0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 WEDNESDAY, SEPTEMBER 17, 2008§ 7 8 COMMISSION MEETING 9 WEDNESDAY, SEPTEMBER 17, 2008 10 11 BE IT REMEMBERED THAT on Wednesday, the 12 17th day September 2008, the Texas Lottery Commission 13 meeting was held from 9:00 a.m. to 2:52 p.m., at the 14 Offices of the Texas Lottery Commission 611 East 6th 15 Street, Austin, Texas 78701; before CHAIRMAN JAMES A. 16 COX, JR., and COMMISSIONER DAVID SCHENCK. The 17 following proceedings were reported via machine 18 shorthand by Lou Ray, a Certified Shorthand Reporter 19 of the State of Texas, and the following proceedings 20 were had: 21 22 23 24 25 0002 1 APPEARANCES 2 3 CHAIRMAN: Mr. James A. Cox, Jr. 4 COMMISSIONER: 5 Mr. David Schenck 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: 8 Mr. Anthony J. Sadberry 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting called to order ...... 7 4 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action on 5 nominations and appointment to the Bingo Advisory Committee ............................... 7 6 AGENDA ITEM NO. III - Report by the 7 Charitable Bingo Operations Director and possible discussion and/or action on the 8 Charitable Bingo Operations Division’s activities ....................................... 9 9 AGENDA ITEM NO. IV - Report, possible 10 discussion and/or action on lottery sales and revenue, game performance, new game 11 opportunities, advertising, market research, and trends ....................................... 13 12 AGENDA ITEM NO. V - Report, possible 13 discussion and/or action on transfers to the State ........................................ 88 14 AGENDA ITEM NO. VI - Report, possible 15 discussion and/or action on the 80th Legislature ...................................... 91 16 AGENDA ITEM MO. VII -- Consideration of 17 and possible discussion and/or action on FY 2009 Internal Audit Plan, external 18 and internal audits and/or reviews relating to the Texas Lottery Commission, and/or 19 on the Internal Audit Department’s activities ....................................... 110 20 AGENDA ITEM NO. VIII - Report, possible 21 discussion and/or action on the agency’s contracts ........................................ 122 22 23 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on the Mega 4 Millions game and/or contract .................... 127 5 AGENDA ITEM NO. X - Report, possible discussion and/or action on GTECH 6 Corporation ...................................... 129 7 AGENDA ITEM NO. XI - Report by the Executive Director and/or possible 8 discussion and/or action on the agency’s operational status, agency procedures, 9 and FTE status ................................... 132 10 AGENDA ITEM NO. XII - Consideration of the status and possible entry of orders in: 11 A. Docket No. 362-08-3830 – MD Food Store & Gift 12 B. Docket No. 362-08-2890 – MN Grocery and Hardware 13 C. Docket No. 362-08-3524 – 4A Food Mart 14 D. Docket No. 362-08-3526 – Smith General Store 15 E. Case No. 2008-18 – In the Matter of International Gamco, Inc .................. 135 16 AGENDA ITEM NO. XIII - Public comment ............ 139 17 AGENDA ITEM NO. XIV - Commission may meet in 18 Executive Session: A. To deliberate the duties and evaluation 19 of the Executive Director pursuant to Section 551.074 of the Texas Government 20 Code B. To deliberate the duties and evaluation 21 of the Deputy Executive Director pursuant to Section 551.074 of the Texas Government 22 Code C. To deliberate the duties and evaluation of 23 the Internal Audit Director pursuant to Section 551.074 of the Texas Government 24 Code 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 D. To deliberate the duties and evaluation of the Charitable Bingo Operations 4 Director pursuant to Section 551.074 of the Texas Government Code 5 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 6 the Texas Government Code F. To deliberate the duties of the Human 7 Resources Director pursuant to Section 551.074 of the Texas Government Code 8 G. To receive legal advice regarding pending contemplated litigation pursuant to 9 Section 551.071 (1) (A) and/or to receive legal advice regarding settlement 10 offers pursuant to Section 551.071 (1) (B) of the Texas Government Code and/or 11 to receive legal advice pursuant to Section 551.071 (2) of the Texas 12 Government Code, including but not limited to: 13 First State Bank of DeQueen et al. v. Texas Lottery Commission 14 James T. Jongebloed v. Texas Lottery Commission 15 Employment law, personnel law, procurement and contract law, 16 evidentiary and procedural law, and general government law 17 Lottery Operations and Services contract 18 Mega Millions game and/or contract ............................. 140 19 20 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XV - Return to open session for further deliberation and possible action 4 on any matter discussed in Executive Session ..... 141 5 AGENDA ITEM NO. XVI -- Adjournment .............. 141 6 REPORTER'S CERTIFICATE ........................... 142 7 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 17, 2008 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. Today is 6 September 17th, 2008. It is 9:07 a.m. Let's call 7 this meeting of the Texas Lottery Commission to order. 8 Commissioner Schenck is here. I'm Jim Cox. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 consideration of and possible discussion and/or action 12 on nominations and appointment to the Bingo Advisory 13 Committee. Mr. Sanderson? 14 MR. SANDERSON: Good morning, 15 Commissioners. For the record, Phil Sanderson, 16 Director, Charitable Bingo Operations Division. 17 In your notebook is the recommendations 18 from the staff, as well as the BAC workgroup, on 19 nominations to fill the three vacancies that occurred 20 on September the 1st. It was laid out at the last 21 meeting that staff's recommendations were Markey 22 Weaver, Rosie Lopez and Francis Ciancarelli. 23 You both have had an opportunity to talk 24 with Mr. Ciancarelli, and at this time we would like 25 to recommend nominating Markey Weaver and Francis 0008 1 Ciancarelli. Over the weekend we received a notice 2 from Rosie Lopez that she is withdrawing her name from 3 consideration on the BAC. So we're going back through 4 the nominations and we will have a recommendation at 5 the next Commission meeting for that position. 6 CHAIRMAN COX: Okay. Commissioner, I 7 have spoken with Mr. Ciancarelli, and he seems quite 8 interested. He has some experience and certainly will 9 gain more valuable experience as he works on this 10 committee. So I was favorably inclined towards the 11 staff recommendation. 12 COMM. SCHENCK: Chairman, I also had the 13 opportunity to visit with Mr. Ciancarelli, and I was 14 impressed with the sincerity of his interest in 15 working on the committee. I think he'll be a valuable 16 addition, so I would recommend that we approve the 17 recommendation to have him added to the committee. 18 CHAIRMAN COX: Okay. Would you make 19 that in the form of a motion? 20 COMM. SCHENCK: Yes, I move we adopt the 21 staff's recommendation. 22 CHAIRMAN COX: Second the motion. All 23 in favor say "aye". 24 COMM. SCHENCK: Aye. 25 CHAIRMAN COX: Aye. 0009 1 The motion carries two zero. 2 AGENDA ITEM NO. III 3 CHAIRMAN COX: Agenda Item No. III is 4 the report of the Charitable Bingo Operations 5 director. Mr. Sanderson? 6 MR. SANDERSON: Commissioners, in your 7 notebook is the monthly activity report of the 8 Charitable Bingo Operations Division. I would like to 9 point out that we're going through the applications 10 and screening those and will be scheduling interviews 11 for the inspector positions shortly. 12 The Bingo Advisory Committee is 13 tentatively scheduled for November the 5th, 2008. And 14 just an update on our on-line training program, we 15 have now had 74 individuals take and pass the test on 16 the on-line training program. And the comments that 17 we continue to receive are very favorable. 18 That concludes my report, and I'll be 19 glad to answer any questions you have. 20 COMM. SCHENCK: Mr. Chairman, I attended 21 the last two Bingo Advisory Committee meetings, the 22 last one by video conference which seemed to work 23 reasonably well. But I think my presence at those 24 meetings obstructs your ability to attend them. So I 25 think we need to coordinate more closely to make sure 0010 1 that you have the access to the Committee that I'm now 2 enjoying. 3 CHAIRMAN COX: Well, I appreciate that 4 concern, Commissioner. The last meeting I was -- I 5 did intend to participate in the last part, and I 6 understand that you had cleared that part for me, and 7 through a logistical situation that didn't happen. So 8 what I would hope would happen in the future is that 9 you would have the opportunity at the beginning and I 10 would have the opportunity at the end, or vice versa, 11 as Chairman Clowe and I did for many, many meetings. 12 COMM. SCHENCK: I think that will work 13 well. And, I assume, Phil, that you'll have the 14 mechanism to pull the plug on me and I'll understand 15 that that means the Chairman has arrived. 16 MR. SANDERSON: I believe we have that 17 capability, yes, sir. 18 CHAIRMAN COX: Thank you for your 19 concern on that, Commissioner. Those are very 20 valuable meetings, and I think our attendance there is 21 very helpful to the membership of the committee. 22 COMM. SCHENCK: I agree. 23 CHAIRMAN COX: Phil, I want to talk a 24 little bit about your audit staff. You've had a 25 posting it says since August 4th for the audit 0011 1 manager, and then you've had a number of other 2 positions posted since about that same time. It's -- 3 I don't have to tell you the importance of getting 4 that manager on board as early as possible so that 5 that person may have his or her input into who is 6 hired, and yet I understand that you don't have a 7 wealth of well-qualified applicants for that position. 8 What kinds of things have you and the 9 staff done to encourage qualified people to apply? 10 MR. SANDERSON: I have reached out to 11 other jurisdictions that regulate charitable gaming, 12 sent out the job posting notices to my contacts in 13 those other areas. 14 CHAIRMAN COX: This would be other 15 states? 16 MR. SANDERSON: Other states, yes, sir. 17 CHAIRMAN COX: Okay. 18 MR. SANDERSON: And I believe that 19 Ms. Melvin and Ms. Pyka have made contact with 20 individuals that they have worked with in other 21 agencies. 22 CHAIRMAN COX: Okay. Have you spoken 23 with Janine about the possibility of some advertising, 24 either in trade publications or regional or 25 national -- at least Dallas or Houston -- kinds of 0012 1 things? Have we done any of that kind of advertising? 2 MR. SANDERSON: I'll have to look to 3 Ms. Mays to see if they've reached out to those type 4 of venues. I do know that, of course, it's posted on 5 the Texas Work Texas web site. And I believe -- I 6 talked with Lisa Glenn and it was posted in some other 7 venue, but I'm not sure if we've done any newspaper 8 advertising. 9 CHAIRMAN COX: Okay. I'm not saying we 10 should, but I think we should be certain -- this is a 11 good situation and pays -- I think, the top of the 12 salary range is near 100,000 a year. Is that correct? 13 MR. SANDERSON: That's correct, yes. 14 CHAIRMAN COX: And I would hope that 15 it's not getting -- that the reason it's not getting 16 qualified candidates is not from a lack of exposure. 17 So let's be sure that we're exposing it as a position 18 like this should be exposed. I'm not saying get out 19 the checkbook and start advertising wildly, but let's 20 be sure we're prudently exposing this position to the 21 public in an effort to get some well-qualified 22 applicants here. This position is very important to 23 your department and to your mission. 24 MR. SANDERSON: Yes, sir. I'll work 25 with Ms. Mays on that reach-out. 0013 1 CHAIRMAN COX: Anything further, 2 Commissioner? 3 COMM. SCHENCK: No, I agree with you. 4 Thank you. 5 AGENDA ITEM NO. IV 6 CHAIRMAN COX: Agenda Item No. III -- 7 No. IV, report possible discussion and/or action on 8 lottery sales and revenue, game performance, new game 9 opportunities, advertising and market research and 10 trends. Ms. Pyka, Mr. Tirloni. 11 MS. PYKA: Good morning, Commissioners. 12 My name is Kathy Pyka. I am the controller for the 13 agency. To my right is Robert Tirloni, our products 14 manager. 15 Commissioners, this morning we'll be 16 presenting final fiscal year 2008 sales and revenue 17 data. Our first chart for you this morning reflects 18 sales and net revenue to the state through the fiscal 19 year ending August 31st, 2008. Total sales for fiscal 20 year 2008 amounted to $3.67 billion; $102.7 million or 21 2.7 percent under our fiscal year 2007 sales total. 22 Estimated net revenue to the state for this period was 23 1.15 -- $1,015,000,000 prior to our adjustment for 24 accruals. 25 Our next slide provides the calculation 0014 1 for the final transfer to the Foundation School Fund, 2 as well as prize expense for the fiscal year. 3 Beginning with the billion 15 million 4 dollars, we've included the accrual transfer from the 5 prior year as an adjustment. And that represented our 6 accrual sales for last fiscal year of $7.4 million, as 7 well as our unspent administration of $10.1 million 8 for last year. That has been adjusted by $10.2 9 million for our accrual transfer for this current 10 fiscal year or fiscal year 2008, and that represented 11 sales for August 29th, 30th and 31st that were 12 transferred in fiscal year 2009. 13 This is further adjusted by $400,000 for 14 our retailer fees. And added to that is the $13.9 15 million transfer that we made for unspent 16 administration in fiscal year 2008, finally adjusted 17 by $54.2 million for the unclaimed prizes that were 18 transferred to the state. And this is the adjustment 19 that was made to prize expense for the final cash 20 basis transfer to the state of $983.1 million. 21 COMM. SCHENCK: Kathy, can I stop you 22 right there? Can you remind me, just for the record, 23 the unclaimed prizes, as I recall, are transferred to 24 basically four or five different related sources, 25 including, I think, UTMB or someplace. Where exactly 0015 1 is all that money going? 2 MS. PYKA: Certainly. Currently the 3 unclaimed prizes are transferred to two different 4 categories per the statute and the General 5 Appropriations Act. The first $10 million is 6 transferred to the Multicategorical Teaching Hospital. 7 And then the balance of any unclaimed prizes are 8 transferred to General Revenue to the unappropriated 9 fund. 10 COMM. SCHENCK: Can you explain to me 11 why we show that as a debit? Why is that a reduction 12 that's not also an offsetting credit? 13 MS. PYKA: Certainly. The adjustment 14 here reflects the adjustment that is made to prize 15 expense to reduce prize expense for any unclaimed 16 prizes that are adjusted and then transferred to the 17 State of Texas. They're not actually transferred to 18 the Foundation School Fund. 19 COMM. SCHENCK: I understand. 20 MS. PYKA: So what I'm doing is walking 21 through the actual cash basis transfer to the 22 Foundation School Fund. 23 COMM. SCHENCK: Okay. But on the top 24 line we would have 54.2 million adjustment upwards to 25 the prize expense for just the overall -- what I'll 0016 1 call the gross net of the operation of the lottery -- 2 MS. PYKA: Right. 3 COMM. SCHENCK: -- but in terms of 4 transfers to the state -- forget putting aside which 5 component of the state, which bucket -- we're over a 6 billion this year, we're just not over a billion to 7 the Foundation School -- 8 MS. PYKA: That is correct, 9 Commissioner. 10 CHAIRMAN COX: Good point, Commissioner. 11 Kathy, I see the unspent administrative 12 funds, 13.9 million, compared to nothing last year. 13 Am I seeing that correctly? 14 MS. PYKA: Last fiscal year we did not 15 provide for a transfer of unspent administration prior 16 to year-end. The unspent administration last year is 17 a component of the 15.3-million-dollar figure that's 18 the first line item under accrued transfers from prior 19 years. And within that figure -- excuse me, the $17.5 20 million this year that was in fiscal year 2008 the 21 amount that was transferred for unspent for the 22 prior -- 23 CHAIRMAN COX: So this is the year-end 24 transfer? Let's talk about the line item unspent 25 administration funds in its totality. Do you have 0017 1 there what that number was for the fiscal year '08 and 2 what it was for fiscal year '07? 3 MS. PYKA: In fiscal year 2007 we sent 4 over $10.1 million as unspent administration and made 5 the transfer in 2008. We did not do an estimated 6 unspent admin transfer during fiscal year 2007. 7 CHAIRMAN COX: Okay. So it was about 8 10 million? 9 MS. PYKA: Yes. 10 CHAIRMAN COX: And then this year this 11 is it, it's about 14 million? 12 MS. PYKA: At this point we have 13 transferred $13.9 million, but we will make another 14 transfer of unspent administrative funds in either 15 October or November of this year, as soon as we 16 complete the finalization of all administrative costs 17 of the agency. 18 CHAIRMAN COX: And that will be about 19 how much, just wild guess? 20 MS. PYKA: I don't have a final -- 21 CHAIRMAN COX: Under 5 million? 22 MR. SANDERSON: Yes. 23 CHAIRMAN COX: Thank you. Now, I guess 24 there are two ways to look at this. If you're school 25 children of Texas, it looks like, gosh, there's some 0018 1 money that I didn't know I was getting. But if you're 2 the Chairman of the lottery Commission, you ask: Is 3 that money that we should have spent and leveraged 4 into more revenues and thus have been able to send 5 more money yet to the school children of Texas? 6 So can you tell me whether you think 7 that is because of operating efficiency that we 8 wouldn't be expected to repeat or is that because 9 we're not spending our advertising money and not 10 generating enough revenue, where if we were operating 11 more efficiently we would be using that money better? 12 What's going on here, do you think? 13 MS. PYKA: Certainly. Chairman, at this 14 point in time we have 12 percent per the statute that 15 can be used for administrative expenses. The 16 components of that 12 percent today are 5 percent for 17 retailer commissions and 7 percent for administrative 18 purposes. Of the 7 percent for administrative 19 purposes, today approximately 5 percent of that is 20 appropriated to the agency for use by the agency 21 within our budget structure. 22 COMM. SCHENCK: Kathy, can I stop you 23 there? Does that include -- when you say "the 24 agency," does that include bingo as well as lottery 25 operations? 0019 1 MS. PYKA: It does not include bingo. 2 This is specific to the GR dedicated lottery account. 3 Bingo is actually funded out of the general revenue 4 appropriations, so they're not part of our statutory 5 cap on the lottery dedicated account. But, however, 6 we do know that the bingo indirect is a small 7 component of that lottery account. 8 So going back to the 7 percent, we're 9 currently using 5 percent in the appropriation bill. 10 Of the 5 percent that's in the appropriation bill, we 11 have transferred $13.9 million as unspent 12 administrative funds that could be considered 13 efficiencies with the agency as well as the unspent 14 contractual obligation on the lottery operator 15 contract because sales did not materialize at the 16 level of the biennial revenue estimate. 17 Now, I want to focus on the difference 18 between the 5 percent appropriated and the 7 percent 19 that we're authorized. Within that 2 percent area 20 that's not appropriated or even considering some of 21 this unspent administrative funds, we certainly 22 believe that if the leadership wished to appropriate 23 those dollars to us, we do believe that there is 24 opportunity through either the advertising strategy or 25 the retailer commission rider to potentially look to, 0020 1 one, trying to address the current decline in sales 2 that we're in, or to either increase sales and 3 transfers to the Foundation School Fund. 4 CHAIRMAN COX: Let me stop you right 5 there and take you back just a step or two. We 6 started with 12? 