0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, OCTOBER 24, 2007 § 8 9 COMMISSION MEETING 10 WEDNESDAY, OCTOBER 24, 2007 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 24th day of October 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 3:56 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONERS 18 C. TOM CLOWE, JR., and DAVID SCHENCK. The following 19 proceedings were reported via machine shorthand by 20 Aloma J. Kennedy, a Certified Shorthand Reporter of 21 the State of Texas, and the following proceedings were 22 had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. C. Tom Clowe, Jr. 5 Mr. David Schenck 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 SPECIAL COUNSEL: 8 Ms. Sarah E. Woelk 9 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 10 DEPUTY EXECUTIVE DIRECTOR: 11 Mr. Gary Grief 12 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Phil Sanderson 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 9 4 AGENDA ITEM NO. II -- Report, possible discussion and/or action on ethics, 5 administrative procedure, and open government laws pertaining to the 6 Texas Lottery Commission........................ 11 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on the 8 implementation of recommendations contained in the Internal Audit Report on bingo audit 9 services, including development of rules........ 19 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action on the 11 Conductor-Books and Records Guidelines.......... 33 12 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, 13 including proposal, on new 16 TAC §402.500 relating to general records requirements........ 39 14 AGENDA ITEM NO. VI - Consideration of 15 and possible discussion and/or action, including proposal, on new rule 16 TAC 16 §402.506 relating to disbursement records requirements............................ 74 17 AGENDA ITEM NO. VII - Consideration of 18 and possible discussion and/or action, including proposal, on new rule 16 TAC 19 §402.511 relating to required inventory records......................................... 76 20 AGENDA ITEM NO. VIII - Report by the 21 Charitable Bingo Operations Director and possible discussion and/or action 22 on the Charitable Bingo Operations Division’s activities........................... 78 23 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on lottery sales 4 and revenue, game performance, including game performance of Daily 4, new game 5 opportunities, advertising, dissemination of prize and game information, market 6 research, Texas Two Step prize reserve, and trends..................................... 80/126 7 AGENDA ITEM NO. X - Report, possible 8 discussion and/or action on transfers to the State and the agency’s budget............ 124 9 AGENDA ITEM NO. XI - Report, possible 10 discussion and/or action on Bingo indirect and administrative expenses............ 196 11 AGENDA ITEM NO. XII - Report, possible 12 discussion and/or action on the 80th Legislature................................ 220 13 AGENDA ITEM NO. XIII - Report, possible 14 discussion and/or action, including procurement, on the agency’s lottery 15 security study.................................. 222 16 AGENDA ITEM NO. XIV - Report, possible discussion and/or action, including 17 procurement on the agency’s market research..... 224 18 AGENDA ITEM NO. XV - Report, possible discussion and/or action on the agency’s 19 contracts....................................... 225 20 AGENDA ITEM NO. XVI - Report and possible discussion and/or action on the agency's 21 HUB program and/or minority business participation, including the agency's 22 Mentor Protégé Program.......................... 226 23 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action on 4 external and internal audits and/or reviews relating to the Texas Lottery Commission 5 and/or on the Internal Audit Department’s activities...................................... 234 6 AGENDA ITEM NO. XVIII - Report, possible 7 discussion and/or action on the Mega Millions game and/or contract................... 236 8 AGENDA ITEM NO. XIX - Report, possible 9 discussion and/or action on GTECH Corporation..................................... 237 10 AGENDA ITEM NO. XX - Report, possible 11 discussion and/or action on Scientific Games................................ 140 12 AGENDA ITEM NO. XXI - Consideration of the 13 status and possible entry of orders in: A. Docket No. 362-07-3736 – Silver Bell 14 Grocery B. Docket No. 362-07-3738 – Stockman’s 15 Minimart C. Docket No. 362-07-3740 – Bob’s Beer & 16 Wine #2 D. Docket No. 362-07-3640 – E-Z Food Mart 17 E. Docket No. 362-07-3641 – Lazy L Shell Convenience Store 18 F. Docket No. 362-07-3642 – Pioneer Mini Mart 19 G. Docket No. 362-07-3643 – Mesquite Mini Mart 20 H. Docket No. 362-07-3896 – 45 Kwik Stop I. Docket No. 362-07-3966 – Normandy 21 Food Store 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 J. Docket No. 362-07-990906PM.B – In the Matter of the Refusal to Add Names of 4 Certain Persons to the Texas Lottery Commission’s Registry of Approved 5 Bingo Workers: Robert Arthur, James Bellinger, Wendy Bowie, Stefani 6 Castillo, Maria Deville, Cassandra Hernandez, David Honish, Mike Kaiser, 7 Sonny Kirkland, Evangelina Romo, Rudolph Vasquez, and James Wood 8 K. Docket No. 362-07-990906AM.B – In the Matter of the Removal of Certain 9 Respondents from the Texas Lottery Commission’s Registry of Approved Bingo 10 Workers: Terry Allison, Brandi Barrett, Dawn Flewellen, Michael Gamez, Tiffany 11 Gonzales, Albert Guerra, Glenda Harris, Autumn Henrichs, Emma Lopez, Angelica 12 Lozano, Sandra Ramirez, Laura Rosas, Frank Sanchez 13 L. Docket No. 362-07-0990807AM.B – In the Matter of the Removal of Certain 14 Individuals from the Registry of Approved Workers: Colby Armstrong, 15 Robert Ascencio, Trina Brown, Rochelle Cazey, Ferdinand Febles, Tanya Frisby, 16 Christopher Grimes, Alvino Mauricio, Christina Nanez, Brandy Poole, Juan 17 Rocha, Erica Rodriguez, William Storey, Patrick Turner, Curtis Walker, Norma 18 Williams, David Derrick, and Blake Edward Gibson 19 M. Docket No. 362-07-990807PM.B -- In the Matter of the Removal of Certain 20 Respondents from the Texas Lottery Commission’s Registry of Approved Bingo 21 Workers: Forrest Blaylock, Carlos Borjas, Jennifer Brown, Brandon Carroll, Venson 22 Cursey, Ruby Fields, Doyla Baubatz, Lois Jackson, Richard McCloud, Frank Montgomery, 23 Marcia Neal, Jules Ordinario, Leisa Powell, David Rodriguez, Tracey Scott, Gerardo 24 Valencia, Gerald Van Brakle, and Quanisha Windom 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 N. Case No. 2007-720 – Childrens Advocacy Center of Hidalgo Co-Estrellas House 4 O. Case No. 2007-718 – Lower Rio Grande Valley Nature Center 5 P. Case No. 2007-721 – Lulac Information Referral Resources Assistance, Inc. 6 Q. Case No. 2007-717 – American Legion Post 37 R. Case No. 2007-210 – SPJST Lodge 183 7 S. Case No. 2007-716 – Hidalgo Lions Club T. Case No. 2007-719 – Make A Wish 8 Foundation of the Rio Grande Valley...... 238 9 AGENDA ITEM NO. XXII - Report by the Executive Director and/or possible 10 discussion and/or action on the agency’s operational status, activities 11 relating to the Charitable Bingo Operations Division, agency procedures, and FTE status..... 238 12 AGENDA ITEM NO. XXIII - Public comment.......... 239 13 AGENDA ITEM NO. XXIV - Commission may meet in 14 Executive Session: A. To deliberate the duties and evaluation 15 of the Executive Director pursuant to Section 551.074 of the Texas Government 16 Code. B. To deliberate the duties and evaluation 17 of the Deputy Executive Director pursuant to Section 551.074 of the Texas 18 Government Code. C. To deliberate the duties and evaluation 19 of the Internal Audit Director pursuant to Section 551.074 of the Texas 20 Government Code. D. To deliberate the duties and evaluation 21 of the Charitable Bingo Operations Director pursuant to Section 551.074 22 of the Texas Government Code. E. To deliberate the duties of the General 23 Counsel pursuant to Section 551.074 of the Texas Government Code. 24 25 0008 1 TABLE OF CONTENTS (continued) 2 PAGE F. To receive legal advice regarding 3 pending or contemplated litigation pursuant to Section 551.071 (1) (A) 4 and/or to receive legal advice regarding settlement offers pursuant to Section 5 551.071(1)(B) of the Texas Government Code and/or to receive legal advice 6 pursuant to Section 551.071 (2) of the Texas Government Code, including but not 7 limited to: Cynthia Suarez v. Texas Lottery 8 Commission Shelton Charles v. Texas Lottery 9 and Gary Grief First State Bank of DeQueen 10 et al. v. Texas Lottery Commission James T. Jongebloed v. Texas 11 Lottery Commission Employment law, personnel law, 12 procurement and contract law, evidentiary and procedural 13 law, and general government law 14 Lottery Operations and Services contract 15 Mega Millions game and/or contract ......................... 187 16 AGENDA ITEM NO. XXV - Return to open session 17 for further deliberation and possible action on any matter discussed in Executive Session.... 189 18 AGENDA ITEM NO. XXVI - Adjournment.............. 239 19 REPORTER'S CERTIFICATE.......................... 240 20 21 22 23 24 25 0009 1 P R O C E E D I N G S 2 WEDNESDAY, OCTOBER 24, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. Today is 6 Wednesday, October 24, 2007. It's 9 o'clock. 7 Commissioner Clowe is here. I'm Jim Cox. I call this 8 meeting of the Texas Lottery Commission to order. 9 I would like to read an announcement 10 issued by the Office of the Governor. 11 "October 17, 2007. 12 "Gov. Perry Appoints Schenck to the 13 Texas Lottery Commission. 14 "Governor Rick Perry appointed David J. 15 Schenck of Dallas to the Texas Lottery Commission for 16 a term to expire February 1, 2013. The Commission 17 oversees the Texas Lottery and ensures that lottery 18 and bingo games are conducted in a legal and fair 19 manner. 20 "Schenck is an attorney and partner of 21 Jones Day, L.L.P., where he manages the appellate 22 department of the Dallas office. He is board 23 certified in civil appellate law by the Texas Board of 24 Legal Specialization. Schenck is a past member of the 25 Rules Advisory Committee to the Fifth U.S. Circuit 0010 1 Court of Appeals and is a past adjunct faculty member 2 of Southern Methodist University. He is also a member 3 of the Dallas Bar Association. 4 "Schenck received a bachelor's degree 5 from the State University of New York, Albany and a 6 law degree from Baylor University School of Law." 7 With that, it is my pleasure to welcome 8 Commissioner David Schenck to the Texas Lottery 9 Commission 10 Commissioner Clowe, do you have any 11 remarks you would like to make? 12 COMMISSIONER CLOWE: Yahoo! 13 (Laughter) 14 After over two years, we finally have 15 another commissioner. And I know Chairman Cox and I 16 are delighted that this board has been restored to its 17 full number of three. The new commissioner is well- 18 qualified, as Commissioner Cox has pointed out to you. 19 I've had the opportunity to have a lengthy visit with 20 him before he took the oath and to give him all the 21 benefit of my experiences and hopefully steer him in 22 the right direction in regard to the wonderful staff, 23 the wise guidance of the Chair and the opportunity to 24 serve the State of Texas in his new role. 25 Commissioner, we welcome you and we 0011 1 give you best wishes for the future. And for maybe a 2 short time, I look forward to serving with you. 3 Thank you, Mr. Chairman. 4 CHAIRMAN COX: Commissioner Schenck, do 5 you have any remarks you would like to make? 6 COMMISSIONER SCHENCK: I'll be brief. 7 I just wanted to thank you both very much. 8 Mr. Chairman. You've been very gracious. The staff 9 here has been very gracious. I look forward to 10 working with everyone, and I'm honored to have this 11 opportunity to serve. Thank you. 12 CHAIRMAN COX: We are very glad to have 13 you. 14 AGENDA ITEM NO. II 15 CHAIRMAN COX: The next order of 16 business, Item II, report, possible discussion and/or 17 action on ethics, administrative procedure and open 18 government laws pertaining to the Texas Lottery 19 Commission. 20 Commissioner, when I was a new 21 commissioner five years ago, this briefing was made by 22 Sarah Woelk who at that time was the General Counsel 23 for the Texas Ethics Commission. Your briefing will 24 also be by Sarah Woelk, but now she is Special Counsel 25 for the Texas Lottery Commission. 0012 1 MS. WOELK: Thank you. For the record, 2 I'm Sarah Woelk, Special Counsel. 3 Commissioner Schenck, I've handed out 4 to you and to the other commissioners a version of a 5 document that you will probably get if you go to 6 Governor's training. It's a document prepared by the 7 Ethics Commission that goes through the ethics laws 8 that are applicable to state board members generally, 9 but you three are subject to some stricter rules. 10 So what I did was, I went through, and 11 if you look through it, you will see a lot of text in 12 blue. So where there is a stricter rule or a 13 different rule applicable to the Lottery Commission, I 14 went in and annotated it. And I can send you an 15 electronic version of this if you want to keep this, 16 because I think one thing y'all need to be aware of 17 is, if you're talking to other state board members, 18 they will say things like, "Well, you can take a gift 19 if it's worth less than $40," or "You can eat a meal 20 if the person is with you." Those exceptions aren't 21 available to members of the lottery Commission. So 22 you don't have the exceptions to the gift rules that 23 ease certain social situations that most board members 24 have. 25 I'm going to do a fairly quick just 0013 1 point-by-point review of some of the things that you 2 need to be aware of. On Page 4 there is a heading 3 that says "Private Interest in Measure or Decision," 4 and you are subject to the general law here. This is 5 the recusal law. 6 Because you're in a law firm, you may 7 have some issues come up about recusal if someone who 8 is a client of your law firm has business before the 9 Lottery Commission. The Ethics Commission did issue 10 an opinion about a similar situation and what requires 11 recusal. So legal staff is available to help you on 12 those issues. But recusal can be a kind of tough 13 issue on a three-member board, because sometimes if 14 you have one person recusing, action can't be taken. 15 So those are often important questions to look at 16 carefully. 17 On the next page, I inserted the basic 18 gift restriction that applies to members of the 19 Lottery Commission. And it's very strict, because 20 there is no -- a gift is a gift of any value. There 21 is no dollar threshold. So there's this list of 22 prohibited sources who are basically people who have 23 some interest in Lottery Commission business. There's 24 one that's a little hard to know if it applies, 25 because you are prohibited from taking a gift from 0014 1 someone who won a lottery prize of more than $600in 2 the last two years. 3 So the basic advice is -- there is an 4 exception for gifts from people with whom you have an 5 independent relationship, meaning people that you knew 6 before you had this position, or people that also 7 might have been giving gifts to you. So as a general 8 rule, don't get any new friends. Or, if you do, you 9 need to kind of find out about their background. A 10 kind of surprising feature is that these restrictions 11 apply for two years after your service ends on this 12 board, which I'm not familiar with that provision in 13 any other Texas statute. 14 In general, the lottery rules are 15 stricter than other rules. There is one area in which 16 general state law might be stricter, and that's in 17 regard to taking gifts from someone who is registered 18 as a lobbyist. The dollar thresholds are pretty high 19 under that law, but there's no exception for old 20 friends. So if you have an old friend who is 21 registered as a lobbyist, there may be some 22 restrictions you need to be aware of. And so if that 23 comes up, that's also something we can discuss. 24 On Page 8 -- this is a minor point that 25 doesn't come up very much. A lot of state agencies 0015 1 have statutory authority for the agency itself to 2 accept gifts. So, for example, Parks and Wildlife and 3 the universities do a significant amount of accepting 4 gifts. Other agencies might accept gifts in the form 5 of books or training. This agency doesn't have that 6 authority. So if something is offered to the agency 7 as a whole, the agency can't accept it. 8 On Page 10, it talks about concurrent 9 employment. There is a rule that you may not accept 10 employment from someone basically who is involved 11 in -- has a significant financial interest in the 12 lottery or has a commercial interest in bingo. And, 13 again, that could come up presumably in your law firm, 14 and that's something you might need to talk to us 15 about to make sure you're aware of what the 16 restrictions are. 17 On the next page, we mention there are 18 revolving door provisions that are general ones. And 19 then on Page 12, I've set out the specific revolving 20 door -- hopefully you won't be worrying about this for 21 sometime in the future. These aren't relevant until 22 you leave here. But you're subject to rules that are 23 similar to the rules that other state board members 24 are and then to a rule that you couldn't lobby on 25 issues that had to do with the lottery for two years 0016 1 after you left here. Most state board members are not 2 subject to that restriction. 3 Page 13 mentions the personal financial 4 statement requirement. That's an annual requirement. 5 Doing it once doesn't end that. That comes up every 6 year. Hopefully it's easier in future years. There 7 is a provision on that page about lobbying by state 8 officers and employees. The general rule is, agency 9 resources can't be used to try to influence 10 legislation. So when staff goes over to the 11 Legislature, our role is as a resource. We can 12 provide information, we can respond to questions, but 13 we can't urge them to pass or not pass a particular 14 piece of legislation. 15 As a board member, as an unpaid board 16 member, you are free to have conversations with 17 members of the Legislature about your thoughts on what 18 they should or should not do, but you can't use agency 19 resources to do that. So if you have strong feelings 20 about something, you can't really take staff along if 21 you're going to meet with a legislator and talk to 22 somebody, because the staff members can't be used, 23 can't participate in any efforts to influence the 24 outcome of legislation. 25 On Page 14, there is a list of 0017 1 conflict-of-interest issues. You would have had to 2 pass those tests to be appointed. Those continue to 3 apply during your appointment. You probably already 4 know, the big one is that you can't play the lottery. 5 You can't share in lottery winnings, and family 6 members who live in your household can't play the 7 lottery or share in winnings. 8 There are a couple of other 9 restrictions about political activity. And I know 10 you've talked to Kim about those, and we can talk more 11 about those if you would like to. 12 So we are available whenever you have 13 any questions. It's important to be just aware that 14 the gift restrictions are pretty tight and to be alert 15 to that. 16 A couple of other things I'm going to 17 mention. If you are not familiar with administrative 18 law before state agencies, you are subject to an 19 ex parte rule. So if someone has a licensing matter, 20 a bingo matter, a retailer matter pending, the person 21 involved can't discuss the matter with you, and also 22 staff who works on it can't discuss the matter with 23 you. So it's a rather odd situation for people who 24 work for you in some circumstance can't talk to you 25 about certain things. So that creates occasionally an 0018 1 awkward situation, and that's another thing to be 2 aware of. 3 And finally -- I'm not going to discuss 4 it in any detail -- if you're new to government, the 5 pretty wide-openness of both public meetings and 6 public records is something that often comes as a 7 surprise to people. Any document you create in your 8 capacity as a board member is subject to the Act. 9 That doesn't mean it would always be released -- there 10 are some exceptions -- but you have to assume that 11 anything you send us or receive from us, or if you 12 write things down in your official capacity, there is 13 a good chance that's something that would have to be 14 released to the public if requested. 15 So you need to be aware of that, 16 because I think that often comes as a surprise, the 17 kind of things, calendars and things that are 18 sometimes released that board members often assume are 19 personal items that wouldn't be released. 20 So if you have any questions, I'm happy 21 to answer them now or happy to talk to you directly 22 later if you have questions. 23 COMMISSIONER SCHENCK: I'm sure I will 24 have some questions. And when they come up, I'm sure 25 we'll look forward to visiting. 0019 1 MS. WOELK: Okay. Thank you. 2 COMMISSIONER SCHENCK: Thank you very 3 much. I appreciate that. 4 CHAIRMAN COX: Thank you, Sarah. 5 AGENDA ITEM NO. III 6 CHAIRMAN COX: Agenda Item No. III, 7 report, possible discussion and/or action on the 8 implementation of recommendations contained in the 9 Internal Audit Report on bingo audit services, 10 including development of rules. 11 Mr. Sanderson. 12 MR. SANDERSON: Good morning, 13 Commissioners. For the record, Phil Sanderson, 14 Director of the Charitable Bingo Operations Division. 15 In your notebook was a status of the 16 update on the management recommendations for the 17 internal audit. Since the notebooks were published 18 and sent to you, I've met with the internal auditor, 19 Ms. Melvin, and we've gone through each issue 20 one-by-one. And I've provided to you at this meeting 21 a revised document that indicates that the Internal 22 Audit recommendations have been fully implemented. 23 I would like to say that there are some 24 recommendations that will be ongoing, and we have 25 processes in place and procedures that we've developed 0020 1 that will allow us to continue to develop our rules 2 and develop our guidelines in a fair and consistent 3 manner so that it's easily understood by the 4 organizations. 5 I would like to go through each issue 6 individually and update you with the final results of 7 implementing these recommendations. Beginning with 8 Issue No. 1, the regulatory objective and approach, 9 the regulatory objective was adopted on September the 10 6th, 2006, at the Commission meeting and was 11 immediately placed on the Division's website. 12 Additionally, the regulatory objective is used to set 13 priorities in line with this objective to maximize our 14 limited resources that are available. 15 The Audit Services Department has 16 adopted a risk-based approach to determine the extent 17 of audit coverage. Information Resource staff have 18 developed a program that uses the data collected by 19 the division in identifying the extent of audit 20 coverage based on risk. And the audit manager is 21 preparing a formal documentations detailing the audit 22 plan, based on the staff resources that are assigned 23 to the division. 24 The licensee experience, Issue No. 2, 25 in order to ensure licensees a fair, consistent and 0021 1 open regulatory experience, the division has adopted 2 and proposed numerous rules, some of which are on the 3 agenda today. And there's a few that will be on the 4 next Commission meeting agenda. And we've 5 communicated the guidelines and the rules and the 6 requirements to licensees via e-mail as well as the 7 Bingo Bulletin and on the division website. 8 The Audit Services Department has 9 developed a clearly identified final audit report that 10 is issued to the licensees only after several levels 11 of quality review have taken place. A process and 12 procedure has been put in place where all audit 13 reports are reviewed to determine if there are any 14 administrative actions that should be taken. And 15 there was language added to the corrective action 16 audit rule to address issues of the licensees' proof 17 of corrective action to the Commission. 18 While the recommendation calls for a 19 30-day time period, the time period in the rule is a 20 little longer than that, due to the possibilities of 21 addressing different situations that could occur if 22 the organization does not agree with the audit 23 findings and they choose to take the dispute 24 resolution or an administrative hearing process to 25 resolve their differences. 0022 1 The Audit Department has been 2 restructured so that the auditors prepare the audit 3 findings. The audit manager issues a final audit 4 report. And any follow-up to determine the adequacy 5 of the corrective actions is performed by someone 6 other than the auditor that performed the audit in the 7 department. 8 There's new rules outlining the dispute 9 resolution process. The current and future 10 rulemakings are being developed to emphasize use of 11 plain language. The Bingo Division has evaluated the 12 different types of examinations conducted by the Audit 13 Services Department and have identified those audit 14 efforts that are appropriately in line with the 15 regulatory objective and identified the risks and the 16 use of available resources. 17 The management has reviewed and 18 identified 242 prior audits that could have been 19 impacted by the practices noted in the Internal Audit 20 Report. Reexamination letters were mailed to those 21 organizations. Twenty-five requests were received for 22 audit reexaminations. We've completed the review of 23 those audit reports and are making corrections where 24 necessary. 25 Issue No. 3 is the audit methodology 0023 1 and protocol. 2 CHAIRMAN COX: Phil? 3 MR. SANDERSON: Yes? 4 CHAIRMAN COX: As you're progressing 5 through that, have you been finding corrections that 6 needed to be made? 7 MR. SANDERSON: There were several that 8 we did identify that we will make adjustments and 9 issue a new audit report on. 10 CHAIRMAN COX: Were there any of these 11 that were particularly significant? 12 MR. SANDERSON: No, sir, I don't 13 believe so. 14 CHAIRMAN COX: Okay. Thank you. 15 MR. SANDERSON: Issue No. 3, the audit 16 methodology and protocol, there has been a written 17 audit program to revise to incorporate the risk 18 assessment process in identifying inherent and control 19 risks and also to assist in determining if the 20 licensees' records are accurate, complete and 21 reliable. 22 Additionally, the written audit program 23 includes the methodology identified in the 24 recommendation, and the audit program is currently 25 being used on audits that have been initiated as a 0024 1 result of requests from organizations. The Audit 2 Services Department has voluntarily adopted the GAGAS 3 standards, and the audit charter was adopted by the 4 Commission at the September 6, 2006 Commission 5 meeting. 6 The audit charter has been added to the 7 Bingo Operations Manual and has been posted to the 8 agency intranet as well as the division's website on 9 September the 15th of 2006. There's also references 10 made to where licensees could locate the audit charter 11 in the Bingo Bulletin that was mailed to licensees in 12 October of '06. 13 The written audit program encompasses 14 the following: The extent of the audit work that is 15 needed to achieve the audit objective, the relative 16 materiality or significance of matters to which audit 17 procedures are applied, the adequacy and effectiveness 18 of internal controls, the probability of significant 19 errors, irregularities or non-compliance and the cost 20 of auditing in relation to potential benefits. 21 The new policy and procedures menu item 22 has been added to the website under the regulations 23 and statutes menu in order to make applicable division 24 policies and procedures available to licensees. The 25 minimum internal control guidelines were posted to the 0025 1 website under this menu item. 2 Management once again, as far as the 3 look-back on the audits, which was another 4 recommendation in this issue, we've reviewed those 5 audit reports, and there's 25 requests, and we're 6 making corrections to the ones that need to have 7 corrections made to those. 8 And, finally, Issue No. 4 is the 9 organizational structure and responsibilities. On 10 October the 1st, 2007, a revised organizational 11 structure was released for the division. The audit 12 report recommended that the Audit Department be a 13 direct report to the Bingo Division Director, and an 14 additional requirement was to segregate certain duties 15 and processes that were previously performed by the 16 auditors. The education, training and taxpayer 17 assistance functions that were previously performed by 18 the auditors have been transferred to other 19 departments within the division. 20 I would like to say that we also have 21 procedures and processes in place to continue with 22 these recommendations. I believe we've met the intent 23 of the recommendations and the development of the 24 rules and the guidelines and the procedures that we 25 currently have in place. As a result, we are 0026 1 reviewing some of the processes in the Licensing 2 Department and are making some rule recommendations on 3 down the line that will assist that department in 4 being fair and consistent with the organizations in 5 providing guidelines as guidance. 6 I would also like to thank Executive 7 Director Sadberry for making available staff within 8 other divisions to assist with this implementation. 9 All division directors had a role in providing staff 10 members to assist. There are a lot of names I would 11 like to name, but there's too many. They know who 12 they are. And I appreciate all the effort and 13 assistance that the directors as well as the other 14 staff members provided in working through these 15 recommendations. 