0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, SEPTEMBER 6, 2006 § 8 9 10 COMMISSION MEETING 11 WEDNESDAY, SEPTEMBER 6, 2006 12 13 BE IT REMEMBERED THAT on Wednesday, 14 the 6th day of September 2006, the Texas Lottery 15 Commission meeting was held from 9:00 a.m. to 16 1:23 p.m., at the Offices of the Texas Lottery 17 Commission, 611 East 6th Street, Austin, Texas 78701, 18 before CHAIRMAN C. TOM CLOWE, JR., and COMMISSIONER 19 JAMES A. COX, JR. The following proceedings were 20 reported via machine shorthand by Aloma J. Kennedy, a 21 Certified Shorthand Reporter of the State of Texas, 22 and the following proceedings were had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. C. Tom Clowe, Jr. 4 COMMISSIONER: Mr. James A. Cox, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO EXECUTIVE DIRECTOR: 9 Mr. Billy Atkins 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order...... 7 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chairman, possible 5 discussion and/or action regarding the Bingo Advisory Committee's activities, including 6 the August 9, 2006 Committee meeting............. 74 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on 2nd quarter 8 Calendar Year 2006 bingo conductor information...................................... 122 9 AGENDA ITEM NO. IV - Report, possible 10 discussion and/or action on the implementation of recommendations contained 11 in the Internal Audit report on bingo audit services, including the adoption of the bingo 12 regulatory objectives, bingo audit charter, bingo division organizational structure, 13 and/or bingo auditing standards.................. 135 14 AGENDA ITEM NO. V - Report, possible discussion and/or action on GTECH Corporation, 15 including proposed acquisition of GTECH.......... 145 16 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action on the 17 lottery operator contract, including whether the negotiation of the lottery operator's 18 contract in an open meeting would have a detrimental effect on the Commission's 19 position in negotiations of the lottery operator contract................................ 20 20 AGENDA ITEM NO. VII - Report, possible 21 discussion and/or action on the agency's contracts........................................ 146 22 AGENDA ITEM NO. VIII - Report, possible 23 discussion and/or action on the procurement of advertising services.......................... 147 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. IX - Consideration of and possible discussion and/or action on external 4 and internal audits and/or reviews relating to the Texas Lottery Commission, including 5 the State Auditor's Office audit of procurement at the Texas Lottery Commission 6 and/or on the Internal Audit Department's activities....................................... 7 7 AGENDA ITEM NO. X - Commission may meet in 8 Executive Session: A. To deliberate the duties and/or 9 evaluation of the Executive Director and/or Deputy Executive Director 10 pursuant to Section 551.074 of the Texas Government Code 11 B. To deliberate the duties and evaluation of the Internal Audit 12 Director pursuant to Section 551.074 of the Texas Government Code 13 C. To deliberate the duties and evaluation of the Charitable Bingo 14 Operations Director pursuant to Section 551.074 of the Texas 15 Government Code D. To deliberate the duties of the 16 General Counsel pursuant to Section 551.074 of the Texas Government Code 17 E. To receive legal advice regarding pending or contemplated litigation 18 and/or to receive legal advice pursuant to Section 551.071(1)(A) or 19 (B) of the Texas Government Code and/or to receive legal advice 20 pursuant to Section 551.071(2) of the Texas Government Code, including but 21 not limited to: Cynthia Suarez v. Texas Lottery 22 Commission Shelton Charles v. Texas Lottery 23 and Gary Grief Stephen Martin vs. Texas Lottery 24 Commission Employment law, personnel law, 25 procurement and contract law, 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 evidentiary and procedural law, and general government 4 law Lottery Operations and Services 5 contract Mega Millions game and/or 6 contract F. To deliberate the negotiation of the 7 lottery operator's contract pursuant to Section 467.030 of the Texas 8 Government Code......................... 160 9 AGENDA ITEM NO. XI - Return to open session for further deliberation and possible action 10 on any matter discussed in Executive Session..... 162 11 AGENDA ITEM NO. XII - Consideration of the Status and possible entry to orders in: 12 A. Various Docket Nos. (Master Docket No. 362-06-990713.B) relating to the Denial 13 of Application of Certain Persons from the TLC's Registry of Approved Bingo 14 Workers -- Jeremiah Comes, Steven Foster, Joey Gonzales, Gregory Griffin, 15 Vanessa Hernandez, Joshua Kappel, Roy Lombrana, Amalia Martinez, Ricardo 16 Ramirez and Justin Walcott B. Various Docket Nos. (Master Docket No. 17 362-06-990713.B) relating to the Removal of Certain Individuals from 18 the TLC's Registry of Approved Bingo Workers -- Chazzidy Wilkinson, 19 Nicholas Tostado, Russell Reta and Victor Villasenor 20 C. Docket No. 362-06-1269 - NASA Food Mart D. Docket No. 362-06-1902 - Sunmart #302 21 E. Docket No. 362-06-2549 - Bob's Sports Center.................................. 149 22 AGENDA ITEM NO. XIII - Report by the Executive 23 Director and/or possible discussion and/or action on the agency's operational status and 24 FTE status...................................... 159 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. AGENDA ITEM NO. XIV - Report by the 3 Charitable Bingo Operations Director and possible discussion and/or action on the 4 Charitable Bingo Operations Division's activities...................................... 159 5 AGENDA ITEM NO. XV - Public Comment............. 160 6 AGENDA ITEM NO. XVI - Adjournment............... 162 7 REPORTER'S CERTIFICATE.......................... 163 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0007 1 P R O C E E D I N G S 2 WEDNESDAY, SEPTEMBER 6, 2006 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN CLOWE: We'll come to order. 6 Good morning. It's 9:00 a.m., September the 6th, 7 2006. Commissioner Cox is here. My name is Tom 8 Clowe. We'll call this meeting of the Texas Lottery 9 Commission to order. 10 AGENDA ITEM NO. IX 11 CHAIRMAN CLOWE: We'll take first Item 12 No. IX on the agenda, consideration of possible 13 discussion and/or action on external and internal 14 audits and/or reviews relating to the Texas Lottery 15 Commission, including the State Auditor's Office of 16 audit procurement at the Texas Lottery Commission 17 and/or the Internal Audit Department's activities. 18 Ms. Melvin. 19 MS. MELVIN: Good morning, 20 Commissioners. For the record, my name is Catherine 21 Melvin, Director of the Internal Audit Division. 22 I have no items of update regarding the 23 internal audit function or its activities. However, I 24 would like to ask the State Auditor's Office to join 25 me. Mr. Michael Apperley is here and Mr. Kels Farmer. 0008 1 As you are aware, they have recently 2 completed their audit of procurement activities of the 3 Texas Lottery Commission. That report was issued. 4 And I'll turn it over to them to present the findings 5 of their report. 6 CHAIRMAN CLOWE: Good morning. 7 MR. APPERLEY: Good morning, sir. For 8 the record, my name is Mike Apperley. With me today 9 is Kels Farmer, a managing senior auditor with our 10 office, and Becky Beachy, a senior auditor with our 11 office. 12 We appreciate the opportunity to talk to 13 you today about the results of our audit. Procurement 14 at the Texas Lottery Commission which, as Catherine 15 mentioned, was released in August 2006. 16 We had three objectives for the audit. 17 They were to determine whether purchases were 18 necessary and reasonable and made in accordance with 19 state laws and regulations and agency rules, policies 20 and procedures, also to determine whether the agency 21 managed selected contracts to ensure that the 22 contracts were monitored and the terms of these 23 contracts were enforced and, finally, to determine the 24 status of findings and recommendations related to the 25 agency contracts reported in prior State Auditor 0009 1 Office reports. 2 At this point I'll turn it over to Kels 3 Farmer, who is the Project Manager on the project, and 4 he's going to talk to you about our overall 5 conclusion, our findings and our recommendations. 6 MR. FARMER: Good morning, 7 Commissioners. 8 CHAIRMAN CLOWE: Good morning. I think 9 your mike needs to be turned on. There you go. 10 MR. FARMER: There we go. Good morning, 11 Commissioner. For the record, my name is Kels Farmer. 12 I'm a managing senior auditor, and I was the Project 13 Manager with the State Auditor's Office for this 14 project. 15 I would like to start by briefing you on 16 our overall conclusion for the audit. We found that 17 while the agency has policies and procedures that 18 establish a sound baseline for its contracting and 19 procurement processes, it can still make improvements 20 in certain areas. Specifically we found that the 21 agency did not pay its lottery operator accurately in 22 one instance. It did not pay an advertising 23 contractor in accordance with the terms of its 24 contract. It did not always maximize competition for 25 its contracts. It should improve how it monitors the 0010 1 primary lottery operator and, finally, its strength 2 and controls over its purchasing system. More detail 3 on those to summarize the findings of our audit: 4 The agency did not deduct $148,000 in 5 sanctions and liquidated damages from a payment to the 6 primary lottery operator. 7 The agency made $287,000 in potential 8 overpayments to an advertising contractor. Those were 9 potential overpayments because they were not made in 10 accordance with the terms of the contract. 11 The agency did not always effectively 12 plan its contract solicitations to maximize 13 competition. I have two examples of that, that I 14 would like to share with you. 15 First, the agency did not always receive 16 at least three responses to its contract solicitations 17 or document the reasons when it received few 18 responses. And second, the agency did not document 19 its justification for minimum contractor 20 qualifications in three of the contracts that we 21 tested. Additional findings include that. 22 The agency does not have a documented 23 contract negotiations process. We did not find 24 evidence of negotiations for two of the six contracts 25 that we tested in this audit. 0011 1 The agency relies on information 2 provided by the primary lottery operator to monitor 3 the performance of the on-line games contract. It 4 does not independently verify the self-reported 5 information in a timely manner. 6 We found that the agency effectively 7 evaluated and selected qualified contractors for 8 contracts when it received at least three bids. 9 And, lastly, the agency includes 10 provisions required by state law in its contracts. 11 We have a number of recommendations to 12 address these findings. We recommend that the agency 13 pay contractors in accordance with contract terms, 14 including terms for sanctions and liquidated damages. 15 We recommend that the agency strengthen 16 its monitoring efforts for the primary lottery 17 operator contract, to ensure compliance with contract 18 terms. 19 We recommend that the agency 20 consistently perform and document needs and risk 21 assessments. 22 We recommend that the agency determine 23 and document the minimum acceptable qualifications for 24 its contract bidders. 25 We recommend that the agency assess and 0012 1 document the reasons that it receives fewer than three 2 bids when soliciting contracts. 3 We recommend that the agency develop 4 written policies and procedures for negotiating 5 contracts to ensure that it identifies the contract 6 terms and conditions that are essential to its needs. 7 And we have one final recommendation 8 that we made to the Legislature, the Texas 9 Legislature, which is that the agency should consider 10 amending Texas Government Code, Section 466.105 to 11 remove the agency's exemptions from contracting 12 statutes. 13 This concludes my summary of the audit. 14 We will be glad to answer any questions that you may 15 have. Thank you. 16 COMM. COX: Kels, what was the period 17 covered by your audit? 18 MR. FARMER: Our period, we covered two 19 different -- our scope was -- for purchasing, it was 20 the year prior to May 2005. And then for contracting, 21 we tested -- or we included in our scope all active 22 contracts on May 2005. 23 COMM. COX: Okay. 24 MR. FARMER: So that varies, depending 25 on the contract that we looked at. Some of them were 0013 1 older; some of them were newer. But they were all 2 active at the point that we started our field work. 3 COMM. COX: Was there anything you could 4 notice about improvement or lack of improvement or 5 digression? Were things getting better later in your 6 audit or were they about the same? 7 MR. FARMER: We noted some instances 8 where the issues that we found -- I don't have the 9 examples off the top of my head -- 10 COMM. COX: I understand. 11 MR. FARMER: -- but there were quite a 12 few in which our exceptions were from periods of time 13 where the agency had since developed policies and 14 procedures on the issue -- 15 COMM. COX: Okay. 16 MR. FARMER: -- and had complied on 17 those policies and procedures afterwards. We feel 18 like the policies and procedures set a sound baseline 19 for contracting and procurement. 20 COMM. COX: Okay. So we're already 21 getting better. 22 MR. FARMER: Yes. 23 COMM. COX: And with your report -- 24 Director Sadberry, did you and your staff concur in 25 the recommendations? 0014 1 MR. SADBERRY: Commissioner, we did. 2 And we concur as well in your observations, as I 3 understand them, that there was a thorough review. 4 And we find it very helpful, and we also see the 5 indication that already improvements are occurring. 6 And the template for further improvements and for 7 compliance with the audit recommendations will be in 8 place, to the extent that they are not already in 9 place, a significant portion of which we believe are 10 in place. 11 COMM. COX: Did you and your staff have 12 any concern about the recommendation that the Lottery 13 Commission's exemption from certain purchasing rules 14 be revoked? 15 MR. SADBERRY: Commissioner, we did not. 16 In fact, to the contrary. We concurred in that 17 informally and formally. We believe that is a good 18 recommendation. 19 COMM. COX: And, Kels, were y'all 20 satisfied with management's response to your 21 recommendations? 22 MR. FARMER: Yes, sir. I feel that we 23 developed a very strong relationship with the agency. 24 We have received their full cooperation, and we got 25 all the information that we needed to conclude our 0015 1 audit. 2 COMM. COX: That's what I like to here. 3 Thank you, Mr. Chairman. 4 CHAIRMAN CLOWE: And I have a couple of 5 questions, in addition to those Commissioner Cox has 6 asked. Did you find the staff forthcoming and helpful 7 in every instance where you conducted your audit, 8 insofar as information and background? 9 MR. FARMER: Very much so, yes, sir. 10 CHAIRMAN CLOWE: And you have said that 11 you were satisfied with the responses that management 12 gave to your recommendations? 13 MR. FARMER: Yes, sir. 14 CHAIRMAN CLOWE: And how soon can we ask 15 you to come back and do a recheck so that you can 16 monitor our progress in this area? 17 MR. APPERLEY: I guess I better take 18 that one. All of our audits are subject to approval 19 by the Legislature Audit Committee. You can request 20 at any time that we come out and do a follow-up. I 21 would probably give yourself some time. I would say a 22 minimum of a year. 23 But any time that you would like to 24 address that request to Mr. Keel, he would be glad to 25 see that. When we balance our work in the future, we 0016 1 balance it against risk assessment across the entire 2 state. And we do have limited resources. We 3 understand that the lottery is a very important part 4 of the State of Texas, but it would depend on 5 basically the State of Texas at that point, how things 6 were going. 7 I think that we've seen a turnaround -- 8 that might be too harsh of a word -- but the impact of 9 Mr. Sadberry coming in has been pronounced. We have 10 seen improvements. The attitude of the staff has been 11 exceptional on all the audits that we've conducted 12 this year, and that is something that we don't see a 13 lot of the time. So I think you're in good hands 14 right now. 15 We will look at it in the future. You 16 will have the opportunity to provide updates to us on 17 an annual basis. We'll actually contact your staff to 18 get those updates. You may not see us actually out on 19 site. But feel free to recommend that we come out or 20 request that we come out, and we'll certainly look 21 into that. 22 CHAIRMAN CLOWE: And this is what, the 23 fourth or fifth audit now? 24 MR. APPERLEY: This is the fifth. 25 CHAIRMAN CLOWE: You've given us a 0017 1 report on the fourth and fifth. I would like to make 2 a general comment to you and ask you to carry a 3 message back to Mr. Keel on behalf of this Commission. 4 I think I can speak for Commissioner Cox. 5 First of all, we are most appreciative 6 of the professionalism and of the quality of work that 7 you have done in these four audits on this agency. 8 These audits were conducted in an atmosphere, in my 9 opinion, of some degree of controversy, and there were 10 many outside interests that were focused on this 11 agency where these audits took place. It was not what 12 might be considered just a normal audit. 13 Your people were exemplary in the 14 objectivity and the professionalism in which they 15 conducted these audits. And I think the beneficial 16 result is of higher quality because of that level of 17 commitment. And I appreciate the opportunity to also 18 say that I think a lot of it is due to not only 19 Director Sadberry but Internal Auditor Melvin as well 20 as all of the members of their respective staff. 21 We would like to have this relationship 22 with you ongoing. And I think one of the audits you 23 did here was maybe nine years ago. We would like to 24 see you more often than that. And the message I would 25 like to ask you to carry back to Mr. Keel is that we 0018 1 think if we can ask you to work with us more closely 2 and more frequently in the future, the state will 3 benefit. 4 We continue to do business here that is 5 very controversial, which is not liked by a great many 6 people in this state. And when you're in that 7 position, you invite inspection and you invite 8 outsiders to examine your work product and your 9 result. That way, I think you avoid problems, and 10 that's our goal at this agency. 11 So thank you again for the good work you 12 and all the members of your agency have done, and we 13 would like to see you more often. 14 MR. APPERLEY: Well, I appreciate your 15 comments, and I'll take those back to Mr. Keel. 16 CHAIRMAN CLOWE: Very good. 17 COMM. COX: Mr. Chairman, I totally 18 agree with you on those things. 19 CHAIRMAN CLOWE: Thank you. 20 COMM. COX: Thank you very much. 21 MR. APPERLEY: Thank you. 22 CHAIRMAN CLOWE: Anything, Ms. Melvin? 23 MS. MELVIN: Commissioners, especially 24 Chairman, regarding your comment about seeing the 25 state auditors again, I guess I should mention to you 0019 1 that the annual financial audits have begun, and we 2 will certainly see Mike throughout that process. It's 3 another team or a group of people that will be working 4 on that, but I think you can anticipate the State 5 Auditor's Office coming probably toward the end of 6 this calendar year to present the results of the 7 annual financial audit. 8 CHAIRMAN CLOWE: And, you know, you have 9 just finished an internal audit on the auditing 10 function in the Charitable Bingo Division. And 11 although that's not on your list and it isn't a formal 12 project for you, as I understand it, where we can have 13 a close relationship, your oversight, informal if not 14 formal, can be beneficial to us. We really want the 15 kind of help that you folks give, and we'll take it 16 any way we can get it so that it will help us improve 17 our operations. 18 The tasks that we have here are complex, 19 and I use the word again "controversial." So the 20 highest level of performance we can achieve will be 21 beneficial for everyone. Thank you very much. 22 MR. APPERLEY: Thank you. I appreciate 23 it. 24 CHAIRMAN CLOWE: Anything further? 25 MS. MELVIN: No, sir. 0020 1 CHAIRMAN CLOWE: Anything further? 2 COMM. COX: No, sir. 3 CHAIRMAN CLOWE: Thank you all. 4 AGENDA ITEM NO. VI 5 CHAIRMAN CLOWE: Next we'll go to Item 6 No. VI, consideration of and possible discussion 7 and/or action on the lottery operator contract, 8 including whether the negotiation of the -- no. I'm 9 sorry. I think I'm on the wrong item there. 10 What item is it, Director Sadberry, that 11 you want regarding the GTECH contract? 12 MR. SADBERRY: You're correct, 13 Mr. Chairman. 14 CHAIRMAN CLOWE: Is that it? 15 MR. SADBERRY: That's Item VI. 16 CHAIRMAN CLOWE: Okay. Then I'll 17 conclude with the reading of that item -- including 18 whether the negotiation of the lottery operator's 19 contract in an open meeting would have a detrimental 20 effect on the Commission's position in negotiations of 21 the lottery operator contract. 22 Director Sadberry. 23 MR. SADBERRY: Good morning Mr. Chairman 24 and Commissioner. For the record, my name is Anthony 25 Sadberry, Executive Director. 0021 1 Commissioners, this item has been on the 2 Commission's meeting agenda for some time. Staff has 3 undertaken negotiations with GTECH relating to a 4 proposed contract amendment. Those negotiations have 5 resulted in the amendment that staff will present to 6 you today as a proposed amendment. 7 Since the beginning of the Commission in 8 1993, the Commissioners have consistently taken the 9 position that matters relating to key contracts, 10 including the lottery operations and services 11 contract, are matters about which the Commission wants 12 to be kept informed and to be able to provide 13 direction to the Executive Director and staff. Staff 14 provides regular updates on agency contracts during 15 Commission meetings and for major contracts, including 16 the lottery operations and services contract, seek 17 Commissioner input and direction before making 18 contracting decisions. 19 Additionally, there have been 20 recommendations made in the past by staff from the 21 Texas Sunset Commission that the Commissioners be more 22 involved and have increased oversight of Lottery 23 Commission major contracts, and the lottery operations 24 and services contract certainly falls under that 25 classification, as it is the largest contract managed 0022 1 by the agency. 