7 MS. PYKA: Yes. 8 CHAIRMAN COX: And is that statutory? 9 MS. PYKA: Yes. 10 CHAIRMAN COX: Okay. That's statutory. 11 MS. PYKA: Yes. 12 CHAIRMAN COX: And the 5 to the 13 retailers is contractual? 14 MS. PYKA: The 5 percent to the 15 retailers -- the statute says that not less than 16 5 percent -- and Kim will correct me if I've stated 17 that incorrectly -- is provided for retailer 18 commissions. In addition to that, we have a rider in 19 our appropriation bill that provides that 5 percent 20 for retailer commissions. So it's in two places not 21 less than 5 percent in the statute, and then the rider 22 comes back and confirms that it is 5 percent. 23 CHAIRMAN COX: Okay. So we pay the 24 retailers 5 percent because that's what is 25 appropriated to pay them, not because of a contract 0021 1 with the retailers or a contract with GTECH to 2 distribute to the retailers, but just because that's 3 what's in the law and it's all appropriated? 4 MS. PYKA: That is correct. 5 CHAIRMAN COX: Okay. Then you've got 12 6 minus 5, that leaves you 7. Now, that 7 is for 7 administration and you say only 5 of that is 8 appropriated? 9 MS. PYKA: Correct. 10 CHAIRMAN COX: Okay. Now, is this 13 11 plus whatever change is going to be returning part of 12 the 5 that was appropriated? 13 MS. PYKA: Yes, sir. 14 CHAIRMAN COX: So there's 2 still 15 floating around that never got put on the job, so to 16 speak? 17 MS. PYKA: Yes, sir. 18 CHAIRMAN COX: Okay. I understand that 19 better than I ever have. Now, why has it become the 20 practice of either this agency, the Legislature or 21 both, that that 2 percent be left on the table? 22 MS. PYKA: Commissioner, I don't know 23 that I have the perfect answer for that. There is a 24 mechanism in place for agencies to submit legislative 25 appropriation requests requesting appropriation. In 0022 1 years past we have submitted exceptional items that 2 didn't get funded or did get funded. At this point in 3 time on a go-forward we have included in our 4 exceptional requests obviously five exceptional items. 5 And of those five exceptional items, two of them do 6 relate to the lottery dedicated account. 7 In addition to the exceptional items 8 related to advertising and the small capital items, 9 we've also submitted the rider revision request to 10 increase the retailer commission from 5 percent to 11 5-and-a-half percent. If all of those items were 12 funded that we asked for, we would be using 13 approximately -- a little bit over 11 percent of the 14 12 percent authorized in statute. 15 CHAIRMAN COX: Okay. So 1 percent -- 16 we're talking about of revenue now? 17 MS. PYKA: Of sales. 18 CHAIRMAN COX: Of sales. So 1 percent 19 is about $4 million? 20 MS. PYKA: Yes. 21 CHAIRMAN COX: Okay. Then help me 22 with -- what you're saying is right now our request -- 23 MS. PYKA: -- $40 million. Let me back 24 up. 25 CHAIRMAN COX: Okay. That's better. 0023 1 Thank you. So our request for additional money for 2 retailers, the .5 percent that we've asked to provide 3 an incentive kind of plan or plans for retailers, how 4 much money is that? 5 MS. PYKA: It's a little bit over $16 6 million per fiscal year. 7 CHAIRMAN COX: Okay. And then the 8 advertising that we asked for is about 10? 9 MS. PYKA: Yes. 10 CHAIRMAN COX: So if they were to give 11 us what we've asked for, we would be appropriated more 12 than the 5 that we've been appropriated in the past, 13 but still less than the 7 that the statute permits? 14 MS. PYKA: That is correct, 15 Mr. Chairman. 16 CHAIRMAN COX: Great. Okay. I 17 understand that. Now, let's get back to my question 18 about returning that -- let's call it 15 million this 19 year, 13.9 plus an additional amount. Is any of that 20 money that was appropriated for advertising that we 21 didn't spend? 22 MS. PYKA: No. No. We actually had to 23 return a million dollars from the advertising strategy 24 at the beginning of the fiscal year that is not 25 considered to be unspent administration by the agency. 0024 1 It's an official reduction of our operating budget per 2 the limitation in the government code under Section 3 466. 4 CHAIRMAN COX: Is there anything -- any 5 significant amount of the money that we're returning 6 that we had budgeted to spend on marketing personnel 7 or market research or things like that that could be 8 directly related to the generation of revenue. 9 MS. PYKA: No. I mean, there's a very 10 small amount, but it's less than $300,000 related to 11 one of our market research items. 12 CHAIRMAN COX: So we are not sending the 13 school children back money out of the money that we 14 could have been using to promote greater sales? 15 MS. PYKA: No. 16 CHAIRMAN COX: We're sending it back out 17 of money that's just efficient operations, which is 18 our fiduciary responsibility? 19 MS. PYKA: Correct, as well as, 20 obviously, the lottery operator contract is based on 21 sales. 22 CHAIRMAN COX: So you believe that we're 23 spending our money well and wisely and that this money 24 that we're returning to them is money that could not 25 have been used to generate additional revenues? 0025 1 MS. PYKA: I do believe that. 2 CHAIRMAN COX: So what we've basically 3 got here is we've got some tools that we don't have 4 complete control over. We've got our hit frequency, 5 we've got our prize pay-out percentage and we've got 6 our advertising budget, and we're working with the 7 Legislature to help them understand that we believe 8 that we could produce more revenue at the bottom line 9 for the school children for Texas were they to give us 10 greater control over those things, but if they don't, 11 we understand that to be, in effect, they're saying: 12 We're pretty much pleased with what y'all are 13 producing now. We don't want to take the risk that 14 additional money would generate additional sales 15 because we don't want more lottery sales. 16 MS. PYKA: That is correct. 17 CHAIRMAN COX: All right. Thank you, 18 Kathy. I'm sorry for the interruption. 19 MS. PYKA: You're welcome. That's okay. 20 We'd like to move down to the bottom of this slide and 21 highlight the final prize expense as a percentage of 22 sales. Our final year-end prize pay-out did end up at 23 62.05 percent, which, Commissioners, we had 24 anticipated that it would exceed the 62 percent rate, 25 which meant that we did have to take another 0026 1 million-dollar reduction in our advertising budget, 2 which was the $30 million that we included in the 3 fiscal year 2009 operating budget that you approved 4 last month. 5 CHAIRMAN COX: Well, Kathy, that isn't 6 61.999, is it? 7 MS. PYKA: No, sir, it's 62.0464. 8 CHAIRMAN COX: So if it had been 61.999 9 we'd have another million in advertising? 10 MS. PYKA: That is correct. 11 COMM. SCHENCK: Does that number include 12 unclaimed prizes? Is there a reduction for that? 13 MS. PYKA: Yes. 14 COMM. SCHENCK: That's the minimum line 15 then. 16 MS. PYKA: Commissioners, I'll move on 17 to the next grouping of slides. Our next three slides 18 will provide you an overview of historical sales, 19 prize expense and transfers from fiscal year 1992 to 20 fiscal year 2008. 21 The first slide that we have for you 22 presents the lottery sales. As you'll note on the 23 slide, sales grew steadily from the inception of the 24 lottery in 1992 through fiscal year 1997. And then 25 you'll notice that there was a sales decline as they 0027 1 dropped in fiscal year 1998 and 1999. We believe that 2 in large part because the prize pay-out percentage had 3 been statutorily reduced during this time period. In 4 the 1997 legislative session, the prize pay-out was 5 capped at 52 percent. 6 Following that particular biennium, the 7 prize cap was repealed in fiscal year 1999, and we see 8 that sales began a steady decline (sic) until in 9 fiscal year 2006, we finally exceeded that fiscal year 10 1997 mark when we reached the $3.8 billion figure. 11 CHAIRMAN COX: I think you meant a 12 steady increase. 13 MS. PYKA: A steady -- decline? I'm not 14 wanting to get focused on decline, but we did have a 15 steady increase throughout that time. 16 CHAIRMAN COX: Now, Kathy, I'm going to 17 ask Gary to join you. 18 MS. PYKA: Certainly. 19 CHAIRMAN COX: I want to get a little 20 history on those first six bars. 21 MS. PYKA: Okay. 22 CHAIRMAN COX: Good morning, Gary. 23 MR. GRIEF: Good morning, Mr. Chairman, 24 Commissioner Schenck. For the record, Gary Grief, 25 Deputy Executive Director. 0028 1 CHAIRMAN COX: Gary, you have been here 2 from the beginning. Is that correct? 3 MR. GRIEF: Yes, sir, that's correct. 4 CHAIRMAN COX: Now, if I remember 5 correctly, at day one we were selling one instant 6 ticket. 7 MR. GRIEF: That's correct, and no 8 online games. 9 CHAIRMAN COX: And had no online games. 10 So walk us through the ramp-up of those first six bars 11 there as to how products were added, when the online 12 was added, what were the key events that you recall in 13 that build from zero in fiscal year '91 to almost 14 4 billion in fiscal year '97. 15 MR. GRIEF: I appreciate that 16 opportunity, Mr. Chairman. However, during my first 17 few years here I was in operations and wasn't in the 18 marketing team. But I believe we have Mr. Tirloni 19 with us who can probably do a very good job of taking 20 you through that. 21 CHAIRMAN COX: Okay. And you chip in 22 what comes to your mind as well. 23 MR. GRIEF: I sure will. 24 MR. TIRLONI: Commissioners, for the 25 record my name is Robert Tirloni. I'm the products 0029 1 manager for the Commission. 2 Commissioners, I wasn't here then, but 3 let me go back and try to give you an idea of what 4 products were introduced at what time. As you said, 5 in May of '92 when the lottery started we were only 6 selling scratch-off games. A few months later, about 7 six months, in November of 1992 we introduced -- 8 CHAIRMAN COX: So the first year, not 9 only we had one product, but it was only a partial 10 fiscal year? 11 MR. TIRLONI: That's correct. 12 CHAIRMAN COX: Okay -- 13 MR. TIRLONI: So from when the first 14 instant game started in May of '92 through August, 15 that would have been what you see as fiscal '92. Then 16 in September 1st of '92 that began fiscal '93. 17 MR. GRIEF: And, Robert, if I could, I'd 18 want to remind everybody we started with a $1 price 19 point, and you'll kind of ramp that up as you go 20 through? 21 MR. TIRLONI: Right. So then in 22 November of 1992 is when we introduced Lotto Texas, 23 which again is in fiscal '93. We also introduced the 24 first $2 price point in 1993. We only had 1 and $2 25 price points all the way up until 1997. 0030 1 CHAIRMAN COX: Really? 2 MR. TIRLONI: Yes. That was -- the 3 scratch-off portfolio consisted of only 1 and $2 price 4 points for about the first five years. 5 COMM. SCHENCK: Can we stop right there? 6 MR. TIRLONI: Uh-huh. 7 COMM. SCHENCK: How many different price 8 points do we have right now? 9 MR. TIRLONI: We have about seven to 10 eight. 11 COMM. SCHENCK: Okay. And the period of 12 steepest growth for the lottery, we had two. 13 MR. TIRLONI: Uh-huh. 14 COMM. SCHENCK: Right? And we have how 15 many individual instant games? I can't even -- 16 MR. TIRLONI: Right now active probably 17 somewhere in the realm of 70 to 80 active. 18 COMM. SCHENCK: But during the period 19 where we were bringing the most new players into the 20 Texas Lottery, we had the fewest number of games. 21 MR. TIRLONI: Uh-huh. 22 MR. GRIEF: I hear what you're saying, 23 Commissioner, but I want the try to balance that. It 24 was brand new. I mean, every lottery across the 25 country when you first introduce it, you'll see this 0031 1 curve. And it really doesn't matter what products you 2 put out there when you start, you're going to see a 3 tremendous ramp-up over the first five or six years. 4 So I wouldn't try to put a lot of weight in the fact 5 that it was just ones or -- 6 COMM. SCHENCK: But you see my point is 7 it was new to everybody, but I don't know how many new 8 people we're bringing in now. And the proliferation 9 of games may not be the simplest way to bring people 10 in if they don't understand what the games are and 11 there's such an array of them that there's no single 12 point of attraction to bring them in. I mean, you 13 would think Lotto Texas would be that game, but I'm 14 not sure if that would bear out. 15 MR. GRIEF: It's just such a different 16 environment now. We didn't have Internet gaming at 17 the time. We didn't have -- New Mexico lottery wasn't 18 around, for example. We could probably build a chart 19 for you if you wanted to see the various factors that 20 come into play over time. But I do recall -- and, 21 Robert, you can chime in -- there was a lot of 22 discussion when we moved from the 1 to the 2, and from 23 the 2 to the 5. And I think without -- without fail 24 we did see tremendous growth in the higher price 25 points as we moved forward. 0032 1 MR. TIRLONI: I would agree with that, 2 yes. 3 MR. GRIEF: Each time. It's been a big 4 success for us each time we've added a higher price 5 point. 6 COMM. SCHENCK: But am I wrong in 7 recalling that each time we got into a higher price 8 point, we've also as a coincidental or otherwise fact 9 increased the prize pay-out as well? 10 MR. GRIEF: Correct. 11 COMM. SCHENCK: So we can't tell if it's 12 the gross amount of the game or whether it's the prize 13 pay-out percentage that's driving the increase in the 14 sales. 15 MR. GRIEF: Well, let me rephrase my 16 point. We've seen net incremental revenue increases 17 by introducing those higher price points. 18 CHAIRMAN COX: And yet the 19 Commissioner's point is one that you and I have talked 20 about for many, many hours over the last six years or 21 so, and that is, yes, you really can't tell how much 22 of it was the higher price point -- which I think is 23 some of the appeal. There are people out there who 24 don't want to scratch two $10 tickets because they get 25 their hands dirty, but they're willing to scratch one 0033 1 $20 ticket -- and how much of it is the higher 2 price -- higher pay-out percentage? Do they know? 3 How do they know? But there is I don't think any 4 doubt that somehow they know, and that somehow the 5 high-price pay-out percentage does add greater appeal 6 to the product. 7 COMM. SCHENCK: Okay. 8 CHAIRMAN COX: So what I'm seeing up 9 there -- and I know that there's an interrupting 10 event -- but what a product life cycle looks like is 11 if you start at '92 and end with '99, that's what a 12 product life cycle looks like. It starts off slowly. 13 It rises rapidly sometimes. And as this one did, it 14 peaks and it falls. 15 Now, if you look then at 1999 versus 16 '08, you can make a case that there's another product 17 life cycle. It began low, it rose at times rapidly, 18 and now it's declining. So what that curve says to me 19 is that we have two product life cycles before us in 20 the 17 years of lottery history, one of which had an 21 intervening event, and the other of which is just 22 related to the maturity of the industry and to the 23 relative lack of appeal of our games compared to other 24 offerings in the market. Does that -- does that hit 25 any -- sound right to y'all? 0034 1 MR. GRIEF: Yes, it does. And I'll add 2 to that, the second product life cycle we've also hit 3 the proverbial wall, if you will, on the ability to 4 offer new products. That's another important factor. 5 CHAIRMAN COX: Sure. 6 MR. GRIEF: When we are at '97 and we 7 had the intervening factor of not just the prize 8 pay-out percentage, but we had several events 9 occurring in and around the agency where the agency 10 suffered significant bad press, if you will. I think 11 that also shouldn't be lost on the analysis. We still 12 had a world of products out there that other lotteries 13 were doing that we weren't doing at that time that we 14 were able to move into through the second life cycle. 15 CHAIRMAN COX: So one of the things that 16 any company tries to do that has a portfolio of 17 products is to be constantly introducing new products 18 that put it on a different life cycle, if you will, 19 that give you an average up that keeps that thing 20 growing as opposed to tipping over like it's tipped. 21 Now we've had the 50. We've had the 22 Pick 4. And as we get into this, you're probably 23 going to show us how they have affected our games. 24 But in 19 -- or in 2008, we tipped over despite the 25 fact that we had a new game in the Pick 4 and a 0035 1 relatively new price point in the 50, which was 2 introduced late in the previous fiscal year. So we've 3 got something going on other than no new products. 4 We've got -- what is it? Is it again mature industry 5 as a whole? Is it greater competition? Is it 6 economic conditions? All of the above? 7 MR. TIRLONI: I would say I think it's a 8 combination of all of the above. I think the product 9 life cycle that you just spoke about a minute ago, I 10 think we've been very successful with the instant 11 product category in planning out the product life 12 cycle and introducing newer price points and higher 13 price points, and I think we've had a lot of 14 opportunity there. And as you well know, we have the 15 highest price point in the country, and we've been 16 successful there. 17 I think we've been less successful on 18 the online side of the portfolio and I think that has 19 to do with the maturity of the games. We've talked in 20 the past about the -- I'll use the word "dullness" -- 21 on the online side compared to the instant side. 22 We've talked about the fact that, you know, if you go 23 in and you buy a Lotto Texas ticket on a Sunday 24 morning, let's say, you don't know if you've won a 25 prize in the drawing until Wednesday at 10:30. 0036 1 CHAIRMAN COX: Not exactly instant 2 gratification. 3 MR. TIRLONI: Exactly. And that's true 4 with -- that's true with a lot of the online games. 5 Pick 3 and Daily 4 come the closest to being able to 6 provide instant gratification. We have two drawings a 7 day, six days a week, and we've seen a lot of success 8 and growth in the Pick 3 product. But the online 9 games as a whole, not only in Texas but industry wide, 10 have suffered and are suffering because of the play 11 style. 12 COMM. SCHENCK: Well, I speak as the 13 lawyer here, so I speak from ignorance by definition 14 about how to make a business actually work as opposed 15 to how to pull it out of a ditch. But I'm -- I 16 still need to be, I think, persuaded -- I've heard 17 this over and over again -- that the industry is 18 tired, the games are tired, and I understand that. 19 On the other hand, as I look at this 20 chart -- this is in constant dollars, correct? If we 21 were to adjust for inflation, we would ratchet the 22 left up disproportionately to the center and again 23 even more disproportionately to the right. And we 24 would have what looks like almost a -- closer to a 25 flat line. And I hear that the online game is boring 0037 1 and yet there's more drama of being able to wait for 2 the drawing and maybe I'll make my plans for what car 3 I'm going to buy and what mansion I'll live in. And 4 we can -- we might just be cannibalizing from one pot 5 to another. And I've heard us discuss what are the 6 effects of advertising? Well, we really don't know. 7 It's more art than science. 8 We could pound out the advertising, we 9 could increase the prize pay-outs, and find that 10 there's really not a whole lot of change. And we 11 could introduce new games and we might find out that 12 they're cannibalizing from each other. 13 But it sounds like we're really 14 groping -- and maybe I'm misunderstanding the 15 problem -- but it could be that we're just -- there's 16 just so many people interested in playing so often any 17 form of state-sanctioned game of chance. And if we 18 change the games, maybe we don't change the outcome. 