16 With that, I'll be glad to answer any 17 questions. 18 COMMISSIONER CLOWE: Phil, I think one 19 of the things that we were questioning you about over 20 the period of the changes that you have implemented is 21 the question of whether or not we're meeting the goals 22 that at that time Commissioner Cox and I set out for 23 you relative to the reorganization and your assuming 24 the position that you now hold, which would be in 25 audit functions that the public conducting bingo 0027 1 licensed by this agency be audited in a fair and 2 consistent manner. And I want to ask you that 3 question again at this points in time. 4 Are we meeting that goal and are we 5 setting up these reorganization efforts with the idea 6 that that's the way the public that is licensed by 7 this agency will be treated in the future and that 8 past mistakes that were discovered and examined and 9 are being corrected by the internal audit function 10 within this agency will not be occurring again in the 11 future? 12 MR. SANDERSON: Yes, sir, I can say 13 that we have developed, like I said, processes and 14 procedures in place to provide a more quality review 15 of the audit reports. We have developed the rules and 16 the guidelines in an effort that are clear to the 17 organizations. We've worked close with industry on 18 developing these rules, and we will continue to do so 19 in the future for any other rules that we identify 20 that need to be developed, as well as any guidelines 21 that we can provide offering organizations the 22 opportunity to have benefit of best practices that, as 23 a regulatory agency, that we can gain from other 24 jurisdictions possibly where they have guidelines that 25 we can incorporate in the bingo industry here. 0028 1 As I said earlier, the final audit 2 report is being reviewed by the audit -- every audit 3 report is being reviewed by the audit manager. Any 4 audits that have findings, the process calls for the 5 division director to review and issue a determination 6 letter that outlines any administrative penalty or any 7 sanctions. So I believe with the review processes in 8 place, the past mistakes that were made should be 9 eliminated, yes, sir. 10 COMMISSIONER CLOWE: Mr. Chairman and 11 Commissioner, I'm sensitive to the treatment of the 12 public in this function. And with these assurances, I 13 think the attention has been focused on this need. 14 And I'm very happy, Phil, that you've 15 reached out to other members within the agency and 16 called on staff resources to create the product that 17 you have. But I would suggest that at some point in 18 time in the not-too-distant future, the internal audit 19 be brought to bear on this function in an ongoing and 20 consistent way so that we measure the results that 21 we've achieved and we don't allow some error to again 22 occur, either by omission or through some other 23 inability to perform. 24 I think that it's very important, when 25 you have enforcement power and you regulate a 0029 1 commercial function, that it be fair, honest and 2 consistent. And I think that ought to continue to be 3 a high priority, and I think we ought to call on the 4 internal audit function to, within a reasonable period 5 of time, revisit this activity. 6 MR. SANDERSON: Commissioner, I've 7 already -- I've met with Ms. Melvin. And, in fact, 8 there are several of the audits that we have recently 9 completed that I've asked to have one of her staff 10 members review to ensure that we are conducting these 11 audits in and the documentations that meet the 12 expectation of the internal auditor as a result of her 13 recommendation. 14 COMMISSIONER CLOWE: Good. 15 CHAIRMAN COX: Commissioner? 16 COMMISSIONER SCHENCK: I have no 17 questions. Thank you very much. 18 CHAIRMAN COX: Catherine, would you 19 like to come up, please. 20 Commissioner, you kind of came in on 21 the middle of all of this, or maybe toward the rear 22 end. But last year Ms. Melvin and her staff -- 23 Ms. Melvin is the head of our Internal Audit 24 Department -- conducted a very thorough and highly 25 productive audit of the audit function of our 0030 1 Charitable Bingo Division, and that is what Phil was 2 responding to. We are just about through a great deal 3 of work that has been a joint effort of Phil, the 4 Bingo staff, Catherine and her staff and the staff of 5 the Lottery Commission, to help improve this function. 6 It's a very important audit function in our Charitable 7 Bingo Division. 8 Catherine, you've heard what Phil said. 9 I know you've worked with him hand-in-hand and you 10 intend to work with him hand-in-hand as things go 11 along the path here. What's your response here? Are 12 you as pleased with the work that has been done as 13 Phil seems to be and as I am, frankly? Do you think 14 we've done a great service to the division and to the 15 industry and will be much better on an ongoing basis? 16 MS. MELVIN: For the record, my name is 17 Catherine Melvin, Internal Audit Director. 18 And, yes, Chairman, I would agree that 19 the Bingo Division certainly has made extensive and 20 diligent efforts since the audit was conducted. I 21 think it's apparent, certainly in the chart and the 22 report that you heard today. And I believe what 23 Mr. Sanderson is asserting today is that the 24 management actions taken in response to our 25 recommendations are fully implemented. 0031 1 And I can say that they have certainly 2 worked very closely with my team in keeping us 3 apprised of their efforts. They've allowed us 4 opportunity to comment on their different actions. 5 We've been asked to provide input and our counsel on 6 the intent of recommendations and the intent of some 7 of the findings that we found during our audit. 8 And, of course, you know, I can't give 9 you the assurance that the recommendations will lead 10 to the effort or to the result that you're asking, 11 without audit, without coming back in and auditing. 12 But I do believe that the division is well-positioned 13 to be in a better place than we last saw. 14 If you remember at the time of our 15 audit, the Bingo Division hadn't been examined in some 16 time, and so I believe that they operated based on 17 some longstanding practices and different practices 18 that had evolved over time. So it was certainly ripe 19 to come in and do the internal audit. They were 20 receptive and open on the internal audit. As you 21 know, we're doing additional work in their division on 22 the licensing end now also. 23 CHAIRMAN COX: Would you be able to 24 respond at this point to Chairman Clowe's observation 25 about the need for ongoing work with you in monitoring 0032 1 the further implementation and then the conduct of the 2 audit function in the future? 3 MS. MELVIN: I certainly agree with 4 you, Commissioner, that at the end of the day, the 5 most important concern, I think is, is that the 6 licensee is afforded that fair, consistent, open 7 regulatory experience with the Lottery Commission. 8 And that would be something, of anything we've 9 examined, that we certainly want to stay close to. 10 It's a fine line for me to walk. As 11 you're aware, Internal Audit can't have too much input 12 if I intend to come back and audit it more formally. 13 But having said that, we certainly will provide our 14 assistance in an on-going manner throughout the year. 15 We certainly would like to come in at some point in 16 the future and perform some follow-up work, perhaps 17 not a full audit as we it this audit, but maybe target 18 some particular issues that were identified in the 19 original audit and do some follow-up work on those. 20 CHAIRMAN COX: Thank you, very much, 21 Catherine. 22 MS. MELVIN: Thank you. 23 CHAIRMAN COX: Thank you, Phil. 24 25 0033 1 AGENDA ITEM NO. IV 2 CHAIRMAN COX: Item IV, consideration 3 of and possible discussion and/or action on the 4 Conductor-Books and Records Guidelines. 5 Mr. Sanderson. 6 MR. SANDERSON: Commissioners, in your 7 notebook are the guidelines that staff has developed 8 for some books and records requirements for 9 organizations. These are guidelines that provide 10 forms and information that is not necessarily required 11 by the organizations to maintain, but it's offered as 12 best business practices to assist them in monitoring 13 their activities and having a general oversight of the 14 fundraising activities that they are using bingo as an 15 avenue for. 16 These guidelines, while there is no 17 official action needed by the Commission, you know, 18 you do have the ability to discuss, deliberate and add 19 to or make any actions if you so desire. These will 20 be posted to the website under the new menu item 21 policies and procedures, once we finalize those today. 22 With that, I'll be glad to answer any 23 questions. 24 COMMISSIONER CLOWE: Mr. Chairman, I 25 would like to know if there has been industry 0034 1 participation in the development of these guidelines 2 to this point. 3 MR. SANDERSON: In these guidelines and 4 also the next three agenda items as they relate to 5 rules, there have been meetings with the industry. 6 We've had BAC workgroups that were formed to discuss 7 these actions. And that's one of the reasons why 8 these are just guidelines instead of actual 9 requirements, is that we're just providing the 10 organizations some additional information that they 11 can utilize to oversee their activities. 12 CHAIRMAN COX: Thank you. 13 Commissioner? 14 COMMISSIONER SCHENCK: I have no 15 questions. 16 CHAIRMAN COX: Now, Phil, if I recall 17 our previous discussions of these correctly, this was 18 originally going to be a rule. Is that correct? 19 MR. SANDERSON: Originally we had one 20 rule that was books and records. 21 CHAIRMAN COX: Okay. 22 MR. SANDERSON: And then after going 23 through there, there were some items such as these 24 here that we felt like: Well, maybe we should do the 25 books and records as a guideline for a certain period 0035 1 of time to offer organizations the opportunity to 2 begin keeping these records. After reviewing those, 3 there were a couple of items that we feel needed to be 4 in the rule, such as the expenses that they -- 5 documentation for expenses and some other records that 6 we feel are necessary to perform audits on, and so 7 those were pulled out. And, as a result, instead of 8 having one rule or guideline for books and records, we 9 now have one guideline and three rules that are on the 10 agenda today and only one additional rule at the next 11 Commission meeting. 12 CHAIRMAN COX: Okay. So the original 13 idea here was to offer -- if I remember right. And 14 you correct me if I don't -- was to offer safe harbor, 15 to say that, "Hey, we're not going to tell you what 16 books and records to have. But if you have these, 17 we're going to say that that's an adequate set of 18 books"? 19 MR. SANDERSON: Yes, sir. 20 CHAIRMAN COX: And the industry said, 21 "Thanks, but we've got way too many organizations that 22 just can't afford to have all of those. And if it's a 23 rule, then we feel like we're going to be coming in 24 behind the eightball." So you decided to make some of 25 the ones that you considered essential into rules and 0036 1 made these into guidelines? 2 MR. SANDERSON: Yes, sir. 3 CHAIRMAN COX: And then consider these 4 for some period of time and decide what, if any, 5 additional of these needed to be rules? 6 MR. SANDERSON: Yes, sir, that. And 7 also if there are some things that are currently in 8 the rule that may not be necessary, we can certainly 9 move those into guidelines. 10 CHAIRMAN COX: Okay. Good. Now, do we 11 have other guidelines? 12 MR. SANDERSON: The only other 13 guidelines we have currently are the minimum internal 14 control guidelines -- 15 CHAIRMAN COX: Okay. 16 MR. SANDERSON: -- that we discussed, I 17 believe, at the last Commission meeting. 18 CHAIRMAN COX: Okay. Those are minimum 19 internal control guidelines; these are minimum record 20 guidelines? 21 MR. SANDERSON: Yes. 22 CHAIRMAN COX: Now, I recognize that a 23 guideline doesn't have the status of a rule; that is, 24 it doesn't require compliance but compliance would be 25 suggested, of course. 0037 1 Now, what's the availability to our 2 constituency of guidelines? Are they right in there 3 with the book of rules where they can find them easily 4 or are they on our website? Do we send them out? How 5 does that work? 6 MR. SANDERSON: We will send them out 7 with the -- or put them in the Bingo Bulletin, 8 announce that we've developed the guidelines in the 9 Bingo Bulletin. As I mentioned previously, we have 10 the new menu item on the website, policies and 11 procedures or -- policies and procedures -- that we 12 have put links to the guidelines on there. And they 13 are along with -- you know, there is a link to the 14 rules and a link to the statute also within that menu 15 item. So they're in the same location. 16 Additionally, we will incorporate these 17 in an operator training program. There will be 18 discussion of these in the training program that we 19 provide to the organizations, and also in the 20 Operations Manual that we have on our website. 21 CHAIRMAN COX: So these will be open 22 and obvious, if you will, and easily accessible to our 23 constituency? 24 MR. SANDERSON: Yes, sir. 25 CHAIRMAN COX: Okay. 0038 1 COMMISSIONER SCHENCK: I have one quick 2 question. 3 CHAIRMAN COX: Yes. Commissioner 4 Schenck. 5 COMMISSIONER SCHENCK: What will be the 6 impetus for moving some of the standards from the 7 rules to guidelines? Are we going to wait until there 8 is a complaint from the licensed public or an 9 adjudication, or are we going to take that initiative 10 now to reexamine, maybe moving them, downgrading them 11 to a guideline? 12 MR. SANDERSON: From a rule to a 13 guideline? 14 COMMISSIONER SCHENCK: Yes. 15 MR. SANDERSON: First, welcome to the 16 board, Commissioner. 17 COMMISSIONER SCHENCK: Thank you very 18 much. 19 MR. SANDERSON: It's two-fold. And as 20 I mentioned earlier, initially this was one big group 21 of guidelines and the reason to allow organizations 22 the opportunity to begin obtaining and maintain these 23 type of records. Another benefit that we were going 24 to utilize with that was also with the audit staff and 25 allowing them the opportunity to review these records 0039 1 and also review other records that organizations may 2 be maintaining that are sufficient to provide them the 3 oversight that they need of the operations and our 4 audit staff for auditing for compliance and the 5 accountability of the funds. 6 So these rules today and the guidelines 7 in my mind will probably be looked at very closely 8 over the next 12 months, working with the industry and 9 with the audit staff to come up with developing what 10 we feel would be the best of both worlds that would 11 provide organizations the least amount of 12 documentation to oversee their organization, their 13 operations, and allow the audit staff the 14 documentations they need to ensure the accuracy of the 15 reports that are filed. 16 COMMISSIONER SCHENCK: Okay. 17 CHAIRMAN COX: Thank you, Phil. 18 AGENDA ITEM NO. V 19 CHAIRMAN COX: Agenda Item No. V, 20 consideration of and possible discussion and/or 21 action, including proposal, on new 16 TAC 402.500 22 relating to general records requirements. 23 Ms. Joseph. 24 MS. JOSEPH: Good morning, 25 Commissioner. For the record, my name is Sandra 0040 1 Joseph, Assistant General Counsel. 2 Before you is draft proposed new 16 TAC 3 §402.500 relating to general records requirements for 4 licensees that are authorized to conduct bingo. The 5 purpose of the proposed new rule is to clearly set 6 forth certain general records requirements in 7 accordance with §2001.505(b) of the Bingo Enabling Act 8 which requires licensees to keep records to 9 substantiate each quarterly report. 10 Specifically the new rule addresses the 11 length of time records must be maintained, the forms 12 for records that may be used and the requirement that 13 licensees make records available to the Commission 14 upon request. Although these requirements also exist 15 in current rules, the staff is aware of no 16 inconsistencies and is presently conducting a review 17 of all bingo rules to determine whether each rule 18 should be readopted, readopted with amendments or 19 repealed. The staff will assess whether the reason 20 for adopting the rules continues to exist and 21 recommend appropriate action, including amendments to 22 eliminate any redundancies in the rules. 23 The submission prepared for the Texas 24 Register includes notice of a public hearing to be 25 held on the proposed rule on November 13, 2007, at 0041 1 10:00 a.m. I recommend that the Commission initiate 2 the rulemaking process by publishing the proposed rule 3 in the Texas Register, in order to receive comments, 4 for a period of 30 days. 5 CHAIRMAN COX: Commissioner, are you 6 familiar with the rulemaking process or would you like 7 a brief description of that process? 8 COMMISSIONER SCHENCK: I think I'm 9 basically familiar with it -- 10 CHAIRMAN COX: Okay. 11 COMMISSIONER SCHENCK: -- that we're 12 proposing an offer for notice and comments these 13 proposed rules and will accept the comments and 14 proceed accordingly. 15 CHAIRMAN COX: Excellent. 16 COMMISSIONER CLOWE: No questions. 17 COMMISSIONER SCHENCK: I have one 18 question. I see in the proposed rule that we're 19 stating that we don't understand ourselves to be 20 making a substantive change from the previous rules. 21 Is that correct? 22 MS. JOSEPH: That's correct. 23 COMMISSIONER SCHENCK: And that would 24 be in the rule itself if it were passed? 25 MS. JOSEPH: That would be in the 0042 1 preamble, the preamble to be adopted. 2 COMMISSIONER SCHENCK: Okay. I'm a 3 little concerned about that, because any time you 4 state in positive law that you're intending not to 5 make a change, you're inviting confusion if you, in 6 fact, had a change. Do you see what I'm saying -- 7 MS. JOSEPH: Yes. 8 COMMISSIONER SCHENCK: -- that there is 9 a difference, that we're inviting debate over whether 10 the difference that we put in there was deliberate or 11 whether it wasn't? And if we're going to pass a rule, 12 it seems to me we need just to pass the rule. 13 I'm a little concerned about embedding 14 in the rule itself this potential argument for what 15 might appear to be a difference to someone, that they 16 can come back and say, "Well, it might look different 17 but, in fact, is not different, because you really 18 said you weren't doing anything with this rule that 19 you were passing." 20 MS. JOSEPH: Yes, I appreciate that 21 comment. What we were attempting to do was give 22 recognition to the fact that at the present time these 23 requirements are addressed in the rule. They may be 24 worded slightly differently, but we feel the substance 25 of them is. 0043 1 I believe, you know, we will receive 2 comments on any inconsistencies, if there are any. 3 And on adoption, that would be the time we could 4 remove that language and say we are adopting these 5 rules. 6 COMMISSIONER SCHENCK: Thank you. 7 CHAIRMAN COX: Would you prefer, 8 Commissioner, that it be removed before we publish 9 this rule? 10 COMMISSIONER SCHENCK: No. I think 11 your statement clarifies things for me, and that's 12 helpful. 13 MS. JOSEPH: All right. 14 CHAIRMAN COX: That's fine. 15 Okay. I have witness affirmation forms 16 from Mr. Fenoglio and Mr. Bresnen on this and other 17 items. 18 Would y'all like to do it together -- 19 MR. BRESNEN: Sure. 20 CHAIRMAN COX: -- one at a time, 21 however y'all want to do it? 22 MR. FENOGLIO: I'll go first. 23 Mr. Chairman, for the record, my name is Stephen 24 Fenoglio. I' an attorney in Austin. I filed an 25 appearance slip. I represent the State VFW. It's an 0044 1 over 325-member post, its members and over 600 other 2 charitable and business organizations organized in 3 bingo. I'm an attorney in Austin. And we look 4 forward to working with our new commissioner. 5 We met yesterday, initially what I 6 thought would be a30-minute meeting, and we ended up 7 for an hour and 40 minutes, I believe, with Phil 8 Sanderson and Sandy Joseph on these proposes rules. 9 And one of the concerns we had was the potential 10 confusion that you raised, Commissioner Schenck, on an 11 existing rule. And there are two rules that have to 12 do with recordkeeping, having to do with pull-tab 13 products and paper bingo products that are embedded in 14 those existing rules. 15 And from our perspective, representing 16 charitable organizations that conduct bingo, there are 17 some substantive changes which we had a very good 18 discussion on yesterday. We'll continue that 19 discussion both formally, assuming the Commission 20 decides to move forward with formal rulemaking, as 21 well as informal comments with the staff. 22 Mr. Sanderson is a refreshing face, in 23 that his office is open and his phone line is 24 available at any time to make comments, which we 25 appreciate. So we've got some substantive concerns. 0045 1 We've got some both big picture and little picture 2 issues to address. Yesterday's meeting was the start 3 of that. We anticipate one or two more separate 4 meetings as well as participation in the public 5 comment meeting that staff had recommended. And we 6 think we can work through all of our differences. And 7 if we can't, we'll be back in front of you to discuss 8 those. 9 And I would be happy to answer any 10 questions. I don't think -- at this point I think 11 it's better if we deal with the specifics with staff 12 at this point. But I'll be happy to answer any of 13 those questions. 14 COMMISSIONER CLOWE: No questions. 15 CHAIRMAN COX: Thank you, Mr. Fenoglio. 16 Mr. Bresnen. 17 MR. BRESNEN: My name is Steve Bresnen, 18 and I represent the Bingo Interest Group which is an 19 organization of commercial lessors with halls from 20 Texarkana to Midland and principally in the Dallas- 21 Fort Worth area. 22 I think my comments are not quite as 23 sanguine as Steve's. And I think after our meeting 24 yesterday, I'm not sure that my confusion is any more 25 remedied than when we started yesterday. And it may 0046 1 be my limitation, that I don't go into the bingo hall, 2 I don't do audits on behalf of clients in the way that 3 Steve does. So I think he may be seeing some 4 detail -- and the way the staff does. Let me back up 5 for just a minute. 6 Commissioner Clowe, the world is night 7 and day different, partly as a result of Ms. Melvin's 8 internal audit and from Phil and his staff, the way 9 they've gone about implementing that. But before that 10 ever happened, you came to a Bingo Advisory Committee 11 meeting, and that was the day that the Commission's 12 approach to charitable bingo in Texas changed. 13 Commissioner Schenck, we're in the 14 exalted position in most of these meetings of getting 15 to go virtually first. I think that in itself says a 16 whole lot. We used to sit to the end. Most of the 17 commissioners who have sat where you sit paid very 18 little attention and had very little sensitivity to 19 charitable bingo, because y'all operate a multi- 20 billion dollar proprietary enterprise. 21 But there's 1,400 charities in this 22 state in over 500 locations who have some $600 million 23 a year going through their bingo halls, and they're 24 trying to hold onto every dollar they can in order to 25 fund things that this State of Texas either won't fund 0047 1 or it's requires some matching money to get it funded, 2 so it's extremely important. And this Commission 3 didn't take that approach until this man showed up. 4 And it really kind of shocked everybody. I won't 5 forget that day that you came and you sat in those 6 meetings. 7 And, Commissioner Cox, when you came, 8 you got started doing a tandem deal, and you would 9 leave and you would come. And so it's a completely 10 different world here. 11 We find ourself often complaining, and 12 we're trying to move the ball from our clients' point 13 of view. And we realize that we have different 14 viewpoints than the staff has and different roles. 15 But this agency is a changed agency because of the 16 service of these two gentlemen, Ms. Melvin and Phil 17 Sanderson. I didn't want that to go without being 18 said. We're happy that you're here, and we look 19 forward to working to inform you about this business. 20 Now, the reason I'm a little less 21 sanguine about this is because I don't think that the 22 regulated community out there can see the big picture 23 right now. And I think we're going to have a -- I 24 think we're going to have some problems of 25 implementation because of that. 0048 1 One of the problems comes from this 2 very issue that you just picked up, and that is that 3 most of these requirements, if not all of them, are 4 somewhere else embedded in various pieces of the 5 rules. And if the Commission goes forward and adopts 6 these, without going through and amending out 7 appropriately from these other rules, I think that 8 people in this broad community that stretches all over 9 this state are going to have a hard time sorting it 10 out. My preference would be to see, just as the 11 Legislature does when it passes statutes, to go 12 through and amend -- they don't always do the best job 13 of it, but at least the idea is to go in and amend 14 other statutes appropriately to accommodate the new 15 statute. 16 So I would like to see that done. I 17 understand that there is a practical problem right 18 now, because there is a statutorily required periodic 19 review of all rules by all agencies, and the agencies 20 got that underway. So they're trying to put two 21 different processes together here, which I think is 22 going to cause some difficulty for people in the 23 regulated community out there if they're not merged 24 together. 25 That having been said, I think the 0049 1 second level of processes here is that -- or a problem 2 here is that all of these organizations have an 3 established business practices. Now, the little 4 75-seat, twice-a- week VFW hall out in the country 5 probably doesn't have very good business practices. I 6 hate to make a generalization like that, because 7 somebody behind me is liable to throw a brick at me. 8 But that's different from the 500-seat commercial 9 hall, Class J, that's doing, you know, really big 10 business. Those organizations have some established 11 business practices. And what they see now or what 12 appears to them from new rules is a movement of having 13 to move information from those established business 14 practices into this new format that's being proposed 15 by the staff. 16 Then they see in the preamble to the 17 rule that this information is already required. And 18 they can't figure out why they're doing this if it's 19 already required. I'm concerned, and I think a 20 significant amount of our discussion yesterday was my 21 concern that people will be in violation, because when 22 they move information out of their daily cash report 23 into one of these summary reports, if nothing else, 24 there are going to be transcription problems. There 25 are going to be somebody have to stay after work and 0050 1 fill out a new form. 2 Now, it seems to me after our 3 discussion -- and correct me if I'm wrong, Phil -- 4 that some of those existing business practices might 5 be able to go by the wayside as this new system is 6 being implemented or this new set of forms that you've 7 got, but people can't see it out there right now. 8 I think you have a real communication 9 problem. I'm doing my best to try to communicate back 10 to the clients: "Hold on. Hold on. This is 11 already -- you're already doing this." There is a 12 perception that the change in the formatting of this 13 information, if it is a change, is for the convenience 14 of the Commission. 15 Well, you know, on the one hand -- I 16 helped run the Controller's office. I know that 17 agencies have a keen and important interest in having 18 information readily available when reported to them in 19 a uniform manner. I get that. I also get that you 20 have organizations out there that have a staffing 21 structure and a cost structure, a payroll structure, 22 that's built on the current reporting system, and the 23 information is being maintained as this preamble 24 material indicates. 25 So somehow we've either got to be able 0051 1 to convey these rules in a way that shows that it's 2 the same information, and you can get some 3 modifications, maybe a transition time. But overall, 4 your costs are not going to increase, or we've got to 5 do something different and let these people use their 6 existing business practices. It may be more difficult 7 for your audit staff, but then we'll go down to the 8 Legislature and ask them to give you some more money 9 to audit this if that's what we have to do. 10 I think you can tell from my comments 11 that I can see purpose in what we're doing. I don't 12 think any of this is frivolous on the agency's part, 13 but I think there is a big divide or a big gap here 14 between the regulated community and the agency as to 15 why we need to do this if all this information is 16 currently being maintained 17 Now, Steve and I have concluded that it 18 wouldn't be a good use of your time or ours to talk 19 about each rule and go into depth and the specifics, 20 but I do want to mention one specific. And I won't 21 even cite the rule so we'll stay on the agenda item. 22 But in one case, one line says you have to complete 23 this new form using the serial number, a separate 24 sheet of paper for each serial number for your bingo 25 paper that's sold out there. 