2 Pursuant to Texas Government Code, 3 Section 467.030, I understand that the Commissioners 4 have the ability to deliberate the negotiations of the 5 lottery operator's contract in executive session if 6 the Commissioners determine in writing that an open 7 meeting would have a detrimental effect on the 8 Commissioners' position in the negotiations. 9 The open meetings notice posted for 10 today's meeting provides the Commissioners with the 11 ability to convene any closed meeting to deliberate 12 the negotiations of the lottery operator's contract as 13 well as to receive legal advice regarding the 14 contract. While staff does not anticipate a need for 15 receipt of legal advice or deliberation of the 16 negotiations of the contract in executive session, 17 staff awaits the direction of the Commissioner on this 18 matter. 19 Deputy Executive Director Gary Grief 20 headed up the agency's contract negotiating team. At 21 this time, unless you have questions for me, I will 22 ask Gary to present to you the details of the proposed 23 amendment. 24 CHAIRMAN CLOWE: To answer your 25 question, with your concurrence, Commissioner Cox, the 0023 1 Commission desires to discuss this in the open meeting 2 and not go into executive session, which has been our 3 practice, I think, on almost every discussion about 4 this contract. 5 MR. SADBERRY: That is correct, 6 Mr. Chairman. 7 COMM. COX: Absolutely. 8 CHAIRMAN CLOWE: Good morning. 9 MR. GRIEF: Good morning, Commissioners. 10 For the record, I am Gary Grief, Deputy Executive 11 Director for the Texas Lottery Commission. And 12 joining me today are Kathy Pyka, our controller; Mike 13 Fernandez, our Director of the Administration 14 Division; and Toni Erickson, our Manager of Support 15 Services in the Administration Division. 16 Commissioners, we have provided you with 17 a draft of Amendment No. 8 to the contract for lottery 18 operations and services with GTECH Corporation. The 19 term of that contract, as a reminder, runs through 20 August 31, 2011. 21 This morning we would like to fully 22 brief the Commission on the details of this proposed 23 contract amendment. We seek any guidance or direction 24 that the Commission may have for us. And as a 25 reminder, as Executive Director Sadberry has 0024 1 previously mentioned, the established practice is to 2 bring all major contracts before the Commission prior 3 to taking any action such as an extension or an 4 amendment. And as the lottery operations contract is 5 certainly the largest and most comprehensive contract 6 for our agency, it does fall under that practice. 7 I would like to start by providing you 8 with some general background information. Our intent, 9 when we opened up the contract negotiations with 10 GTECH, was to more closely align the goals of the 11 Texas Lottery Commission with that of our lottery 12 operator. These efforts began in earnest back in 13 April 2005. And our original objective was to reach 14 an agreement with GTECH to modify the lottery operator 15 contract such that GTECH's compensation percentage 16 would be based on net revenue to the state rather than 17 the current 2.6999 percent of gross lottery ticket 18 sales. 19 However, the practicalities of reaching 20 that type of arrangement with the lottery operator 21 could not be addressed, as the agency was unable or in 22 some cases unwilling to cede the amount of control of 23 the games to the lottery operator in order for them to 24 agree to this type of arrangement. Ultimately, our 25 scope became focused on the prize payout percentage. 0025 1 Under the current compensation 2 agreement, GTECH's compensation percentage, unlike the 3 State of Texas', is unaffected by changes to the prize 4 payout percentage. Furthermore, under the terms of 5 our contract with GTECH, they provide the Commission 6 with a wide variety of advice and recommendations on 7 marketing strategy, which include but are not limited 8 to recommendations on prize payout percentages for 9 particular lottery games. 10 So to better ensure that GTECH shares 11 the risk, so to speak, for the Texas Lottery taking 12 those recommendations into consideration and 13 implementing those type of recommendations on the 14 prize payout percentages, both parties entered into 15 these contract discussions that took place over about 16 an 18-month period. 17 In late March of this year, these 18 discussions culminated into intense contract 19 negotiations over a two-day period, with negotiating 20 teams from both parties involved. For the Lottery 21 Commission, I worked alongside Mr. Fernandez and 22 Ms. Pyka in representing the agency. And for GTECH, 23 they utilized their team of Jaymin Patel, Senior Vice 24 President and Chief Financial Officer; Tim Nyman, who 25 was at that time Senior Vice President for Global 0026 1 Services; Ramon Rivera, who is the Account General 2 Manager here in Texas; and Joe Lapinski, who is the 3 Assistant Account General Manager here in Texas. 4 On the Texas Lottery side, we also had 5 the full support and review from our Executive 6 Director, as well as the Legal Division in our agency 7 and the Office of the Attorney General. And, in 8 addition, we received contributions from a wide 9 cross-section of the agency as we entered into these 10 negotiations. 11 Those negotiations ultimately led to the 12 development of Draft Amendment No. 8, which is before 13 you today. And the agency management and GTECH have 14 agreed in principle to the term of this amendment. As 15 I mentioned previously, our focus was on the alignment 16 of goals relating to the prize payout percentage. 17 However, as negotiations developed, we widened the 18 scope of those negotiations to include several other 19 contractual changes which we believe ultimately 20 benefit the state. We're going to get into each one 21 of those items in detail today. But as an 22 introduction, here are the basic elements of the 23 amendment. 24 Texas Lottery has agreed to waive a 25 requirement in the current contract for a new central 0027 1 computer and backup system, amend certain contract 2 sanctions, clarify certain existing contract 3 provisions and add some new contract provisions. In 4 return, GTECH has agreed to provide annual credits to 5 the Texas Lottery, based on sales and the prize payout 6 percentage, provide additional equipment and services, 7 add some additional contract sanctions and clarify 8 certain other contract provisions. 9 Agency staff has also developed a 10 financial operational impact analysis related to this 11 proposed contract amendment which we have provided to 12 the Commissioners. As shown in that analysis, the net 13 tangible value to the state, identified after 14 determining a cost of the goods and services obtained 15 under this amendment less the cost of the goods and 16 services being given up, is approximately $4 million 17 over the term of the contract. 18 In addition, and just as important, 19 there are also a number of intangible benefits of 20 significant value that can be realized under the terms 21 of the amendment. With that information as a 22 background, I will now ask Kathy Pyka to take you 23 first through the details of the annual credit 24 arrangement based on sales and the prize payout 25 percentage. 0028 1 CHAIRMAN CLOWE: Just one minute. 2 MR. GRIEF: Yes, sir. 3 CHAIRMAN CLOWE: Madam Recorder, I know 4 that this is your first time with us. Are we moving 5 along at a pace that's comfortable for you? 6 THE REPORTER: Yes, sir. 7 CHAIRMAN CLOWE: You're doing fine. All 8 right. Fine. 9 Thank you, Ms. Pyka. 10 MS. PYKA: Good morning, Commissioners. 11 For the record, Kathy Pyka, Controller at the Lottery 12 Commission. And I am going to provide you an overview 13 of Section 10.3.3 and 10.3.4 of the amended contract. 14 These sections require that GTECH 15 provide credit to the Commission based on lottery 16 sales and increases in the overall prize payout 17 percentage. First, beginning with Section 10.3.3, 18 this provides an annual credit to the Commission equal 19 to 12 percent of GTECH's annual incremental revenue 20 from sales over the previous fiscal year for every 21 .1 percent increase in the overall prize payout 22 percentage for instant and on-line games. The 23 incremental revenue will be based on sales over the 24 previous fiscal year, and the prize payout percentage 25 will be compared to the previous fiscal year. This 0029 1 credit will not exceed 50 percent of GTECH's 2 incremental annual revenue over the prior year. 3 Section 10.3.4 of the contract 4 provides -- 5 CHAIRMAN CLOWE: Kathy, let me ask a 6 question at this point, for clarification. Does your 7 comment in that regard apply to the first bullet 8 that's up there? 9 MS. PYKA: Yes, it does, Mr. Chairman. 10 CHAIRMAN CLOWE: And I thought I heard 11 you say on-line games. 12 MS. PYKA: Instant and on-line. 13 CHAIRMAN CLOWE: Instant and on-line. 14 Both games. Okay. Fine. Thank you. 15 MS. PYKA: Section 10.3.4 provides an 16 annual credit to the Commission equal to 4.5 percent 17 of the year-over-year decline in dollar returns to the 18 state. And it indicates that the sales remain flat 19 and the weighted prize payout ratio for instant and 20 on-line games to increase by .1 percent. This credit 21 shall not exceed $1.2 million in any state fiscal 22 year. 23 Mike Fernandez will now provide you a 24 detailed overview of additional sections of the 25 contract. 0030 1 MR. FERNANDEZ: Good morning, 2 Mr. Chairman, Commissioner Cox, Mr. Sadberry. My name 3 is Mike Fernandez. I'm the Director of 4 Administration. 5 Now I would like to briefly discuss 6 other offerings that have been included as a part of 7 this amendment. Now, the first is the financial 8 interface system. This will allow the agency to 9 better monitor all financial transactions with a 10 system that more closely fits our financial structure, 11 upgrade the lottery gaming system to accommodate up to 12 200 active games, the retailer hotline, change the way 13 the sanction is calculated, from monthly to bi-weekly, 14 and extend the hotline hours of operation from 4:00 15 a.m. to midnight, provide 1,000 new game point 16 terminals. 17 This is state-of-the-art equipment and 18 provides sales for both on-line and instant tickets, 19 provide 10,250 express point check-a-ticket devices -- 20 this will ease the burden on retailers in checking 21 tickets for customers -- replace the GVT extra 22 terminals with more current technology ISYS terminals, 23 provide 1,320 instant ticket vending machines at a 24 reduced rate for the next two years and at no cost for 25 the remaining three years on the contract, also 0031 1 provide on-line connectivity for all ITVMs. 2 I would also like to call your attention 3 to Page 8, Section K of Amendment 8. The first 4 sentence has been changed to now read "effective 5 September 1, 2006." As you know, we extended the ITVM 6 contract at the last Commission meeting. This change 7 and effective date will take advantage of better 8 pricing, provide two promotional trailers to include 9 current on-line and instant sales technology and the 10 ability to validate and cash winning tickets. 11 COMM. COX: Mike, I've got a couple of 12 questions on that one. 13 MR. FERNANDEZ: Yes, sir. 14 COMM. COX: How many ISYS terminals -- 15 most of the retailers had ISYS terminals. Right? 16 MR. FERNANDEZ: Yes, sir. I believe 17 that we have -- well, we have about 500 GVT terminals 18 out there right now, 500 or 600, Mr. Commissioner. 19 COMM. COX: Okay. So that's a 20 relatively small percentage of the 17,000 we've got 21 out there. And these were the smaller retailers? 22 MR. FERNANDEZ: This is a smaller 23 footprint. That device will only handle Quick Picks. 24 COMM. COX: Okay. 25 MR. FERNANDEZ: Now, that doesn't mean 0032 1 that we're going to replace all of those. I think 2 Mr. Anger and his staff will work with those retailers 3 to decide which of those -- 4 COMM. COX: So those who need them and 5 can accommodate them will get them, and those that 6 just don't have the room or don't have the volume -- 7 MR. FERNANDEZ: May not choose to do so. 8 That's correct, Commissioner. 9 COMM. COX: Okay. Got you. 10 MR. FERNANDEZ: In exchange for the 11 items just discussed, the agency agrees to waive the 12 requirement for a new central computer and backup 13 system. This is a current requirement in the contract 14 and was due to be on-line March 1, 2008. 15 After a lengthy discussion with agency 16 staff, it was determined that such an upgrade would 17 not provide a level of operational enhancement worth 18 the cost or risk of conversion. Again, through a 19 discussion with Lottery staff and GTECH staff, the 20 consensus is, the current system will support new game 21 growth through the remainder of the contract. 22 I would now like to turn it over to Toni 23 Erickson to discuss new and amended sanctions, 24 liquidated damages and clarifying contract language. 25 MS. ERICKSON: Good morning, 0033 1 Commissioners. For the record, Toni Erickson, Support 2 Services manager. I'm going to start with current 3 sanctions that were amended. 4 The first sanction has to do with the 5 inability to cash winning tickets at a retailer 6 location. As currently written, this sanction is 7 assessed if the lottery gaming system has a problem 8 and will not cash tickets for any game. This sanction 9 is applied whether it's one ticket or an entire game 10 that will not validate. The current sanction is 11 $1,000 per minute, with a two-minute grace. 12 When amending this sanction, we looked 13 at two different validation scenarios and the urgency 14 to correct the problem within those scenarios. The 15 first part of the sanction was written such that if 16 retailers are unable to cash winning tickets for an 17 entire game or all of the instant ticket games, the 18 sanction will remain at $1,000 per minute, with a 19 two-minute grace. 20 Under the second scenario, the sanction 21 was written such that if retailers are unable to cash 22 a single winning ticket or a few winning tickets for 23 any game, then sanctions may be assessed at a 24 graduated rate of $1,000 per hour each hour for the 25 first four hours, then $5,000 per hour thereafter. 0034 1 The second sanction we amended was the 2 inability to cash winning tickets at a claim center. 3 The change to this sanction was minor and intended for 4 clarification purposes only. As currently written, 5 the sanction says if any claim center is unable to 6 cash a winning ticket and process a claim, sanctions 7 may be assessed. That meant if the claims and payment 8 application went down at 9:00 p.m. on a Tuesday night, 9 technically we could assess sanctions, even though we 10 weren't in the center processing claims. The 11 clarifying language states that the claim center must 12 be open for business and unable to cash winning 13 tickets before the sanction would be assessed. 14 The next sanction is for the inability 15 to confirm or activate instant ticket packs. As 16 currently written, this sanction is assessed if 17 retailers are unable to confirm or activate instant 18 ticket packs. The sanction is applied whether it's 19 one retailer or all retailers, and the current 20 sanction is $1,000 per minute, with a two-minute 21 grace. 22 This is another sanction where we 23 considered two different scenarios, based on the 24 magnitude of the issue. The first part of the 25 sanction was written such that if all retailers were 0035 1 unable to confirm or activate instant ticket packs, 2 the sanction will remain at $1,000 per minute, with a 3 two-minute grace. Under the second scenario, the 4 sanction was written such that if a retailer or a 5 handful of retailers are unable to confirm or activate 6 instant ticket packs, sanctions may be assessed at a 7 graduated rate of $1,000 per hour each hour for the 8 first four hours and then $5,000 per hour thereafter. 9 The next item is the inability to 10 produce accurate terminal reports. Currently the 11 sanction for inaccurate terminal reports is $5,000 per 12 incident, up to four hours, thereafter $5,000 per hour 13 until the problem is fixed. The cure was to add a 14 maximum daily sanction for inaccurate reports of 15 $50,000. 16 Finally we looked at the sanction for 17 the inability of the lottery gaming system to conduct 18 management functions or provide daily reports. This 19 is another sanction where the change was minor and 20 intended for clarification purposes. And the change 21 is similar to that which was done for the claim 22 centers. As currently written, the sanction states if 23 any lottery management functions or daily system 24 reports are unavailable, sanctions may be assessed. 25 The clarifying language says if these functions or 0036 1 reports are required by the Texas Lottery staff to 2 conduct business and are unavailable, sanctions may be 3 assessed. 4 The current contract has two liquidated 5 damages. These are on-line game unavailability and 6 the inability of retailer terminals to communicate 7 with the lottery gaming system. 8 I'm not going to go over these 9 individually because the proposed change is the same 10 for both. As currently written, both of these damages 11 are assisted based on a percentage of average per 12 minute sales. For example, in any on-line game is 13 unavailable for sales, liquidated damages may be 14 assessed at the rate of 40 percent of the previous ten 15 weeks' average per minute sales for the same day and 16 same effective game. 17 So if Lotto Texas went down on Tuesday, 18 we would look back at the previous ten Tuesdays and 19 get the daily sales for each of those days and come up 20 with a per minute average. We would then assess at 21 40 percent of that average. 22 The proposed change in this amendment 23 for both damages says that in addition to looking back 24 at the same day of week, we will also use the same 25 time of day corresponding to the period the game was 0037 1 unavailable. So again, if the game was unavailable 2 for 20 minutes at 8:15, we will use average sales for 3 the ten previous weeks on the same day at the same 4 time, and this gets us closer to actual damages. 5 Next I'm going to discuss new sanctions 6 that were added in this amendment. The first sanction 7 noted is for an out-of-balance between the lottery's 8 internal control system and GTECH. Every night we 9 balance all transactions and amounts between our 10 internal control system and GTECH. 11 Under the new sanctions, the Commission 12 can assess $1,000 per incident when an out-of-balance 13 occurs as a result of GTECH processing. 14 The second new sanction is for the 15 failure of the lottery gaming system to execute a 16 planned on-line promotion. Under this sanction, the 17 Commission can assess $5,000 per incident when the 18 lottery gaming system fails to execute planned 19 retailer or player promotion. 20 Third on the list is a sanction for 21 failure to load instant game files within the 22 specified time frame. Included in this amendment is a 23 new provision that requires GTECH to load instant game 24 files within five days from receipt of authorization 25 by the Commission. This allows the Commission to have 0038 1 full accountability of the games received and ensure 2 the accuracy of inventory reports. In the event the 3 game files are not loaded timely, the Commission can 4 assess a sanction of $100 per day of delay until 5 loaded. 6 And last, there are appropriate 7 accompanying sanctions for all of the new equipment 8 included in this amendment that Mike reviewed. The 9 sanctions cover services such as delivery, 10 installation and maintenance. 11 CHAIRMAN CLOWE: Toni, as a matter of 12 history, how often is there an out-of-balance 13 situation between ICS and GTECH? 14 MS. ERICKSON: I would say maybe once a 15 quarter. It's not something that happens very often. 16 But when it does, it slows down processing like at our 17 end and start of day. 18 CHAIRMAN CLOWE: So historically maybe 19 four times a year? 20 MS. ERICKSON: Yes. 21 CHAIRMAN CLOWE: Thank you. 22 COMM. COX: Toni, how do we know or is 23 it even a question whether the GTECH caused the 24 out-of-balance or the internal control system of the 25 lottery caused the out-of-balance? 0039 1 MS. ERICKSON: We know once we do the 2 research and find out. When we're balancing at night 3 and we come up and there is an out-of-balance, 4 obviously, we go back and start researching the 5 transactions to find out where the out-of-balance 6 occurred. And it could be something, that GTECH put a 7 credit on their system that we don't have on our 8 system, you know, that didn't flow through. So it's 9 the process of research that lets us know why that 10 out-of-balance occurred and who is at fault. 11 COMM. COX: Are there ever instances in 12 which it was we who caused the out-of-balance? 13 MS. ERICKSON: I can't answer that. I'm 14 sorry. 15 MS. PYKA: I'm not aware of any. I 16 mean, we would need to go back and look. 17 COMM. COX: But this would only apply, I 18 assume, if GTECH caused the problem? 19 MR. FERNANDEZ: That is correct. 20 MS. PYKA: Correct. 21 COMM. COX: Thank you. 22 CHAIRMAN CLOWE: Don't give them money. 23 (Laughter) 24 COMM. COX: I was just making sure. 25 MS. ERICKSON: I can assure you that the 0040 1 language is very specific in Amendment 8, that they 2 pay us for out-of-balance. 3 Next is the -- 4 CHAIRMAN CLOWE: Good clarification. 5 MS. ERICKSON: Next is clarifying 6 language that was also included in the amendment. The 7 first item is background investigations for GTECH 8 employees. I want to note that this item addresses an 9 audit finding identified in the Commission's last 10 security audit. 11 And the proposed language in the 12 amendment formalizes the requirement and the process 13 for background investigations of GTECH employees. 14 There are two separate provisions that were written 15 into the amendment. The first states that no GTECH 16 employee shall be permitted to work on or have access 17 to any Texas Lottery system or account, pending 18 completion of a criminal background check by and 19 receipt of approval from the Texas Lottery. 20 The second provision is a reporting 21 requirement. It states that GTECH shall provide 22 monthly reports listing all current employees that 23 have access to Texas Lottery systems and accounts. 24 GTECH shall also notify the Texas Lottery within one 25 workday of a change in an employee's name or when the 0041 1 employee has been charged, arrested or convicted of a 2 crime or when an employee has been terminated and no 3 longer has access to Texas Lottery systems or 4 accounts. 5 The second item -- 6 COMM. COX: Toni, this one, as you said, 7 was in the State Auditor's report -- 8 MS. ERICKSON: Correct. 9 COMM. COX: -- so this one was special 10 significance. Now, help me understand what GTECH is 11 doing internally to assure that they can comply with 12 this, to assure that they do comply with this. As I 13 understand it, there are no sanctions attached here, 14 this is just a -- you've got to have the controls that 15 keep anybody that isn't appropriately investigated 16 from working on the Texas Lottery. 