19 But I think you know better than I, but when I look at 20 that chart and I think about real dollars, I wonder if 21 we're just moving from bucket to bucket in terms of 22 where the revenues are coming from. 23 CHAIRMAN COX: Okay. Let me address 24 that, because I think that's an excellent point. 25 What -- the way as a nonlawyer I would say the same 0038 1 thing is I would ask the question: Is the demand for 2 lottery products as a whole elastic or inelastic? 3 COMM. SCHENCK: Yeah, exactly. 4 CHAIRMAN COX: And there is a good deal 5 of evidence up there, particularly if you take out the 6 intervening event, that -- and then if you put 7 inflation on it, I think there's evidence that not 8 only that the industry is declining, but that there 9 may be a high degree of inelasticity as regards demand 10 for lottery products of whatever type. 11 COMM. SCHENCK: Of course you'd have to 12 add one more variable into our chart, which is the 13 competition, the value of online -- I'm sorry, 14 Internet wagering and other activities that are 15 drawing from the same demand -- what we would call a 16 demand curve. And I don't know what that is. I mean, 17 is it -- you know, is it an inch on our five-foot-high 18 chart or is it three feet? 19 CHAIRMAN COX: There are a lot of things 20 we could do. And this isn't something that the staff 21 was prepared for. This is something that I know we 22 have a good staff and they could help us address and 23 maybe form other questions we need to ask, but when I 24 walked in here this morning, Benito handed me the 25 sales report for September, and it is not good. Now, 0039 1 it is not good for probably more than one reason, the 2 most dominant of which is Hurricane Ike. But it 3 wasn't good before Hurricane Ike. That's a very short 4 period, and yet I think we have to watch our sales on 5 a short period basis as well as over the longer term. 6 I think there is some elasticity to 7 demand for lottery products, but I think that in large 8 part it may be dependent upon not only new games, but 9 new concepts. For instance, we see over here that we 10 started off with one instant ticket. Then we went to 11 instant ticket and online, and we got a big gain. So 12 I think that clearly, if we had stayed with just 13 instant tickets or just with online, we wouldn't have 14 the sales that we do now. 15 Now, other states have video lottery 16 terminals, they have keno, they have raffles. What 17 other things do they have that we don't have? 18 MR. GRIEF: Instant online games. 19 CHAIRMAN COX: Instant online games. 20 There are quite a few things that we don't have in our 21 portfolio for constitutional, legal or state policy 22 reasons, that if added probably would provide a 23 one-time boost. They would move the demand curve to 24 the right on a permanent basis. How far they would 25 climb up that demand curve would depend upon, of 0040 1 course, the other factors that we're talking about. 2 But I think that each new line of lottery products 3 does move the demand curve. 4 However, we've made that point over and 5 over, and there hasn't been an appetite for increasing 6 that, so I think what we need to do is we need to show 7 people this curve in a different way. And I don't 8 know how we show it, but I think Commissioner Schenck 9 is on the right track when he says, let's do some 10 inflation adjusting to it. 11 COMM. SCHENCK: I'll bet if you just 12 took 1997 to 2008 and showed that in 2008 constant 13 dollars, that 3.7 would be more like 5 billion. 14 MR. GRIEF: And you can amplify that by 15 adding per capita to that also. 16 CHAIRMAN COX: Exactly. 17 COMM. SCHENCK: Yeah. 18 CHAIRMAN COX: And I think that when you 19 show a curve like this, the story it tells you is we 20 started off great, we made a mistake, we've recovered. 21 And I asked Gary the question the other 22 day, had we never made the mistake, where do you think 23 sales would be -- had the limit not been put on the 24 prize pay-out percentage -- and he described to me a 25 curve that I would describe to you as having gone up 0041 1 above 4 billion now, maybe 5 billion, in current 2 dollars, but not having escalated like it was 3 escalating over at the beginning. 4 And then I asked Gary: Well, what do 5 you think would have happened had the prize pay-out 6 percentage cap remained? And he said it would have 7 probably declined slightly from the 2.6 million, but 8 it wouldn't have gone down remarkably from that point. 9 So I'd like to say that what we're 10 giving y'all is some ideas as to what we would like to 11 see in the future, hopefully, starting next month, 12 looking at some inflation adjustments in per capita 13 numbers and other things that y'all have thought of 14 that we haven't thought of yet that would help us 15 show -- help us understand and to show those people 16 who want to know those kinds of things just exactly 17 what our sales really look like if you convert them to 18 current dollars and look at them on a per capita 19 basis. 20 Now, one of the things I would ask you 21 to look at as well, when we talk about per capita, but 22 I'm trying to remember what has happened to gross 23 domestic product per capita in Texas since '92. My 24 recollection is that in the early '90s gross domestic 25 product per capita in Texas was above average for the 0042 1 50 states. My recollection is the most recent numbers 2 that I've seen is it's way below average. So you've 3 got buying power in there, too. It's not just the 4 absolute number of people. So let's try to factor the 5 buying power of those per caps into this as well. So 6 you might just look at GDP per capita as a surrogate 7 for number of people as one way of looking at this 8 curve. 9 Commissioner, before we move on, do you 10 have anything to add on that? 11 COMM. SCHENCK: Yeah, I wonder if 12 there's been any reliable prediction of what the 13 volume of Internet gaming is in Texas? I don't know 14 if anyone has attempted to study it by self-report 15 study or otherwise to see what the chart would look 16 like of all gaming activity, legal and un -- illegal. 17 But I'll bet it's also looking up and to the right and 18 it may be plateauing also. But, Gary, do you know 19 whether -- 20 MR. GRIEF: Typically, what we see, 21 Commissioner, it's somewhat disappointing data because 22 they usually give a huge range of what it might be, 3 23 billion to 50 billion. 24 COMM. SCHENCK: In the United States? 25 MR. GRIEF: That's just the numbers I 0043 1 see from time to time. But I think what we'd like to 2 do, if it pleases the Commission, is to try to pull 3 some of that data together for you for the next 4 meeting. We'll look at Internet gaming, try to get a 5 handle on any casino gaming that might be in or around 6 Texas as well, the effects of other lotteries near 7 Texas. 8 And then also I'll throw this out for 9 your consideration if you want us to think about this, 10 a demographic study along with our research that's 11 done by Ipsos Reid, our market research firm, has 12 clearly shown over the past -- I don't know how far 13 back, but as long as I can remember -- that the 14 percentage of Texans who are playing the lottery 15 continues to fall. 16 So even with these gross numbers, what 17 it tells us is that fewer people are spending more 18 money per cap, those individuals that play the 19 lottery, to keep us at this sales level. And some of 20 that may be the aging of the population, some of it a 21 bit similar to the bingo industry. However, it might 22 be other factors as well. 23 COMM. SCHENCK: I'm really more curious 24 to know about the illegal gaming and the volume that's 25 going on in Texas, because it seems to me if the 0044 1 Attorney General can bring a lawsuit to recover 2 Medicare and Medicaid expenses -- Medicare mostly -- 3 against the tobacco industry, which is a legal 4 industry, there's something worth pursuing there in 5 terms of lost revenue to a state from illegal 6 activities that are targeted at the state. And I 7 don't know how many -- what the volume is in terms of 8 a hundred or whether it's 10 large offshore or 9 domestic Internet gaming operations that are syphoning 10 revenue off from the Texas Lottery and in turn the 11 Texas school children, but it's worth knowing whether 12 we're talking about a hundred million or $50 billion 13 over the last decade or so. 14 MR. GRIEF: We'll see what we can dig up 15 on that. 16 CHAIRMAN COX: And, Gary, this is 17 clearly Pandora's box that we're talking about here, 18 and we don't expect that you will have everything next 19 month, but maybe you can start us on a several-month 20 process of educating us on this. 21 Another thing that I think we must look 22 at is some kind of estimate of the eight-liners. 23 Professor Huff and Dr. Jarrett did an estimate for us 24 several years ago, and I think that was another one of 25 those huge ranges, but I think it was from a billion 0045 1 to 6 billion in revenue of eight-liners that are -- 2 many of which are sitting right there in lottery 3 retailers and competing directly for the lottery 4 dollar. 5 I think that we need to look at a few 6 states that are either comparable to us or that we 7 wish we were comparable to, such as Massachusetts, 8 New York, Illinois, Florida, Georgia, some of those, 9 see what their curves look like and what they've done 10 to keep that product life cycle ever increasing. You 11 know, have they introduced new things including some 12 of the things you're thinking about introducing, as 13 well as the things that we are proscribed from 14 introducing such as the raffle, the video lottery 15 terminals, et cetera. Those lottery revenues in some 16 places are pretty wonderful, but they're not carrying 17 the same products we are. 18 MR. GRIEF: Uh-huh. 19 CHAIRMAN COX: Okay. I think that 20 you've got a great opportunity to educate us and, 21 hopefully, pick up a few ideas in the process, and we 22 look forward to hearing more on this. 23 Now, Kathy, with that I know you've got 24 a nice presentation to continue. 25 MS. PYKA: Certainly. We'll move on to 0046 1 the next slide. And this slide provides again the 2 sales data with the blue bars. We've included the 3 prize pay-out or prize expense with the green bar, 4 with the prize pay-out percentage noted as the 5 percentage there. 6 So again, while the prize pay-out cap 7 was repealed, Section 466.015(d) of the Texas 8 Government Code did include a provision linking prize 9 pay-out percentage to the Commission's advertising 10 budget. 11 Commissioners, I know we discussed this 12 last month and we touched on it a bit today, but based 13 on our prize pay-out at 62 percent at the end of 14 fiscal year 2008, our advertising budget in fiscal 15 year 2009 will be $30 million as compared to the 16 original $40 million advertising budget that the 17 agency had at one time. 18 Again Robert -- we'll note again while 19 those sales dropped in '98 and '99, the first year of 20 sales following the repeal on prize pay-out include 21 sales of $2.7 billion dollars, and a prize pay-out of 22 56.8 percent. The mix of our lottery sales, 23 Commissioners, at this point was 63 percent of total 24 sales was instant ticket, and 37 percent of total 25 sales were online sales. As compared to today, our 0047 1 sales mix, with the prize pay-out at 62 percent, is 2 76 percent instant and 24 percent online. 3 CHAIRMAN COX: You said 63 to 76? 4 MS. PYKA: Yes, sir. The next slide now 5 includes a yellow bar overlay that includes the 6 transfers to the state, with the red bar reflecting 7 cash basis transfers to the Foundation School Fund. 8 Beginning in fiscal year 1998, transfers to the state 9 were statutorily dedicated to the Foundation School 10 Fund with unclaimed prizes directed to General 11 Revenue. 12 During this period, you'll note that for 13 six consecutive years, moving -- there we go -- net 14 revenue to the transfer -- or net revenue transferred 15 to the Foundation School Fund increased over that 16 six-consecutive-year period. And again, for fiscal 17 year 2006 -- fiscal year 2008, of the 1.036 billion 18 transferred to the state, 983 million was the amount 19 transferred to the Foundation School Fund. 20 Commissioners, I'd like to move on to 21 our analysis by game. As noted on the previous 22 slide -- or the earlier slide -- our total decline 23 from fiscal year 2007 sales was 2.7 percent or $102.7 24 million. The overall sales decline includes 25 29 million or 3.2 percent in online games, and 73.7 0048 1 million, or 2.6 percent, from instant ticket sales. 2 The jackpot games are portrayed at the 3 top of the slide with the white font, noting the $49.3 4 million decline or 9.5 percent. I'd like to focus 5 first on Lotto Texas, which had a sales decline from 6 fiscal year 2007 of 12 percent. Commissioners, our 7 average jackpot advertised for Lotto Texas in fiscal 8 year 2008 was $15 million, as compared to $19 million 9 advertised in fiscal year 2007. So while we had a 10 sales decline of 12 percent, we had a decline of 11 21 percent on the average advertised jackpot. 12 I'd also like to note while our highest 13 lotto jackpot advertised in fiscal year 2007 was $75 14 million, the highest jackpot in fiscal year 2008 was 15 $30 million. 16 CHAIRMAN COX: Kathy, I want to go back 17 to what you just said about Lotto Texas. Now, what I 18 understood you to say was we had a decline in average 19 jackpot from I think you said 19 million to 20 15 million? 21 MS. PYKA: Correct. 22 CHAIRMAN COX: About a 21 percent 23 decline. 24 MS. PYKA: Uh-huh. 25 CHAIRMAN COX: And yet sales declined by 0049 1 only 12 percent. 2 MS. PYKA: Right. 3 CHAIRMAN COX: That seems to say that 4 there is a loyal core of people that play that doggone 5 game by golly period. 6 MS. PYKA: Yes. 7 COMM. SCHENCK: It also says something 8 about our presumptions about -- that significance of 9 advertising and prize pay-outs, that even though the 10 prize pay-out is down, there's -- the percentage of 11 playing is not down by a proportionate amount. 12 CHAIRMAN COX: Now, the prize pay-out 13 percentage is -- 14 COMM. SCHENCK: Well, that's true, at 15 least the jackpot. The perceived expectation of any 16 individual player is -- 17 CHAIRMAN COX: Right. 18 COMM. SCHENCK: And yet they're still 19 playing. 20 CHAIRMAN COX: So we've got some people 21 there that are -- while we know that until it gets to 22 75 or hundred million, there are people that aren't 23 coming in -- we've got some people that play that game 24 probably without even knowing what the top jackpot is. 25 They just play it. 0050 1 MR. GRIEF: That's correct. 2 MR. TIRLONI: And we see -- I mean, I 3 think we see that best at the $4, $5, $6 million 4 jackpot levels where we see pretty much -- 5 MS. PYKA: Very constant sales. 6 MR. TIRLONI: -- sales levels from one 7 drawing to the next. 8 MS. PYKA: We start to see the increase 9 in sales is when we get to the higher advertised 10 jackpot. 11 CHAIRMAN COX: Now, if I've got that 12 kind of loyal base and I'm a consumer product -- and 13 we do and we are -- let's just take -- those little 14 strips of stuff that you put in your dryer to cut down 15 the static. 16 MS. PYKA: Dryer sheets? 17 CHAIRMAN COX: What are they called? 18 MS. PYKA: Dryer sheets. 19 CHAIRMAN COX: Oaky. Let's call them 20 dryer sheets unless anybody has a better name. But 21 they come in little packages and you pull them off one 22 at a time. And they've got a very loyal following and 23 they're not going to sell another one next year than 24 they sold this year, unless they can get those people 25 that buy those loyally to use two instead of one. 0051 1 Now, what they're doing right now is 2 they're advertising how much less static there will be 3 if you use two of those little sheets instead of one. 4 So they're trying to convert -- up sell, if you will, 5 their loyal base to use more of their product. 6 Now, does that give us any ideas? Can 7 we do something like that? You know, this is like the 8 old Karo syrup. Have any of y'all ever heard of Karo 9 syrup? Well, Karo syrup, how did they increase their 10 sales? Well, they put a great recipe for peanut 11 brittle on the back. And people looked at that and 12 said: My goodness, we can make peanut brittle of Karo 13 syrup, and they doubled their sales. Can we -- think 14 about that and see if that gives you any ideas as to 15 what we can do with that loyal player base that is 16 there time after time? And, Gary, I know you think 17 I'm going to say increase the price to $2, and I'm 18 not, because I don't know whether that's it or not. 19 That may be the worst thing we can do. They may be $1 20 players now and forever -- 21 COMM. SCHENCK: Could we make that tenth 22 Lotto Texas ticket in any individual string purchased 23 free? 24 MR. GRIEF: We do promotions just like 25 that many times during the year. In fact, Kathy and I 0052 1 have been having a discussion recently as to whether 2 or not those are cost effective or not. 3 But what I will say, Chairman, is -- and 4 you've been here when we've really tried to do just 5 that by the changes that we've made to Lotto Texas. 6 We've tried to make the odds better. We've tried to 7 offer better prizes at the different levels. 8 And what we found through experience -- 9 I think we've changed Lotto three times, Robert, two 10 times -- 11 MR. TIRLONI: I think three times. 12 MR. GRIEF: -- three times? Is that 13 each time we make any change -- any change -- those 14 loyal players don't like their game being changed, and 15 we lose a piece of that loyal base. They walk away 16 and they never play again. Our loyal base used to be 17 a lot larger before we ever made the three changes to 18 the game. So we're very concerned and very hesitant 19 to do anything that tweaks with the major gears of 20 that particular game. 21 CHAIRMAN COX: Yeah, I understand that. 22 MR. TIRLONI: And I will say that we are 23 talking with GTECH and the statistician, Dr. Eubank, 24 right now on some concepts for Lotto that do exactly 25 what Gary just said, don't change the basic core 0053 1 operation of the game or the matrix, which is what in 2 the past, I think, has all alienated players and 3 caused them to leave the game, but to tweak it in a 4 way that can make it more appealing, kind of in your 5 example that you talked about with other consumer 6 products, make it more appealing to the existing 7 people that are still in the game that are there draw 8 after draw after draw. We're looking at adding a 9 prize tier and some other things that we hope if 10 they're financially and statistically sound to be 11 coming to you with those ideas in the next few months. 12 COMM. SCHENCK: Why not do something 13 with losing tickets? I know that sounds stupid, but 14 -- 15 MR. GRIEF: Yeah, we've had 16 second-chance drawings many times over the years. 17 That's a very good promotional opportunity. 18 COMM. SCHENCK: Or trying -- it would 19 take a lot of work, obviously, but trying to get some 20 secondary benefit from them -- you know, save a 21 hundred Lotto Texas tickets, you know, trade them in 22 at Wal-Mart for your hunting license. I don't know. 23 Something. 24 MR. GRIEF: Lotto Texas is a very 25 interesting game. When you get in a room with players 0054 1 who are loyal to that game -- and I'm talking about -- 2 I have friends who they've bought a ticket ever since 3 we introduced the game back in fiscal year 1993, and 4 they buy a ticket for Wednesday and a ticket for 5 Saturday or they buy multi-draws. And they're almost 6 in a panic if it gets close to the draw night on 7 Wednesday or Saturday and haven't got their ticket, 8 because they know the one time they don't buy their 9 ticket, their numbers will come up and then they'll do 10 damage to themselves if that happens I think. 