0052 1 One of my members uses 30 to 40, 2 according to his testimony to me, 30 to 40 serial 3 numbers a night. Now, that's one place in one part of 4 the state. I would hate -- and it's also a very 5 successful venture. So I would hate for these rules 6 to drive them away from doing what's successful in the 7 marketplace by saying, "Well, there's no way that we 8 can -- we'll have a proliferation of paper here. 9 We'll have 30 or 40 sheets every night. Somebody has 10 got to sit out and sort that out when, in fact, we've 11 already got it in another record. It will just take 12 the auditor some time to go through the various places 13 where that information is held." 14 So those will be common themes, 15 Commissioner Schenck, with me. Bingo is stabilized 16 right now, primarily because of the actions that the 17 commissioners have taken to give some new games and to 18 boost the use of technology, and it's stabilized. But 19 before that, with the advent of the Texas Lottery and 20 gambling in the states around, that graph is going 21 down like this, and they're competing in an 22 environment where other gaming is occurring in Texas. 23 And so unless we can change that graph 24 and make it go the other way on their revenue side, 25 we've got to be particularly careful about the costs 0053 1 that are imposed, and particularly shifting costs from 2 the state to the charities, I want to be particularly 3 careful about that. 4 That's all I have to say today about 5 that. I'm sure there will be a public hearing about 6 this, and we'll work the rules over. And Steve and I 7 have committed to doing some drafting and see if we 8 can make things merge up with the existing rules and 9 make this a little clearer to the regulated community. 10 But I wanted to express my concerns as we go down this 11 road, for the reasons I've just stated. 12 CHAIRMAN COX: Thank you, Mr. Bresnen. 13 Could I ask you a couple of questions? 14 MR. BRESNEN: Yes, sir. 15 CHAIRMAN COX: I see that on 16 Mr. Fenoglio's witness affirmation form, he wanted to 17 address V, VI and VII. 18 And I understood from you before the 19 meeting, Mr. Fenoglio, that you were going to do all 20 of that at on this agenda item? 21 MR. FENOGLIO: Yes, that's correct, 22 Mr. Chairman. 23 CHAIRMAN COX: Okay. Mr. Bresnen, I 24 see that you indicated V. 25 MR. BRESNEN: That's my intention, too. 0054 1 I was just trying to signal to you when I thought we 2 would get up and speak. 3 CHAIRMAN COX: Okay. Great. Now, I 4 understand your concerns, I believe. Is it your 5 desire that we just understand this going in as we 6 approve exposing these rules or do you want these 7 rules rewritten before they are exposed? 8 MR. BRESNEN: I'm not going to advocate 9 that, Mr. Chairman. Like I said, it's night and day 10 here. And there's an ongoing process here and other 11 things in the pipeline that y'all are going to want to 12 get to. I know this is important to staff. These 13 issues, the integrity of charitable bingo and how this 14 money is used and accounted for is hugely important to 15 me when I go to the Capitol building and ask them to 16 make changes in the statute up there. So I'm not 17 going to be down here falling in front of this process 18 and asking -- and trying to derail it. This rule, as 19 I understand it, once it's published, you've got 180 20 days to act one way or the other, so we've got ample 21 time to work on it. 22 I would just ask you to use -- I'm not 23 asking you to use six months -- but I'm asking you to 24 use the time necessary, No. 1, to merge it up with the 25 existing rules and also to think about very 0055 1 substantial changes in what you're proposing, which 2 could require a republishing at some point in time, I 3 assume. Steve is the real administrative lawyer here; 4 I just play one occasionally before y'all. 5 But I just ask you to use that time and 6 not let this momentum of 180 days and having to 7 republish, sometimes those are agency concerns. 8 They're not my concern. My concern is not shifting 9 costs to these charities in the absence of an 10 additional revenue stream where they can make a 11 profit. 12 COMMISSIONER CLOWE: Mr. Chairman, if I 13 may -- as you know, I never miss an opportunity -- I 14 can't speak with the new commissioner except on the 15 record. And Mr. Bresnen has raised some issues that I 16 just want to comment on and to some extent expand on. 17 And this is some of that folklore 18 that's passed around the campfire. You won't find 19 this written anywhere, Commissioner, but my sense is 20 that we are doing two things here. We're operating, 21 as commissioners on this board, a policy and oversight 22 responsibility on the Texas Lottery, and that's ours. 23 That was set up by the Legislature, after it was 24 approved by the voters of this state, and we run that 25 business to benefit the Foundation School Fund. It's 0056 1 a big business. 2 We have those members of the public who 3 appear and have comments -- in some cases, criticisms. 4 We have those members of industry that work for this 5 entity. And we have direction from the leadership in 6 the Legislature. We have a lot of input. But the 7 lottery is our business, and the state benefits from 8 it. 9 The bingo industry in my mind is very 10 different. It came to the Texas Lottery Commission 11 from another agency when the lottery Commission was 12 formed. And my sense of reading history was that it 13 was an unhappy industry. They were not happy with the 14 relationship they had with the regulating agency. And 15 it was moved here with the hope that that relationship 16 would improve by virtue of what might be termed 17 better regulation. 18 When I came on this board in November 19 of '98, I was frankly more attuned to those being 20 regulated than I was being a regulator, because I had 21 been in an industry that was regulated -- for 35 22 years -- and I saw the complaints and the unhappiness 23 in better focus from their side of the table. And I 24 endeavored to use that in my efforts to improve the 25 relationship. And one of the things that Mr. Bresnen 0057 1 has pointed out was, I walked straight into the 2 problem and started listening and attending the Bingo 3 Advisory Committee meetings and benefited from that. 4 And Chairman Cox, when he came on the board as a 5 commissioner, adopted the same practice. 6 And as a lame duck now that's quacking 7 pretty loud, I'm offering up my slot in the Bingo 8 Advisory Committee to you and the Chairman. And I 9 think if you have the opportunity, you would benefit 10 from attending those meetings, as I have and as I 11 believe he has. 12 My understanding is that Chairman Cox 13 is the designated bingo commissioner, and there is one 14 of the three that's designated as a bingo 15 commissioner. But each of us have equal interest and 16 each of us have a vote on these issues that come up. 17 Now, I think Mr. Bresnen has correctly 18 characterized the industry as one that has need. And 19 clearly that industry is experiencing the threat to 20 its player group, its market, as is the lottery, from 21 outside interests, those being casinos which are legal 22 outside of the state, the interstate or the internet 23 gambling that is prevalent -- it's illegal -- the 24 gaming activities within the state represented by 25 8-liners, and other illegal gambling devices that are 0058 1 in effect awarding more than the $5.00 prize limit per 2 winner. 3 And you must always remember that in 4 contrast to the lottery, in bingo, although there is a 5 license granted to the operators, there is, in 6 addition to the charitable interest, a commercial 7 interest. There are people who are operating these 8 games who make money from operating the game, and 9 there is a profit motive. 10 And I can tell you that where this 11 agency as a regulatory agency deals with the 12 reporting, the enforcement, the auditing that results 13 in penalties in some cases, there is always a conflict 14 at that point between the operators and the regulator. 15 And I don't think we'll ever end that, but I hope that 16 we can diminish it to a point where we're working 17 together more than we were when I came on this board 18 nine years ago. 19 The industry has spokespeople such as 20 Mr. Bresnen and Mr. Fenoglio who come to these 21 meetings and participate in these discussions. And in 22 my mind, they're helpful, just like people who come to 23 these meetings and comment about the lottery are 24 helpful. I wish -- and I've stated this publicly -- 25 that there was more representation on behalf of the 0059 1 bingo industry, because I think the more feedback the 2 staff gets, the more feedback the Commissioners get, 3 the better we are equipped to make votes and to direct 4 staff and the staff can do better work. 5 But I would like to tell you that I 6 think this is an area that requires some interest and 7 some effort on the part of the Commissioners, and it 8 is a separate division in the lottery and in my mind 9 should be viewed as one of the two things that we do 10 here that's separate and apart from the lottery. 11 We really have worked on this since 12 Commissioner Cox and I have been here and Chairman Cox 13 has been chairman. I don't think we're ever going to 14 make all of these people happy. But my goal is to 15 treat them fairly, honestly and consistently, as I 16 mentioned in our earlier agenda item. And if we can 17 achieve that, then I think this agency and this board 18 has done its job. 19 There have been many, many requests on 20 behalf of members of the BAC and members of the 21 industry for things that are outside the jurisdiction 22 of this agency, such as advertising dollars for bingo. 23 There have been requests for other items such as, 24 "Well, we want a different agency to regulate bingo. 25 We want a separate and apart agency." And in every 0060 1 case on those issues, Chairman Cox and I have 2 suggested to the members of the industry and the BAC, 3 that issue should be dealt at the Legislature with the 4 leadership. That's not for us to address. We can't 5 address that. We have the statutes from which we make 6 rules, and we have authority over the rules, and 7 that's the limit of our authority. 8 So Mr. Bresnen gave me an 9 opportunity -- and I wanted to take it, 10 Mr. Chairman -- to give the Commissioner my view of 11 history up to this point. And I hope it will be 12 helpful to you in your dealing with representatives 13 such as these two gentlemen and members of the 14 industry who will come to you and state their wants, 15 needs and desires and as you get into rulemaking, 16 which we're addressing at this time, help you 17 understand the bingo industry and its complexity and 18 its detail as I see it, separate and apart from the 19 lottery. 20 CHAIRMAN COX: Thank you, Chairman 21 Clowe. 22 COMMISSIONER SCHENCK: Thank you. Just 23 a few questions and comments. It occurs to me that -- 24 first of all, I understand and appreciate fully the 25 importance of the bingo industry and the bingo issues. 0061 1 Those have been brought to my attention. And it seems 2 to me that the staff here at the Commission is very 3 much aware of that as well and are very sensitive to 4 those needs. 5 But isn't the nature of regulation to 6 regulate? And the staff has its job to do. And the 7 mandate -- it's not just statutes here. The statutes 8 constitute mandates. And we have room, it seems to 9 me, to operate with them that should be in your 10 interests and the interests of the public and 11 consistent with the law as the Legislature tells us 12 the law will be. And to the extent the Legislature 13 delegates to us the authority to make rules consistent 14 with their general statement of policy and to fill in 15 ambiguities in the statutes such as they exist, then 16 obviously we need to work with you to understand your 17 issues and to be sensitive to them and to take care of 18 you and the public, and I fully appreciate that. 19 And I hope that you appreciate also 20 that our staff are working against two agendas here. 21 One is to do with the Legislature and we tell them 22 they have to do, and the other is to listen to you and 23 understand what your concerns are, and it sounds to me 24 like they're doing that. And I think everyone has our 25 support as we move forward in that sometimes very 0062 1 difficult effort. 2 And I think one of the things that you 3 get when you look for attention from a regulatory 4 agency is regulation, and sometimes that's a burden. 5 And the question I had for you is, I wasn't really 6 understanding fully from your comments about -- and 7 your concerns about this proposed rule, whether you're 8 suggesting that we should have two tiers or two tracks 9 of regulation with respect to what I would call major 10 bingo activities or the small VFW hall somewhere in 11 Cut And Shoot or wherever else you might find it. Or 12 are you saying that the proposed regulations that we 13 have aren't sufficiently a comprehensive effort at 14 codification so that we don't have inconsistencies 15 within the existing rules? 16 MR. BRESNEN: Well, I'm certainly 17 making the second point, that even if the rule -- even 18 if -- there is currently a rule requiring a perpetual 19 inventory. One of the rules before you today requires 20 a perpetual inventory; and, yet, there's going to be 21 two different rules out there. There's going to be 22 things that need to be reconciled one with the other 23 eventually. 24 And if I'm misstating this, you know -- 25 I think that's what the language in the rule is about, 0063 1 that there's no apparent inconsistency in it. But if 2 other rules need to be -- I'm concerned that 3 redundancy, that the great unwashed masses out there 4 who are not lawyers are going to see two different 5 things there and wonder -- 6 COMMISSIONER SCHENCK: I'm fully 7 sympathetic with that. I mean, it's -- 8 MR. BRESNEN: You spend your full time 9 in the courthouse dealing with those things, don't 10 you? 11 COMMISSIONER SCHENCK: Lay people 12 should not be expected to -- they're on notice for 13 what these laws say, but they should be able to 14 understand them when they read them. 15 MR. BRESNEN: Yes. 16 COMMISSIONER SCHENCK: Are you saying 17 that the proposed rules as they're written right now 18 creates confusion with what otherwise have been there? 19 And if you're saying that, then it seems to me I'm a 20 little concerned about publishing them and just 21 pushing this problem forward like a fumbling football. 22 MR. BRESNEN: I'm concerned that the 23 existing -- that there will be duplication between 24 existing rules. If I'm not mistaken, I think that's 25 what the language in the preamble says. I don't want 0064 1 to take the language out of the preamble, because it's 2 the only signal that we've got in a mass way to tell 3 people, "You're already keeping these records." So 4 I'm saying -- 5 COMMISSIONER SCHENCK: And -- 6 MR. BRESNEN: -- during this -- I'm 7 sorry. I didn't mean to interrupt you. 8 COMMISSIONER SCHENCK: That's fine. 9 MR. BRESNEN: During this process, to 10 the extent that there are other rules that need to be 11 modified in order to fit with these and not have that 12 problem, those should be taken care of. And you've 13 got ample time to do that, because even if you go 14 ahead and publish these today, you'll have 180 days to 15 accommodate that. It would require some additional 16 publishing to amend those other rules somewhere down 17 the line. I think we can do that. 18 I'm just saying the things need to fit 19 together here so people don't -- the things I get the 20 most is, "We're already doing that. We already have 21 an inventory. Why are we having an inventory rule"? 22 And the inventory rule was adopted not very long ago. 23 It doesn't seem very long ago to me anyway. 24 So people are looking out there -- you 25 know, they're running a commercial enterprise all day 0065 1 every day, and they're looking up and going, "I've 2 already got this inventory." They've already got that 3 information. I think, based on our conversation 4 yesterday, that I can now tell that in one of these 5 rules, that it appears to require two different 6 things. And I think one of those what looked like two 7 different things, one of them is embedded in the -- 8 there is a general category with something embedded in 9 it, and maybe it's not two different things, so some 10 drafting might fix that. 11 I think that working with the staff -- 12 I'm not asking you not to publish today -- I think 13 that working with the staff, that we can reconcile 14 those things, make sure there's no conflicts, try to 15 communicate to the regulated community that, "Here is 16 what you need to do, and it's just this," these are 17 the standards in the statute. I think we can achieve 18 that, using this platform. 19 But I know -- I've been through enough 20 rulemakings at this agency and others, I know that 21 once you publish and the 30-day comment period runs 22 and you have your hearing and there is another 23 Commission meeting coming up, that there is a momentum 24 to, "Okay. Let's go. Let's do it. Let's incorporate 25 your comments and go on." I'm saying I think with 0066 1 these, the task is a little bit bigger than normal, 2 and we ought to be sure and not get ahead of ourselves 3 and let that momentum stampede. 4 With respect to a bifurcation, I don't 5 know where you draw the line. We've not had a 6 bifurcation in the past. I'm not advocating one. I 7 will say that all the people who are my immediate 8 clients fit into that higher tier of the larger volume 9 halls, so the concerns that I'm expressing on their 10 behalf are really the concerns of those larger halls. 11 And we run into this large hall/small hall problem all 12 the time. To my recollection, we really haven't, 13 other than in the fee structure that's embedded in the 14 statute, we really haven't bifurcated on the basis of 15 size or revenue. 16 Now, there are other representatives 17 that have a broader representation in terms of size 18 than I do. They will participate in these public 19 hearings. The last public hearing on the house rules 20 and the fair conduct, Commissioner Clowe, we had a 21 very good representation and a number of faces that 22 you don't normally see here. Because the people who 23 come here to comment on the rules are volunteers, we 24 try to be kind of -- we kind of try to shepherd their 25 time. And Steve and I will show up at an event like 0067 1 this and then try to get them more involved in a 2 hearing where there is real meat and substance and we 3 need to have the day-to-day experience -- 4 COMMISSIONER SCHENCK: To be clear, I 5 wasn't suggesting that necessarily before, multi- 6 tiered regulation. I was just trying to understand -- 7 MR. BRESNEN: You're trying to 8 understand what I -- sure, I understand; yes. 9 COMMISSIONER SCHENCK: So to the extent 10 you've identified or you're able to identify what you 11 can see as redundancies or confusion within the 12 existing framework, you're making those known to 13 staff? 14 MR. BRESNEN: Absolutely. We're 15 starting the process, so we certainly will. We'll 16 make our recommendations as to any other changes in 17 the other rules that ought to be made to avoid 18 confusion. 19 COMMISSIONER SCHENCK: Okay. 20 COMMISSIONER CLOWE: Chairman Cox -- 21 CHAIRMAN COX: Yes, sir? 22 COMMISSIONER CLOWE: -- I would like to 23 add a couple of comments on the interchange between 24 the Commissioner and Mr. Bresnen. 25 I think this process works out some 0068 1 problems. And with the participation of individuals 2 such as these gentlemen and others working with the 3 staff, it really creates a better product. It is an 4 imperfect world, and you really can't make everybody 5 happy. But as you know from your experience, when it 6 comes time to vote, you vote the way you think is the 7 best outcome. And through this process, I've watched 8 a better product be created for the Commissioners to 9 vote on where individuals that represent some segment 10 of this commercial world that's out there, and these 11 people have accepted licenses from this agency, so 12 they have to operate under the rules for those 13 licenses to continue. And our job is to make it, in 14 my mind, conform with the law, as you pointed out, and 15 there's heat there. 16 I would like to also comment that in my 17 mind -- and I don't speak for Chairman Cox or anybody 18 else -- the law does not provide for bifurcation of 19 this industry. And I have stated that past the public 20 and I still feel that way. The law says the rules 21 that are made have to conform with the statute, and 22 there is no distinction between little operators and 23 big operators. 24 And if I were an operator and something 25 was passed in a rule that was more favorable to 0069 1 somebody different from me, I would be in the 2 courthouse saying, "I want the same thing." And that 3 comes from my background of being regulated. There 4 were little operators and there were big operators, 5 but the rules were the same for all. 6 Until the Legislature were to change 7 that -- and it can be changed by the Legislature if 8 the leadership signs off on it -- that's the way I see 9 our position. And I may be wrong in that, but that's 10 my position at this time. 11 CHAIRMAN COX: And I will say that I 12 worked in an industry that had two tiers of 13 regulation, and that was a very elegant structure, 14 because it allowed you to impose on the large folks 15 who could afford it the control structure that they 16 should have and the state needed; and, yet, to not 17 require non-cost effective measures on the part of the 18 very small operators. But as Chairman Clowe points 19 out, the Legislature has decided that we will have 20 one, and so we will have one. 21 MR. BRESNEN: I would just ask you to 22 recall that even though my clients are the building 23 owners, they rent space to charities. And it's the 24 costs that the charities pay that I'm speaking of. 25 Commissioner Schenck, we're in sort of 0070 1 an odd spot. I almost never come down here and ask 2 for -- or the Legislature for that matter -- and ask 3 for anything that has to do with the landlord's role 4 in bingo. It's always about these charities. Now, my 5 clients will be able to collect rent if the charity 6 can afford to pay the rent. Other than that, what 7 we're trying to do is make the operations work on a 8 day-to-day basis. 9 They have to get five to seven 10 organizations working together, following the same 11 rules, complying with the Commission's rules, in order 12 to have a stable environment for customers to come and 13 play at and spend their money, so that will be a 14 constant thing as well. 15 And thank you for the amount of time 16 you've spent with this. We will work diligently with 17 the staff on these rules and see if we can't make a 18 silk purse out of it. 19 CHAIRMAN COX: Now, Ms. Joseph, having 20 heard all of that, let me ask you a couple of 21 questions that occur to me based on what I've heard 22 here. 23 I hear that there would now be two 24 rules about perpetual inventories. Are they in 25 conflict? Do we have one rule that says one thing and 0071 1 one that says another, it this is adopted before the 2 other one is amended? 3 MS. JOSEPH: I don't believe they're in 4 conflict. 5 CHAIRMAN COX: In any of the cases that 6 Mr. Bresnen cited, we may have something down twice, 7 as I understand it? 8 MS. JOSEPH: Yes. 9 CHAIRMAN COX: But this section and 10 this section are going to say the same thing and 11 require the same thing? 12 MS. JOSEPH: There may be some slight 13 nuances, but the basic substance of it we believe is 14 the same. 15 CHAIRMAN COX: Okay. Now, help me 16 understand why you chose to propose new rules without 17 at the same time proposing appropriate revision of the 18 old rules. 19 MS. JOSEPH: All right. Mr. Bresnen 20 alluded to that. In September the Commission did vote 21 to notify the public that we are undergoing a review 22 of all bingo rules. This is required periodically of 23 every agency. Because of that, we thought it might be 24 more efficient, rather than to propose separate 25 amendments on the rules that we're concerned about 0072 1 today that may be duplications or redundant, to 2 complete that rule review to see if there are other 3 changes that may need to occur to those very same 4 rules, so that we could roll it up into one ball of 5 wax. 6 CHAIRMAN COX: Okay. So if I 7 understand now -- I'm putting the pieces together -- 8 Mr. Bresnen says, "Take your full six months," what 9 he's suggesting there is that at the end of the day, 10 we will not be with rules that have duplicative or 11 conflicting, slightly conflicting provisions, 12 everything will work? 13 MS. JOSEPH: Yes. And I believe that 14 would be entirely appropriate. And my recommendation 15 that at the time hopefully that we recommend any 16 adoption of these proposed rules, we would be able to 17 also recommend amendments to those rules that are in 18 conflict -- 19 CHAIRMAN COX: Such that -- 20 MS. JOSEPH: -- if they are in 21 conflict. 22 CHAIRMAN COX: -- at any given point in 23 time, we will not have duplicative rules or rules that 24 might be, if only slightly, in conflict? 25 MS. JOSEPH: I certainly believe that's 0073 1 preferable. 2 CHAIRMAN COX: Okay. So that's what 3 we're working towards? 4 MS. JOSEPH: Yes, sir. 5 CHAIRMAN COX: And, Steve, that's what 6 you want us to work towards? 7 MR. BRESNEN: Yes, sir. 8 CHAIRMAN COX: Good. 9 Phil, do you have anything to add? 10 MR. SANDERSON: I do not. I believe 11 Sandy answered, you know, the intent that we were 12 looking at with the rule review, to make sure that 13 there were not any other changes to the particular 14 rules that these sections come out of, so that we 15 don't have a conflict in trying to amend a rule too 16 many times. 17 CHAIRMAN COX: Okay. Anything further? 18 Thank you very much. 19 MR. BRESNEN: Thank you. 20 CHAIRMAN COX: Now, for action on Item 21 V, what you recommend, Sandy -- 22 MS. JOSEPH: Yes, sir. Again, I do 23 recommend that the Commission initiate the rulemaking 24 process by voting to publish the rules in the Texas 25 Register for a period, in order to receive comments, 0074 1 for 30 days. And I have a T-bar memo for your 2 approval. 3 COMMISSIONER CLOWE: So move. 4 COMMISSIONER SCHENCK: Second. 5 CHAIRMAN COX: A motion has been made 6 and seconded approving the staff recommendation. All 7 in favor, say "Aye." 8 COMMISSIONER CLOWE: Aye. 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN COX: Aye. 11 Any opposed? 12 Motion passes 3-0. 13 MS. JOSEPH: All right. And with your 14 permission -- 15 CHAIRMAN COX: Do you want to bring all 16 of them forward at one time or do you want to do them 17 one at a time? 18 MS. JOSEPH: Yes, I would prefer that. 19 CHAIRMAN COX: Okay. 20 AGENDA ITEM NO. VI 21 CHAIRMAN COX: Okay. Agenda Item No. 22 VI, consideration of and possible discussion and/or 23 action, including proposal, on new rule 16 TAC 402.506 24 relating to disbursement record requirements. 25 Ms. Joseph. 0075 1 MS. JOSEPH: This is the second rule in 2 this group of three that the staff recommends 3 proposal. It is Rule 402.506 relating to disbursement 4 record requirements. The purpose of this proposed new 5 rule is to clearly set forth disbursement record 6 requirements in accordance with §2001.505(b) of the 7 Bingo Enabling Act. 8 The staff believes that the 9 requirements in the proposed new rule are consistent 10 with existing Internal Revenue Service requirements 11 for recordkeeping by non-profit organizations. If the 12 Commission receives any information indicating an 13 inconsistency with IRS requirements, the staff will 14 reevaluate the need for the requirement. 15 This proposal rule also includes notice 16 of a public hearing to be held on November 13, 2007, 17 at 10:00 a.m. And the staff recommends that the 18 Commission initiate the rulemaking process in order to 19 receive comments for a period of 30 days. 20 COMMISSIONER CLOWE: No questions. So 21 move. 22 COMMISSIONER SCHENCK: Second it. 23 CHAIRMAN COX: All in favor, say "Aye." 24 COMMISSIONER CLOWE: Aye. 25 COMMISSIONER SCHENCK: Aye. 0076 1 CHAIRMAN COX: Aye. 2 Motion carries 3-0. 3 AGENDA ITEM NO. VII 4 CHAIRMAN COX: Item No. VII, 5 consideration of and possible discussion and/or 6 action, including proposal, on new rule 16 TAC 402.511 7 relating to required inventory records. 8 Ms. Joseph. 9 MS. JOSEPH: This rule for your 10 consideration again is proposed new 16 TAC §402.511 11 relating to required inventory records for licensed 12 authorized organizations. The purpose of the proposed 13 new rule is to clearly set forth requirements for 14 maintenance of a licensed authorized organization's 15 inventory records. 16 Specifically, the new rule requires a 17 licensed authorized organization to maintain a 18 perpetual inventory of all disposable bingo cards and 19 pull-tab bingo tickets. Although these requirements 20 also appear in existing rules, as has been discussed, 21 the staff is aware of no inconsistencies and, as 22 stated earlier, is in the process of reviewing current 23 rules to determine if there are amendments that are 24 appropriate. 25 The submission prepared for the 0077 1 Register also includes notice of a public hearing to 2 be held on November 13th at 10:00 a.m. And I 3 recommend that the Commission initiate the rulemaking 4 process in order to receive public comments for a 5 period of 30 days. 6 COMMISSIONER CLOWE: So move. 7 COMMISSIONER SCHENCK: Second. 8 CHAIRMAN COX: The motion is made 9 seconded. All in favor, say "Aye." 10 COMMISSIONER CLOWE: Aye. 11 COMMISSIONER SCHENCK: Aye. 12 CHAIRMAN COX: Aye. 13 Motion carries 3-0. 14 MS. KIPLIN: Mr. Chairman, if I could 15 just put on the record, Mr. Bresnen and Mr. Fenoglio 16 came up, and they came up on Item V and they made 17 comments that carried over for all these items. 18 CHAIRMAN COX: Yes. 19 MS. KIPLIN: And I just want the record 20 to be clear that their comments will be carried over 21 and will pertain to each of these preceding three 22 items on the agenda. 