 13 know, we certainly need to be in a position to be a 14 resource to the Legislature and the leadership should 15 they ask us if there's impact of this illegal gambling 16 on lottery proceeds, as they have asked us every year 17 that I've been a Commissioner. So that seems to be a 18 good way to gather data. It may not be conclusive at 19 all, but we will have at least done the best we could. 20 MR. SANDERSON: Well, we will 21 definitely look into it. The one thing to keep in 22 mind, you know, we get numbers every quarter. We 23 don't have the capability to get the daily numbers in 24 that area unless we actually go down and get the 25 organizations to voluntarily report those to us. 0047 1 CHAIRMAN COX: That's true. So it's 2 not as easy on your side as it is on the lottery side, 3 is it? 4 MR. SANDERSON: That's correct. 5 CHAIRMAN COX: But maybe you can do 6 some macro kind of work on, "Hey, there was one here, 7 pretty much the middle of the quarter, and these guys 8 look like they came up a little bit," and on a 9 selective basis maybe call and ask people what 10 actually happened, looking into some numbers. 11 MR. SANDERSON: We can certainly do 12 that. 13 CHAIRMAN COX: Okay. Good. 14 Anything else, Bruce? 15 MR. MINER: Nothing, sir. 16 CHAIRMAN COX: Thank you very much. 17 AGENDA ITEM NO. IV 18 CHAIRMAN COX: Agenda Item No. IV, 19 consideration of and possible discussion and/or 20 action, including adoption, on repeal of 16 TAC 21 §402.705 relating to compliance review. 22 Ms. Joseph. 23 MS. JOSEPH: Good morning, 24 Commissioners. For the record, my name is Sandra 25 Joseph, Assistant General Counsel. 0048 1 Before you is a draft submission 2 prepared for the Texas Register to repeal 16 TAC 3 §402.705 regarding compliance review. The proposed 4 repeal was published in the February 1, 2008 issue of 5 the Texas Register. 6 The Commission is proposing the repeal 7 because during Chapter 402 rule review, it was 8 determined that there was no reason to readopt the 9 rule. The rule subject matter is now covered in 10 another rule, §402.715 relating to compliance audit. 11 A public hearing was held on this rule 12 on February 6, 2008. One person commented at the 13 hearing in favor of the proposed repeal. No written 14 comments were received. 15 The staff recommends that the 16 Commission adopt the repeal of §402.705, compliance 17 review. 18 COMMISSIONER SCHENCK: No questions. 19 COMMISSIONER REYES: No questions. 20 CHAIRMAN COX: Do I have a motion? 21 COMMISSIONER SCHENCK: Well, in view of 22 that overwhelming public support for the withdrawal, I 23 recommend we adopt staff recommendation and publish 24 the rule. 25 COMMISSIONER REYES: I'll second the 0049 1 motion. 2 CHAIRMAN COX: All in favor, say "Aye." 3 COMMISSIONER SCHENCK: Aye. 4 COMMISSIONER REYES: Aye. 5 CHAIRMAN COX: Aye. 6 Motion carries 3-0. 7 MS. KIPLIN: Commissioners, just to be 8 clear, this is an action to adopt the repeal of the 9 rule. And I've got an order that will carry that out. 10 COMMISSIONER SCHENCK: I didn't say 11 "adopt"? Adopting the repeal. 12 AGENDA ITEM NO. V 13 CHAIRMAN COX: Agenda Item No. V, 14 consideration of and possible discussion and/or 15 action, including adoption, on repeal of 16 TAC 16 402.406 relating to exemptions from licensing 17 requirements. 18 Ms. Joseph. 19 MS. JOSEPH: Yes. Thank you, Chairman. 20 This also is a draft submission to the 21 Texas Register to repeal another bingo rule, 16 TAC 22 §Section 402.406, regarding exemptions from licensing 23 requirements. The proposed repeal was also published 24 in the February 1st issue of the Texas Register. The 25 Commission is proposing the repeal of this rule 0050 1 because it's no longer necessary, since the Bingo 2 Enabling Act does not require organizations to obtain 3 Commission approval of exempt status. 4 A public comment hearing was held on 5 the rule. No comments were made at the hearing, and 6 no written comments were received. The staff 7 recommends that the Commission adopt the repeal of 8 16 TAC §402.406. 9 COMMISSIONER SCHENCK: I have no 10 questions. 11 COMMISSIONER REYES: No questions. 12 COMMISSIONER SCHENCK: I move that we 13 adopt the repeal. 14 COMMISSIONER REYES: Second. 15 CHAIRMAN COX: Motion made and 16 seconded. All in favor say "Aye." 17 COMMISSIONER SCHENCK: Aye. 18 COMMISSIONER REYES: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 3-0. 21 MS. KIPLIN: Mr. Chairman, I have an 22 order. 23 24 25 0051 1 AGENDA ITEM NO. VI 2 CHAIRMAN COX: Agenda item No. VI, 3 consideration of and possible discussion and/or 4 action, including adoption, on new rule 16 TAC 402.210 5 relating to house rules. 6 Ms. Joseph. 7 MS. JOSEPH: Yes. This third bingo 8 rule before you for consideration is a draft rule 9 prepared for submission to the Texas Register in order 10 to adopt a new rule, 16 TAC §402.210 regarding house 11 rules. It's recommended that the rule be adopted 12 without changes to the proposed text as it was 13 published in the Texas Register on March 7, 2008. 14 The purpose of this new rule is to set 15 out the minimum requirements for house rules, 16 informing players in detail of how a licensed 17 authorized organization will conduct its bingo games. 18 Specifically, the new rule requires licensed 19 authorized organizations to develop and adhere to its 20 house rules, also to ensure that the house rules are 21 consistently applied and that they are made available 22 to anyone upon request. It also provides that the 23 house rules must not conflict with the Bingo Enabling 24 Act or the Charitable Bingo administrative rules. 25 There were no members of the public 0052 1 present at the public comment hearing held on this 2 draft rule. No written comments were received. 3 However, I would say that the BAC at their meeting 4 were in support of this rule in their informal 5 comments that they did not submit for the record. 6 The staff recommends that the 7 Commission adopt this rule, 16 TAC, §402.210. 8 CHAIRMAN COX: Okay. And in support of 9 your statement, I have witness affirmation forms from 10 Mr. Stephen Fenoglio and Steve Bresnen. Both are for 11 and neither wishes to testify. 12 COMMISSIONER SCHENCK: Sandy, I have a 13 question or two. What would be the consequence of 14 failing to adhere to the house rules that have been 15 published? Would it become, by virtue of its presence 16 in our rules, like a violation of one of our rules? 17 MS. JOSEPH: Yes, it would. It would 18 then be a violation of this rule, that we could seek 19 an administrative penalty or revocation, could take 20 enforcement action. 21 COMMISSIONER SCHENCK: And that would 22 be true if they failed to notify people of the house 23 rules at the beginning as well, not only for a lapse 24 of their own rules but failure to tell people about 25 them in the first place? 0053 1 MS. JOSEPH: Yes. It's required that 2 they make them available. 3 COMMISSIONER SCHENCK: Okay. Thank 4 you. 5 COMMISSIONER REYES: I don't have any 6 questions. 7 COMMISSIONER SCHENCK: I move that we 8 adopt the proposed rule. 9 COMMISSIONER REYES: Second. 10 CHAIRMAN COX: All in favor, say "Aye." 11 Aye. 12 COMMISSIONER SCHENCK: Aye. 13 COMMISSIONER REYES: Aye. 14 CHAIRMAN COX: Motion carries 3-0. 15 MS. KIPLIN: Mr. Chairman, I have an 16 order. 17 AGENDA ITEM NO. VII 18 CHAIRMAN COX: Item No. VII, report by 19 the Charitable Bingo Operations Director and possible 20 discussion and/or action on the Charitable Bingo 21 Operations Division's activities. 22 Mr. Sanderson. 23 MR. SANDERSON: Good morning, 24 Commissioners. In your notebook is the monthly 25 activity report of the Bingo Operations Division. A 0054 1 few items I would like to point out. April the 1st 2 was the 14th anniversary of bingo at the Lottery 3 Commission, and also it's the 26th anniversary of 4 bingo's first license being issued in the State of 5 Texas. 6 Also on April the 1st, we announced a 7 new structure for the Bingo Division. Formerly it was 8 three departments reporting to a director. We now 9 have it as two departments reporting to a director. A 10 copy of the organizational structure in included in 11 your notebook for your review. 12 Additionally, the Bingo Advisory 13 Committee, which was tentatively scheduled for May the 14 7th, due to scheduling conflicts, has been moved to 15 May the 14th. And any Commissioner that wishes to 16 attend, I'll be getting in touch with you to set up a 17 schedule if more than one decides to attend the BAC 18 meeting. 19 Also the website has been recently 20 updated with new news alerts and, of course, the new 21 structure of the Bingo Division. And we're working 22 with Media Relations right now on a public service 23 announcement that will incorporate 2007 financial 24 information. 25 I will be glad to answer any questions 0055 1 you have 2 COMMISSIONER SCHENCK: I have no, 3 questions, Phil. Thank you. 4 COMMISSIONER REYES: I have no 5 questions. 6 CHAIRMAN COX: Thank you, Phil. 7 AGENDA ITEM NO. VIII 8 CHAIRMAN COX: Agenda Item No. g's, 9 report, possible discussion and/or action on lottery 10 sales and revenue, game performance, new game 11 opportunities, advertising, market research and 12 trends. 13 Ms. Pyka, Mr. Tirloni -- and my 14 goodness, we've got the whole crew today. 15 MS. PYKA: Good morning, Commissioners. 16 My name is Kathy Pyka, Controller for the Lottery 17 Commission. With me to my right this morning is 18 Robert Tirloni, our Products Manager. And with me to 19 my left this morning is Dr. David Sizemore, our 20 research coordinator. 21 Our first chart for you this morning 22 reflects revenue from sales and net revenue to the 23 state through the week ending April 19, 2008. Total 24 sales through this 34-week period amount to 25 $2,037,000,000, with prize expenses of just over 0056 1 $1.5 billion. 2 Our net revenue to the state reflects a 3 5.7 percent decline as compared to the $613.9 million 4 figure noted for Fiscal Year 2007 at this point in 5 Fiscal Year 2007. And our prize expense as a 6 percentage of sales is 63.6 percent as compared to 7 62.6 percent at this time period in Fiscal Year 2007. 8 COMMISSIONER SCHENCK: Kathy, I have a 9 question for you. 10 MS. PYKA: Certainly. 11 COMMISSIONER SCHENCK: When you say 12 we're down in percentage, this is year to date, not 13 just for the week? 14 MS. PYKA: That is correct. This is 15 cumulative sales through the 34 weeks. And so 16 focusing first on sales, we're at $2.369 billion, 17 which represents 1.8 percent decline, as compared to 18 Fiscal Year 2007. 19 Our prize expense is $1.5 billion, 20 which is slightly under prize expense for this time 21 period in Fiscal Year 2007. So looking at that 22 comparison, prize expense is showing a change of 23 $3.9 million, but sales is showing a change that is 24 significantly different. So prize expense is up at a 25 greater share or greater percentage than sales is 0057 1 down. 2 COMMISSIONER SCHENCK: And I know we've 3 talked about this a little bit. But I think maybe for 4 the benefit of Commissioner Reyes, you can share your 5 insights on why it would be that prize expenses are 6 going up at the same time that the sales revenue are 7 going down. Is it because of the higher price tickets 8 tend to be more popular and also have a higher prize 9 payout? 10 MS. PYKA: As we go to the next slide, 11 I think that that will the change in sales by game 12 type, and we'll talk about the prize expense for each 13 of those game types, if it's okay to go to the next 14 slide on that. 15 COMMISSIONER SCHENCK: Of course. 16 CHAIRMAN COX: Before we do, Kathy -- 17 MS. PYKA: Yes, sir. 18 CHAIRMAN COX: -- this slide almost 19 needs to be three dimensional for me, because I like 20 percentages, but I also like absolute numbers. 21 MS. PYKA: Okay. 22 CHAIRMAN COX: And I'm having to dig 23 the absolute numbers out. The sales contribution 24 looks like it's down about $40 million so far this 25 year. 0058 1 MS. PYKA: Correct. 2 CHAIRMAN COX: And it looks to me like 3 that net revenue to the state is down about 4 $35 million. So without regard to what percentages 5 those are, we are not tracking toward delivering a 6 billion dollars for the school children of the State 7 of Texas, are we? 8 MS. PYKA: At this point in time, we 9 are not take tracking to that billion dollar figure 10 for Fiscal Year 2008. Our sales, as we've noted the 11 last several presentations, are down. Right now we're 12 down 1.8 percent. As we move forward in the fiscal 13 year, we expect that sales decline to only accelerate 14 at this point, because we've got the $50 ticket in our 15 base during Fiscal Year 2008, and it was introduced in 16 Fiscal Year 2007 in May. 17 So when we start reaching those year- 18 over-year comparative totals when we hit May, the 19 declines only grow. In Fiscal Year 2007 at the 20 introduction of the $50 price point, we were seeing 21 sales of that ticket alone at $8 million a week. And 22 right now that's leveled out to be more of a, you 23 know, high $2 million, $3 million figure on a weekly 24 basis. So we certainly project at this point a 25 further decline in sales as we go forward in the 0059 1 fiscal year, which will ultimately impact our ability 2 to transfer proceeds to the Foundation School Fund at 3 the level that we did in Fiscal Year 2007. 4 COMMISSIONER SCHENCK: And we don't 5 have another offering in the pipeline, May or 6 otherwise, coming forward to give a like boost? 7 MS. PYKA: A different type of product 8 is what you're asking, Commissioner Schenck? At this 9 point in time -- I'm not sure, Robert, if you would 10 like to address that -- I mean, staff is exploring 11 options on other price points that's in the 12 exploration stage. 13 MR. TIRLONI: For the record, my name 14 is Robert Tirloni. I'm the Products Manager for the 15 Commission. 16 We currently have two fifties out right 17 now. The first 50 that Kathy talked about, that 18 started in May of 2007 and is approximately 80 percent 19 sold. We did release the second 50 in November. That 20 game is about 30 percent sold. And we have started 21 work on a third version of the 50. But as of right 22 now, there are two that are out at the same time. 23 COMMISSIONER SCHENCK: But we're 24 talking apples for apples. That's not going to 25 produce any kind of a change like we had from the 0060 1 introduction of the 50 game in the first place in the 2 middle of last year. 3 CHAIRMAN COX: No. What I hear them 4 saying, in fact, is the opposite, that when we get 5 into comparative times after the 50 was introduced in 6 the previous fiscal year, the $50 ticket sales would 7 be less than they were last year. So that's what 8 Kathy is referring to as the further decline that we 9 could expect. 10 COMMISSIONER SCHENCK: Okay. I was 11 misunderstanding. 12 CHAIRMAN COX: We cannot get Lotto 13 Texas out of the gate. It gets hit at four or five or 14 seven every doggone time. 15 MR. TIRLONI: I have slides later in 16 the presentation. But since we last met, Lotto Texas 17 has been hit twice, three winning tickets, but it's 18 been hit twice since we last met. 19 CHAIRMAN COX: When it gets hit at 20 those low levels, we lose money? 21 MR. TIRLONI: That's correct. 22 CHAIRMAN COX: We have to get it up to 23 13 or 14 before we even break even? 24 MR. TIRLONI: Approximately. That's 25 correct. 0061 1 CHAIRMAN COX: So we're losing money on 2 Lotto Texas. We have a decent run on Mega Millions 3 right now -- 4 MS. PYKA: Right. 5 CHAIRMAN COX: -- if I'm correct. 6 MS. PYKA: Right. The run on Mega 7 Millions right now, today's jackpot is advertised at 8 $85 million. They're doing the call right now as we 9 speak, to determine what it will roll to if we're not 10 hit tonight. But even with Mega Millions, we're 11 having difficulty getting over in that $250 million 12 roll cycle area. And for us, that's when we start 13 generating sales, is when we get over $200 million 14 here in the State of Texas. 15 MR. TIRLONI: And if I may add, on Mega 16 Millions, at the end of last fiscal year, we also had 17 a very large run upon the Mega Millions jackpot. So 18 that will be -- we could be facing decline. We're 19 already in decline on Mega, but we'll be dealing with 20 the same issue that we've just been talking about with 21 the 50 year-over-year. We'll be dealing with a 22 similar issue on Mega Millions as we get to the end of 23 the fiscal year. If we don't have a large jackpot, 24 we'll be competing with last year, which at the end of 25 the fiscal year had a very large jackpot, over 0062 1 $300 million. 2 CHAIRMAN COX: So unless we get very 3 lucky on Lotto Texas and on Mega Millions, we're going 4 to have a significant shortfall from last year in net 5 revenue to the state? 6 MS. PYKA: That is correct. 7 CHAIRMAN COX: And, Kathy, what -- I 8 know you don't have numbers to give you precise 9 predictions -- and a lot of it depends on luck -- but 10 what is your guess as to how much that shortfall might 11 be? 12 MS. PYKA: Chairman Cox, we're 13 currently analyzing and projecting sales figures. 14 Looking at our $50 product very closely, we do not 15 have a final total but certainly expect that the 16 instant ticket sales, which represents 76 percent of 17 our overall product sales, is going to come in 18 significantly less than where we were. 19 You know, I think on a conservative 20 estimate, we could look at $100 million reduction in 21 that transfer total. 22 CHAIRMAN COX: Okay. Now, what is our 23 procedure at this time about letting folks outside 24 this building know that we are looking at that kind of 25 a shortfall? 0063 1 MS. PYKA: We presently communicate 2 with our leadership offices that includes the 3 Legislative Budget Board, the oversight offices as 4 well, the Comptroller's office, on a weekly basis by 5 providing them summary data as it relates to our sales 6 and then our transfer information. And so that is 7 something that is communicated, you know, again on a 8 weekly basis. 9 I've had a couple of conversations 10 within the last month with the revenue estimator from 11 the Comptroller's office to discuss the current status 12 of our instant ticket sales as well as our on-line 13 sales. 14 CHAIRMAN COX: And are these reports 15 that you send such that they will throw up a red flag, 16 that somebody will look at that and say, "Hey, we're 17 running short here," and we need to be aware of that? 18 Or does it just kind of get hit down in the smaller -- 19 MS. PYKA: No. The individuals that 20 are receiving these reports -- there's an individual 21 assigned in the Governor's office and the Legislative 22 Budget Board -- are very familiar with our products 23 and are very familiar with the decline that we're 24 experiencing. 25 CHAIRMAN COX: Okay. 0064 1 MS. PYKA: I think that the 2 communication is very clear. 3 CHAIRMAN COX: So we're keeping people 4 informed and nobody is going to be surprised? And 5 we're doing the best we can? 6 MS. PYKA: I think we're doing the best 7 we can. 8 COMMISSIONER SCHENCK: Let me ask on 9 that question. I really would like us to think more 10 about what we could do by way of advertising or the 11 way we're marketing the products generally. And I 12 think this would be a good time, mid-year -- before 13 mid-year -- to start thinking more creatively. I have 14 the sense that -- we're very conservative, and I think 15 that's the appropriate way to approach these things. 16 But I would be, at least speaking for 17 myself, welcome to more creative and potentially 18 aggressive ideas that we can all consider. Maybe we 19 wouldn't ultimately approve them, but it would be 20 helpful to know what it is that we're not doing, where 21 we're exercising discretion not to do something, so 22 that we can all agree that we're making those judgment 23 calls appropriately. 24 We have -- what? -- less than seven and 25 a half months left for these numbers. It's important 0065 1 that we communicate where we are and where we project 2 ourselves to be. But if there is any way we can 3 improve what we're doing, I had rather substantively 4 address the issue. 5 CHAIRMAN COX: Again, that seven and a 6 half months I think would be more like three. 7 MS. PYKA: Three. Right. Our fiscal 8 year end will be August 31st. 9 CHAIRMAN COX: Right. 10 MS. PYKA: And so we're well into the 11 fiscal year with regard to our sales projections and 12 where we stand in comparison to Fiscal Year 2007. 13 CHAIRMAN COX: Gary, would you come up 14 and talk to us for a minute, please. 15 MR. GRIEF: Yes, sir. 16 CHAIRMAN COX: Gary, considering 17 Commissioner Schenck's observation, are we 18 under-spending our advertising dollar, which is 19 limited? Do you see anything that we are not doing 20 that we could be doing to improve sales and revenues? 21 MR. GRIEF: I feel confident that we're 22 very diligent and trying to be as creative and 23 aggressive as possible, but it's always worth taking 24 another look at it. And I would like to take an 25 opportunity to do that with Michael Anger and Robert 0066 1 and the rest of the Marketing staff, and sit down. 2 And I understand your point, 3 Commissioner Schenck, about bringing forward some 4 ideas that may or may not be approved, but at least it 5 would show the diligence of the staff and the efforts 6 that are being made to try to turn those numbers 7 around. 8 We do have a very short time frame left 9 in this fiscal year. We are facing a very, very steep 10 uphill battle competing with the introduction of the 11 first $50 ticket last year. And then someone 12 mentioned this, at the end of the last fiscal year, we 13 also have about two or three weeks where we're 14 competing with a greater than $300 Mega Millions 15 jackpot. 16 So even as we get to the last two or 17 three weeks, that year-over-year decline, as Kathy 18 mentioned, will continue to accelerate. And I'm the 19 one that has started to throw around that $100 million 20 figure. I think we'll have a better handle on that in 21 another couple of weeks. But we'll certainly take 22 another look at that and see what we can bring forward 23 to the Commission as far as if, for nothing else, 24 informational purposes, that type of thing, whatever 25 is your pleasure, Commissioner. 0067 1 CHAIRMAN COX: Gary, I would ask that 2 when you have that meeting of your staff to brainstorm 3 that, that you offer Commissioner Schenck an 4 opportunity to attend if he would like to. 5 MR. GRIEF: I would be happy to do 6 that. 7 COMMISSIONER SCHENCK: Thank you. 8 CHAIRMAN COX: I assume also there's 9 very little we can do, never grow a business on the 10 cost side. But if there is anything we can do by way 11 of saving money, this would be a good time to do it. 12 We have not much time left, obviously, but I think 13 that would be someplace else we could be giving some 14 thought and attention. 15 MR. GRIEF: Just to share this with our 16 newer commissioners, we're appropriated seven percent 17 of sales for our operating costs, and we like to think 18 that we run very lean. I think on average we're 19 hitting about -- 20 MS. PYKA: Five. 21 MR. GRIEF: We're only using about five 22 of the seven that's allocated to us. We use every 23 single dollar we have as far as advertising, of 24 course. We're limited by statute in our advertising 25 dollars. That's an issue that, going forward in the 0068 1 next legislative session, if we could get some relief 2 there, that might be helpful to us. We leave that to 3 the policymakers to decide that. But we do focus very 4 much on the cost side, and we're keeping a close eye 5 on that, Commissioner Schenck. 