17 MS. ERICKSON: Absolutely. 18 COMM. COX: Now, how do they do that? 19 For instance, one of the difficulties that we have had 20 in this agency is finding out when retailers had 21 criminal convictions. How do they find out? What are 22 their procedures to be sure that they comply with this 23 part of the contract? 24 MR. GRIEF: Commissioner Cox, if I 25 could, I'm asking Ed Rogers, our acting Director of 0042 1 Enforcement, to come forward and speak to that for 2 you. 3 COMM. COX: Great! 4 MR. ROGERS: Good morning, 5 Commissioners. For the record, my name is Ed Rogers. 6 I'm the acting Director of the Enforcement Division. 7 Just for a little background, we've 8 recently or are close to completing a review of all 9 current GTECH employees that were discussed in the 10 State Auditor's finding. On September 10th, we will 11 be getting a list of all GTECH current employees, and 12 we'll be checking that with our database to make sure 13 that we've run these background checks to everyone 14 that we needed to run them on. Then we're going to do 15 an initial comparison between our files and GTECH's 16 files, and we'll do that I believe on a quarterly 17 basis going forward. 18 In addition to that, we will also be 19 over at GTECH's offices, working with their security 20 and Human Resources personnel, to verify that they 21 are, in fact, following their internal procedures 22 regarding the vetting of their employees during the 23 time of hiring. 24 The GTECH employees that we do 25 background checks on, we're doing fingerprints, and 0043 1 those are on file with the Department of Public 2 Safety. So we'll have two processes in order to 3 capture someone whose status may change, especially as 4 it relates to an arrest, going forward. One would be 5 the DPS will have it on file that we're to be notified 6 if they get notice of arrest as a result of those 7 fingerprint cards being in their possession. And then 8 also GTECH does have an internal requirement for 9 employees to report that to I believe their management 10 or HR. But that would be something that we'll be 11 monitoring going forward, either through the DPS and 12 in working directly with GTECH security and Human 13 Resources staff. 14 COMM. COX: Okay. So what I hear you 15 saying, Ed, is that your department will be acting 16 sort of as the auditor on this, that you will be sure 17 that GTECH has adequate procedures in place and you 18 will be checking to see that they're complying with 19 those procedures? 20 MR. ROGERS: Yes, sir. 21 MR. GRIEF: Commissioner Cox, I'll add 22 to that. GTECH has secured a contract with Protiviti, 23 at our request. And that company will be conducting 24 quarterly contract compliance checks. And as a part 25 of their review, they'll be looking at issues just 0044 1 like the one you've raised, to make sure GTECH is 2 complying with that part of the contract. 3 COMM. COX: Excellent. 4 CHAIRMAN CLOWE: And, Toni, you said I 5 think in your explanation to us that any GTECH 6 employee who was charged. 7 MS. ERICKSON: Right. 8 CHAIRMAN CLOWE: For what level of 9 offense is that applicable? 10 MS. ERICKSON: Well, the language that's 11 stated is "charged, arrested or convicted," so it's 12 all levels. 13 CHAIRMAN CLOWE: A third class 14 misdemeanor? 15 MS. ERICKSON: I don't think -- we did 16 not designate, I mean, because arrested, if you were 17 arrested, I don't know that it -- 18 CHAIRMAN CLOWE: Well, you're arrested 19 when you -- 20 MS. ERICKSON: Right. 21 CHAIRMAN CLOWE: -- get a speeding 22 ticket. 23 MS. ERICKSON: Exactly. So at any time 24 we've asked for that notification. We didn't -- 25 CHAIRMAN CLOWE: I don't think I'm 0045 1 clear. I don't want to get to the point where if a 2 GTECH employee gets a speeding ticket, that they're 3 put outside the system. Can you help me understand 4 that? 5 MR. GRIEF: Well, let me try to speak to 6 that, Toni, and correct me if I'm wrong. 7 Notification to us doesn't necessarily 8 mean we would bar them from utilizing the system. We 9 just want to be informed, and we'll make the decision 10 as to whether or not they're allowed. 11 Is that correct? 12 MR. SADBERRY: Mr. Chairman, I think I 13 understand your question, and I believe it's important 14 that the record be clear on this. I think the 15 question is -- and I agree with what Gary just said -- 16 we want a mechanism in place for minimum notification, 17 so it might well be the traffic ticket that evokes a 18 notification. But clearly that is not the intent of 19 disqualification for service or working on the 20 contract. 21 The question I believe being asked -- 22 and I think it's important that the record be clear as 23 to an answer -- is whether the contract establishes 24 the threshold level by which a decision may be made 25 for disqualification of a GTECH staff person from 0046 1 working on the contract or whether that is 2 discretionary and, therefore, the exercise of that 3 discretion must be measured by some type of objective 4 or subjective or combination of factors that go into 5 play. And that, of course, would go back to the 6 original contract provisions. 7 MR. GRIEF: Can our legal staff help us 8 with that question? 9 MS. KIPLIN: Sure. I'll ask Mr. Marker 10 to come forward. He is the contract -- 11 CHAIRMAN CLOWE: The reason I would like 12 a full understanding of this on the record is that 13 when you put this language in there, it implies that 14 we're going to be looking at this -- which 15 Commissioner Cox has clarified -- and then we're going 16 to be doing the right thing. And I would like to know 17 the mechanism is in place when we get these 18 notifications, that we will do the right thing, which 19 is, in fact, to have a review established so that a 20 correct decision is made and that we don't in 21 retrospect say, "Well, you know, we knew about it but 22 we didn't do the right thing," or, "We didn't do 23 anything." 24 It's a situation that when you take on 25 the responsibility, you must be prepared to take 0047 1 action. I would like some comfort in that regard. 2 MR. MARKER: Good morning, 3 Commissioners. My name is Andy Marker. I'm an 4 attorney for the Commissioners. 5 Chairman Clowe, your point, I believe 6 that review is being performed by the Enforcement 7 Division. Mr. Rogers spoke in terms of trying to 8 review the backlog of GTECH employees who have access 9 to the Texas Lottery account, both those in the State 10 of Texas and those located in other GTECH offices. 11 I believe it clearly does contemplate a 12 review. Notification alone is not enough to 13 disqualify a GTECH employee from working on the Texas 14 Lottery account. It simply starts the internal review 15 here at the Commission. Without that notice, the 16 Lottery Commission staff would be responsible for 17 searching DPS records, local police records, to try to 18 determine if there has been a change in the status of 19 a GTECH employee. 20 What this contract amendment language is 21 intended to do is to place that responsibility 22 squarely on GTECH to notify the Commission so that 23 internal review can take place. And if there is a 24 need for additional information, staff can request 25 that from GTECH. 0048 1 CHAIRMAN CLOWE: Okay. Andy, I'm 2 comfortable with that. I think that point is very 3 clear. But my question really goes to the next step. 4 And that is, when you get the information and you have 5 been notified, assuming the system is working -- 6 Commissioner Cox has satisfied my need to know on 7 that -- what are we going to do with this information? 8 Who is going to make the decision as to -- who is 9 going to play the role of Mack Brown? When it comes 10 to it and you've got two guys that are charged and 11 it's not a speeding ticket, who is going to be the guy 12 at the Texas Lottery -- or the lady -- who is going to 13 say they're off the team? That's what I'm asking. 14 MR. ROGERS: Chairman, in general, the 15 standard would be the same for GTECH employees as it 16 is for Texas Lottery Commission employees, and it's 17 the same standard that we hold for retailers. So when 18 we get the information, we would do the research, as 19 Mr. Marker stated, and then be monitoring going 20 forward, looking for the disposition of the charges 21 against the person. 22 If there was a conviction, typically -- 23 CHAIRMAN CLOWE: The charge -- 24 MR. ROGERS: Yes, sir. 25 CHAIRMAN CLOWE: -- just a charge now, 0049 1 not a conviction. 2 MR. ROGERS: We have the capability of 3 tracking these employees individually, documenting the 4 notification from GTECH and then monitoring on an 5 ongoing basis, as they work their way through the 6 legal proceedings. And at such time that there was a 7 conviction, then the Enforcement Director, working 8 with executive management in the agency, would make a 9 determination as to whether or not an employee was 10 eligible or would not be able to work on Texas 11 contracts. 12 CHAIRMAN CLOWE: That's new information. 13 We're going to be notified if there is a charge. But 14 Ed is just now saying there won't be any action unless 15 there is a conviction. 16 COMM. COX: That says that -- now, let's 17 start at the bottom of this. 18 MR. ROGERS: Yes, sir. 19 COMM. COX: At the bottom of this are 20 the requirements for getting a retailer license. 21 MR. ROGERS: Yes, sir. 22 COMM. COX: And those are no conviction 23 of prior moral turpitude or a gambling offense? 24 MR. ROGERS: Or felonies or fraud. 25 COMM. COX: Okay. So that's 0050 1 convictions. Now, what would happen if someone at 2 GTECH -- or someone in the Texas Lottery, for that 3 matter -- was charged with embezzling? 4 MR. ROGERS: Well, I guess I would have 5 to take a step back and say that I think it would be 6 possible for there to be exceptions if a situation 7 proposed such a risk or was so egregious that 8 immediate action needed to be taken. Then again, in 9 consultation within the agency, and I would imagine 10 with GTECH management, you know, that situation would 11 be evaluated and a decision would be made possibly 12 prior to a conviction. I mean, I think we would have 13 to -- 14 COMM. COX: But the issue I guess might 15 be, does the contract amendment that you negotiated or 16 the contract itself give us the right to do that? 17 MR. MARKER: Commissioners, if I can 18 speak to that point. You do have provisions under 19 your current contract that speak to Lottery approval 20 of staffing, and so you would have the right to ask 21 that a particular employee or employees not work on 22 the Texas Lottery account. So that again is specific 23 to the Texas Lottery account. And it's not 24 necessarily restricted to this background 25 investigation. It could just be any other matter 0051 1 that -- 2 COMM. COX: Okay. So it's for any 3 reason or no reason? 4 MR. MARKER: Right. It could be 5 performance related. 6 COMM. COX: Okay. Great. 7 CHAIRMAN CLOWE: I think that answers 8 our questions. I would like to see some clarity about 9 this and some clear understanding. It's easy to say 10 that the appropriate decision will be made, and I 11 trust that it will be. But I think for the future, 12 Director Sadberry, if you and your staff would look 13 into this and establish guidelines so that we are more 14 certain we're going to make the right decision when 15 these instances come to light. 16 We may be dealing in minutiae here, but 17 I think it's important to talk about these things and 18 to have a procedure so that people are treated 19 fairly -- and there, you know, are always two sides to 20 a story -- and that we do the right thing. And by 21 thinking about this and talking about it ahead of 22 time, we put ourselves in a position to be ready to 23 act instead of having a hurried meeting and saying, 24 "We got this situation. What are we going to do?" So 25 if you would, spend some time on this. 0052 1 MR. SADBERRY: Mr. Chairman, thank you. 2 I fully understand and I fully concur in both the 3 importance of the existence and establishment of 4 procedures, kind of a guideline of how to follow the 5 process here, as well as it being clear, consistent 6 and, importantly, fair. 7 I think, by a combination of the 8 discussion from the various persons who have spoken 9 and with the assistance of the Commissioners, I 10 believe we have combined all of those together, we 11 have the answer to the questions. But I think it's 12 important that we put that answer in place in writing 13 so that it's clear what the answer is and that it be 14 clear on a going-forward basis. 15 This is a matter of priority to me. It 16 has been helpful for me to hear it discussed here this 17 morning. It gives us guidance to as to where we go 18 now with the implementation of the language of the 19 amendment. 20 And what's important here, Commissioner 21 Cox, is it was not necessary through the amendment 22 process in order to get us to this point, I think is 23 the point. The first bullet does address an important 24 finding of one of the audit phases of the State 25 Auditor's Office concerning the background 0053 1 investigations. But the right and the power and the 2 opportunity for the Lottery Commission to monitor and 3 control and determine the staff of GTECH who works on 4 the Lottery contract -- and that's the focus here, not 5 the employment status of that GTECH staff, but working 6 on the Lottery contract -- based upon the statutory 7 provisions for minimum qualifications, and now what we 8 will have is a procedure for the review and 9 implementation of the information that we do get and 10 how we do that in a manner that withstands muster or 11 review and withholds our integrity provisions of our 12 own staff as well as our commitment to fairness. We 13 want to treat GTECH's staff fair in that regard as 14 well as we would the Lottery Commission staff. We 15 will accomplish these objectives and we'll do so 16 posthaste. 17 COMM. COX: Just a couple more 18 questions. How many people are we talking about here? 19 Is this dozens, hundreds, thousands? 20 MR. ROGERS: I want to say it's just 21 over 400. 22 COMM. COX: Okay. And the procedures 23 that you will be establishing, Ed, will go to how that 24 list was determined so that you'll be satisfied that 25 by golly, there is not anybody that has access to 0054 1 Texas Lottery information that isn't on this list? 2 MR. ROGERS: Yes, sir. 3 COMM. COX: Thank you, Mr. Chairman. 4 CHAIRMAN CLOWE: That's a good 5 clarification, Andy. Thank you for your help on that. 6 And, Ed, yours as well. 7 MR. ROGERS: Thank you. 8 MS. ERICKSON: The second bullet on this 9 slide is for weekly connectivity report for all 10 self-service equipment. The proposed language in the 11 amendment formalizes the requirement for GTECH to 12 provide a weekly report of the on-line availability of 13 all self-service equipment. That includes all the 14 self-service equipment that will be obtained under 15 this amendment. 16 The next line item is formalization of 17 the instant game load process. I briefly touched on 18 this item when discussing new sanctions. Again, the 19 amendment formalizes the current process and requires 20 GTECH to load instant game files within five days from 21 receipt of authorization by the Commission. This 22 allows the Commission to have full accountability of 23 the games received and ensure the accuracy of 24 inventory reports. 25 The next item, procedures for incomplete 0055 1 transactions. The language in the amendment addresses 2 a finding in the Lotto Texas audit conducted by the 3 SAO. Specifically the Lotto Texas audit says that the 4 agency should develop and enforce a formal agreement 5 with the lottery operator that describes lottery 6 operators's responsibilities regarding incomplete 7 transactions. This new provision formalizes the 8 process for the identification, evaluation and 9 reporting of incomplete transactions. 10 And the last item on the list is a 11 mutually developed five-year marketing plan. 12 With that, I'm going to turn it back 13 over to Gary. 14 MR. GRIEF: Commissioners, that 15 concludes our presentation to you on Draft Amendment 16 No. 8. We would be happy to answer any questions that 17 you might have. 18 COMM. COX: The gist of this seems to be 19 that sometime back we negotiated with GTECH a new 20 system that was going to be installed in 2007 or '08. 21 Is that -- 22 MR. GRIEF: The new central computer and 23 backup system. 24 COMM. COX: Yes. When was that 25 negotiated, Gary? 0056 1 MR. GRIEF: At the beginning of the term 2 of this contract back in 2001. 3 COMM. COX: Okay. So presumably when we 4 got that provision, we gave something up for it. We 5 don't know what it is, but presumably GTECH just 6 didn't throw that in gratuitously. So what we seem to 7 have done is run into a situation where they're 8 committed to do something that is going to cost them a 9 bunch of money, and it's going to cost us a bunch of 10 money, too, and we really don't need it and we don't 11 want to take the risk? 12 MR. GRIEF: That's exactly right. 13 COMM. COX: So we made a sound business 14 decision that we were going to forego that new system. 15 And we asked GTECH, "What can you help us with to 16 cause us to feel good about giving that up and feel 17 like we've satisfied our fiduciary responsibility for 18 giving that up?" And this long list of things are 19 what you and GTECH worked out that would satisfy that 20 release, if you will? 21 MR. GRIEF: Yes, sir, that's correct. 22 COMM. COX: Now, at the same time, since 23 I came here, I have been talking about the idea that 24 our interest and those of GTECH are not aligned 25 because they get a percentage of sales, and the school 0057 1 children of Texas get net revenue. They get sales 2 less payouts, less expenses of all kinds. So what I 3 heard you say was that the practicalities could not be 4 addressed at this time because of control issues? 5 MR. GRIEF: That's correct. 6 COMM. COX: And it's easy to see how 7 that would be the case, how GTECH would be concerned 8 about going to the bottom line when there are 9 legislative provisions, for instance, that control how 10 much we can spend on advertising, when there have been 11 in the past legislation that would limit the amount 12 that we could pay out on certain of our games, so I 13 understand their concerns. I think that your team, 14 Gary, and GTECH have done an outstanding job of doing 15 the best we could with the current situation. 16 But what I want to ask is, Director 17 Sadberry, I think it's very important, as we go toward 18 2011, that we try to eliminate or deal with all of 19 these issues that keep us from getting our interests 20 totally aligned by sharing -- school children of Texas 21 and GTECH sharing in the same pool. And I ask you to 22 work with GTECH and other potential vendors to deal 23 with -- mitigate, eliminate, whatever -- these issues 24 so that in 2011, we can get there. 25 MR. SADBERRY: Commissioner Cox, I 0058 1 understand your point fully. I understand your 2 interest. And you can be assured they will be kept 3 fully in mind and will be a major focus in our process 4 of going forward. I would concur with you. As Gary 5 pointed out, I have been aware of this process. 6 What is in place now to some extent is 7 what we all have inherited over a period of time, 8 including the original contract, been a function of 9 state government and the controller's office at the 10 inception of the lottery. That by no means is any 11 indication of our intent to progress forward, but it 12 gives us an historical backdrop. 13 I think going forward to 2011, when we 14 will go out to bid if other factors have not occurred 15 before that time, we will be able to keep in mind all 16 of the priorities and utilize the benefit of our 17 experience and our capabilities on a going-forward 18 basis, and as well the relationship that has been 19 developed with the current vendor and any potential 20 vendors that may be part of the equation on a going- 21 forward basis. 22 So it is helpful to us to understand and 23 hear your concerns, have them expressed and be a 24 matter of record. And we will use them as guidance, 25 and it will be a point of focus and a point of 0059 1 priority for us on a going-forward basis toward 2011. 2 COMM. COX: Thank you, sir. 3 Thank you, Mr. Chairman. 4 CHAIRMAN CLOWE: Coming off of that 5 point, Commissioner Cox, I see the, if you can call 6 it, give-back on the instant and on-line games that 7 you describe, Toni, as a step actually in that 8 direction. 9 And, Kathy, being the good accountant 10 that I know you are, you have pro formaed that out, 11 I'm sure. Can you share with us what the assumed 12 impact of that will be over some period of time? 13 MS. PYKA: And, Mr. Chairman, for 14 clarification you're talking about the annual 15 credit -- 16 CHAIRMAN CLOWE: Yes. 17 MS. PYKA: -- or the bullet of tangible 18 items -- 19 CHAIRMAN CLOWE: Yes. 20 MS. PYKA: -- annual credits? On the 21 annual credits, we've actually not been able to 22 quantify it because it is a factor of the prize payout 23 percentage and sales data. So while one has the cap 24 of not to exceed $1.2 million, we have not actually 25 been able to quantify the value of the credits, due to 0060 1 the unknown. We have a model. We know how the model 2 is calculated. But not knowing the actual data on a 3 go-forward basis, we do not have a value associated 4 with that we've identified as an intangible value. 5 CHAIRMAN CLOWE: So you want this in the 6 contract without really knowing what the impact is 7 going to be? 8 MS. PYKA: We believe that it's 9 certainly an intangible plus to the State of Texas, as 10 we look at this, in looking at increases in prize 11 payout. We look at it as protection for the state. 12 So we believe there is an added value to these two 13 credits being placed in the contract. 14 COMM. COX: Mr. Chairman? 15 CHAIRMAN CLOWE: Yes, sir. 16 COMM. COX: When I was briefed 17 yesterday, one of the analogies we came up with on 18 this was, it's an insurance policy. You don't know 19 what you're ever going to -- what, if anything, you're 20 going to get from an insurance policy but you're glad 21 you have it. 22 CHAIRMAN CLOWE: I agree with that. I 23 see it that way. But I also see it as a step in the 24 direction that you want us to go in. 25 COMM. COX: Oh, it absolutely is. 0061 1 CHAIRMAN CLOWE: I see it as a fact that 2 we are having an increased growth in instant tickets 3 because of the higher prize payout. And GTECH is 4 willing to include some insurance to us that if that 5 continues to happen, there will be a give-back. It's 6 not much, admittedly, but at least it's a small step 7 in the direction that you would like to see this 8 contract move in. 9 COMM. COX: Absolutely. It addresses -- 10 there are three primary areas that I'm concerned 11 about. One is the prize payout percentage, and this 12 to some extent addresses that one. The other is 13 advertising and marketing, and the other is retailer 14 compensation, because GTECH offers us advice and 15 services that we pay for on advertising and promotion 16 and retailer compensation; and, yet, their interests 17 on those matters are not aligned with ours. 18 CHAIRMAN CLOWE: That's right. And I 19 see their point about control from the standpoint that 20 we have a directed advertising budget which is 21 punitive in a matter of sense -- 22 COMM. COX: Yes, sir. 23 CHAIRMAN CLOWE: -- about the amount of 24 money we can spend, which I think is very important to 25 the sales. But we have no control over that. 0062 1 COMM. COX: Correct. 