23 CHAIRMAN COX: Thank you. 24 COMMISSIONER CLOWE: Further, for 25 clarification, Counselor, the discussion that ensued 0078 1 following Mr. Bresnen's remarks was somewhat broad in 2 its nature. And I assume by your silence that it was 3 within the agenda as published and is proper for the 4 Commission to have engaged in those items of 5 discussion? 6 MS. KIPLIN: Yes, sir, that's correct. 7 I was reviewing the agenda, and my conclusion was that 8 there was a need for backdrop on Commission policy as 9 it related to your policymaking on rulemaking in the 10 bingo area. 11 COMMISSIONER CLOWE: Thank you very 12 much. 13 CHAIRMAN COX: Ms. Joseph, I just 14 wanted to let you know, I'm sympathetic to the concern 15 about killing all those trees -- 16 MS. JOSEPH: Yes, sir. 17 CHAIRMAN COX: -- requiring a separate 18 page for each number. 19 MS. JOSEPH: All right. Thank you. 20 AGENDA ITEM NO. VIII 21 CHAIRMAN COX: Item No. VIII, report by 22 the Charitable Bingo Operations Director and possible 23 discussion and/or action on the Charitable Bingo 24 Operations Division's activities. 25 Mr. Sanderson. 0079 1 MR. SANDERSON: Commissioners, in your 2 notebook is my monthly report on the activities of the 3 Bingo Operations Division. I would like to highlight 4 and point out that as a result of the restructuring 5 and the reorganization, we have now posted for eight 6 positions that we had FTEs for. Additionally, we have 7 one position for a data entry operator, that we've 8 interviewed five individuals and have submitted the 9 successful candidate's name to Human Resources for a 10 background investigation. 11 Also, the next regularly scheduled BAC 12 meeting is scheduled for November the 7th at 13 10:00 a.m. It's a Wednesday. And the quarterly 14 reports are due for the third quarter of 2007 15 tomorrow, on October the 25th. 16 In your notebook is the new structure 17 of the Bingo Division as well as a copy of the most 18 recent Bingo Bulletin. 19 And I'll be glad to answer any 20 questions you may have. 21 COMMISSIONER SCHENCK: I have none. 22 Thank you. 23 CHAIRMAN COX: Thank you, Phil. 24 That concludes the bingo agenda. Why 25 don't we take about a10-minute break. 0080 1 (Off the record: 10:30 a.m. to 10:42 2 a.m.) 3 AGENDA ITEM NO. IX 4 CHAIRMAN COX: Agenda Item No. IX, 5 report, possible discussion and/or action on lottery 6 sales and revenue, game performance, including game 7 performance of Daily 4, new game opportunities, 8 advertising, dissemination of prize and game 9 information, market research, Texas Two Step prize 10 reserve, and trends. 11 Y'all going to do all of that? 12 MS. PYKA: We'll attempt to. How is 13 that? 14 CHAIRMAN COX: Ms. Pyka and a 15 Mr. Tirloni. 16 MS. PYKA: Good morning, Commissioners. 17 My name is Kathy Pyka, Controller of the Lottery 18 Commission. And with me to my right this morning is 19 Robert Tirloni, our Products Manager. 20 COMMISSIONER CLOWE: Is your mike on, 21 Kathy? 22 MS. PYKA: It is. I'll move it a 23 little closer. 24 Our first chart for you this morning 25 reflects revenue from sales and net revenue to the 0081 1 state for the week ending October 13th of 2007. Total 2 sales through this seven-week period amounted to 3 $418.2 million, while estimated net revenue to the 4 state for this period was $104 million. 5 Net revenue to the state does reflect a 6 slight increase of 1.7 percent, as compared to the 7 $105.8 million figure for this time period in Fiscal 8 Year 2006. And our prize expense as a percentage of 9 sales is reflected at 63.1 percent for the current 10 time period, which is a slight increase over the same 11 time period for Fiscal Year 2007. 12 CHAIRMAN COX: My Pyka? 13 MS. PYKA: Yes, sir. 14 CHAIRMAN COX: I'm going to ask you, 15 for the benefit of Commissioner Schenck, to go through 16 these kind of line-by-line and give him time to 17 absorb. I see you have the explanations out there by 18 them, but let's take a little additional explanation 19 and give him time to absorb what you're presenting. 20 MS. PYKA: Certainly. 21 CHAIRMAN COX: Thank you. 22 MS. PYKA: The first line item that 23 we're presenting is sales, and that represents our 24 gross sales, followed by on-line and our instant 25 ticket products. And from that, we reduce it by the 0082 1 prize expense. This is actually the prize that has 2 gone back to the player, to arrive at the sales 3 contribution. Now, the sales contribution that is 4 there is before we reduce it for any of the 5 administrative expenses of operating the games, so it 6 is simply the total sales less the prize expense. 7 And then from that, we reduce it by the 8 expense allotted for retailer commissions -- they get 9 5 percent of every sale transaction -- less the 10 administrative expense related to GTECH as well as the 11 operation of the agency. We're allotted 7 percent for 12 the administration of the agency, which includes the 13 GTECH contractual provision of 2.6999 percent of gross 14 sales. And so those line items are broken out. 15 And when we look at the appropriation, 16 while we are allotted 7 percent by law for those two 17 items, it is restricted by the General Appropriations 18 Act, which is generally not that full 7 percent 19 amount, so we footnote that. And from that, we then 20 get the net, which is the actual transfer to the 21 state. And when we're looking at the sales here, 22 100 percent of these sales represent, then, the 23 transfer, the transfer to the Foundation School Fund, 24 which we make on a monthly basis, based on our actual 25 sales each month. 0083 1 And prize expense as a percentage of 2 sales is looking at the prize expense as just simply 3 that percent of sales at the top of the chart. 4 COMMISSIONER SCHENCK: Am I clear in 5 understanding that this is for year to date or is this 6 a one-month? 7 MS. PYKA: This is actually on the 8 fiscal year basis, beginning with Fiscal Year 2008. 9 And our fiscal year covers the time period of 10 September 1 to August 31. So we're looking at, in 11 this case, the first seven weeks of sales for this 12 fiscal year. And we like to compare it week-over-week 13 to the previous fiscal year sales because, as you look 14 at instant ticket products, you see a common 15 fluctuation by week. 16 CHAIRMAN COX: Now, Kathy, I see a 17 trend up there -- or maybe it's not a trend; maybe 18 it's an aberration -- that we don't typically see, and 19 that is prize expense as a percentage of sales -- I'm 20 sorry. I'm looking on the wrong columns. It is going 21 up. 22 MS. PYKA: It is going up, and it is 23 slightly higher. We do have the new product in Fiscal 24 Year 2008 related to the $50 game that would not have 25 been there at this point in time last fiscal year. 0084 1 CHAIRMAN COX: That percentage -- our 2 sales contribution percentage has been decreasing over 3 time, and our prize expense as a percentage of sales 4 has been increasing over time because our instant 5 product, which has a higher payback to the customer, 6 is growing as a percentage of our product mix, as 7 compared to the on-line game, which are typically 8 50 percent payback. 9 COMMISSIONER SCHENCK: Well, it does 10 look like our sales have also dropped a little bit. 11 MS. PYKA: And our sales -- I would 12 like to note that. While it appears they have dropped 13 a little bit, the way that we do this week-over-week 14 comparison in looking at the fiscal year data, you'll 15 note there that this is through October 13, 2007. We 16 capture our sales on a Saturday week-ending date. And 17 last fiscal year was through October 14th of '07. So 18 there is actually one extra day of sales in the Fiscal 19 Year 2007 data that's not in the Fiscal Year 2008 20 data. So you can look at that at $8 million 21 difference -- 22 CHAIRMAN COX: Or vice versa? Actually 23 one more day in '06 than in '07? 24 MS. PYKA: '07 is Fiscal Year '08, so 25 there's one fewer days in '07 than in '06, Fiscal Year 0085 1 '07. We're in '08 now. 2 CHAIRMAN COX: There's one fewer. 3 That's okay. That's what I see. 4 MS. PYKA: In fact, actually looking at 5 it from that perspective, sales are slightly higher 6 this fiscal year than they were last fiscal year. And 7 we're starting to see that trend bypass itself in a 8 couple more weeks, since we have more days in the 9 fiscal year. It's still very early in the fiscal year 10 at this point. 11 Moving to our next slide, we've 12 included the Fiscal Year 2008 year-to-date sales, 13 which again is through the week ending October 13th of 14 '07. That does represent seven weeks of sales. And 15 noted on the slide, 76.3 percent of our sales, or 16 $319.1 million, is from our instant ticket product. 17 8.3 percent of sales, or $34.7 million, 18 is from our Pick 3 product, followed by 6.3 percent of 19 sales, or $26.2 million from our Lotto Texas on-line 20 product. 21 And I also wanted to note that this 22 slide does reflect our first two weeks of sales for 23 the Daily 4 and the Daily 4-Sum It Up game. You'll 24 note Daily 4 includes $2.8 million for the first two 25 weeks of sales and Daily 4-Sum It Up includes 0086 1 $.8 million for those first two weeks of sales. 2 Yes, Commissioner? 3 COMMISSIONER CLOWE: Chairman Cox, I 4 want to emphasize the point you made to Commissioner 5 Schenck, as pointed up in this slide. 6 Commissioner, instant tickets you see 7 up there are 76.3 percent of the total sales. 8 And, Robert, how many games do we have 9 on the street now? 10 MR. TIRLONI: For the record, my name 11 is Robert Tirloni. I'm the Products Manager for the 12 Commission. 13 We have about 70, anywhere from 70 to 14 80 available. 15 COMMISSIONER CLOWE: So my sense is 16 that instant tickets are two-thirds, three-quarters of 17 our total sales. And they are constantly being 18 refreshed and made attractive and things that are done 19 to create desire on behalf of the players, are able to 20 be instituted in that area. 21 The on-line games, which represent the 22 remaining approximately 24 percent of sales, with the 23 exception of the addition of the Daily 4 and the Sum 24 It Up, which is brand-new, are pretty much the way 25 they've been for a long time. We fiddled with Lotto 0087 1 Texas and changed it. It didn't have any positive 2 effect at all. And by statute, we are required to 3 maintain those games pretty much the way they are. 4 Now, the Pick 3 game has grown some and 5 is consistent, I think, in its popularity. But 6 basically the on-line games are jackpot-driven. And 7 my way of saying it is that they're old and they're 8 tired, but they get all the attention. In the media, 9 when something happens, that's more interesting, it 10 seems, than what goes on in the instant tickets. So 11 it would surprise, I think, the general public -- as 12 you are exposed in your new capacity to the public, it 13 will surprise the public when you tell them that the 14 instant tickets are 76 point something percent of 15 overall sales. 16 And I think that's an important point, 17 because for the gaming dollar in the State of Texas, 18 the lottery is competing with these other outside 19 gaming activities -- some legal, some illegal -- that 20 as a commissioner, you need to have in your mind 21 thinking about all the influences that affect gaming 22 in this state. 23 My sense is, the staff tries to 24 maintain on a fiscal year annual basis the one million 25 dollar a year contribution to the Foundation School 0088 1 Fund. And although that's not written down any place, 2 I think mentally that's the goal that the staff 3 strives for. So far they've been successful. 4 But there are many influences that are 5 affecting the players that represent the market to the 6 lottery in this state. And I hope that you're able to 7 avail yourself of a staff briefing, which I think both 8 Chairman Cox, and I know I was privy to when we came 9 on this board. And part of that would be who the 10 players are in this state and outside the state, who 11 the people are who are buying these tickets and 12 playing these games. That has changed over the years, 13 and it is the subject of criticism and conversation of 14 the lottery's operation. And you will be well- 15 equipped if you have the time to let the staff brief 16 you on that, as well as these other matters. 17 The Chairman and I have been very 18 interested over the past couple of years in the 19 market. And, you know, if you're running a 20 $3.77 billion a year business, you darn sure want to 21 know what your market is. And if you have 22 approximately half of the people in this state who 23 don't like what you do, you better be aware of how you 24 approach that market, because there are problems that 25 can develop as a result of your attempt to expand the 0089 1 market. And you need to be respectful of those people 2 who are opposed to gaming of any form in the state. 3 Chairman Cox pointed out to you the 4 payouts for instant tickets being different from all 5 the other basically on-line games. So it's a very 6 complex and interesting subject, that as you're here 7 on this board over time, you'll learn more about. But 8 a good briefing from the staff will start you off in 9 good shape. 10 COMMISSIONER SCHENCK: And I'm sure I 11 would appreciate that. 12 I have a quick question. Is this 13 phenomenon of instant tickets taking over a 14 disproportionate share of the total percentage of 15 revenue fairly universal across other states that are 16 having lotteries like Texas? 17 COMMISSIONER CLOWE: Excellent 18 question. 19 MR. TIRLONI: Commissioner, different 20 states have different experiences. But for the most 21 part, instant tickets have grown in popularity faster 22 than on-line games have, pretty much nationwide. 23 COMMISSIONER SCHENCK: Has there been a 24 proportionate decline in the amount of on-line gaming 25 as a result of the introduction of the incident 0090 1 gaming; in other words, cannibalizing its own market? 2 MR. TIRLONI: I believe that it has. 3 And, you know, I think in Texas, what we've seen, we 4 have a pretty aggressive instant game launch 5 scheduled. We launch new games almost every single 6 week. And I think the play style of those games lends 7 to the success of that product line, meaning there's 8 an immediate gratification for the player. 9 That can actually buy the ticket or buy 10 the game, scratch it, and they know if they've won a 11 prize on the spot; whereas, there is a much more 12 delayed time between purchase and realization of 13 winning or not winning on the on-line side. And so I 14 think the play style and the availability of the 15 product on the instant side has helped make it that 16 much more successful than the on-line games. 17 COMMISSIONER SCHENCK: Thank you. 18 CHAIRMAN COX: And, Robert, correct me 19 if I'm wrong on this, but I would add to Robert's idea 20 that the instant gratification is what is driving this 21 thing, is that among our on-line games, the most 22 frequent gratification game is Pick 3, which is the 23 traditional numbers game, which is drawn twice a day. 24 And it is the only -- correct me if I'm wrong -- 25 on-line game that's growing. 0091 1 MR. TIRLONI: Yes, that's correct, 2 Pick 3 has grown every single year since it was 3 launched in '93. And we do draw it twice a day, every 4 day at 12:27 and at 10:12. When I say "every day," 5 every Monday through Saturday, no drawings on Sundays. 6 And now that Daily 4 has started, it is following the 7 exact same draw schedule as well. 8 MS. PYKA: Our next slide that we have 9 for you is the graphical presentation of the year-to- 10 date sales of $418.2 million by game. 11 With that, Robert will now discuss 12 price point for y'all. 13 MR. TIRLONI: Commissioners, this is 14 just a summary of our instant ticket sales broken down 15 by price point, through the week ending Saturday, the 16 13th of October. For that time period, instant sales 17 totaled $319.1 million, and the $5.00 price point 18 continues to be our best selling price point, followed 19 by the $2.00 and then the $10. 20 Commissioners, towards the end of last 21 fiscal year, we were having to show you two pie charts 22 because, Mr. Chairman, you were interested in the 23 share that the $50 price point was representing. Now 24 that we've started a new fiscal year, we'll only have 25 to show one pie chart to you every month. And you can 0092 1 see that the $50 is representing about 5 -- 2 5.7 percent of the total. 3 CHAIRMAN COX: Robert, why don't you 4 take a couple of minutes and walk through the history, 5 how we started with $1.00 tickets and how we added 6 these and how share has changed over time among the 7 different price points. 8 MR. TIRLONI: Sure. When the lottery 9 first started, we pretty much started with the $1.00 10 price point. That was the only price point available. 11 We grew into the $2.00 price point and then eventually 12 the $5.00 price point -- 13 COMMISSIONER SCHENCK: Can I ask you a 14 question? 15 MR. TIRLONI: Sure. 16 COMMISSIONER SCHENCK: Why is it that a 17 player would pick a -- and I think I know the answer, 18 but I'll ask anyway -- would they pick a $5.00 price 19 point versus a $3.00 price point? Some of the payout 20 is -- the potential payout is bigger. 21 MR. TIRLONI: The price payout is 22 bigger, and the top prize is always typically bigger 23 on the -- 24 COMMISSIONER SCHENCK: The expectancy 25 is about the same as the percentage for the player? 0093 1 MR. TIRLONI: In terms of top price? 2 COMMISSIONER SCHENCK: I mean, the rate 3 of return on the different ticket. 4 MR. TIRLONI: The $3.00 has a return or 5 a prize payout of about 66 percent, and the $5.00 has 6 a payout of about 68 percent, so they are pretty 7 close. The $3.00 price point tends to be kind of a 8 niche price point for us. It's typically an extended 9 play price point. You see a lot of our cash word and 10 cross-word style games in the price point. 11 So it's extended play, and it's 12 probably not a -- the style of game at the $3.00 price 13 point is not a style of game that everybody would 14 enjoy or everybody would enjoy playing, just based on 15 the way you play the game. 16 The $5.00 I think is one of the leading 17 price points. We talked about the top prize is more 18 attractive than at the $1.00, $2.00 and $3.00. But I 19 also think it's -- I think it's almost an easy -- I 20 think it's an easy purchase. It's that level where 21 the top price is attractive enough and it's a -- it's 22 easy for people to take out a $5.00 bill and make that 23 purchase. 24 COMMISSIONER SCHENCK: Have we studied 25 how often it is that -- and this may be better 0094 1 reserved for the briefing -- but how often it is that 2 someone is buying one ticket versus two or five or -- 3 I mean, a person that has a five dollar bill can buy 4 five $1.00 tickets or they could buy a $5.00. Is that 5 person not going to buy two or three or five $5.00 6 tickets? 7 MR. TIRLONI: I think it depends on a 8 few things. I think the area of the state. It 9 depends on the area of the state. We see some price 10 points sell much better in certain areas of the state. 11 We see some play styles sell much better in certain 12 areas of the state. 13 For example, the extended play styles 14 that I talked about are bingo games. Our cash word 15 games typically do very well in the southern part of 16 the state. They typically don't do well up towards 17 the Dallas-Fort Worth area or up to the northern part 18 of the state. Our Irving sales district, for example, 19 is typically a higher price point district. The 20 higher price points sell better there. That's also 21 true of our Tyler sales district. So I think there's 22 regional differences. 23 I think, to your question about why 24 somebody would buy one $5.00 as opposed to five $1.00, 25 I think people that have played the games and have 0095 1 experience with them probably like the idea of buying 2 one $5.00, because they have the opportunity to win, 3 you know, 50 to $60,000 as a top prize on that game; 4 whereas, some of our $1.00 games may offer a top prize 5 of $500 or $1,000. 6 COMMISSIONER SCHENCK: But the 7 rationality there is that the person is only going to 8 typically be buying one ticket, and that seems to 9 suggest that the price point that -- that the buyer is 10 very price-point sensitive. In other words, it's not 11 that someone is going to spend all their money on 12 scratch-offs, but they're going to buy a ticket and 13 they're going to be very rational about how the ticket 14 is tailored to whatever their expectations are. 15 MR. TIRLONI: Yes, I agree with that. 16 MR. GRIEF: Could I supplement Robert's 17 response just a little bit? 18 CHAIRMAN COX: Please, Gary. 19 MR. GRIEF: I just want to bring in one 20 other thing, Commissioner. 21 CHAIRMAN COX: This is Gary Grief, our 22 Deputy Executive Director. 23 MR. GRIEF: And I'll soon be sitting in 24 the audience when Anthony gets here. 25 But we have 16,000-plus retailers where 0096 1 we have our products on display, and we are at the 2 mercy, if you will, of the salesmanship of each 3 particular retailer. And as you can imagine, the way 4 those tickets are displayed, the way that the sales 5 message is communicated or not to each individual 6 player really drives our sales. 7 Our experiences is that our players 8 walk in and many times they'll ask the retailer, 9 "What's the hot ticket?" And the retailer may say, 10 "It's the $2.00 today," or "It's the $10 today," or "I 11 sold a top winner." We have GTECH who goes out and 12 visits all of our retailers, as required by contract, 13 once every two weeks. And in those visits, we try to 14 work with the retailers to provide them with 15 promotional material, coach them, if you will, on how 16 best to display the product, market the product, 17 et cetera. 18 So my point is, in addition to Robert's 19 points about various areas of the states and the 20 players, a lot of what we do is driven by the 21 individual retailer locations. And even taking that 22 to a greater extent, chains versus mom and pop 23 locations handle it completely differently, too. But 24 we would be happy to get that briefing for you and 25 really go into a lot of detail. 0097 1 COMMISSIONER SCHENCK: That would be 2 helpful. I didn't come in to testify, but I'll tell 3 you, I was halfway to (inaudible) this last weekend, 4 between here, and I had a customer in front of me 5 trying to buy ice. He wanted that $5.00 ticket, and 6 they had run out or they didn't have anything. He was 7 very clear and adamant that he wanted the $5.00 8 ticket. And so, obviously, it's quite popular. 9 CHAIRMAN COX: How many fives do we 10 have out there right now, Robert? 11 MR. TIRLONI: Right now we have about 12 12 that we have available to ship out of our 13 warehouse. We probably have -- probably say actually 14 available for sale in retail stores, maybe about 15 another five more or six more than that. So probably 16 about 17 or 18 that you would actually be able to buy, 17 depending on how many dispensers a retailer had 18 available in their store. 19 CHAIRMAN COX: One thing I would add, 20 Commissioner, is that part of this decision on the 21 part of the customer as to price point is his pain 22 pressure threshold. You know, we've found as we've 23 gone into higher denominations, that people move from 24 lower denominations to those. Maybe some new people 25 come in. One of the ideas we had with the $50 price 0098 1 point is that there may be people out there that 2 aren't interested in our lower price points, but we 3 might be able to bring some new money into the game 4 with a bigger ticket. The $50 -- correct me if I'm 5 wrong, Robert -- the $50, the 30 and the 25 all have 6 the same payback percentage? 7 MR. TIRLONI: The 50 and the 30 are 8 just slightly more, Mr. Chairman. They're 72.5. And 9 the 20 is 72. But they're all basically very close in 10 payback. 11 CHAIRMAN COX: But the 30 and 50 are 12 identical? 13 MR. TIRLONI: Yes, sir. 14 CHAIRMAN COX: But the 50 -- which we 15 introduced only in March, maybe? 16 MR. TIRLONI: May. 17 CHAIRMAN COX: May. -- has already 18 captured 18 percent -- pardon me -- 5.7 percent, 19 $18 million -- 20 MR. TIRLONI: $18 million. Right. 21 CHAIRMAN COX: -- which says that there 22 were folks out there who were looking for that. Maybe 23 they're new. Maybe they came from the $30 price 24 point. But one of the things we found -- we do a lot 25 of market research and pay a good deal of money for 0099 1 very professional market research, which we use very 2 carefully -- but one of the more important stories, 3 there was a story that Gary Grief came in with, an 4 anecdote. 5 He had a friend who worked in a 6 convenience store, and he said, "You know, every 7 Saturday afternoon after golf, these four guys come in 8 and they buy a full package of $30 tickets." So it 9 was clear that at least in that one instance, there 10 was a market for something bigger than a 30, because 11 they come in and buy a whole packet, which is 10. 12 MR. TIRLONI: Depending on when that 13 was, it may have been more than that. We've adjusted 14 or packet sizes. So the value of the pack was 15 probably at least $450, if not more at the time. 16 CHAIRMAN COX: So as we go to these 17 high points, we find demand, whether it's coming from 18 the lower price points and people saying, "Wow! I now 19 don't have to select two 25's; I can select only one 20 50. 21 COMMISSIONER SCHENCK: And again, I 22 assume the payout, the top payout, is potentially much 23 higher with a 50 than a 30? 24 MR. TIRLONI: Yes. Just looking at our 25 charts here, it seems that that play on the on-line 0100 1 games, on the Mega Millions or whatever else, spikes, 2 obviously, when the jackpots go up. So this is the 3 same behavior you're seeing with the scratch- off 4 tickets. But there is a more impulsive character that 5 is purchasing, or they want an instant 6 gratification -- 7 MR. TIRLONI: Yes. 8 COMMISSIONER SCHENCK: -- that they 9 wouldn't get with waiting. 10 MR. TIRLONI: Yes. On the on-line 11 side, what you just referred to at the jackpot games, 12 at the lower level, there tends to not be as much 13 interest as kind of -- you have base level play. And 14 gradually as that jackpot amount gets up to a more 15 attractive level, you see more and more people start 16 to come into the game. 17 And then, you know, like on the Mega 18 Millions game, for example, you get to those humongous 19 levels where you're over, you know, $250 million or 20 $300 million where you just have tremendous interest 21 and tremendous play because of the level. Of course, 22 that can cause other issues down the road of jackpot 23 fatigue; whereas, once you hit that level, people tend 24 to get bored and want something even bigger and better 25 the next time you roll up into the triple-digit 0101 1 jackpot levels. 2 CHAIRMAN COX: And the jackpot fatigue, 3 along with the instant gratification tendency, are the 4 two primary explanations of the claim in Lotto Texas 5 in the Mega Millions. That $50 million used to bring 6 them out in droves. $50 million now is, "Ho-hum. 7 What are you going to do for me today?" 8 MR. TIRLONI: Is it okay if we move on 9 from this slide? 10 CHAIRMAN COX: Please. 11 MS. PYKA: Commissioners, our next 12 slide relates to the Texas Two Step reserve balance, 13 and I wanted to follow up. In our June Commission 14 meeting, someone had asked to us revisit the Texas Two 15 Step prize reserve. And Legal is currently working on 16 a rule revision related to this, and we expect that 17 we'll have that I believe in the December time frame. 18 And, Commissioner, just to give you a 19 little bit of history, we have three on-line game 20 rules that handle the prize reserve in a different 21 way. Currently when we look at the Lotto Texas 22 jackpot game, we don't have any percentage of sales, 23 on-line sales, going into a prize reserve fund, but we 24 still have a prize reserve balance that's from a 25 previous rule that can be used if sales do not support 0102 1 the advertised jackpot. 2 Mega doesn't have a reserve fund. 3 Texas Two Step does have a reserve fund. Two percent 4 of the prize tier goes to the reserve fund, and then 5 it also guarantees the seventh and eighth prize level. 6 So we wanted to provide y'all an update 7 on Two Step this morning. And the chart includes the 8 beginning balance at the beginning of Calendar Year 9 2007. And at that point in time, we had a balance of 10 just over $400,000. Taking us down to the current 11 balance as of October 18th, we were at $16,849. 12 As we look at this, the reserve fund is 13 plotted with the pink line. And then the yellow 14 circles are actually jackpot wins for Texas Two Step. 15 So when we started with that $400,000 balance, we saw 16 that we had a sharp decline with that $200,000 jackpot 17 win and then another sharp decline again. We had the 18 200, then $225,000 jackpot wins in which we had to use 19 the reserve fund in order to supplement sales for the 20 advertised jackpot. 21 From this period around late February 22 through the period through mid- to late May of 2007, 23 you see that the reserve balance begins to increase 24 back up to the 300, almost $300,000 range as we have 25 increase in jackpot wins of $900,000, $500,000 and 0103 1 $600,000 2 And then we go back in a decline state 3 when we had several hits again at the lower level of 4 either $225,000 or $200,000, and even went into a 5 deficit situation when we went below the balance of 6 the reserve fund and had to go into the lottery 7 dedicated account with the back-to-back $225,000 wins. 8 Late in Fiscal Year 2007, we see an 9 increase to the reserve as we have some larger jackpot 10 growth, larger wins, going all the way up to the 11 million dollar jackpot that we had in September of 12 this past year where the reserve fund replenished 13 itself back to $200,000. And then again, we're had 14 some back-to-back 200 and $225,000 wins, taking the 15 jackpot reserve back down to $16,000. 16 So I wanted to just give y'all an 17 update of where we are today. We know that Legal is 18 working on a reserve fund rule modification on Two 19 Step but wanted to let you know that we are back in 20 that $16,000 range again. This was as of the 18th. 21 We had a roll Monday night, and so we'll have another 22 jackpot on Thursday and will continue to provide 23 updates on this particular items. 