6 MS. PYKA: Now might be an appropriate 7 time to talk about that advertising dollar. Right now 8 the appropriation is $32 million, but it's been 9 reduced by a million dollars, based on the Government 10 Code restriction that ties our advertising 11 appropriation to our prize payout percentage. So the 12 current budget is reduced from $32 million to 13 $31 million. And as you can see, we track this prize 14 payout percentage closely, out of concern of further 15 reductions to it as a result of increases to the prize 16 payout and how that will impact future advertising 17 budget. So when Gary speaks to the relief on that 18 limitation, it's critical on a go-forward basis that 19 we continue to work on that. 20 COMMISSIONER SCHENCK: Thank you. 21 COMMISSIONER REYES: How are your 22 marketing dollars allocated? Is that geographically? 23 Do you look at areas that have a tendency to buy more 24 lotto tickets? Do you spend more marketing dollars 25 there or is it just wherever the marketing people 0069 1 think that they need to market? 2 MR. GRIEF: We currently allocate very 3 little dollars to our instant ticket product. In 4 order to fully fund the advertising that's necessary 5 for our billboards, for example, for our jackpots and 6 for those types of marketing and advertising, that 7 takes up the bulk of our funding right now. 8 To give you a little more insight into 9 our advertising budget, we actually have a $40 million 10 annual advertising budget. However, for every full 11 one percent that the prize payout is above -- is it -- 12 MS. PYKA: It's three g's (phonetic) 13 from the basis fixed g (phonetic). 14 MR. GRIEF: But what's the prize payout 15 percentage it has to be increased over? 16 MS. PYKA: 52 is the base level. 17 MR. GRIEF: Is it 52? 18 MS. PYKA: Yes. 19 MR. GRIEF: 52 percent. For every full 20 one percent that our overall prize payout percentage 21 is above 52, our advertising budget is reduced one 22 million dollars. So you heard Kathy say it's 23 currently at thirty- -- 24 MS. PYKA: 31. 25 MR. GRIEF: -- -one. That means for 0070 1 the last fiscal year, our overall prize payout 2 percentage was 9 percentage points above 52, which 3 effectively reduced our advertising budget. Now, that 4 was a bargain that was struck in the Legislature a 5 number of years ago between the proponents and the 6 opponents of lottery in general and advertising the 7 lottery in particular. 8 COMMISSIONER SCHENCK: What's happened 9 with our advertising costs under that contract? They 10 haven't remained static, have they? 11 MR. GRIEF: No, sir. They've gone up 12 significantly. 13 COMMISSIONER SCHENCK: And we can't 14 change those numbers, other than cutting down the 15 prize payouts? 16 MR. GRIEF: And we've got good 17 experience in doing that. Back in 1997, we were 18 legislatively mandated to do so. We saw a terrific 19 decrease in sales at that time. 20 CHAIRMAN COX: So, Gary, if I remember 21 correctly, Professor Huff and Dr. Jarrett from UT did 22 a study on advertising. They had some real good data 23 from Florida that they used as part of their study 24 that indicated within a reasonable range above 25 $30 million, we could significantly increase sales and 0071 1 revenue cost efficiently with an increase in 2 advertising. We presented that to the Legislature and 3 they chose not to make any changes. Do I remember 4 that correctly? 5 MR. GRIEF: Yes, sir, you do. 6 CHAIRMAN COX: And I think that one 7 thing that I hadn't thought of that Commissioner 8 Schenck just recognized is that since '97, or whenever 9 that was put in, we've had a bit of inflation. I 10 don't know if we could get two people in the room to 11 agree on what it's been. But certainly we should at 12 least be asking for an increase that recognizes 13 inflation and hopefully dust off the Huff/Jarrett 14 information and try to demonstrate to them that, "We 15 can make more money if you'll let us spend more money 16 on advertising." 17 MR. GRIEF: Yes, sir. 18 CHAIRMAN COX: There was a time when I 19 came on this board that we didn't have that kind of 20 data, and we starting preparing for that question and 21 now we're ready for that question. And I think that 22 at whatever time that we might have the opportunity to 23 present ways that we might increase revenue when they 24 ask us that, that should be certainly near the top of 25 the list. 0072 1 MR. GRIEF: We'll certainly have that 2 information prepared and ready. 3 COMMISSIONER SCHENCK: Can you remind 4 me if under our advertising contract, do we track and 5 have we historically tracked the number of minutes of 6 radio buy time that we're getting or how many 7 billboards we're getting and whether that's sloping 8 down into the right as a result of the fixed costs we 9 have -- or fixed budget on advertising? 10 MR. GRIEF: We do track that 11 information. And not having it here in front of me, I 12 can tell you definitely, our money does not buy as 13 much air time as it did in years gone by. That has 14 continued. 15 COMMISSIONER SCHENCK: That data would 16 go along pretty nicely -- 17 CHAIRMAN COX: Yes. 18 COMMISSIONER SCHENCK: -- just to show 19 what we're getting in terms of minutes on the radio 20 over time. 21 MR. GRIEF: I think I've got a sense 22 for what you're looking for, and we'll work towards 23 providing something along those lines for your review 24 and feedback. 25 COMMISSIONER SCHENCK: Thank you. 0073 1 CHAIRMAN COX: Okay. Kathy, I guess on 2 now to the next question that Commissioner Schenck 3 asked, which I think you said was on the next slide. 4 MS. PYKA: Yes. Focusing on this 5 slide, you'll note on the bottom line, as we've stated 6 before, the decline from Fiscal Year 2007 sales is 7 $44.5 million, or 1.8 percent. The overall sales 8 decline includes a $29.1 million decline, or 9 4.9 percent in our on-line games, which is subtotaled 10 at the bottom there for you, and a $15.4 million, or 11 eight-tenths of a percent on our instant ticket 12 product. 13 Focusing back to the top on our jackpot 14 games, you can see that, as we've talked this morning 15 about the jackpot games being driven by advertised 16 jackpots, we have a sales decline there of 17 $42.6 million, or 12.6 percent. 18 Our daily games, while the subtotal 19 only shows the gain of $13.5 million, or 5.3 percent, 20 I do want to note for you that while Pick 3 reflects a 21 decline of $16.5 million, the addition of the Pick 3 22 Sum It Up, the Daily 4 and the Daily 4 Sum It Up games 23 actually reflect a $20.7 million gain over our Fiscal 24 Year 2007 sales. That's a 10.3 percent gain. So you 25 can see there with the introduction of this new 0074 1 product in Fiscal Year 2008, or these new products in 2 Fiscal Year 2008, we have seen a gain on that 3 particular product area. 4 Commissioner Schenck, going back to 5 your point, we focused on the 1.8 percent decline on 6 the first slide, in overall sales. And focusing then 7 on the other component of that, while sales have 8 declined 1.8 percent, prize expense has declined .25, 9 or a quarter of a percent. So we're not seeing the 10 same type of a decline there percentage-wise as we are 11 seeing in the sales area. 12 Breaking that down further, it's our 13 on-line product that we're seeing some greater prize 14 expense areas, in particular our Megaplier game. We 15 have a greater prize expense in comparison to the 16 Fiscal Year 2007 prize expense for that game 17 COMMISSIONER SCHENCK: Now, I know 18 we're studied the sales response to payout 19 adjustments. And my concern is, to seems to me to get 20 people interested in the game and to play, we're 21 having to increase the payouts. And that is a process 22 that eventually, it's like an asymptote. The more we 23 have to keep adding on top in terms of the payout to 24 get people to play, the less room we have on top with 25 these adjustments. 0075 1 So we need to come up with a strategy 2 for addressing that challenge, because we're going to 3 keep seeing, it seems to me, that spread of the net 4 total revenue going down as a result of the payouts 5 going up, in order to chase fewer sales. 6 CHAIRMAN COX: We've got some 7 information that I think will help on that, a little 8 bit later. We are looking very hard, Commissioner, at 9 just the issue you're talking about. In fact, when we 10 were in Rhode Island with GTECH, the last question 11 that I asked Chairman Patel and his senior staff was, 12 "Do we really have to?" I know the conventional 13 wisdom is, we have to pay more on higher tickets, but 14 we want your best answer and the best data you can 15 give us. Do we really have to? Because, on the one 16 hand, there is data that strongly supports the idea 17 that if you decrease the prize payout percentage, 18 sales will go down, and that's the information from 19 1997 experience in Texas, when the Legislature chose 20 to cut the prize payout percentage, and sales sure 21 enough went down. 22 On the other hand, we have our 23 experience where on the $50 ticket, we did not 24 increase the prize payout percentage and sales were 25 wonderful. So there's mixed evidence out there, and 0076 1 we're trying our very best to get the bias and the 2 conventional wisdom out of that and get some real data 3 on what works. 4 MS. KIPLIN: Mr. Chairman, I'm being 5 told we're having a hard time hearing you, so if I 6 could ask you to get closer to your mike. 7 CHAIRMAN COX: Thank you. 8 MS. KIPLIN: Thank you, sir. 9 MS. PYKA: Moving to our next slide, 10 this includes our Fiscal Year 2008 year-to-date sales 11 by game. As noted on the slide, 76.1 percent of total 12 sales, or $1.8 billion from our instant ticket 13 product, followed by 7.8 percent of sales, or 14 $183.6 million from our Pick 3 product. 5.6 percent 15 and $132.6 million from Lotto Texas, and 4.6 percent 16 and $108.8 million from Mega Millions. Sales to date 17 for the Daily 4 game are $27 million, and $6.1 million 18 for the Daily 4 Sum It Up, followed by Pick 3 Sum It 19 Up sales amounting to $4.0 million. 20 So with that, Robert will now discuss 21 sales by price point. 22 MR. TIRLONI: Commissioners, this next 23 slide shows our year-to-date instant ticket sales by 24 price point. So our total year-to-date sales are 25 $1.8 billion for instants. And there is a slight 0077 1 shift this month to report -- I alluded to it last 2 month -- our $5.00 price point is our leading price 3 point, followed by the two and then followed by the 4 10. But the one is no longer the fourth best selling 5 price point; it is now the three. 6 So we go five, two, 10 and now three. 7 We've had some very strong and some very successful 8 $3.00 price points that we've introduced that have 9 helped move the $3.00 price point into that fourth 10 best selling slot. 11 CHAIRMAN COX: Robert, do we know of 12 any state that has pulled the one dollar ticket? 13 MR. TIRLONI: I do not know of any 14 state that has done that. The one and the two -- and 15 we've talked about this in previous meetings -- we're 16 suffering at the one and the two. But so far this 17 fiscal year, they do make up almost 24 percent of 18 the -- almost 25 -- of the instant ticket sales. And 19 they bring us between 12 to $14 million a week, 20 depending on the week. 21 COMMISSIONER SCHENCK: But, of course, 22 the question is: What would the three look like 23 without the one and two there? Would they pick up 24 that almost 25 percent? And I believe your conclusion 25 is, these are important games. 0078 1 MR. TIRLONI: Yes, sir; yes, sir. I go 2 and meet with retailers once a month in different 3 areas of the state. And so I've been asking regularly 4 now for months, "We're seeing declines at the one and 5 the $2.00 price points. Can you tell me why? Why is 6 that happening?" 7 The response that I hear time and time 8 again, month after month from the retailer base is the 9 price of gas, the price of goods that they're selling 10 in their stores has increased drastically, and that 11 has impacted the casual players that would typically 12 make your one and $2.00 purchase. 13 CHAIRMAN COX: So they're not going to 14 three, they're going to nothing? 15 MR. TIRLONI: I think the concern about 16 potentially not having a one or two in your product 17 mix is, you know, if we continue to see the cost of 18 gas increase and the cost of goods in store increase, 19 what happens to your five and your $3.00 player if 20 they're in a financial pinch, if you don't have a 21 level for them to come down to? 22 COMMISSIONER SCHENCK: Well, Robert, by 23 that logic, why don't we have a 50-cent game? 24 MR. TIRLONI: Well, on our on-line 25 game, we do. We don't on instants, though. 0079 1 COMMISSIONER SCHENCK: But I asked the 2 question before a couple of meetings ago about -- at 3 some point I thought the one dollar price point would 4 get cost-prohibitive, just from the cost of 5 manufacturing the tickets. And, as I recall, the 6 incremental cost per ticket was something like a 7 fraction of a cent. 8 MR. TIRLONI: Yes. 9 COMMISSIONER SCHENCK: But, you know, 10 there's debate being getting rid of the penny, because 11 it costs more than a penny to make one, given the way 12 inflation has been going. So if the one dollar and 13 the two dollar are important entry games for the 14 casual player -- I'm being somewhat literal with 15 this -- I mean, couldn't they be combined in the one, 16 or do you think we would have losses of sales from 17 people coming down from the five and the three who 18 would go and play a two but wouldn't play a one? 19 MR. TIRLONI: Well, year-over-year our 20 three and our $5.00 sales are up, looking at this 21 fiscal year over last fiscal year. Both of those 22 price points are up if you look at them independently 23 of each other. 24 COMMISSIONER SCHENCK: Then I would 25 suggest that the one and $2.00 players are buying 0080 1 three and $5.00 tickets. 2 MR. TIRLONI: I don't -- based on what 3 I'm hearing and based on what I'm seeing, I don't 4 believe so. I don't believe we've moved the one and 5 $2.00 player up to the three. 6 CHAIRMAN COX: Well, now we have, 7 Robert, a huge amount of market research. Doesn't it 8 cover that kind of thing? 9 MR. TIRLONI: We have been asking about 10 instant ticket sales in our monthly tracking. I don't 11 believe we delved down into that level by each price 12 point, though. 13 DR. SIZEMORE: We have tracked -- I am 14 David Sizemore, the research coordinator. We have 15 tracked the frequency of purchases at each price 16 point. And we did that for a while last year, moved 17 away from it, and then we're coming back to it now, in 18 response to some of the trends that we're seeing here 19 with reference to sales, the price points. So, yes, 20 we do. 21 CHAIRMAN COX: Okay. Now, there are 22 those who say that we have a recession going on out 23 there, and there are those who say that we have very 24 high inflation, particularly in gasoline and food 25 prices. Do we have any evidence, other than just a 0081 1 wild guess, that this is hurting our sales? 2 MR. TIRLONI: Well, we do have 3 information later -- 4 CHAIRMAN COX: But my tennis buddies, 5 one of their measures of the economy is, "Cox, how are 6 lottery sales doing?" And I can generally tell them 7 how they're doing, and then they can draw their own 8 conclusions. 9 MR. TIRLONI: Well, I can tell you that 10 David Sizemore pulled some information for us for 11 today. And looking at lotteries all around the 12 country -- and this is for Calendar Year 2007 -- from 13 the third quarter of Calendar Year 2007 to the fourth 14 quarter of 2007, 28 out of the 42 jurisdictions saw 15 sales decline. So what we're experiencing seems to be 16 prevalent among most of the U.S. jurisdictions. 17 CHAIRMAN COX: So then you come to the 18 question of: Is that because it's a mature industry? 19 Is that because we're competing with much more 20 exciting forms of entertainment, including other forms 21 of gambling? Or is that because of a recession? And 22 the answer is probably all of the above. 23 MR. TIRLONI: There's many variables. 24 And we've got some follow-up information for you later 25 in the presentation that you asked us about last 0082 1 month, and we list some of those variables, regional 2 differences and some of the things that we've actually 3 just ended up talking about right now. 4 CHAIRMAN COX: Good. 5 COMMISSIONER REYES: Well, I know in 6 San Antonio, there was some company that was 7 advertising the 8-liners as legal gambling, and they 8 give you a ticket to go get some merchandise. And I 9 think they're trying to test the law. But they're 10 actually advertising in the paper. I mean, I don't 11 see how they get away with it, but they're doing it. 12 CHAIRMAN COX: Ms. Kiplin, do you want 13 to say anything about that? 14 MS. KIPLIN: I'm not familiar with the 15 specific event or action that is occurring in Bexar 16 County. It really depends on the method of operation 17 and payout on each of these machines, whether they fit 18 within the definition of a gambling device or they fit 19 within an exception to that definition of gambling 20 device, which is called a bona fide amusement machine. 21 And there has been an issue regarding 22 the receipt of a ticket that then can be redeemed for 23 merchandise. And there's been a couple of Supreme 24 Court cases, one in particular, on that particular 25 issue. It's very fact-bound, very fact-based on, you 0083 1 know, what is it? Is it a bona fide amusement machine 2 or is it a gambling device? 3 The other aspect to it is, these are 4 gambling offenses, and so they're local venue. And so 5 it could very well be that what is occurring -- I'm 6 not saying specifically in this case -- but what is 7 occurring is that it is an illegal gambling device. 8 But it's actually up to the local authorities to 9 prosecute and to proceed against the operators of 10 those machines. 11 And so I guess where I would be on that 12 is, just because it's operating doesn't mean it's 13 lawful. But the opposite is true as well. There are 14 just so many different variables that are at play. 15 COMMISSIONER REYES: On the other hand, 16 I would be a little nervous reducing 25 percent of 17 your sales and hope that they move to the $3.00. And 18 that's a pretty good chunk. 19 COMMISSIONER SCHENCK: Yes. 20 CHAIRMAN COX: For sure; for sure. 21 COMMISSIONER SCHENCK: Well, maybe we 22 could change the prize payouts to these particular 23 segment of our playing public to bread and gas, if 24 that's really what's motivating their purchasing 25 decisions. 0084 1 COMMISSIONER REYES: Yes. 2 CHAIRMAN COX: And, you know, I think 3 before we would do that, maybe we would ask one brave 4 soul to take a chance and see what it does in his 5 store. 6 COMMISSIONER REYES: That's right. 7 COMMISSIONER SCHENCK: Or go into the 8 50-cent, the spare change game. 9 CHAIRMAN COX: Yes. 10 MR. GRIEF: If I could offer up just a 11 couple of other comments. The questions that the 12 Commission is posing and the things being raised are 13 all dead on. And if we could ever get definitive 14 answer to some of these questions, I would be the 15 happiest person in the room. There is a very high 16 level of frustration. You are finding a lot of 17 different factors. 18 People in general don't like to tell 19 you about their gambling habits, and many times 20 they're not truthful when we do surveys, focus growth 21 testing, et cetera. I've never seen an industry like 22 the lottery industry that I believe -- my own 23 experience tells me the only effective marketing tool 24 that you really can use is trial and error. And you 25 have to try different products and put different 0085 1 things out in the marketplace and see what kind of 2 attractiveness it plays out. 3 The staff, we brainstorm quite a bit. 4 We talk about new products. We talk about creative 5 products. And sometimes we have success in 6 introducing those and sometimes we don't, because of 7 all of the different pressures that come to bear on 8 it. 9 And we -- I think Chairman Cox will 10 tell you, we will thoroughly research, and we've used 11 The University of Texas and we've used all types of 12 marketing and consulting firms to try to get to these 13 answers. But I've been doing this for 15 years, and 14 I've yet to get the definitive answers that we need in 15 order to know it black and white on how to market 16 these products 17 So I share your frustration along those 18 line. And I can commit to you that we will be 19 diligent and we will use these firms and these 20 organizations to the best of our ability to try to get 21 to these answers. But we would just ask that you, as 22 a Commission, help us in trying to introduce new 23 products and try to bring forth new ideas for your 24 consideration, so we can put those out to the market 25 and see how those fare. 0086 1 COMMISSIONER SCHENCK: I would really 2 appreciate that, Gary. And this is the most important 3 thing I think that you do. This is the time, it seems 4 to me. If it's trial and error, then I think it's 5 time to start trying. I mean, the problem is that, 6 you know, we've been very successful -- or you really 7 have been very successful the last few years of 8 producing a billion dollars in revenue to the state, 9 which is wonderful. 10 But when you start talking about going 11 backwards in terms of what the net numbers are going 12 to be, and dropping a digit, you know, the money has 13 got to come from somewhere. And I know we operate 14 within these constraints, and we need to be creative 15 and making sure that we've tried everything that we 16 can so that we are delivering as much as we can, 17 consistent with the mandates that we operate under to 18 have these games conducted in a fair and ethical 19 manner, and I'm not suggesting that we ever do 20 anything contrary to that. 21 But I think it's time to start looking 22 hard at what more we can do. Maybe the answer is 23 nothing. But if there is something else that we can 24 be doing, we need to be sure that we're trying it. I 25 know everyone feels the same way here. I mean, we 0087 1 want to -- this is about school children. We've got a 2 billion dollars we've been delivering, and we try to 3 keep that number up. 4 CHAIRMAN COX: And, Gary, one of the 5 things that I would ask you to do, it's my perception 6 that direct selling is a large part of what we do, 7 they ask for the buy. And I have noticed at the 8 Randalls that I go to and a convenience store that I 9 stop at from time to time, that they don't ask for the 10 sale. They don't say, "Would you like to buy a 11 lottery ticket?" 12 If I see somebody near me buying a Mega 13 Millions ticket, they don't say, "Do you want to 14 Megaply that?" I would like to see us urge our direct 15 sales force to really put the press on those people, 16 those retailers, to ask for the sale. I think if we 17 knew every customer that came through, every one of 18 those 16,000 outlets, was asking, "Do you want to buy 19 a lottery ticket?" then I think we would know that 20 we've done our best. But I have reason to believe 21 that there's not nearly that many people being asked. 22 MR. GRIEF: Will do. 23 MR. TIRLONI: Chairman, we ask in those 24 monthly retailer meetings that I was talking about a 25 few moments ago, part of those meetings is the sharing 0088 1 of beneficial sales tactics and, you know, what works 2 for one retailer that they can share with the other. 3 And that seems so basic, but a lot of times you'll 4 have a retailer that says, "You have to ask every 5 time. When somebody comes up and they're buying milk, 6 you have to ask them, "'Do you want a scratch-off 7 ticket? Do you want to buy the new scratch-off 8 ticket? Mega Millions is $85 million tonight. Would 9 you like to buy a Mega Millions ticket? And would you 10 like to play Megaplier?'" 