2 CHAIRMAN CLOWE: So they're uneasy about 3 entering into that kind of an arrangement where those 4 factors are not only beyond their control, they're 5 beyond ours. 6 COMM. COX: Yes. 7 CHAIRMAN CLOWE: But I still see this as 8 a first step in the direction that you are concerned 9 about. And hopefully it will have, as things 10 progress, a beneficial result to the extent that it 11 can. And I think in that sense, if this contract with 12 this change is adopted, we would want to monitor that 13 very closely. 14 MS. PYKA: And we certainly will, 15 Mr. Chairman. There's two prongs to it still, then 16 the net revenue to the state, and we'll watch it 17 closely. 18 CHAIRMAN CLOWE: I just want to have a 19 good discussion about this on the record and 20 acknowledge that in my opinion you have made progress 21 in this direction by virtue of this change in the 22 contract, if it's adopted. 23 COMM. COX: It's a step in the right 24 direction, absolutely. 25 CHAIRMAN CLOWE: Then secondly -- and I 0063 1 know you have these numbers written somewhere inside 2 your pocket there -- what's the value of what we gave 3 up for what we got? 4 MS. PYKA: Certainly. The value of the 5 services and goods that we received as intangible, the 6 total of that is $38,942,600. The value or the 7 estimated cost of the goods and services, the 8 elimination of the central computer system is 9 $35 million, for a net gain to the state of 10 $3.9 million. And that is the value of the tangible 11 items only. There are, of course, many other 12 intangible items, such as the credit, that we have not 13 included evaluation on for this estimation process. 14 COMM. COX: And I believe it's also true 15 that you have not attempted to quantify what our costs 16 would have been had the new system been put in? 17 MS. PYKA: That is correct, Commissioner 18 Cox. 19 COMM. COX: But our costs we believe 20 would have been substantial and our risks would have 21 been substantial as well? 22 MS. PYKA: That is correct, based on the 23 evaluation performed by Mike. 24 CHAIRMAN CLOWE: Anything further? 25 COMM. COX: No, sir. 0064 1 CHAIRMAN CLOWE: Director Sadberry, I 2 think you've achieved, with the good work your staff 3 has done and the presentation they've given the 4 Commissioners this morning -- in addition to what I 5 understand were individual briefings of the 6 Commissioners, a detailed opportunity to have 7 questions answered -- everything that you sought in 8 your preamble. 9 I see that our attorney is present, 10 Mr. Mattax, and I would invite him to make any comment 11 he might have relative to this contract which is under 12 his care, custody and control. 13 MR. MATTAX: Mr. Chairman, Commissioner, 14 for the record, my name is David Mattax. I'm an 15 Assistant Attorney General. 16 As a preparatory matter, I should say 17 that my principal involvement, as you know, started 18 with the intense work we did behind the examination of 19 the Lottomatica merger with GTECH in that transaction. 20 You are probably aware that that transaction has been 21 consummated, and so that merger has been accomplished. 22 As an off-shoot of that, I was also 23 brought into the contract negotiations that had been 24 ongoing and sort of I think has already been told sort 25 of picked up speed earlier this year but had been 0065 1 pre-dating the announcement of the merger. And the 2 Executive Director and Lottery staff made a 3 determination, and I agreed with that and advised them 4 that any discussions or any consideration of the 5 approval or disapproval -- as you know, what we 6 decided to do pursuant to our contract, was after the 7 examination of Lottomatica and finding nothing that 8 would be disqualifying for them, took no action. 9 But that examination of the Lottomatica 10 transaction and the suitability of Lottomatica was 11 completely distinct and separate from the 12 examination -- or excuse me -- or the contract 13 negotiations. And the reason for that was two-fold. 14 One, regardless of whether or not the Lottomatica 15 transaction was consummated, the negotiations with 16 GTECH with respect to the contract were going to 17 continue. 18 And, secondly, whether those 19 negotiations were successful or unsuccessful was 20 irrelevant, to the advice that was given to this 21 Commission with respect to the examination of 22 Lottomatica. But I did want to make that point, that 23 these were completely separate and distinct. And, in 24 fact, the Executive Director specified that the 25 persons working on the contract negotiations would not 0066 1 be involved in any way with respect to the vetting and 2 the examination of Lottomatica in that transaction. 3 So I think that's just a good point to make. 4 With respect to the contract issue, I 5 have reviewed the contract, and it does appear to 6 capture the intent of the parties, as has been 7 described to the Commission today. I would make a 8 couple of points with respect to the sanctions and the 9 liquidated damages with respect to the clarifications 10 that have been made. 11 When the word "sanctions" is used, what 12 we're really talking about here is a failure of 13 performance. And so with a failure of performance, 14 there may not actually be any particular damage; you 15 know, in other words, there may not be some sort of 16 fiscal impact to that. But they didn't perform; they 17 didn't do their job. And it's basically like docking 18 somebody's pay for not doing their job, and that's 19 what a sanction is. 20 And I think these clarifications have 21 now put those sanctions more directly in line with 22 actual performance. Just as an example, there was a 23 sanction in there for failure to do something when 24 there was no one at work; and, therefore, there really 25 was no effect on performance with that particular 0067 1 sanction. So they have directly tied to it on some of 2 these sanctions that, you know, during business hours 3 or when someone is working on it. So I think that 4 that's a good thing because that directly ties 5 sanctions to performance, which is where they should 6 be. 7 And, secondly, on liquidated damages, 8 those have been clarified to make them -- because 9 liquidated damages are intended to bear a reasonable 10 resemblance to actual costs. Even though you can't 11 necessarily determine actual costs, liquidated damages 12 are intended as a substitute. And I believe the 13 clarifications that have been made in that contract 14 again tie liquidated damages more closely to the 15 actual potential damages of the Commission, which is a 16 good thing. So I think those clarifications were 17 appropriate. 18 Now, I would point out one thing that 19 lawyers don't like to see in contracts. And there is 20 that in this contract, but it's sort of inevitable in 21 the situation, and I think it's something that should 22 be followed by the staff and reported back to the 23 Commission. 24 And that has to do with several of the 25 items in this contract are going to require additional 0068 1 discussions and working between GTECH and the Lottery 2 staff. For example, with respect to the financial 3 interface system, they have agreed to do that, but the 4 details of that have not been worked out. So you have 5 a provision in the contract that says, "The final 6 project work plan and installation timeline shall be 7 developed in good faith by the Texas Lottery Committee 8 and GTECH." 9 You also have in the delivery and 10 installation, "The Gamepoint terminals, the final 11 project plan and installation timeline shall be 12 developed in good faith by the Texas Lottery 13 Commission and GTECH." Also that language is used in 14 the delivery and installation of the check ticket 15 terminals and the GVT extra terminals and the instant 16 ticket vending machines. 17 And my only point I'm trying to make 18 with respect to that is, certainly I don't see any 19 reason to believe that GTECH will not be operating in 20 good faith with respect to resolving those issues. 21 But I think, based upon conversations that occurred at 22 the last meeting with respect to Bruce Turner, that 23 this is something the Commission should want to find 24 out from staff is, as these negotiations progress, are 25 they being performed in good faith? I think they will 0069 1 be, but I think it's something that, of course, is not 2 the best thing to have in a contract. You know, from 3 a lawyer's standpoint, we want, you know, everything 4 specified to the letter. 5 And I certainly understand in this 6 particular instance, that can't be done. So I make 7 that point as a point that I think should be monitored 8 and watched. And my perception and hope before us 9 would be that that's not going to be an issue, and it 10 certainly would be reflective of the future 11 relationship between the Commission and GTECH on that 12 those negotiations do go on in good faith. 13 My only last point would be to make, 14 that I did look at this from a legal standpoint. And 15 it's like I said, I think that the contract does 16 appear to capture the intent of the parties. But from 17 a substantive standpoint, that's not really my job to 18 determine: Is this a good thing or a bad thing? I 19 certainly didn't see anything in there that would jump 20 out at me and say it's a bad thing. But I obviously 21 would defer to the Lottery Commission staff on their 22 operations and if these things are going to help their 23 operations, and I certainly don't see any reason to 24 doubt that. 25 So with that, if there's any questions, 0070 1 I would be happy to answer them. 2 CHAIRMAN CLOWE: Mr. Mattax, as always, 3 your comments are helpful and instructional. 4 And, Gary, do you have any problem with 5 anything that he has recommended as far as 6 incorporating it in the remarks you've had from the 7 Commissioners? 8 MR. GRIEF: No, sir. The remarks from 9 Mr. Mattax and the Commission have been very helpful. 10 Appreciate it. 11 CHAIRMAN CLOWE: Great. 12 Director Sadberry, I don't think you 13 want a motion on this. But I think you've had the 14 overview that you asked for from the Commissioners. 15 And unless there is anything further, I think we're 16 complete. 17 MR. SADBERRY: Mr. Chairman, we will 18 follow your direction in that regard. It is a matter, 19 as I have received legal advice and understand, that 20 it is the office of the Executive Director to sign the 21 contract or the contract amendment or take the action 22 with regard to the contract in that regard. It is the 23 discretion you have if you wish to give direction by 24 way of formal action or not as to directing my 25 performance in that regard by vote or not. I leave it 0071 1 to you in that regard. 2 CHAIRMAN CLOWE: What's your pleasure? 3 COMM. COX: What is your pleasure, 4 Mr. Sadberry? 5 MR. SADBERRY: It would be helpful, if 6 you would be amenable to it and if you find it 7 appropriate, that you indicate, should you wish, by 8 motion and vote, to direct my action in approving this 9 amendment, that it would reflect the deliberation of 10 the Commission and would I believe be consistent with 11 my understanding of the recommendation of the Sunset 12 Commission, that you have demonstrated your active 13 involvement in this major contract action by taking 14 such a to vote to direct my action to execute the 15 amendment. 16 CHAIRMAN CLOWE: Let me give you this 17 comment, Commissioner Cox. I've heard what Director 18 Sadberry's preference is. My understanding is that 19 this authority lies within the office of the Executive 20 Director. And I would like to be respectful of that 21 authority, and I would be happy to indicate on the 22 record that I approve this action. 23 But I would prefer not to have a formal 24 vote on it because I do not want to establish the 25 precedence of having the Executive Director come to 0072 1 the board and get approval for contract action where 2 it is not required by statute. 3 I'm open to your thoughts and will be 4 respectful of them. 5 COMM. COX: Well, clearly he has the 6 authority by statute to do it. 7 CHAIRMAN CLOWE: Right. 8 COMM. COX: And I'm totally respectful 9 of your view on this thing. And I support his signing 10 the contract, but I'm very comfortable without formal 11 action. 12 CHAIRMAN CLOWE: Well, then, I think 13 based on this Commission, Director Sadberry, you've 14 heard from both Commissioners. And we approve this. 15 We're in favor of it. And if you understand the 16 concern I have about establishing unnecessary 17 precedence. And perhaps at some point in time in the 18 future, unnecessarily taking authority away from your 19 office, we'll not have a motion. 20 MR. SADBERRY: Mr. Chairman and 21 Commissioner, I do fully understand that and I do 22 appreciate that position. I think what's important 23 is, the record will reflect in this setting, along 24 with prior records of other sessions of the 25 Commission, what position and what direction you take 0073 1 in that regard. 2 Stepping away from any personal 3 involvement I might have as the current ED, I would 4 say, looking at the office of the ED and understanding 5 the functions of that office statutorily as compared 6 with the position, in my view that is a good direction 7 to take. And I think the responsibility is placed 8 appropriately where it should lie in that regard, so 9 long as that function respects the protocol that is 10 recognized and made evident by today's presentation 11 and the participation of the Commissioners in that 12 regard under the Commission's statutory authority. 13 With that, I will say that I have heard 14 your preferences, and they will be taken into account 15 in regard to my actions with regard to the amendment. 16 CHAIRMAN CLOWE: And I might add that I 17 think this discussion, these questions and answers and 18 the clear statements, both on behalf of Commissioner 19 Cox and myself, satisfies the Sunset review desire to 20 have a more in-detail knowledge on behalf of the 21 Commissioners of these principal contracts. 22 MR. SADBERRY: I would agree, 23 Mr. Chairman. 24 CHAIRMAN CLOWE: With that, we'll thank 25 you-all then, and we'll take a short recess. 0074 1 (Off the record: 10:21 a.m. to 10:31 2 a.m.) 3 AGENDA ITEM NO. II 4 CHAIRMAN CLOWE: We'll come back to 5 order. 6 Our next item on the agenda is No. II, 7 report by the Bingo Advisory Committee Chairman, 8 possible discussion and/or action regarding the Bingo 9 Advisory Committee's activities, including the 10 August 9, 2006 committee meeting. 11 Ms. Taylor. Good morning. Do you have 12 one for the recorder? 13 MS. TAYLOR: I already took care of her. 14 CHAIRMAN CLOWE: Great! 15 MS. TAYLOR: Good morning. 16 CHAIRMAN CLOWE: Good morning. Suzanne, 17 this is a lengthy report. And rather than reading it 18 verbatim, could you just summarize it for us and maybe 19 we'll have some questions, please. 20 MS. TAYLOR: I would be glad to. 21 Obviously, we did call the meeting to 22 order. We approved the minutes. Everybody was in 23 attendance. Our two new committee members were there. 24 Knowles Cornwell and Markey Weaver were replacing 25 Mario Manio and Danny Moore. 0075 1 And we went through all the different 2 reports that we normally do. Sandy did an update to 3 BAC members on the activities of the Price Fixing 4 Workgroup. 5 We talked about the draft rule for the 6 progressive bingo games. We also talked about the 7 proposed rule amending Rule 402.102 pertaining to the 8 Bingo Advisory Committee. 9 One of the very interesting things we 10 did talk about, which was one of the items in the 11 audit report, was Item No. VII, and I would like to 12 read this one to you. 13 "Rosie Lopez requested discussion on a 14 possible rule relating to the responsibilities of 15 conductors, lessors, manufactures and distributors. 16 She asked for input and feedback from the committee as 17 to whether precise language is needed on what the 18 definition is of a lessor involvement with day-to-day 19 operations of the bingo hall and what the charities' 20 day-to-day" guidelines would be. 21 She was advised that we do have the 22 mandatory operator training that each organization is 23 required to take before they are allowed to renew 24 their license at that one year date and that also, 25 prior to receiving their license, they do have to meet 0076 1 with the representatives from the Lottery Commission 2 who do go over their financial responsibility. The 3 auditors meet with them and tell from what they are 4 responsible for. There is a checklist that is checked 5 off as they are explaining some of the rules. And 6 they are supposed to have read the Bingo Enabling Act 7 and administrative rules prior to this. 8 Larry requested -- one of the items -- 9 probably the most important one that we discussed at 10 this meeting was Item No. VIII. And what this is 11 about is, Larry is requesting that -- currently when 12 our organizations are operating as a unit, or even if 13 an organization has back-to-back sessions -- for 14 instance, Campfire has the first session and Campfire 15 has the second session -- they are required at this 16 time to close up all the pull tabs at the end of the 17 first session, even though they may be reusing exactly 18 the same pull tabs -- and I am at this time talking 19 about the instant pull tabs. Even though they might 20 be using the exact same pull tabs during the second 21 session, they have to close out sales, do the 22 paperwork, show everything on first session and then 23 reopen the exact same boxes of tabs to pull them back 24 out again for second session to reuse these tabs. 25 Whether it's the same charity or whether it's a unit, 0077 1 currently that's what we're required to do. 2 We also are having a problem with some 3 of the event tabs, that you finish selling the event 4 tabs maybe towards the middle of your bingo session 5 and you know that at this point if you bring out 6 another box of event tabs, you might not be able to 7 get them finished before the session is over. At this 8 time we have to stop selling event tabs and leave that 9 time just as a dead time. 10 And what we would like to see is whether 11 your unit, or if it's the same charity operating 12 back-to-back sessions, to be able to continue with the 13 sales. Currently you have to play the game in the 14 session in which the tabs were sold. We would like to 15 be able to extend that over, that you could -- as long 16 as you notified your customers that these tabs are 17 going to be played during the second session, that we 18 could begin to sell them during first session. 19 Currently we can sell our electronics and our paper 20 during the first session, the items that will be 21 played during second session. So we would like to try 22 and do that the same with those instant tabs. And, of 23 course, it wrote require a rule change, and that would 24 be Rule 402.300. 25 We did create a work group to study the 0078 1 impact from the smoking ordinances and bans and what 2 effect does that have on gross receipts, attendance 3 and distribution, to see if that is one of the causes 4 that in some of the cities -- for instance, Dallas 5 especially -- why the instant -- why gross receipts 6 might be going down and why charitable distributions 7 might be going down. 8 Nelda updated the committee with the 9 activities of the 79th Legislature. We did discuss 10 what would happen if the -- during the 79th 11 Legislature at the July 26th meeting notice for the 12 House Committee. One of the charges was to review 13 ways to make Texas racetracks more attractive to 14 Texans and tourists. 15 And, of course, one of the items 16 discussed in this was the authorization of video 17 lottery terminals at the racetrack. And Billy did 18 talk to us about there had previously been a study 19 done, and it was estimated that there would be a 20 50 percent reduction in gross receipts for charitable 21 bingo organizations within the immediate area located 22 around those tracks and about a 30 percent reduction 23 in gross receipts statewide. Obviously, that's 24 something that people interested in bingo are keeping 25 their eye on. 0079 1 Rosie also advised the committee that 2 she has been using the PSAs provided by the Texas 3 Lottery Commission and has had great success with 4 them. 5 The annual report was presented by the 6 committee to the workgroup. It was approved, and we 7 would like to present it to you at this meeting for 8 your approval. 9 Billy reviewed the activities of the 10 Charitable Bingo Operations Division. Phil went 11 through one of the reports that he had showed you at 12 your last meeting, or one of the previous meetings of 13 the first quarter 2006. He went through that with the 14 BAC. 15 We reviewed the characteristics and 16 profiles of the organizations conducting bingo in 17 Texas. At this time we did not have any nominations 18 for the commercial lessor position that were viable. 19 And we received public comment and tentatively 20 scheduled our next meeting for November 8th at 10:00 21 a.m. 22 CHAIRMAN CLOWE: Commissioner Cox, I 23 think you attended this meeting. Do you have comments 24 or questions? 25 COMM. COX: Well, there was one issue 0080 1 that was discussed there, Mr. Chairman, that I would 2 like to deliberate with you about and see if we have 3 any guidance to offer the Bingo Advisory Committee. 4 And this was Item IX on the agenda, which was 5 discussion and possible creation of a workgroup on the 6 impact of smoking ordinances and smoking bans in bingo 7 halls. 8 Now, Suzanne, on that item, help me a 9 little bit with how you compile your agenda in general 10 and how in particular that item got on your agenda. 11 MS. TAYLOR: I was actually talking to 12 Stephen Fenoglio about some additional cities that had 13 been looking at additional smoking ordinances and 14 bans. And at that point, we had asked if we could 15 possibly put that on the agenda, that we would like to 16 see what effect does it actually have on bingo halls. 