24 MR. TIRLONI: Commissioners, I also 25 should let you know that we have sent the reserve fund 0104 1 information to Dr. Eubank, and so he has submitted an 2 analysis that we're looking at and that Kathy is 3 looking at with her staff, too. And that will be the 4 basis for the recommendation that we come forward 5 with. 6 MS. PYKA: And, Commissioners, I think 7 I had better clarify something. As I'm thinking back, 8 I may have said guaranteed seventh and eighth prizes. 9 How about sixth and seventh prizes? I don't know why 10 I think I said eighth tier prizes, but it's sixth and 11 seventh. 12 CHAIRMAN COX: Okay. Now, I'm going to 13 give you three guesses what I'm going to say next. 14 The first two don't count. When are we going to get 15 rid of these reserves? 16 MS. PYKA: Well, the first step will be 17 the prize reserve rule for, obviously, Two Step. 18 CHAIRMAN COX: Let me explain for 19 Commissioner Schenck's benefit the purpose of my 20 question. These rules provide for these reserves, but 21 they don't have anything to do with anything. One 22 would conclude, looking at that, that if we get that 23 reserve below zero, we can't pay prizes. Not true. 24 It doesn't have any effect on our 25 income. It doesn't have any effect on our ability to 0105 1 pay prizes. Somebody just put it in a rule for some 2 reason that I don't think anybody who is here today 3 either knows or will admit to, and I have been 4 endeavoring for five years to get rid of them, and I 5 just hope we're getting closer and closer to that 6 solution. 7 MS. PYKA: Mr. Chairman, I believe we 8 are getting closer and closer to that resolution. I 9 know that our legal team is working on the Two Step 10 rule modification that will address this one. And we 11 submitted a legal referral with regard to Lotto Texas 12 prize reserve balance. 13 Like I had mentioned earlier, there is 14 no longer allocations on the Lotto Texas game going to 15 the reserve fund, but we still have a large balance 16 that's sitting on our balance sheet as a designated 17 retained earnings or designated fund balance. And so 18 we're sought counsel's guidance on the proper way to 19 address the current balance that's there with Lotto 20 Texas. So once we get those two addressed, I think 21 we'll be happy to report that we have then treated all 22 of the on-line game rules related to reserves in a 23 consistent manner. 24 COMMISSIONER SCHENCK: May I ask a 25 question, Mr. Chairman? 0106 1 CHAIRMAN COX: Please. 2 COMMISSIONER SCHENCK: If we were 3 following these reserves on all of these games that we 4 are, by rule, required to, what would be the total 5 amount of money we would be holding in these accounts? 6 MS. PYKA: Currently the Lotto Texas 7 reserve account is just over $11 million. And so -- 8 COMMISSIONER SCHENCK: Every year there 9 is a lag, then, of $11 million that we're not paying 10 out to the school fund. Is that not right? 11 MS. PYKA: Well, it's actually dollars 12 that were reserved as part of the prize fund to be 13 used. And so that's the question that we have before 14 Legal right now, is the disposition of the $11 million 15 balance that we have on Lotto Texas that dates back 16 some years in the past, and how we can address the 17 resolution of moving that balance. 18 COMMISSIONER SCHENCK: Well, without 19 the rule, we would have the prizes paid out of 20 revenue. And then we wouldn't have that 21 $11 million -- 22 MS. PYKA: Right. 23 COMMISSIONER SCHENCK: -- sitting there 24 doing nothing? 25 MS. PYKA: Right. Any plus or minus 0107 1 would be out of the lottery dedicated account, as 2 outlined in statute. That is correct. 3 COMMISSIONER SCHENCK: So the net to 4 the schools would be at least that marginal extent 5 better? 6 MS. PYKA: Correct. 7 CHAIRMAN COX: And when we get rid of 8 those, that's where it will go? 9 MS. PYKA: Yes -- well, we're doing the 10 review on Lotto Texas and getting counsel's advice on 11 that. 12 So, Commissioners, that's all we have. 13 Yes, sir? 14 COMMISSIONER CLOWE: But I think it's 15 only fair, Kathy -- and you correct me if I state this 16 improperly to Commissioner Schenck -- that we've been 17 audited in regard to the Lotto Texas operation. And 18 Auditor Keel criticized this agency for putting money 19 at risk by having a jackpot that exceeded the reserve. 20 And he so stated before the House 21 Licensing Committee that by doing what we were doing, 22 we were putting at risk money that we didn't have in 23 the reserve fund, and that was valid. We appeared 24 before the Licensing Committee and stated that in a 25 gaming operation, which we have here, when you start 0108 1 off, for example, with Lotto Texas at $4 million, 2 which has been the minimum that we began that game at 3 after the jackpot is hit, and then we increase it one 4 million dollars per roll but, in fact, the revenue 5 coming in doesn't justify that. And I think now we're 6 up to a breakeven somewhere around 12 or $13 million? 7 MS. PYKA: We're been at around 12 or 8 $13 million. And with the recent interest rate 9 changes, it looks like we may go up one million in 10 this time frame. But that is correct. The historical 11 breakeven has been around the 12 or $13 million at the 12 point that sales have supported the Lotto Texas 13 advertised jackpot. 14 COMMISSIONER CLOWE: So there are two 15 different things that are working together there. One 16 is Auditor Keel's correct statement that we don't have 17 the money in the reserve. But we're in a game of 18 chance, and we are bank-rolling, so to speak, the game 19 so that it's attractive to the players and we have the 20 money to play and pay the jackpot if the game is hit. 21 And my sense is, the Licensing Committee understood 22 what we were doing and agreed that we were doing the 23 proper thing. 24 Chairman Cox, how would you comment on 25 that? 0109 1 CHAIRMAN COX: Well, I recall Auditor 2 Keel's concern being that our rule did not permit us 3 to progress to the point where we were progressing 4 without coverage, if you will, without reaching the 5 breakeven point, and that we amended our rule to 6 increase that threshold from six, I think it was, to 7 take the threshold off that said that what we will do 8 is, we will start at four and we will go up by one 9 each time, regardless of what sales justified. 10 So when we amended the rule, I think we 11 addressed Auditor Keel's concern. And as you point 12 out, though, our threshold of breaking even -- that 13 is, total cumulative sales, giving us the ability to 14 pay the total jackpot -- is increasing from 15 $10 million, maybe to 11, to 12. And you're saying it 16 may go to 13 with the new lower interest rate. 17 MS. PYKA: Right. I think it will 18 probably be at 14 on this roll cycle that we're 19 looking at right now. 20 COMMISSIONER CLOWE: Well, with 21 respect, our recollection differs. 22 CHAIRMAN COX: Yes, sir. 23 COMMISSIONER CLOWE: And, you know, it 24 may be that's a point we ought to ask the staff to go 25 back and clarify for us. But if we're doing something 0110 1 that our rule doesn't support, we ought to change the 2 rule. 3 CHAIRMAN COX: And my recollection is, 4 that was the case, and we did. 5 COMMISSIONER CLOWE: On the other hand, 6 if the rule supports it and Auditor Keel says we 7 shouldn't be putting state money at risk if we don't 8 have it in the reserve fund or in-hand dedicated, then 9 I think we took one position and he took the other. 10 And the House Licensing Committee said what we were 11 doing was okay. 12 CHAIRMAN COX: I do recall the latter 13 portion. 14 COMMISSIONER CLOWE: I don't think they 15 blessed it, but I don't think they -- 16 CHAIRMAN COX: I think they understood 17 it. 18 COMMISSIONER CLOWE: They understood 19 it. 20 CHAIRMAN COX: Yes, sir. 21 COMMISSIONER CLOWE: And my 22 recollection is, our records will reflect -- and we 23 had a lengthy discussion in this chamber and went over 24 that in great detail, because we wanted it to be 25 publicly known. 0111 1 CHAIRMAN COX: Yes, exactly. 2 COMMISSIONER CLOWE: And, Commissioner, 3 these are the kinds of things that you get into that 4 are involved in these games. We're running a business 5 here. We're not regulating, per se, like we are in 6 bingo. We're concerned on the lottery side with the 7 take. 8 And we are marketing to a group of 9 players, and we're trying to make these games 10 attractive to them on the one hand. But they must 11 involve full disclosure and they must be honest and 12 fair. And there are differences of opinion in this 13 state among the public on how to do that. And that's 14 why you are so richly rewarded in your compensation 15 for taking this job. 16 (Laughter) 17 You get to make these decisions from 18 now on. 19 MR. TIRLONI: Commissioners, it was the 20 first four drawings in the roll cycle under the 21 previous version of that Lotto Texas rule. We 22 guaranteed the first four, so we were starting at 23 four. So we went four, five, six, seven. And then 24 once we got beyond the fourth drawing in the roll 25 cycle, we were no longer guaranteeing what we 0112 1 advertised -- 2 CHAIRMAN COX: Thank you, Robert. 3 MR. TIRLONI: -- if that helps. 4 COMMISSIONER CLOWE: But we were still 5 under water at that time -- 6 MR. TIRLONI: We were. 7 COMMISSIONER CLOWE: -- after the first 8 four rolls. 9 MR. TIRLONI: Yes, sir. That's 10 correct. 11 COMMISSIONER CLOWE: So we kept 12 increasing it by virtue of the rule beyond the 13 guarantee. 14 MR. TIRLONI: Correct; that's correct. 15 COMMISSIONER SCHENCK: I'm going to 16 appreciate some briefing on this in more detail later, 17 I think. 18 COMMISSIONER CLOWE: I think we've 19 trapped you now into wanting a briefing. And they're 20 going to throw so much at you in that briefing that it 21 will be overwhelming, but it will come to you. 22 CHAIRMAN COX: Yes. If you get enough 23 time and if you set aside enough time, they'll work it 24 through so that when you leave, you'll have a real 25 thorough understanding. 0113 1 COMMISSIONER SCHENCK: I would 2 appreciate it. 3 MS. PYKA: Be happy to. 4 MR. TIRLONI: Commissioners, that 5 concludes our report. I just do have one note of 6 update. We talked about Daily 4 and Sum It Up. The 7 sales for Daily 4 and Sum It Up started on Sunday, 8 September 30th. We conducted the first Daily 4 9 drawing on October 1st. And I just want to let you 10 know we are adding the Sum It Up add-on game feature 11 to Pick 3, with sales starting on Sunday, November 12 11th. And once we get beyond that, we'll have a sales 13 data to report to you in future meetings. 14 COMMISSIONER CLOWE: Thanks. 15 COMMISSIONER SCHENCK: Thank you. 16 CHAIRMAN COX: Thank you very much. 17 MR. TIRLONI: Thank you. 18 CHAIRMAN COX: I have a witness 19 affirmation form on this item, Item IX, from Dawn 20 Nettles. 21 Ms. Nettles. 22 MS. NETTLES: Good morning, 23 Commissioners. My name is Dawn Nettles. I'm with the 24 Lotto Report out of Dallas. 25 I would like to make several comments 0114 1 pertaining to the Texas Two Step prize reserve fund 2 that y'all were just talking about 3 The prize reserve fund, with the rule 4 change that's coming in December, if y'all will 5 recall, this issue came up in May, and it was a clear 6 warning that because of the guaranteed prize of 7 $200,000, that the game was going to be in the hole -- 8 CHAIRMAN COX: Ma'am? 9 MS. NETTLES: -- had there -- this game 10 was going to be -- 11 CHAIRMAN COX: Could you define "game 12 going to be in the hole" for me, please. 13 MS. NETTLES: Well, what I mean by it 14 is, you-all allocate 50 percent of sales to pay prizes 15 and 50 percent goes to the state. Because of the 16 guaranteed prize of $200,000 and the guaranteed sixth 17 and seventh prize game, that the reserve funds have 18 been depleted. 19 If there had been a winner the other 20 night, there would have been a negative $168,000, 21 roughly, in that account. The reserve fund, which I 22 didn't understand a while ago, Commissioner, from 23 sales, the state is supposed return 50 -- or per the 24 rule, the state returns 50 percent to the players. 25 That two percent that's held in reserve in the 0115 1 players' share of sales that is supposed to be 2 returned to them in way of prizes. 3 They've kept it in reserve all these 4 years in case it did not have enough to fund the wins, 5 and it's always been a really huge figure that has 6 always been held. That is also the case with Lotto 7 Texas, why there's $11 million in reserve for it. 8 That is actually the players' share of money. The 9 rule says that 50 percent is returned to the players 10 by way of prizes, but it has really never been the 11 case, except now on Texas Two Step. 12 Right now the players are actually 13 receiving 50 percent or close to it. But if they -- 14 my objective has always been that the state never face 15 a liability, and they have faced a liability or are 16 facing a liability on the Texas Two Step game. It is 17 not and was not just on paper; it has always been a 18 fact that the game was declining. 19 The sales have come down so much since 20 the game started that it cannot afford to pay a 21 $200,000 guaranteed prize. And the Commission has 22 known about this for at least two years, because this 23 is the first time I filed a complaint with the AG was 24 about two years ago. 25 But I did want you to understand more 0116 1 of the reserve. The reserve ins the players' share of 2 money where the funds are supposed to go back to the 3 player by way of prizes. I will be curious to see the 4 rule change that comes in December. 5 What I really wanted to talk to you 6 about -- well, no. There was one other thing. I 7 noticed when y'all were talking about the sales, the 8 chart where 70 -- what is it? -- 77 percent of revenue 9 comes from the scratch tickets. I wonder if you-all 10 have ever compared the unclaimed prizes from these 11 games to see how much money or what percentage from 12 that sale is actually unclaimed. But, as you know, 13 it's turned over to the general revenue fund as well 14 as the two teaching hospitals. That would be an 15 interesting point to see a presentation on. 16 The other thing I wanted to comment on 17 that I'm here for -- and I thought Robert was going to 18 cover it with you -- was the complaint that I made two 19 weeks ago to the Attorney General with regard to the 20 Daily 4 game. Commissioners, I did not understand 21 this in the rule. I had no way of knowing that the 22 state was going to offer a Sum It Up bet in 23 conjunction with the other plays that could be made. 24 COMMISSIONER CLOWE: Ms. Nettles -- 25 MS. NETTLES: Yes? 0117 1 COMMISSIONER CLOWE: -- pardon me for 2 interrupting you. 3 Mr. Chairman, I'm not sure this is the 4 appropriate time for this comment. In fairness to 5 anyone that's interested in this subject, the item 6 we're under is oriented to the games and the revenue, 7 the projections, the item that you read out. It would 8 make me more comfortable, before Ms. Nettles proceeds, 9 if the General Counsel would advise us if this is a 10 proper item or not. 11 CHAIRMAN COX: Thank you. 12 MS. KIPLIN: Thank you, Commissioners. 13 Under the agenda item -- let me just 14 read it. It says report, possible discussion and/or 15 action on lottery sales and revenue, game performance, 16 including game performance of Daily 4, new game 17 opportunities, advertising, dissemination of prize and 18 game information, market research, Texas Two Step 19 prize reserve, and trends. 20 So right now I'm okay, as she's making 21 a comment on Daily 4, with proceeding. It's the 22 Commission's decision on receiving public comment. 23 You have received public comment in the past, and you 24 have received comment on agenda items. 25 COMMISSIONER CLOWE: And Ms. Nettles is 0118 1 proceeding into what I envision in my mind as a 2 complaint she's made to the Attorney General in regard 3 to this game, and that's my question. 4 MS. KIPLIN: I understand. 5 COMMISSIONER CLOWE: My sense is, 6 that's not noticed under this item. 7 MS. KIPLIN: With regard to a 8 particular complaint she's made to another state 9 agency, that's true. But I'm listening, because if it 10 has to do with a concern she has regarding the game 11 performance, dissemination of prize and game 12 information, I think the notice is broad enough and 13 does provide adequate notice to the public on that. 14 COMMISSIONER CLOWE: That's fine. 15 Thank you. 16 CHAIRMAN COX: Go ahead, Ms. Nettles. 17 MS. NETTLES: Okay. I'm glad you said 18 that, because they called me last week and asked me to 19 come and comment on it. 20 I know that you-all, or most people 21 have a hard time understanding the Pick 3 game. And 22 the Daily 4 is exactly like the Pick 3 game, with the 23 exception that they're drawing -- 24 CHAIRMAN COX: Excuse me. 25 MS. NETTLES: -- four numbers rather 0119 1 than three. 2 CHAIRMAN COX: You said you think we 3 have a hard time understanding the Pick 3 game? 4 MS. NETTLES: Most people do, yes. 5 CHAIRMAN COX: I see. 6 MS. NETTLES: As easy as it is, yes, 7 sir, Commissioner Cox, they do have a hard time. And 8 the public is having a really tough time with this a 9 Daily 4 game, on understanding it. And the Commission 10 knows it. I mean, there is -- and it is so simple 11 that I don't understand why nobody understands it, 12 because it's just drawing four numbers between zero 13 and 9, and that's your pick and that's the way it is. 14 Well, this Daily 4 game, as you know, 15 they added the Sum It Up feature. And at the time 16 that the rule was being proposed, I never opposed the 17 Sum It Up feature at all. In fact, I played the Sum 18 feature on the Pick 3 and had it posted on my website 19 since the Year 2000, so I understood fully the Sum It 20 Up play. I didn't exactly like the idea that you had 21 to make another bet in order to play the Sum It Up. 22 And I believe, Commissioner Clowe, if 23 my memory serves me right, you said something back 24 then that it ought to be a stand-alone wager. I 25 agreed with you at that time. But they overruled it 0120 1 and they said, "You have to make another play in order 2 to play Sum It Up, and you can pick your sum." I was 3 always under the impression that players picked their 4 sum, between zero and 36, whatever it is they wanted 5 to play. Well, once the game was launched, then I 6 found out that it's your four numbers that you pick 7 that equals your sum. 8 Well, if that's the rule, that's the 9 rule. It's fine. Okay? However, what I didn't know 10 was that the Commission was going to -- the terminals 11 was going to sum those numbers to equal your sum if 12 you made a wager on it. Well, the Texas Lottery is 13 allowing a Sum It Up bet in conjunction with a pair 14 play. Now, I have a real problem with that. 15 The terminal -- when the players are 16 playing pairs, and only in pairs -- they're picking 17 two numbers, 21 or 23 as the first two numbers or mid- 18 numbers or last two pairs, last two numbers in the 19 game -- the terminal is adding that and that's their 20 sum. So for people who play birthdays and all, 21 they've got a pretty low sum. Well, in order to win 22 that wager, that sum has to equal the sum of all four 23 numbers drawn. 24 I know that they have a letter from 25 Dr. Eubank stating that the odds are correct. But 0121 1 Dr. Eubank has failed to compute the method of play to 2 arrive at his odds. The odds are wrong on the game. 3 I know you have a letter that says something else. 4 But I've two statisticians that have told me and 5 explained to me what's wrong with it. 6 The odds that Dr. Eubank is giving 7 you-all is correct for the sum of four digits, zero to 8 9. They are not correct when you consider the method 9 of play. When a player in Texas is playing the 10 Daily 4 and he's going for a pair, and that's all he 11 wants to play, is just pick two numbers in the right 12 location and the right order, he's playing a pair and 13 he's expecting to win that. He doesn't care what the 14 other two numbers are. He's only playing those two 15 numbers. 16 Well, to be offered to play and to put 17 his money on a Sum It Up bet, when the computer is 18 going to add his two numbers, but the only way it wins 19 is with the sum of four, that's nearly an impossible 20 wager. He's guaranteed to lose one or the other, and 21 that is not his intent when he puts his money down. 22 CHAIRMAN COX: Ms. Nettles, could I 23 interrupt for just a second, please? 24 MS. NETTLES: Yes. 25 CHAIRMAN COX: Commissioner Schenck, 0122 1 Dr. Eubank who she refers to is the agency's 2 statistician. He is a chaired professor -- is a Ph.D. 3 and a chaired Professor of Statistics at Arizona State 4 University. 5 MS. NETTLES: Now, I really do believe 6 that this Commission needs to make a change fast on 7 this, because it is not fair to the people to be 8 selling them such a wager. And I really was under the 9 impression -- and that's why I'm here today -- because 10 the staff was going to discuss this with you-all. 11 Robert says he will. 12 CHAIRMAN COX: Ms. Nettles, was that 13 asking us for a response? 14 MS. NETTLES: Yes, sir. Something 15 needs to be done about that. 16 CHAIRMAN COX: Let me tell you that 17 I've been thoroughly briefed on this matter. 18 MS. NETTLES: Okay. 19 CHAIRMAN COX: I understand exactly 20 what you're talking about. I don't agree with you, 21 and Dr. Eubank doesn't agree with you. Now, what I 22 would suggest that you might do is that you might 23 have -- and Robert will be happy to provide you with 24 the information, contact information on Dr. Eubank -- 25 you can have your statisticians contact him, he will 0123 1 be happy to receive their feedback. And if he 2 considers it appropriate, he'll revise his opinion. 3 MS. NETTLES: Okay. So, in other 4 words, y'all don't plan to do anything about this? 5 CHAIRMAN COX: At this point, no. 6 MS. NETTLES: Well, I'm not going to be 7 the one, but I would think that this right here would 8 open the Commission up to a huge class action lawsuit 9 by the people over this sort of wager. But, of 10 course, it's in the Attorney General's hands. 11 CHAIRMAN COX: Yes, it is. And, 12 Ms. Nettles, I would point out to you that we have 13 received no complaints from the public. 14 MS. NETTLES: Sir, I have over 300. 15 That's how I know about it. 16 CHAIRMAN COX: If you would like to 17 share those with our staff, I'm sure they would be 18 happy to see them, but we have received no complaints. 19 MS. NETTLES: Okay. Thank you very 20 much, commissioner Cox. You-all have a good one. 21 CHAIRMAN COX: Thank you. 22 COMMISSIONER CLOWE: No comment. 23 COMMISSIONER SCHENCK: No. 24 CHAIRMAN COX: Okay. 25 0124 1 AGENDA ITEM NO. X 2 CHAIRMAN COX: Item No. X, report, 3 possible discussion and/or action on transfers to the 4 State and the agency's budget. 5 Ms. Pyka. 6 MS. PYKA: Thank you Mr. Chairman. For 7 the record, my name is Kathy Pyka, Controller of the 8 Lottery Commission. 9 Tab X includes information on the 10 agency's financial status. The first item under the 11 tab is the agency's Fiscal Year 2007 method of finance 12 summary for the period ending August 31, 2007, so this 13 is our final report on the Fiscal Year 2007 operating 14 budget. 15 The Commission's Fiscal Year 2007 16 lottery dedicated account budget for Fiscal Year 2007 17 was $189.1 million. Of this amount, 97.4 percent was 18 expended at year end. And our bingo operations budget 19 funded by the general revenue fund was $14.3 million. 20 And as of August 31, the Bingo Division expended 21 96.9 percent of their budget. 22 The second item in your notebook behind 23 this tab includes the transfers and allocations to the 24 Foundation School Fund and the allocation of unclaimed 25 prizes for the one-month period ending September 30th 0125 1 of 2007. Total cash transfers to the state for this 2 period amounted to $85.8 million for the first month 3 of the fiscal year. And this does represent just a 4 slight decline from where we were in Fiscal Year 2007. 5 It's point one-tenth of a percent, so it's very 6 slight. 7 The second page of your notebook 8 includes the detailed information for the monthly 9 transfer. Of the $85.8 million transfer to the state. 10 $85.7 million was the amount transferred to the 11 Foundation School Fund. The remaining balance of 12 .5 million dollars was transferred from unclaimed 13 lottery prizes. 14 Then the next document to your notebook 15 includes a report of lottery sales, expenditures and 16 transfers from Fiscal Year 1992 to date. Total 17 cumulative transfers to the Foundation School Fund 18 during this period amounted to $9.8 billion. 19 I would be happy to answer any 20 questions that you might have. 21 COMMISSIONER CLOWE: No questions. 22 COMMISSIONER SCHENCK: No questions. 23 CHAIRMAN COX: No questions. 24 MS. PYKA: Thank you, Commissioners. 25 0126 1 AGENDA ITEM NO. IX (continued) 2 CHAIRMAN COX: Ms. Kiplin, I need to 3 correct something that I said to Ms. Nettles. Would 4 you ask her if she could come back? 5 (Brief pause) 6 CHAIRMAN COX: Thank you, Ms. Nettles. 7 If you want to come back, I want to clarify something 8 that I said. 9 When I said that we didn't intend to do 10 anything, what I meant was, we didn't intend to change 11 the way the game is conducted. We do, however, have a 12 number of plans, as a result of your comment, to 13 change the disclosure that we make to the potential 14 players on the documents that we use to promote the 15 game and explain the game. 16 And, Robert, would you be willing to 17 come forward and talk to us about those changes, 18 please? 19 MR. TIRLONI: Sure. 20 Again, for the record, my name is 21 Robert Tirloni. I am the Products Manager for the 22 Commission. 23 Commissioners, what we've done already 24 was, we have clarified information on the how-to-play 25 pages of the agency website, the how-to-play Daily 4 0127 1 pages of the website, and we've provided examples of 2 how the Sum It Up games work in conjunction with pair 3 play. So we updated that and made that change on 4 Monday. 5 We're going to also include that 6 example in our how-to-play brochures, so we will print 7 those and put those out with that new information. 8 And I've also asked staff to begin working on a 9 retailer education piece or a retailer education flier 10 that also explains pairs play in a little more detail 11 and how it works in conjunction with the Sum It Up 12 add-on feature. So all of those are in the works 13 right now. 14 And I know Sarah and I had a 15 conversation with Ms. Nettles on the phone last 16 Thursday, it was, I believe, and we talked to her 17 about those pieces and our plans to, you know, make 18 those changes and add some more information to those 19 pieces. 20 CHAIRMAN COX: So we saw -- and when I 21 was briefed, I can tell you that I was confused for 22 about the first 15 minutes of the briefing. I kept 23 asking questions that turned out to be irrelevant. So 24 I can understand how someone might be confused by this 25 game, particularly if they're trying to analyze it in 0128 1 a systematic manner as opposed to just accepting that 2 the game must be fair. 3 So I understand your concerns. We have 4 addressed them in trying to communicate better. But I 5 am totally satisfied that there is not anything 6 inherently wrong with the game. 7 MS. NETTLES: There's not, Commissioner 8 Cox, just that one wager. That one wager is really 9 bad. It would take a complete idiot to put money up 10 on a Sum It Up bet if he's playing a pair -- a 11 complete idiot. Who would ever say my two numbers 12 equal the four that are drawn? That's the only 13 objection I have. 14 CHAIRMAN COX: And you're right. It is 15 totally counter-intuitive, and that's why it took me 16 so long to get through it. But the thing that makes 17 it possible is that zero is possible in every 18 position, whether you have two or four. So you can 19 produce with either two or four numbers, zero through 20 something. Now, there are numbers that two -- a pair 21 cannot win. But the odds, as stated there, take into 22 account the fact that you cannot win with two numbers 23 certain of the numbers on a scale. 24 MS. NETTLES: Exactly. But, sir, even 25 in Dr. Eubank's letter, he spells out for you, if they 0129 1 did pay based on a pair, that the prize structure 2 would have to change. And if you will notice for the 3 sum of 18 for a pair, it would have to be changed to 4 pay $25 rather than $2,500. Now, what I'm saying 5 is -- 6 CHAIRMAN COX: Excuse me for a moment, 7 if I could. 8 MS. NETTLES: Okay. 9 CHAIRMAN COX: That isn't the way I 10 read Dr. Eubank's letter. 11 Robert, is that the way you read his 12 letter? 13 MR. TIRLONI: I think what Ms. Nettles 14 is referring to is -- I think one of the suggestions 15 that Ms. Nettles made was what we should allow is, if 16 I play the front pair and I choose the front pair of 17 1-2, the Sum It Up feature should work so that if the 18 first two numbers that we draw are 1-2, then that 19 player could win the Sum It Up feature. 20 And I think what Dr. Eubank was trying 21 to show was, if you do that, you reduce the odds or 22 you make the odds -- the odds of winning become so 23 much easier that we cannot build a valid prize 24 structure to support that kind of game, and I believe 25 that was the point that he was trying to make. 0130 1 MS. NETTLES: And that was the point 2 I'm trying to make, is that the method of play is not 3 incorporated into the odds quoted. 4 Dr. Eubank's odds are correct, based on 5 drawing four numbers between zero through 9. They are 6 not correct for a pair play. Now, that's my 7 opinion -- well, that's my opinion. 