11 And the retailers that typically attend 12 these meetings are the better selling retailers. But 13 even in those forums, you have some of them that say, 14 "Well, you know, I don't ask every time," and that is 15 so basic. But what we find is that retailers are 16 lacking in that area. Part of that I think also has 17 to do with clerk turnover in the convenience store 18 industry, which is where the bulk of our tickets are 19 sold. But I just wanted to emphasize what you said. 20 And we see and we hear that regularly from the 21 retailers in these meetings. 22 CHAIRMAN COX: And I know there's only 23 so much we can do with our structure. But the people 24 who ask for the sale are the people who get a 25 commission. 0089 1 MR. TIRLONI: Yes, sir. Absolutely. 2 CHAIRMAN COX: Most people don't get a 3 commission. 4 MR. TIRLONI: Absolutely. 5 CHAIRMAN COX: So, you know, maybe 6 there's something there. I don't know. But, you 7 know, I think that point of sale is something that we 8 really need to look hard at and see if we can improve. 9 MR. TIRLONI: So as I mentioned, 10 Chairman, last month you asked us all to get together 11 and pull some rankings of different lottery 12 jurisdiction. And so between Kathy's group and David 13 and the research group and my department, we have 14 information to share for you -- or with you today. 15 Before we get into the actual rankings, 16 though, we wanted to provide you with a list of 17 variables that can perhaps explain or provide 18 background for the differences that you will see in 19 the rankings. And I think it also illustrates why it 20 might be difficult to generalize or apply the finding 21 from one state to another, because of these different 22 factors. It's a long list. I won't go into every 23 single item on the list. I'll hit some high points. 24 Regional differences. Attitudes about 25 gaming are different in different areas of the 0090 1 country, especially in the Northeast and the East 2 Coast. 3 Beneficiaries. Beneficiaries can have 4 an impact on sales. I think a good example is the 5 State of Georgia. They have a HOPE Scholarship 6 program. Lottery proceeds fund that program, so 7 that's very tangible, and it a measurable benefit 8 derived from lottery proceeds. 9 Another one to briefly talk about is -- 10 and we just talked about it in terms of asking for the 11 sale -- the retailer commission structure, bonuses and 12 incentives. Some states have access to unclaimed 13 prize dollars that they can then use to build sales 14 contests for retailers. They can build in cashing 15 bonuses and special promotions for sales efforts. 16 Competition from border states. For 17 example, Florida has very little border competition. 18 COMMISSIONER SCHENCK: Well, Robert, 19 does Alaska have a lottery? 20 MR. TIRLONI: No, sir. 21 COMMISSIONER SCHENCK: Okay. So we're 22 the largest state in the Lower 48. So by definition, 23 other than the Florida coastline, we would have I 24 think probably the second least competition from 25 border states, wouldn't we? 0091 1 MR. TIRLONI: Well, I mean, the fact is 2 that the states that we are surrounded by, all offer 3 multi-jurisdiction games such as Power Ball that 4 compete with Mega Millions. And Louisiana, Oklahoma 5 and New Mexico also have casinos also. 6 COMMISSIONER SCHENCK: Our big 7 population centers are pretty remote, though. If you 8 want to go play the Arkansas lottery from Austin, 9 you're a dedicated player. 10 CHAIRMAN COX: But if you want to go 11 play Indian Casino of Houston or regular casino from 12 Dallas, you don't have far to go. And I think if you 13 want to go north from Dallas and play Indian slot 14 machines, you don't have very far to go. So our major 15 population centers are close to gambling outlets of 16 various kinds. 17 COMMISSIONER SCHENCK: Close from Texas 18 measures a distance. I would agree. 19 (Laughter) 20 But if you're talking about the 21 Northeast, I mean, New York State and New York City 22 are within an hour of casinos in Connecticut and 23 places like that. 24 CHAIRMAN COX: Sure. 25 COMMISSIONER SCHENCK: That's a good 0092 1 point. 2 MR. TIRLONI: Just another note on 3 beneficiaries. Some of the new lotteries have 4 actually built education into their names -- for 5 example, there is the South Carolina Education 6 Lottery -- to emphasize where their proceeds go. I 7 believe North Carolina is the same. It's the North 8 Carolina Education Lottery. So they've built their 9 beneficiary into the actual name of their 10 organization. So, again, this is just a list of 11 variables that can impact the numbers that we're about 12 to see. 13 MR. GRIEF: I just want to emphasize, 14 before Robert goes on to the next slide, the very 15 first variable, regional differences. He touched on 16 that briefly. 17 I think when you see the numbers and 18 you see the map that they have put together, it's very 19 striking. And I will just highlight for you the east 20 coast of the United States. The acceptance of 21 gambling in those areas, the history of gambling in 22 those areas, it's a different culture, if you will, 23 when it comes to the spending of your gambling dollar. 24 And I think that will be made very 25 clear with Robert's slides. All these are important, 0093 1 and it's a case-by-case basis in each state. But I 2 think the one generalization that you can make is that 3 first one, the regional differences. 4 MR. TIRLONI: This next slide will show 5 Fiscal Year 2000 total sales. And before I go through 6 these, the source for all of this information is 7 La Fleur's. That's where our research group pulled 8 all these sales stats. 9 In order to make it an apples-to-apples 10 comparison, our staff went and excluded VLT and kino 11 sales. So since Texas is not offering either of those 12 products, we wanted to make sure that we were giving 13 you an apples-to-apples comparison. 14 CHAIRMAN COX: Commissioner, if you're 15 not familiar with the term "VLT," that's video lottery 16 terminal, which basically is a slot machine. 17 COMMISSIONER REYES: Oh, okay. 18 COMMISSIONER SCHENCK: But if you were 19 to include them, that would mean there was even more 20 gaming, legal gaming dollars being brought into the 21 state in those states. 22 COMMISSIONER REYES: Yes, sir. 23 COMMISSIONER SCHENCK: Because 24 presumably those revenues are cannibalizing from what 25 would be the comparable games that we have here in 0094 1 Texas. 2 MR. TIRLONI: Yes. For example, in 3 Massachusetts, I believe they do well over 4 $700 million a year in keno alone. New York does well 5 over $400 million in keno. The small states such as 6 Rhode Island does almost $85 million -- I'm sorry -- 7 $84 million a year in keno. 8 MR. GRIEF: And keno has been -- 9 there's been legislation introduced I think multiple 10 times over the years. And, Kathy, do you recall what 11 our fiscal note revenue projection was for keno the 12 last time we did that? 13 MS. PYKA: Gary, I apologize. I do not 14 have that number on recall. It was significant, 15 though, in looking at the overall contribution when we 16 looked at the -- 17 MR. GRIEF: Do you remember, Robert? 18 MR. TIRLONI: I don't remember. 19 CHAIRMAN COX: I think I remember 20 $800 million. 21 MR. GRIEF: I think that's a little 22 large. I was looking around for Nelda to see if she 23 might recall. We'll get that number for you just for 24 a source of reference. 25 CHAIRMAN COX: And one of the things, 0095 1 Commissioners, that we have done recently and we have 2 done in the past as well is to ask GTECH to put 3 together for us what our revenue will look like over 4 the next five years, playing the games we play, and 5 what it could look like if the Legislature were to 6 legalize other forms of play such as VLT and keno. 7 And so if you're interested in that information as to 8 what revenue might be in Texas compared to what 9 revenue is all up in those states, we have that data, 10 too. 11 MR. TIRLONI: So, Commissioners, when 12 you look at this ranking -- and I won't read it all to 13 you -- New York is the No. 1 ranked state -- and 14 again, this is just traditional lottery games -- just 15 under $6.2 billion, followed by Florida at 16 $4.1 billion. We are in third place at 3.77, or just 17 under 3.8, followed by Massachusetts at $3.6 billion. 18 COMMISSIONER SCHENCK: Do you know 19 whether New York has keno and video lottery? 20 MR. TIRLONI: New York has both; New 21 York has both. And I do have the -- for this time 22 period, their keno sales were $476 million. I don't 23 have their VLT sales. 24 COMMISSIONER SCHENCK: I would like to 25 hear your thoughts on that, because New York has 0096 1 off-track betting also. 2 MR. TIRLONI: They do. 3 COMMISSIONER SCHENCK: And they have 4 race tracks in Saratoga and in The Bronx. I mean, 5 there is an enormous -- and we have more population. 6 CHAIRMAN COX: We do have more 7 population. 8 MR. GRIEF: Goes back to the culture, 9 the regional issues. 10 CHAIRMAN COX: And one of the things 11 that I don't think showed up on the factors, but one 12 of the things that Prof. Huff and Dr. Jarrett told us 13 was that urban versus rural is a significant variable 14 as well. 15 COMMISSIONER SCHENCK: Well, half of 16 New York's population is in what we would call rural 17 areas. New York City has got 7 million people in it. 18 But you get north of Poughkeepsie, you've got rural 19 population centers, and I guess they must be playing 20 there as well. It may be of more use to the Krebs 21 cycle of taxation up there as well if somebody -- you 22 know, they're getting tax heavier with their winnings. 23 We don't do that. 24 MR. TIRLONI: I think New York's 25 population is about 19 million, I believe. 0097 1 CHAIRMAN COX: Yes. 2 COMMISSIONER SCHENCK: They're No. 3; 3 we No. 2. 4 MR. TIRLONI: I think so. 5 COMMISSIONER SCHENCK: California is a 6 much more populous state, well behind us. 7 MR. TIRLONI: Yes. I think about 8 33 million, 36 million population. 9 COMMISSIONER SCHENCK: Correct. 10 MR. TIRLONI: Yes; yes. California has 11 some very strict mandates that they have to follow in 12 terms of -- I'm sorry? 13 MR. GRIEF: That's exactly what I was 14 going to say. 15 MR. TIRLONI: -- in terms of what 16 they -- they are required to return -- they have a 17 mandate to return a certain percentage on their games. 18 So they are very, very limited in what they can do 19 with their prize payout percentage. 20 California's highest instant ticket 21 price point is $5.00. They can't go above that. And 22 I have been told that they monitor the payout of their 23 games day by day. And if that payout starts to creep 24 up, they actually have to go out and pull games that 25 are for sale at retail locations, in order to get that 0098 1 payout down, because of that mandated return that they 2 have to return to the state. So that's some very 3 strict requirements that I believe prevent them from 4 being more successful, especially based on their 5 population size. 6 Chairman, you asked us to look at it on 7 a per capita basis. And again, through all these 8 slides, VLTs and keno are excluded to make an 9 apples-to-apples comparison. 10 Massachusetts ranks No. 1 when you look 11 at the per cap. D.C. is No. 2, $414 per capita. You 12 see New York comes in fourth, $320. We gave you the 13 top 10, but then we also gave you our ranking. And 14 when you look at us on a per capita basis, we're 19. 15 COMMISSIONER SCHENCK: Out of 42? 16 MR. TIRLONI: 42 lottery -- 42 17 jurisdictions, yes. 18 COMMISSIONER SCHENCK: Okay. Now, this 19 is I think the most telling figure we've got. Where 20 do we compare to -- we're saying there are regional 21 differences here, which I agree with. I think that 22 people in the Northeast behave differently. But where 23 is some of our other southern, southwestern states? 24 MR. TIRLONI: Let me go to the map. I 25 think that's going to answer your question, sir. 0099 1 So if we go from east to west, then we 2 start looking at the per capita. The highest per 3 capita is the District of Columbia. Now, that is not 4 on the map. That's noted up here for you. The 5 mapping software, it was a little bit challenging for 6 us to get D.C. in there. But D.C., as we said, and 7 Massachusetts, are the highest, and their per capita 8 is over $400. 9 And then you get into a next cluster of 10 about $300 to $399 per capita, and you're in the 11 States of Georgia, New York, Connecticut, New Jersey, 12 Pennsylvania, South Carolina -- I'm sorry. For the 13 $300 to $399, it's only Georgia and New York. I 14 apologize. 15 The next cluster of $200 to $299 would 16 be Connecticut, New Jersey, Pennsylvania, South 17 Carolina, Florida. 18 And then your next cluster is the per 19 capita of $100 to $199, which we are included with 20 Arizona, Virginia, West Virginia, Ohio, Indiana, 21 Illinois. And then you have pretty much under $100 22 per cap for the remainder of the states. The states 23 in white do not offer lottery: Nevada, Utah, Wyoming, 24 Alabama, Mississippi, Arkansas. 25 What we've always heard from GTECH -- 0100 1 and I had to bone up on my geography a little bit -- 2 but east of the -- the Mississippi is kind of a 3 dividing line. East of the Mississippi tends to be 4 much more successful with lottery products and gaming. 5 And so -- Mississippi cuts right about down through 6 here (indicating). 7 COMMISSIONER SCHENCK: How many of 8 those states, Robert, if you know, that big cluster of 9 the Midwest and central south, how many of those have 10 keno and video lottery, if you know? Ohio, Indiana, 11 Michigan, are those states -- 12 MR. TIRLONI: Let me see. I can tell 13 you. Michigan does offer keno; for this time period, 14 about $505 million. Ohio does not offer keno. 15 Indiana does not offer keno. Illinois does not offer 16 keno. 17 COMMISSIONER SCHENCK: Okay. Those 18 are -- 19 MR. TIRLONI: Is that -- 20 COMMISSIONER SCHENCK: Okay. 21 MR. TIRLONI: Okay. 22 COMMISSIONER SCHENCK: Okay. That's 23 instructive. 24 MR. TIRLONI: Michigan does. 25 CHAIRMAN COX: Illinois has casino 0101 1 boats. Iowa has casino boats. Missouri has casino 2 boats. 3 MR. TIRLONI: Kansas does offer keno, 4 about $33 million in keno in Kansas. 5 COMMISSIONER SCHENCK: So Texas is out- 6 playing its neighbors to the extent they have lottery? 7 MR. TIRLONI: For our region of the 8 country, yes. 9 Then, Chairman, you asked us to also 10 look at net sales, and net sales is sales less prizes 11 paid. So if we look at it in that regard, in terms of 12 net sales, New York ranks No. 1, at just under 13 $2.5 billion, followed by Florida, about $1.6 billion, 14 California, just under 1.5. And we're pretty close to 15 California, 1.45. 16 CHAIRMAN COX: Now, what this shows us 17 is that Massachusetts, which has a very high prize 18 payout percentage, falls down significantly when you 19 look at net sales? 20 MR. TIRLONI: Yes. 21 CHAIRMAN COX: So that that asymptotic 22 thing that you're talking about does come into play. 23 And Massachusetts, however, has some things that they 24 don't do. I think they're just now selling a $20 25 ticket -- 0102 1 MR. TIRLONI: Yes, that's correct. 2 CHAIRMAN COX: -- of a very small 3 number of tickets that they run from time to time. 4 They have a very small advertising budget, for a long 5 time didn't have any advertising budget. But they 6 have a huge population concentration and a cultural 7 propensity to gamble. 8 MR. TIRLONI: Yes, sir. And then again 9 we took those numbers that you just saw and we broke 10 them down on a per capita basis. And you see D.C. is 11 up at the top at $180 per capita, followed by 12 Massachusetts and New York. When you look at Texas, 13 again we fall down in the rankings. When you look at 14 it on a per capita basis and on net sales, we are 15 21st. And we have a map for you again that depicts 16 this. 17 And so again, it's very similar. The 18 higher per capita net sales are on the East Cost, and 19 the Northeast specifically, and as you move across the 20 country to the west, you see the per capita decrease 21 for net sales. But again, in our region and our area, 22 Texas does fare better than a lot of our neighboring 23 states. 24 COMMISSIONER SCHENCK: It is 25 interesting that the highest tax and spending states 0103 1 seem also willing to buy lottery tickets, 2 notwithstanding the soaking they're taking by their 3 state governments and, in this district, its own tax. 4 MR. TIRLONI: Yes. I have some 5 additional product updates for you. But if you have 6 any other questions -- do you have any other questions 7 about any of that, that you would like me to go back 8 to on any of those slides? 9 COMMISSIONER SCHENCK: I don't. I 10 found that very informative and helpful. I think you 11 also have -- and I'm not sure if Commissioner Reyes 12 has seen it yet -- you have regional sales figures for 13 the State of Texas that I think are informative to 14 look at as well, that show regional differences. 15 MR. TIRLONI: We talked about this 16 briefly. I do like to let you know whenever we do 17 jackpot wins in Texas. And we've had two drawings in 18 which there are winners, since we last met. There was 19 a jackpot ticket sold in The Valley, in Pharr, for the 20 drawing on March 29th. That jackpot was estimated at 21 $13 million. The player did choose cash value option. 22 The cash value option is $8.6 million. That player 23 has already claimed this prize. The ticket was sold 24 by one of our corporate accounts, which is a Stripes 25 account. And the retailer is eligible for a $130,000 0104 1 bonus. That bonus is approved; it's pending payment. 2 Then for the drawing on Saturday, 3 April 12th, there were actually two tickets sold, one 4 in Seguin, one in Cleveland. That was, Chairman, the 5 $7 million jackpot level I think you were referring to 6 earlier. We got hit very early in the roll cycle. 7 Interestingly enough, both of these tickets were 8 annual payment option prizes. We talked a little bit 9 about that last month. We had not seen annual payment 10 prizes in quite a while. And now, since January, I 11 believe we've had five Lotto Texas jackpot tickets 12 sold, and four of the five have been annual payments. 13 COMMISSIONER SCHENCK: That choice is 14 always made at the terminal at the time of the 15 purchase. Right? 16 MR. TIRLONI: Yes. 17 COMMISSIONER SCHENCK: Could it be 18 there's less point-of-sale hand-holding, like the 19 Chairman was asking about? Normally they'll ask if 20 you want the cash value. 21 CHAIRMAN COX: Whats' the default? 22 MR. TIRLONI: The default is annual 23 payments. 24 COMMISSIONER SCHENCK: That's what it 25 is. I think we're seeing people who are just hitting 0105 1 buttons. 2 CHAIRMAN COX: There's certainly not 3 that many people out there that think interest rates 4 are going down. 5 COMMISSIONER SCHENCK: No. 6 MR. TIRLONI: Kathy is telling me two 7 of the five selected -- 8 MS. PYKA: And the feedback that we've 9 received in winner processing, and that's always a 10 question we like to inquire on. And it's our 11 understanding that two of those five, the individuals 12 consciously elected to select that annuity payment. 13 COMMISSIONER SCHENCK: Three out of 14 five means that they didn't. 15 MS. PYKA: Correct. 16 COMMISSIONER SCHENCK: That's more than 17 half. 18 CHAIRMAN COX: So the two out of five, 19 did they tell you why? Do we pry that much? 20 MS. PYKA: I'm not sure if the staff 21 may have gotten into that level of detail. 22 CHAIRMAN COX: The only reason I can 23 think of is that they're spendthrifts and they just 24 don't want to take the risk that they'll spend it all 25 at once, because a rational decision says that within 0106 1 the next 25 years, interest rates will at some point 2 be much higher than they are today. 3 MS. PYKA: You're correct. 4 COMMISSIONER SCHENCK: Are these older 5 people? 6 MS. PYKA: I'm not sure they're wanting 7 to judge on age. 8 (Laughter) 9 COMMISSIONER SCHENCK: But if I'm 65 or 10 older -- well, I plan to live to a hundred. But 25 11 years' payout is a substantial period of time for most 12 people to be looking at. 13 MR. TIRLONI: So both of these tickets 14 were annual payment tickets. And the annual payments 15 are $140,000 per year for 25 years, totaling three and 16 a half million dollars each. And then again, each 17 retailer is eligible for a $35,000 bonus. We have had 18 contact from the Seguin potential claimant. We have 19 had no contact from the Cleveland claimant. 20 I just wanted to give you an update. 21 You may have heard. Advertising on our annuity suite 22 of games, it's been running for approximately the 23 past four weeks. The advertising does support our 24 entire annuity suite. I did want to point out the red 25 ticket to the right, the Super Set For Life, is our 0107 1 brand-new annuity game. It is a $20 ticket. We've 2 never had a core or a base game at the $20 ticket. 3 This game has been doing extremely well, and we 4 believe this will now become a core product offering 5 for us at the $20 price point. So we have core 6 product offerings at the one, two, three, five and 10. 7 And so we're happy to have a core product that we can 8 make available at all times at the $20. 9 And if you've seen some of these games 10 before, the purple ticket in the middle, Set For Life, 11 we've had that game for quite a while, but this has 12 been recently redesigned. It's been given a brand-new 13 look. And we've been successful with retailers in 14 getting double facings for this game, meaning we have 15 two versions of this game out right now. We have the 16 previous $10 Set For Life version and this new 17 version. And retailers are allocating two bins for 18 this game. So they're putting one of the older 19 version in one bin and the newer version in another 20 bin. 21 COMMISSIONER SCHENCK: Robert, can you 22 remind me of the payout period for these games? 23 MR. TIRLONI: The payout period? The 24 $20, the brand-new one, it's capped at $500,000 a year 25 for 15 years, so it gives you a total payout of seven 0108 1 and a half million. And the Set For Life, the $10 Set 2 For Life, you can win up to $5,000 a week. You can't 3 win more than $5 million total. 4 Weekly Grand pays you a thousand per 5 week for 20 years. That comes to $1,040,000. And the 6 monthly bonus, you win up to -- I believe it's 7 $2.4 million. It's about $10,000 -- it's $10,000 a 8 month. 9 COMMISSIONER SCHENCK: That's net, not 10 net present value? 11 MR. TIRLONI: That's correct; that's 12 correct, yes. 13 COMMISSIONER SCHENCK: These are unlike 14 the infamous games that were put out in the nineties 15 where we would actually pay out for the life of a 16 natural person, where we were required, then, to audit 17 to make sure that the person was actually still 18 amongst us? 19 MR. TIRLONI: Yes. All of these are 20 capped. All of these have limits, and have for quite 21 a while on these that you see here. 22 And the last bit of information I have 23 for you is about our newest licensed property game. 24 This is our new Indiana Jones game. I was traveling 25 last week. I went to Atlanta to visit one of our 0109 1 instant ticket printers, and there are billboards and 2 ads for this game all over -- I'm sorry -- for this 3 movie release all over the place that we hope will be 4 good for sales for this game. 5 It's the first Indiana Jones movie 6 that's come out in almost 19 years. It starts in May. 7 Our game started a few weeks ago. Actually, I take 8 that back. Just a week ago, last Monday the 21st. As 9 I said, there's a lot of ads, there's a lot of hype 10 about this new movie. And we are conducting second 11 chance drawing for Indiana Jones merchandise. And it 12 is a scenes game, so there are four different scenes, 13 one from each of the different movie releases over the 14 years. 