17 We haven't actually done a study. I 18 don't know if there's been any studies done to say: 19 Does this hurt -- does it hurt or does it help? I 20 mean, from the information that we have, we feel that 21 it definitely detrimentally affected the halls in 22 Dallas. But was that a fluke? Does that happen in 23 every city in which this happens? Is it something in 24 the future that we need to be aware of to -- let me 25 put this in other words. Is it something that the 0081 1 organizations, the charitable organizations, need to 2 worry about? Do they need to start working to do 3 something else to make their games viable? Is it 4 something that will detrimentally affect their bingo 5 sessions and their gross receipts and their charitable 6 distribution? 7 COMM. COX: Okay. Well, I'm looking 8 here at the Bingo Advisory Committee Work Plan adopted 9 March 29, 2006. And I'm sure that one of the things 10 that governs whether an item gets on your agenda is 11 whether or not it's on the work plan? 12 MS. TAYLOR: Yes, sir. 13 COMM. COX: And I see here that the 14 first item is comment on improvement and status of the 15 bingo industry. And I can see how under that you 16 could talk about doggone near anything. That's very, 17 very broad. 18 And, yet, Mr. Chairman, my concern is 19 that when we're talking about smoking bans, those are 20 under the jurisdiction of local authorities, not the 21 State of Texas and certainly not this Commission. And 22 I'm having difficulty determining whether this is 23 really something that the Bingo Advisory Committee 24 should be working on or whether, if they had that 25 industry association that we've asked them to form so 0082 1 many times, that would be the appropriate place for 2 that to be worked on. 3 CHAIRMAN CLOWE: I think it's a good 4 point. 5 And, Suzanne, I know you're responsive 6 to this concern on behalf of the board, that we have 7 talked so many times about the fact that the BAC is an 8 advisory group to the Commissioners and isn't 9 authorized to be proactive in and of itself in a 10 number of areas. Legislative is the one that we talk 11 about so much, and the other is I think influencing 12 public opinion or municipalities of any kind -- 13 government, cities, state, city or county. 14 I think Commissioner Cox brings up a 15 good point. There is a desire on I think everybody's 16 part on the BAC to be a positive contributor to the 17 bingo industry, and that's good. In a way, as Chair, 18 you've always got to manage those desires so that they 19 keep within the proper channel. 20 And I know Steve Fenoglio is a good 21 representative of his clients, and I can see where he 22 would like to see some action on this. I think 23 Commissioner Cox is on track, where that concern is 24 probably more correctly addressed in a different venue 25 than the BAC; rather, through an organization outside 0083 1 of this structure where those concerns can be 2 addressed and some action can be taken on it if that's 3 a determination. 4 This is a less than easy job. It may 5 not be terribly difficult, but it's just not -- the 6 easiest thing I think for you as the Chair to say to 7 one of your members, "Well, you know, that's just not 8 really our charter," and that's where Commissioner Cox 9 I think is referring to the work plan, and he's 10 exactly right. 11 We pretty well had an understanding, I 12 think, that legislative matters are not the activity 13 of your function or of our function. But when you get 14 into these kind of things, they can, under a stretch, 15 get to the point where you can talk about them under 16 things benefiting the bingo industry. But, in fact, 17 as he points out, Commissioner Cox points out, these 18 are local jurisdictional matters, and there isn't 19 anything that you can do about it or there isn't 20 anything this board can do about it. And we need to 21 ask you, as Chair, to stay within that work plan and 22 to guide the efforts of the committee. 23 I think it's a tough job. I think it's 24 something you're going to have to be very delicate in 25 pursuing, and I know you can do that. But that's the 0084 1 role of the BAC, and that's the role of this board. 2 Is that the way you see it, 3 Commissioner? 4 COMM. COX: Yes, sir, it is. 5 CHAIRMAN CLOWE: I would like to suggest 6 that you review our comments and take what action you 7 think is appropriate. I would like to begin by asking 8 you for your reaction. How do you feel about the 9 advice we're giving you, honestly? 10 MS. TAYLOR: Honestly, I feel that I 11 hear you many times say that you would be a resource 12 for the legislators to be able to come to, to ask 13 questions, and you would have the available answers. 14 I fell kind of in the same category 15 here. It would be good for organizations that their 16 cities are possibly considering bans or doing 17 something, that as a resource they could come and get 18 this, "This is a study that was done by the BAC. This 19 is what they found." 20 I'm not saying to be active and to go 21 out to these cities and say, "You can't do this 22 because this might hurt bingo." But it would be nice 23 if there was somewhere that the organizations could go 24 to and resource-wise be able to say, "This is what the 25 study found. It doesn't say you should do it, you 0085 1 shouldn't do it. This is what they found." 2 COMM. COX: Mr. Chairman, I have 3 discussed this matter with Ms. Joseph from the legal 4 staff. It might be helpful to get her thoughts on 5 this, do you think? 6 CHAIRMAN CLOWE: Sure. While she's 7 coming up, I think the proper venue for this kind of 8 thing is back to those representatives of the bingo 9 industry. I think it's Steve Fenoglio and Steve 10 Bresnen and the new group that's been formed. 11 Commissioner Cox mentioned, you know, 12 the association that would benefit the industry. That 13 to me is the move in the direction of a unified voice. 14 I'll be surprised if Ms. Joseph says this is something 15 that we need to stick our hand in. 16 I'm eager to hear what you have to say. 17 MS. JOSEPH: Good morning, 18 Commissioners. My name is Sandy Joseph, Assistant 19 General Counsel, for the record. 20 I do believe that not just the BAC but 21 Commission staff needs to be careful in expending 22 Commission resources; that is, not just money but also 23 staff time, which equates to money, on efforts that we 24 are not authorized to perform, such as promoting bingo 25 or as legislative activities. And legislative 0086 1 activities I believe would include efforts to 2 influence ordinances, regulations, at a local level as 3 well as lawmaking at the state level. 4 So I believe that -- I mean, it's hard 5 to draw the line sometimes. I think certainly the 6 Commission should be aware of concerns at a basic 7 level of problems. But to spend more than minimal 8 time on projects that we really have no authority to 9 influence, we don't have appropriations for those 10 activities, I believe the Commission should use 11 restraint in those areas. 12 CHAIRMAN CLOWE: In contrast, Sandy, let 13 me ask you, while you're opining about the back-to- 14 back sessions issue that Suzanne brought up, where do 15 you see that fall? 16 MS. JOSEPH: I'm not sure if I heard 17 that comment on back-to-back sessions. I apologize. 18 I came in just a few minutes after she began her 19 presentation. 20 CHAIRMAN CLOWE: Well, in order to make 21 this comparison, Suzanne, why don't you bring her up 22 to date on what you reported to us, because I would 23 like this as a contrast if we can get to it. 24 MS. TAYLOR: Okay. I'm just going to go 25 ahead and read No. VIII. 0087 1 CHAIRMAN CLOWE: Sure. 2 MS. TAYLOR: "Larry Whittington 3 requested the committee review Rule 402.300 Pull-tab 4 Bingo (e) Sales and Redemption. Currently 5 organizations operating as units and organizations 6 having back-to-back sessions must close the instant 7 bingo pull tabs and put those figures onto the first 8 session paperwork, turn around and reopen the same 9 boxes again, using exactly the same tabs and show 10 those sales on the second session paperwork. 11 "Larry requested the rule be amended to 12 allow the organizations to show the sale of all the 13 instant bingo pull tabs on the second session 14 paperwork. He also requested that in this same 15 example, organizations be allowed to sell event tabs 16 during the first session that will not be played until 17 the second session so that tab sales do not have to 18 stop between sessions. It was noted that this was 19 contrary to how bingo paper and electronics are sold 20 since both sessions are sold at the same time. 21 "Public comment was received that the 22 language that the commission has adopted is an 23 impediment to aggressive sale of instant tickets that 24 goes to the charity's bottom line in a good way and 25 this problem needs to be addressed as soon as 0088 1 possible. A workgroup was created consisting of 2 Larry, Kim, Knoles, Stephen Fenoglio and David 3 Heinlein to review Rule 402.300 and make suggestions 4 for changes." 5 MS. JOSEPH: Mr. Whittington's request 6 does appear to be within the purview of the 7 Commission. He is asking for the Commission to 8 consider a rule change that's different from the 9 smoking issue, which the Commission has no authority 10 over. And I'm not sure if that's what you were 11 asking. 12 CHAIRMAN CLOWE: That was my reaction; 13 yes, it is. And my sense is that there is an issue 14 that is within the purview of the Commission and one 15 that the BAC, through studying, could come with a 16 recommendation that might be helpful to the industry 17 and in the end have a beneficial result. 18 MS. JOSEPH: Yes. 19 CHAIRMAN CLOWE: I see that as being on 20 target. 21 COMM. COX: One thing I heard Ms. Joseph 22 say was that it is hard to draw the line. And I think 23 it's important enough that we don't spend money where 24 it's not appropriated and that we don't influence or 25 be perceived as trying to influence legislation, that 0089 1 we draw that line in a very in conservative manner. 2 CHAIRMAN CLOWE: Correct. 3 Mr. Fenoglio, you're in the audience. 4 And since you started this whole thing, why don't you 5 come up and give us your comments on it. And you 6 understand the role of the BAC from your past 7 government service, I think, very clearly. You 8 understand where we're trying to help the Chair end up 9 on issues like this? 10 MR. FENOGLIO: Yes, Mr. Chairman, I do. 11 When I worked at the Railroad Commission, they had an 12 Advisory Committee for Propane Fuels. This issue has 13 come up periodically. Actually, there was a limited 14 study of the smoking ordinance done by the BAC. Billy 15 Atkins reminded me of that. And that was done in the 16 '01 time frame to '03, I believe. I can't recall. I 17 think it lasted about a year. 18 When I reviewed the BOC charge in the 19 Legislature, that the Legislature gave the Lottery 20 Commission, which is Section 2001.057 of the 21 Government Code -- I'm sorry -- the Occupations Code, 22 the Bingo Enabling Act, it says the committee may, 23 one, advise the Commission on the needs and problems 24 of the state bingo industry and perform other duties 25 as determined by the Commission. 0090 1 I have sat in this meeting where y'all 2 have discussed problems in the industry. And 3 Commissioner Cox has asked me I believe on three 4 separate occasions, "What is the impact of Internet 5 gaming on the charitable bingo industry? What is the 6 impact or legal or illegal 8-liner operation on the 7 charitable bingo industry? What is the impact of 8 Louisiana, New Mexico or Oklahoma casinos on the bingo 9 industry?" -- none of those issues that the Lottery 10 Commission has jurisdiction over. 11 But when you start trying to drill down 12 into the details of why are some charities successful 13 and others aren't -- and y'all had a lengthy 14 discussion of that on June 7 of '06 -- these external 15 factors do affect charities and the charitable bingo 16 industry and the ability of charities to generate net 17 receipts that can flow to their, quote, bottom line. 18 In that regard, I think, not that the 19 BAC would ever advocate for a legislative change -- I 20 think they understand their role -- but in trying to 21 identify external factors that affect the charitable 22 bingo industry, the smoking ordinances I think are an 23 external factor that does affect the bottom line. 24 I think if you were to look at -- and I 25 don't think it's going to take a lot of the staff 0091 1 time. And I heard Ms. Joseph say at the BAC meeting 2 that her staff is pretty well overwhelmed, I think, or 3 words to that effect, and that she did not know that 4 she could give much staff time. 5 I looked at this as something that the 6 industry should bring forward. And, of course, your 7 agency has generated a wonderful resource -- and I'm 8 looking at Billy as well -- with the data that's on 9 the website now of charitable organizations so that 10 someone can go in, and BAC members as volunteers can 11 go in and look at revenues and numbers from charities 12 conducting bingo in municipalities where either 13 smoking is allowed, smoking is prohibited or smoking 14 is restricted and can make some conclusions on that, 15 not only with just the data but in interviewing or 16 knowing individuals that are responsible for 17 charitable bingo in those particular municipalities. 18 And I think that would be helpful to 19 know when you're trying to say, "Well, why is the 20 charity in McAllen, Texas, doing so incredibly well 21 versus a charity in Dallas, Texas, that they may have 22 similar characteristics but one is doing extremely 23 well and one is not?" 24 And you look at some of those facts like 25 how much rent are they paying, what are their payroll 0092 1 expenses? But then you can look at some other factors 2 of: Well, the hall in McAllen has 350 customers and 3 the hall in Dallas has 120, and make some conclusions 4 based on some of those external factors. 5 I don't think you will ever with 6 precision determine some of those external factors, 7 the precision that I think a Commissioner Cox likes to 8 see. But I think you can make some specific -- I 9 think you can look at some of those external factors 10 and draw conclusions that are reasonable and based on 11 numbers. And I think that's helpful when y'all 12 continue to ask, "Why are some charities doing well 13 and some charities aren't?" 14 And I think to say that we're going to 15 ignore what goes on in a municipality I think misses 16 the point, without the BAC trying to advocate a 17 legislative change either at the Legislature or 18 anywhere else. I think they know that's not their 19 job. But what are the facts? As Sgt. Friday said, 20 "Just the facts, ma'am." And then the policymakers 21 can make their own conclusions. 22 And I have a witness affirmation. 23 CHAIRMAN CLOWE: I don't want to argue 24 with you. Do you want the first crack? 25 COMM. COX: Well, you know, I have to 0093 1 admit, I would like to know. The question is, is it 2 within our authority? 3 CHAIRMAN CLOWE: Well, let me argue with 4 you, then. 5 COMM. COX: Okay. 6 CHAIRMAN CLOWE: Steve, I think you did 7 a masterful job of dancing around it. 8 MR. FENOGLIO: That was not my intent. 9 CHAIRMAN CLOWE: I know, but you do it 10 so well. 11 Yes, I think we want to know what the 12 impact of Internet gaming and VLTs and the casinos in 13 the surrounding states, what that impact is, not only 14 on charitable bingo operations but on the lottery 15 itself, and we would like to have that information. 16 And I would stipulate with you -- and I think I'm on 17 the record as having said those three factors have 18 hurt charitable bingo in my opinion and lottery sales 19 as well. 20 And I would stipulate with you that I 21 think the smoking ban has hurt bingo. My favorite 22 restaurant in Dallas closed down because they had the 23 no smoking rule which was applicable to them. And I 24 think there is a certain percentage of alcoholic sales 25 that qualify you for smoking. And then if you drop 0094 1 below that, you're just a restaurant, it's no smoking. 2 And they didn't qualify so they closed. And the 3 manager said, "You know, this is what the no smoking 4 rule has done to us." I think the same thing is 5 happening to bingo operations. 6 But being aware of something and being 7 concerned about it, which Commissioner Cox is saying 8 that he is and I'm saying that I am and you're saying 9 that you are and the BAC is, does not enable us to go 10 across the line to devote resources to a study on a 11 formal basis. And I think you said yourself the 12 industry is the best source of that kind of 13 information, and there we're in total agreement. 14 And I think it's up to you and the 15 clients you represent, and Steve Bresnen, who is the 16 other well-recognized representative of the bingo 17 industry, and the new association which has made 18 itself known to us, as the people to carry the ball on 19 that kind of a study that, as you said, would be 20 presented to the Legislature. 21 This agency in the Charitable Bingo 22 Division should, as I see it, only act as a resource 23 to the extent that we have information that comes to 24 us from the industry itself. And we've done the best 25 job we can to tabulate that and put it on the Internet 0095 1 so it can be used. 2 But I think the whole point of the 3 discussion is that this is outside of our scope of 4 authority to be proactive in. We're aware of it. 5 We'll respond to regulatory bodies. The Legislature 6 is the one we're focused on. City government, other 7 entities, we would be responsive to them. But we 8 cannot take an active role. That falls to you and 9 your colleagues, as I see it. And I think that's 10 basically what you said, although you want us to be 11 concerned about it, and I think we are. 12 Did I make you mad? 13 COMM. COX: No, sir. I totally agree. 14 CHAIRMAN CLOWE: Can you convince me 15 otherwise? 16 MR. FENOGLIO: Well, if the interest is 17 from the Lottery Commission, what factors make for a 18 successful hall, what factors make for a successful 19 charity and, conversely, what factors make for an 20 unsuccessful hall and an unsuccessful charity, there 21 are certain things that go on within the four corners 22 of the bingo hall, the four corners of the bingo 23 facility, that directly impact. But there are other 24 factors that do not go on within that facility that 25 directly impact charitable bingo. 0096 1 And I've never advocated or never 2 thought, by putting this on the agenda, that it would 3 be a high-dollar, labor-intensive effort from staff. 4 I think for the most past, most of the BAC issues 5 they're working on, most of those issues are addressed 6 by volunteers with limited staff time. Billy may feel 7 otherwise. And I've made a point when I've sat down 8 with staff of, I sit on one side of the table and they 9 sit on the other. And I advocate my side and they 10 obviously advocate theirs. But I don't think this is 11 a big consumption of staff time. 12 But again, from the standpoint that 13 y'all want to know what affects charitable bingo -- 14 and I think that there is enough data available to 15 show, in fact, that that is -- maybe, Mr. Chairman, 16 what you're suggesting -- and at the end of your 17 comment, the industry should go do the study first and 18 then bring it to the BAC. You know, if that's what 19 you have in mind, I can't argue with that. 20 CHAIRMAN CLOWE: That's what I'm 21 advocating. And I would like to give you an example 22 of where I think there is a big difference. We just 23 had a completed audit by our internal audit function 24 or the auditing function in bingo. And the bottom 25 line determination in my opinion is that it's not very 0097 1 good and it needs to be improved. 2 Now, there is an area where I think we 3 ought to devote our resources and our time and 4 capital, to help the bingo industry. There is a real 5 need to be addressed within this division, to help the 6 bingo industry with the kind of auditing that 7 Commissioner Cox has defined many times. That's the 8 kind of thing I would like to see us focused on. 9 There are many things that are good to 10 know and helpful. And as we act as a resource, we can 11 give that information to the legislators. But I think 12 you're exactly on track now. The industry should 13 conduct that study. And then if they bring that 14 information to the BAC, the BAC can advise this board. 15 We can respond to it, and it becomes information as 16 the division or the agency is called on by the 17 legislator to be a resource. 18 I will tell any legislator that asks me, 19 in my opinion, the no smoking rule has adversely 20 affected bingo operations in many municipalities, but 21 that's as far as I think I'm qualified to go at this 22 point in time. And I think that's the sense of this 23 work the BAC has done at this time. To take it 24 further, I think that's an industry task. 25 How do you feel, Commissioner Cox? 0098 1 COMM. COX: I completely agree. 2 MR. FENOGLIO: I don't want to speak for 3 the BAC Chair because I know she speaks well for 4 herself. But if that's the sense, I can tell you the 5 industry would be happy to do that. 6 And, Mr. Chairman, on the other issue, 7 on the audit, I agree with you, that that is a far 8 higher priority. It has been a problem that I've 9 identified time and again in audits that I have 10 represented clients on where there has been a huge 11 disconnect in different regions of the state, auditors 12 applying old law, old regs, versus some auditors 13 applying the changes that were made in 2001, statutory 14 changes, so I can't argue on that specific example. 15 It was unfortunate I was out of town when that audit 16 report was discussed at the last bingo Lottery 17 Commission meeting. But had I been available, I would 18 have given you my two cents' worth on that. 19 Be happy to answer any questions. 20 CHAIRMAN CLOWE: Yes. I brought that up 21 because I think it is a really good example of an area 22 where we need to improve, and it's a work in progress. 23 And, you know, the directors called our attention, 24 through the internal audit request, for improvement in 25 that area, and our internal auditors made some 0099 1 excellent recommendations. Now, that's the kind of 2 thing that I think this board ought to be focused on 3 to help the bingo industry, and I think it will help 4 the bingo industry. 5 MR. FENOGLIO: I agree. 6 MR. ATKINS: Mr. Chairman, could I just 7 provide some very brief background to some of this 8 discussion? 9 CHAIRMAN CLOWE: I don't see why not. 10 MR. ATKINS: When Ms. Taylor first 11 brought this issue forward for placement on the 12 agenda, I asked several questions similar to what 13 you've asked today. And the way it was presented was 14 just to get an idea of the impact that the smoking 15 ordinances could be having on charitable bingo 16 locations. 17 And it was during the discussion that 18 took place at the BAC that I think the issue kind of 19 grew beyond itself. And there were members of the BAC 20 and maybe of the public who started to go down the 21 route of talking about using this information to take 22 to either local jurisdictions or the Legislature to 23 effect smoking ordinances. 