8 MS. WOELK: And I want to clarify, the 9 method of play is irrelevant to the odds. Once you 10 have played your numbers, then you have a sum. And 11 the odds of all four numbers turning out to be that 12 sum, that's how you get the odds. How you got to your 13 sum is irrelevant to the determination of the odds. 14 And I think all Dr. Eubank was saying 15 is that if you do a different game, which would not be 16 allowed by the current rule, and compare a pair total 17 to the total of the corresponding pair, that by 18 definition, you increase the odds very much in the 19 players' favor. And because the whole game is 20 designed to be a 50 percent payout game, you would by 21 definition have to lower the payout. 22 But the game is all designed around a 23 50 percent payout. And it's a bit of a illusion that 24 the idea that how many numbers you select has anything 25 to do with the total -- with the sum of our numbers 0131 1 achieving any given total. And the odds -- once 2 you've played your initial play, you've got your 3 number, and you can choose to play Sum It Up or not. 4 But the odds of all four numbers being that number is 5 what Dr. Eubank is determining are the only odds that 6 are relevant to the game. 7 CHAIRMAN COX: And, Ms. Nettles, I 8 think in your initial remark when you said that you 9 thought that the Sum It Up feature would be -- you 10 pick a number that you think will be the sum -- 11 MS. NETTLES: You pick a sum. 12 CHAIRMAN COX: -- zero through 36. 13 MS. NETTLES: Exactly. 14 CHAIRMAN COX: And what in effect is 15 happening here is, that is what's happening. When you 16 pick two numbers -- let's say they're 9 and 1 -- then 17 you have selected 10 as your sum. 18 MS. NETTLES: Well, the players don't 19 know that. 20 CHAIRMAN COX: Pick four numbers -- and 21 let's say they're 1, 2, 3, and 4 -- you can again 22 selected 10 as your sum. So what is happening is 23 exactly what you described, but it's not as obvious as 24 you would have made it. 25 MS. NETTLES: Well, sir, what I'm 0132 1 trying to explain to you is that the players are not 2 aware that their sum is going to be the sum of their 3 two numbers. People who play this game -- and, of 4 course, Daily 4 is too new to have the stats on the 5 game -- but Daily 4 is played just like Pick 3. 6 People calculate it. They figure what should be 7 coming out. Okay? 8 It's not like Lotto Texas or Cash Five 9 or Texas Two Step. It is a totally unique game. And 10 so when they figure that 6-7 should be the first two 11 numbers out, they're not thinking about the sum, 12 they're looking at when those digits were drawn last, 13 the history of them. They've got it computed in their 14 computer scientifically, percentage-wise, as to when 15 those digits should come. 16 They don't care what the other two 17 numbers are, and they don't understand when they say, 18 "Do you want to" -- when the clerk says, "Do you want 19 to Sum It Up?" And I say, "Well what's that"? And 20 they say, "Well, if the sum of your numbers equals, 21 you know, the sum of the four numbers -- the numbers 22 drawn, then you win again." Well, the person says, 23 "Oh, shoot! Why not? You know, I'm already going to 24 hit this one." 25 Well, he doesn't understand that he's 0133 1 got to get -- if he's playing 6 and 7, that his sum is 2 going to be 13. What I'm trying to explain to you is, 3 is that they do not understand. They have no way of 4 knowing that it's the sum of all four numbers that's 5 going to win -- okay? -- not the sum of those two 6 numbers, and they're not playing it that way. They 7 never will play it that way. And I'm just saying that 8 it's an unfair wager, because they are guaranteed to 9 lose one of the other; yet, their intent is to win 10 both wagers. 11 CHAIRMAN COX: And I can only say that 12 we recognize what you were saying, that it might be 13 confusing so to some people. We have clarified our 14 point-of-sale information to make that as crystal 15 clear as we possibly know how to do. 16 MS. NETTLES: But it's not out there 17 yet, and it's going to take a long time. 18 CHAIRMAN COX: No, ma'am, it isn't, but 19 it's getting out there just as soon as we can get it 20 out there. 21 MS. NETTLES: Yes. Well, that's at 22 least -- 23 CHAIRMAN COX: I think Robert said some 24 of it is already out there. 25 MR. TIRLONI: The website is updated as 0134 1 of right now. 2 MS. NETTLES: I'm just saying that the 3 whole wager is unfair. 4 CHAIRMAN COX: Yes, ma'am. I 5 understand. 6 MS. NETTLES: The rest of it is not. 7 Okay? The rest of it is fine. It's just that one 8 wager that needs to stop or do a Quick Pick for a Sum 9 It Up number, you know. It's just not fair to take 10 people's money, knowing that they're only getting the 11 sum of two numbers when it's the sum of four that 12 wins, and that's all I'm saying. 13 CHAIRMAN COX: And I'm going to ask the 14 staff to continue to take your -- consider your 15 recommendations under advisement. 16 MS. NETTLES: I already begged him. 17 CHAIRMAN COX: Okay. 18 MR. TIRLONI: Commissioners, I will 19 tell you, I did ask GTECH for some information about 20 pair play, and I did get this yesterday. Pair play is 21 not a tremendous amount of the sales. It is a brand- 22 new feature. We've never offered pair play on Pick 3. 23 It is a new feature for Daily 4, and we allow players 24 to wager on the front, the mid or the back pair. 25 And again, as Kathy talked about 0135 1 earlier, we're only seven weeks into this game. But 2 pair play right now is only about 5.4 percent of the 3 total Daily 4 sales. But Sum It Up -- of those 4 wagers, Sum It Up is being played with 68 percent of 5 those pair wagers. 6 MS. NETTLES: And those are the 68 7 percent of the people that I've heard from. 8 MR. TIRLONI: I believe what that shows 9 is that there is -- I completely agree with 10 Ms. Nettles. I think your Pick 3 players -- and I 11 think it translates to Daily 4 -- and we talked about 12 that on the phone last week -- I think they are savvy 13 players, because Pick 3 and Daily 4 are complex games. 14 It's not as simple as picking a Quick Pick on Cash 15 Five or on Lotto. 16 But I think that the players are 17 looking at the odds of winning on a pairs wager, 18 because those give you the best odds of winning on the 19 base game. And I think the fact that 68 percent of 20 the pair play or pair players are then summing up 21 their wagers, I think they are being strategic about 22 their wagers, and I think they're trying to play pairs 23 on the base game and then also be strategic about 24 their sum. And I believe that's why there is such a 25 high percentage of them that are playing the Sum It Up 0136 1 feature. 2 MS. NETTLES: The reason for that, too, 3 is that that has been the theory on my website since 4 the Year 2000, and I have a humongous Pick 3 player 5 base for our predications but, more importantly, to 6 follow -- because I have that information current at 7 all times for what the sum of the Pick 3 numbers are 8 in all ways so they can pick their two digits. And 9 then what they do is, they'll pick two digits they 10 think are going to come, and then they'll just play 11 all the other digits with it. They will do nine 12 tickets or 10 tickets to cover every way that those 13 two digits will come. 14 Well, when you came one with Daily 4 15 with that pair play, that's precisely what they're 16 doing, except they don't have any information to do it 17 on, but they're still doing it, whether they're doing 18 it on 9-9 or playing the Year 2007 and taking that 19 zero zero in the middle pair or whatever. You know, 20 the odds of getting four digits all alike if you are 21 playing zero zero and your sum is zero, well, sir, 22 that's one in10,000 odds that the results are going to 23 be zero zero zero zero. 24 CHAIRMAN COX: Right. And I think 25 those are the odds that are listed in our how-to-play 0137 1 brochure. 2 MS. NETTLES: It's not for a pair, sir, 3 because it's only a chance of one in a hundred for a 4 pair, because there's only 100 pairs. So no, sir, 5 it's different. 6 CHAIRMAN COX: And, Robert, let me ask 7 you to do this -- 8 MR. TIRLONI: Yes, sir. 9 CHAIRMAN COX: -- we have focus groups 10 from time to time. 11 MR. TIRLONI: Yes. 12 CHAIRMAN COX: Is it possible that we 13 could, in an appropriate focus group, ask the players 14 and get feedback on these issues? 15 MR. TIRLONI: Yes. We don't have one 16 scheduled -- we don't have a focus group scheduled 17 right now in the near future. But the next time that 18 we do, we can certainly poll the players that are in 19 attendance and talk about the feature. 20 CHAIRMAN COX: Let's do that. 21 MR. TIRLONI: We can do that. 22 MS. NETTLES: And I'm going to say one 23 more thing about Daily 4. They didn't spell out for 24 you the sales on the Daily 4, but they're not very 25 good. In Pick 3, Pick 3 sales declined. Cash Five 0138 1 sales broke a record last month. And Two Step sales 2 are declining as a result of people moving their money 3 over to the Daily 4. If you continue this pair play 4 and this Sum It Up, it's going to hurt you big time 5 financially. 6 CHAIRMAN COX: Ms. Nettles, let me ask 7 for clarification on that. I believe our Controller 8 told me last Thursday that our Daily 4 sales are ahead 9 of our fiscal note for the first two weeks, now that 10 that's a very long time. 11 MS. PYKA: That is correct, sir. And 12 they've updated my data through Saturday, so I've got 13 three weeks of data. And our actual sales 14 collections, for both Daily 4 as well as our Sum It Up 15 feature, are higher than the actual fiscal note 16 projection that we had developed when this game was 17 introduced. 18 As you and I discussed, three weeks of 19 data is not, I think, valid to draw a conclusion with 20 regard to the overall life of the game. We don't have 21 enough weeks. But in each of the four scenarios that 22 we looked at on thea fiscal note estimate, we have 23 exceeded each of those four note components in our 24 projection. 25 CHAIRMAN COX: And I think you told me 0139 1 as well that the cannibalization of Pick 3 was less 2 than we had projected that it might be? 3 MS. PYKA: That is correct. We had 4 estimated a 15 percent decline in Pick 3 weekly sales 5 as the result of the introduction of this new game, 6 and we have not seen a 15 percent decline. The other 7 component that we have looked at was combined Daily 4 8 and Pick 3 sales, and it looked at those together. 9 And we're exceeding that estimate as well, as well as 10 the percentage of players that are playing the Sum It 11 Up feature. 12 CHAIRMAN COX: So we are ahead of 13 expectations on all benchmarks? 14 MS. PYKA: Yes. 15 CHAIRMAN COX: Thank you. 16 MS. NETTLES: What about Cash Five and 17 Two Step? 18 MS. PYKA: Ms. Nettles is asking about 19 Cash Five and Two Step. And we did not utilize Cash 20 Five and Two Step as a factor in preparing the fiscal 21 note projection for Daily 4, as those games are not 22 similar as Daily 4. We looked at Pick 3, as it is a 23 daily game that is drawn twice a day, similar to the 24 Daily 4 game. 25 CHAIRMAN COX: So your belief was that 0140 1 any cannibalization would most likely be of the Daily 2 4 game as opposed to any other game -- Lotto Texas, 3 scratch-offs or whatever? 4 MS. PYKA: That is correct. 5 CHAIRMAN COX: Thank you. 6 MS. PYKA: Instead of the Pick 3 game. 7 MS. NETTLES: May I go? 8 CHAIRMAN COX: Thank you for your 9 continued interest, Ms. Nettles. 10 COMMISSIONER CLOWE: May we take a 11 break? 12 CHAIRMAN COX: Yes, sir. Let's take 13 about a10-minute break. 14 (Off the record: 11:58 a.m. to 12:10 15 p.m.) 16 CHAIRMAN COX: At this point, let's 17 come back to order, please. 18 AGENDA ITEM NO. XX 19 CHAIRMAN COX: Let's come back to 20 order, please. 21 Commissioners, with your permission, I 22 would like to take Item XX out of order at this time. 23 COMMISSIONER CLOWE: Certainly. 24 COMMISSIONER SCHENCK: Yes. 25 CHAIRMAN COX: Okay. Item No. XX, 0141 1 report, possible discussion and/or action on 2 Scientific Games. 3 Gary Grief. 4 MR. GRIEF: Good morning, 5 Commissioners. For the record, my name is Gary Grief, 6 and I'm the Deputy Executive Director here at the 7 Lottery Commission. 8 Joining us this morning is Mr. Mike 9 Chambrello, the President of Scientific Games. For 10 the benefit of Commissioner Schenck, Scientific Games 11 is our primary instant ticket printer. They have been 12 our vendor for several years. The most recent 13 contract that we have with Scientific Games, the 14 initial term of that contract was a three-year term, 15 from September 1st, '04, through August of this year. 16 We have exercised one of the five-year extensions 17 available under that contract. And that means that 18 the current expiration date for our contract with 19 Scientific Games is August 31, 2008. 20 As Mr. Tirloni alluded to earlier 21 today, we have around 70 or 80 active instant ticket 22 games out there in the market. We print around 100 23 every fiscal year, and Scientific Games prints the 24 majority of those. The contract that we do have with 25 them, the initial terms what worth around $44 million 0142 1 for the three-year term. 2 Mr. Chambrello is here to give a state 3 of the company address. In the past, the Commission 4 has asked that the leadership of our primary vendors 5 come forward on a regular basis and brief the 6 Commission as to the state of the company, be 7 available for any questions that you might have. So 8 with that, unless you have any questions for me, I'll 9 introduce Mr. Chambrello. 10 COMMISSIONER CLOWE: And for 11 Commissioner Schenck's further information, Gary, you 12 mentioned the amount of the current contract. That is 13 the second largest contract this Commission has with a 14 vendor. 15 MR. GRIEF: That's correct, sir, second 16 only to GTECH. 17 COMMISSIONER SCHENCK: May I ask a 18 quick question? 19 CHAIRMAN COX: Please. 20 COMMISSIONER SCHENCK: And you say 21 they've had the contract for four years or -- 22 MR. GRIEF: This particular contract 23 began in September 1st of '04. And I would have to 24 refer to my contract folks. 25 How long have they had this? 0143 1 MR. TIRLONI: We've been printing with 2 SciGames since I believe '98 approximately. 3 COMMISSIONER SCHENCK: My question was, 4 who was doing it before that? 5 MR. GRIEF: Do you want to speak to 6 that, Robert? 7 MR. TIRLONI: Commissioners, we have 8 been printing with Scientific Games since 1998. Prior 9 to that, we were printing with Oberthur Gaming 10 Technologies, and Scientific Games recently acquired 11 Oberthur Gaming Technologies. And I believe that will 12 be -- maybe what's going to be discussed today. 13 MS. KIPLIN: And prior to that was 14 Dittler Brothers. 15 MR. TIRLONI: And BABN, I think which 16 was a subsidiary of Dittler, or BABN bought out 17 Dittler. But, yes, we're been printing consistently 18 with SciGames now for just under 10 years. 19 CHAIRMAN COX: Thank you, Robert. 20 MR. GRIEF: Any other questions for me? 21 With that, I'll invite Mr. Chambrello 22 up to the table. 23 MR. CHAMBRELLO: Thank you, Gary. 24 Again, my name is Mike Chambrello. I'm President and 25 Chief Operating Officer of Scientific Games. 0144 1 COMMISSIONER CLOWE: Would you close 2 that laptop and -- are you going to use it? 3 MR. CHAMBRELLO: We actually have a 4 presentation. 5 COMMISSIONER CLOWE: Okay. Fine. 6 MR. CHAMBRELLO: Is that all right? 7 COMMISSIONER CLOWE: Don't close it. 8 MR. CHAMBRELLO: I promise to be brief. 9 With me is Jim Kennedy who is our 10 Senior Vice President of Sales and Marketing. And we 11 do have a brief presentation which I think and hope 12 will update you on where the company is and where 13 we've been since we last had the opportunity to come 14 before you. Certainly through the presentation or 15 following the presentation, we would welcome any and 16 all questions that you have related to our business 17 and our relationship with you in Texas. 18 Perfunctory slide. 19 For those of you that are not familiar 20 with us, Scientific Games has been in the industry for 21 over three decades. We do have 5,500 people spread 22 around the world, with 400 customers. Our primary 23 areas of business are certainly lottery instant 24 on-line. We're in the racing business as well. We 25 are the leading supplier of TOTE systems in the world. 0145 1 And increasingly we're getting into what's called 2 fixed odds betting outside of the United States. 3 We are a NASDAQ company. Depending on 4 the market, we're about $3.7 billion. Our sales have 5 grown over 100 percent in this decade alone. And if 6 you look at it from a global perspective, Scientific 7 Games has produced and distributed over 220 billion 8 tickets worldwide, 24 billion in2006 and we'll exceed 9 that number in2007. 10 Just jumping down to the bottom, about 11 $21 billion of retail sales in North America are 12 generated through Scientific Games services and 13 products. 14 From a overall company perspective, as 15 I mentioned, we have four primary business units. We 16 are proud of the fact that from any measurement, we 17 are No. 1in instants, No. 1in racing, No. 1in game 18 offerings. That would be instant ticket games, race- 19 related games and certainly on-line games as well. We 20 are the No. 2 provider of on-line systems worldwide. 21 And increasingly we have a large presence in the fixed 22 sides betting terminal world and VLT business, 23 although not large enough at this point to denote 24 where we might fit in the overall market size. 25 From an organizational structure, we 0146 1 are generally a flat organization. We are divided 2 into business units. I have responsibility for all of 3 our business units as well as the technology, 4 manufacturing and other support services. We do have 5 a global reach, which I will show you a little more on 6 a map. I think it will be a little more clearer that 7 way. 8 From a corporate structure, we have a 9 very, very seasoned team. Lorne Weil is our Chairman 10 and Chief Executive Officer. He has presented before 11 this Commission in the past. 12 Jim Kennedy is to my right, about a 13 20-year veteran; Bill Huntley, 30 years in our 14 business. Steve Beason is our Online System and 15 Support person. He is also our Chief Technology 16 Officer and has been in the gaming business, although 17 he is a relatively young guy -- certainly younger than 18 I am -- for over 25 years at this point. Steve 19 Saferin and Jim Trask, long-term veterans of the 20 business. We have a lot of experience. And you as a 21 commission and your team have direct access really to 22 anyone on this staff, on this chart, at any time. 23 From a financial performance, we're 24 pleased to say that we've had a continuous growth 25 pattern; as I mentioned, over 100 percent since 2001. 0147 1 We'll certainly exceed $897 million in this current 2 calendar year, which is also our fiscal year. We are 3 on a billion dollar run rate. I can't predict what we 4 will be at the end of the year, but I would hope that 5 the chart would have a additional digit on it when we 6 present to you next year. 7 From a overall business perspective, 8 roughly half of our revenue is generated from instant 9 tickets and instant ticket-related services such as 10 distribution, tel-sell, warehousing, game development, 11 game design and those types of activities. We are 12 fully integrated lottery providers, both on-line, 13 instant, sports wagering. And again from a TOTE, you 14 have a simulcasting and other gaming perspective. 15 Almost a third of our sales are, 16 however, generated from lottery systems. Lottery 17 systems to us would be the equivalent of on-line 18 systems as you would recognize them, your three-digit 19 game, your four-digit game, lotto and sales that are 20 generally generated directly through a point-of-sale 21 device at the retail location. 22 The other roughly third of our business 23 is in racing, the sports betting and fixed odds 24 betting terminal that I mentioned earlier. So as a 25 overall provider, we are the largest pari-mutuel 0148 1 provider in the world and, again, the second largest 2 on-line provider in the world today. 3 Market performance. You know, it's 4 generally up on upward grind. Being a publicly traded 5 company in this environment has very specific benefits 6 that we think bring to the Commission and to all of 7 our customers, obviously, the level of audit, 8 integrity. And reporting requirements certainly are 9 heightened as a publicly traded company. We are very 10 much aware of that and support all of those practices. 11 This is actually one of my favorite 12 slides. I think it's my favorite U.S. slide anyway. 13 Each of those color codes represents either one or a 14 combination of the types of goods and services that we 15 provide to lotteries in the United States. 16 If you were to look at the blue, as we 17 are in Texas, we provide only instant tickets to you 18 here in Texas. However, if you were to look at some 19 of the red states that we have, including 20 Pennsylvania, we provide what we term as a full line. 21 We are the provider of instant tickets, the on-line 22 service system and infrastructure such as you have 23 today provided by GTECH. And we also provide the CSP, 24 which we call co-op services, which would be the 25 distribution of instant tickets, tel-sell, 0149 1 warehousing, game design, game development and 2 marketing support. So given the different lines of 3 business that we're in, we are virtually a provider of 4 some form of lottery services to all of the sanctioned 5 lotteries here in the United States. 6 From a worldwide perspective, again, we 7 have expanded relatively rapidly over the last four or 8 five years outside of the United States. We did make 9 a acquisition two years ago in Europe, which we have 10 greatly expanded our on-line support and service 11 capabilities in Europe. We do have lotteries in Asia 12 at this point in time. 13 We do have a plant that produces 14 tickets in Sidney, Australia, which is part of out OGT 15 acquisition, as well as Santiago, Chile; Atlanta and 16 in Montreal as well as Germany and, for the time 17 being, in San Antonio as well. So our footprint on a 18 international basis continues to expand, and we see 19 growth opportunities outside as well as within North 20 America. 21 From a critical mass perspective, this 22 is just a little finer detail than the map that we 23 just showed you. But from an on-line or video 24 perspective, we do have 16 lotteries. That is the 25 second largest number of any provider. We have 37 0150 1 lottery contracts for the provision or sale of on-line 2 services outside of the United States. About a third 3 of those were acquired as a result of our acquisition 4 of S-net in 2006. 5 From a lottery instant perspective, we 6 have a significant market share. Licensed brands, you 7 know, we have a little fun slide a little bit letter. 8 But as you look at some of the games that you play 9 here in Texas as well as other places, whether they're 10 NBA-related or Pink Panther-related or Monopoly, those 11 are actually licensed products that we as a company 12 license the brand and the use of that brand from very 13 popular and well-known business groups for 14 entertainment entities. 15 And in racing, although racing is 16 increasingly a smaller part of our overall business, 17 we do have a significant footprint in the U.S., North 18 America and outside. 19 From a gaming experience, a lottery 20 experience, you know, I started off in this business 21 in the early 1980s. I actually started off as a 22 project manager. And part of my job was to install 23 new lottery systems or convert existing lottery 24 systems from one vendor to the other, which I often 25 find to be a difficult process, certainly difficult if 0151 1 not done properly, but one that's done repeatedly in 2 consistency over the years from vendor-to-vendor, and 3 Scientific Games has had the opportunity to convert 4 over 23 systems. 5 And as an old project manager and old 6 project guy, would suggest that Scientific Games today 7 has the capability, the skill set and the technology, 8 as well as the experienced implementation personnel, 9 to convert any system of any size in the world today. 10 I don't think I could have said that three or five 11 years ago. 12 From a Scientific Games perspective, we 13 are committed to the growth of the lottery. That is 14 what we do and have done for a many, many years. We 15 are a user of technology. Our technology we think is 16 certainly state of the art and on the cutting edge. 17 But we do technology as a tool to enhance lottery 18 growth, reporting, ease the use of lottery devices for 19 retailers, certainly for management of lottery by 20 lottery executives and commissioners such as yourself. 21 But at this point in the lottery 22 industry, in the lotteries' life cycle, we don't see 23 the ability to produce transactions per minute as a 24 criteria for entry. There are many companies that can 25 do that. But the use of technology to enhance the 0152 1 business is something that we are wholly supportive 2 of, as is evidenced by the roughly 100 million in 3 research and development dollars that we've spent over 4 the last few years. 5 This is just a outline of some of the 6 point-of-sale devices that we use. Some you'll 7 recognize, in type anyway, to those used here in 8 Texas. The green one in the center is our latest 9 terminal, development effort. We actually presented 10 that at the Nashville conference a few weeks ago in 11 Louisville, Kentucky. And we have terminals of that 12 type that are actually functioning in Maryland today, 13 and they will be implemented as part of a new 14 conversion in the State of Connecticut at the end of 15 this year and early next year. That's a development 16 effort that took a bit of time, but we think it's a 17 terrific terminal and will help not only sell lottery 18 tickets but ease of use by retailers as well. 19 From a printed products perspective, 20 that's really our instant ticket market, again over 21 three decades' worth of experience in that area, more 22 dedicated staff, specifically to printed products, 23 then I would suggest all competitors in the world 24 combined. 25 As we sit here today, we have a ticket 0153 1 capacity of 37 billion tickets printed in each of our 2 facilities. We do have a new press that just started 3 up last week -- I'm sorry -- two months ago. It is 4 now fully functional, so that 37 billion is probably a 5 little bit conservative. And with the addition of 6 that sixth press, we have the four newest presses that 7 have been implemented in the world over the last few 8 numbers of years. 9 135 customers. 36 of our 42 U.S. 10 customers, we are the primary instant ticket supplier 11 or provider of co-op services. We are proud of the 12 fact that we were the first vendor to achieve NASPL 13 Quality Assurance's Best Practice certification. I 14 believe and hope that the lotteries will use that as a 15 standard going forward on a consistent basis, and 16 it's certainly something we're very, very supportive 17 of. 18 Our Cooperative Services, again, this 19 is a -- if you go back to the red states -- and I 20 think it was the brownish colored states -- Co-op 21 Services is -- we've become much more of a partner to 22 the lottery as opposed to a provider of just the 23 instant tickets themselves, as we are here to you 24 today, although we like to think that we serve as a 25 good partner on more of an informal basis. 0154 1 But we do allow the lottery under Co-op 2 Services to take advantage of the billions and 3 billions and billions worth of tickets that we provide 4 in other places outside of Texas and around the world. 5 It is a concept that we believe helped transform the 6 instant ticket or the printed products business which 7 was stagnant at best and declining more appropriately 8 in the eighties, to something that now is -- as we 9 learned, your breakout is 75 percent, roughly 10 25 percent. If you were to go back 10 years ago in 11 the industry, you would see roughly an inverse of that 12 where instant tickets were only about 35 percent of 13 total sales and on-line was something that made up the 14 balance. So, again, our philosophy is, you have the 15 integrity, you have the technology, and you have the 16 people working together that could propel the a type 17 of achievement that I think is on the next slide. 18 Thank you. It is. 19 This is basically the top 16 selling 20 lotteries from a instant ticket perspective in the 21 United States today. Only New Jersey is not a 22 customer of Scientific Games at this point. If you 23 look at the stars, that's where we, Scientific Games, 24 are the primary supplier. And if we look at the red, 25 that's where we have primary responsibility for 0155 1 Cooperative Services. So this is a list that has 2 changed somewhat over the years, and it's one that 3 we're very proud to be a part of in each of the 4 partnerships in each of these jurisdiction, certainly 5 including the Great State of Texas 6 CHAIRMAN COX: Now, let me ask you a 7 question at this point. What is the unit of measure 8 here? 9 MR. CHAMBRELLO: I'm sorry. What is 10 the -- 11 CHAIRMAN COX: The unit of measure. 12 MR. CHAMBRELLO: It's on a per capita 13 basis. 14 CHAIRMAN COX: So this is not total 15 salse? 16 MR. CHAMBRELLO: That's correct. It's 17 sales -- 18 CHAIRMAN COX: So total sales, Texas, 19 would be second or third? 20 MR. CHAMBRELLO: Yes. 21 COMMISSIONER CLOWE: Thank you for that 22 clarification. 23 MR. CHAMBRELLO: People often ask the 24 question: What is Cooperative Services? It can be 25 pretty much anything that you want it to be. So if 0156 1 you'll look at the Co-op Services states that we have 2 across the top row and then the definition of services 3 that can be provided down the left-hand side in the 4 left-hand column, it's sort of an a la carte menu. 5 You can take what you want and you don't have to take 6 what you feel, as a lottery, is inappropriate either 7 to divest such or that the lottery thinks that it can 8 do better or would prefer that a different vendor 9 provided it. So we're very, very flexible in that 10 regard. But it is something that increasingly over 11 the years lotteries have gone more and more towards 12 this type of service as it relates to instant tickets 13 and the sale of instant tickets. 