11 But when you talk to these people, it's 12 not the Texas Lottery. It's not a game that we 13 operate. They will tell you "that is our game." That 14 is Lotto Texas. We are Texans, and that is our game. 15 And the comments that we receive whenever we try to 16 make a rule change to that game, invariably they start 17 off with "don't change our game." That's what we hear 18 from those loyal players so I'm trying to reinforce 19 the concern that they have. 20 CHAIRMAN COX: We had one retro move, if 21 I remember correctly where we said we've given you 22 back your old Lotto Texas, where we went back to a 23 previous play style -- or close to a previous play 24 style. 25 MR. GRIEF: "Close" was the operative 0055 1 word. 2 CHAIRMAN COX: Okay. 3 MR. GRIEF: Because it wasn't exactly, 4 we took the same type of criticism. 5 CHAIRMAN COX: And one of -- what we're 6 trying to do here is increase sales. We've never 7 changed the win percentage, right? That's always been 8 the same. 9 MR. TIRLONI: Lotto has always been 10 devised as a 50 percent pay-out game. 11 CHAIRMAN COX: Okay. So all we're doing 12 is changing the game trying to make it more attractive 13 to people, and what we've succeeded in doing is making 14 it less attractive just by the fact that we're 15 changing it? 16 MR. GRIEF: I believe that, yes, sir. 17 CHAIRMAN COX: Is there any going back? 18 Is there a previous matrix that we could go back to 19 and bring people back? 20 MR. TIRLONI: The only previous matrix 21 we could go back to would be the original which 22 started in '92, which was the 6 of 50, which when -- a 23 couple of years ago when we went back to the 6 of 4, 24 from a financial aspect, we were very concerned about 25 going to the 6 of 50 because of the likelihood of 0056 1 getting hit and what that would mean to us from a 2 financial standpoint since we start the jackpot at 3 4 million and what that could -- what impact that 4 could have on us where we're having jackpot winners 5 and we're not covering the jackpot that we're 6 advertising. 7 CHAIRMAN COX: The moves that we have 8 made have been to generate higher jackpots? 9 MR. GRIEF: That's correct. 10 CHAIRMAN COX: And part of the reason 11 for that is that -- the size of our game is -- if the 12 game is a certain size, you have to have a certain set 13 of odds to prevent it from getting hit every time or 14 so many times that you never make any money. 15 MR. GRIEF: Uh-huh. 16 CHAIRMAN COX: Okay. 17 MR. GRIEF: One way to increase the 18 jackpot that we've never done, never tried, and part 19 of it has been the -- because it's the industry 20 standard not to, part of it has been because the prize 21 pay-out is tied to our advertising, is to raise the 22 prize pay-out percentage on that game. If you raised 23 it to 60 percent, for example, you could do a lot of 24 creative things with the jackpot. But that's 25 something we've never touched historically over time. 0057 1 CHAIRMAN COX: Does any other state to 2 your knowledge pay-out more than half? 3 MR. GRIEF: I don't believe -- 4 MR. TIRLONI: I think most of the -- I 5 think most of the jackpot games are designed as 6 50 percent, or right in that realm. You know, I think 7 one of our versions of Lotto Texas a couple years back 8 was at 52 percent, but they're right in that 50 to 52, 9 53 percent pay-out, in that ball park. 10 MR. GRIEF: But that's a paradigm the 11 industry has been in since before we became a lottery. 12 CHAIRMAN COX: And so if I remember the 13 lottery industry in this country, it goes back to the 14 late '50s, early '60s? 15 MR. GRIEF: Yes, sir. 16 CHAIRMAN COX: -- New England states 17 were first introducing the lottery? 18 MR. TIRLONI: I think New Hampshire was 19 the first. 20 CHAIRMAN COX: At that time, the slot 21 machines in Las Vegas were paying back maybe on 22 average 60 percent, and now they're paying back on 23 average over 90 -- way over 90. So that bet has 24 become far less appealing as compared to at least that 25 form of competition over time, and yet it's never 0058 1 changed. Las Vegas changed. They recognized that 2 people wanted higher returns, if for no other reason 3 because they get more time to play with their money, 4 not necessarily that they would win more, because 5 typically they lose their budget. But given more 6 time, by increasing and by advertising the prize 7 pay-out percentage, which is something I don't know 8 whether lotteries do or not, and I don't know whether 9 it would be wise for lotteries to do. But you go down 10 the Las Vegas strip and every marquee tells you up to 11 99.9 percent or 97 percent paid back. There's no 12 doubt that there is advertising of the win pay-out 13 percentage in the industry. 14 MR. GRIEF: And, Chairman, as you know, 15 we're very focused on all those issues right now and 16 looking at ways we can maybe leverage some of that 17 historical data with some products we might be wanting 18 to think about introducing. 19 CHAIRMAN COX: Exactly. 20 MR. TIRLONI: I did want to make one 21 comment. We talked about the second-chance drawings 22 and, you know, we've run second-chance drawings quite 23 a bit on the instant side of our portfolio with our 24 licensed property games and our merchandise games. 25 Our challenge on the online side is what prize we 0059 1 would actually give away in a second-chance drawing. 2 A lot of states will use their unclaimed prize dollars 3 to run those kind of second-chance drawings where you 4 send in non-winning Texas or you can save 10 Lotto 5 Texas tickets or 10 Cash 5 tickets and enter them into 6 a drawing. 7 However, our challenge would be we don't 8 have the availability of those unclaimed prize dollars 9 to actually come up with cash prizes for those 10 drawings. So again, on the online side, that's 11 somewhat challenging for us. 12 COMM. SCHENCK: I'm going to come back 13 to my wacky suggestion about having some other state 14 resource available to help us with lottery by maybe 15 leveraging the unsuccessful tickets. Texas Parks and 16 Wildlife runs a lottery, for -- they have -- we have 17 big horn sheep, believe it or not, that exist in 18 now-huntable populations out in West Texas, and some 19 other hunting opportunities. I'm not sure what total 20 revenues they're running off of this, but I think it's 21 fairly substantial. To enter -- I think it's not 22 nominal. It's not a dollar, it's not 10. It's 20 or 23 50. You can enter as many times as you want, and 24 those are big drawings. 25 Now, I think it's fine. I think -- I'm 0060 1 sure they're within their statutory authority to run a 2 lottery or a raffle drawing of that nature. And I 3 know it generates substantial revenues for them, 4 but -- and this obviously is an idea that would take 5 legislative assistance, but there have got to be 6 people out there who want hunting licenses at $49 a 7 year. If we have them turn in 200 Lotto Texas tickets 8 to get one, that would certainly encourage some 9 members of the public to play, if for no other reason 10 than they might win. And even if they don't, they'll 11 get something that they would otherwise have paid for 12 from the state. 13 CHAIRMAN COX: Sure. I don't know 14 what -- if I walk into Wal-Mart and want to buy a 15 hunting license, what do they ask me for, my driver's 16 license? Is that all I have to -- 17 COMM. SCHENCK: They ask for our 18 driver's license, and they'll ask you if you want 19 migratory birds and whether you want a fishing license 20 and it will -- 21 CHAIRMAN COX: So I don't have to meet 22 any qualifications other than possess a driver's 23 license -- 24 COMM. SCHENCK: -- and be 18. 25 CHAIRMAN COX: -- and be 18. 0061 1 COMM. SCHENCK: Yeah. 2 CHAIRMAN COX: So there wouldn't be any 3 issues of licensing the winners unless perhaps they 4 didn't have a form of ID that showed they were 18. 5 COMM. SCHENCK: No, that's right. As a 6 group they'd all be eligible. 7 CHAIRMAN COX: I think there might be 8 something there. You know, one way would be to do it 9 with non-winning tickets. And another way to do it is 10 put in a prize tier on some game that's a hunting 11 license. 12 COMM. SCHENCK: Well, I don't know -- 13 lottering off assassinating sheep in West Texas, but 14 there's people that I think that would be very willing 15 appealing to. Those things, when they sell them, 16 they're 20 and $30,000 a hit. 17 CHAIRMAN COX: Wow. 18 COMM. SCHENCK: They auction them off 19 all over the United States. It's a very expensive 20 thing. And that's why -- and I'll bet you that Parks 21 and Wildlife is generating well more than that off of 22 each one of those actual drawings. So if they can run 23 a lottery well, and I know that they can and they do 24 many other things well, I think they can maybe help 25 us. 0062 1 MS. PYKA: We'll research what they're 2 doing. 3 CHAIRMAN COX: Okay. 4 MR. TIRLONI: Commissioners, before we 5 leave Lotto, I want to make sure I don't leave without 6 noting that there is also the factor of interest 7 factor that we can't control. I wanted to put on the 8 record that in fiscal year 2007 the average interest 9 factor for the year was 1.6814 as compared to 1.6080 10 in fiscal year 2008. That was well over a 4 percent 11 decline in interest factor, an item that we can't 12 control but it's certainly a huge factor in the amount 13 of jackpot roll that we're going to have. 14 COMM. SCHENCK: And it's not going to 15 get better. 16 MS. PYKA: No. So moving on to Mega 17 Millions, again Mega experienced similar results in 18 fiscal year 2008 as Lotto Texas did. Mega had an 19 average advertised jackpot of $61 million in fiscal 20 year 2008 as compared to $70 million in fiscal year 21 2007. Again, a 13 point -- a 13 percent decline in 22 the advertised jackpot, and we experienced 9.3 percent 23 decline in sales for that particular game . 24 Mega Millions again had two jackpots in 25 fiscal year 2007 that were over $300 million, one of 0063 1 those being a record-setting jackpot. In fiscal year 2 2008 we only had one jackpot over 200 million. 3 The interest factor also experienced the 4 same exact issue as Lotto Texas. Our average interest 5 factor in '07 was 1.713 as compared to 1.643 in '08, 6 again a 4.09 percent decline in interest factor. 7 CHAIRMAN COX: So, Kathy, I could make 8 the same observation based on those numbers that there 9 is a very loyal base for Mega Millions as well. I 10 don't know whether there is or not. We haven't had 11 that game all that long. But it occurs to me that 12 given the size that some of those jackpots get to, 13 that one jackpot could make or break a year. 14 MS. PYKA: You're correct. And that's 15 what we saw in 2008. With those two jackpots that 16 were over $300 million, once you get to that $200 17 million level, your sales go up exponentially -- I'm 18 sorry in, '07. 19 But when we look at our standard 20 12 million, 15 million, 23 million, 30 million 21 jackpots, we're able to forecast those sales on those 22 jackpots rolls because we do have a very constant 23 sales level from jackpot to jackpot. 24 CHAIRMAN COX: And is -- are we 25 experiencing an inflation factor or something like 0064 1 that? Are their fewer buyers at 30 -- this year than 2 there were last year at 30? 3 MS. PYKA: There are. 4 CHAIRMAN COX: And the same is true for 5 Lotto Texas at a given level? 6 MS. PYKA: That is true. 7 CHAIRMAN COX: So it's taking us 8 longer -- particularly this is a factor on Lotto Texas 9 to reach breakeven than it was in past years? 10 MS. PYKA: Correct. 11 MR. TIRLONI: And if I can just add, 12 since we're talking about Mega Millions, we had -- 13 there was an out-of-state winner at the end of July. 14 We started to roll up -- just got above a hundred 15 million at the end of August, right on the 29th, I 16 believe, and there was an out-of-state winner, and 17 then twice since then. So just since the beginning of 18 September there have been jackpot wins -- one last 19 night in Ohio at 15 million -- so that the Mega 20 Millions game has been suffering a little on getting 21 some good long jackpot rolls going here recently. 22 CHAIRMAN COX: Reminds me of a year we 23 had about five years back, Gary. 24 MR. GRIEF: Sometimes the balls come 25 your way and sometimes they don't. 0065 1 MS. PYKA: Let's move on now to daily 2 games. They're presented in the green font. They 3 reflect an overall gain of $20.3 million as compared 4 to fiscal year 2007 sales. While Pick 3 does reflect 5 a $26.3 million decline, again the addition of Pick 3 6 Sum It Up, Daily 4 and Daily 4 Sum It Up reflects a 7 $30.8 million gain over our fiscal year 2007 Pick 3 8 sales, with a 9.8 percent gain on those new products 9 that we introduced in fiscal year 2008. 10 CHAIRMAN COX: Now, Kathy, this doesn't 11 tell the whole story. This shows down 8.4 percent in 12 Pick 3, but the whole story has two parts -- before 13 the introduction of Pick 4 and after the introduction 14 of Pick 4. How do the two parts look? Do you have 15 that information? 16 MS. PYKA: I don't have the 17 pre-introduction of Daily 4 with me. It was 18 introduced in late September and then, of course, Pick 19 3 Sum It Up was introduced after that. But certainly 20 we saw the gain as soon as those games were introduced 21 over the Pick 3 sales from the prior year. 22 CHAIRMAN COX: It was introduced that 23 early in the year. I didn't remember that. 24 MS. PYKA: Yeah, that was September 25 29th? 0066 1 MR. TIRLONI: Right at the end of 2 September last year, and then Sum It Up started on 3 Daily 4 at that same time, and then we introduced Sum 4 It Up on Pick 3 in November of last year. 5 CHAIRMAN COX: So we got basically a 6 full fiscal year? 7 MS. PYKA: Almost. 8 CHAIRMAN COX: I think I heard you say 9 that we saw cannibalization from the beginning? 10 MS. PYKA: Very small cannibalization. 11 We had expected to see a greater decline in Pick 3 12 than we did. It did much better than we expected. 13 CHAIRMAN COX: So we might have had a 14 decline in Pick 3 even without introducing Pick 4? I 15 know that calls for speculation -- 16 MR. TIRLONI: We had seen a 17 year-over-year increase on Pick 3 for pretty much 18 since the game was introduced in '93. 19 CHAIRMAN COX: You had? 20 MR. TIRLONI: Yes. 21 CHAIRMAN COX: Okay. 22 MR. TIRLONI: Yeah. That was the only 23 game out of all of the instants and all of the online 24 that had seen a steady increase year-over-year since 25 it was introduced. 0067 1 CHAIRMAN COX: So possibly all of the 26 2 3 and more is cannibalization. 3 MS. PYKA: I believe it is. 4 MR. TIRLONI: I would think that that 26 5 million-dollar decline is as a result of Daily 4 and 6 the Sum It Up add-on features. 7 CHAIRMAN COX: But the bottom line is 8 that we end up in daily games with an increase. 9 MS. PYKA: Correct. Commissioners, with 10 that Robert will now move on to the next slide and 11 discuss our sales by game. 12 MR. TIRLONI: Commissioners, this next 13 slide just gives you a graphical representation of the 14 $3.7 billion we realized in sales during fiscal '08. 15 As Kathy talked about earlier, instants are making up 16 just under 76 percent of the total, and then when we 17 look at online, Pick 3 is the best selling online game 18 coming in at just over 286 million. And Lotto Texas 19 comes in as the second-best performer on the online 20 side at 204 million. And Lotto Texas does still sell 21 more than the Mega Millions game does, looks like just 22 about $30 million more. Mega Millions is coming in at 23 174. And then the smaller pieces of the pies are 24 the -- typically the add-on games, megaplier, Sum It 25 Up on Daily 4, Sum It Up on Pick 3. 0068 1 CHAIRMAN COX: Robert, you're showing 2 Cash 5, if I'm seeing the right color -- that will be 3 orange? 4 MR. TIRLONI: Yes, sir. 5 CHAIRMAN COX: The Pick 3 Sum It Up is 6 that tiny little slice -- 7 MR. TIRLONI: Yes, it's this very little 8 sliver here. And, you know, we've talked about that 9 as well. I know Gary has mentioned this. I think he 10 mentioned it a couple of months ago. We tend to have 11 greater success with that on games when we actually 12 launch them with a base product. So, for example, 13 megaplier was launched with Mega Millions. Sum It Up 14 was launched with Daily 4. Those add-on -- add-on 15 games tend to do better when you bring them in and 16 advertise them when you are advertising and promoting 17 the launch of the base game. 18 CHAIRMAN COX: Okay. Robert, I'm going 19 to ask you to change your slides a little bit next 20 month. 21 MR. TIRLONI: Okay. 22 CHAIRMAN COX: Would you make your first 23 slide a pie of instants versus all onlines? 24 MR. TIRLONI: Sure. 25 CHAIRMAN COX: In other words, all that 0069 1 multi-colored stuff will only have one color. Then 2 make your second one percentages of the online pie. 3 And your third one as it already is, your percentages 4 on the instant pie. 5 MR. TIRLONI: I think we have the 6 instant one for you next, but we can -- we'll do that 7 on the online. 8 CHAIRMAN COX: -- add one -- modify that 9 one to make it just instant versus online. And then 10 show -- 11 MR. TIRLONI: Sure. 12 CHAIRMAN COX: -- a hundred percent of 13 onlines and how the pie shapes up. 14 MR. TIRLONI: Sure. And then this is 15 the instant sales chart for you. Again this is for 16 the entire fiscal year. It represents the 2.8 17 billion. 18 We show you this monthly, and the pie 19 for the entire fiscal year is no different. The 5 20 continues to be the best selling price point. The 2 21 is the second best selling price point, followed by 22 the 10 then followed by the 3. So again, not much 23 change from what we've seen month to month. 24 I do have some updates for you on the 25 new product side. And I give you a sample of these 0070 1 tickets so you could see them up close. This is our 2 new Texas Ranger limited edition silver series game. 3 It starts next Monday, the 22nd. 4 We were approached by a company called 5 LDT Customs Incorporated. They make the custom 6 motorcycle that you see pictured on the ticket. 7 This game gives away the custom 8 motorcycle. It is approved by the Texas Ranger Hall 9 of Fame and Museum in Waco, Texas. LDT has the 10 licensing privileges to produce this motorcycle. The 11 motorcycle honors the Texas Rangers. And LDT donates 12 a portion of each bike they sell to support the museum 13 that I referenced in Waco. 14 People that -- or players that win this 15 bike will also get a certificate from the Hall of Fame 16 and Museum. And they also will have their name 17 engraved on a plaque that will be permanently 18 displayed in the museum in Waco. And they also 19 receive a five-year family pass to go to the museum as 20 well. 21 And there are seven motorcycles that are 22 part of the prize structure. Four are instant win and 23 then three of the motorcycles will be given away 24 during second-chance drawings. 25 I want to let you know that this company 0071 1 has been very accommodating, very easy to work with. 2 And they are providing us with one of these custom 3 motorcycles to have on-site at our booth at the State 4 Fair of Texas. They're providing a trailer and it 5 will be there for the entire month for people to see. 6 So we're excited about this opportunity. 7 We're paying no licensing fee to do this game. We're 8 just buying the bikes as they are fulfilled or as they 9 are won. So there's no licensing cost. 10 COMM. SCHENCK: -- we're buying the 11 bikes or they're being donated? 12 MR. TIRLONI: No, we are -- when a 13 player actually wins the bike and it's custom built, 14 then we purchase the bike. 15 CHAIRMAN COX: Okay. 16 MR. TIRLONI: But every time the company 17 sells a bike, whether it be through somebody winning 18 in this game or selling it on their own, they make the 19 donation that I referenced to the Hall of Fame. 20 COMM. SCHENCK: So we're helping the 21 Hall of Fame with this? 22 MR. TIRLONI: In effect, yes. 23 CHAIRMAN COX: Okay. In effect what 24 we're doing here is buying seven motorcycles? 