24 It was stated several times on the 25 record that this was an item that the Commission had 0100 1 no authority over or that the Commission would not be 2 able to take any action on. But as Commissioner Cox 3 had referenced, it could be information that the 4 Commission would find useful and beneficial just in 5 terms of the effect. 6 I did want to point it out because it 7 has been referenced several times, the association 8 that's been formed, and let you know Hank Anawaty, who 9 is a member of that association, is in the audience if 10 you would like to discuss this matter with him. 11 CHAIRMAN CLOWE: I think that's fine. 12 I would like to come back to you, 13 Suzanne. I hope this is helpful. You know, being the 14 Chair of this group is not easy. You're kind of like 15 Commissioner Cox and me. That's why you get paid all 16 this big bucks, you know. But it really comes back to 17 you to control these good ideas when they come up and 18 manage it and still keep your committee enthusiastic 19 and productive. I hope all of this discussion is 20 something that will be helpful to you. Commissioner 21 Cox and I are very supportive to your efforts, to the 22 entire committee. But it's your job and our job to 23 keep us all on track. 24 Shall we hear from Hank and get his 25 reaction? 0101 1 MR. ANAWATY: Sure. 2 CHAIRMAN CLOWE: Thank you, Steve. 3 MR. FENOGLIO: Thank you. 4 MR. ANAWATY: Hi. Hank Anawaty, Senior 5 Advisor for Texas Charity Advocates. 6 Commissioners, as you-all probably know 7 by now, our association is new, it's young, but doing 8 very well. And the reason I mention that is that 9 we're just now getting our mission underway, and this 10 is something that hasn't been addressed among our 11 members. However, we do know the business very well, 12 most aspects of it. And I have to walk a fine line 13 here because I'm aware that we would have several 14 members already within our association that would be 15 negatively impacted by non-smoking ordinances. 16 So I was just doing some thinking about 17 this, and we would not have the resources to take on a 18 study at this time, but I do think that it could be 19 done -- I agree with Steve -- with a minimal amount of 20 effort by the people that are more accustomed to doing 21 this kind of thing. I can't imagine a better 22 qualified group of people to do it. 23 And when it comes out, I'm sure it will 24 show that it would be a negative set of consequences 25 and a decrease in attendance and could possibly have 0102 1 much more of an impact if it had the backing of the 2 BAC, if it had originated from the BAC and the Lottery 3 Commission, with the Lottery Commission's approval on 4 that. 5 It would be nice -- it would be real 6 nice for our members to be able to point to a study 7 that came from this level of authority so that when 8 local municipalities do threaten that, then it could 9 be pointed to. And we're almost all aware that it 10 would be in support of not limiting smoking in the 11 bingo venues. My experience with it is that it's a 12 very -- it's a real high negative. 13 CHAIRMAN CLOWE: Hank, I'm kind of 14 surprised to hear you say what you've said because I 15 think our whole discussion is that this is outside of 16 the BAC's authority and it's outside of this 17 Commission's authority. All we can be is a resource. 18 And the BAC cannot officially undertake 19 a study or take a position. And the whole idea, I 20 think the discussion we've had is that this is an 21 industry issue and we want to help the industry 22 understand if this is a problem -- and I think it 23 is -- that the industry has to deal with it. 24 So, you know, if you would like to visit 25 about this with Billy or the Commissioners, we would 0103 1 be happy to help you with some background and some 2 history and be helpful to you in any way we can. But 3 these are things that it will be beneficial to you to 4 understand that that's just not the role of this body. 5 MR. ANAWATY: I understand that. I do 6 see that it's a gray area as well. 7 CHAIRMAN CLOWE: Okay. Thank you very 8 much. 9 MS. KIPLIN: Sir, can I get you to 10 complete a witness affirmation form? 11 MR. ANAWATY: Sure. 12 MS. KIPLIN: Thank you. 13 MR. ANAWATY: They're out in the lobby? 14 MS. KIPLIN: They are. 15 CHAIRMAN CLOWE: Thank you. 16 Thank you, Sandy. I think you answered 17 the question. 18 Suzanne, this is a lengthy discussion 19 over ground that, you know, we've covered a lot. Let 20 me just ask you a question for my information. I see, 21 as a citizen, the move towards the prohibition of 22 smoking in public places as gaining momentum. I see 23 more and more buildings now where there is a 24 prohibition against smoking within 15 or 20 or 25 feet 25 of the front entrance. I see in public places that 0104 1 I'm in transit in small rooms that smokers are 2 confined in if they want to smoke, and the air is very 3 tightly controlled in those places. And the 4 non-smokers seem to be growing in predominance and 5 being protected more by legislation. 6 And this discussion at this point in my 7 mind doesn't have anything to do with bingo, except I 8 do want to ask, do you see it that way and do you 9 think, based on your experience in the bingo industry, 10 that an anti-prohibition of smoking in bingo 11 operations has a chance of being successful, just 12 based on your personal observations and knowledge? 13 MS. TAYLOR: On my personal observation, 14 I've seen that in some areas that have been tightly 15 knit communities, places where perhaps the bingo 16 people knew the local people on the city councils very 17 well, that they have gone in and said we have separate 18 smoking areas with separate ventilation and only 19 smokers need to go into those areas, and the city 20 council has backed up and said as long as there's 21 separate ventilation and no-smokers are protected and 22 they don't have to smell the smoke or come into 23 contact with second-hand smoke, that they've let the 24 bingo halls have that smoking area for the smokers. 25 So is there a possibility? Yes, I think 0105 1 there is a possibility that if you have the right 2 contacts or you have the correct information or you 3 have information to show that it's not a whim, that it 4 is in fact reality, that there is a chance that the 5 local municipalities will allow them to retain their 6 smoking rooms -- not areas, rooms. 7 CHAIRMAN CLOWE: That's very helpful. I 8 think this discussion has been very beneficial, and I 9 would hope that you would take it back to the BAC and 10 perhaps at your next meeting, if Commissioner Cox is 11 available -- and I'll try to be available -- we can 12 have this discussion to some extent with your group 13 and be helpful in your reporting this discussion to 14 them. 15 Anything further? 16 COMM. COX: No. 17 CHAIRMAN CLOWE: What else, Suzanne, on 18 your report? 19 MS. TAYLOR: We would like to present 20 you the annual report from the BAC for 2005. 21 CHAIRMAN CLOWE: Very good. 22 MS. TAYLOR: I do have a couple of extra 23 copies if anybody would like them. 24 And I will go ahead and give you a copy 25 of this (speaking to court reporter). 0106 1 Kim and I are going to go ahead and 2 share in this so that you don't have to hear one 3 person speaking the entire time. But we would like to 4 talk about some of the charts in here. 5 CHAIRMAN CLOWE: Very good. 6 MS. TAYLOR: The Bingo Advisory 7 Committee used data contained in the Charitable Bingo 8 Conductor Return Summaries from the Statewide 9 Financial Reports provided by the Texas Lottery 10 Commission Charitable Bingo Website. The committee 11 analyzed the data and makes the following 12 recommendations for the improvement of bingo in Texas 13 to the Commission. 14 One, gross receipts: Gross receipts 15 have continued to improve because of increased instant 16 bingo sales due to event tabs. Which card sales 17 entrance fees decreased by $19,631,513 and electronic 18 sales decreased by $424,224, instant bingo sales 19 increased by $49,436,059 resulting in an increase in 20 instant bingo sales of approximately 28 percent and 21 creating an increase in gross receipts of 22 approximately five percent or $29,380,322. However, 23 as the sales of instant bingo have increased, so have 24 the prizes paid out. 25 Additional improvements in gross 0107 1 receipts would be achieved by adding progressive 2 bingo, linked bingo, satellite bingo or Instant Bingo 3 Card Minders. Continuing to allow instant bingo sales 4 only in halls conducting bingo sessions is also 5 recommended. 6 And if I could get you to turn to the 7 chart on Page 4, all this chart is showing you is the 8 gross receipts from 2000 to 2005. And as you can see, 9 the gross receipts from 2000 to 2002 went down, then 10 with introduction of the event tabs have continued to 11 increase so that they have continued to go up through 12 2005. 13 One of the items that we wanted to see 14 is, on our reports that we filed, the quarterly 15 reports, it doesn't break down instant tabs from event 16 tabs. So I asked Good Time Bingo if they could give 17 me a breakdown of on their sales, how many of the 18 sales of tabs are instant compared to event. They 19 told me that for the year of 2005, their instant 20 ticket sales were 18 percent of sales and event ticket 21 sales were 82 percent of sales. So when we keep 22 coming back to saying this is all because of the event 23 tabs, there's the numbers. 82 percent of the tab 24 sales are the event tabs that were introduced. 25 The chart on Page 5 shows us our 0108 1 adjusted gross receipts. Everything remains pretty 2 stable across there. 3 The chart on 6 shows the bingo sales 4 comparison between 2004 and 2005, just with the 5 electronic card sales instant and the electronic. 6 The chart that I really appreciated the 7 most when we were putting this together was the chart 8 on Page 7 which shows us per person what has gone on. 9 For instance, in 2000, our per person entrance fees, 10 which would be the sale of paper, was $13.80. They 11 have gone down to $13.01 per session. So it's a 12 pretty small decrease. 13 The electronic sales was at $5.31. Now 14 it's gone up to $7.49, so it's a slight increase. But 15 your instant bingo sales started at $3.46 and went up 16 to $11.14, which is where we projected when we 17 originally had talked to the Commission about 18 introducing event tabs. This is the projection that 19 we had talked about at that time, because we felt it 20 would go up to $12 a person, and it's right there 21 where we thought it might be, because of looking at 22 what Louisiana was doing. 23 Are there any questions on that? 24 MS. ROGERS: For the record, my name is 25 Kimberly Rogers. 0109 1 No. 2 is charitable distribution. 2 Charitable distributions have continued to increase 3 over the last year. Charitable distributions in 2004 4 were $30,048,545. They rose by $298,130, to be 5 $30,346,675 in 2005. This is the third year in a row 6 to see a slight increase in charitable distributions 7 even though there has been a increase in conductors 8 during the same time period. In many instances 9 organizations must use income from instant bingo sales 10 to help pay for the $2,500 prize board for bingo 11 games. Increasing the gross revenue from card sales 12 and electronic sales through increased attendance 13 would allow more income to be available for charitable 14 distributions. 15 And if you look on Page 8, there is a 16 chart that shows in 2000, the distribution is 17 $36,809,265; and in 2005, $30,346,675. So they have 18 increased since 2004 and 2003, since the event tabs 19 have come in. 20 MS. TAYLOR: Item No. 3 is expenses. 21 Expenses have remained relatively stable throughout 22 the last six years and were actually $3,564,287 less 23 in 2005 than in 2000, showing that conductors have 24 been managing their expenses well. There was an 25 increase in expenses of $1,554,088 from 2004 to 2005. 0110 1 This was due largely to the increase in mortgage 2 payments of $1,205,697 for this time period. Rent 3 payments increased by $1,174. Lease payments to 4 distributors for electronic equipment increased by 5 $365,840, and the cost of goods sold increased by 6 $343,150. The first year "other expenses" had been 7 broken down was 2005; therefore, no comparisons could 8 be made item-by-item. However, other expenses as a 9 total decreased by $361,773. To increase the 10 charitable distributions, the focus should be on 11 revenue enhancement rather than on cutting down 12 expenses. 13 The chart on Page 9 shows us that the 14 expenses year-by-year, 2000 to 2005. On Page 10 we 15 have the expenses separated by category. Page 11 16 shows us a 2004 and 2005 expense comparison. And what 17 is most interesting about this is how the lines are 18 almost right on top of each other. 19 Page No. 12 shows a pie graph of your 20 2004 expenses and net revenue broken down. If you 21 flip to 2005, it looks like almost exactly the same 22 pie. The only difference is the "other expenses" has 23 gone to one percent and the -- I'm sorry. The "other 24 expenses" increased one percent and the mortgage 25 payments went up a percent. But other than that, you 0111 1 can see they're so close, it looks just like the same 2 pie. 3 MS. ROGERS: No. 4, attendance. 4 Attendance has decreased approximately 22 percent from 5 2000 to 2005. It's gone from 25,820,526 down to 6 20,041,191, with a decrease in attendance of 7 1,555,879, from 2004 to 2005. The continued decrease 8 is due in part to bingo games that are no longer 9 exciting to the general public, competition for the 10 gaming dollar -- the lottery, internet gaming, 11 floating casinos and casinos in neighboring states -- 12 and from lack of advertising bingo in Texas. 13 Recommendations for improvement include 14 progressive bingo, linked or satellite bingo, 15 increasing license times and adding an appropriation 16 for advertising to the bingo budget. Improving 17 attendance remains the key issue to the success of 18 charitable bingo in Texas. 19 And there is a clart on Page 14. As you 20 can see, in 2000 it has gone down slightly, basically 21 by a million each year. 22 CHAIRMAN CLOWE: Could we go back to 23 Page 13, please -- 24 MS. TAYLOR: Yes, sir. 25 CHAIRMAN CLOWE: -- 2005 expenses and 0112 1 net revenue. Help me understand where the 2 contribution to charities is, if it's in that chart. 3 MS. TAYLOR: It's the net revenue. This 4 isn't actual contributions. What it is, is the net 5 revenue that's left. 6 CHAIRMAN CLOWE: And the net revenue is 7 $27,981,000 -- is that right? -- for that year. 8 MS. TAYLOR: Yes; yes, sir. 9 CHAIRMAN CLOWE: And then how can the 10 contribution to charities then -- let's see. I'm 11 trying to reconcile that with the chart on Page 8. 12 MS. TAYLOR: I believe what you're 13 looking at is the charitable distribution. But what 14 is happening is, charitable distribution is being paid 15 by funds that were already in their bingo bank 16 accounts. 17 CHAIRMAN CLOWE: That's what it looked 18 like to me. It's exceeding net revenue. 19 MS. TAYLOR: It happens. I was looking 20 at the charts from Corpus for the last quarter. I was 21 using the information from statewide. And for the 22 quarter -- these numbers might be a little off -- but 23 I believe it was 23 charities that actually lost money 24 for the quarter, even though they made a distribution. 25 Prior to making the distribution, they actually were 0113 1 at a loss for the quarter. And I see the same thing 2 happening statewide. The money that's being disbursed 3 is money that was in the account from previous years. 4 CHAIRMAN CLOWE: It looks like in '05, 5 about two million or so came out of the bank? 6 MS. TAYLOR: Yes, sir. 7 CHAIRMAN CLOWE: Okay. That's what I 8 was seeing. I appreciate confirmation of that. 9 Pardon me for interrupting. 10 MS. ROGERS: Oh, that's okay; that's 11 okay. 12 The attendance is on the last page, 14, 13 which you can see has gone down about a million per 14 year. And no other areas were requested by the 15 Commission at this time. 16 So if y'all have any questions? 17 COMM. COX: Mr. Chairman, I'm looking at 18 the sentences in each of these that has -- I'll just 19 read the one from gross receipts. "Additional 20 improvement in gross receipts would be achieved by 21 adding progressive bingo, linked bingo, satellite 22 bingo or Instant Bingo Card Minders." 23 Those are proposals for new legislation, 24 I believe. Are you comfortable with those being in 25 this report? 0114 1 CHAIRMAN CLOWE: That's a good question. 2 It's an answer that, if asked, I think is appropriate. 3 I guess the hesitation I have is whether to lay it out 4 there as a recommendation as opposed to a response to 5 a question from the Legislature. Probably, to be 6 mindful of our position, we shouldn't make it in this 7 report as a recommendation but be prepared to answer a 8 request as a resource in that vein. 9 COMM. COX: So you would translate what 10 our posture has to be one step back to the Advisory 11 Committee and say they probably ought to be in that 12 same posture? 13 CHAIRMAN CLOWE: I think that's 14 appropriate. I think it's good information and I 15 agree with it, but I think it's not proper, based on 16 our lengthy discussion just a little while ago, that 17 we shouldn't put it out there as a recommendation in 18 the report. 19 MS. TAYLOR: Well, because it actually 20 and the Enabling Act asked for specific 21 recommendations for improvement, that's why we have it 22 in the report. It's hard to say, "Well, we don't have 23 any recommendations for improvement." And we do 24 realize that within the scope of what rulemaking can 25 be done, we are trying to do that. But, honestly, the 0115 1 specific recommendations would have to be items 2 currently we're not allowed to do. 3 CHAIRMAN CLOWE: Outside of -- 4 MS. TAYLOR: Outside of the -- 5 COMM. COX: I know we led you down this 6 path. Now that we're down there, I'm wondering: Do 7 we belong there? 8 CHAIRMAN CLOWE: I think the honest 9 answer is no, that we really shouldn't put this in as 10 a recommendation. It should be couched as a response 11 to an inquiry. And I think we ought to stay with that 12 position because I think that's the ground we stand 13 on. 14 I'm sorry, Suzanne. I think 15 Commissioner Cox is right on target. 16 COMM. COX: I'm sorry. I probably just 17 flew right by it last year and the year before that. 18 But every now and then, something just hits you in the 19 face. 20 CHAIRMAN CLOWE: I did want to ask 21 you -- and maybe it comes back to this point -- at the 22 conclusion of your presentation, but I think it's 23 appropriate to ask you now. If you were asked in the 24 forthcoming legislative session, "What would be most 25 helpful to the bingo industry?" what would your answer 0116 1 be? 2 MS. TAYLOR: Speaking not as a member of 3 the committee but as an individual, these same 4 recommendations. 5 CHAIRMAN CLOWE: So you've codified them 6 right here. 7 COMM. COX: And should the Legislature 8 ask us for information on this, you're prepared, you 9 stand ready to make this recommendation to them and 10 base it on whatever data you may have and whatever 11 perceptions you may have? 12 MS. TAYLOR: Yes. 13 COMM. COX: And that's the position I'm 14 comfortable being in. 15 CHAIRMAN CLOWE: And I think that's 16 where we ought to be. And I think we've had 17 presentations or comments from members of the public 18 who represent bingo entities, and they should be aware 19 of this report and this information. And when they do 20 the work that they are engaged to do and we are 21 approached as a resource, now I think we have our 22 response, and it's current and it's back. 23 Commissioner Cox, I compute the 24 charitable bingo contribution as about 20 percent of 25 gross revenue -- 22 percent. With your background and 0117 1 experience in the gaming industry, how does that 2 strike you as being related to the norm? 3 COMM. COX: Well, if you look at the 4 casino industry, the average hold that is in table 5 games, the percentage of handle that's left, that the 6 game nets out, is usually around 20 percent. But, you 7 know, from that, then, you would subtract expenses to 8 come to net, which is going to be a significantly 9 smaller percentage. And here I think we're looking at 10 the net number. 11 CHAIRMAN CLOWE: That's right. 12 COMM. COX: So I don't know what comfort 13 we draw from that. But the numbers are better than 14 the numbers in a casino. 15 CHAIRMAN CLOWE: That's interesting. 16 COMM. COX: Now, what you're looking 17 at -- I'm sorry. Let me back up there. You're 18 looking at contributions as a percentage of net 19 revenues, which is win. Is that correct? 20 CHAIRMAN CLOWE: No. I think I used as 21 a divisor the gross revenue. 22 COMM. COX: Is gross revenue in here? 23 MS. TAYLOR: This is adjusted net on 24 these last few pages. 25 CHAIRMAN CLOWE: I think I was on 0118 1 Page -- I used Page 8 and Page 4, total gross 2 receipts, for my calculation. 3 COMM. COX: So you're looking at -- 4 CHAIRMAN CLOWE: For the Year 2005. 5 COMM. COX: Okay. Now, you're looking 6 at the $30 million versus $634 million? 7 CHAIRMAN CLOWE: Well, now, wait a 8 minute. That's not how I got my number. That's a 9 different result. That's 4.7 percent. 10 MR. ATKINS: Mr. Chairman -- 11 CHAIRMAN CLOWE: Yes? 12 MR. ATKINS: -- if I could, I was just 13 going to say generally distributions run approximately 14 five percent of total gross receipts and around 19 to 15 20 percent of net receipts. That is gross minus 16 prizes. 17 CHAIRMAN CLOWE: Yes, Billy, thank you. 18 I see what I -- I used as my divisor total expenses, 19 which is $134 million. 20 MR. ATKINS: Okay. 21 CHAIRMAN CLOWE: You can straighten me 22 out on that. 23 COMM. COX: So now that number, 24 $134 million versus $634 million is -- let's see -- 25 something like 20 percent, so the comparison that I 0119 1 made holds. 2 CHAIRMAN CLOWE: That's right. 3 COMM. COX: When you get from net 4 revenue to the bottom line, I don't have a metric for 5 you there. 6 CHAIRMAN CLOWE: Okay. But it's about 7 4.7 or 5 percent. That, from my business background, 8 is about the percentage that you would like to make 9 off of cash in many industries. It doesn't speak to 10 the return on invested capital, which you would like 11 to be up around 17-18 percent. But a cash return of 12 five percent is not a bad target for a lot of 13 industries. I don't know. Gaming, I think it might 14 be a little bit higher, but I don't know how it 15 relates to invested capital. 16 COMM. COX: I sure don't either. 