14 I talked about licensed properties -- 15 or properties or licensed product. This is what I 16 call the fun slide. Everyone that works within our 17 Properties Division seems to have a lot more fun maybe 18 than the rest of us do. But whether it's major league 19 baseball or American Idol or Deal or No Deal, many of 20 which Texas has taken advantage of over the years and 21 is really one of the heavier users of licensed 22 products of all of our customers, it's something 23 that -- again, earlier in the day you were discussing 24 sort of the frequency of win or the frequency of play. 25 This gives a little more interaction, adds a little 0157 1 more entertainment value, gives something that people 2 can identify with. And today licensed products 3 actually make up about 10 percent of the overall 4 tickets that are sold in the United States today, 5 which is really a fairly incredible number, given 6 where it started less than five years ago. 7 We talked about this a little bit. One 8 of the things that -- it may be the last two bullets I 9 will hit on -- the major league baseball-themed game. 10 We launched those in 2006, and they were successful. 11 But it was a minimized launch really in Boston and New 12 York and I think one other jurisdiction. 13 This year I think we had 17 or 18 14 different states playing baseball-themed games and 15 they were very, very successful. Again, it's taking 16 different forms of entertainment and people that may 17 not normally buy a instant ticket, and try and draw 18 them into the Community. 19 Hasbro, you think of monopoly and games 20 of that nature, which we have all grown up with, and 21 people easily and readily associate with that, we're 22 finding a different type of activity. 23 This shows the sale of licensed 24 product. And, as I mentioned, the growth in the last 25 five years has been incredible. If I put the chart 0158 1 below that, you would see something like -- oh, I 2 don't know -- 30 licensed products games in2002. And 3 in2006, you would see well in excess of 200. So it's 4 a game that certainly is becoming vetted as part of 5 the overall product and portfolio for many lotteries 6 around the United States. 7 From a Scientific Game's perspective, 8 again, we're very people-oriented. We do try and -- 9 you know, it's sort of a cliche -- but work very 10 closely with our customers to maximize benefits to all 11 stakeholders. Certainly the beneficiaries, whether 12 here in Texas, Georgia, Iowa or Idaho, are very, very 13 important to us. So it's advancing lotteries but at a 14 very reasonable and responsible -- in a reasonable and 15 responsible manner. 16 The second bullet is important to all 17 of us. I should note here that from a corporate 18 governance code-of-conduct perspective, our senior 19 compliance officer, a gentleman named Larry Potts, had 20 a long and very successful career with the FBI. When 21 he retired from the FBI, he was actually the No. 2 22 person. He was the Deputy Director. Our General 23 Counsel is a former assistant to the U.S. attorney. 24 So as we increase and we expand our 25 business outside of the United States and into more 0159 1 developing nations, this is something that every 2 member of our organization is not only aware of but 3 trained in and absolutely required to comply to. 4 New game development, I would say that 5 content is king from Scientific Games' perspective. 6 Again, although we love our new terminal, the new 7 terminal is only as good as the games that it 8 distributes. We're proud of our new press, but the 9 press is only as good as the new games and the quality 10 of the games and the integrity of the games that it 11 produces. 12 So we really do think that quality is 13 king and -- content is king, quality as well. And as 14 we continue to expand together as a lottery industry, 15 we do need to look outside of the traditional bricks 16 and mortar of traditional retail locations when the 17 time is right and certainly when legal and legislative 18 requirements permit. 19 A little quick. But since we've done 20 this before, I didn't want to give you the full 21 corporate propaganda pitch. 22 One of the things that did come up a 23 littler earlier was OGT, so I would like to comment on 24 that. We did acquire OGT in May of 2007. OGT has 25 been a long-term player in the lottery industry. They 0160 1 are a company, however, that has been for sale for 2 quite some time. We were in line but far from first 3 in line as far as companies that were looking to 4 acquire them. And while OGT had good products, have 5 good people, many of which we've retained, given the 6 environment, the economic environment that the lottery 7 industry and instant tickets in particular have 8 evolved into over the last, you know, three, five to 9 10 years, it was becoming -- it became increasingly 10 obvious to OGT that they could not be competitive as a 11 stand-alone company. 12 And they had certain areas in market 13 share that we at Scientific Games did not have, either 14 critical mass or the printing capabilities such as in 15 Canada, Australia and in pockets of Europe. So it was 16 an attractive mix for us as sort of a, you know, what 17 I refer to as a tuck-in acquisition. Unfortunately, 18 as I think you're all aware, OGT did have a printing 19 facility in San Antonio. 20 And we announced last month that that 21 plant could not survive as a stand-alone printing 22 entity and that it would be absorbed into our Georgia 23 facility where, as I think I mentioned earlier, we 24 have the capability today, with a new press, of about 25 27 or 28 billion tickets, which will easily absorb the 0161 1 declining volume and capacity that was in San Antonio. 2 So that is our most recent acquisition. 3 I would say we're very close to being fully integrated 4 at this point. Some of the games that OGT did and the 5 intellectual property that they brought are things 6 that certainly we will carry on. And as we made that 7 acquisition and as we made the announcement in San 8 Antonio, we were very sensitive to the needs and the 9 concerns that Texas would have. 10 And as we are a public company, 11 certainly there was nothing that we could do to 12 communicate in advance of our announcement. But I 13 will say that Jim Kennedy was here in a hotel room 14 waiting to try and get in with the lottery as soon as 15 the public disclosure was made. So that transition is 16 going very smoothly. And, you know, we look forward 17 to continued service and taking advantage of the very 18 good things that OGT did have to offer. 19 With that, I will conclude my comments 20 anyway. And between Jim and I, we would welcome any 21 questions that you might have. 22 CHAIRMAN COX: Thank you. 23 COMMISSIONER CLOWE: Do you want me to 24 go ahead? 25 CHAIRMAN COX: Please. 0162 1 COMMISSIONER CLOWE: Mr. Chambrello, we 2 thank you and -- both you gentlemen for coming here 3 today and giving us this update and this presentation. 4 My sense is that your company has been 5 very innovative in the development of the instant 6 games. You showed us a number of the labels, I guess 7 you would say, or brands that you're offering. And I 8 think that's one reason that we have seen the growth 9 of instant tickets in the state. 10 But it was interesting that you 11 represented to us that among your customers, Texas is 12 13th. And the Chairman asked for clarification on 13 that measure, unit of measure. And I'm wondering if 14 you have a idea or a explanation why, although Texas 15 may be second or third in gross sales, we're 13th in 16 per capita? 17 CHAIRMAN COX: Excellent question. 18 MR. CHAMBRELLO: Well, it probably 19 would be helpful if I had listed or we had put on the 20 chart the differences between many of the states on a 21 per capita basis, because what you have is 22 Massachusetts that -- or I don't know. Jim, is it $10 23 per capita? 24 MR. KENNEDY: About $9.50. 25 MR. CHAMBRELLO: About $9.50, really an 0163 1 exorbitant amount. And then you have a huge gap to 2 the next state, which I believe is Georgia, which is 3 maybe $5.00, $6.00. And then you have a number of the 4 other states that are sort of bunched up. 5 So sort of the category of 13th 6 isn't -- you know, maybe isn't as great an indicator 7 as the growth of overall sales and the increase of 8 overall per capita that all of the states on that 9 chart have achieved. If you were to look at 10 Massachusetts as a example, Massachusetts went to a 11 higher price -- or a higher prize payout much sooner 12 than other lotteries have. And, in fact, their growth 13 has slowed down now. 14 So a lot of the things that your 15 lottery has put in place over the last few years have 16 increased sales and will continue to increase sales; 17 whereas, other lotteries, some of which like 18 Massachusetts, have been around for many, many, many 19 more years than Texas has, have already implemented a 20 lot of the types of things that have resulted in 21 higher per capita sales. 22 So I actually would put that up as 23 something to be very proud of, not something that 24 would hint in any way that this has not been anything, 25 particularly on an instant side, a very, very 0164 1 successful lottery -- unless, Jim, you would like to 2 add anything to that? 3 MR. KENNEDY: No. 4 COMMISSIONER CLOWE: Would you ask your 5 folks to give our marketing people those statistics so 6 that we might benefit from them? 7 MR. KENNEDY: Certainly. 8 COMMISSIONER CLOWE: Just what 9 Mr. Chambrello quoted off the top of his head, we 10 would like to look at that in more detail and 11 understand better what those numbers represent and 12 maybe what opportunities are there for Texas. 13 MR. CHAMBRELLO: We would be happy to 14 present that. 15 COMMISSIONER CLOWE: You represented to 16 us in your presentation that you're providing on-line 17 gaming in a number of states in the United States. 18 And I think at one point when our contract came up for 19 bidding, I asked an executive in your company when he 20 was here before us if they were going to bid on our 21 contract, and I think I got a positive response. 22 And then your company didn't bid on our 23 contract, if I remember correctly. And I'm just 24 wondering what your feeling is about bidding on it 25 when it comes up again this next time. You may be 0165 1 aware that there was only one bidder on our contract 2 this last time. And, frankly, I like competition. 3 And you're the next guy in line, I think, in size and 4 capability. 5 And without asking you to make a firm 6 commitment -- don't tell me you are if you're not -- 7 but if you're going to seriously look at it and you 8 can tell us about what you think your intentions might 9 be, I think this Commission would like to hear it. 10 MR. CHAMBRELLO: Actually, I do welcome 11 the opportunity for that. I actually wasn't with the 12 company when the Texas went out for bid. 13 COMMISSIONER CLOWE: That's a wonderful 14 answer. I've given that myself. 15 MR. CHAMBRELLO: So I know I didn't 16 make that comment. One of the things that we as a 17 company -- and I personally have disclosed both in 18 forums like this with our an investor community and in 19 public forums like NASPL and other related events -- 20 is that the on-line industry is very different than 21 the instant industry or the Co-op Services industry. 22 Where we find ourselves as vendors is 23 in a situation where in order to provide the 24 technology and the infrastructure that would be 25 required to service any jurisdiction, certainly one 0166 1 the size of Texas, requires a huge capital investment. 2 We at Scientific Games have made a 3 commitment to bid on the majority of on-line 4 procurements that come out. And I'll give you as an 5 example, there were three currently in process. One 6 is in Pennsylvania, West Virginia and South Carolina, 7 and a bid on all three of those contracts. However, 8 contracts in -- procurements in Michigan, Oregon, New 9 Mexico -- there may be one more. 10 MR. KENNEDY: Idaho. 11 MR. CHAMBRELLO: -- and in Idaho we 12 chose not to bid, and we chose not to bid because 13 there is a simple criteria that we use: What is the 14 opportunity within the state to add value? Again, use 15 sort of a cliche, how do we mean add value? Are we in 16 a position and is the state position to grew sales? 17 Is the state in a position to add retailers where 18 retailers need to be added? And does the regulatory 19 environment permit you to responsibly expand sales, 20 service the retailer base and service the lottery 21 staff in a manner that you can submit a bid and be 22 competitive? 23 As the second largest provider of 24 services, on-line service in the world, we think we 25 can be competitive in most situations. However, there 0167 1 are situations where, as an example, the price may be 2 an overriding determinant, and we would simply do a 3 economic model that says, "At 40 percent of the 4 evaluation criteria, we don't think we can add enough 5 value in revenue growth or in expanded retail 6 locations or points of distributions that would add 7 value to the lottery and allow us to submit a bid that 8 would be competitive on a $50, $7,500, $200 million 9 investment, have a adequate return to our investors. 10 So that's our philosophy. Our track 11 record is such that I expect that we will bid on the 12 majority of on-line contracts, you know, as they 13 present themselves. Texas is a bit unique, not solely 14 unique. I think there were a couple of other 15 contracts that are sort of an all-in-one where you 16 have on-line, CSP and all of the associated services 17 all bundled together. 18 I should fully disclose that while I 19 wasn't with Scientific Games when you went out to bid, 20 I actually may have been with GTECH. I was a long- 21 time GTECH employee and actually was on the 22 implementation team here in Texas in the mid-nineties. 23 So this bundled effect is something 24 that, you know, I think is probably -- as sales and 25 others would indicate, have served the Commission 0168 1 well. I would recommend that you take a look at what 2 it is you will be going out to bid for. Will it be 3 all in one? Will it be broken up into one, two or 4 other pieces? And if increased competition is one of 5 the driving factors, certainly it's not the only 6 driving factor. 7 Price, quality and innovation and 8 others would be equally important I'm sure. But I 9 suggest that you would have more competition if it 10 were broken into more digestible bites, and I'm not 11 talking about Scientific Games. We are in a position 12 to bid one, two or three pieces. 13 And as I sit here before you today, our 14 inclination would be to do so. However, without 15 actually reading and understanding what your 16 requirements are going to be, which we can't do until 17 RFP time, I can't give you a definitive answer that, 18 "Yes, we will be bidding." I will say, yes, we are 19 very much committed to the on-line business. You 20 know, new terminal development and new central system 21 development I think are a testament to that. 22 The fact that we have three bids that 23 have been submitted in major jurisdictions, as I sit 24 before you, I think are further evidence of that. 25 But, no, I can't sit here and say, "Yes, we will 0169 1 absolutely bid," although we certainly have a 2 intention and a desire to bid in Texas. 3 That was a long-winded answer, but I 4 had to give you a little more information than maybe 5 you anticipated. 6 COMMISSIONER CLOWE: Well, you did a 7 good job on that. But, you know, the facts are, as I 8 see them, that we're bundled, we're bundled because of 9 the statute, can't unbundle. 10 MR. CHAMBRELLO: Yes. 11 COMMISSIONER CLOWE: It's not going to 12 happen under the current law. And we are what you 13 see. And if you want it, you got to bid on the 14 package. And there's no question about it, it's a 15 heck of a investment. And you've got to run for a 16 year probably to get it up and know that you can do 17 the job. I think you got into -- what was it, Arizona 18 or New Mexico? -- and you had a problem and you had to 19 change it? 20 MR. CHAMBRELLO: We don't do the 21 on-line in either location. 22 COMMISSIONER CLOWE: I may be 23 remembering that wrong, or another state. But it's 24 certainly not one that if you got into, you could 25 afford to fail, or we couldn't either. 0170 1 MR. CHAMBRELLO: Yes. Going back years 2 and years -- 3 COMMISSIONER CLOWE: I have a long 4 memory. 5 MR. CHAMBRELLO: Okay. 6 COMMISSIONER CLOWE: I've been here a 7 long time. 8 MR. CHAMBRELLO: Well, it was actually 9 Arizona that did have a problem -- 10 COMMISSIONER CLOWE: Ah! Okay. 11 MR. CHAMBRELLO: -- with a predecessor 12 of a predecessor of predecessor company. 13 COMMISSIONER CLOWE: But, you know, 14 people in Arizona still -- they have that history and 15 we wouldn't want that here. 16 MR. CHAMBRELLO: No. I understand. 17 COMMISSIONER CLOWE: But I'm not 18 encouraged by your answer, quite frankly, because, you 19 know, it's a big package. You know what the rate is, 20 public information. And, you know, we want 21 competition, but we're talking about public money. 22 MR. CHAMBRELLO: I understand that, 23 sir. 24 COMMISSIONER CLOWE: And in business, 25 in the private sector, sometimes you can buy a price 0171 1 that's a premium price to get competition and get what 2 you perceive as a higher quality or better service. 3 But in public money, you get a extra scrutiny there 4 that you have to be very much aware of. 5 MR. CHAMBRELLO: I do understand that, 6 and we do well understand the economic model. And 7 again, you know, with a bid in in Pennsylvania, while 8 Pennsylvania doesn't have quite the size of the 9 network that -- 10 COMMISSIONER CLOWE: Don't have the 11 size either. 12 MR. CHAMBRELLO: What's that? Excuse 13 me? 14 COMMISSIONER CLOWE: They don't have 15 the size. 16 MR. CHAMBRELLO: Oh, no. That's what I 17 meant. Yes, they don't have the number of terminals 18 and things of that nature. All of their very major -- 19 lottery was a very major infrastructure. And again, 20 that was one we didn't hesitate to bid on. 21 COMMISSIONER CLOWE: Well, that worries 22 me. That's been one concern I've had for a long time, 23 that we really are tied to one company. That's not 24 saying anything about their performance. 25 MR. CHAMBRELLO: Oh, I understand. 0172 1 COMMISSIONER CLOWE: It's just a fact 2 that in the private sector, when I was in business, I 3 never got locked into one supplier or one vendor. 4 And, you know, it makes me uncomfortable as a member 5 of this board. So we don't want you to tell us you 6 can do something you can't, and we don't want you to 7 do something that you would fail in or be detrimental 8 to your company. And I assume you wouldn't even 9 entertain that, much less do it. But it's a fair 10 question, I think, and I want you to understand that 11 we like competition in this state. 12 I want to go back to the new press that 13 you mentioned. And that's outside of Georgia, 14 Atlanta, Georgia? 15 MR. CHAMBRELLO: That's correct. It's 16 in Alpharetta, Georgia. 17 COMMISSIONER CLOWE: Yes. How many 18 presses do you have there? 19 MR. CHAMBRELLO: We have five that are 20 currently operating in Georgia. 21 COMMISSIONER CLOWE: So you had four, 22 and then you brought on this new one? 23 MR. CHAMBRELLO: That's correct. 24 COMMISSIONER CLOWE: How many presses 25 are in the factory or the plant in Bexar County? 0173 1 MR. CHAMBRELLO: One. 2 Right? Well -- 3 COMMISSIONER CLOWE: I think I've been 4 there, and I think there were two there when I was 5 there. 6 MR. CHAMBRELLO: Yes. 7 COMMISSIONER CLOWE: Are you sure? It 8 may have knocked down one. 9 MR. CHAMBRELLO: Yes. There are two. 10 However, neither of those presses are presses that we 11 would have kept in commission for any period of time, 12 given the way that they were configured and given -- 13 you know, frankly, given their age. 14 COMMISSIONER CLOWE: So they were 15 obsolete? 16 MR. CHAMBRELLO: They were greatly 17 outdated. I won't say they were obsolete, because 18 today they're still capable of printing tickets. 19 Whether they're capable of printing the types of 20 tickets at a rate of efficiency and quality that are 21 cost effective I would say is not the case. 22 COMMISSIONER CLOWE: So although you 23 acquired the owner of the facility, the hardware you 24 got in that purchase wasn't cost efficient for the 25 operation? 0174 1 MR. CHAMBRELLO: That's correct. We'll 2 probably re-deploy parts of that equipment. There are 3 things -- ancillary equipment like imagers and things 4 of that nature that will adapt in other plants in the 5 company. But the actual presses themselves we have 6 just not been able to find a use for them to relocate 7 or to use, you know, as they were currently 8 configured. 9 COMMISSIONER CLOWE: How many jobs were 10 lost when you finally shut that plant down? 11 MR. CHAMBRELLO: When we shut it down, 12 the total, about 340, I think it was, 360. 13 COMMISSIONER CLOWE: Were any of those 14 people offered opportunities elsewhere in your 15 company? 16 MR. CHAMBRELLO: Yes, they were. 17 Certainly not all of them, but a number were. A 18 number accepted the offers and will be relocating. 19 Those that did not choose to relocate or choose to 20 accept the offers were all given what I would 21 certainly consider by industry standards above average 22 severance and out-placement packages. 23 We worked with the Chamber of Commerce, 24 as an example. Our communication to the employees and 25 to placement offices and things of that nature were 0175 1 very, very rigorous. And as difficult as the 2 environment a and the situation is, I know from my 3 perspective, I have received absolutely no questions, 4 complaints or concerns related to how that's being 5 effected, once the decision was made to shut it down, 6 which we really have gone out of our way to try and be 7 very, very sensitive economically as well as -- you 8 know, as well as emotionally. 9 COMMISSIONER CLOWE: I think that's 10 important to the people of San Antonio and Bexar 11 County. That represents a nice package of employment 12 and a clean operation, which environmentally, as I 13 recall from my visit there, was very desirable. Is 14 there any chance of that facility being sold to 15 someone and some replacement of the lost employment 16 taking place? 17 MR. CHAMBRELLO: I don't see it. We 18 actually, as a part of the acquisition, did not 19 acquire the building. The owners wanted to keep the 20 building. The evaluations just didn't work. So we 21 actually don't own the building. We have and will try 22 and sell the equipment that we're not going to use. 23 But our initial review of that was not very 24 encouraging that we have a buyer for that equipment. 25 COMMISSIONER CLOWE: And are you 0176 1 prepared to assure the Commissioners -- I don't know 2 whether you chatted with the other two commissioners 3 or not. I assume you've spoken with staff -- about 4 the dependability of the work product that we're 5 contracted to you for and the ease of communication 6 and being able to inspect the tickets and test them 7 and keep all of our standard operating procedures in 8 place with this move to Georgia? 9 MR. CHAMBRELLO: Yes, but just to keep 10 in mind that prior to our acquisition of OGT and prior 11 to the disclosure of the shut-down, we were your 12 primary supplier anyways. We were providing the 13 overwhelming majority of tickets. I would defer to 14 staff at the level of our communication. 15 It was certainly our intention to 16 communicate consistently throughout the process, to 17 provide the type of assurances from the security 18 perspective, from an investigation perspective, from a 19 ease of transition for those games that were being 20 printed in San Antonio. And, you know, that's 21 certainly a high intention of ours. And I believe my 22 understanding is that we were successful in that and 23 certainly will continue to be through the final 24 transition. 25 COMMISSIONER CLOWE: Well, I think it's 0177 1 most important, in my mind anyway, for you to satisfy 2 the staff in that regard, and I would hope you would 3 be very sensitive to that -- 4 MR. CHAMBRELLO: Yes. 5 COMMISSIONER CLOWE: -- so that they 6 will be satisfied. You know, we're like any other 7 state. When we're a big customer -- and we are, of 8 yours -- we don't like to see you move out of our 9 state, that employment base, first, suffer and all of 10 the other benefits that come from having industry in 11 our area. 12 Toyota has just put a big plant in 13 Bexar County, and it's been very beneficial and was 14 very much welcomed by those people. We understand 15 you're running a business and you're going to make 16 what business decision is best for you. 17 Mr. Chairman, I think those are all the 18 questions that I have. Thank you. 19 CHAIRMAN COX: Thank you. 20 Commissioner? 21 COMMISSIONER SCHENCK: Just one quick 22 question. Thank you for the briefing. I found that 23 very informative. 24 You say you're taking some of the 25 physical equipment out of this San Antonio facility 0178 1 and you're moving it elsewhere, I assume to Georgia or 2 somewhere else in the country -- 3 MR. CHAMBRELLO: Yes, sir. -- fixtures 4 and things of that nature, but you're leaving the 5 physical printing presses themselves? No, no, no. 6 I'm sorry. We've been able to define a immediate use 7 for certain pieces of the equipment, some in Georgia, 8 some in Chile and other places. The actual presses 9 themselves or the stations, we'll be relocating them 10 out of that building and either in storage. Or if we 11 can find a buyer, then it would be our intention to 12 sell the stuff. 13 COMMISSIONER SCHENCK: If I'm 14 understanding correctly, OGT was leasing that 15 facility, it wasn't the owner? 16 MR. CHAMBRELLO: The parent company of 17 OGT, which was actually based in France -- it's a 18 banknote company -- is the owner of that building. 19 COMMISSIONER SCHENCK: Was this 20 acquisition of yours reviewed by the FTC or the 21 Justice Department? 22 MR. CHAMBRELLO: Yes. The acquisition 23 went through -- well, we did all of the appropriate 24 due diligence from an FTC perspective and were granted 25 the opinions that given the accelerated deterioration 0179 1 in the state of OGT and their lack of competitiveness 2 as a result of, you know, frankly just not being able 3 to win contracts in this environment as the primary 4 vendor, that our opinions came back that that would 5 not be an issue. The FTC is reviewing the 6 acquisition, but we don't have any closure at this 7 point. 8 COMMISSIONER SCHENCK: My understanding 9 of that process is that the conclusion would look to 10 the -- the inquiry would look to the question of 11 whether the transaction would benefit competition in 12 the long run. And I'm assuming that with your 13 acquisition, there will be some benefits to 14 competition and that purchasers of your services like 15 us will see some benefits by virtue of that 16 transaction? 17 MR. CHAMBRELLO: Well, certainly. One 18 of the benefits that this acquisition brings, you 19 know, is a combination of what OGT had from a specific 20 game, an IP perspective, but didn't have sort of the 21 critical mass of the economies of scale to deliver 22 that in a way that would be effective or would allow 23 them, you know, to maintain their economic viability. 24 From a overall competitive perspective, 25 there have historically been three competitors in the 0180 1 printing industry and two or three in the on-line 2 industry. And today that really does remain the case 3 as OGT, who was exiting the business. A smaller 4 printer was acquired by one of our competitors. And 5 I'm quite certain that they will make the investments 6 appropriate, you know, to ensure that they have 7 significant competition, you know, for the decades to 8 come. 9 So, you know, while not wanting to -- 10 I'm certainly not -- I'm not a attorney and not 11 wanting to step anywhere near FTC issues, as a lottery 12 industry veteran of a number of decades, I would say 13 that the printing industry, instant ticket printing, 14 is competitive and the combination of our company with 15 OGT will allow the best parts of OGT to be continued 16 and maintained in the industry where, otherwise, they 17 would have -- you know, they would likely have gone 18 away. 19 COMMISSIONER SCHENCK: Well, I think 20 you can certainly understand that we would hope -- at 21 least I would hope that if we're going to lose these 22 jobs in San Antonio, that there will be some benefit 23 ultimately in terms of increased competition, 24 increased effectiveness or something that we would be 25 able to realize here in a tangible way as a result of 0181 1 this development. 2 MR. CHAMBRELLO: Well, I'm quite 3 certain there will be an increase in effectiveness. 4 One of the things, frankly, that has gotten us to this 5 point is, you know, being able to maintain economic 6 viability so the costs of providing our tickets or our 7 services in an instant ticket environment here in 8 Texas are as low as they are anywhere in the world. 9 And, you know, from our perspective, being able to add 10 on some of these different types of games in IP that 11 OGT had will be a mutual benefit. 12 COMMISSIONER SCHENCK: Thank you. 13 Appreciate it. 14 COMMISSIONER CLOWE: Commissioner, one 15 of the problems that I was trying to point up is that 16 in this business of providing on-line services or 17 printing tickets, it's a large market, but it's very 18 narrow. 19 COMMISSIONER SCHENCK: It seems that 20 way. 21 COMMISSIONER CLOWE: There is a 22 tremendous capital investment required. GTECH's 23 investment in providing the services they provide for 24 us, I don't think we've ever known that number, but 25 I'm sure it's substantial. 