15 And with that -- oh, I'm sorry. Gary 16 has something. 17 MR. GRIEF: Let me follow up on one 18 thing regarding the game of keno. The last time we 19 looked at a revenue estimate for the game of keno in 20 Texas was back in February of 2006, and that 21 information was presented at a House committee 22 meeting, the House Committee on Licensing and 23 Administrative Procedures. Keno is a game that's 24 traditionally offered at bars and restaurants. Many 25 of those locations, which we are currently 0110 1 unauthorized to sell in, would be among this revenue 2 estimate. 3 We projected that approximately 4,000 4 currently prohibited locations for us to sell lottery 5 tickets in would be expected to offer keno to their 6 patrons. In addition, about another 1,250 existing 7 lottery retailers would offer keno. 8 And our revenue projection, we 9 estimated that approximately $50 million annually in 10 net revenue would be produced by the third year of 11 operations, and that would increase to around 12 $60 million by the end of the fifth year. 13 Now, I'll qualify that by saying that 14 our approach to revenue estimation is very 15 conservative. It's very much in line with revenue 16 projections of the Legislative Budget Board and the 17 Controller's office. I think our lottery operator 18 would probably have a much more aggressive and higher 19 revenue estimate than we have for that, but I wanted 20 to share that with you, since we had mentioned that 21 earlier. 22 CHAIRMAN COX: Ramon looks like the cat 23 that swallowed the canary out there. 24 MR. GRIEF: Thank you, Robert. 25 MR. TIRLONI: Thank you. 0111 1 Commissioners, that concludes our portion of the 2 presentation, but David Sizemore does have some slides 3 and has a research update for you today. 4 DR. SIZEMORE: Good morning, 5 Commissioners, Chairman. I am David Sizemore, the 6 research coordinator for the Texas Lottery. 7 I have the pleasure to present the 8 public opinion material about the Texas Lottery that's 9 collected on a monthly basis by our research vendor, 10 our market research vendor Ipsos Reid, and to provide 11 some brief perspective or a contextual overview of -- 12 I'll give you some information dealing with 13 essentially where this is from, its origins and what 14 its source is. 15 The opinion material that follows -- 16 I'll show you three slides -- is collected as part of 17 the larger monthly tracking study that we do for 18 market research. And this tracking study is, again, 19 conducted by the research firm Ipsos Reid. 20 The lottery, using the vendor, has 21 conducted this market research since the 1990s, 22 roughly. And some of the material that is presented 23 today, the slides on whether the Texas Lottery is fair 24 and honest, dates back to roughly the mid-1990s, so it 25 goes back quite a way. And again, this is part of a 0112 1 larger project that has a battery of questions that 2 are posed -- or that is posed to about 400 Texans on a 3 monthly basis. And these are, of course, Texas 4 adults. 5 Some of the questions deal with 6 participation, game awareness, advertising recall and, 7 of course, what you'll see next, image of the lottery. 8 Other add-ons in terms of the questions that might be 9 of a particular on-a-need basis or interest that we're 10 trying to pursue are also developed, and these are 11 included whenever we need some information collected. 12 Right now, for example, as I referred to earlier, 13 we're collecting data on the instant price point 14 purchase frequency that respondents claim to engage 15 in. 16 So the following items are just three 17 questions from the overall tracking study that may 18 include anywhere from 20 to 25 and, on some occasions, 19 more questions, depending on what we need to collect. 20 And these questions that follow are actually extracted 21 from this broader monthly collection of material. 22 The first slide asks respondents to 23 tell us how well informed they are about the Texas 24 Lottery. What you see here is the material that's 25 rolled up on a quarterly basis. Each month we ask, 0113 1 again, 400 people all these questions. And then on a 2 quarterly basis, we roll it up into a sample of 1,200, 3 with the exception of, for example, Q-1, the first 4 quarter. Here you see the sample is 2,000. That's 5 because on a yearly basis, we conduct a segmentation 6 study that includes 1,200 respondents, a much larger 7 piece of the puzzle here. 8 Roughly speaking, about 38 percent of 9 respondents claim that they are not informed about the 10 lottery, while 14 percent are on the other end of the 11 spectrum and claim to be informed or very informed. 12 And you'll see from top to bottom, the gray section at 13 the top represents not being informed -- and this is, 14 of course, a continuum -- while the bottom represents 15 being very informed. 16 Typically when we talk about these 17 slides, I discuss the idea of stability and that 18 there's relative stability over time, with the 19 exception, of course, of those middle groups where we 20 see some fluctuations and variation over time. But 21 generally speaking, each of these slides represents 22 some measure of stability with reference to the 23 questions asked. And you see the question at the top 24 of the slide, "How well informed do you feel about who 25 the Texas Lottery is and what it does?" 0114 1 The good Chairman likes to ask about 2 margin of error, so I feel compelled to say something 3 about margin of error. With a sample size of 1,200, 4 the margin of error is roughly three percent. So 5 these figures may vary upwards of three percentage 6 points, while for a sample of 2,000, the margin of 7 error is two percent, so there may be fluctuation of 8 two percentage points. 9 The next slide has to do with 10 respondents' overall opinion of the Texas Lottery. 11 Same scale, one to seven, one being a very negative 12 opinion, seven being a very positive opinion, same 13 time frame. And the question asks, "How do you 14 describe your overall opinion of the Texas Lottery?" 15 At this point for Q-2, 2008, about 19 percent of 16 respondents claimed to have a negative or very 17 negative image, while 23 percent claimed to be 18 positive or very positive. And again, stability is 19 the trend, with some fluctuation in the middle 20 segments. 21 Finally, we asked respondents about 22 their views regarding how fairly or honestly the Texas 23 Lottery is operated. And the question that's really 24 being asked, a series of questions are asked, and the 25 tag line is, "The Texas Lottery is operated fairly and 0115 1 honestly," at the end of the sentence at the top. 2 Here about 16 percent of respondents 3 claimed to disagree or strongly disagree, while 37 4 percent claimed to agree or strongly agree. And 5 again, stability is the trend. 6 Thank you. Are there any questions? 7 COMMISSIONER SCHENCK: I don't have any 8 questions. Thank you. 9 CHAIRMAN COX: Thank you very much. It 10 was a very good presentation. 11 MR. GRIEF: If I could just ask one 12 clarification. This information that Dr. Sizemore 13 prepared, I think right now, David, you're presenting 14 this how often? 15 DR. SIZEMORE: Quarterly. 16 MR. GRIEF: Quarterly. 17 Is that a practice the Commission would 18 like to continue? Do you want to have it less, more 19 frequently, only when there's changes that are of 20 significance? It's the Commissioners -- 21 COMMISSIONER SCHENCK: Well, looking at 22 that chart, there's not been a whole lot of variation. 23 I would think twice a year would be fine. 24 CHAIRMAN COX: Work for you? 25 COMMISSIONER REYES: Yes, that will 0116 1 work. 2 CHAIRMAN COX: Okay. Twice a year. 3 Very good. 4 MR. GRIEF: Thank you. 5 CHAIRMAN COX: And you might think 6 about all those gradations. I think maybe five or 7 three might be more helpful than seven. 8 DR. SIZEMORE: Three is much cleaner. 9 CHAIRMAN COX: Okay. Great. 10 In fairness to the Court Reporter, 11 let's take a very short break. 12 (Recess: 11:41 a.m. to 11:50 a.m.) 13 AGENDA ITEM NO. IX 14 CHAIRMAN COX: Okay. Let's come back 15 to order, please. 16 Report, possible discussion and/or 17 action on the transfers to the State and the agency's 18 budget. 19 Ms. Pyka. 20 MS. PYKA: For the record, my name is 21 Kathy Pyka, again Controller of the Lottery 22 Commission. 23 Tab IX includes your information on the 24 agency's transfers to the state and the agency's 25 operating budget. The first report in your notebook 0117 1 reflects transfers and the allocations to the 2 Foundation School Fund and the allocation of unclaimed 3 prizes for the period ending March 31, 2008. Total 4 cash transfers amounted to $574.8 million for the 5 first seven months of Fiscal Year 2008. This 6 represents a five percent decline from the amount 7 transferred through March of 2007. 8 The second page in your notebook 9 reflects the detailed transfers of the $574.8 million 10 transfer to the state. $554.5 million was the amount 11 transferred to the Foundation School Fund, with a 12 balance of $30.4 million transferred from unclaimed 13 lottery prizes. 14 The next document in your notebook 15 provides the calculation for the monthly transfer 16 amount. And then the final document under that first 17 section includes the cumulative transfers as well as 18 the sales and expenditures from 1992 to date. Our 19 cumulative transfers to the Foundation School Fund 20 through March of this fiscal year amount to 21 $10.2 billion. 22 The final item under this tab is the 23 agency's Fiscal Year 2008 method of finance summary 24 for the second quarter, ending February 29, 2008. The 25 Commission's lottery account budget for Fiscal Year 0118 1 2008 is $193.7 million. Of this amount, 86.2 percent 2 was expended and encumbered through the end of the 3 second quarter. 4 And our bingo operations budget, funded 5 by general revenue dollars, is $15.2 million, with 6 53.7 percent expended and encumbered through the end 7 of the second quarter. Both of these expenditure 8 rates are right on track for where we should be at 9 this point in the fiscal year. 10 I would be happy to answer any 11 questions that you might have. 12 COMMISSIONER SCHENCK: I have no 13 questions. 14 COMMISSIONER REYES: No questions. 15 CHAIRMAN COX: Thank you, Kathy. 16 AGENDA ITEM NO. X 17 CHAIRMAN COX: Item X I would like to 18 pass. 19 AGENDA ITEM NO. XI 20 CHAIRMAN COX: Item XI, report, 21 possible discussion and/or action on lottery 22 operations and services contract Amendment No. 8 23 credit calculation. 24 Ms. Pyka. 25 MS. PYKA: For the record again, Kathy 0119 1 Pyka, Controller for the Lottery Commission. 2 Commissioners, this morning I wanted to 3 provide you on Amendment No. 8 of the lottery 4 operations and services contract and the amount due to 5 the Commission for the second quarter of Fiscal Year 6 2008. 7 And for purposes of background, 8 Commissioner Reyes, this contract was effective with 9 us receiving credit calculations beginning the first 10 quarter of Fiscal Year 2007, just to give you a bit of 11 background on the amendment. 12 Section 10.3.3 of the amendment 13 provides the Commission an annual credit equal to 14 12 percent of GTECH's annual incremental revenue from 15 sales over the previous fiscal year for every tenth of 16 a percent increase in overall prize payout percentage 17 for our on-line and instant games. 18 Under this section of the contract, we 19 have a credit for the second quarter of $227,469. The 20 credit resulted as -- well, there was an increase in 21 prize payout in Fiscal Year 2008 for the second 22 quarter, as compared to Fiscal Year 2007, as well as 23 an increase to the lottery operator for their 24 incremental revenue. 25 Section 10.3.4 of the amendment is the 0120 1 other portion of the contract that requires GTECH 2 provide an annual credit to the Commission equal to 3 four and a half percent of the year-over-year decline 4 in dollar returns to the state if sales remain flat 5 and the prize payout increases by a tenth of a 6 percent. This section of the contract did not result 7 in a credit during the second quarter. 8 And I would be happy to answer any 9 questions for you. 10 COMMISSIONER SCHENCK: Thank you, 11 Kathy. Appreciate it. 12 COMMISSIONER REYES: No questions. 13 CHAIRMAN COX: Thank you, Kathy. 14 MS. PYKA: Thank you, Commissioners. 15 AGENDA ITEM NO. XII 16 CHAIRMAN COX: Item XII, report, 17 possible discussion and/or action on the 80th 18 Legislature. 19 Ms. Trevino. 20 MS. TREVINO: Good morning, 21 Commissioners. For the record, I'm Nelda Trevino. 22 I'm the Director of Governmental Affairs. 23 I provided you this morning with a copy 24 of the hearing notice for the House Licensing and 25 Administrative Procedures Committee. The Committee is 0121 1 scheduled to meet on May the 7th at 10:00 a.m. in Room 2 E2.010 at the Capitol Extension. 3 The committee noticed two interim 4 charges to be considered at their hearing. These 5 include the interim charge related to charitable Bingo 6 and the Bingo Enabling Act and the interim charge 7 related to charitable raffles. Phil Sanderson has 8 been asked to be in attendance to provide testimony 9 and to be an agency resource to the committee. 10 Additionally, the agency is finalizing 11 some documents that we will provide to the committee 12 in preparation for their hearing. 13 This concludes my report, and I will be 14 happy to answer any questions 15 COMMISSIONER SCHENCK: Well, Nelda, 16 from time to time I have these bright ideas or not so 17 bright ideas about things we would like the 18 Legislature to be thinking about as we go forward. Is 19 anyone keeping track of those or am I going to need to 20 remind you of them when we get closer to the 21 Legislature actually going into session? 22 MS. TREVINO: Maybe, Commissioner 23 Schenck, just to be sure, maybe we should just visit, 24 and just to be sure that we've got the list that 25 you're thinking of -- 0122 1 COMMISSIONER SCHENCK: I think that 2 would be a good idea. 3 MS. TREVINO: -- and to be sure that 4 we're not leaving anything out. 5 COMMISSIONER SCHENCK: No. 1 on my list 6 is those people who are cheating us on the revenues 7 when we get to the blue sheets at the back. I don't 8 think they should be allowed to sell cigarettes and 9 beer while they're holding onto lottery money, so 10 let's not forget that one. 11 MS. TREVINO: Okay. 12 COMMISSIONER SCHENCK: But thank you. 13 I have no questions germane to your report. 14 MS. TREVINO: Okay. 15 COMMISSIONER REYES: I have no 16 questions. 17 MS. TREVINO: Yes, sir? 18 CHAIRMAN COX: Okay. Nelda, let's talk 19 about the meeting on May 7th. 20 MS. TREVINO: Okay. 21 CHAIRMAN COX: Should I plan to be 22 there? 23 MS. TREVINO: I think it would be 24 helpful, Chairman Cox. Again, the committee has asked 25 for Phil to be there to provide some testimony and to 0123 1 be a resource. But I certainly think it's always of 2 benefit to have the chair of the agency, if possible, 3 to be able to be in attendance. 4 CHAIRMAN COX: Okay. Now, 5 Ms. Kiplin -- correct me if I'm wrong -- we can all 6 go, all three of us can go if we choose? 7 MS. KIPLIN: I need to actually look at 8 the Open Meetings Act a little more closely. I think 9 it's if you're requested to come -- 10 COMMISSIONER SCHENCK: Is that 11 inherently an open meeting that we're going to? 12 MS. KIPLIN: Beg your pardon -- but 13 it's not an open meeting of the Commission. There is 14 an exception that's been built into the Open Meetings 15 Act to address this issue, but I thought it was at the 16 time that the Commission was asked to come over. But 17 let me take a look at that more closely, and I'll get 18 you an answer. 19 CHAIRMAN COX: I know there was a time 20 when Tom and Betsy and I all went, and only Tom spoke. 21 And I would just like for Commissioner Schenck and 22 Commissioner Reyes to have the opportunity to come, if 23 it is available to them, or to know that there is that 24 opportunity, should they wish to come. At some point, 25 obviously, we want them to meet the members of that 0124 1 committee, and that would be an excellent opportunity, 2 if they were able to come. 3 MS. KIPLIN: And there is an exception. 4 I just need to see what triggers it. 5 CHAIRMAN COX: Okay. 6 COMMISSIONER SCHENCK: Well, couldn't 7 we, if we wanted to, just solve it by just noticing 8 that as an open meeting of this agency? 9 MS. KIPLIN: If you notice it as an 10 open meeting of this agency, then we would need to put 11 it up. And then we would have to have a -- 12 logistically have a record of that meeting as the 13 minutes. You would have to call the meeting to order. 14 And -- 15 COMMISSIONER SCHENCK: And that's "No"? 16 MS. KIPLIN: Yes. 17 (Laughter) 18 There's some logistical issues. You 19 could do it legally, but there are some logistical 20 issues that I think we -- 21 COMMISSIONER SCHENCK: I don't think 22 they want us taking over their meeting. 23 CHAIRMAN COX: I can assure you that 24 that's the case. 25 COMMISSIONER SCHENCK: Yes. 0125 1 CHAIRMAN COX: Okay. Anything else, 2 Nelda? 3 MS. TREVINO: No, sir. 4 CHAIRMAN COX: Thank you very much. 5 AGENDA ITEM NO. XIII 6 CHAIRMAN COX: Okay. Item No. XIII, 7 report, possible discussion and/or action on the 8 agency's contracts. 9 Mr. Jackson. 10 MR. JACKSON: Good morning, 11 Commissioners, Chairman Clowe -- or Cox. Excuse me. 12 For the record, my name is Tom Jackson, Purchasing and 13 Contracts Manager for the Commission. 14 Commissioners, in your notebooks under 15 Tab No. XIII is a report on prime contracts that has 16 been updated for your review. Several of the 17 contracts listed on this report are on the agenda for 18 possible discussion today. 19 If you have any questions at this time, 20 I would be happy to respond. 21 COMMISSIONER SCHENCK: I have a 22 question about Tracey Locke contract -- 23 MR. JACKSON: Yes, sir. 24 COMMISSIONER SCHENCK: -- that is 25 expiring 8/31 of '09. Are we engaged in discussions 0126 1 with them now about extending that? I think we are -- 2 MR. JACKSON: Yes, we are. 3 COMMISSIONER SCHENCK: -- I seem to 4 recall. 5 MR. JACKSON: Yes, that's correct. 6 COMMISSIONER SCHENCK: Are they 7 sympathetic to our advertising dollar constraints? 8 MR. JACKSON: Very much so, yes. 9 COMMISSIONER SCHENCK: Are they 10 sympathetic enough that they're making concessions to 11 us? 12 MR. JACKSON: They haven't at this 13 time, no, sir. 14 COMMISSIONER SCHENCK: Because there 15 are other agencies we could be considering. I know we 16 have HUB priorities and other things that they're 17 helping us with. But it sure would help us to help us 18 with the bottom line. 19 MR. JACKSON: We can certainly look 20 into that. 21 COMMISSIONER SCHENCK: If you want to 22 communicate to them that I'm concerned about that. 23 MR. JACKSON: Yes. 24 CHAIRMAN COX: That's an excellent 25 point, and let's just take it a little bit further. 0127 1 What was the basis, if you can describe it in a few 2 words, Tom, of the RFP that went out for advertising 3 services when they were awarded this contract? Was 4 price per unit of something a significant factor that 5 we looked at, or did we just look at: These guys look 6 like they draw pretty pictures and say pretty words? 7 MR. JACKSON: We looked very closely at 8 the budget we had, and then we also looked very 9 closely at what they were charging per individual 10 working on that contract, their dollar rates for the 11 individuals. That's where we scored -- basically 12 scored the RFP in that respect as far as their high 13 dollar people for the contract, the rates they were 14 charging us, basically clear on down through the 15 different personnel that would be working on the 16 contract, the fees that we were paying for the 17 advertising services. 18 CHAIRMAN COX: Okay. Well, I concur 19 completely with Commissioner Schenck, is we need to be 20 putting a fine pencil to this thing and asking them to 21 help us with things. You know, I think a starting 22 place would be, let's don't increase any salaries 23 or -- 24 MR. JACKSON: Right. 25 CHAIRMAN COX: -- billing rates. And a 0128 1 good place to go would be, let's see if we can cut 2 some of this down. 3 MR. JACKSON: Sure. We'll be looking 4 at that. 5 COMMISSIONER SCHENCK: And A good deal 6 of this $90 million is really being passed through to 7 the people whose billboards we're buying and the air 8 time that we're buying. And to the extent that we 9 can -- we're a big buyer of that air time. We ought 10 to be getting discounts, given the volume that we're 11 putting to these people. And if they're not going to 12 give us discounts, I expect Tracey Locke ought to be 13 looking to somebody else who will. If it's not going 14 to be Channel 8, then it will be Channel 5 or it will 15 be somebody else. But we really need them working for 16 us, given what we're dealing with in terms of the 17 constraints we have and how much money we're willing 18 to spend on these contracts. 19 CHAIRMAN COX: Excellent point. 20 MR. JACKSON: Yes. 21 CHAIRMAN COX: Ms. Melvin, have you 22 ever done any auditing of the Tracey Locke? 23 MS. MELVIN: Commissioner, no, we have 24 not done any formal audit work. We, some years ago, 25 began looking at some of the advertising expenses, but 0129 1 specifically we were looking at how we monitored 2 compliance with the contract requirements. 3 CHAIRMAN COX: Okay. Now, Tom, do you 4 do any auditing up there, or is anything that would 5 look like contract auditing, being sure that we're 6 getting the rate that we were told we would get and 7 being sure that they're out competing, Channel 8 and 8 Channel 5, and the like? 9 MR. JACKSON: We have contract 10 administrators that do monitor the contract, make sure 11 they are following the contract requirements. And the 12 end user does a lot of the monitoring of the contract, 13 to make sure they audit the receipts, all the 14 documentation for the bills that we receive from 15 Tracey Locke, to make sure that they -- we are paying 16 for what we are getting. 17 COMMISSIONER SCHENCK: That's a pretty 18 rudimentary form of audit, though. I'm talking about 19 something a little more aggressive in terms of having 20 them basically go beat on the vendors and suppliers. 21 I mean, Wal-Mart does it, and there is a reason why 22 they get it cheaper. And, you know, we're buying a 23 lot of air time. So it would be great if -- and I 24 believe, if I'm not remembering wrong, that was one of 25 the concerns the State Auditor had, was auditing these 0130 1 contracts, the need to set up an independent layer. 2 COMMISSIONER REYES: Does the contract 3 call for any types of auditing? 4 MR. GRIEF: If I could just offer up 5 some more information. The manner in which Tracey 6 Locke bills us is -- and I wish someone from Tracey 7 Locke were here -- it's probably the most burdensome 8 method put on any advertising vendor, certainly in the 9 State of Texas, could be in the country. The level of 10 detail that must be provided by our advertising 11 vendor, based on our experience in years gone by when 12 we did have an audit done by the SAO at one time of 13 our advising vendor, I would let you know that I 14 believe we do an outstanding job of monitoring every 15 nickel and dime in that contract. And we have a team 16 of people who are assigned to review every single 17 invoice and every single billing that comes through on 18 that particular contract. And we would welcome 19 Ms. Melvin's assistance or her review of our process, 20 if the Commission so desires. 