25 MR. TIRLONI: Correct. 0072 1 CHAIRMAN COX: Does that go through the 2 normal purchasing channels? 3 MS. PYKA: It's part of the prize 4 expense, so it's not a purchase that's made by the 5 Texas Lottery Commission. 6 CHAIRMAN COX: But is it? 7 MS. PYKA: It's part of the game side. 8 CHAIRMAN COX: I understand that. But 9 when I think of purchasing at the Texas Lottery 10 Commission, I think of Mike Fernandez. And what I 11 hear you saying is that these are purchased through a 12 different channel, and I ask that we consider, 13 Director Sadberry, that purchases of this nature 14 should go through the normal purchasing channel rather 15 than through -- which is, I believe, our most 16 qualified purchasers and those most familiar with the 17 process -- rather than through the lottery operations 18 or wherever they go through at this point. 19 MR. SADBERRY: Mr. Chairman, for the 20 record, my name is Anthony Sadberry, Executive 21 Director. We'll look into that and give it immediate 22 attention. 23 CHAIRMAN COX: Thank you, sir. 24 MS. PYKA: And, Chairman, I might want 25 to define that differently. It is a prize like a 0073 1 prize that might be -- a dollar prize included on that 2 ticket. 3 CHAIRMAN COX: Yeah, I understand 4 completely. What I'm concerned about is that we bring 5 our best resources to bear on everything we do. And I 6 think our best resources for purchasing things are in 7 Mike Fernandez's department. And so I just ask that 8 we look at that kind of a change there. 9 These motorcycles, Ms. Kiplin -- 10 MS. KIPLIN: Yes, sir. 11 CHAIRMAN COX: Are we in the chain of 12 defective product liability by virtue of retailing 13 these motorcycles? 14 MS. KIPLIN: No, I don't believe we are. 15 There's a couple of reasons. One, this is a 16 fulfillment game -- and I'll go back and look at the 17 working papers -- but we are never in the chain of 18 title on these motorcycles. It's like we're not in 19 the chain of title on the vehicles that have been part 20 of any -- of any other instant game where there's been 21 a top prize. 22 CHAIRMAN COX: Is that -- 23 MS. KIPLIN: With regard to a 24 deceptive -- for example, UCC or something along those 25 lines -- 0074 1 CHAIRMAN COX: Excuse me. 2 COMM. SCHENCK: Yeah, I have a -- even 3 if we're not in a chain of title, maybe that is right 4 that the chain of title determines 402(a) strict 5 liability claim. But if we're marketing the thing and 6 there's a defect of some kind and we don't warrant or 7 if we're not providing -- I was going to ask this 8 question -- I guess I will -- if we're not providing a 9 helmet for instance with the motorcycle to the 10 winner -- I'm assuming normally -- I guess you're 11 right. I mean, the Texas Tort Claims Act has an 12 exception for immunity for motor-driven -- 13 MS. KIPLIN: But it's use of state 14 property. This is not -- this wouldn't be state 15 property. So the Texas Torts Claims Act -- you're 16 right, it does carve out an exception to sovereign 17 immunity as it relates to personal injuries or 18 property damage, but it goes back to use of state 19 property. This is not state property. 20 COMM. SCHENCK: So even if it were a 21 defective product, then they would have to look to 22 someone else in the chain of distribution for a 23 remedy? 24 MS. KIPLIN: I believe they would. And 25 we can look at the Deceptive Trade Practices Act, but 0075 1 we would not be a proper defendant under the Deceptive 2 Trade Practices Act. We're not -- we wouldn't fit 3 within the scope of that. 4 COMM. SCHENCK: So we've done these 5 vehicle promotions and prizes before. 6 MR. GRIEF: Numerous times. 7 COMM. SCHENCK: Do we have people sign a 8 waiver or something understanding that we're not a 9 manufacturer of the vehicle, we don't warrant 10 vehicles -- 11 MR. GRIEF: I don't know if we -- 12 MS. KIPLIN: I can look into it and get 13 you a specific answer on that. But I can tell you 14 that with the first game where there was -- I can't 15 remember if it was a Harley or -- I think it was a 16 Bucks and Trucks ticket -- 17 MR. TIRLONI: The first game was a 18 truck. 19 MS. KIPLIN: The issue really goes back 20 to who's purchasing the -- who is purchasing the 21 vehicle. And we are not within the chain of title on 22 that. We are never part of it. And that has to do 23 with dealership issues. It's the Texas Commission on 24 Auto Dealerships, and we had to talk to their folks 25 over there. 0076 1 So the way these games work is we are 2 never on the chain of title on these because then the 3 issue would be, well, you have to be a licensed 4 dealer. So I can tell you that that's -- we never are 5 within that chain of title. This is -- while it is a 6 vehicle -- in this case it's a motorcycle -- on that 7 level it's no different than any other game, one of 8 these instant games where there's a property as a 9 prize and not cash. 10 MR. GRIEF: And to add to that, 11 Mr. Chairman, just to -- I completely agree that Mike 12 and his team are the best people for purchases, and 13 they are involved in this. And where they are 14 involved is in the negotiations with the instant 15 ticket vendors and these other subcontractors, if you 16 will, who provide these type of prizes to make sure 17 we're getting the very best cost that's built into the 18 prize structure for that particular game. 19 CHAIRMAN COX: Okay. 20 MR. GRIEF: Mike either personally 21 handles most of those or his senior staff. 22 CHAIRMAN COX: And that's what I'm 23 looking for. Thank you, Gary, for that. 24 MR. TIRLONI: That's actually where the 25 first initial contact was made on this game. LDT 0077 1 contacted Mr. Jackson in the administration division. 2 CHAIRMAN COX: Okay. Good. 3 MR. TIRLONI: That's where the initial 4 contact started, and he passed the concept on to the 5 products group to see if it was something we were 6 interested in. 7 CHAIRMAN COX: So, Mike, I can look to 8 you and say: Did we pay a fair price for this 9 motorcycle, and you can tell me, yes, we paid a fair 10 price. It was part of the negotiation that my people 11 did? That's what I wanted to know. 12 MR. GRIEF: Yes. 13 CHAIRMAN COX: Great. Now, Kim -- 14 MS. KIPLIN: Yes, sir. 15 CHAIRMAN COX: -- at the risk of getting 16 in way over my head, I don't know that chain of title 17 is the only issue in whether we have liability. 18 Consignees sometimes have liability for product 19 defects, even though never were in the chain of title. 20 So I would just ask you to be sure that we're out of 21 the loop on any liability considerations here to the 22 maximum extent possible. And if we're not, to get 23 indemnities from everybody you can find to give you 24 one. 25 MS. KIPLIN: And we'll report back to 0078 1 you. I'll ask -- within the legal division I'll ask 2 somebody to take a look at that -- that particular 3 issue and make sure that -- maybe they've already 4 addressed it and I'm just not aware of it. 5 CHAIRMAN COX: Sure. 6 MS. KIPLIN: But if not, we'll address 7 it and get back with you. 8 CHAIRMAN COX: All right. It looks like 9 fun. I'll bet that will be a big draw at the State 10 Fair booth. 11 MR. TIRLONI: It should be. It should 12 be attention-getting for us at the Fair. 13 CHAIRMAN COX: You'll be selling these 14 tickets there? 15 MR. TIRLONI: Yes, sir. 16 CHAIRMAN COX: -- opportunity to -- 17 MR. TIRLONI: Absolutely. 18 CHAIRMAN COX: Good. 19 MR. TIRLONI: And I also provided you a 20 copy of this year's State Fair of Texas ticket. This 21 is the second time we've done this game. And again, 22 no licensing fee involved. The State Fair of Texas 23 has provided us with their art work. They were very, 24 very pleased with the ticket we did last year and very 25 eager to do another one this year. And the one we did 0079 1 last year, the first one, was a very successful game 2 for us. So I wanted to give that to you also. 3 COMM. SCHENCK: Where is the booth at 4 the State Fair? Where has it been? 5 MR. TIRLONI: It's at the Magnolia 6 Lounge. There's two locations at the Fair. I believe 7 last year was the first time they had a second 8 location, a remote location. The Magnolia Lounge is 9 the main location where they have two sales trailers. 10 They have a promotional trailer and they have a game 11 show that takes place. And that's where the 12 motorcycle will be. 13 CHAIRMAN COX: And it's pretty close to 14 Big Tex, if I remember right. 15 MR. TIRLONI: I think it is. It's been 16 a few years since I've been to the location, but I 17 believe it is pretty close to Big Tex, yes. 18 COMM. SCHENCK: The questions is whether 19 it's close to where the Snicker's bar is fried in 20 grease. 21 (Laughter) 22 CHAIRMAN COX: Well, if it isn't, it's 23 close to another equally sinful product. There's a 24 place right across the way there where you can get the 25 corny dogs. And I think there's also a place around 0080 1 the corner where you can get the legs. 2 COMM. SCHENCK: How nice. 3 CHAIRMAN COX: I want to say, we went 4 two years ago with our -- met our kids and our 5 grandchildren up there and went to the booth. And the 6 only thing I would say about it is there's not a 7 television set and that was the day of the 8 Texas-Nebraska game where Texas won with the kick 9 at -- the field goal at the end of the game and I had 10 to be popping into the restaurant next door to catch 11 that. 12 But other than not having a television 13 set, it was more fun. And our kids loved the show. 14 It's a corny little game show and the guy is a buddy 15 of Gary's that puts it on and he -- at least he 16 perceives himself to be -- 17 MR. GRIEF: For the record, I'm 18 acquainted with the gentleman. That's all. 19 CHAIRMAN COX: He perceives himself to 20 be a buddy of Gary's -- 21 COMM. SCHENCK: I'm going to make a 22 point of -- I'll be at the booth this year. Will it 23 run the full length of the Fair -- 24 MR. TIRLONI: Yes, from beginning to 25 end. 0081 1 CHAIRMAN COX: We went on a Saturday and 2 took the family and it was just great. But that was 3 great -- but the booth was great, too. 4 COMM. SCHENCK: And we're selling 5 tickets at the location? 6 MR. TIRLONI: Yes, we sell instant and 7 online tickets there. It's a very -- it's a huge 8 effort for our promotions department to staff those -- 9 to staff that event for the month, but it's a very big 10 event for us, it gives us quite a big of exposure 11 being there. 12 CHAIRMAN COX: Excellent. 13 MR. TIRLONI: I have one last slide and 14 then one other bit of information to share with you. 15 I always give you updates when we have a jackpot 16 ticket sold on either Lotto or Mega Millions. We did 17 sell a jackpot ticket in Waco right at the end of the 18 fiscal year on the -- for the drawing on Wednesday, 19 the 27th. We were advertising a $30 million jackpot. 20 That's the estimated annuitized jackpot for that 21 drawing. 22 The ticket that was purchased in Waco 23 was a cash value option prize. That player -- winner 24 has already come forward and claimed their prize and 25 the cash value was 19.4 million. The retailer was 0082 1 the -- or is the Ez Shop in Waco. And they -- we are 2 working with them right now on their retailer bonus, 3 and their retailer bonus will be approximately 4 $304,902. 5 And before we close today, I do have 6 some information for you, Commissioners, on our 7 Houston sales district and the issues that we are 8 experiencing as a result of Hurricane Ike. You made 9 mention of that earlier, Chairman. 10 Houston is our largest sales district in 11 the state in terms of number of retailers and sales. 12 We have over 4600 licensed retailers in the Houston 13 district. And we have over 5,000 sales terminals 14 deployed in Houston. 15 Just to give you an idea, some of the 16 cities included in the district are, of course, 17 Houston proper, Beaumont, Galveston, Texas City, Kema, 18 Orange, Baytown, Pasadena, Seabrook, Crystal Beach and 19 Gilchrist. Anybody that's been monitoring the 20 hurricane knows that some of those are the hardest -- 21 some of the hardest hit areas as a result of Hurricane 22 Ike. 23 For the week that just ended on 24 Saturday, September 13th, Houston's lottery sales were 25 down by approximately $6 million when compared to 0083 1 their average weekly sales. 2 COMM. SCHENCK: Which are how much, 3 Robert? As a percentage is that 50 percent, is that 4 20 percent? 5 MR. TIRLONI: They typically do 6 25 percent -- over 25 percent of sales for the state. 7 CHAIRMAN COX: So in numbers what would 8 that be, Robert, comparable to that 6 million down? 9 MR. TIRLONI: The average -- GTECH 10 provided us a 37-week average. For online they 11 usually do about 5.6 million a week in online sales, 12 and then they usually do just under 13 million a week 13 on instant sales. So for the week ending 9/13, they 14 did about 3.7 million online and 8.8 million in 15 instants. 16 COMM. SCHENCK: Well, part of that week 17 was before the hurricane, right? 18 MR. TIRLONI: Yes. So really the full 19 impact was probably, roughly, let's say Thursday 20 through Saturday for our -- in terms of our lottery 21 sales week which ends on Saturday. 22 COMM. SCHENCK: Do we know what 23 percentage of those outlets are now up and running 24 versus down? 25 MR. TIRLONI: Yes. On Monday there were 0084 1 only 1,071 terminals that were signed on and selling 2 tickets. 3 CHAIRMAN COX: So that's about 4 25 percent? 5 MR. TIRLONI: Out of the 5,000 -- 6 CHAIRMAN COX: So 20 percent. 7 MR. TIRLONI: Yeah. 8 COMM. SCHENCK: And that's not going to 9 turn up any time soon I would imagine. 10 MR. TIRLONI: No. 11 CHAIRMAN COX: What is latest number 12 that you have? Monday is the latest number? 13 MR. TIRLONI: Monday is the latest 14 number, but same number yesterday. So Ramon 15 (inaudible) is telling us that the number is the same. 16 CHAIRMAN COX: Wow. 17 MR. TIRLONI: So needless to say, we 18 expect sales decline this week -- because it will be a 19 full week -- to be much worse than it was last week. 20 CHAIRMAN COX: So 80 percent by 21 quantity, if not by volume, of our capacity in Houston 22 is down in the Houston district? 23 COMM. SCHENCK: And I'll venture that 24 that 20 percent is doing much better business selling 25 ice and eggs than they are lottery tickets right now. 0085 1 CHAIRMAN COX: Wow. 2 MR. TIRLONI: Yes. I was also asked to 3 let you know that both our Beaumont and our Houston 4 claim centers are closed. We expect them to remain 5 closed for the remainder of the week, and executive 6 management is expecting a status update at the 7 beginning of next week to determine when and if those 8 claim centers are going to be able to open for 9 business next week. I think that's unknown at this 10 time due to power outages and other issues, based on 11 where the claim centers are located. 12 COMM. SCHENCK: Gary, what is being done 13 for our employees that are there? Is the time that 14 they're out being counted against them as vacation 15 time or anything like that? 16 MR. GRIEF: Certainly we will not 17 require them to use their personal vacation time while 18 they're out, and we will work with them in every 19 possible way. We finally made contact with the last 20 two that we weren't able to find. And we have folks 21 who have had everything from minor damage at their own 22 personal homes to significant damage. So we will work 23 with them and extend them every courtesy and 24 everything that we can do to help them. 25 CHAIRMAN COX: So they will be -- their 0086 1 leave will be paid? 2 MR. GRIEF: Certainly. 3 CHAIRMAN COX: And is there any fund or 4 something that we can dip into to help them with their 5 losses? 6 MR. GRIEF: I'm sure we will be setting 7 something up. We haven't done so as yet. We're just 8 still trying to get an account for where they are, 9 when they think they'll be back in the area, et 10 cetera, right now. 11 CHAIRMAN COX: Okay. Are there forms of 12 aid that are being provided by local, federal, state 13 governments that we could make them aware of just as a 14 service that, say, hey, this is out there and you may 15 be eligible for it? I don't know how people find that 16 out if they don't have a home and a computer. 17 MR. GRIEF: Certainly we can gather that 18 data together and make sure we get that information to 19 them. That's a great idea. 20 COMM. SCHENCK: Yeah, that's a good 21 idea. 22 MR. TIRLONI: So we'll be getting a 23 status on those claim centers hopefully at the 24 beginning of next week. And then at the October 25 meeting we'll give you an update on those claim center 0087 1 locations and we can give you an update on retailers 2 in the Houston district, how they're fairing and how 3 many are signed on, how many are selling. And that 4 will probably give us another 3 to 4 weeks and we can 5 compile some more information. 6 COMM. SCHENCK: Robert, I'm curious, how 7 far east are we talking about? How far west and how 8 far inland? Do we have people as far as Huntsville 9 offline? 10 MR. TIRLONI: I believe we do -- 11 MR. RIVERA: -- up to about College 12 Station to the north, to the Louisiana border to the 13 east and right around Sugar Land to the west. 14 COMM. SCHENCK: Okay. So pretty close 15 to Houston on -- 16 MR. RIVERA: Close to Houston 17 (inaudible) -- 18 MR. GRIEF: And likewise, Commissioners, 19 we're putting into place our normal process of working 20 with retailers affected by the inclement weather in 21 that area to make sure that peoples' licenses don't 22 get revoked and NSF charges aren't assessed and 23 everything we can do to assist the business people as 24 well. 25 CHAIRMAN COX: For the record, the 0088 1 gentleman speaking from the audience was Ramon Rivera 2 of GTECH. 3 MR. TIRLONI: Commissioners that 4 concludes our presentation. If you have any further 5 questions, we're happy to try to answer those for you 6 today. 7 COMM. SCHENCK: I don't. Thank you very 8 much. 9 CHAIRMAN COX: Thank you. Kathy, I know 10 you're next, but I'm going to have a break right now 11 out of consideration of the court reporter. And we'll 12 be -- let's be back about 11 o'clock. 13 (Recess: 10:47 a.m. to 11:04 a.m.) 14 AGENDA ITEM NO. V 15 CHAIRMAN COX: Let's come back to order. 16 Ms. Pyka, Item V, report, possible 17 discussion and/or action on transfers to the State. 18 MS. PYKA: Commissioners, again for the 19 record, Kathy Pyka, Controller for the Lottery 20 Commission. 21 The first report in your notebook 22 reflects the transfers and allocations to the 23 Foundation School Fund and the allocation of unclaimed 24 prizes for the fiscal year ending August 31, 2008. 25 Total cash transfers to the State amounted to $1.037 0089 1 billion for the fiscal year. 2 The second page of your notebook 3 reflects the detailed information for the monthly 4 transfers. Of the 1.036 billion-dollar transfer to 5 the State, $983.1 million was transferred to the 6 Foundation School Fund, with a balance of $53.5 7 million transferred from unclaimed lottery prizes. 8 The August transfer to the Foundation School Fund also 9 included a transfer of $13.9 million estimated for 10 unspent administrative expenses. 11 The amount transferred to the Foundation 12 School Fund represents a 4.7 decrease or $48.7 million 13 for the amount transferred in the year 2007. 14 Commissioners, in addition to the cash 15 basis transfers to the State for the fiscal year 16 ending August 31st, 2008, the Commission also made an 17 accrual transfer to the State in September for $10.9 18 million. The total amount transferred to the State in 19 September, $10.2 million was transferred to the 20 Foundation School Fund for August 29th through 21 August 31st sales, and the remaining balance of 22 728,000 was transferred for accrued unclaimed prizes 23 as of August 31st, 2008. 24 As I noted earlier, an additional 25 accrual transfer for unspent administrative funds will 0090 1 be made in a future month upon finalization of 2 administration expenses. 