17 CHAIRMAN CLOWE: This discussion is 18 almost academic. We're just trying to get some 19 comparisons to see for our own benefits, Suzanne, 20 whether or not this is a business that's being run on 21 business criteria. I'm not sure the answer is 22 meaningful at all. 23 MS. TAYLOR: All of the graphs that are 24 in this came off of Page 3. So if you look on Page 3, 25 you can see the charitable distribution versus the net 0120 1 revenue, you know, so everything is right on this 2 page. 3 CHAIRMAN CLOWE: Yes. Well, I think 4 we're going to ask you, then, to remove those 5 recommendations and not let that be part of the 6 report. Other than that, I find it very helpful and 7 educational. 8 COMM. COX: I agree. 9 CHAIRMAN CLOWE: Anything further, 10 Commissioner? 11 COMM. COX: And, Kimberly, I know you've 12 worked a lot on this report, and you've really 13 improved it. 14 MS. ROGERS: Thank you. 15 COMM. COX: Thank you both for this 16 report. 17 CHAIRMAN CLOWE: Kimberly, are you a 18 co-chair now or right-hand person, or what's your -- 19 MS. ROGERS: Right-hand helper. How 20 about that? I don't think we have officially elected 21 a new co-chair. I think that will be handled maybe at 22 our next meeting. 23 CHAIRMAN CLOWE: Okay. I don't mean to 24 campaign for you. I just -- 25 MS. ROGERS: That's okay; that's okay. 0121 1 MS. TAYLOR: No, I had already asked 2 Kimberly if she would be willing to step into that. I 3 just needed to final out first if that was something 4 that the Chair names or if that was something that the 5 committee voted on. 6 MR. ATKINS: I think in the past, the 7 committee has voted on it. 8 CHAIRMAN CLOWE: Kind of like the 9 Governor appoints the chair of this committee. 10 You've both done a great job. 11 Billy, do you have anything to add? 12 MR. ATKINS: I do not. 13 CHAIRMAN CLOWE: Is a motion required to 14 accept this? 15 MS. KIPLIN: I do not believe it is. 16 I'll defer to Sandy Joseph on that matter regarding 17 the annual report, but I think it's their annual 18 report -- 19 CHAIRMAN CLOWE: You're shaking your 20 head, Sandy. 21 I move the adoption of this report by 22 the Commission. 23 COMM. COX: As it will be amended? 24 CHAIRMAN CLOWE: As amended. 25 COMM. COX: Yes. Second. 0122 1 CHAIRMAN CLOWE: All in favor, please 2 say "aye." 3 COMM. COX: Aye. 4 CHAIRMAN CLOWE: Aye. 5 Opposed "No." 6 The vote is 2-0. 7 Thank you, ladies. 8 COMM. COX: Thank you. 9 MS. ROGERS: Thank you. 10 MS. TAYLOR: Thank you. 11 CHAIRMAN CLOWE: Thank you, Sandy, for 12 the nod of the head. 13 AGENDA ITEM NO. III 14 CHAIRMAN CLOWE: Next, Item III: 15 Report, possible discussion and/or action on the 16 second quarter Calendar Year 2006 bingo conductor 17 information. 18 And Hank, did you get your appearance 19 form filled out for us? 20 MR. ANAWATY: Yes. 21 CHAIRMAN CLOWE: Good. Thank you. 22 Phil. 23 MR. SANDERSON: Good morning, 24 Commissioners. For the record, my name is Phil 25 Sanderson, Assistant Director of the Charitable Bingo 0123 1 Operations Division, and I'm here to present to you 2 today the second quarter 2006 information as reported 3 by the licensed authorized organizations. 4 As you can see for the second quarter, 5 prize payout percentages for gross receipts for 6 regular prizes of gross receipts was 77.6 percent, 7 while the prize payout percentage for instant pull-tab 8 tickets was 72.6 percent. 9 For cash disbursements as it relates to 10 other than prizes, as a percentage of net receipts, 11 the highest percentage continues to be rent payments 12 to commercial lessors at 24.8 percent, followed by the 13 salaries for callers, cashiers and ushers at 23.8 14 percent. Charitable distribution paid was 21.8 15 percent. Lease payments to distributors for 16 electronic card minders was 12.3 percent. The cost of 17 goods sold for paper and pull tabs is 7.5 percent. 18 And the remainder the other expenses, 7 percent or 19 less. 20 For all expenses as it relates to the 21 percentage of total expenses, once again excluding the 22 prize payout percentages, the salaries for the 23 janitorial, caller, cashier, usher, security, legal 24 and accounting account for 42 percent of total 25 expenses, the rent payments to commercial lessors at 0124 1 28.6 percent, the cost of goods sold at 22.8 percent. 2 We've indicated that the instant sales 3 continue to surpass the regular paper sales since the 4 first quarter of 2006. Currently instant bingo 5 represents 39 percent of the bingo gross receipts. 6 The regular card sales equal 38 percent of gross 7 receipts, while the electronic card sales is 23 8 percent of gross receipts. 9 This chart indicates the average 10 attendance per -- average number of players per 11 occasion. And as you can see from the second quarter 12 of 2004, compared to the second quarter of 2005, there 13 is a continued -- there is a dramatic decrease into 14 the second quarter of 2006. 15 This chart indicates the net receipts 16 for the second quarter of 2002 through 2006 for 17 instant bingo sales. As you can see, the net 18 receipts, which is gross minus prizes, has increased 19 from $6.3 million in the second quarter of 2002, to 20 $17.1 million for the second quarter of 2006, an 21 increase of $10.8 million. 22 While net receipts for regular bingo has 23 decreased from $32.3 million in 2002, the second 24 quarter, to $22 million in the second quarter of 2006, 25 which represents a decrease in $10.3 million for net 0125 1 receipts, thus leaving overall net receipts has only 2 increased one-half of a million dollars from the 3 second quarter of 2002 to the second quarter of 2006, 4 while gross receipts during that same time period had 5 increased $21.7 million. 6 As it relates to the prize payout 7 percentage, as you can see, the regular bingo 8 percentage has increased from 72.4 percent payout in 9 2002, to 77.6 percent payout for the second quarter of 10 2006, while instant bingo prize payout percentages 11 have increased 70.4 -- was at 70.4 percent in the 12 second quarter of 2002, and has only increased to 72.6 13 percent for the second quarter of 2006. 14 CHAIRMAN CLOWE: Why do you have that 15 dip in '06, Phil? 16 MR. SANDERSON: This is based on the 17 instant ticket sales and the prize payout percentages. 18 And 2002 is when the event tab tickets were initiated, 19 and those had a higher payout percentage. There may 20 have been some new games in the second quarter of 2006 21 that may have decreased that prize payout percentage a 22 little bit, to offer more money in net receipts to the 23 organizations. I'm not sure. This is based on what's 24 been reported and what was, you know, prize payout. 25 This concludes the information for the 0126 1 second quarter of 2006. In your notebook is 2 additional information from the analysis that was 3 performed by Susan Beasley, program specialist for the 4 Office of the Controller, and also includes some 5 spreadsheets that have additional information for 6 comparison purposes. 7 I'll be glad to answer any questions you 8 may have. 9 COMM. COX: Well, I would like to ask 10 Mr. Sanderson at the next meeting to have an answer 11 for your question. Those are the kinds of things that 12 we should be looking at. I think we should do more 13 than compile this data. I think we should analyze 14 this data. 15 CHAIRMAN CLOWE: And that's within our 16 authority. 17 It's an interesting answer you gave, 18 Phil, that if they're cutting back on the prize 19 payout, you know, they may be -- you can short-term 20 gaining and long-term hurting themselves. And we're 21 not saying that. We would just like to know. 22 MR. SANDERSON: Yes, sir. 23 CHAIRMAN CLOWE: Commissioner Sadberry, 24 did you vote on instant pull tabs? 25 MR. SADBERRY: Mr. Chairman, I could 0127 1 answer that if I could be told what the time frame in 2 which it occurred. I think I did. Was it before 3 March of 2001? 4 CHAIRMAN CLOWE: Billy, was he on the 5 Commission? 6 MR. SANDERSON: The pull tabs and event 7 tab tickets were adopted in July of 2002. 8 MR. SADBERRY: No, I did not. 9 CHAIRMAN CLOWE: It's become a big part 10 of the picture, hasn't it? 11 MR. SADBERRY: The presentation? 12 CHAIRMAN CLOWE: Yes, it's a third of 13 the whole thing. And just for our information, do 14 people buy them more at the beginning of the session 15 or do they just get up and buy them through the whole 16 session or what's the sense of when the sales peak? 17 Do people move around during the sessions and offer 18 them? 19 Suzanne, come back up. You probably 20 know better that anybody else. Help us understand 21 that. 22 MS. TAYLOR: The majority of your pull 23 tabs are sold before the session starts. Once the 24 session starts, the customers are concentrating more 25 on the bingo games. We do have floor workers that 0128 1 move around through the hall through the entire 2 session selling the tabs. So there is never a time 3 when more than two minutes goes by, somebody is not 4 walking behind you saying, you know, "Horse race" or 5 "car race" or, you know, "Get them while they're hot 6 here." But the vast majority are sold before the 7 first game is ever played in the session and during 8 the break, which is why we would like to work on that 9 rule. 10 CHAIRMAN CLOWE: And that's what I've 11 seen from my visits to bingo operations, that when 12 people come in, they'll buy a handful and at a break, 13 they'll buy a handful. 14 MS. TAYLOR: They'll be lined up at the 15 tab booths during the break. Once bingo starts, 16 there's never going to be anybody gets out of their 17 seat and walks up there. 18 CHAIRMAN CLOWE: And then the electronic 19 devices have come in for a third of the revenue it 20 looks like, and that has grown. There is no 21 limitation anymore. 22 MS. TAYLOR: Well, there is a limit, 66 23 cards on each game. There is a limit of 66 cards per 24 customer on each individual game. 25 CHAIRMAN CLOWE: I meant on the 0129 1 electronic devices. 2 MS. TAYLOR: But many customers, what 3 they're doing is, they're buying multiple electronic 4 devices. Unfortunately, what that does it, it costs 5 the charity more money because now instead of paying 6 rent on one electronic device, you're paying it on 7 three or four electronic devices. 8 CHAIRMAN CLOWE: That's how they hit the 9 limit, by buying those electronic. What's the maximum 10 number of card on any electronic -- 11 MS. TAYLOR: 66 faces. 12 CHAIRMAN CLOWE: 66. 13 COMM. COX: Is that by rule or -- 14 MS. TAYLOR: It's the law. 15 COMM. COX: The law? 16 CHAIRMAN CLOWE: It's in the law. 17 MR. ATKINS: No, no, it's a rule; it's 18 in the rules. The 66 card face limitation is a rule. 19 COMM. COX: Okay. Does anybody know 20 why? 21 MR. ATKINS: When the card minding 22 device language was added to the statute and the rule 23 was first developed, there was extensive discussion 24 about the fact that there is a perception, at least 25 among players, that the electronic card minding 0130 1 devices give an individual an advantage over a paper 2 player. 3 And at the time, I recall that the audit 4 staff went out and did a survey -- I don't know how 5 formal it was -- of what I would call the average 6 number of paper card faces that they saw players 7 playing, and it came out to be 66. And that was also 8 consistent, I believe, with some other jurisdictions 9 that had just introduced these devices. 10 COMM. COX: Well, I'm going to really 11 show my ignorance here now. How big does a table have 12 to be to put 66 of these things on there? 13 MS. TAYLOR: It would depend upon 14 whether you are laying them out or stacking them. 15 Most players stack the books. It's faster. 16 COMM. COX: And they go through 66 of 17 them -- 18 MS. TAYLOR: Oh, that's not -- that's 19 only seven books. You have players that play 10 and 20 12 books. 21 CHAIRMAN CLOWE: Wow! 22 MS. TAYLOR: A lot of the whole -- the 23 bingo is not fast. You're not talking about a speed 24 game where the numbers are called fast. You've got 30 25 seconds to 40 seconds in a lot of halls to mark your 0131 1 numbers. You're looking for specific patterns, so 2 you're not looking for every single number. If you're 3 playing the letter "X", you're only looking at the 4 number at the top and the bottom of each of the 5 squares. 6 CHAIRMAN CLOWE: Yes. These are people 7 who know what they're doing. 8 COMM. COX: Oh, I believe if. 9 Thank you. I appreciate that. 10 CHAIRMAN CLOWE: Well, I think there is 11 a sense in this that if the industry wanted to look at 12 that, the Commission would be open to input. Do I 13 sense that correctly? 14 COMM. COX: Certainly. 15 CHAIRMAN CLOWE: You know, that was done 16 sometime ago. If it's applicable now, it's fine. If 17 it's not applicable, it might be something that could 18 be changed that would be beneficial to the industry. 19 MR. ATKINS: On the limitation of the 20 number of card faces? Chair, I don't think, you know, 21 the staff has any strong feeling one way or another. 22 I believe that there have been, at least informally, 23 discussions about that in the past. And I don't 24 recall there being a strong interest at the time in 25 changing card face limitation. 0132 1 COMM. COX: What I just heard Suzanne 2 say was that now people are getting three or four of 3 these machines, and that's running expenses up. So if 4 they can get three or four machines, they're getting 5 beyond the spirit of what your rule was intended to 6 do, if not the letter. 7 So maybe we should look at letting them 8 put four times as many in there, and they will have to 9 have only one-fourth as many machines. That would be 10 good for some people and bad for others. That would 11 be good for the operators and bad for the 12 distributors. So, you know, I don't know how our 13 responsibility for balancing those interests works, 14 but we ought to be hearing it if somebody wants to 15 bring it up. 16 CHAIRMAN CLOWE: Well, that would be a 17 subject, that if it was brought to the Commission and 18 a rule were proposed, you would have public input on 19 and you can evaluate that. 20 COMM. COX: There you go. 21 CHAIRMAN CLOWE: But that is clearly 22 within the authority of the Commission, and it's the 23 kind of thing that we ought to be discussing, it seems 24 to me. It kind of comes along the pull tabs, you 25 know. We're trying to recognize trends and be 0133 1 responsive within our authority to those things are 2 beneficial to the industry. 3 MR. SANDERSON: Commissioners, if I may 4 add, on the pull tabs there is a regulatory 5 requirement that the prize payout percentage cannot be 6 less than 65 percent on an instant bingo ticket. And 7 there are varying degrees of ticket payout 8 percentages. They range anywhere from 65 percent, and 9 there are some tickets on the market that are 80 to 10 82 percent payout. And the difference each quarter as 11 to what that payout percentage could be is related to 12 what tickets are being sold in the market during that 13 period of time. 14 COMM. COX: Okay. Now, you said there 15 is a regulatory requirement? 16 MR. ATKINS: It's a rule. 17 COMM. COX: It's in the statute or by 18 rule? 19 MR. SANDERSON: That's by rule. 20 COMM. COX: Okay. Well, if we made it, 21 we can change it. Right? 22 MR. SANDERSON: That is correct. 23 COMM. COX: If anybody thinks it's 24 inappropriate or outdated or wasn't the right thing to 25 do in the first place, we want to hear from them. 0134 1 MR. SANDERSON: Yes, sir. 2 CHAIRMAN CLOWE: And, Phil, in your 3 opinion, is it the same with bingo players as it is 4 with lottery instant scratch-off ticket players, that 5 they're sensitive to that payout and it guides their 6 purchases? 7 MR. SANDERSON: I don't know if it does 8 as much with the bingo player because, you know, like 9 I said, they do know that there is that minimum 65 10 percent payout percentage. The pull tab ticket has on 11 the face of it what the number of cards are in the 12 deal and what the payout of the cards, you know, for 13 that deal are. And I guess an individual could 14 compute what that payout percentage was, but I've not 15 heard any particular player playing an instant ticket 16 because of what the payout percentage was. Most of 17 them play it because of the $500 prize or, you know, 18 what the high prize is. 19 CHAIRMAN CLOWE: Both the ladies on the 20 Bingo Advisory Committee are shaking their heads 21 affirmatively to your answer. So it's prize oriented 22 rather than percentage -- 23 MR. SANDERSON: That is correct. 24 CHAIRMAN CLOWE: -- in everybody's 25 opinion? 0135 1 MR. SANDERSON: That's my opinion, yes, 2 sir. 3 COMM. COX: Help me understand how we 4 got in the business of setting minimum payouts. 5 MR. SANDERSON: That came over from the 6 Comptroller's office. I don't think it's ever been 7 changed. 8 COMM. COX: Okay. Well, this might be a 9 good time to be thinking about whether that's 10 appropriate or not. You know, America is a wonderful 11 country. And legislating or creating by rule minimum 12 payout percentages is a little beyond what I think is 13 the purpose of a regulatory agency, but I could be 14 totally wrong on that. That's just my initial 15 perception. I know in Nevada, they don't require that 16 there be any minimum payout percentages. They only 17 require that it be disclosed what the possible winning 18 combinations are. 19 MR. SANDERSON: Yes, sir. 20 CHAIRMAN CLOWE: Okay. Very good, Phil. 21 Thank you very much. 22 Anything further? 23 AGENDA ITEM NO. IV 24 CHAIRMAN CLOWE: Next item, IV: Report, 25 possible discussion and/or action on the 0136 1 implementation of recommendations contained in the 2 Internal Audit report on bingo audit services, 3 including the adoption of the bingo regulatory 4 objectives, bingo audit charter, bingo division 5 organizational structure and/or bingo auditing 6 standards. 7 Mr. Atkins. 8 MR. ATKINS: Thank you. Thank you, 9 Commissioners. 10 At your August 9th Commission meeting, 11 there were three items that you asked me to have 12 prepared for you today. The first is a regulatory 13 objective. The Internal Audit Report recommended that 14 the Bingo Director present a regulatory objective to 15 you for your review and approval. 16 And what Mr. Sanderson has put on the 17 screen is the draft that I would like to present to 18 you today for your consideration. A copy of this 19 draft has been provided to the directors of the Legal 20 and Enforcement Divisions. I've had the opportunity 21 to discuss it with the Executive Director and the 22 Internal Audit Director, and I've also provided a copy 23 to the staff of the Audit Services Department and the 24 Charitable Bingo and invited their comment. 25 Briefly, the regulatory objective 0137 1 consists of the following: An opening paragraph that 2 identifies the importance of bingo as a fundraising 3 activity to Texas non-profits. It states the 4 statutory responsibilities and our goal of achieving 5 voluntary compliance. 6 The second paragraph outlines how we 7 will conduct our regulatory activities and develop our 8 regulatory requirements. This paragraph also contains 9 our commitment to the highest levels of 10 professionalism. 11 I would be happy to answer any questions 12 that you may have about this objective. 13 COMM. COX: Mr. Chairman, Mr. Atkins 14 shared this with me last week and we talked about it 15 at some length, and I believe it captures what I 16 wanted it to capture. 17 CHAIRMAN CLOWE: I agree. 18 MR. ATKINS: Then, Commissioners, I 19 would, as I mentioned earlier, pursuant to the 20 recommendation in the Internal Audit Report, ask for 21 your approval on this item. 22 CHAIRMAN CLOWE: Are you asking for a 23 motion? 24 MR. ATKINS: The Internal Audit Report 25 was not specific as to a motion and a vote. But I see 0138 1 Ms. Melvin shaking her head, so I believe yes. 2 CHAIRMAN CLOWE: I'm not sure a motion 3 is appropriate. I think you've gotten approval from 4 both the Commissioners. 5 Counselor, what's your opinion on this? 6 MS. KIPLIN: I think if you want to 7 formalize as a Commission on the record what you see 8 the bingo regulatory objective to be for the division 9 or for the agency, it's appropriate. It's setting I 10 think a high standard or policy at a high level. And 11 I think, from the discussions I've had with the Bingo 12 Division Director, it's in his view the underpinning 13 of building a program. 14 I don't think it's required. I think 15 it's certainly not something that would require 16 action. 17 CHAIRMAN CLOWE: Commissioner Cox, I 18 think we ought to make a motion on this. 19 COMM. COX: I think so, too. 20 CHAIRMAN CLOWE: So move. 21 COMM. COX: Second. 22 CHAIRMAN CLOWE: All in favor, please 23 say "Aye." 24 Aye. 25 Opposed "No." 0139 1 The vote is 2-0 in favor. 2 MR. ATKINS: Thank you, commissioners. 3 With that approval, we will be communicating this 4 objective to the industry. We'll be posting the 5 regulatory objective on the division's Internet and 6 the agency's Intranet, as well as including it in our 7 Bingo Bulletin, our operator training program and our 8 Operations Manual. 9 The next item you requested was the 10 adoption of the audit standards, as recommended in the 11 Internal Audit Report. Specifically the request was 12 to be prepared to adopt generally accepted government 13 auditing standards as promulgated by the U.S. 14 Government Accountability office, and I am prepared to 15 do that through the adoption of an audit charter which 16 has been provided to you. This chatter was developed 17 with the assistance of the staff and the Audit 18 Services Department. And I've had the opportunity to 19 receive comment from the Internal Audit Director and 20 the Director of the Office of the Controller. 21 If you have no suggested changes to the 22 charter, then, as I stated, I am prepared to adopt it. 23 COMM. COX: Mr. Chairman, I have 24 reviewed this one as well. I would like to ask 25 Ms. Melvin and Ms. Pyka to tell us what their thoughts 0140 1 on this are. 2 MS. MELVIN: Hello, Commissioners. 3 Again, for the record, my name is Catherine Melvin, 4 the Director of the Internal Audit Division. 5 As Mr. Atkins has stated, I have had the 6 opportunity to review the draft charter. Mr. Atkins 7 asked me some questions related to our recommendation 8 of adopting standards and the best method to go about 9 that, and so we discussed utilization of a charter 10 document and the necessary elements that it should 11 contain. And then finally we discussed who the 12 charter should be between and discussed the signatures 13 on that document. 14 In my review, I feel that the charter 15 adequately meets the needs of the division and, more 16 specifically, the Audit Services Department, 17 encompassing the activities that they conduct. 18 MS. PYKA: For the record, Kathy Pyka, 19 Controller for the Lottery Commission. 20 I, too, have had the opportunity to 21 review the charter. Billy provided it to me last 22 week. And I provided him several areas of feedback. 23 And just with a quick review of seeing the final 24 presented here today, it looks like a lot of the 25 suggested items that I provided to Billy have been 0141 1 incorporated. I think it is a good document and will 2 be very useful as a document to use as a guide and to 3 go forward with the Audit Services Department. 