21 CHAIRMAN COX: Well, I think what I 22 would like to say is that let's be sure that they're 23 doing what Commissioner Schenck says, that they're 24 competing, that they're asking for every discount they 25 can get on our behalf, that they're doing just 0131 1 whatever they can to get us the most for our 2 advertising buck, because we ain't got many of them. 3 MR. GRIEF: Would you like us to work 4 with Catherine in that regard, to provide some 5 assurance to the Commission on that? 6 CHAIRMAN COX: I think if you need that 7 help. But Tom is very good at what he does. And, you 8 know, I think really just to underscore that on every 9 contract, let's get everything we can for the buck. 10 MR. GRIEF: Very good. 11 CHAIRMAN COX: And, clearly, if 12 Ms. Melvin's help is needed, she's got some time set 13 aside to help with things like that. 14 MR. GRIEF: Okay. 15 AGENDA ITEM NO. XIV 16 CHAIRMAN COX: Okay. Item XIV, report, 17 possible discussion and/or action, including 18 extension, on the agency's drawings studio and 19 production services contract. 20 Mr. Jackson. 21 MR. JACKSON: Commissioners, you have 22 previously requested that we provide you with updates 23 to the contracts listed on the spreadsheet in your 24 notebooks. All updates today are for informational 25 purposes and no action is required on your part. It's 0132 1 just providing more information on these prime 2 contracts. 3 Agenda Item No. XIV is for the current 4 contract with M&S Works for drawing studio and 5 production services, which expires on August 31st of 6 this year, with one one-year extension remaining. It 7 is recommended by staff that we exercise our option to 8 extend the current contract for one year. 9 I would be happy to answer any 10 questions. 11 COMMISSIONER SCHENCK: The rate is not 12 changing on the contract, by granting the extension? 13 MR. JACKSON: No, they're not. 14 CHAIRMAN COX: Okay. This doesn't 15 require any action, does it? 16 MS. KIPLIN: No, sir, it does not. 17 CHAIRMAN COX: Would you just, for 18 benefit of Commissioner Reyes, talk a little bit about 19 what authority this board, doesn't have on purchasing. 20 MS. KIPLIN: Yes, sir, I would be happy 21 to. 22 For procurements and contracts, the 23 Executive Director is the contract officer. That 24 power is left with the Executive Director. The 25 Commission sits in somewhat of an appellate body, so 0133 1 that persons who feel aggrieved by a decision by the 2 Executive Director, either by the issuance of a 3 procurement document or by contract award, may appeal 4 that decision to the governing body. 5 I can tell you, though, historically, 6 since the very beginning of the Lottery Commission 7 back in 1993, there were certain contracts that were 8 considered to either be prime contracts, primary 9 contracts or major contracts. And those words were 10 pretty much interchangeable for a particular cluster 11 of contracts in which the Commission, the governing 12 body, the three-member Commission, said, "Those 13 contracts we want to be kept informed of what is 14 occurring." And so that is what drives these 15 contracts coming to you, because these are considered 16 to be that cluster of the prime, major, primary 17 contracts. 18 There is one contract that bubbles up 19 to the very top where the Commission has indicated to 20 the Executive Director and staff a desire, an 21 interest, a very strong interest in wanting to be much 22 more involved in that. And through the course of 23 time, I think there has been an acknowledgment of 24 that, both by the Legislature in adopting an amendment 25 to Chapter 467, which I'll get into later, and also 0134 1 through the reports that have been issued in 2 particular by the Sunset Commission and I believe also 3 the State Auditor's office, that there needs to be 4 more Commission oversight and more involvement; 5 frankly, not only over just the GTECH contract but 6 these contracts that are considered to be the major 7 contracts. 8 And so when Mr. Jackson comes up, he 9 says, "This doesn't require action by the Commission 10 in terms of voting to approve that amendment." 11 Certainly the Commission -- and I can recall for sure 12 in '97 -- directed the Executive Director, and 13 particularly on the lottery operator contract, to go 14 out to bid. 15 So there are different ways that the 16 Commission has expressed a strong interest in its 17 oversight responsibilities 18 Is there more that you would like for 19 me to share? 20 CHAIRMAN COX: Maybe I'm wrong. When 21 the Sunset Advisory Committee came through here, they 22 recommended that the Commission take on more 23 responsibility for purchasing, but that was never 24 enacted. 25 MS. KIPLIN: That's correct. There 0135 1 were sunset bills that were drafted. And in the 2 sunset bills, there were changes, revisions to the 3 State Lottery Act, that would include the Commission 4 being part of, being more of the contract officer or 5 the contracting authority. Those bills did not pass. 6 CHAIRMAN COX: So we have a collegial 7 sharing of the authority with the Executive Director 8 and his staff so that they keep us informed and we 9 have input, and I think it's worked satisfactorily in 10 the past. 11 COMMISSIONER REYES: All right. 12 CHAIRMAN COX: Okay. Tom, anything 13 else? 14 MR. JACKSON: That's all on that one, 15 sir. 16 CHAIRMAN COX: Okay. You're still up, 17 aren't you? 18 MR. JACKSON: Yes, sir. 19 AGENDA ITEM NO. XV 20 CHAIRMAN COX: Okay. Item No. XV, 21 report, possible discussion and/or action, including 22 extension, on the agency's contract for drawings audit 23 services. 24 MR. JACKSON: Commissioners, the 25 current contract with Davila, Buschhorn & Associates 0136 1 for drawing audit services expires on August 31st of 2 this year, with three one-year extensions remaining. 3 In a letter dated February 12, 2008, the State 4 Auditor's officer delegated to the Texas Lottery 5 Commission the authority to extend the term of the 6 existing contract through August 31st of 2009. It is 7 recommended by staff that we exercise our option to 8 extend the current contract for one year. 9 I would be happy to answer any 10 questions. 11 COMMISSIONER SCHENCK: I don't have any 12 questions. 13 COMMISSIONER REYES: These contracts 14 were bid out when they were first initiated? 15 MR. JACKSON: Yes. 16 COMMISSIONER REYES: And they had these 17 options that go with it, so you're exercising the 18 options? 19 MR. JACKSON: Yes, sir, that's correct. 20 COMMISSIONER REYES: They'll come up 21 for a renewal next year? Or this one, when does it 22 come up? 23 CHAIRMAN COX: Mike, did you want to 24 work on that one? 25 MR. FERNANDEZ: I just wanted to add 0137 1 just a bit of information. Really, I'm kind of 2 getting in our Internal Auditor's business. 3 But there was legislation passed that 4 required all state agencies to send their -- if they 5 intend to engage an audit firm to do any audits, 6 legislation was passed that required all state 7 agencies to ask permission to conduct the contract for 8 that audit, of the State Auditor's office. 9 So when Tom makes a comment about that 10 we received a letter, what had occurred is that we had 11 to go to the State Auditor's office in saying that we 12 had this contract that was getting ready to expire or 13 we had a contract that had extensions on it and that 14 we either wanted to execute the extension or that we 15 wanted to put it out for bid and to see if we could do 16 that. And the State Auditor then responds. And I 17 think -- what? -- two years ago they actually 18 conducted the audit contract, if you will. 19 But subsequent to that, when we've gone 20 back, they have given us the authority to go forward 21 and issue the contract. 22 What we do in most of our contracts, 23 Commissioner, is depending on the type of contract, 24 the difficulty to get people to bid -- many cases 25 with, for whatever reason, we won't get bidders. 0138 1 We'll get one bidder. So we've found that -- 2 CHAIRMAN COX: We're not that easy to 3 deal with. 4 MR. FERNANDEZ: We're not that easy to 5 deal with, for whatever reason. So we try to build in 6 extensions, and I think most of those extensions are 7 at the current rate. So you won't see a cost 8 escalator in. I think there's one or two that we 9 have, but most of ours are not like that. 10 So what occurs is that we get out about 11 six months or eight months, perhaps a year in some 12 cases. Depending on the difficulty of that contract, 13 we will -- Tom's staff will begin to speak with the 14 business unit responsible for that to see where they 15 are and what their desire is, whether we want to put 16 that back out to bid or whether we want to execute the 17 option to extend. 18 And in these cases -- I believe that 19 there are three today on the agenda of contracts that 20 the staff is recommending -- or the staff intends to 21 extend those contracts for another year. So that's 22 what you're seeing. But they are competitively bid 23 COMMISSIONER REYES: But if you only 24 get one bidder, that's not very competitive. 25 MR. FERNANDEZ: That is not very 0139 1 competitive. 2 COMMISSIONER SCHENCK: You are hitting 3 on what I think is my biggest concern on this 4 Commission. 5 CHAIRMAN COX: Let me talk a little bit 6 about the one that I think we're focused on right now, 7 and that's the drawings audit. Is that where we are? 8 MR. FERNANDEZ: Is that the one you're 9 on, Tom? 10 MR. JACKSON: Yes -- 11 CHAIRMAN COX: Okay. 12 MR. JACKSON: -- drawings audit 13 services. 14 CHAIRMAN COX: This was originally done 15 by Coopers & Lybrand, and that was at a time when 16 lotteries were sexy and being on there got Coopers & 17 Lybrand advertising like Price Waterhouse gets on the 18 Academy Awards. What it turns out to be, however, is 19 a really awful job, because they have to come over 20 here -- 21 COMMISSIONER SCHENCK: For an 22 accounting firm. 23 CHAIRMAN COX: -- six days a week, 24 several times a day, and do the same doggone thing 25 over and over and over and over again. 0140 1 MR. FERNANDEZ: It's really boring. 2 That's correct. 3 CHAIRMAN COX: And we are fortunate we 4 got a bidder. 5 MR. FERNANDEZ: That's correct; that's 6 absolutely correct. The other thing that we do do -- 7 and we do realize those kinds of situations in other 8 areas. What we do do is that when we get ready to put 9 out a bid, what Tom's staff will do is that they will 10 go to the state list of bidders that is kept by the 11 Comptroller, I guess -- 12 MR. JACKSON: Yes. 13 MR. FERNANDEZ: -- of Public Accounts 14 now, since it moved from Purchasing Commission -- and 15 what they will do, based on what we're after, what 16 types of services or commodities, they will have 17 listed all of the vendors that have been approved, if 18 you will -- paid their money and got on the list -- 19 with the State of Texas. And what Tom's staff will do 20 is that they will send to those bidders that meet that 21 criteria, offer those services, a notice that we're 22 currently going out to bid and ask them if they would 23 like to receive a copy of that RFP when it's issued. 24 And when we issue that -- and we go 25 through the process, and we have bidders' meetings and 0141 1 10 people show up or one person -- or they don't have 2 bidders meetings, what Tom's staff will do, is if we 3 only get one bid or we only get two bids, his staff 4 will go back with letters to those people that had 5 shown an initial interest in that bid, to try and 6 understand why they chose not to bid. 7 And, in fact, over the past few years, 8 I have spoke personally with some of the senior people 9 or principals in some of those companies, to try and 10 gain an understanding of why they don't choose to bid. 11 And subsequent to that, we have come back and we have 12 worked with our procurement staff, we worked with our 13 legal staff to do some things to hopefully improve the 14 relationships and encourage people to bid. 15 CHAIRMAN COX: We have the same 16 situation with our financial audit. No Big Four firm 17 will even touch us, and I've called them and asked 18 them to bid. They won't touch us. Fortunately, there 19 is a good firm in town that is willing to do our audit 20 for a fair price, and the State Auditor hired them. 21 Once we hired them, the State Auditor hired them 22 again. And then the State Auditor delegated that 23 authority back to us. 24 MR. JACKSON: That's correct. 25 CHAIRMAN COX: But auditing this agency 0142 1 is not a plum. I wish it were. 2 COMMISSIONER SCHENCK: Well, the next 3 one is the one I'm going to have questions about. 4 CHAIRMAN COX: Okay. Does that finish 5 Item XV? 6 MR. JACKSON: Yes, sir. 7 CHAIRMAN COX: Okay. Get ready. 8 AGENDA ITEM NO. XVI 9 CHAIRMAN COX: Item XVI, report, 10 possible discussion and/or action, including extension 11 on the agency's instant ticket manufacturing and 12 services contract. 13 Mr. Jackson. 14 MR. JACKSON: The current contract with 15 Scientific Games International for instant tickets and 16 services expires on August 31st of this year, with 17 four one-year extensions remaining. The staff has 18 recommended that we exercise the option to extend the 19 current contract for one year. 20 We're ready for questions. 21 COMMISSIONER SCHENCK: Well, I think 22 you've heard me on this subject before. I'm sensitive 23 to the lack of apparent competition for this business. 24 We have two -- this is a big contract. 25 MR. FERNANDEZ: Absolutely. 0143 1 COMMISSIONER SCHENCK: It's I think the 2 second biggest contract that we have, unless -- Tracey 3 Locke could be bigger. 4 MR. FERNANDEZ: It probably is. 5 COMMISSIONER SCHENCK: You'll recall 6 that we had an excellent presentation from Scientific 7 Games when I first came on board. And we asked the 8 question at the time, whether they would commit to bid 9 competitively for the contract that's currently held 10 by GTECH. And I think I got what I would describe -- 11 or we got -- a non-responsive, non-committal answer. 12 And we had an excellent presentation 13 from Mr. Patel recently where I expressed to him my 14 concern that there didn't seem to be as vigorous 15 competition as you would expect for these big 16 contracts. I understand that the barriers to entry 17 are very high, that the cost of getting competition 18 ramped up is also very high and, for that reason, 19 these are long-term contracts. 20 So I think we're, from everything I can 21 tell, being very well serviced by both of these 22 companies. But these are serious, big contracts. And 23 I think we need, if we have them, peoples who speak 24 English with a German accent and don't blink, to be 25 looking across the table when we're doing these 0144 1 negotiations. 2 And it seems to me that the Scientific 3 Games contract, we basically really have four more 4 years on it before it's over and we're renegotiating, 5 with no one potentially in the room bidding against 6 them. 7 MR. FERNANDEZ: Well, let's talk about 8 that for a second, and our General Counsel can, you 9 know, cut me off. 10 When we bid those contracts, the 11 instant ticket manufacturing contracts, what we do -- 12 and, as you point out, which is a very apt point -- is 13 there aren't very many instant ticket manufacturers. 14 COMMISSIONER SCHENCK: There are less 15 than there were last year. Right? 16 CHAIRMAN COX: That's right. 17 MR. FERNANDEZ: When you get down in 18 there, you're talking about three or four, mainly two, 19 to be honest. So what we do is that we spend an 20 extensive amount of time with Michael Anger, Robert 21 Tirloni, Dale Bowersock, staff, and we look at what 22 they're printing, what the size and shapes and all of 23 the various things that they want on their tickets and 24 they're thinking about and they're seeing in the 25 industry or they're hearing about. 0145 1 And when we go out to bid, we ask those 2 companies to bid what we call a matrix of tickets and 3 the various types of things that they can put on those 4 tickets and the various layers of things they put on 5 those tickets and the size and shapes and colors. 6 And then we come back and we negotiate 7 every one of those sales, every one of those sales 8 with the tickets that -- vendors that we're meeting 9 with. And what we believe today -- and this is my 10 job -- what we believe today is that I believe that we 11 have probably one of the best, if not the best, 12 instant ticket pricing structures in terms of any 13 state lottery. Now, I don't know about the private 14 sector. 15 So we think we do do a good job doing 16 that. And that doesn't mean that there aren't -- and 17 we're continually looking at ways to improve that. 18 But that doesn't preclude us in going back, prior to 19 an extension of those contracts, and going back over 20 that same ground again. 21 COMMISSIONER SCHENCK: I have no doubt 22 that you're doing everything that you possibly can on 23 these contracts. I'm comfortable with that. What I'm 24 talking about is really an externality, that I want us 25 looking much further down the road to be concerned 0146 1 about. 2 In law there is a doctrine called the 3 pre-exiting duty rule. That's basically, you know, if 4 you negotiate with a crew to man your ship and you get 5 out in the middle of the Atlantic, they can just put 6 their feet up on the decks and say, "You know what? I 7 want twice as much." 8 MR. FERNANDEZ: Right. 9 COMMISSIONER SCHENCK: And I think 10 we're getting out into the middle of the ocean, that 11 if we don't have competitors to bid on these 12 contracts, it will come -- let me think -- 13 September 1, 2011. 14 MR. FERNANDEZ: Absolutely. 15 COMMISSIONER SCHENCK: And they can 16 say, "You know what?" -- 17 MR. FERNANDEZ: Absolutely. 18 COMMISSIONER SCHENCK: -- "It's not 19 going to be what you're used to." 20 MR. FERNANDEZ: Absolutely. And let 21 me -- I want to talk about that. And the next item on 22 the agenda is Item XVII, Commissioner Schenck, and I 23 think that's an excellent place to have this 24 discussion. 25 Tom has a one-year extension on the -- 0147 1 his last item is the instant ticket vendor, SciGames. 2 And our intent is to extend that for one year. And so 3 if we're closed with that, then I would like to move 4 on to talk about -- 5 CHAIRMAN COX: Let me just say a couple 6 of things about that. And correct me if I'm wrong, 7 Mike. We don't have instant ticket contracts just 8 with Scientific Games? 9 MR. FERNANDEZ: No, sir. We have 10 another vendor, Pollard -- 11 MR. JACKSON: Pollard -- 12 MR. FERNANDEZ: -- Banknote out of 13 Canada. 14 CHAIRMAN COX: We have another vendor. 15 And if there were other qualified people out there, we 16 would have contracts with them, too? 17 MR. FERNANDEZ: Well, we probably 18 wouldn't at this time. We could. What we did is that 19 we had a primary and secondary vendor, is how that 20 went out. And at the time, there was only one 21 other -- to my recollection, there was only one other 22 ticket vendor which fell out of competition, if you 23 will, when we got down to cost and other factors. 24 CHAIRMAN COX: So what you've got here 25 is a situation where, if we didn't have Scientific 0148 1 Games, we wouldn't be able to keep operating the way 2 we operate? 3 MR. FERNANDEZ: Well, I would -- I hate 4 to make the statement, because I agree with what 5 Commissioner Schenck said, you know. I agree on this 6 point absolutely. 7 CHAIRMAN COX: Well, but -- 8 MR. FERNANDEZ: But there are in the 9 marketplace -- not the ones that we have been dealing 10 with. Now, if there are others that we're unaware of, 11 but they're just not there. 12 CHAIRMAN COX: So there are two ways to 13 deal with a contract. Now, the public sector, the 14 government sector tends to do it on bidding, and then 15 they tend to either go with the lowest price or best 16 value or some combination, based on a matrix. 17 MR. FERNANDEZ: Correct. 18 CHAIRMAN COX: And the private sector, 19 that isn't the way I did it. I picked the vendor I 20 wanted, and then I beat them down until I got the 21 price I wanted. And some of what we do here is a 22 little bit of that. You know, we don't just say, "You 23 put in your price and, because you're the only one, we 24 take your price." We take every bite at the apple 25 that we can take at the apple. Correct me if I'm 0149 1 wrong. 2 MR. FERNANDEZ: We try to. That's 3 correct. 4 COMMISSIONER SCHENCK: But there's only 5 so hard you can push the guy who fixes the fence, if 6 there's only one guy who fixes fences. 7 MR. FERNANDEZ: That's correct. 8 CHAIRMAN COX: That's true. It's 9 called a monopoly. 10 MR. JACKSON: Unless you fix your own. 11 MR. FERNANDEZ: Well, I'm going to talk 12 about that, but I want to do it under this other item. 13 CHAIRMAN COX: Do you want me to call 14 the next item? 15 MR. FERNANDEZ: Yes, I do. 16 COMMISSIONER SCHENCK: We're not asked 17 to do anything on item No. XVI? 18 MR. FERNANDEZ: No, sir. It's just 19 an information -- 20 COMMISSIONER SCHENCK: I would like to 21 keep thinking about Item XVI and XVII together. 22 CHAIRMAN COX: Okay. Well, let me call 23 XVII and we'll do that. 24 AGENDA ITEM NO. XVII 25 CHAIRMAN COX: Item No. XVII, 0150 1 consideration of and possible discussion and/or action 2 on the lottery operator contract, including whether 3 the negotiation of the lottery operator's contract in 4 an open meeting would have a detrimental effect on the 5 Commission's position in negotiations of the lottery 6 operator contract. 7 Okay. Now, this has got arms and legs 8 of all kinds -- 9 MR. FERNANDEZ: Right. This is -- 10 CHAIRMAN COX: -- because y'all want to 11 talk about what y'all want to talk about and Kim wants 12 to talk about what she wants to talk about. So why 13 don't we start by letting Kim talk about what she 14 wants to talk about. 15 MS. KIPLIN: Commissioners, I did want 16 to bring to your attention that there is an 17 opportunity for the Commission to go into a closed 18 meeting relating to the negotiation of the lottery 19 operator's contract, if the Commission determines in 20 writing that an open meeting would have a detrimental 21 effect on the Commission's position in the 22 negotiations. 23 So it's at the discretion of the 24 Commission whether the Commission would like to 25 entertain going into executive session. But first you 0151 1 must make a determination, a written determination -- 2 and I have that document, if that's the desire of the 3 Commission -- that an open meeting would, in fact, 4 have a detrimental on the Commission's position in the 5 negotiations. 6 CHAIRMAN COX: Okay. 7 MS. KIPLIN: And I'll leave it at that 8 for you-all. And then I can read, if you want to get 9 to that, what I've got written for the Commission 10 determination. I'll pass it out. 11 CHAIRMAN COX: Let me just say that in 12 my seven years on this board -- or I guess it's not 13 quite seven yet, but it's getting close to it -- we 14 have never exercised this option to negotiate 15 privately, not while I was here. 16 Now, Mike, is there any reason that you 17 believe we should go into executive session to talk 18 about this contract? 19 MR. FERNANDEZ: Yes, I believe there 20 is. I believe that laying out this amendment is not 21 that part of the topic. I would say that the 22 amendment we should lay out as we have always done. 23 But I think the follow-up discussion of that contract 24 issue that Commissioner Schenck has raised earlier I 25 think would be of benefit for us to discuss in an 0152 1 executive session. 2 CHAIRMAN COX: Okay. Ms. Kiplin? 3 MS. KIPLIN: I think to be able to do 4 that, Mr. Fernandez, it's going to have to be on the 5 specific, not the more global -- 6 MR. FERNANDEZ: Well, I think -- 7 MS. KIPLIN: -- because -- 8 MR. FERNANDEZ: Excuse me for 9 interrupting you, Counsel. 