3 Also included in your notebook is a 4 report of lottery sales, expenditures and transfers 5 from fiscal year 1992 to date. Total cumulative 6 transfers to the Foundation School Fund through August 7 of this year, total $10.67 billion. 8 Commissioners, this concludes my 9 presentation. I'd be happy to answer any questions. 10 COMM. SCHENCK: I don't have any 11 questions. I appreciate this summary. The thought 12 occurred to me on the break that, Anthony, I want to 13 communicate to you. During this time of recovery in 14 these areas that we have down, we need to make sure I 15 think that we don't have planned -- or at least I 16 think we should make sure -- that if we have a 17 promotional event with like a Lucille Ball 18 impersonator, anything like that, that this is 19 probably not the time to be carrying through on that 20 and we might want to constrain our merrymaking in the 21 Houston-Galveston area. I can't imagine anyone would 22 try to carry through on a promotional -- 23 CHAIRMAN COX: I'm in total agreement. 24 COMM. SCHENCK: But if we have something 25 like that planned, we need to be aware of it before it 0091 1 runs off on its own and turns into a media mess. 2 MR. SADBERRY: We'll look into it and 3 I'll let you know of any issues. 4 MS. PYKA: Thank you, Commissioners. 5 COMM. SCHENCK: Thank you, Kathy. 6 CHAIRMAN COX: Thank you, Kathy. 7 AGENDA ITEM NO. VI 8 CHAIRMAN COX: Okay. Report, possible 9 discussion and/or action on the 80th Legislature. 10 Ms. Trevino? 11 MS. TREVINO: Good morning, 12 Commissioners. For the record, I'm Nelda Trevino, the 13 Director of Governmental Affairs, and I have a few 14 updates to provide related to some legislative interim 15 committee hearings. 16 The joint hearing of the Senate State 17 Affairs Committee and the Senate Finance Subcommittee 18 on General Government Issues was held on August the 19 27th to consider the interim charge to study the 20 privatization of the state lottery. Additionally, the 21 House Appropriations Subcommittee on General 22 Government held a hearing on September 10th. One of 23 their agenda items included studying the privatization 24 of the state lottery as well. 25 In response to requests made by each of 0092 1 these committees, the agency was asked to appear at 2 these committee hearings to serve as a resource. 3 Executive Director Sadberry provided testimony at each 4 hearing, and senior members of the Commission staff 5 were also in attendance to assist with responding to 6 questions. Additionally, Chairman Cox was in 7 attendance at these two hearings. 8 In response to a request at the Senate 9 Joint Committee hearing, we provided each member of 10 the joint committee and Senator Dan Patrick with 11 information related to the closing of instant games. 12 Additionally we are in the process of compiling 13 responsive information for the request made by 14 Representative Norma Chavez at the House 15 Appropriations Subcommittee hearing. 16 Lastly, it is anticipated during the 17 fall season that Senate and House committees will be 18 adopting their interim charge recommendations and 19 issuing their interim committee reports to the 20 Lt. Governor and to the Speaker. We will be 21 monitoring these actions and will keep you advised on 22 any recommendations or interim committee reports that 23 may impact the agency. 24 This concludes my report, and I'll be 25 glad to answer any questions. 0093 1 COMM. SCHENCK: I'm curious as to what 2 questions came to us during the lottery privatization 3 hearing. 4 MS. TREVINO: Commissioner Schenck, I 5 think I would answer that question -- I don't know 6 that there was -- I don't recall a specific question 7 to the privatization. I think the questions that came 8 to the agency were more in regards to our sales 9 trends, our revenue trends, our current product 10 portfolio, what we might be able to do in the future 11 with regards to the increasing revenue to the State. 12 And I would certainly ask, you know, 13 Anthony and Chairman Cox who were also there if they 14 might have some recollection specifically to the 15 question that you're asking. 16 CHAIRMAN COX: I agree with that answer 17 Nelda. A good deal of time was spent by the joint 18 committee -- Senator Duncan was presiding along 19 with -- 20 MS. TREVINO: Senator Averitt -- 21 CHAIRMAN COX: -- Senator Averitt -- on 22 asking us what we could do as a resource for them -- 23 did we have money to contract for studies? Were we 24 able to conduct studies on our own? Did we know the 25 value of the lottery, et cetera? And I think in 0094 1 general the answer to that was subject to the 2 restrictions placed upon us by Rider 15 that we would 3 do what we could to help. I don't think whether we 4 have received any requests pursuant to that discussion 5 or not. 6 MS. TREVINO: We have not at this point. 7 CHAIRMAN COX: Okay. Another thing that 8 was brought up was Senator Patrick raised a question 9 as to whether we were in compliance with our rule, 10 which we passed at his behest last year as a parallel 11 to legislation that he wanted to introduce. In fact, 12 I think it's a replica of the legislation he wanted to 13 introduce. 14 And that -- that discussion was not 15 concluded. In effect, what happened at that meeting 16 was his concern was laid on the table, and Director 17 Sadberry was willing and able to answer it and wasn't 18 permitted to. 19 So, Director Sadberry, I think at this 20 time, if you'd like to answer that particular 21 observation and concern, that this would be a good 22 time for you to do that. 23 MR. SADBERRY: Will do, Commissioners. 24 Anthony Sadberry, Executive Director. 25 Going back to the question of the 0095 1 Commissioner on what questions we received on the 2 level of privatization, I would agree with everything 3 that Nelda and Chairman Cox have said in that regard. 4 One of the things that came home to me 5 and it stands out in my mind, was a query as to 6 whether the Lottery Commission -- either itself or 7 through resources that it may be able to retain -- can 8 place a value on the asset of the Texas Lottery. And 9 before that question was asked of the agency, I 10 believe the panel -- in that particular hearing the 11 panel presenters went first and we came on 12 secondarily. It was just the opposite on the House 13 committee hearing. 14 So we were asked to come up after that 15 query had been made to the panel of presenters on the 16 privatization issues. And they had presented concepts 17 which are not foreign to us -- for example, what a 18 willing purchaser is willing to pay to a willing 19 seller, et cetera. 20 I think the question to us was a little 21 more basic than that, as to whether, from an 22 accounting principle standpoint we have a mechanism to 23 actually place a dollar value on an asset and do we do 24 that in the normal, regular course of business, which 25 we customarily do not. 0096 1 And we responded by saying two things: 2 One, we do have the revenue income stream data from 3 which asset valuation can be made, as you well know. 4 A number of procedures exist to do so at -- things 5 like that, which we have not done traditionally and do 6 not do as a normal course of business. Whether we may 7 be able to do that, either directly from a staff 8 standpoint, or through contracting, I think it's an 9 open question. 10 We also began our comments by referring 11 to Rider 15. And I think in the course of our 12 testimony, Chairman Duncan -- it was brought to his 13 attention that we do have Rider 15 -- as to whether 14 that in fact may be an activity that could conceivably 15 be covered by Rider 15 as to whether we should or 16 should not be engaged in the process of valuing the 17 lottery for purpose of the possible use of that 18 valuation in a sale/lease of the lottery. 19 We were also asked questions about 20 whether or not Rider 15 would apply because it does 21 specifically talk about a sale, but actually in the 22 course of one of the presenters on the panel -- and 23 again, as you well know, you can get into a -- in a 24 legal concept of the UCC -- Uniform Commercial Code -- 25 where some things begin being seen as a lease but 0097 1 you've got enough ingredients in the contract of 2 transactional documentation where it may in fact be, 3 from a legal standpoint, a purchase. 4 And those were kind of aired-out issues 5 that weren't concluded, and I think I agree we were 6 waiting for the letter to say what we were going to be 7 maybe asked to do along those lines, which I don't 8 think we have received to date. So those are sort of 9 open questions. I would agree in my mind the general 10 tenor from the Senate side is: What can you do to 11 help us deal with the interim charge on issues that 12 may get into feasibility and other areas? 13 And on the House side, I think it -- 14 well, before I leave the Senate side, the game closing 15 issue, which certainly began before you came. I'm not 16 sure to what extent it's been developed or explored 17 since you've been here -- started prior to the 18 legislative session. And actually, when we had one of 19 the -- one of the persons who keeps a pretty good eye 20 on the lottery making a number of proposals regarding 21 the lottery's operation, one of which included closing 22 the games -- and scratch-off tickets, instant tickets, 23 after all the top tier prizes have been claimed, a 24 concept in that regard, which initially was not 25 adopted by the Commission. 0098 1 Shortly after that, I think the same 2 proponent of those proposals went to the Legislature 3 and did get attention. And Senator Patrick is one of 4 the persons who did give him attention, and we were 5 asked to come over and speak to the Senator on those 6 issues, which we did, and got down to him introducing 7 legislation that would in fact require closure of a 8 game after all top tier prizes have been claimed. 9 Now, we did point out that we did have a 10 procedure in place to evaluate the closing of the 11 games, which may be done, in fact, when there are top 12 tier prize remaining. It may be done after all top 13 tier prizes have been claimed, et cetera. We didn't 14 have any procedure that drove automatically to close a 15 game when all the top tier prizes have been claimed. 16 Of course, you can define top tier the absolute top 17 list of prizes such as if there are five $1 million 18 prizes in a particular game, those five $1 million 19 prices are gone. 20 And what we agreed to do and committed 21 to do and did in fact was, independent of that 22 legislation, we did two things: We adopted a 23 procedure first by the agency that would require or 24 provide for the closing of the game after all top tier 25 prizes have been claimed. In addition to that -- and 0099 1 that procedure became effective immediately. 2 In addition to that, the Commission 3 adopted a rule mirroring, basically, the legislation 4 that Senator Patrick had introduced. In both there is 5 a 45-day window after a game is officially called to 6 be closed for the mechanism of the tickets to be 7 picked up, where you literally have that game off the 8 street entirely. 9 And I think what has happened is in that 10 45-day window there is some discussion as to whether 11 or not some possibility for additional ticket sales of 12 that game, which has officially been closed, may in 13 fact occur while you're in the process of picking it 14 up, realizing you have 16,000 plus retailers and GTECH 15 is in the process of going around and doing this. 16 And some media attention covered the 17 fact that maybe there was one or more instances where 18 a person could say this game was closed, I was able to 19 buy this ticket after the game was closed in this 20 45-day window. But the point being that that 45-day 21 window was also provided for in the legislation. 22 It also came after a discussion among 23 staff and the presentation to the Commission of what 24 is feasible and what is practical in that regard, 25 because I believe it began with a 60-day window and 0100 1 was narrowed down to the most narrow point that was 2 deemed or considered to be feasible, and that is a 3 45-day window. 4 And we had other mechanisms in place 5 such as the printing out of notification to the 6 players that the game has been closed, et cetera. So 7 I think that's being -- that was described in the 8 hearing as either a failure or lack of total 9 compliance with the spirit of the legislation. 10 By the way, the legislation did not 11 pass, and we received a letter from Senator Patrick 12 basically saying even though the legislation didn't 13 pass, we expect you will continue in the spirit of 14 what you committed to do. And we wrote back and said 15 absolutely, and we have done that. 16 But that is the question I laid on the 17 table. And where we are now is we've provided all of 18 that information to the Senator's office and offered 19 that I will meet with him personally or with staff to 20 the extent he wishes to discuss this issue more fully, 21 but to indicate that -- and we did not specifically 22 state this in the letter, but this is the intent we 23 would have -- is to indicate that the agency is in 24 fact in compliance with the letter and the spirit of 25 the procedure and the rule of the agency and the 0101 1 intent of the legislation. If there are questions 2 about how that is being done, we're happy to respond 3 to those questions. 4 There are two additional things. One is 5 a rider that was adopted by the appropriations bill. 6 MS. TREVINO: That's correct. 7 MR. SADBERRY: -- that gives Kathy $3 8 million to the agency to carry out this process of 9 game closing, and also a requirement that we provide a 10 report to the Comptroller of Public Accounts on the 11 activity of closing these games, both of which 12 activities are being carried out. 13 So I can say in my estimation that we 14 are doing what we committed to do and it is being 15 monitored. I have personally been involved in the 16 monitoring of it. But if there are other questions, 17 we're in a position to address them and respond to 18 them. 19 And if there are occurrences of one or 20 two instances of tickets being purchased after a game 21 has been closed in this 45-day window, I would think 22 at this point those are minimal. We can certainly 23 amass the data that exists to see if in fact it occurs 24 and see if there is anything more that can be done to 25 address that potential one open item. But that's 0102 1 basically the gist of it all. 2 COMM. SCHENCK: I believe at the last 3 meeting we discussed -- we confirmed it would be 4 appropriate for me to attend these meetings as well. 5 There's not an open records -- open meetings problem 6 with that. I believe we had a conversation after that 7 last meeting about whether it would be best for me to 8 attend. 9 I do want to make clear I want to attend 10 these meetings if it's in the interest of the agency 11 for me to attend. So, Nelda, when you think it's 12 appropriate and helpful for me to attend, I want to 13 make sure that I'm there. 14 MS. TREVINO: Very well. 15 MR. SADBERRY: On the House side, I 16 believe it was more of the same. They had had the 17 opportunity to observe the Senate side, and I think it 18 really -- I can't think of any particular questions 19 other than the specifics from Representative Chavez on 20 zip codes and retailers -- retailer base -- 21 MS. TREVINO: Representative Chavez's 22 request. 23 MR. SADBERRY: Other than that I can't 24 think of anything that stands out. 25 COMM. SCHENCK: Could you elaborate on 0103 1 that for me? 2 MS. NELSON: She requested, 3 Commissioner Schenck -- she wanted a report for 4 certain cities -- I think it was Houston, Dallas, 5 El Paso, maybe a couple of others -- identifying 6 median household income and identifying the number of 7 licensed lottery retailers by zip code and sales 8 information. So that's the information again that 9 we're compiling at this time -- 10 COMM. SCHENCK: -- information on retail 11 outlets from sales within a zip code, not random 12 samplings of households, for instance? She just wants 13 to know what the agents are selling there and what the 14 median income is within the zip code? 15 MS. TREVINO: That's what I understood. 16 COMM. SCHENCK: -- people stopping in 17 their Bentley to pick up a lottery ticket in South 18 Dallas would be within that study? 19 MS. TREVINO: I would think so. Yes. 20 MR. SADBERRY: Targeting -- 21 CHAIRMAN COX: Let me be sure that I 22 understood, Director Sadberry. My understanding is 23 that within 45 days of calling the game, we are still 24 authorized -- our retailers are still authorized to 25 sell tickets? 0104 1 MR. SADBERRY: Gary is back in the room? 2 My understanding is they may sell tickets. 3 CHAIRMAN COX: Yes. So there will have 4 been sales of closed games in the 45-day period, but 5 we know of no instances where the sales are made after 6 the 45-day period, and I see Mr. Rogers coming 7 forward. 8 MR. ROGERS: I'm -- for the record, Ed 9 Rogers, retailer services manager for the agency. 10 Commissioners, when we call a game, what 11 we do is we immediately send out terminal messages to 12 the retailers advising them to pull that inventory off 13 their shelves and to stop selling the games. We also 14 notify the GTECH sales representatives to begin 15 visiting the stores on their normal -- on their normal 16 route visit cycles and to pick up this inventory that 17 should have been pulled from the dispensers. And they 18 do that over the course of 45 days. Previously they 19 did have a window of 60 days, but we reduced that to 20 45. 21 At the 45th day, we then do some 22 reporting to try to evaluate any of the inventory that 23 might -- that's in a status that -- confirmed or 24 active inventory that has not been returned to our 25 warehouse or has not been returned to the system and 0105 1 we expect that it's at a GTECH district office. And 2 we send that message out again to GTECH and said, you 3 know, here are the few packs that are remaining around 4 the state, make an expedited visit to those stores and 5 retrieve these tickets. 6 So that's the process. And there is a 7 chance that someone doesn't pull those tickets off the 8 shelf, but that is the message that we give them, the 9 instruction that we give them, to stop selling them 10 immediately and ask GTECH to immediately begin 11 retrieving that inventory from the stores. 12 CHAIRMAN COX: But we don't have -- we, 13 the Texas Lottery, through our lottery operator, don't 14 have control over those -- we don't know the sales 15 have stopped until GTECH has the ticket stock in their 16 hands. 17 MR. ROGERS: On an individual retailer 18 basis, that's correct. 19 CHAIRMAN COX: The system has to allow 20 for the fact that the communication, though 21 immediately made to all retailers, will be either 22 missed, misinterpreted, ignored or whatever. We don't 23 have physical control of the sale of those tickets 24 until such time as GTECH has them in GTECH's 25 possession. 0106 1 MR. ROGERS: That's correct. 2 CHAIRMAN COX: So we can't assure 3 anybody that there aren't sales until such time as 4 they are in our possession because our agent has them. 5 MR. ROGERS: That's correct. And 6 typically -- I mean our target is that 45th day as 7 we -- 8 CHAIRMAN COX: Okay. So we have -- a 9 reasonable person might conclude that there could be 10 sales up to 45 days afterwards because we don't have 11 them in our hot little hands until then? 12 MR. ROGERS: There could be. 13 CHAIRMAN COX: Okay. So I think that in 14 any of our efforts here, Director Sadberry, we need to 15 allow for that fact that, yeah, we call them and we 16 send them letters -- probably send it through the 17 terminal. Is that how it happens? 