4 CHAIRMAN CLOWE: Is there a motion? 5 COMM. COX: Yes, sir, I move. 6 CHAIRMAN CLOWE: Second. All in favor, 7 please say "Aye." 8 Aye. 9 Opposed "No." 10 The vote is 2-0 in favor. 11 MR. ATKINS: Thank you, Commissioners. 12 We also will be communicating that charter to staff 13 and the industry as well. 14 Finally, the last item you had asked for 15 was the reporting structure of the division to be 16 changed, specifically that the Audit Services 17 Department report directly to the Director. 18 After discussions with both of you, I 19 would like to ask that this item be postponed at this 20 time. As discussed in management's response to this 21 recommendation, I'm evaluating some broader 22 organizational changes based not just on the 23 recommendation to change the reporting structure but 24 also the recommendation that certain functions be 25 transferred from the Audit Services Department to 0142 1 other sections in the division. Additionally, I'm 2 considering other organizational changes that I 3 believe will result in greater efficiencies within the 4 division. 5 CHAIRMAN CLOWE: Commissioner Cox, you 6 and I are not allowed to discuss this. But I have had 7 a couple of conversations with Billy, and I would like 8 to take this opportunity to tell you that I have urged 9 him to do just what he said he's doing, and that is to 10 look at the overall organization of the division and 11 take this as an opportunity to look at his human 12 resources, his job functions, and come up with the 13 best utilization of those to improve the work product 14 of this division. I would not be surprised if you 15 hadn't done the same thing more skillfully than I 16 have, but I want to -- 17 COMM. COX: We have had the same 18 discussion, Mr. Atkins and I, and I concur with what 19 he's doing. 20 CHAIRMAN CLOWE: So then, Billy, both 21 Commissioners are on record as urging you to make the 22 most of this opportunity, based on the recommendations 23 from the Internal Audit Report. 24 MR. ATKINS: Thank you, Commissioners. 25 In addition to the items that we 0143 1 discussed, I did want to briefly update you on some 2 other activities that have been taking place 3 associated with the recommendations in the Internal 4 Audit Report. 5 At your last meeting, we provided you 6 with a high level Gantt chart. We're continuing to 7 identify and build into that chart the various 8 subtasks associated with the recommendations contained 9 in the Internal Audit Report. 10 Additionally, the meetings with staff 11 from the Legal and Enforcement Divisions continue as 12 we review existing functions, processes, statutes and 13 rules. 14 I also wanted to thank Catherine Melvin 15 and her staff, once again. On Monday, August 21st, we 16 brought all of the Audit staff into Austin, and 17 Ms. Melvin and her staff met with them, and they 18 answered any questions they had regarding the Internal 19 Audit Report. While I wasn't able to attend that 20 meeting, I have been briefed by both Ms. Melvin as 21 well as my staff, and I believe the consensus is that 22 the meeting was much appreciated and very helpful. 23 Also while the Audit staff was in 24 Austin, there were 10 work groups formed which Audit 25 staff have volunteered to serve on as we work to 0144 1 address the various recommendations in the Internal 2 Audit Report. 3 And, finally, on September 20th and 4 21st, a number of the Audit staff members will be 5 attending the State Auditor's Office Texas Government 6 Accountability Conference, which includes, among other 7 things, sessions on the 2006 yellow book standards. 8 That concludes my report, and I would be 9 happy to answer any questions you may have. 10 CHAIRMAN CLOWE: Billy, I would like to 11 give you a sense of moving ahead on this timely. I 12 think the Commissioners have given you some additional 13 time now from a deadline maybe that you were asked to 14 adhere to on the one hand. On the other, we would 15 like for you to call on the resources of Director 16 Sadberry and his staff, the Director of the Human 17 Resources Division, the Internal Audit Division 18 Director, and move ahead with this study and the 19 implementation of your results in a timely manner. 20 We want to do this in balance with the 21 skills and the abilities of the people involved in the 22 division. But, on the other hand, when there is a 23 reorganization, people are concerned about that, and 24 we want to be respectful of those concerns and see you 25 make your decisions timely and move ahead with 0145 1 implementation. 2 So although I believe the sense is, 3 we're not asking you to come back at the next meeting 4 or any specific time, but we will be available 5 individually to work with you and talk with you. But 6 we ask you to move ahead on your own with this 7 project. 8 MR. ATKINS: Thank you, Mr. Chairman, 9 and I will. I will take the opportunity to call on 10 each of you. I've also had the opportunity to already 11 had some discussions with Mr. Sadberry as well as the 12 HR staff. So I will continue working in that 13 direction and be bringing you a product. 14 CHAIRMAN CLOWE: Very good. 15 AGENDA ITEM NO. V 16 CHAIRMAN CLOWE: Item V: Report, 17 possible discussion and/or action on GTECH 18 Corporation, including proposed acquisition of GTECH. 19 Mr. Sadberry. 20 MR. SADBERRY: Mr. Chairman and 21 Commissioner, Anthony Sadberry, Executive Director. 22 This agenda item pertains to the 23 previously announced proposed acquisition of GTECH, 24 the Commission's lottery operator, by Lottomatica, the 25 operator of the Italian lottery. 0146 1 To provide you an update -- and 2 Assistant Attorney General Mattax alluded to this this 3 morning, and I concur in his comments. And to add to 4 that, GTECH issued a press release on August 29, 2006, 5 announcing that all the conditions in the merger 6 agreement were satisfied and Lottomatica has completed 7 its previously announced acquisition of GTECH. 8 I have no further updates and will be 9 happy to answer any questions. 10 CHAIRMAN CLOWE: Thank you, Director 11 Sadberry. 12 AGENDA ITEM NO. VII 13 CHAIRMAN CLOWE: Next is Item VII, 14 report, possible discussion and/or action on the 15 agency's contracts. 16 Mr. Jackson. 17 MR. JACKSON: Good morning, 18 Commissioners. For the record, my name is Tom 19 Jackson, Purchasing and Contracts Manager for the 20 Commission. 21 Commissioners, in your notebooks under 22 Tab No. VII is a report on prime contracts that has 23 been updated for your review. I would be happy to 24 answer any questions you might have. 25 COMM. COX: Thank you, Mr. Jackson. 0147 1 CHAIRMAN CLOWE: Thank you. 2 AGENDA ITEM NO. VIII 3 CHAIRMAN CLOWE: The next item, VIII, 4 report, possible discussion and/or action on the 5 procurement of advertising services. 6 Mr. Fernandez. 7 MR. FERNANDEZ: Good morning, 8 Mr. Chairman, Commissioner Cox. My name is Mike 9 Fernandez. I'm the Director of Administration. 10 And I'm here this morning to inform you 11 that the agency has entered into a three-year contract 12 with DDB Dallas and the Cultura group for advertising 13 services. That contract was entered into August the 14 29th. 15 If you have any questions, I would be 16 happy to answer them. 17 COMM. COX: Do you have two prime 18 contractors or one? 19 MR. FERNANDEZ: One. 20 COMM. COX: DDB is then the prime, and 21 Cultura is their sub; whereas, previously we had been 22 contracting directly with both? 23 MR. FERNANDEZ: That's correct. 24 COMM. COX: That was in conformity with 25 the recommendations of the team from The University of 0148 1 Texas. Is that correct? 2 MR. FERNANDEZ: That is correct, 3 Commissioner. 4 COMM. COX: Okay. I think that's a good 5 move. 6 CHAIRMAN CLOWE: How many bidders were 7 there, Mike? 8 MR. FERNANDEZ: Well, we had five 9 bidders. 10 Did we have five acceptable bids? 11 MR. JACKSON: I think we had four. 12 MR. FERNANDEZ: We had four acceptable 13 bids. 14 CHAIRMAN CLOWE: Had four? 15 MR. FERNANDEZ: Yes, sir. 16 CHAIRMAN CLOWE: That's good. 17 COMM. COX: Are there any protests? 18 MR. FERNANDEZ: No, sir. 19 COMM. COX: And has the time for which 20 there might be a protest lapsed? 21 MR. FERNANDEZ: It has expired. 22 COMM. COX: Okay. 23 CHAIRMAN CLOWE: Very good. Thank you, 24 gentlemen. 25 0149 1 AGENDA ITEM NO. XII 2 CHAIRMAN CLOWE: Next, Commissioner Cox, 3 with your approval, we'll move to Item No. XII, 4 consideration of the status and possible entry of 5 orders in the dockets represented by the Letters A 6 through E. 7 Ms. Kiplin. 8 MS. KIPLIN: Commissioners, if I could 9 take up Letter A, and the reason I would like -- the 10 first two letters, A and B, both have to do with bingo 11 registry. But on Letter A in particular, we are 12 asking -- the staff is asking that you approve the 13 Findings of Fact and Conclusions of Law that are 14 contained in the Proposal For a Decision as to each 15 person that went before the State Office of 16 Administrative Hearings, with the exception of one, 17 and that lady's name is Teresa Ogle. 18 And the reason for that is, while she 19 did not appear at the hearing, after the Proposal For 20 a Decision was issued, she had communications that 21 indicated that perhaps that conviction was not a 22 conviction of her. And the DPS records indicate that 23 she did have an alias. The alias is on the 24 conviction. 25 These workers are run on a tape, not on 0150 1 fingerprints. We're trying to get fingerprints to 2 determine whether it really is her conviction or not 3 her conviction. And then if not, we're going to move 4 forward at sometime in the future, once we get 5 confirmations, to either file a motion to dismiss this 6 case against her with you-all or to proceed, to ask 7 that you adopt the Proposal For a Decision as it 8 relates to her. We think that's the way that justice 9 ought to be served as it relates to her. 10 CHAIRMAN CLOWE: And what is this 11 person's name again, please? 12 MS. KIPLIN: Her name is Teresa Ogle, 13 and she is not before you. The reason that I need to 14 have -- 15 CHAIRMAN CLOWE: She's not on this 16 report? 17 MS. KIPLIN: No, she's not, but she is 18 contained within the Proposal For a Decision because 19 she was noticed up for hearing before that Judge. And 20 so he has incorporated by reference in his Findings 21 and Conclusions this exhibit that does contain her 22 name. And so when you adopt your order, the order 23 needs to modify the Finding and Conclusion as it 24 relates to this individual. And so that's why I 25 wanted to take this up separately, to lay that out. 0151 1 And with that, then staff would ask that 2 you would adopt all Findings and Conclusions of the 3 Judge, with the exception of those as it relates to 4 Teresa Ogle, and then vote to approve the PFD. 5 CHAIRMAN CLOWE: And that's within good 6 practice? 7 MS. KIPLIN: Yes. I think it serves 8 justice to hold until we know for certain. 9 CHAIRMAN CLOWE: Any questions? 10 COMM. COX: No, sir. 11 CHAIRMAN CLOWE: Move the adoption of 12 the staff recommendation. 13 COMM. COX: Second. 14 CHAIRMAN CLOWE: All in favor, please 15 say "Aye." 16 COMM. COX: Aye. 17 CHAIRMAN CLOWE: Aye. 18 Opposed "No." 19 The vote is 2-0. 20 COMM. COX: That was with respect to 21 Items A and B? 22 MS. KIPLIN: No, that was just with 23 respect to A. 24 COMM. COX: Just with respect to A? 25 MS. KIPLIN: Right. B is the denial of 0152 1 folks who want to be on the registry. And the staff 2 would recommend and would request that the Commission 3 vote to approve the Proposal For a Decision that 4 contains the proposed Findings and Conclusions of the 5 Administrative Law Judge. 6 CHAIRMAN CLOWE: Any questions? 7 COMM. COX: No, sir. 8 CHAIRMAN CLOWE: Move the adoption of 9 the staff recommendation. 10 COMM. COX: Second. 11 CHAIRMAN CLOWE: All in favor, please 12 say "Aye." 13 COMM. COX: Aye. 14 CHAIRMAN CLOWE: Aye. 15 Opposed "No." 16 The vote is 2-0. 17 MS. KIPLIN: Commissioners, I would like 18 to take up Item C now separate from the others. And 19 this has to do with a criminal conviction on the 20 person who is the solo under the retailer, NASA Food 21 Mart. And I know that there has been an interest in 22 terms of timings of convictions, timings of license 23 applications. And so I wanted to make sure that you 24 were aware of this particular Proposal For a Decision. 25 This gentleman actually did appear in 0153 1 front of the Administrative Law Judge, which is for 2 the most part different. Most of these are defaults. 3 The facts are very clear that this individual was 4 convicted of felony credit card abuse on July 16, 5 2002. And the sentence that ran did not end until 6 July 15, 2005. 7 So under the operative statute, which is 8 466.155 of the Government Code, this person is subject 9 to -- this license is subject to revocation or 10 suspension for a period of 10 years from the date of 11 the last day of the sentence served. 12 The gentleman did appear and put on 13 information that another licensing agency didn't 14 revoke his license. Other issues, the Administrative 15 Law Judge went through I thought a pretty thorough 16 analysis on the distinction between revocation and 17 suspension and said that, "Even if you went with 18 suspension, you would have to suspend him until he was 19 eligible." 20 So his view is, the only practical 21 decision or outcome would be a revocation. Staff does 22 request that you do vote to approve the State Office 23 of Administrative Hearings' ALJ's recommendation. 24 I will say that this case does fall 25 within the category of those that were cases that were 0154 1 pending disposition in the former Security Division, 2 that when the Enforcement Department took over, with 3 the help of the Lottery Operations Retail Division, 4 this case came to surface and we did research the 5 conviction, and that's what led to the case being 6 presented to the State Office of Administrative 7 Hearings and before you today for your decision. 8 I'll be glad to answer any questions 9 that I can. 10 CHAIRMAN CLOWE: Any questions? 11 COMM. COX: Ms. Kiplin -- 12 MS. KIPLIN: Yes? 13 COMM. COX: -- have we found the rathole 14 where all of these things were stuck and cleaned it 15 out? 16 MS. KIPLIN: We are cleaning it out. 17 The rathole were two -- it was a file cabinet that 18 were two drawers full of cases that were closed 19 because there was arrest but no conviction, and they 20 were supposed to be handled by a security analyst and 21 followed up on pending disposition. And then once 22 this came to our attention, the then Enforcement Chief 23 requested that these cases be a priority, go out and 24 get the dispositions and let's find out where we are, 25 and we're working through that process. 0155 1 COMM. COX: Okay. Now, Director 2 Sadberry, this function now reports to you. Is that 3 correct? This is Mr. Rogers now? 4 MR. SADBERRY: That's correct. The 5 Enforcement Division was established and is currently 6 operating as a separate division. The director of 7 that division reports directly to my office, as 8 Executive Director. And that position is currently 9 held by Ed Rogers, who is the Acting Director that 10 appeared before you earlier today. That's correct. 11 COMM. COX: Are you satisfied that you 12 and your staff have taken corrective action so that 13 these things are not continuing on your watch? 14 MR. SADBERRY: It is my intent that they 15 not continue. I am satisfied with the progress that 16 is being made. And in that regard, you are correct, 17 we are coordinating with the Legal Services and 18 Division of General Counsel to make certain that we're 19 getting our arms around this. 20 My sense, in hearing your discussion and 21 working with you, is that you and I and the 22 Commissioners and I concur that this is not a 23 desirable situation. A large and significant part of 24 the consideration that went into the reorganization 25 and the structural changes that were made was to take 0156 1 this into account. I think we needed to have 2 accountability and performance. That's my standard or 3 that's what I require and expect, and that's what is 4 occurring. 5 That there are not one or two others, I 6 cannot tell you because, as you, we see them as they 7 percolate up. But I can tell you when they are 8 identified, we're being very active in addressing them 9 and getting the proper disposition of them. I think 10 they have the General Counsel more directly involved, 11 as I believe is the directive you gave at some earlier 12 point, is being very helpful in that regard, to have a 13 division director who is reporting directly to the ED. 14 And to be completely abreast of the 15 activities that are occurring there is also helpful in 16 that process. Being at the switch, being active and 17 being responsible in handling job responsibilities and 18 duties, that's the objective that is being employed 19 here and that's been consistently employed throughout 20 the agency on my watch. 21 COMM. COX: And at the risk of repeating 22 myself from previous meetings and preaching to the 23 choir as well, having a felon out there holding a 24 license to sell Texas Lottery products is just about 25 as bad a reflection on the integrity of the Lottery as 0157 1 I can think of. 2 MR. SADBERRY: Commissioner, I 3 completely concur in that specific observation and in 4 the observations in general, that our duty, our charge 5 is to discharge our responsibilities of this nature 6 that are entrusted to us. And staff responsibility is 7 to carry out those functions and to do them timely, 8 adequately and professionally and fairly. I agree, it 9 should not be acceptable; it is not acceptable. 10 And we are working to make sure we have 11 eradicated all problems where there is any issue, as 12 we discussed this morning, where procedures need to be 13 in place to support agency actions, where the 14 interagency actions need to be carried out in a timely 15 and effective manner. You can rest assured that you 16 and I share those views and then those requirements of 17 responsible handling of agency business. 18 To inform you, I think you may be aware, 19 but I have weekly meetings with the responsible 20 division directors who are carrying out these 21 particular functions. Generally the Deputy Executive 22 Director, Gary Grief, joins with me so that when I'm 23 not in the office such as last week, three days, those 24 things don't stop. And there is a full awareness of 25 my concern of the priority that I have placed on that 0158 1 particular type of performance of agency staff. So we 2 are aware, we are at the switch and it is my intent 3 that this be much the exception than the rule and, in 4 fact, that it not occur. 5 COMM. COX: Thank you, Director 6 Sadberry. 7 Thank you, Mr. Chairman. 8 CHAIRMAN CLOWE: Is there a motion? 9 COMM. COX: So move. 10 CHAIRMAN CLOWE: Second. 11 All in favor, please say "Aye." 12 COMM. COX: Aye. 13 CHAIRMAN CLOWE: Aye. 14 The vote is 2-0 in favor. 15 Items D and E. 16 MS. KIPLIN: Commissioners, Items D and 17 E are cases against retailers for insufficient funds 18 at the time that the lottery swept the account. In 19 both of these cases, the Administrative Law Judge has 20 recommended revocation of the license and adoption of 21 the proposed language. 22 COMM. COX: So move. 23 CHAIRMAN CLOWE: Second. 24 All in favor, please say "Aye." 25 COMM. COX: Aye. 0159 1 CHAIRMAN CLOWE: Aye. 2 The vote is 2-0 in favor. 3 Anything further, Counselor? 4 MS. KIPLIN: No. 5 AGENDA ITEM NO. XIII 6 CHAIRMAN CLOWE: We'll move then to Item 7 XIII, report by the Executive Director and/or possible 8 discussion and/or action on the agency's operational 9 status and FTE status. 10 Director Sadberry. 11 MR. SADBERRY: Mr. Chairman and 12 Commissioner, Anthony Sadberry, Executive Director. 13 There are materials in your notebooks 14 for your review regarding the status of positions as 15 of August 29, 2006. I do not have anything further to 16 report to you at this time. I would be happy to 17 answer any questions you may have. 18 CHAIRMAN CLOWE: Thank you, sir. 19 COMM. COX: No questions. 20 CHAIRMAN CLOWE: Thank you, sir. 21 AGENDA ITEM NO. XIV 22 CHAIRMAN CLOWE: Next, Item No. XIV, 23 report by the Charitable Bingo Operations Director and 24 possible discussion and/or action on the Charitable 25 Bingo Operations Division's activities. 0160 1 Director Atkins. 2 MR. ATKINS: Commissioners, the only 3 thing I would add, since the report was placed in your 4 notebook, the agency has issued another press release 5 on September 1st relating to charitable distributions 6 for the second quarter of 2006. And that's all I had 7 to add to my report. 8 CHAIRMAN CLOWE: Thank you, sir. 9 AGENDA ITEM NO. XV 10 CHAIRMAN CLOWE: Is there anyone wishing 11 to make public comment to the Commission at this time? 12 (No Response) 13 AGENDA ITEM NO. X 14 CHAIRMAN CLOWE: Commissioner, with your 15 approval, I'm going to move we go into executive 16 session. 17 COMM. COX: Yes, sir. 18 CHAIRMAN CLOWE: At this time I move the 19 Texas Lottery Commission go into executive session to 20 deliberate the duties and evaluation of the Executive 21 Director, Deputy Executive Director, Charitable Bingo 22 Operations Director and the Internal Audit Director 23 and deliberate the duties of the General Counsel, 24 pursuant to Section 551.074 of the Texas Government 25 Code, to receive legal advice regarding pending or 0161 1 contemplated litigation and/or receive legal advice 2 pursuant to Section 551.071(1)(A) or (B) of the Texas 3 Government Code and/or to receive legal advice 4 pursuant to Section 551.071(2) of the Texas Government 5 Code, including but not limited to: 6 Cynthia Suarez vs. Texas Lottery 7 Commission; 8 Shelton Charles vs. Texas Lottery 9 Commission and Gary Grief; 10 Stephen Martin vs. Texas Lottery 11 Commission; 12 Employment law, personnel law, 13 procurement and contract law, evidentiary and 14 procedural law and general government law. 15 Is there a second? 16 COMM. COX: Second. 17 CHAIRMAN CLOWE: All in favor, please 18 say "Aye." 19 COMM. COX: Aye. 20 CHAIRMAN CLOWE: Aye. 21 The vote is 2-0 in favor. The Texas 22 Lottery Commission will go into executive session. 23 The time it 12:20 p.m. Today is September 6, 2006. 24 (Off the record for executive session: 25 12:20 p.m. to 1:23 p.m.) 0162 1 AGENDA ITEM NO. XI 2 CHAIRMAN CLOWE: The Texas Lottery 3 Commission is out of executive session. The time is 4 1:23 p.m. 5 Is there any action to be taken as a 6 result of executive session? 7 If not, I believe we have completed the 8 agenda. 9 Commissioner Cox, is there any 10 additional business you would like to cover? 11 COMM. COX: No, sir. 12 AGENDA ITEM NO. XVI 13 CHAIRMAN CLOWE: Thank you-all very 14 much. We are adjourned. 15 (Texas Lottery Commission meeting 16 adjourned: 1:23 p.m.) 17 18 19 20 21 22 23 24 25 0163 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 September 2006. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/06 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25