10 MS. KIPLIN: Sure. 11 MR. FERNANDEZ: But I think that the 12 questions -- and certainly -- I certainly don't have 13 any idea what the Commission may choose to ask -- but 14 given the line of questioning I've heard from the 15 Commission today, I suspect I will hear those very 16 same questions relative to the topics that will be 17 laid out in this amendment, and that's relative to 18 competition. 19 MS. KIPLIN: Okay. 20 MR. FERNANDEZ: And I think that that 21 is the part of the discussion -- and that's why I 22 phrased it in two parts -- that would be of benefit 23 for the Commission to hear candidly in an executive 24 session. 25 MS. KIPLIN: And you also, just as part 0153 1 of the Open Meetings Act, have the ability to go in to 2 receive legal advice on the lottery operator contract. 3 And I do have a prepared written determination if 4 y'all want to continue your deliberations. 5 CHAIRMAN COX: Would it be appropriate, 6 Counsel, for me to call a two-minute recess and talk 7 to Mr. Fernandez? 8 MS. KIPLIN: Yes, it would be, and -- 9 yes, it would be. 10 CHAIRMAN COX: Okay. Take about a 11 two-minute recess. 12 (Recess: 12:30 p.m. to 12:34 p.m.) 13 CHAIRMAN COX: Let's come back to 14 order, please. 15 Commissioners, after a discussion with 16 counsel and with Mr. Fernandez, we have concluded that 17 it would be appropriate to have this decision in 18 public. 19 So, Mike, you want to start reporting 20 on Item No. XVII -- 21 MR. FERNANDEZ: Yes, sir. 22 CHAIRMAN COX: -- and the Commissioners 23 will pursue their questions as they see fit. 24 MR. FERNANDEZ: Yes, sir. Good 25 afternoon, Commissioners. My name is Mike Fernandez. 0154 1 I'm the Director of Administration. 2 Item XVII in your book addresses 3 Amendment No. 11 to the GTECH contract for lottery 4 operations and services. This contract began 5 October 2001 and will terminate August 31, 2011. The 6 staff proposed to amend the contract to revise 7 trademark and service mark search requirements, 8 address the schedule for transporting instant ticket 9 inventory, specify the manner of making changes to the 10 business subcontracting plan, provide additional 11 express point check-a-ticket terminals and revise the 12 contract compliance review process. 13 The six proposed changes identified in 14 the amendment can be grouped into three categories: 15 Address and formalize current business practices, 16 changes recommended by the State Auditor's office, and 17 the provision of additional equipment, in response to 18 changes in technology. Staff is asking Commission 19 approval to proceed with the amendment. 20 And I would be happy to answer any 21 questions. 22 CHAIRMAN COX: Now, Mike, are you 23 asking approval or is this a reporting item? 24 MR. FERNANDEZ: It's been my feeling, 25 or since I've been here and dealing with this, is that 0155 1 when we amend the GTECH contract, we're asking the 2 Commission to proceed on this. 3 MS. KIPLIN: This twist where the 4 Commission has gone on the record in terms of 5 evidencing its approval on a go-forward basis as it 6 relates to just this contract. 7 CHAIRMAN COX: Okay. 8 MS. KIPLIN: And it's done it in 9 several different ways. There has been approval of 10 what the staff is recommending. There has been a vote 11 to direct the Executive Director to take on different 12 actions. But it certainly is in keeping with, I 13 think, the intent and the recommendations by both the 14 Sunset Commission and the State Auditor's office. 15 CHAIRMAN COX: Okay. So with that, 16 you've made a recommendation that we approve this. Is 17 there any discussion, Commissioners? 18 COMMISSIONER SCHENCK: Yes. 19 Mike, the changes are shown in the 20 highlighted -- or I'm sorry -- the bold and italicized 21 language? 22 MR. FERNANDEZ: Yes, sir. 23 COMMISSIONER SCHENCK: Okay. And I'm 24 fine with the trademark and the HUB contracting 25 changes. There's no other changes, as I understand 0156 1 it, to this contract? 2 MR. FERNANDEZ: That's correct. 3 COMMISSIONER SCHENCK: Okay. For now, 4 I don't think I want to push much harder on this 5 question, other than you've sat through these meetings 6 before and heard my views on the need for identifying 7 competition. This particular amendment seems to me to 8 have nothing to do with -- 9 MR. FERNANDEZ: That's correct. 10 COMMISSIONER SCHENCK: -- the broader 11 questions of whether we're getting all the value we 12 might from the competition that would exist in this 13 industry. And to make the record clear, I have seen 14 nothing but excellent service from all of our vendors. 15 But I just think -- I get sensitive when I see what 16 appears to be a lack of interest in competitive 17 bidding. 18 And given the size of these contracts, 19 I think it's very important for us to keep our eye on 20 that ball and am more concerned about the Scientific 21 Games contract, given that we're amending that, but 22 not suggesting that's an inappropriate thing to do at 23 this time. 24 MR. FERNANDEZ: Absolutely. And 25 really, Commissioner, to address your concern, which 0157 1 is shared by I know the Commission, your colleagues, 2 and certainly the agency itself, one of the things 3 that we have done -- and we believe that -- we like to 4 believe that we're out in front of this contract end 5 date. And, as you pointed out earlier, it's 6 August 31, 2011. 7 That was set in motion with an effort 8 that was referred to internally as Plan B. And 9 really, from whence that came was, what happened if 10 one day that operator was gone, for whatever reason, 11 what would we do and what actions would we take? 12 And at that time, in working with my 13 boss, Gary Grief, and the other divisions and then 14 with our staff, we began to formulate what we refer to 15 as Plan B. And that would lay out what we believe 16 were the various components of the service providers' 17 operation, at a very light level -- all right? -- at a 18 very high level. 19 And we said, "Well, if they went away, 20 what would we have to do and how would we go about 21 doing that?" And what that became was really the 22 underpinning for the agency to move forward with the 23 procurement in 2011. And once that was laid out, it 24 went to the Commission. I believe it was sent to 25 legislative offices or oversight committee and others 0158 1 to review, which I believe they were in concurrence 2 with. 3 And then ultimately the staff came back 4 and recommended to the agency and to the Commission 5 that we move forward with identifying a consultant 6 that would come in and help the staff review the 7 services that were currently being provided, the 8 services that the agency was providing and what the 9 resource requirements were of those, and associated 10 costs, and then to look in turn in the marketplace to 11 see who also provided those services. In some cases, 12 there could be service providers that provided 13 numerous services, others singular: Transaction 14 processing, warehousing, distribution, et cetera. So 15 what we had done is that we had put together and RFP, 16 released that RFP, received bids from that RFP, and 17 that is working its way through the process. 18 Now, what we believe is that when we 19 have that consultant on staff and with our line of 20 business experts, that we're going to be able to 21 identify the various components, the resource 22 requirements, the associated cost to perform those 23 services, and then in turn look in the marketplace and 24 identify what companies provide those services at what 25 levels and what we would believe would be the 0159 1 appropriate cost to support those services. 2 Out of that will come business cases, 3 and those business cases will ultimately be reviewed 4 by the staff, presentations will be made to the 5 management team, and then ultimately it will come to 6 the Commission in terms of how that might look, what 7 are the options that the agency and the State of Texas 8 would have? Is it best to bundle that and try to find 9 one service provider that can do it? Is it best to 10 break off components of that and bid those components 11 out? And is it more economical to do so? Are there 12 things that might be brought inside that again would 13 provide greater economies to the State of Texas? We 14 don't know those answers. And I'm not saying the way 15 it is isn't the way it will be. I have no idea. But 16 that is the process that we're going through, because 17 of the very question that you just asked. 18 COMMISSIONER SCHENCK: I appreciate 19 that. 20 MR. FERNANDEZ: I hope that that's 21 helpful. 22 COMMISSIONER SCHENCK: It is. 23 CHAIRMAN COX: And I will say, in 24 addition to that, that Gary and his staff are also 25 working to identify potential bidders for the entire 0160 1 process. 2 MR. FERNANDEZ: That's correct. 3 CHAIRMAN COX: And I feel confident 4 personally that there will be at least three. 5 COMMISSIONER SCHENCK: I mean, I recall 6 now my first meeting here, Mike, in October, came in 7 with news that the printing presses were being pulled 8 out of Bexar County as a result of an acquisition 9 Scientific Games made. And they explained that this 10 is a step forward and this was progress. And that 11 equipment I think they were moving someplace else, and 12 a hundred or so people in Bexar County were not going 13 to be having jobs printing tickets for anybody 14 anymore, not that they printed our tickets, at the 15 time anyway. 16 But it didn't seem that there was a 17 whole lot of competition at the time. As I recall, 18 the FTC was still looking at the acquisition that they 19 were making. I'm not sure where ultimately that came 20 out. But I haven't seen a whole lot of competition in 21 this process. 22 And I think, obviously, as part of this 23 analysis you're doing you're contemplating our options 24 fully. And the fact that we put too many eggs in one 25 basket is part of our competitive bidding ability. 0161 1 And, obviously, you're sensitive to that, as am I. 2 And again, I think we're getting excellent service 3 from our vendors and our partners, and we want to make 4 sure that continues. 5 But our primary charge here is on 6 behalf of the citizens of the state, to make sure the 7 games are operated fairly and that we're returning 8 everything that we possibly can to the school 9 foundation. So this is the second most -- well, it's 10 mirror images. This is the most important thing that 11 we do. 12 MR. FERNANDEZ: Absolutely. And we 13 share your feelings and concerns. And I would say to 14 you, as I would any of the Commission, you're welcome 15 at any time to call us and we will provide a full 16 briefing on what that process -- what process we're 17 going through, what our feelings are about that. 18 COMMISSIONER SCHENCK: I think that 19 would be helpful. And I've been having conversations 20 that I think will be good to -- or I've been having 21 ideas, I should say, that I think will be good to run 22 by you. 23 MR. FERNANDEZ: And we appreciate that, 24 too, also. And I offer that again to any of the 25 Commission -- commissioner Reyes -- at any time. 0162 1 COMMISSIONER REYES: Based on your 2 explanation, I have no other comments. 3 CHAIRMAN COX: Okay. So you need a 4 motion to approve the staff recommendations? 5 MR. FERNANDEZ: To go forward, yes, 6 sir. 7 COMMISSIONER SCHENCK: I move that we 8 adopt the staff recommendation. 9 COMMISSIONER REYES: I'll second it. 10 CHAIRMAN COX: All in favor, say "Aye." 11 COMMISSIONER SCHENCK: Aye. 12 COMMISSIONER REYES: Aye. 13 CHAIRMAN COX: Aye. 14 Motion carries 3-0. 15 MR. FERNANDEZ: Thank you very much. 16 CHAIRMAN COX: Thank you. 17 AGENDA ITEM NO. XVIII 18 CHAIRMAN COX: Okay. Item No. XVIII, 19 report and possible discussion and/or action on the 20 agency's HUB program and/or minority business 21 participation, including the agency's mentor Protégé 22 Program. 23 Ms. Bertolacini. 24 MS. BERTOLACINI: Good morning, 25 Commissioners. For the record, my name is Joyce 0163 1 Bertolacini, and I'm the coordinator of the TLC's 2 Historically Underutilized Business Program. 3 The Texas Procurement and Support 4 Services Division of the Comptroller of Public 5 Accounts released the Fiscal Year 2008 Semiannual 6 Statewide HUB Report on April the 15th. The report 7 includes data on the state's utilization of HUBs for 8 the first six months of Fiscal Year 2008. 9 I have provided a series of summary 10 reports to you today, which analyze the TLC's HUB 11 performance for this six-month period, and I would 12 like to highlight some key points for you. 13 The TLC's overall HUB utilization 14 during the first six months of Fiscal Year 2008 was 15 29.6 percent as compared to 26.1 percent for the same 16 report period in Fiscal Year 2007. The agency 17 increased its HUB spending by over $2.7 million. 18 During this report period, the agency exceeded the HUB 19 goals for two report categories, and those are 20 professional services and commodities. And I would 21 like to also mention that the professional services 22 category is where the Davila, Buschhorn & Associates 23 contract falls for the drawings audit, just for your 24 information. 25 And we also showed improvement in the 0164 1 two remaining categories of the report. The agency 2 had a significant HUB percentage increase in the area 3 of commodity purchasing during this report period, as 4 you can see. 5 Although direct spending with HUB- 6 certified companies decreased somewhat during the 7 report period, subcontracting payments to HUB vendors 8 increased by $2.9 million. Subcontracting payments 9 made to minority-owned HUBs have also continued to 10 rise. 11 The final report in the series shows 12 that the TLC ranked No. 14 in total expenditures 13 captured by the statewide HUB report. And I should 14 mention, perhaps for Commissioner Reyes, that not all 15 expenditures made by the agency are included in this 16 total. So there are only certain payment codes that 17 are determined to fall within this report. Salaries 18 and leases and things of that nature are not included, 19 as an example. 20 If you look at the TLC's performance in 21 relation to the other 13 largest spending agencies of 22 the state, the TLC ranked No. 1 by overall HUB 23 percentage, and that is again just looking at the top 24 14 top spending agencies. 25 Finally, for this report period, the 0165 1 TLC was included on the list of the top 25 agencies 2 spending more than $5 million that have the largest 3 percentage spent with HUBs. This is not included in 4 your reports, but we ranked No. 13 on this list of the 5 top 25 agencies that spend more than $5 million. And 6 this represents an improvement over last year, again, 7 when the TLC ranked No. 20 on the list. 8 Regarding the agency's mentor Protégé 9 Program, we currently have five active Mentor Protégé 10 relationships. The mentors have all had at least one 11 meeting with their protégés. Goals for the years have 12 been developed, and I will be providing additional 13 information as it becomes available. 14 And just to fill you in, this is a 15 statewide program that most agencies are required to 16 have in place, and it involves matching of HUB vendors 17 with protégé companies that can provide developmental 18 assistance to them in areas where they need to improve 19 their business, so that's basically what it is. 20 That's all I have for you today, but I 21 would be happy to answer any questions you might have. 22 COMMISSIONER REYES: You capture the 23 subcontracting for some of our contractors. Is that 24 included in here? 25 MS. BERTOLACINI: Yes. If you look at 0166 1 the various summary reports, it should explain at the 2 top which ones include the subcontracting and which 3 ones don't. The first one does. The first one is the 4 total. Summary Report No. 1 shows it does include the 5 subcontracting. 6 The second one just breaks out the 7 direct spending -- I'm sorry. It breaks it out in two 8 parts. You'll see the direct spending. The middle 9 section of the report is the subcontracting and then 10 the total. It's the third one that only focuses on 11 the direct spending without including the 12 subcontracting dollars, and that's just to give you a 13 picture of what's going on there. 14 And as you can see, a large percentage 15 of our HUB expenditures does come from the 16 subcontracting dollars that are paid. 17 COMMISSIONER REYES: Is that that 18 "Other Services," if I'm looking at this correctly? 19 MS. BERTOLACINI: I'm sorry. Which 20 report? 21 The procurement categories are 22 pre-determined by the Comptroller, the ones that do 23 the report. And so you can see we don't have 24 expenditures in a couple of the categories. We have 25 expenditures in basically four of the six procurement 0167 1 categories. 2 COMMISSIONER REYES: Okay. 3 MS. BERTOLACINI: Did you have any 4 other questions? 5 COMMISSIONER REYES: 29 percent sounds 6 like a pretty good number, depending on what they're 7 doing, though. That's what I was trying to get at. 8 MS. BERTOLACINI: Right. 9 COMMISSIONER REYES: I mean, do we have 10 any mentor protégés working on producing tickets or 11 lottery tickets or anything like that, trying to build 12 up competition? 13 MS. BERTOLACINI: Not specifically, 14 no -- 15 COMMISSIONER REYES: Okay. 16 MS. BERTOLACINI: -- not on printing 17 lottery tickets. Scientific Games does have a protégé 18 company they're working with. I believe that her 19 company provides packaging and things of that type. 20 She is not a printing company. 21 COMMISSIONER REYES: Are there any 22 plans to incorporate maybe some minority vendors a 23 protégé program to get some competition in the future? 24 MS. BERTOLACINI: Well, I can say right 25 now at this time that I haven't really thought about 0168 1 going in that direction. I believe that the printing 2 process for the instant tickets is pretty specialized, 3 but I can keep an eye out for, you know, companies 4 that I think might have some capabilities. It's 5 just -- 6 COMMISSIONER SCHENCK: Or even start- 7 ups that might be encouraged to move in that -- 8 MS. BERTOLACINI: Right. 9 COMMISSIONER REYES: Well, that's what 10 I'm thinking of. And, I mean, I know it takes a lot 11 to print these tickets. I've seen the equipment and 12 all of that. But it might be an idea where you put in 13 the future, start to develop some minority business to 14 be able to do something like that. 15 MS. BERTOLACINI: I would certainly be 16 happy if there were some minority companies out there 17 that I could encourage to move in that direction. 18 COMMISSIONER SCHENCK: Well, apparently 19 there's some printing presses running around free 20 somewhere. 21 (Laughter) 22 COMMISSIONER REYES: Bexar County has a 23 nice building there. 24 COMMISSIONER SCHENCK: Yes, empty 25 warehouse. 0169 1 Thank you. 2 COMMISSIONER REYES: That's all I've 3 got. Thank you. Good numbers. 29 percent is very 4 good. 5 MS. BERTOLACINI: Thank you. 6 CHAIRMAN COX: And I want to underscore 7 something that Commissioner Reyes pointed out, is 8 that, you know, some of this we do. But in large 9 part, this is done by our subcontractors, and 10 certainly we encourage them to do these things. But 11 without our subcontractors' diligent efforts in this 12 regard, we could not do this. 13 MS. BERTOLACINI: I think all state 14 agencies are facing a lot more challenges in their 15 contracts and their procurements now as far as HUB is 16 concerned, with direct spending, because of the way 17 things have been moving with the law. For example, 18 the Department of Information Resources, most agencies 19 are required to buy through them for their technology. 20 And we are not required to, but we still purchase 21 some, you know, services through them. 22 But what I'm trying to say is, overall 23 I think a lot of the opportunities tend to be 24 dwindling down for the direct spending; whereas, the 25 subcontracting for our agency, we have large contracts 0170 1 where we can focus on getting our vendors to use HUBs. 2 However, I'm still diligently trying. 3 And, as you can see in the commodities category, 4 that's an area where we can see changes in the direct 5 spending pretty quickly. It's fairly, you know, 6 changeable, that particular category, depending on 7 what we need to buy. And so I work very closely with 8 the purchasing staff. And, you know, we basically do 9 try to solicit HUB vendors and use HUB vendors as much 10 as we can in the direct spending. But the big dollars 11 are tied up in the big contracts. 12 CHAIRMAN COX: Okay. Thank you, Joyce. 13 MS. BERTOLACINI: Sorry for going on. 14 Thank you. 15 AGENDA ITEM NO. XIX 16 CHAIRMAN COX: Okay. Item XIX. 17 Ms. Melvin is right at the finish lines, but she isn't 18 quite over it, so she wants to defer this item until 19 next month, with your permission. 20 AGENDA ITEM NO. XX 21 CHAIRMAN COX: Item XX, report, 22 possible discussion and/or action on Mega Millions 23 game and/or contract. 24 Director Sadberry. 25 MR. SADBERRY: Commissioners, I have 0171 1 nothing specific to report to you on this item. I 2 would be happy, however, to respond to any questions 3 you might have at this time. 4 COMMISSIONER SCHENCK: No, thank you, 5 Anthony. I appreciate it. 6 COMMISSIONER REYES: I have no 7 questions. 8 AGENDA ITEM NO. XXI 9 CHAIRMAN COX: Okay. Item XXI, report, 10 possible discussion and/or action on GTECH 11 Corporation. 12 Director Sadberry. 13 MR. SADBERRY: Commissioners, again I 14 have nothing specific to report to you on this item. 15 I will tell you that there is general information 16 under the tabular of this item that you might review 17 at your pleasure. And if there's any additional 18 information or follow-up you would like regarding that 19 information, we would be happy to provide that for 20 you. 21 It does contain some additional 22 information that was requested by the Commissions at 23 the last Commission meeting, as well as information on 24 activities, including corporate acquisitions and other 25 activities of that nature that have occurred in the 0172 1 intervening time frame. 2 CHAIRMAN COX: Thank you, Director 3 Sadberry. 4 I will report to you on the trip that I 5 told you I was going to take with some of the staff to 6 Providence, Rhode Island. We had a great time with 7 American Airlines. They canceled -- delayed one of 8 our fights for five hours, canceled another and 9 threatened to cancel another but somehow got it back 10 together. That would have been the one that got us 11 back from Chicago to Austin. So we did probably 12 better than the average American Airlines traveler has 13 been doing recently. 14 Chairman Patel and all of his senior 15 staff, it's my recollection, were there. Our local 16 service folks, Ramon and Scott, were there. We had a 17 minimum of PowerPoint presentations and a maximum of 18 meaningful discussions, which Ramon, thanks to you for 19 helping them understand our culture, that we had 20 rather talk than look at somebody make a presentation. 21 And I think that your folks adapted very well, and it 22 was an excellent meeting. The capabilities that GTECH 23 demonstrated are continuing to advance, and I think 24 that the dialogue was excellent. 25 I will tell you, as to the 0173 1 arrangements, it was a little bit unusual in that we 2 couldn't have breakfast with them. We did have lunch 3 in their office, but each of us paid $11.81 for our 4 lunch, and that included all-you-could-see sandwiches. 5 And I will also promise you that each of us got our 19 6 cents change. And then we weren't able, of course, to 7 have dinner with them either. But it was a very 8 congenial meeting and I think a very helpful meeting. 