18 MR. ROGERS: We send a terminal message 19 through the terminal that, I believe, it's one that 20 they have to read. I'm not a hundred percent sure, 21 but it's one they have to take and to reset the 22 terminal so that they can continue other activities. 23 CHAIRMAN COX: Okay. So they have to 24 push this button over here and they put it in this 25 stack over here and if they forgot to read it and 0107 1 they're still selling them when GTECH shows up to -- 2 so we still have that -- I won't call it a weakness -- 3 but we have that fact that we don't have physical 4 access to these tickets except on a route kind of 5 basis and the route is every two weeks? And so all of 6 those possibilities exist for sales after the event is 7 called -- after the game is called? 8 MR. ROGERS: Yes, sir. I do believe 9 that in our rule we did make that clear that there was 10 that 45-day window to actually physically take 11 possession of these tickets. 12 CHAIRMAN COX: Exactly. That was my 13 point, Ed, that our rule provides for 45 days of 14 possible sales, even though we endeavor to both get 15 the people to stop selling them and to pick them up 16 earlier than 45 days? 17 MR. ROGERS: Yes, sir. 18 MR. SADBERRY: Chairman, if I may, I 19 had -- and I'll modify my answer to your question then 20 to adopt what Ed has said. We also appeared, prior to 21 the two meetings we were talking about now, before the 22 subcommittee studying the interim choice of 23 advertising and -- let me give the official name of 24 that committee. 25 MS. TREVINO: Anthony, that was the 0108 1 House State Affairs Committee. 2 MR. SADBERRY: -- House State Affairs 3 Committee, in which that question was also asked at 4 that hearing, and Michael Anger, Audit Director was 5 present, and I think what he said is similar to what 6 Ed has said, is that the opportunity or the 7 possibility of sales in that 45-day period does still 8 exist. 9 CHAIRMAN COX: Okay. Commissioner? 10 COMM. SCHENCK: Well, I don't want to 11 criticize a rule that I didn't pass, but the premise 12 that sales after the game has been called are somehow 13 deceptive seems debatable at a minimum. I mean, no 14 one would argue that if everyone was told don't 15 scratch the tickets until midnight six months from 16 now, the first ticket sold was the biggest prize 17 winner, no one would argue that anyone had been 18 deprived the opportunity to participate in a win. 19 It's just the fact that someone scratched before the 20 event. The overall odds of the game are the same for 21 everyone. So I don't think we have a substantive 22 deficiency in the fairness of the operation of the 23 game. 24 CHAIRMAN COX: I think you're exactly 25 right. In fact, there have been strong criticisms of 0109 1 other lotteries for closing the game before all the 2 tickets are sold. So it depend on who raises what 3 issue in your jurisdiction which ox gores you. 4 COMM. SCHENCK: Yeah. 5 CHAIRMAN COX: I would add, 6 Commissioner, that there was a healthy discussion 7 between the Senate Finance and the Senate Public 8 Affairs committee and the investment bankers from the 9 various firms. And a consultant named Eugene 10 Christiansen, who has worked with Merrill Lynch, I 11 understand, those discussions were generally very 12 complimentary of the work of the Texas Lottery 13 Commission, and complimentary of the planning that we 14 have done -- that is the documents that we have put 15 out there, our strategic plan and our business plan, 16 which describe those things that could be added by the 17 Legislature to increase lottery revenue. 18 Mr. Christiansen indicated that he 19 believed that the first thing that the State might do 20 if it wanted to privatize the lottery would be to take 21 the constraints off of the Texas Lottery Commission 22 and let them operate as a private company might and 23 see what improvement that was there. And they 24 mentioned specifically the hit percentage, the prize 25 pay-out percentage and the restriction on advertising. 0110 1 And I would commend to you, if someone could queue it 2 up for you, maybe you can even do that in your office, 3 that you watch that part of the tape. I think it 4 would be helpful to you. 5 COMM. SCHENCK: Thank you. 6 CHAIRMAN COX: Anything else, Nelda? 7 MS. TREVINO: No, sir. 8 CHAIRMAN COX: Okay. Thank you, Nelda. 9 Thank you, Ed. 10 AGENDA ITEM NO. VII 11 CHAIRMAN COX: Item 17 (sic) the 2009 12 audit plan, external and internal audits and reviews 13 relating to the Texas Lottery Commission, internal 14 audit department activities. 15 Ms. Melvin? 16 MS. MELVIN: Good morning, 17 Commissioners. 18 CHAIRMAN COX: And for the record, I 19 have his witness affirmation form. 20 MS. KIPLIN: Thank you. 21 MR. REZA: Thank you. My name is 22 Ernesto Reza, and I'm here representing the firm Mir 23 Fox & Rodriguez, PC, which is a CPA and professional 24 services firm that has been in business for the last 25 20 years. On behalf of the shareholders and my 0111 1 colleagues and employers, we want to thank the Texas 2 Lottery Commission for giving us this opportunity to 3 provide this service and analysis of your operations. 4 Mir Fox & Rodriguez has been in business 5 for the last 20 years. We provide consulting and 6 traditional CPA services to all different sizes of 7 organizations from the public, private and government 8 sectors. I've been very fortunate of working with the 9 Texas Lottery Commission before with my former 10 employer. Members of my current team also helped me 11 to deliver the previous services for the security 12 study, so we have been able to gain that understanding 13 and use that understanding for this assessment. And 14 I'm here to answer any questions that you may have. 15 COMM. SCHENCK: As part of your charge, 16 will you be looking for us at monitoring who has 17 access to confidential materials so that we'll know 18 who is downloading information, for instance? 19 MR. RODRIGUEZ: Yes. Actually, one item 20 I'm to share with all of you is that our main office 21 is based in Houston, Texas. As you know, we just got 22 through the hurricane. We are recovering our 23 operations, and two-thirds of my team are based in 24 Houston. They're still dealing with some personal 25 issues. But the one-third here is based in Austin and 0112 1 we are taking care of business. 2 The answer to your question is we just 3 finalized the first phase of our assessment, which 4 includes the risk assessment and the planning phase. 5 As part of that assessment, we have identified using 6 previous information from previous history, internal 7 reviews from (inaudible) and from other third parties. 8 There is that representative high risk for our study, 9 so we're using the risk base approach for focusing on 10 the areas that could represent the higher risk for 11 your operations. 12 One of those areas is the lottery 13 computer security. In that area, the team we have 14 initially assessed the possible risks, identified some 15 initial level of effort to provide you a level of 16 assessment and feedback regarding the controls that 17 are in place to prevent those risks from happening. 18 I came back from Houston yesterday, and 19 the director made me aware of one incident that has 20 taken place recently regarding downloading information 21 and abuse in the access right that were given to a 22 user. We have -- I have made my team aware of that 23 situation. We will use that information to maybe 24 focus on a bit more on the whole process that manages 25 security. But if we are required to specifically 0113 1 address that situation, we will have to assess with 2 the Commission what is the impact of that to our 3 initial approach. 4 COMM. SCHENCK: Do you think as part of 5 your overall approach, assuming you don't have to make 6 that change, that you'll have a recommendation for us 7 for how we might ameliorate or reduce that risk? 8 MR. RODRIGUEZ: Yes. From the process 9 perspective and from a top-down approach, we will 10 identify the main areas of exposures and the main 11 control that could be in place or may be considered to 12 be in place. 13 COMM. SCHENCK: Okay. Bearing in mind 14 that -- the exigencies of your Houston situation, how 15 soon do you think you're going to have a final report 16 and recommendation for us? 17 MR. RODRIGUEZ: We have the ability to 18 discuss with Catherine Melvin, the Director of Audit, 19 and one of our shareholders the specifics of the 20 contract, and our commitment is to deliver the report 21 before or on the deadline that is December 31st of 22 this year. 23 COMM. SCHENCK: Thank you. 24 CHAIRMAN COX: Okay. Mr. Reza, 25 following up on Commissioner Schenck's question, 0114 1 specifically are you aware of a recent instance in 2 which Texas Lottery Commission data was found on a 3 personal computer at the Comptroller's Office? 4 MR. REZA: Yes, I was made aware of this 5 yesterday. 6 CHAIRMAN COX: Okay. And that that is 7 part of an ongoing criminal investigation being 8 conducted by the Texas Comptroller of Public Accounts 9 and the Travis County District Attorney. 10 MR. REZA: Uh-huh. 11 CHAIRMAN COX: Now, I understand the 12 general process of evaluating risk and using a 13 risk-based approach to an audit of this nature. Let 14 me say that if you find that this occasion, this 15 particular instance, does not heighten your interest 16 in that area, that I will want to ask Ms. Melvin to 17 extend your engagement to cover it. So what I would 18 like to have is your assurance that you will, whether 19 it's within the -- you find it within the scope of 20 your examination as contemplated, or whether it's an 21 extension of your task, that you will look at the 22 implications of unauthorized use of that -- of 23 authorized data of the Texas Lottery Commission, both 24 in this -- in the general nature of that and in the 25 specific instance. 0115 1 MR. REZA: Okay. 2 CHAIRMAN COX: And include that data in 3 your report -- and I understand you will have the 4 report by 12-31. And I would like to ask you to also 5 plan that your firm will make that report to us in a 6 public meeting as well as in written form. 7 MR. REZA: Okay. 8 CHAIRMAN COX: Anything to add to that? 9 COMM. SCHENCK: No, I agree with that 10 completely. 11 CHAIRMAN COX: Further, I want to talk 12 about cooperation. One of the things that we pride 13 ourselves in at the Texas Lottery Commission is our 14 transparency and our availability to work with 15 auditors. I want to assure you that you will have our 16 complete cooperation. Director Sadberry is committed 17 to that process, as are the members of his team. 18 Of course your contact is Ms. Melvin. 19 And should you have any concerns about access to 20 whatever information you consider appropriate for your 21 examination and you're not getting it, or concern that 22 you might not be getting it, contact Ms. Melvin and 23 also feel free to contact Commissioner Schenck and me. 24 And I extend that opportunity both in 25 the event that you find difficulties or if you want to 0116 1 talk to us in the ordinary course of your work as to 2 how we understand security at the Lottery Commission 3 and what our expectations are for security. 4 MR. REZA: Thank you. I thank you for 5 your commitment and your offer. And mostly I would 6 like to confirm to you that during the first phase 7 that I just explained to you, we have received that. 8 CHAIRMAN COX: Excellent. 9 MR. REZA: We have received full 10 support, not only from the TLC but also from the 11 vendors supporting your operation. And I'm sure that 12 that will continue to be the case. 13 CHAIRMAN COX: Good. Thank you very 14 much. 15 Catherine, was there anything you would 16 like to add to that? 17 MS. MELVIN: No, I have no other 18 comments. 19 CHAIRMAN COX: Thank you, very much, 20 Mr. Reza. The work that you're doing is very 21 important. We value it highly and we appreciate your 22 commitment to it. 23 MS. MELVIN: Commissioners, I'm going to 24 scoot over. I actually have one other item for you. 25 The second item is related to the 0117 1 internal audit annual plan. And so today we will be 2 seeking your approval of that proposed plan. With me 3 are members from the internal audit team, Ms. Susan 4 Oballe and Ms. Nancy Walden, so they will be 5 presenting that to you. 6 Just as an introduction, let me say that 7 both our professional standards and the Texas Internal 8 Auditing Act require the preparation and approval of 9 the annual audit plan. So with that, I'll turn it 10 over to Susan. 11 MS. OBALLE: Good morning, 12 Commissioners. For the record, I'm Susan Oballe with 13 the Internal Audit Division. 14 Commissioners, I would first like to 15 walk you through how we derived this year's audit 16 plan, and Nancy will provide an overview of the plan. 17 Last year internal audit worked 18 extensively with the executive management team and 19 agency staff to identify and to obtain an overview of 20 the agency's key processes, as well as the risk 21 associated with these processes. To perform our risk 22 assessment for the fiscal year 2009 audit plan, we 23 again worked with executive management to identify any 24 changes or additions to the key processes they 25 identified last year. Management also provided us 0118 1 with their top risk, as well as any areas of the 2 agency they felt would benefit from internal audit 3 review. We would like to extend our appreciation to 4 management for their assistance throughout our risk 5 assessment process. 6 After reviewing the information 7 provided, internal audit then assessed the risk of 8 each key process using factors that focus on critical 9 agency objectives. We developed the audit plan before 10 you based on the following; The final risk of each key 11 process from a risk assessment, current work being 12 performed by internal audit, the extent of external 13 audit coverage for fiscal years 2008 and '09, and any 14 requested project we received. 15 If there are no questions at this time 16 I'll turn it over to Nancy. 17 COMM. SCHENCK: When you say the 18 external audits from '08 to '09, do you include in 19 that the recent audit we got from the State Auditor's 20 Office? 21 MS. OBALLE: Yes, sir. 22 COMM. SCHENCK: So the areas of 23 particular concern that they expressed, we've 24 encompassed within our own internal audit? 25 MS. OBALLE: And in fact, we have one 0119 1 project that we're going to be following up on a 2 recommendation that was not fully implemented. 3 COMM. SCHENCK: Thank you. 4 MS. WALDEN: Chairman Cox, Commissioner 5 Schenck, for the record, my name is Nancy Walden. I'm 6 with the Internal Audit Division, and I'm here to 7 discuss the fiscal year '09 internal audit activity 8 plan. 9 In fiscal year 2009, internal audit 10 intends to continue its efforts to examine critical 11 areas of agency operations that are at the core of the 12 security and integrity of the agency. In addition, 13 internal audit intends to proactively focus efforts on 14 educating agency management and employees on the 15 importance of control activities as part of their 16 daily routine. This will be accomplished through 17 participation in project meetings, facilitating 18 knowledge sharing throughout the organization, and 19 maintaining focus on internal controls. 20 It's internal audit's intent to assist 21 in identifying possible risks at the project's 22 inception and encouraging management to incorporate 23 those appropriate controls rather than identifying 24 weaknesses and recommending corrective actions at a 25 later date. 0120 1 We have built-in flexibility into our 2 plan to allow for unanticipated projects that may 3 arise during the year. These may be requests that you 4 have, Commissioners, as well as requests from 5 management or outside interested parties such as the 6 State Auditor's Office. 7 Hours have been set aside for 8 statutorily-required internal audit activities, which 9 includes an external quality assurance review. In 10 accordance with our auditing standards, a quality 11 assurance review is required once every three years. 12 The Internal Audit Division is committed 13 to being a valuable resource in improving the agency's 14 operations and is proposing a plan that targets key 15 agency responsibilities, focuses on internal controls 16 and builds flexibility to allow for special requests. 17 This concludes our presentation. If you 18 have any questions, we'll be happy to answer them. 19 COMM. SCHENCK: I do not have any 20 questions. 21 CHAIRMAN COX: Thank you very much. 22 This an excellent plan. Catherine, you put together a 23 good plan the first year you were here and it just 24 keeps getting better. 25 MS. MELVIN: I have good staff to help 0121 1 me with that. 2 CHAIRMAN COX: You have an excellent 3 staff and this is as professional a plan as I have 4 ever seen. I think it is right in the ball park, and 5 it provides flexibility in the event that we find that 6 we missed the spot a little bit or something new comes 7 up. So thank you for this. 8 And I think that you want approval from 9 us. Is that correct? 10 MS. MELVIN: That is. 11 CHAIRMAN COX: Okay. Well, I will move 12 approval of the audit plan as proposed by the internal 13 audit staff. 14 COMM. SCHENCK: I second the motion. It 15 appears that Commissioner Vacant has already signed 16 for us at the bottom, but I'll second the motion. 17 (Laughter) 18 CHAIRMAN COX: Okay. 19 COMM. SCHENCK: And propose that we add 20 our signatures to the internal audit plan. 21 CHAIRMAN COX: To add those to 22 Commissioner Vacant's -- 23 COMM. SCHENCK: -- or Commissioner 24 Vacant. 25 CHAIRMAN COX: Okay. Second that 0122 1 motion. All in favor say "aye". 2 COMM. SCHENCK: Aye. 3 CHAIRMAN COX: Aye. Motion carries two 4 zero. 5 Thank you very much. 6 MS. MELVIN: Thank you. 7 MS. KIPLIN: Commissioners, I've got the 8 original, and for the record the entry for 9 Commissioner Vacant has been removed. So I'll just 10 put that on the record. 11 (Laughter) 12 AGENDA ITEM NO. VIII 13 CHAIRMAN COX: Item No. 8, report and 14 discussion on the agency's contracts. 15 Mr. Fernandez. 16 MR. FERNANDEZ: Good morning, 17 Mr. Chairman, Commissioner Schenck. For the record, 18 my name is Mike Fernandez. I'm the Director of 19 Administration. Item No. 8 is information on the 20 agency's contracts. As we discussed, I believe, 21 meeting before last -- I believe in July -- that we 22 would bring these to you quarterly or we would bring 23 them to you if there was any change in the prime 24 contracts. So what you have in front of you today are 25 both those contracts that we deem prime and those that 0123 1 we deem high risk. 2 So I'd be happy to answer any questions 3 if you have them. 4 COMM. SCHENCK: Mike, we have a lot of 5 prime contracts expiring on the same day next year. 6 Are all of those going to be in the air at the same 7 time? 8 MR. FERNANDEZ: They will be in the air 9 at the same time to some degree. And what I mean by 10 that, really for the most part I think what you're 11 going to see is many of those, with the exception of 12 two, have extensions. So what we will begin doing six 13 months prior to that time is we'll be working with the 14 impacted division to see whether the performance of 15 that contractor and the opinion of the division 16 warrants an extension. 17 COMM. SCHENCK: Okay. But you have 18 enough staff to manage nine contracts expiring at the 19 end of August next year? 20 MR. FERNANDEZ: Yes, we do. 21 COMM. SCHENCK: And the contract 22 extensions for GTECH contract, it says "90 days or 23 one," is there one something? What is the term there? 24 MR. FERNANDEZ: Let me find that one, 25 Commissioner. What that is is 90 days or one two-year 0124 1 extension. And the way that contract is written, it's 2 written for transition purposes -- 3 COMM. SCHENCK: Okay. 4 MR. FERNANDEZ: -- in that we have, I 5 believe, a 30-day -- I want to say a 30-day period to 6 notify them if we want to extend that contract for 90 7 days. But during that 90-day period the option that 8 we have in the contract, then the next renewal is for 9 that two-year period. That is the way that contract 10 is structured. 