9 Mike Fernandez was there. Kathy Pyka 10 was there. Gary Grief was there. Is that the whole 11 outfit? 12 FROM THE AUDIENCE: Michael. 13 CHAIRMAN COX: And Michael Anger was 14 there as well. And I benefited from the depth of 15 knowledge that was around me, both on the GTECH side 16 and the Lottery side, in listening to the questions 17 and the answers that were relayed there. So I think 18 it was a very worthwhile undertaking. 19 Any questions on that? 20 COMMISSIONER SCHENCK: No. Thank you, 21 sir. 22 COMMISSIONER REYES: No questions. 23 AGENDA ITEM NO. XXII 24 CHAIRMAN COX: Okay. Item XXII, report 25 by the Executive Director and/or possible discussion 0174 1 and/or action on the agency's operational status, 2 agency procedures and FTE status. 3 Director Sadberry. 4 MR. SADBERRY: Commissioners, again 5 under your tabular for this agenda item, there is 6 general information that's provided to you on a 7 monthly base concerning the FTE status of the agency. 8 If you have any questions about that, I 9 would be happy to address them. Other than that, I 10 have nothing in particular to report to you at this 11 time but would be happy to address any questions you 12 might have. 13 COMMISSIONER SCHENCK: Anthony or Phil, 14 I have a quick question about bingo. It seems that we 15 have a lot of openings there. How long have they been 16 there? Do we intend to leave them there? 17 MR. SANDERSON: I'll attempt to answer 18 that. The openings have been there roughly between 19 six to 18 months, and it all hinges on the bingo 20 indirect agenda item. 21 COMMISSIONER SCHENCK: Are you 22 functioning appropriately at this time with the staff 23 that you have? 24 MR. SANDERSON: I don't think 25 "appropriately" is probably the accurate word. I 0175 1 think we're making a little headway. And we're, you 2 notice, performing some audits and some other 3 activities. But -- 4 COMMISSIONER SCHENCK: How is morale 5 among the staff? 6 MR. SANDERSON: The morale is beginning 7 to dwindle just a little bit. The staff is concerned 8 about what's going to happen in the future as far as 9 these postings or any additional postings that may 10 take place. And a lot of people are absorbing a lot 11 of activities and are working overtime and so forth, 12 trying to get things accomplished. 13 COMMISSIONER SCHENCK: Thank you, Phil. 14 COMMISSIONER REYES: I have no 15 questions. 16 CHAIRMAN COX: Okay. Let's see. Kim, 17 is your Attorney General here? 18 MS. KIPLIN: Yes, sir. 19 CHAIRMAN COX: Okay. And what I'm 20 going to do is, I would like to take Item XXIII and 21 Item XXV and then skip the cases and go into executive 22 session. Does that sound right, Kim? 23 MS. KIPLIN: Yes. 24 CHAIRMAN COX: Okay. 25 0176 1 AGENDA ITEM NO. XXIII 2 CHAIRMAN COX: Item XXIII, report, 3 possible discussion and/or action on the Ombuds 4 charter, procedure and/or agency personnel handbook. 5 Director Sadberry and Lauren Bloom and 6 Kimberly Kiplin. 7 And, Director Sadberry, I'm going to 8 let you orchestrate this baby. 9 MR. SADBERRY: Mr. Chairman, thank you. 10 And what I would ask you and the Commission to do is 11 guide me as to the extent to which you would desire to 12 have background information or discussion. I don't 13 want to come up short of providing all that you would 14 require or a question in that regard. I also don't 15 want to go beyond what's necessary for you to 16 understand what we are doing and requesting you to do 17 today and the background that gets us to that point. 18 CHAIRMAN COX: I would suggest that at 19 a minimum, Anthony, you take this back to its origin 20 with the State Auditor recommendation and kind of walk 21 us through the history, with the interim ombuds and 22 now the part-time ombuds. 23 MR. SADBERRY: I will do that, 24 Mr. Chairman. 25 There was an audit report on the 0177 1 workforce management at the Texas Lottery Commission 2 July 2006 that included a recommendation that the 3 agency should create an employee ombudsman position 4 that reports directly to the Executive Director, with 5 access to members of the Texas Lottery Commission. 6 This position should meet the qualification for an 7 ombudsman set forth in the state certification plan. 8 The agency responded by a management 9 response that agreed with that recommendation and set 10 about to implement it, implementation of which would 11 require the creation of the position, the construction 12 of a job description for posting purposes, going 13 through the posting and an application and employment 14 process in order to get the ombudsman on board. 15 In that time frame, certain reporting 16 activities occurred with the state oversight 17 committee, which is the Licensing Committee, the 18 Legislature and the State Auditor's office. And 19 interest was expressed that the agency act sooner than 20 that in order to get the ombudsman in place, primarily 21 out of concern that some of the recognized and noted 22 problems in Human Resources that were the subject of 23 that same audit, indicated the need to have this 24 ombudsman in place as soon as possible while the 25 issues in Human Resources were being addressed. 0178 1 One of the suggestions of how we might 2 do that was that we engage someone in the area which 3 would assimilate the type of functions the ombudsman 4 might carry out, such as the Internal Audit Division, 5 to be appointed on a part-time basis as ombuds while 6 continuing to service as Internal Audit, in order to 7 get the ombuds position up and running. 8 And the agency reacted positively to 9 that, with the agreement of Ms. Melvin, the Internal 10 Audit Director. Dale Hernandez was appointed as part- 11 time or temporary agency ombuds, and we proceeded with 12 the ombuds position while we worked on the full 13 implementation of the audit recommendation. 14 Ms. Hernandez in that role, in addition 15 to serving the function of ombuds, set about the 16 preparation of certain documents that would address 17 the ombuds charter and procedures and brought that 18 before the Commission. 19 In the May 16, 2007 Commission meeting, 20 a discussion took place regarding the draft charter 21 and the procedure for the ombudsman position that 22 Ms. Hernandez had submitted. To briefly summarize the 23 Commission discussion at that point -- and at that 24 time there were two commissioners serving, Chairman 25 Cox and Commissioner Clowe. 0179 1 Commissioner Clowe stated that the 2 Commission had a high level of interest in the 3 ombudsman position and that this was going to be a way 4 to achieve some of the goals that the State Auditor 5 laid out and we adopted -- that is, the Commission 6 adopted -- indicating that the person who serves as 7 the ombudsman ought to have some specialized training 8 as well as experience. 9 And critically important to the 10 position is in the way that we are going to work to 11 improve the attitudes and the commitment level of all 12 employees of the agency relative to the results of the 13 State Auditor's survey of the Lottery Commission 14 staff. 15 Chairman Cox discussed the reporting 16 relationship, and that I think was a discussion also 17 that occurred at last month's Commission meeting; that 18 is, that while the literal reporting relationship was 19 to the Executive Director, the State Auditor had also 20 indicated that in some ways, this wording of the 21 access to the Commission indicated a reporting 22 relationship directly between the ombudsman and the 23 Commission as well. 24 And the instruction to staff -- and I 25 might indicate that we were at the Legislature that 0180 1 day, and the Deputy Director, Gary Grief, presented 2 this matter on our behalf. And the Chairman stated 3 that he would like to see the charter and would like 4 for Commissioner Clowe to see the charter before it 5 was approved. 6 Ms. Melvin indicated that that was, in 7 fact, the intent of the document; that is, the docket 8 provided for signatory of the Commission as opposed to 9 signatory of the Executive Director, which means that 10 for the charter to become effective, it would have to 11 be approved and signed by the Commission, which would 12 ensure the satisfaction of the Commission of the 13 reporting relationship. 14 However, Mr. Grief indicated that a 15 determination had been made by his committee, which he 16 headed as an ad hoc committee for the ombudsman 17 position at that time, that these documents should be 18 held until the full-time or I will say part time but 19 full function ombudsman was hired so that that 20 person -- he or she -- could work on these documents 21 and then present them to the Commission as fully 22 integrated documents for the Commission's 23 consideration and deliberation. And that's where it 24 was left at the conclusion of the May 16, 2007 25 Commission meeting. 0181 1 Pending that time, an ombudsman was 2 hired -- that's Ms. Bloom who is sitting at the table 3 now -- and she was hired with a full-time ombuds 4 function -- that is, that's all she does -- but in a 5 part-time position. That is, she works only 20 hours 6 per week as opposed to 40 hours per week. 7 And there was a follow-up audit 8 conducted by the State Auditor's office, as you're 9 familiar with. They presented as well at last month's 10 Commission meeting. And that was based upon their 11 February 28 follow-up report which addressed three of 12 the audits they previously addressed, which included 13 workforce. 14 And as it relates to the ombuds 15 position, the overall conclusion, to summarize, was 16 that while the agency has made progress in 17 implementing most of the prior audit recommendations, 18 it should continue its efforts to strengthen the 19 workforce management activities. 20 For example, although the agency has a 21 process for addressing formal complaints made through 22 its Human Resources Division, it does not have a 23 process to address informal employee complaints made 24 to the ombudsman, among others. In addition, the 25 agency lacks formal policies and procedures for the 0182 1 ombudsman position it created in 2006. In addition, 2 the agency's ombudsman does not have a formal role in 3 the employee complaint process. 4 The key recommendations regarding the 5 ombuds were that the agency should develop guidelines 6 for informal complaints made to the agency's 7 ombudsman. The agency's processes for addressing 8 informal complaints should assist supervisors in 9 identifying issues that require follow-up beyond the 10 informal complaint process. 11 Additionally. For complaints made to 12 the agency's ombudsman or internal auditor or for 13 complaints that require additional follow-up beyond 14 informal management resolution, the guidelines should 15 provide a defined process to ensure appropriate 16 initiation, investigation, documentation, resolution 17 and communication of the final resolution of all 18 complaints for all parties involved. 19 The agency should finalize its policies 20 and procedures for the ombudsman position and obtain 21 approval of those policies and procedures from 22 executive management and the Commission. The agency 23 should evaluate how the ombudsman position can best 24 address the concerns and employees and, if necessary, 25 revise the ombudsman's duties so that the ombudsman 0183 1 has a formal role in ensuring the success of the 2 employee complaint process. A management response of 3 the agency was agreement with the recommendations in 4 that report. 5 At last month's Commission meeting, 6 March 25, 2008, as you might recall, a discussion 7 occurred concerning certain aspects of this matter, in 8 which the Auditor's office was present, including what 9 exactly is meant by the access to the Commission, what 10 is exactly the reporting structure that exists with 11 the ombudsman and the Executive Director and the 12 Commission, how does the ombudsman react and relate to 13 the Human Resources function, and how might any of 14 these documents that we are mentioning today or 15 otherwise address or impact the reporting structure 16 between the ombudsman and the Commission? 17 A strong statement was made that the 18 desire was to have no change away from any existence 19 of a reporting structure between the Commission and 20 the ombudsman and that we proceed to finalize these 21 documents, as recommended by the State Auditor's 22 office, the due date on which is May 1, 2008. 23 So this is the operative meeting that 24 we propose to bring this before the Commission for 25 purposes of your discussion, deliberation and 0184 1 determination on whether or not to approve these 2 documents or to direct staff otherwise. 3 And so the documents that you have 4 before you, first is the ombuds charter which has been 5 in your notebooks. And I would touch on two key 6 aspects -- there may be others you wish to address -- 7 but one is to address the reporting structure. And 8 the second paragraph on Page 1 indicates the ombuds is 9 free to contact members of the Commission directly, 10 without prior consultation with the Executive 11 Director. The intent of that is to I think address 12 the Commission's interest, that it be clear that there 13 is no bar, barrier or any mediary step between the 14 ombuds and the Commission, if the ombuds feels the 15 need appropriate function or purpose to reach directly 16 to the Commission, or vice versa should the Commission 17 wish to directly address the ombuds' function. 18 The other aspect of the charter that I 19 would point out is the provision that any complaint 20 concerning workforce or human resources issues, 21 discrimination, et cetera, that is brought to the 22 attention of the ombuds will be reported to executive 23 management. That is addressed in the ombuds standards 24 and practices. 25 There is some discussion in the 0185 1 industry of whether the ombuds is an agent for notice, 2 for purposes of knowledge of workforce issues such as 3 hostility in the workplace, any type of issue that 4 might be the subject of an EEO complaint such as 5 sexual harassment, et cetera. 6 And there's two schools of thought as 7 to whether the ombuds de jure is an agent for notice 8 in that regard. The default position that we're 9 taking in these documents is that the ombuds will be 10 an agent for notice. You may wish to discuss that 11 with the ombuds, who is here, because I'm sure she has 12 fears in that regard. But I will tell you that these 13 documents have been vetted. They have been worked on 14 by Gary Grief and his committee. They have been 15 worked on by Special Counsel, Sarah Woelk, who is 16 here -- yes, she is there. They were presented at a 17 director's meeting in which all directors of the 18 agencies attend, two weeks ago for purposes of 19 vetting, discussion, review and approval from the 20 administrative standpoint, executive management 21 standpoint. 22 So the next step is to present them to 23 the Commission for your deliberation as to whether you 24 will approve them from the Commission's standpoint, 25 which is the recommendation of the State Auditor, 0186 1 given the importance of the ombuds position, is that 2 the documentation should be approved by the Commission 3 in addition to executive management. 4 The final documentation that you have 5 in your folder, your binders, is not as brought to you 6 for purposes of your approval, although you may wish 7 to indicate your approval or lack thereof, it is 8 brought on for the purpose of explaining to you how 9 the agency is purporting and intends to include the 10 ombuds in the agency's formal complaints and 11 grievances processes, which is set forth in Chapter 9 12 of the personnel handbook. 13 There is the requirement that the 14 ombuds maintain these certain -- in this year, the 15 ombuds position; that is, confidentiality, neutrality 16 and other things that are required from their ethical 17 standards, which means that the ombuds does not get 18 directly involved in either the complaint process or 19 the grievance process from the standpoint of 20 involvement from an advocacy standpoint or making a 21 determination on the merits of the issues that are 22 being brought on in these formal proceedings. To do 23 so would be in violation of these tenets of the 24 ombuds' ethical positions; at the same time, to comply 25 with the Auditor's recommendation that the ombuds have 0187 1 a formal role in these processes. 2 The role that we are envisioning, which 3 is highlighted in the yellow print, is that the ombuds 4 be made aware of, by formal notification, of the 5 effect of these proceedings and be updated as to their 6 progress, so that the ombuds can make a determination 7 of whether there has been any miscarriage of the 8 proceedings as provided for under either the personnel 9 handbook or the procedures and can so inform the 10 Executive Director or the Commission, should she feel 11 the need to do so. 12 For example, if there are time 13 deadlines that are required that are not being met, if 14 there are due process requirements, the right to 15 hearings, the right to have counsel, the right to 16 hearings before the State Hearings Officers, any type 17 of proceedings that are provided for that may not be 18 carried out appropriate or may be carried out in a way 19 that leaves questions as to whether they perhaps 20 should be changed or modified or if they're serving 21 their function, those are things in which we are 22 providing for the ombuds to be involved in but not to 23 have a role in the actual processes themselves. And 24 so that is the intent of the agency to satisfy what we 25 see as the final requirement or recommendation of the 0188 1 State Auditor's office. 2 And so we present that to you today. 3 Lauren Bloom, our ombuds, is at the table. Sarah 4 Woelk is here. Janine Mays, who is our Human 5 Resources Director, has been part of this process as 6 well. And so with that, unless you have any 7 additional questions for me -- if you wish, perhaps 8 Ms. Bloom might have some comments in that regard. 9 CHAIRMAN COX: Okay. Let me see if I 10 understand the order of things, Anthony. The first 11 two pages are a charter which you're asking the 12 approval of this Commission? 13 MR. SADBERRY: Yes, sir. 14 CHAIRMAN COX: The remaining pages are 15 standards and practices, which is an internal document 16 that you have the authority to approve, but you're 17 soliciting our suggestions and comments if we have 18 any? 19 MR. SADBERRY: That's correct. 20 CHAIRMAN COX: Okay. So why don't we 21 at this point go to any questions that the 22 Commissioners may have. 23 COMMISSIONER SCHENCK: I have just a 24 couple. Lauren or Sarah or Anthony, are you confident 25 that we've addressed all of the recommendations that 0189 1 were made by the State Auditor's office? 2 MS. BLOOM: I'm Lauren Bloom, the 3 ombuds, for the record. 4 We did go through the documents, the 5 state audit report that was published at the end of 6 February and touched upon each of the recommendations, 7 to the best of our ability. 8 MS. WOELK: Yes. And I made contact 9 with the Auditor's office after we had come up with 10 this sort of approach where Lauren's role is a bit 11 more than audit function or a looking-over-the- 12 shoulder function. And they confirmed that was 13 consistent with what they were looking for, that they 14 wanted to make sure that the ombudsman was aware of 15 how things were working. 16 COMMISSIONER SCHENCK: And, Lauren, 17 I've looked at this myself, and some of this is pretty 18 vague and broad aspirational language. Are you 19 comfortable that you have enough guidance in what your 20 responsibilities are, in the written document? 21 MS. BLOOM: Absolutely. And one of 22 those best practices in the field is to have a lot of 23 discretion about how to handle cases so that you can 24 really handle them informally. I think this is a very 25 good overarching document, especially the chapter. It 0190 1 has a broad laying out of what the position is. It 2 still makes it clear to employees. Employees would 3 also have access to standards and practices and any 4 other agency policy that outlines it more 5 specifically. 6 COMMISSIONER SCHENCK: And I believe at 7 the last meeting where we discussed this, I raised my 8 view that I felt it was important for you to have 9 direct access to us -- 10 MS. BLOOM: Yes. 11 COMMISSIONER SCHENCK: -- which I 12 obviously understand is in the document. But also I 13 would expect that the Executive Director would be part 14 of that process as well, and if you would feel 15 comfortable to bring to us anything that you felt 16 needed be brought to us. But to the extent the 17 Executive Director should be involved, obviously, the 18 matter should go to the Executive Director as well. I 19 wasn't trying to suggest there is a routine bypass but 20 just that that access to us should be assured, too. 21 MS. BLOOM: Absolutely. 22 COMMISSIONER SCHENCK: And then I have 23 a question, I think, for Sarah or Kim. The last thing 24 I see in the charter is that staff and management will 25 have a right to consult the ombuds without reprisal or 0191 1 fear of reprisal. And then also in what I understand 2 is going to be part of the handbook, we have a number 3 of detailed deadlines that are responsive to concerns, 4 I think, that the State Auditor had had. Are we 5 creating an argument here that there is a contract or 6 that there is another layer of litigation that we're 7 opening ourselves up to here with respect to 8 retaliation that wouldn't have existed before? 9 MS. KIPLIN: I think I'll defer, if 10 you're comfortable with that, Commissioner, to Sarah, 11 who is Special Counsel but also labor and employment 12 lawyer. 13 MS. WOELK: We were careful, of course, 14 to include language throughout the handbook, or on 15 relevant occasions, that employees still are at will. 16 COMMISSIONER SCHENCK: And you don't 17 have a contract rather than a right to a two-day 18 answer or a five-day response? I mean, these are the 19 intentions of the agency with respect to the deadlines 20 and timelines for these actions. But if for some 21 reason you're sick or you're not at work or something 22 else, and someone walks out the door the next day, I 23 don't want to see a claim filed that, "I don't have to 24 come back. You have defaulted on your obligation to 25 get me an answer." 0192 1 MS. WOELK: In the procedures in the 2 handbook, there is an additional statement that says 3 the Executive Director may, by agreement of people 4 involved or the Executive Director, may extend any 5 deadline. And we added that the Executive Director 6 would document extensions and explain why. 7 COMMISSIONER SCHENCK: But if someone 8 just misses? 9 MS. WOELK: I don't think that there is 10 any consequence that's in the favor of a grievant if a 11 deadline is missed, a legally enforceable consequence. 12 The additional deadlines were driven by the State 13 Auditor's suggestion that employees should have an 14 idea of how the process works. 15 COMMISSIONER SCHENCK: This Chapter 9 16 that I'm holding here is part of the employee handbook 17 at which there is a preface, I assume, that says, 18 "This handbook does not constitute a contract. You 19 don't have a right to pursue" -- 20 MS. KIPLIN: Yes. 21 COMMISSIONER SCHENCK: Okay. One more 22 question. Who has the authority to fire the ombuds? 23 Is that something vested in the Executive Director? 24 (No audible response) 25 COMMISSIONER SCHENCK: Okay. Well, if 0193 1 the circumstance should arise where you feel the need 2 to bypass the Executive Director, do you think there 3 should be protection for the ombuds, that the 4 Executive Director cannot be discharged without -- 5 MS. WOELK: I think Lauren does think 6 that. But I think -- 7 (Laughter) 8 COMMISSIONER SCHENCK: Well, without 9 consulting with the Commission or something to that 10 effect, to assure independence as soon as necessary? 11 MS. WOELK: And that is not a -- Lauren 12 and I sort of worked on -- she had the charter that 13 gave her everything she would want in her dream world 14 and I, you know, chopped away at it. But she did 15 include in there basically that she was not at will, 16 and we suggested that we didn't think that was the 17 case. 18 COMMISSIONER SCHENCK: No, I'm not 19 suggesting lifetime tenure. The power to hire and 20 fire could affect independence, to the extent it's 21 necessary to exercise independence. 22 MS. WOELK: I think you could direct 23 the Executive Director. That would be your preference 24 should he ever decide to fire the ombudsman, that he 25 should consult with the Commissioners. 0194 1 COMMISSIONER SCHENCK: I would expect 2 that that would happen -- 3 MS. WOELK: Yes. 4 COMMISSIONER SCHENCK: -- with Anthony, 5 obviously, so I think we're fine on that. 6 The one concern I had with respect to 7 this possibility of creating a claim, Kim, is in the 8 ombuds charter, that last bullet point, last 9 paragraph, the right to consult ombuds without fear of 10 reprisal. Well, people have fears all the time, 11 founded or unfounded, and they talk to you and then 12 they lose their job. Now we're got potentially 13 another layer of a claim. I'm wondering if we 14 don't -- if we need that in there? 15 MR. SADBERRY: I think that is an 16 excellent point. I don't know where that -- 17 COMMISSIONER SCHENCK: I mean, this is 18 warm and fuzzy enough throughout it, but I think that 19 it's fairly stated that -- 20 MS. WOELK: It's that language of yours 21 that I let stay after I tore everything else out. 22 MS. BLOOM: Is there a new way to word 23 it? I mean, we have that for the formal complaint 24 process and the grievance process, that you can do 25 this without retaliation. 0195 1 COMMISSIONER SCHENCK: An employee 2 should be made to feel comfortable that they can come 3 to the ombuds without fear of retaliation. 4 MS. BLOOM: And, I mean, there are 5 additional -- 6 COMMISSIONER SCHENCK: That's -- 7 MS. BLOOM: -- such as I tried to keep 8 the anonymity whenever possible, but -- 9 MS. WOELK: We can soften it with some 10 "should" language. 11 MS. BLOOM: I mean, I think that -- 12 yes. I do think a -- 13 COMMISSIONER SCHENCK: This seems to be 14 lawyered up a little bit. 15 MS. WOELK: Well, it was pretty 16 lawyered up from her perspective. But a very strong 17 motif in the audits is -- 18 COMMISSIONER SCHENCK: Okay. 19 MS. WOELK: -- employees should not 20 fear retaliation. 21 COMMISSIONER SCHENCK: And I'm not 22 saying that it doesn't -- there is already retaliation 23 protections -- 24 MS. WOELK: Right. 25 COMMISSIONER SCHENCK: -- in state and 0196 1 federal law. I'm just suggesting that we don't want 2 to create another layer of -- 3 MS. KIPLIN: Commissioner, would you 4 feel comfortable if we amended that last sentence that 5 brings in the "should" concept? 6 COMMISSIONER SCHENCK: Yes. Staff and 7 management should be encouraged to consult the 8 ombudsperson without fear of reprisal by the 9 ombudsman. 10 MS. KIPLIN: And then what we'll do 11 doing the executive session, if that's okay, is we'll 12 lift the language that you just uttered -- 13 COMMISSIONER SCHENCK: Something like 14 that. 15 MS. KIPLIN: Sounds good. And I think 16 it gets to the same Language. We can tighten it a 17 bit and then bring this signature page back to you-all 18 for your signature, and you can review it after 19 executive session. Does that meet with y'all's 20 satisfaction? 21 CHAIRMAN COX: Let see what -- 22 COMMISSIONER SCHENCK: Let's see if 23 there are more questions. 24 MS. KIPLIN: On this particular issue. 25 COMMISSIONER REYES: I just have a 0197 1 couple -- just one question. It says you're going to 2 provide feedback to the members of the Commission. 3 How are you planning to do that? 4 MS. BLOOM: I know that last year when 5 the annual report went in, and I think presented by 6 Dale Hernandez, and I plan on doing the same thing on 7 an annual basis, reporting trend data, that being what 8 kinds of cases, what kind of assistance, very general 9 information that won't break anybody's anonymity or 10 confidentiality. 11 COMMISSIONER REYES: That's all. 12 CHAIRMAN COX: Okay. So what I would 13 like to do, if we may, is get a motion to approve the 14 staff recommendation for the ombuds charter. 15 COMMISSIONER SCHENCK: I would like to 16 move that we make amendments to and then adopt the 17 proposed chapter, as we've just discussed. 18 CHAIRMAN COX: Excellent. 19 COMMISSIONER REYES: Second. 20 CHAIRMAN COX: All in favor, say "Aye." 21 COMMISSIONER SCHENCK: Aye. 22 COMMISSIONER REYES: Aye. 23 CHAIRMAN COX: Motion carries 3-0. 24 Now, I for one have a couple of 25 comments on the procedure, just thoughts. One of the 0198 1 things I've heard here through three different 2 administrations and the HR Department is that it takes 3 too long to get a complaint processed. And I've heard 4 people say justice delayed is justice denied. And I 5 really think that it's important that we try to 6 expedite this process without doing -- creating the 7 impression that we're rushing through it. 8 And I think some of these timings time 9 frames are a little luxurious, so I would ask y'all to 10 think about going back through those and see if there 11 might be a way to tighten them up. For instance, 12 there's one in which the Executive Director gets 30 13 calendar days from the date of appeal, and he also has 14 the authority to extend that time. 15 Well, maybe make it 10 and have the 16 authority to extend that time, setting a little better 17 target process. So I just ask y'all to go through 18 these time frames. I came up with 64 days that it 19 would take to process a complaint, and that seems a 20 little long to me. I would like to see it be more 21 like 30, if that's possible. So that's just a general 22 recommendation for y'all's consideration as you 23 formalize this document. 24 Commissioners, any thoughts on the 25 procedure? 0199 1 COMMISSIONER SCHENCK: I think I'm with 2 you, given this is an internal process and we should 3 be able to sort this out fairly directly. But 30 days 4 for an appeal to me is a pretty quick one, if we're 5 outside the context of working in-house, but we are. 6 So I agree that we should look at trying to tighten 7 those up. 8 COMMISSIONER REYES: I agree. I think 9 we should try to reduce that number of days. 10 CHAIRMAN COX: Okay. Any other 11 suggestions for the staff on the procedure? 12 Okay. Thank you, Director Sadberry. 13 Thank you, Lauren, Sarah, Ms. Kiplin. 14 AGENDA ITEM NO. XXV 15 CHAIRMAN COX: Okay. Is there any 16 public comment, Item XXV? I have no witness 17 affirmation forms. 18 AGENDA ITEM NO. XXVI 19 CHAIRMAN COX: Okay. Commissioners, 20 with your permission, I would like to go into 21 executive session. I move that the Texas Lottery 22 Commission go into Executive Session: 23 A. To deliberate the duties and evaluation of 24 the Executive Director, the Deputy Executive Director, 25 Internal Audit Director and Charitable Bingo 0200 1 Operations Director and to deliberate the duties of 2 the General Counsel, pursuant to Section 551.074 of 3 the Texas Government Code; 4 B. To receive legal advice regarding pending or 5 contemplated litigation pursuant to Section 6 551.071(1)(A) or to receive legal advice regarding 7 settlement offers pursuant to Section 551.071 (1)(B) 8 of the Texas Government Code and/or to receive legal 9 advice pursuant to Section 551.071(2) of the Texas 10 Government Code, including but not limited to: 11 Shelton Charles v. Texas Lottery 12 Commission and Gary Grief; 13 14 First State Bank of DeQueen et al. v. 15 Texas Lottery Commission; 16 James T. Jongebloed v. Texas Lottery 17 Commission; 18 The Lotter Ltd; 19 Employment law, personnel law, 20 procurement and contract law, evidentiary and 21 procedural law, and general government law; 22 Lottery Operations and Services contract; 23 Mega Millions game and/or contract. 24 Is there a second? 25 COMMISSIONER SCHENCK: I second the 0201 1 motion. 2 CHAIRMAN COX: All in favor, say "Aye." 3 COMMISSIONER SCHENCK: Aye. 4 COMMISSIONER REYES: Aye. 5 CHAIRMAN COX: Aye. 6 The vote is 3-0. The Texas Lottery 7 Commission will go into executive session. The time 8 is 1:33 p.m. Today is April 29, 2008. 9 (Recessed for executive session: 10 1:33 p.m. to 3:14 p.m.) 11 AGENDA ITEM NO. XXVII 12 CHAIRMAN COX: The Texas Lottery 13 Commission is out of executive session. The time is 14 3:14 p.m. 15 Is there any action to be taken as a 16 result of executive session? 17 AGENDA ITEM NO. XXIV 18 CHAIRMAN COX: If not, let's move to 19 Agenda Item XXIV, consideration of the status and 20 possible entries of orders in Dockets No. A through G. 21 Ms. Kiplin. 22 MS. KIPLIN: Thank you, Mr. Chairman. 23 If I could, I would take to take Items A, B and C 24 together. 25 CHAIRMAN COX: Okay. 0202 1 MS. KIPLIN: These are cases that are 2 on the lottery side. Each of them is a case against a 3 lottery retailer who had insufficient funds available 4 at the time that the lottery swept the retailer's 5 account. It went to hearing to revoke their licenses. 6 In each of these cases, the 7 Administrative Law Judge did recommend revocation of 8 the license, based on insufficient funds being 9 available, in violation of the State Lottery Act. 10 With that, the staff would recommend 11 that you adopt those proposed findings and 12 conclusions. 13 CHAIRMAN COX: I couldn't hear you. 14 (Laughter) 15 MS. KIPLIN: That's a new one. 16 CHAIRMAN COX: That was mean, wasn't 17 it? 18 COMMISSIONER SCHENCK: I could hear 19 you, Kim. 20 CHAIRMAN COX: Okay. 21 COMMISSIONER SCHENCK: And I would move 22 that we adopt the staff recommendations with respect 23 to Items A, B and C. 24 COMMISSIONER REYES: Second. 25 CHAIRMAN COX: All in favor, say "Aye." 0203 1 COMMISSIONER SCHENCK: Aye. 2 COMMISSIONER REYES: Aye. 3 CHAIRMAN COX: Aye. 4 Motion carries 3-0. 5 MS. KIPLIN: Commissioners, I have 6 orders on those, and I'll give you a second to -- 7 CHAIRMAN COX: Well, what's the next 8 group, or is there another group? 9 MS. KIPLIN: Well, there is another 10 good grouping, and that would be Items D and E. 11 CHAIRMAN COX: D and E. Okay. 12 MS. KIPLIN: And if I could go through 13 these. Commissioners, in each of these cases -- one 14 is a Veronica Williams and the other one is Jackie 15 Cory Simpson -- these cases were presented to you 16 sometime ago, along with another matter which was a 17 proposed settlement agreement in the case of Lisa 18 Garland. 19 And the threshold issue that was 20 presented at that time had to do with whether being on 21 the bingo registry equaled having a license issued 22 under the provisions of the Bingo Enabling Act. And 23 the reason that that was an issue that presented 24 itself was because of the limitation of the 25 enforcement, the opportunities to take enforcement 0204 1 action against those that were on a bingo registry but 2 not considered to be holding a license under the Bingo 3 Enabling Act. 4 There were only certain enumerated 5 items that are under the registry for which somebody 6 could either be refused to be added or can be removed. 7 One, for example, is lying on an application. That 8 would not be expressly enumerated in the bingo 9 registry but would be under a more generic provision 10 in the Bingo Enabling Act that says that if you 11 falsify an application for a license, then you're 12 subject to disciplinary action. 13 We've also had, at least on one 14 occasion, and Administrative Law Judge at SOAH say, 15 "Well, why isn't this the same as a license?" which 16 you asked for us to go back and do further analysis, 17 and we did do further analysis. 18 And in doing that further analysis, we 19 went back and looked at the rule that implemented the 20 bingo registry to begin with. And because of certain 21 language in that rule, it became pretty clear that 22 there was an argument that could be made, a very good 23 argument, that the Commission never intended that 24 somebody being on the registry was the same as holding 25 a license. 0205 1 And as the General Counsel, I have to 2 say that even within the Legal Division, there are 3 arguments on both sides of this issue, one that would 4 stand for the proposition that being part of the 5 registry isn't the same as having a license, and the 6 opposite. 7 But I can tell you, because 8 historically, while this is not legislative history, I 9 must tell you that at the time of the promulgation of 10 the bingo registry statute, there was great debate, if 11 you would, between the bingo staff and the lobby, the 12 industry, that we want it to be the license and the 13 regulated entity not wanting it to be a license. 14 Now, what's all come of all of this I 15 think is confusion. And so while I think you can make 16 both -- you can make either argument, I'm, as the 17 General Counsel, recommending that you pull these 18 cases down and you dismiss the actions against these 19 two. And if you want to make it very, very clear what 20 the Commission's position is, that you direct the 21 staff to look to amending the rule, the registry rule, 22 and making it very clear so that all have a very fair 23 beginning. 24 Also we have been invited -- and, Phil, 25 I think you're participating in these meetings -- to 0206 1 sit down -- we've been invited by the Chairman of the 2 House Licensing Committee over us, on the work of a 3 reform bill, and this would be another opportunity to 4 clarify: Is it or is it not? And so I leave it with 5 that. 6 What is in here are orders that would 7 dismiss without prejudice the cases against these two. 8 The reason these two can't be removed -- one can't be 9 removed and the other one can't be refused to be 10 added -- is if you go on the registry, is that they 11 don't hold disqualifying criminal convictions. You 12 know, the facts are, you know, pretty tough for each 13 one, and it does go into bad facts makes bad law, kind 14 of a theory. 15 But strictly speaking, it doesn't 16 trigger removal or refusal to add, based on their 17 actions, save and except if you wanted to leapfrog 18 over to this other statute that only really applies to 19 the licensee. And so with that, I would once again 20 urge that you enter orders dismissing these cases 21 against these two. 22 Mr. Sanderson and I have spoken, and I 23 believe you are in agreement with that action? 24 MR. SANDERSON: Yes, I'm in agreement 25 with that. 0207 1 COMMISSIONER SCHENCK: All right. 2 That's notwithstanding that like Ms. Williams, for 3 instance, was found guilty of a crime of moral 4 turpitude, she's going to be added to the registry? 5 MS. KIPLIN: Well, regrettably, she got 6 it deferred. 7 COMMISSIONER SCHENCK: That's right; 8 that's right. 9 MS. KIPLIN: And so that's not going to 10 be disqualifying. 11 COMMISSIONER SCHENCK: Fair enough. I 12 remember that. 13 MS. KIPLIN: Unless I'm wrong. And if 14 I am, I'm -- 15 MR. SANDERSON: That's my 16 understanding. I think both of these people, 17 individuals, were, one, being requesting to be 18 removed, and the other one, refused to add, is because 19 they failed to disclose on their application the 20 convictions that they had, even though they were both 21 deferred. 22 COMMISSIONER SCHENCK: Okay. I 23 remember this quite well. And, Kim, thank you. I'm 24 glad that we did this work, and it sounds like a 25 rulemaking is a better way to address this and allow 0208 1 the interested parties to comment on whatever 2 prospective rule we're going to establish. 3 MS. KIPLIN: And we can certainly move 4 forward on that. I'm sorry. I didn't mean to 5 interrupt you. 6 COMMISSIONER SCHENCK: No, that's fine. 7 But I would look for you to give us guidance on what 8 rule, Phil, you think would be appropriate. 9 MS. KIPLIN: And so what we will do -- 10 and I want to -- I think I said this, but I want to 11 make it clear. This was not an easy issue to wrestle 12 with. It's fair to say that as a matter of policy on 13 the enforcement side -- and there are two very capable 14 enforcement attorneys here -- they want to make sure 15 that you understand that this will be a limitation on 16 taking enforcement action against folks in the future 17 by not being able to leapfrog over to this licensing 18 provision. So it does go to your -- you know -- 19 COMMISSIONER SCHENCK: We'll just need 20 to make a rule, that's all. 21 MS. KIPLIN: Yes. 22 CHAIRMAN COX: Commissioners, 23 questions? 24 COMMISSIONER REYES: No questions. 25 COMMISSIONER SCHENCK: I move we adopt 0209 1 the staff recommendation to dismiss these two matters. 2 COMMISSIONER REYES: Second. 3 CHAIRMAN COX: All in favor, say "Aye." 4 COMMISSIONER SCHENCK: Aye. 5 COMMISSIONER REYES: Aye. 6 CHAIRMAN COX: Aye. 7 Motion carries 3-0. 8 MS. KIPLIN: And I have those orders. 9 CHAIRMAN COX: Okay. Ms. Kiplin, it 10 looks like F and G are pretty similar also. 11 MS. KIPLIN: F and G are not in the 12 sense that they are fully within the scope of the 13 registry worker statute, in that these are both mass 14 dockets. One is to refuse to add people to the 15 registry, and the other one is to remove people from 16 the registry. And it has to do with the fact that in 17 each one of these cases against the individual, they 18 do have a disqualifying criminal conviction. 19 COMMISSIONER SCHENCK: They've all been 20 notified of the fact that we intend to remove them, or 21 not add them -- 22 MS. KIPLIN: Yes. 23 COMMISSIONER SCHENCK: -- and they've 24 not objected? 25 MS. KIPLIN: They've all been notified. 0210 1 We've sent it out. They've all been notified. We 2 sent it to whatever address we had. So they've all 3 been notified under what is good law, did not appear. 4 They'll get a copy of this order. And if they want to 5 file a motion for rehearing, they're free to do that. 6 COMMISSIONER SCHENCK: I move that we 7 adopt the staff recommendation. 8 COMMISSIONER REYES: Second. 9 CHAIRMAN COX: All in favor, say "Aye." 10 COMMISSIONER SCHENCK: Aye. 11 COMMISSIONER REYES: Aye. 12 CHAIRMAN COX: Motion carries 3-0. 13 MS. KIPLIN: Thank you, sir. 14 CHAIRMAN COX: That's the completion of 15 the agenda. Ms. Kiplin, do you agree? 16 AGENDA ITEM NO. XXIII (continued) 17 MS. KIPLIN: No, sir, I don't. And 18 there are a couple of things. One is the ombuds 19 charter. I wanted to make sure we went on the record 20 with the change -- 21 CHAIRMAN COX: Oh, okay. Yes. 22 MS. KIPLIN: -- and make sure you all 23 had that -- thank you, Mr. Sadberry. If I could go 24 ahead and give out copies and turn your attention to 25 the second page. 0211 1 COMMISSIONER SCHENCK: What do I have, 2 two copies of -- 3 MS. KIPLIN: I think I'm giving out -- 4 I'm giving out multiple copies, am I not? I'm holding 5 the original in my hand, a colored copy. 6 CHAIRMAN COX: So we've got -- 7 MS. WOELK: I'm Sarah Woelk, Special 8 Counsel. 9 All I changed is a single word. I 10 changed "will" to "should" in that last sentence. I 11 understood that was -- 12 COMMISSIONER SCHENCK: Well, it's good 13 enough. I mean, this will be part of the handbook? 14 Yes? 15 MS. KIPLIN: This charter will not be 16 part of the handbook. But, obviously, for 17 consistency, we'll make sure. 18 MS. WOELK: Anything that's in the 19 handbook, we'll go through and make sure we're 20 consistent. But the charter is the document that 21 we're asking you to actually adopt. And there is a 22 single version to sign, plus copies for everybody. 23 MS. KIPLIN: Okay. I have a colored 24 copy. I don't know -- 25 CHAIRMAN COX: I have a colored copy, 0212 1 too. That will be in -- 2 COMMISSIONER SCHENCK: I've got three 3 back and whites. 4 MS. KIPLIN: Well, let me make sure, 5 because I'm looking at the one that does have the 6 right -- well, I guess you do, too. 7 COMMISSIONER SCHENCK: Yes. 8 MS. KIPLIN: Okay. He's got it. 9 COMMISSIONER SCHENCK: Do you want me 10 to sign one or . . . 11 AGENDA ITEM NO. XII (continued) 12 MS. KIPLIN: And there was one other 13 outstanding matter, Mr. Chairman. You asked me, and I 14 said I wanted to look at the Open Meetings Act. And 15 this had to do with -- 16 CHAIRMAN COX: Yes. 17 MS. KIPLIN: -- whether a quorum could 18 attend. And I want to make sure you know that under 19 the Open Meetings Act, you may attend. You may attend 20 a committee, legislative committee agency -- I mean 21 hearing, but no -- and that's a quorum. 22 Okay. Know that it won't be triggered 23 to be a meeting of your commission, the three-member 24 Commission, if your deliberations at the meeting by 25 the members of you-all consists only of publicly 0213 1 testifying at the meeting, publicly commenting at the 2 meeting and publicly responding at the meeting to a 3 question asked by a member of the legislative 4 committee. 5 And what that means is, you can't, as a 6 quorum, stand in the back and start chit-chatting 7 about agency business. 8 CHAIRMAN COX: Okay. Does that 9 preclude my going forward and shaking Chairman Flores' 10 hand? I didn't hear that enumerated. 11 MS. KIPLIN: No, I think you'll be fine 12 with that, but this had to do with, for example, all 13 three of you wanting to go and whether your being 14 there constitutes a meeting of the Commission. 15 CHAIRMAN COX: So we could all go? 16 MS. KIPLIN: Right. 17 CHAIRMAN COX: The important thing is 18 that each of us have someone that we sit with and that 19 at such time as the Commissioners want to be 20 introduced to the committee members, that somebody 21 from the staff will take them up so that I 22 shouldn't -- it won't be appropriate for me to do 23 that? 24 MS. KIPLIN: Yes, I think that's -- 25 under this provision, I think that's correct. And it 0214 1 also doesn't preclude -- if Chairman Flores said, 2 "Chairman Cox, I see you're in the audience. Can you 3 come forward and answer a question?" It doesn't mean 4 that Commissioner Reyes and Commissioner Schenck have 5 to leave the room. 6 CHAIRMAN COX: Okay. 7 MS. KIPLIN: You can actually state 8 things on the record there and not have you-all have 9 to leave. 10 COMMISSIONER SCHENCK: If we go 11 together -- we're not going together -- 12 CHAIRMAN COX: No! 13 COMMISSIONER SCHENCK: If we should go 14 to the same place at the same time, we should arrive 15 separately, not be together beforehand. We can sit in 16 the room. We can each speak to the Commissioner -- or 17 to Mr. Flores -- and we should leave separately? 18 MS. KIPLIN: That would be my 19 preference, just out of an abundance of caution. And 20 a lot of people would say, "Well, that's way extreme," 21 but it eliminates the, "Oh, so you rode in the same 22 car. Gee, what did you talk about?" 23 CHAIRMAN COX: Good. If y'all choose 24 to come to that -- 25 COMMISSIONER REYES: When is it? 0215 1 CHAIRMAN COX: 27th. Nelda will be 2 pleased to provide you with the -- 3 COMMISSIONER REYES: I think I'm going 4 to be in Washington then. 5 CHAIRMAN COX: Good place to be. 6 COMMISSIONER SCHENCK: Can you make it? 7 AGENDA ITEM NO. XXVIII 8 CHAIRMAN COX: Okay. The meeting is 9 adjourned. Thank you very much. 10 (Meeting adjourned: 3:29 p.m.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0216 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 13th day of May 2008. 15 16 17 ____________________________ Aloma J. Kennedy 18 Certified Shorthand Reporter CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 20 Kennedy Reporting Service, Inc. Cambridge Tower 21 1801 Lavaca Street, Suite 115 Austin, Texas 78701 22 512.474.2233 23 24 25