11 COMM. SCHENCK: And I know I've asked 12 this before, and I'm sorry to ask it again, our 13 contract with outside counsel for litigation matters, 14 the $50,000, is that just a retainer or are we assured 15 some form of gainful employment out of that? 16 MS. KIPLIN: It's a not to exceed. It's 17 on a billable hour. So we control the gauge on that. 18 And that's -- that's -- it's actually the outside 19 counsel for intellectual property matters. The Office 20 of the Attorney General required us to split that out, 21 one being transactional and one being litigation 22 services. 23 COMM. SCHENCK: But when you say it's a 24 max, we're not committed to pay it if we don't use it? 25 MS. KIPLIN: That's correct. It's a not 0125 1 to exceed. It's based on billable hours. We receive 2 monthly billings that we review. And once -- we 3 actually -- and those actually do have to go to the 4 AG's Office for their approval as well. 5 COMM. SCHENCK: Great. Thank you. 6 CHAIRMAN COX: And welcome. You asked 7 the same question that I've asked seven years in a 8 row, so I don't have to ask it this year. 9 (Laughter) 10 CHAIRMAN COX: And Mr. Fernandez tells 11 me that some day we might have a contract that ends on 12 other than the fiscal year. 13 MR. FERNANDEZ: Well, I believe that we 14 have -- I believe that we have contracts that -- now, 15 Commissioner, that ends on -- 16 (Laughter) 17 MR. FERNANDEZ: -- list in its entirety. 18 You know, again, you know, remembering 19 we operate on state fiscal year, and so what you're 20 seeing is very typical of all state agencies. You're 21 not seeing anything out of the norm really. 22 CHAIRMAN COX: And I guess I can ask you 23 one more time; this isn't causing you to have 24 additional people on your staff -- 25 MR. RODRIGUEZ: No. 0126 1 CHAIRMAN COX: -- that you wouldn't have 2 to have if you spread this better through the year? 3 MR. FERNANDEZ: No, sir. I think that 4 we're adequately staffed. I think what you see are 5 different issues that come to bear with us. And what 6 those issues usually are is that we will have added 7 some RFPs that we're going to put on in addition to 8 what we normally do, or that the bid itself will be 9 done two or three times. So in some instances we'll 10 go out to bid and that RFP will be, for whatever 11 reason, rescinded or pulled down and we'll go back out 12 to bid. So those are usually the issues that come 13 into play at the end of the year. 14 CHAIRMAN COX: Okay. Anything further? 15 COMM. SCHENCK: Yeah, Mike, on high risk 16 contracts we have one expiring, the Xerox contract. 17 It's not a huge volume, but it's up to expire in three 18 months. 19 MR. FERNANDEZ: That's correct. 20 COMM. SCHENCK: Where are we on 21 extending that contract -- renewing that contract or 22 bidding it out? That's the second line item, document 23 center services. Expiration is 12/22 of this year. 24 MR. FERNANDEZ: That's under review in 25 terms of extension. 0127 1 COMM. SCHENCK: Okay. 2 CHAIRMAN COX: Mike, help me remember 3 the criteria for high risk. 4 MR. FERNANDEZ: High risk are those 5 contracts that do impact the overall integrity and 6 security of the lottery as opposed to prime contracts 7 which we define those that directly support the game 8 function. And there are other criteria, Commissioner, 9 on high risk, including those that have a value of a 10 million dollars or more, those that have contract 11 staff that have direct access to systems or particular 12 areas of the agency, or that provide legal advice or 13 financial advice. 14 CHAIRMAN COX: Anything further? 15 COMM. SCHENCK: No. 16 CHAIRMAN COX: Thank you, Mike. 17 AGENDA ITEM NO. IX 18 CHAIRMAN COX: Item 9, report, possible 19 discussion and/or interaction on the Mega Millions 20 game and our contract. 21 Director Sadberry? 22 MR. SADBERRY: Yes, Commissioners. For 23 the record, Anthony Sadberry, Executive Director. 24 No specific items to report to you on 25 any developments on the Mega Millions games and our 0128 1 contract, except to remind you, as I stated 2 previously, that the Mega Millions directors are 3 reviewing certain conceptual possible changes in the 4 game. I would generally -- I would generalize and 5 describe those to be of a similar nature of the 6 concerns that you addressed yourselves in an earlier 7 discussion concerning the product, the Texas games, 8 but not to the depth or expansiveness of the nature of 9 your discussion, for example, in this morning's 10 meeting, but on a general similar trend. 11 For example, whether the prize tier 12 structure of a game should be modified, whether the 13 price point of the game should be modified, whether 14 the contract should be amended to provide for a 15 succession of at least two, if not more, possible 16 deficit jackpot estimations similar to the way the 17 Lotto Texas process occurs -- not in my mind to the 18 extent of continual weekly deficit projections, but 19 more than the first jackpot estimation. 20 The meeting of the directors will occur 21 next week. Again, I still consider this to be in the 22 conceptual stage and the developmental stage, although 23 we will have presentations made by vendors and 24 consultants and at some point may lead to a discussion 25 of specific game changes. 0129 1 The bottom line I think is to suggest 2 that many of these directors have a similar concern as 3 those expressed in today's meeting earlier today about 4 the game performance, the trend and the jackpot growth 5 and other factors that go into the overall progress 6 and health of the game. 7 I'll keep you posted on any updates on 8 that. 9 CHAIRMAN COX: Any questions? 10 COMM. SCHENCK: No, thank you. 11 AGENDA ITEM NO. X 12 CHAIRMAN COX: Item No. X, report, 13 possible discussion and/or action on GTECH 14 Corporation. 15 Director Sadberry? 16 MR. SADBERRY: Commissioners, in your 17 notebooks are the materials that were provided to you 18 on a monthly basis and the general activities of note 19 involving GTECH, particularly in the area of 20 consultant contracts or in any other contract 21 developments, matters of general note or interest to 22 the agency. We continue to provide this information 23 to you, as well as the standing committee, which is 24 comprised of the representative from this agency, one 25 from the Attorney General's Office, and one from the 0130 1 Department of Public Safety. I refer you to that 2 document and would be happy to address any questions 3 you might have. 4 COMM. SCHENCK: Anthony, in my materials 5 there's some material that's marked confidential. 6 Was -- did we intend to include that? And is it 7 possible, if it was intended to be kept confidential, 8 it's inadvertent for us to take it out? 9 MR. SADBERRY: We've had ongoing 10 discussions about that. Kim is here, I'll let her 11 speak to it if she wishes. 12 My understanding is that it is intended 13 that you receive it as Commissioners in the event of a 14 request for open records public information, for 15 example, where GTECH has claimed confidentiality, the 16 intent there, as I understand it, is that they have 17 the opportunity to protect it from disclosure and to 18 seek an Attorney General's ruling if necessary on it. 19 COMM. SCHENCK: Okay. 20 MR. SADBERRY: And certainly the intent 21 is that we as an agency would not voluntarily dispense 22 it beyond the agency or the Commission itself, but 23 that we're not restricted from using it in the manner 24 in which we are doing now. 25 Now, I'll yield to the General Counsel 0131 1 if you have a more exact answer than that. 2 MS. KIPLIN: I think that's correct. 3 Simply because something is put in the Commission 4 meeting notebook does not necessarily blow an 5 assertion of confidentiality. There are documents 6 that should we get an open records request for a 7 document that is in a notebook, we will do the same 8 thing that we do in term of an analysis on the 9 process, and that's take a look at it, see if it fits 10 within the emption. Just because it's marked 11 confidential, these particular documents, we would 12 follow that process. GTECH would be given an 13 opportunity to brief its arguments about why it 14 considers it to be proprietary information to its 15 company and, therefore, exempt from disclosure in the 16 Open Records Act. 17 COMM. SCHENCK: Okay. Great. 18 MS. KIPLIN: And the distribution of 19 materials that are marked confidential or are in fact 20 privileged is limited. So each person that includes 21 something within a notebook makes that decision on 22 what the distribution should be. 23 COMM. SCHENCK: Great. Thank you. 24 CHAIRMAN COX: All right. Director 25 Sadberry, some months ago I reported to this group 0132 1 that I had received a call from Jaymin Patel, CEO of 2 GTECH, and that he was planning a visit to us in the 3 upcoming months. Do you know more about that? 4 MR. SADBERRY: I do not. I do recall 5 your -- us discussing that. I thought it was in the 6 early winter, early part of the year -- 7 MR. RIVERA: In October. 8 MR. SADBERRY: In October, early fall. 9 Is that still on? 10 MR. RIVERA: Yes. 11 CHAIRMAN COX: We'll welcome him. 12 AGENDA ITEM NO. XI 13 CHAIRMAN COX: Item No. XI, the report 14 of the Executive Director. 15 Director Sadberry? 16 MR. SADBERRY: Commissioners, the 17 information you have in your notebooks is the general 18 report on the FTE status of the agency. And I'll 19 remind you this would include bingo. You've already 20 received from Director Sanderson and discussed with 21 him data regarding the status of the bingo positions. 22 I will add to that -- I think 23 Commissioner Schenck at one point had asked about the 24 activities in the legal services division. There have 25 been three activities. One is the hiring -- a new 0133 1 hire who is in fact present with us today, coming from 2 the Attorney General's Office. One is a rehire of a 3 retired staff who is also present with us today, and 4 one is a reconsideration who rescinded the 5 application. Am I understanding that correctly, Kim? 6 It's left open? 7 MS. KIPLIN: It's an open position, 8 yeah. 9 MR. SADBERRY: The other activities 10 reflected in your materials show what I would describe 11 as standard operating procedures, nothing out of the 12 ordinary that appears to stand out. 13 CHAIRMAN COX: Mr. Schenck? 14 COMM. SCHENCK: Well, I think I feel a 15 need to reiterate -- and I know I've said it before -- 16 but, Phil, you're about 25 percent down on what your 17 staffing should be, and that needs to be addressed 18 with a sense of urgency I think -- 19 MR. SANDERSON: Yes, sir, I totally 20 agree with that statement. And we're moving forward 21 with some of those things to conduct interviews on a 22 few of those positions at this point in time. 23 COMM. SCHENCK: Well, I'll ask the next 24 question: How timely are we in processing 25 applications and dealing with complaints? I know I'm 0134 1 hearing some concerns from the regulated industry that 2 we're just not moving with the speed that we should. 3 MS. SANDERS: As a matter of fact, we -- 4 I just finished reviewing some of those -- that 5 information as it relates to our performance measure 6 that we filed with the LBB, and the average days to 7 complete a complaint, which is from the date that we 8 start the investigation to when the investigation is 9 completed, has increased a little bit. We have had a 10 reduction in the number of inspections and the number 11 of audits that are conducted, both as a result of 12 reduced staffing as well as some changes in audit 13 methodology. 14 COMM. SCHENCK: And I can't imagine the 15 effectiveness of those audits that we're getting done 16 is as good as it might be if we had more people with 17 more time to conduct -- to do their work. 18 MR. SANDERSON: Yes, sir. 19 COMM. SCHENCK: Thanks. 20 CHAIRMAN COX: On that same subject, 21 Phil, is Brenda Winkler still working with you to help 22 the audit process along? 23 MR. SANDERSON: Yes, sir, she is. 24 CHAIRMAN COX: And I believe that the 25 audit staff has planned that that will continue for 0135 1 whatever period is necessary to support your 2 operation? 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: So you do have some 5 leadership down there and you do have some staff. And 6 one of the things, as we've talked about that is a 7 chicken and egg problem, is hiring a bunch of auditors 8 for report to a manager that we don't have yet and how 9 the dynamics would work if that person were to find 10 that that person's staff was already in place and that 11 you would have to deal with that situation. 12 So the part of the appeal of that 13 position is that you get to build your own staff, and 14 we recognize all the balances there. But I share 15 Commissioner Schenck's concern that in a perfect world 16 we would be moving a lot faster than we are and 17 encourage you to use all due speed. 18 MR. SANDERSON: Yes, sir. 19 AGENDA ITEM NO. XII 20 CHAIRMAN COX: Okay. The consideration 21 of the status and possible entry of orders, Item XII. 22 Ms. Kiplin, how would you like to handle 23 this? 24 MS. KIPLIN: Items A through D are 25 lottery cases. Items A, C and D are NSF cases, and 0136 1 I'd recommend -- staff recommends that you adopt the 2 order of the Administrative Law Judge and revoke those 3 lottery licenses for failure to have sufficient funds 4 available at the time the lottery took the accounts. 5 Item B -- 6 CHAIRMAN COX: You want to do these all 7 at once? 8 MS. KIPLIN: It's at the pleasure of the 9 Commission, however you would like to proceed. 10 CHAIRMAN COX: Okay. Let's do the Items 11 A, C and D, the NSF items. I move approval of the 12 staff recommendation for these three items. 13 COMM. SCHENCK: I second the motion. 14 CHAIRMAN COX: All in favor say "aye." 15 COMM. SCHENCK: Aye. 16 CHAIRMAN COX: Aye. The motion carries 17 two zero. 18 MS. KIPLIN: Term B is a disqualifying 19 criminal conviction, and it's related to a gambling 20 conviction. Staff recommends that you also adopt the 21 proposed order of the Administrative Law Judge and 22 revoke this businesses's license. 23 COMM. SCHENCK: This is a lottery 24 retailer? 25 MS. KIPLIN: Yes, it is. 0137 1 COMM. SCHENCK: Grocery and hardware -- 2 this is within ten years of the -- 3 MS. KIPLIN: Yes, it is. It's 4 January 2008. 5 COMM. SCHENCK: All right. I move that 6 we adopt the staff's recommendation. 7 CHAIRMAN COX: Second. All in favor say 8 "aye". 9 COMM. SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 Motion carries two zero. 12 MS. KIPLIN: Item E is the return of the 13 proposed agreed order in the International Gamco. 14 It's a bingo manufacturer. At an earlier Commission 15 meeting -- I believe it was the July Commission 16 meeting -- staff presented this agreement and proposed 17 consent order. The penalty amount was $750. The 18 Commission at that time rejected the proposed consent 19 order and requested that the bingo director 20 communicate with the licensee. So what you have now 21 is an agreement with the proposed order imposing a 22 fine of $3,000. 23 COMM. SCHENCK: And that's a maximum 24 fine, as I recall? 25 MS. KIPLIN: It's up to a thousand for 0138 1 each violation. 2 COMM. SCHENCK: And there were three 3 total violations. 4 MR. SANDERSON: Yes, sir. 5 COMM. SCHENCK: But I think the longer 6 term issue here is to remember that with when get in 7 our next legislative session that the idea that we 8 need some more measured and more flexible approach to 9 these proceedings because not every violation is 10 equal, not every violator is equal in terms of the 11 deterrent effect. This is a big company with -- as I 12 recall -- a fairly profound problem, and that would be 13 better if we could treat it in some way different from 14 what we would treat a small bingo operator in Cut and 15 Shoot, Texas. 16 MR. SANDERSON: And we are currently 17 researching how other jurisdictions have staggered 18 their administrative penalties as it relates to -- for 19 lack of a better word -- for-profit and non-profit 20 type operations. 21 COMM. SCHENCK: So we'll keep track of 22 that as we go into the next session? 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN COX: And I would say there's 25 another cut on that, and that is matters involving the 0139 1 integrity of the game as this one did and then routine 2 administrative matters or other matters. Because to 3 me that is the focus that we should have, if something 4 affects the integrity of the game, we need to be on it 5 and they need to realize that we're serious about it. 6 MR. SANDERSON: Yes, sir. 7 CHAIRMAN COX: Okay. Did you move 8 approval -- 9 COMM. SCHENCK: I have not yet. I move 10 approval of the staff recommendation of the revised 11 penalty. 12 CHAIRMAN COX: Second. All in favor say 13 "aye." 14 COMM. SCHENCK: Aye. 15 CHAIRMAN COX: Aye. Motion carries two 16 zero. 17 AGENDA ITEM NO. XIII 18 CHAIRMAN COX: Item No. XIII, public 19 comment. Is there any public comment? 20 I don't have any witness affirmation 21 forms. 22 All right. Commissioner, with your 23 permission then we'll go into executive session. 24 COMM. SCHENCK: Please. 25 0140 1 AGENDA ITEM NO. XIV 2 CHAIRMAN COX: At this time, I move the 3 Texas Lottery Commission go into Executive Session: 4 A. To delineate the duties and evaluation of 5 the Executive Director, the Deputy Executive Director, 6 Internal Audit Director and Charitable Bingo 7 Operations Director; and, deliberate the duties of the 8 General Counsel and Human Resources Director pursuant 9 to Section 551.074 of the Texas Government Code. 10 B. To receive legal advice regarding pending 11 or contemplated litigation pursuant to Section 12 551.071(1)(A) and/or to receive legal advice regarding 13 settlement officers pursuant to Section 551.071(1)(B) 14 of the Texas Government Code and/or to receive legal 15 advice pursuant to Section 551.071(2) of the Texas 16 Government Code, including but not limited to: 17 First State Bank of DeQueen et al. v. Texas 18 Lottery Commission 19 James T. Youngblood v. Texas Lottery 20 Commission 21 Employment law, personnel law, procurement 22 and contract law, evidentiary and procedural law, and 23 general government law 24 Lottery Operations and Services contract 25 Mega Millions game and/or contract. 0141 1 Is there a second? 2 COMM. SCHENCK: I second the motion. 3 CHAIRMAN COX: All in favor say "aye". 4 COMM. SCHENCK: Aye. 5 CHAIRMAN COX: Aye. The vote is two 6 zero. The Texas Lottery Commission will go into 7 executive session. The time is 12:10 p.m. Today is 8 September 17th, 2008. 9 (Recess for Executive Session from 12:10 10 p.m. to 2:52 p.m.) 11 AGENDA ITEM NO. XV 12 CHAIRMAN COX: The Texas Lottery 13 Commission is out of Executive Session. The time is 14 2:52 p.m. 15 Is there any action to be taken as a 16 result of Executive Session? 17 COMM. SCHENCK: No, sir. 18 AGENDA ITEM NO. XVI 19 CHAIRMAN COX: The meeting is adjourned. 20 COMM. SCHENCK: Thank you. 21 (Proceedings concluded at 2:52 p.m.) 22 23 24 25 0142 1 C E R T I F I C A T E 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, LOU RAY, a Certified Shorthand 7 Reporter in and for the State of Texas, do hereby 8 certify that the above-mentioned matter occurred as 9 hereinbefore set out. 10 I FURTHER CERTIFY THAT the proceedings 11 of such were reported by me or under my supervision, 12 later reduced to typewritten form under my supervision 13 and control and that the foregoing pages are a full, 14 true and correct transcription of the original notes. 15 IN WITNESS WHEREOF, I have hereunto set 16 my hand and seal this 23rd day of September 2008. 17 18 19 ________________________________ 20 LOU RAY Certified Shorthand Reporter 21 CSR No. 1791-Expires 12/31/09 22 Firm Certification No. 276 Kennedy Reporting Service, Inc. 23 Cambridge Tower 1801 Lavaca Street, Suite 115 24 Austin, Texas 78701 512.474.2233 25