0182 1 These presses that Mr. Chambrello is 2 talking about, if I remember correctly, they're about 3 100 yards long. 4 MR. CHAMBRELLO: Some of them can be 5 that long? 6 COMMISSIONER CLOWE: They're massive 7 machines. And by the time you get the first sheet of 8 tickets out to look at and test, you've run a half a 9 million. It's a very specialized piece of equipment. 10 And it's not like taking bids for trucks or cars or 11 desks or something that's readily available and in 12 inventory that's deliverable. 13 COMMISSIONER SCHENCK: I wonder, can we 14 play with the length of the contracts to make it more 15 attractive to someone who is going to be looking at 16 making this massive capital investment up front? 17 COMMISSIONER CLOWE: Absolute 18 appropriate thought. And I think that we did 19 something, just for a example -- is this within the 20 agenda item, Counselor, talk about the length of the 21 GTECH contract? 22 MS. KIPLIN: GTECH is noticed. So is 23 the lottery operator contract and the agency's 24 contract. 25 COMMISSIONER CLOWE: Mr. Chairman, with 0183 1 your permission? 2 CHAIRMAN COX: Go ahead. 3 COMMISSIONER CLOWE: We gave GTECH, 4 when the contract came up this last time, a nine-year 5 contract. 6 I'm right on that, aren't I, 7 Mr. Sadberry, nine years? 8 MR. SADBERRY: Commissioner, that's my 9 understanding. That's the information I've been 10 given, that it was a lengthy multi-year contract 11 different from prior contract length terms. 12 COMMISSIONER CLOWE: That's a long-term 13 contract. But we got a substantially, in my 14 opinion -- and I was in favor of the Executive 15 Director signing the contract, and I think it came to 16 us for approval -- based on the benefit to the state 17 for the costs, that length of contract, but it was 18 long-term commitment. And these are the kinds of 19 issues that you're going to have to deal with and vote 20 on, because there are just very few suppliers out 21 there that can provide these very specialized high 22 capital investment services, and it's tough. 23 When you start buying this for the 24 state, it's a perplexing conflict between cost and 25 spending public money and competition and the length 0184 1 of term that you have to commit. You heard Gary tell 2 us, we have just exercised the first I think five-year 3 option. 4 And we have how many more options at 5 five years left on this contract? 6 MR. GRIEF: Again, for the record, Gary 7 Grief, Deputy Executive Director. 8 We exercised the first one-year 9 extension of five that are available. 10 COMMISSIONER CLOWE: Oh, okay. Sorry. 11 I misunderstood you. 12 But that affords us some protection on 13 one hand, but it certainly gives them something to 14 anticipate in the way of a commitment or a potential 15 commitment I should say. This is one thing that's 16 been very troubling to me over the years. And 17 Chairman Cox has more experience in the gaming 18 industry than I do. 19 What are your thoughts, Mr. Chairman? 20 CHAIRMAN COX: Well, I think that -- I 21 don't know anything about the approach that's been 22 taken in the past, but I do know that Mike Fernandez 23 is responsible for this area for us in preparing for 24 the 2011 contract date. And I think we'll be putting 25 out one of more RFPs in2009. 0185 1 Mike, is that correct? 2 MR. FERNANDEZ: (Nods head) 3 CHAIRMAN COX: We now have an RFP out 4 for services of a consultant to help us construct one 5 or more RFPs that we might put out for the 6 procurement, 2009, to be effective in 2011. So we are 7 looking at this hopefully with new eyes and with an 8 eye to all of the things that you raised. 9 COMMISSIONER CLOWE: And I think to get 10 that outside professional help is very wise. It gives 11 us a at least a nationwide view -- and maybe a 12 worldwide view -- of what options we have and we're 13 just not plowing ahead with our head down and not 14 looking at those options. 15 CHAIRMAN COX: Exactly. 16 COMMISSIONER CLOWE: And again, that 17 doesn't reflect on your company's performance. It's 18 just a good business practice to provide for the 19 supplying of the services and goods that we need in a 20 way that we're not stranded if a corporation has 21 problems. And a contingency or a succession plan is 22 always a must with a well-run business entity, whether 23 it's public or private. 24 CHAIRMAN COX: Thank you. 25 Let's, without asking you again the 0186 1 question that Chairman Clowe asked about whether you 2 would bid on our next procurement, let me just ask you 3 to assume for a moment that you find it of a scale and 4 scope that you're comfortable bidding on all of the 5 terms. One of the things that's very important to me 6 is that the lottery operator's compensation not be 7 based on gross sales but at least be based on net 8 sales, taking into account prize payouts, and perhaps 9 after other expenses as well, that the lottery 10 operator might have relevant input toward and 11 responsibility for. Would you be prepared to bid on a 12 net contract of that kind of basis? 13 MR. CHAMBRELLO: Mr. Chairman, I don't 14 think that that would be one of the determining 15 factors if you went one way or the other. That would 16 not play heavily on whether or not we would bid. And 17 again, I don't want to leave this Chair with the 18 impression that we don't have a desire to bid or we 19 don't have the capability to bid. We have both. But 20 until we're actually able to go through the bid, 21 understand what the requirements are, understand what 22 the investment is, the economic model is, I cannot 23 give you a commitment -- 24 CHAIRMAN COX: Sure. 25 MR. CHAMBRELLO: -- that I may have to 0187 1 retreat from at some point. 2 CHAIRMAN COX: We understand that 3 completely. But it being -- the fee being based on 4 gross sales versus net sales in some form would not be 5 a factor in your decision? 6 MR. CHAMBRELLO: It wouldn't be a 7 determining factor for us. 8 CHAIRMAN COX: Excellent. Thank you 9 very much for your travel here and for your 10 informative presentation. We appreciate it. 11 MR. CHAMBRELLO: Thank you very much. 12 CHAIRMAN COX: Commissioners, I think 13 we better get some lunch. 14 COMMISSIONER CLOWE: Yes, sir. 15 AGENDA ITEM NO. XXIV 16 CHAIRMAN COX: At this time I move that 17 the Texas Lottery Commission go into executive session 18 (A) to deliberate the duties and evaluation of the 19 Executive Director, the Deputy Executive Director, 20 Internal Audit Director and the Charitable Bingo 21 Operations Director and to deliberate the duties of 22 the General Counsel pursuant to Section 551.074 of the 23 Texas Government Code; 24 (B) to receive legal advice regarding 25 pending or contemplated litigation pursuant to Section 0188 1 551.071(1)(A) and/or to receive legal advice regarding 2 settlement offers pursuant to Section 551.071(1)(B) of 3 the Texas Government Code, and/or to receive legal 4 advice pursuant to Section 551.071(2) of the Texas 5 Government Code, including but not limited to: 6 Cynthia Suarez vs. Texas Lottery 7 Commission; 8 Shelton Charles vs. Texas Lottery 9 Commission and Gary Grief; 10 First State Bank of DeQueen, et al., 11 vs. Texas Lottery Commission; 12 James T. Jongebloed vs. Texas Lottery 13 Commission; 14 Employment law, personnel law, 15 procurement and contract law, evidentiary and 16 procedural law and general government law; 17 Lottery operations and Services 18 contract; 19 Mega Millions game and/or contract. 20 COMMISSIONER CLOWE: Second. 21 CHAIRMAN COX: All in favor, say "Aye." 22 COMMISSIONER CLOWE: Aye. 23 COMMISSIONER SCHENCK: Aye. 24 CHAIRMAN COX: Aye. 25 The vote is 3-0. The Texas Lottery 0189 1 Commission will go into executive session. The time 2 is 1:09 p.m. Today is October 24, 2007. 3 (Off the record: 1:09 p.m. to 2:59 4 p.m.) 5 AGENDA ITEM NO. XXV 6 CHAIRMAN COX: The Texas Lottery 7 Commission is out of executive session. The time is 8 2:59 p.m. 9 Is there any action to be taken as a 10 result of executive session? 11 Mr. Deane, could you come forward, 12 please, sir. 13 MR. DEANE: Yes, sir. 14 CHAIRMAN COX: I would be pleased to 15 hear your thoughts on the case that you've been 16 working on. 17 MR. DEANE: Thank you, Mr. Chairman. 18 It's Bill Deane, Office of Attorney General. 19 Gentlemen, I'm here today on the Cindy 20 Suarez versus Texas Lottery Commission case. It is a 21 retaliation case filed in the Travis County District 22 Courts. She has sued the Texas Lottery Commission as 23 a result of a termination that she experienced back on 24 June 7, 2005. 25 At the time of the lawsuit being filed, 0190 1 which was in January of 2006, she initially sued under 2 national origin discrimination and for retaliation. 3 But a few months ago, she dropped out the national 4 origin discrimination and maintained the lawsuit as a 5 retaliation suit. 6 Briefly, the facts of it center on 7 three different meetings. Ms. Suarez was a 8 administrative assistant in the Human Resources 9 Department here at the Lottery Commission. And in 10 March of 2005, she met with one of the Lottery 11 Commission's auditors and expressed some problems she 12 was having with the Human Resources Director, which 13 was her supervisor, relating to when she would be 14 evaluated and other matters relating to a 15 reclassification. She thought that she should be 16 reclassified to a higher position. 17 The auditor made notes of that meeting, 18 but nothing came of it. And then in May of 2005, she 19 met with two of the auditors here at the Commission. 20 She again expressed the same problems with her 21 supervisor, which was the -- at this time, though, she 22 actually had a draft evaluation and she expressed that 23 she was unhappy with that evaluation, even though that 24 evaluation contained a number of "Exceeds" and only 8 25 "Meets All" of the expectations. It was a very good 0191 1 evaluation. 2 But she met with the two auditors, 3 complained about that. She also talked about her 4 failure to be reclassified and talked a little bit 5 about her job duties. But the significant thing of 6 these two meetings is that she did not talk about any 7 claim of discrimination. She did not express any 8 opinions about being rationally discriminated against 9 or any other persons in the Commission, at this place 10 of employment, as being discriminated against. 11 And the reason that is significant is 12 because you had at the time two different policies 13 that governed this type of activity. You had the 14 PR-O53 policy that relates to discrimination, and then 15 you had the PR-047 that related to workplace 16 grievances. And had this been a discrimination 17 complaint by her, she certainly would not have been 18 sent back to her immediate supervisor to counsel with 19 her about these issues. 20 Subsequent to the May 2005 meeting with 21 the auditors, because it was a workplace complaint and 22 not a discriminatory complaint, she went and met with 23 the Director of Administration, who was the supervisor 24 over the HR Director. When she met with the 25 director -- this was May 27, 2005 -- she again 0192 1 evidenced her evaluation complaints. She again talked 2 about the workplace as far as not being reclassified 3 to a higher position, but she at no time expressed to 4 the Director of Administration any complaints about 5 discrimination against Hispanic employees at the 6 Lottery Commission. 7 Again, failing to do so, the Director 8 of Administration treated it as a grievance and simply 9 asked her would she be willing at that point to 10 dialogue with her supervisor, which is the appropriate 11 response under PR-047, your policy that relates to 12 workplace grievances. 13 She answered the question "No." And so 14 at that point, the Director of Administration treated 15 that as an insubordination, because she is basically 16 saying she will not go back and talk to her immediate 17 supervisor, she will not work on her problems with the 18 Commission. And because there was no other 19 immediately available position, the Lottery Commission 20 elected to terminate her at that time. 21 She filed a lawsuit claiming, again 22 originally, a discrimination complaint relating to 23 national origin and a retaliation complaint. She 24 later dropped the discrimination complaint, and so she 25 was left with retaliation. And in Texas, of course, a 0193 1 retaliation complaint requires that you first make 2 what we call a protected activity which is a complaint 3 about discrimination, to somebody here at the 4 Commission. And then you are saying to the Court, "I 5 was terminated on June 7th because I complained about 6 discrimination relating to Hispanics." 7 Having failed to do so in this case, 8 however, there was simply no evidence that she ever 9 made such a report. And so as a result, a few months 10 ago when we were preparing for trial, in the discovery 11 they disclosed to us that their damages were $440,000, 12 which included $87,000in attorneys' fees. 13 About a week before the trial, which 14 was scheduled for Monday of this week, October the 15 22nd, a week before that, they sent me a letter saying 16 that they reduced their settlement demand to $60,000, 17 and we responded to that with a lower offer. 18 And finally last Friday, the Friday 19 before the trial, which was to have been held this 20 last Monday, they reduced their offer to $5,000, which 21 is basically nuisance value. So this is $5,000 on a 22 case where damages are over $450,000 by now, where 23 attorneys' fees are in excess of $100,000. And, of 24 course, costs are excessive. 25 And so the Plaintiff has basically 0194 1 acknowledged through this offer that they want to 2 settle and that neither side would have any admission 3 of liability and she would not be in a position of 4 going to court and making an allegation that she 5 complained about discrimination when, in fact, 6 everything that we found indicated otherwise. 7 So at this time, Mr. Chairman, the 8 Office of the Attorney General would highly recommend 9 that you accept the $5,000 settlement offer made by 10 the Plaintiff. We would pay $5,000. We would then do 11 what we call a compromise settlement agreement and 12 submit it, saying that neither side acknowledges any 13 responsibility and neither side acknowledges any 14 wrongdoing. And this will allow her to get on with 15 her life and allow the Commission to close this 16 chapter. 17 CHAIRMAN COX: Thank you, Mr. Deane. 18 Commissioner Clowe? 19 COMMISSIONER CLOWE: I would like to 20 make one point, Mr. Deane, in regard to your 21 commentary, just for clarification. And that is, this 22 lady's complaint against her immediate supervisor, the 23 Director of Human Resources, is not the person who is 24 our Director of Human Resources at this time. 25 MR. DEANE: That's correct, sir. 0195 1 COMMISSIONER CLOWE: That was at an 2 earlier date. And since then, those individuals have 3 changed in that position. 4 MR. DEANE: Yes, sir, that's correct, 5 Mr. Clowe. 6 COMMISSIONER CLOWE: I have no 7 questions, Mr. Chairman, and I'm prepared to move to 8 accept the recommendation. 9 COMMISSIONER SCHENCK: I have no 10 questions. 11 CHAIRMAN COX: No questions. Okay. 12 COMMISSIONER CLOWE: So move. 13 COMMISSIONER SCHENCK: Second. 14 CHAIRMAN COX: Motion made and seconded 15 to approve the recommendation of the Attorney General. 16 All in favor, say "Aye." 17 COMMISSIONER CLOWE: Aye. 18 COMMISSIONER SCHENCK: Aye. 19 CHAIRMAN COX: Aye. 20 Motion passes 3-0. 21 Thank you very much, Mr. Deane. 22 And thank you, Madeline. 23 MR. DEANE: Thank you. 24 25 0196 1 AGENDA ITEM NO. XI 2 CHAIRMAN COX: Agenda Item No. XI, 3 report, possible discussion and/or action on bingo 4 indirect and administrative expenses. 5 Director Sadberry. 6 MR. SADBERRY: Chairman and 7 Commissioners, the literal report on this is that the 8 letter of intent that has been discussed at several 9 previous Commission meetings as being the vehicle to 10 address and hopefully resolve at this stage, and to 11 the extent it can be resolved at this stage -- and 12 "this stage" being outside of a legislative session 13 occurring -- and the letter of intent being having an 14 expression made by several authorities who are members 15 of the Legislative Budget Board, that the current 16 practice of the agency of funding certain bingo 17 overhead administrative expenses out of lottery ticket 18 sales proceeds is consistent with the legislative 19 intent for the use of those funds, although it 20 recognizes the absence of express statutory authority 21 for such purpose, that letter which has been 22 anticipated has not been received. 23 And I cannot give you at this time a 24 projection on when it might be received. So that 25 leaves it to the point of, if you wish to discuss 0197 1 where we are now and where we might go from here. And 2 I'm happy to make that discussion or answer any 3 questions you might have in that regard if you wish. 4 CHAIRMAN COX: I would like for you to 5 outline where we might go from here, Anthony. 6 MR. SADBERRY: Well, I would be happy 7 to attempt to address that. I think the letter of 8 intent is certainly still a viable option as to it 9 being issued, and we have not been informed that it 10 will not be issued. We have not had any indication 11 that's different from indications we've received 12 previously, that there is every anticipation that we 13 might receive it. However, we understand there has 14 been a passage of time that may have impacted the 15 timing of when we might receive it and possibly even 16 the probabilities of same. 17 As you might recall, there were other 18 options -- and I'm trying to recall, and I believe it 19 was at the July meeting. Ms. Pyka might confirm that 20 or verify that -- where you also received information 21 about other options that are in addition to and 22 possibly different from the letter of intent, such as 23 budget execution, emergency funding. I'm sure 24 Ms. Pyka can speak to that even more specifically if 25 you wish. 0198 1 There is a possibility, if you wish, to 2 have those options explored, and that could be 3 simultaneously with the letter of intent so long as, 4 of course, we make clear what we're doing so there is 5 no miscommunication if we were to pursue those 6 options. 7 I think it becomes important that, as 8 we have done in the past, we have informed responsible 9 offices, state leadership offices, members of the 10 Legislative Budget Board, et cetera, of this practice 11 so that it is, without question, disclosed fully, 12 which does not remove the current statutory issue but 13 it at least makes clear the intent of this agency, 14 that we are doing what we understand to be appropriate 15 under the circumstances, until we get instructions or 16 direction otherwise. 17 It is my hope as agency head, and 18 working with the Bingo Director and the Controller and 19 other management level staff, that it can be resolved 20 in such a way that the Commissioners have a comfort 21 level. I think it's important that we are acting 22 consistently with the law, at least with the approval 23 of the appropriate officials, that it's an approved 24 practice, realizing at some point we clearly must try 25 to get a resolution to this at the next legislative 0199 1 session, if that's possible. 2 So what we're talking about now is what 3 we do during this biennium. And I'm happy to pursue 4 any avenues the Commissioners direct me to do so. I'm 5 happy to report on meetings I've had about it. I can 6 tell you, if you wish, the level of meetings that have 7 occurred. I have personally met with the Office of 8 the Governor. I've met with other members of the 9 staff, with the Lt. Governor's office and the 10 Speaker's office. 11 I've met personally with the Chairman 12 of the House Licensing and Oversight Administrative 13 Procedures Committee. I have met personally with the 14 Chairman of the Senate State Affairs Committee. I 15 have met personally with the Chair of the House 16 Appropriations Subcommittee on General Government. 17 And that has been over the last several 18 months, beginning around the June time frame when this 19 became a matter of imminence to us, given the results 20 of the legislation in the House and the Senate during 21 the legislative session which ended late May or early 22 June. Soon after that we began these outreach efforts 23 to communicate our situation and to make clear what we 24 were trying to do about it. So to that extent, we 25 have communicated I think effectively, the question 0200 1 being -- you know, that's one step. What we do in 2 addition to that, should you wish that more be done, 3 and perhaps exploring multiple options on addressing 4 this question. 5 CHAIRMAN COX: Chairman Clowe? 6 COMMISSIONER CLOWE: I don't really 7 understand what the plan is. Let me be very plain -- 8 MR. SADBERRY: Sure. 9 COMMISSIONER CLOWE: -- in telling you 10 what I understand our situation. We can't use funding 11 as we have in the past. We thought the letter of 12 intent was going to authorize that. You're telling us 13 now it's not going to be issued. And it looks like to 14 me we've got to look at other options. Am I 15 understanding it correctly or incorrectly? 16 MR. SADBERRY: No, sir. I'm sorry if I 17 was not clear. I have not been informed that it will 18 not be issued. 19 COMMISSIONER CLOWE: Okay. 20 MR. SADBERRY: I'm saying it has not 21 been issued. 22 COMMISSIONER CLOWE: Okay. 23 MR. SADBERRY: I'm saying that it is 24 still conceivably a viable option. All offices with 25 whom we've communicated -- and that's as late as 0201 1 5 o'clock yesterday afternoon with one of the members 2 of the LBB -- still indicate that it is a possibility 3 it will be issued. They just can't give us a timeline 4 when we can anticipate it. It has been coupled with 5 other state funding issues involving institutions and 6 other agencies, some of which have been resolved as of 7 yesterday. 8 And the possibility now that this 9 letter might move -- it could go either way. It could 10 well be that because of these other issues having been 11 resolved, that might take some of the emphasis on 12 resolution off. I can't say that's the case, but you 13 should be aware that that's one possible reaction. 14 And it also could be that because these other issues 15 have been resolved, it might now clear the path for 16 this letter where our agency is concerned might come 17 forward. 18 So, no, we have not been told that it's 19 not forthcoming. But, obviously, the situation is, 20 we've been waiting for it since June, and that's the 21 concern is, when we might get it. And while we 22 haven't been told it's not forthcoming, until it's 23 here, we don't have a commitment that it will be 24 received. 25 COMMISSIONER CLOWE: Okay. Well, thank 0202 1 you for that clarification, because I did not 2 understand that. 3 So there is still the hope that it will 4 be issued. But in the meantime, since we've been 5 waiting for it since June, we have been in violation 6 since September the 1st by continuing to fund these 7 positions with lottery funds? 8 MR. SADBERRY: That is correct. That 9 is my understanding. That is my understanding of the 10 interpretations that have been made. I've not heard 11 any contrary interpretation. And I think the 12 interpretation is that we do not have express 13 statutory authority. That means we are not in 14 compliance with the law as of today. 15 CHAIRMAN COX: Let me see if I 16 understand. 17 COMMISSIONER CLOWE: Yes. 18 CHAIRMAN COX: On the one hand, we do 19 not have specific statutory authority. But on the 20 other hand, the money has been appropriated? 21 MR. SADBERRY: The money has been 22 appropriated -- I invite Ms. Pyka, anytime she wishes 23 to join me -- subject to a rider and subject to the 24 passage of legislation that would amend the enabling 25 statute to authorize the expenditure of that 0203 1 appropriated money -- 2 CHAIRMAN COX: Okay. And -- 3 MR. SADBERRY: -- which it did not 4 occur. 5 CHAIRMAN COX: -- which is the 6 legislation that passed both houses unanimously and 7 ultimately was taken down on a point of order? 8 MR. SADBERRY: It passed both houses 9 unanimously in the Senate. Amendments were added on 10 issues totally unrelated to the legislation. When it 11 went to the House, it was pulled down on a point of 12 order. And it went back to the Senate, but no action 13 was taken in the Senate. 14 CHAIRMAN COX: Excuse me, Chairman. 15 COMMISSIONER CLOWE: That's right to 16 the point. So, you know, that's all very good and 17 well. But -- 18 MR. SADBERRY: It didn't pass. 19 COMMISSIONER CLOWE: -- we don't have 20 authorization. 21 MR. SADBERRY: That's right. 22 MS. PYKA: May I clarify one point? 23 For the record, Kathy Pyka, Controller. 24 The money has been appropriated out of 25 the lottery dedicated account in the appropriations 0204 1 bill, but the statutory authority is not there. 2 CHAIRMAN COX: Okay. Now I hear you 3 saying two things and I hear Anthony saying three. 4 MS. PYKA: Right. The element that 5 Anthony was referring to was the statutory language 6 modification that did not pass that included a rider 7 that gave us specific authority to use the dedicated 8 fund for the bingo expenses. 9 CHAIRMAN COX: Okay. So that's over 10 and above? 11 MS. PYKA: Right. 12 CHAIRMAN COX: The appropriation was 13 not contingent on that. That was something related 14 but separate? 15 MS. PYKA: Correct. 16 CHAIRMAN COX: Is that inconsistent 17 with your understanding, now that she brings that up? 18 MS. PYKA: The appropriation bill still 19 includes Goal A, lottery, which includes all of 20 indirect expenses funded out of the lottery dedicated 21 account. But the next step of having statutory 22 authority to use the lottery dedicated account for 23 bingo expenses is what we don't have. 24 MR. SADBERRY: We're saying the same 25 thing. 0205 1 MS. PYKA: So that was the purpose of 2 the letter of intent, to give us some link on the lack 3 of current statutory authority -- 4 CHAIRMAN COX: Okay. 5 MS. PYKA: -- to note that it was the 6 Legislature's intent to allow us to use that dedicated 7 account for the bingo indirect and admin expenses. 8 CHAIRMAN COX: Okay. So where we are 9 is, the money was appropriated? 10 MS. PYKA: Yes, sir. 11 CHAIRMAN COX: We didn't have organic 12 law supporting that expenditure. There was an effort 13 to provide that organic law which, for reasons 14 unrelated to us, didn't occur? 15 MS. PYKA: Yes, that is correct. 16 CHAIRMAN COX: Okay. Thank you for 17 that clarification. 18 MR. SADBERRY: And I think we're saying 19 the same thing. Do you have any concern with we're 20 not -- 21 MS. PYKA: The only thing I just wanted 22 to point out was just a clarification on the 23 appropriation, that the dollars are appropriated in 24 that manner in the bill. 25 MR. SADBERRY: And the importance of 0206 1 that is, in some of the mechanisms that were 2 discussed, for example, on budget execution, where the 3 funding would have to come from taking the money from 4 another source, we don't need that, because we have 5 the money. And those are the kinds of things that go 6 into the mechanisms of giving us the authority to 7 spend it. So we have the money without question. The 8 question is the express statutory authority -- 9 MS. PYKA: Correct. 10 MR. SADBERRY: -- to spend the money as 11 appropriate. 12 MS. PYKA: That's correct. 13 COMMISSIONER CLOWE: And the opposite 14 of that is, when you get statutory authority to spend 15 money and you don't have it. 16 CHAIRMAN COX: That happens too, 17 doesn't it? 18 COMMISSIONER CLOWE: That happens, too. 19 CHAIRMAN COX: Yes. 20 COMMISSIONER CLOWE: So my question, 21 Ms. Pyka, I think to you is: Suppose the agency goes 22 forward for some period of time and funds these 23 expenses out of money that's allocated, and Auditor 24 Keel and his folks come over and they run an audit on 25 us -- which I anticipate they will and welcome them to 0207 1 do so -- are they going to say, "This agency took 2 funds that they were not authorized by statute and 3 used them incorrectly"? 4 MS. PYKA: I cannot speculate on what 5 they might say. The practice dates back to -- the 6 very first documented evidence of this ins Fiscal Year 7 1998. So the practice dates back many, many years. 8 COMMISSIONER CLOWE: I was here. 9 MS. PYKA: You were here. 10 COMMISSIONER CLOWE: I remember it 11 well. 12 MS. PYKA: So you've got the practice 13 and you've got all of the agency's documented effort. 14 But bottom line, we don't have the statutory 15 authority. 16 CHAIRMAN COX: And never have had; been 17 doing it since '98, never had that? 18 MS. PYKA: Correct. 19 COMMISSIONER CLOWE: That doesn't give 20 me much comfort. 21 CHAIRMAN COX: And the one thing that I 22 will say is that I came on this board in2002, and I 23 remember the first budget I looked at, and we made it 24 open and obvious what we were doing in that and 25 apparently have from the beginning. 0208 1 MS. PYKA: Yes. There's documentation 2 every biennium of this practice. We made further 3 progress this last legislative session. But all the 4 evidence I was able to find in the files for the 5 previous bienniums, there's evidence there. I mean, I 6 was able to find hard copies. 7 COMMISSIONER CLOWE: And, you know, 8 that gave me confidence. That gave me comfort, Kathy, 9 through all those years that we were doing it and it 10 was okay. I wouldn't have agreed to the budget if I 11 didn't feel it was okay. But we brought it up this 12 last Legislature. 13 MS. PYKA: Yes. 14 COMMISSIONER CLOWE: We said, "We 15 should not be doing this without authorization," and 16 we didn't get authorization. 17 MS. PYKA: Right. 18 COMMISSIONER CLOWE: So this dilemma 19 now has been highlighted or spotlighted. And we've 20 been thinking, I think since June, we were going to 21 get this letter of intent. And now Executive Director 22 Sadberry is telling us, "It's not here yet." 23 I want an airing of this, which we're 24 having right now. And, you know, I don't want 25 anything to happen in this agency that we're not 0209 1 saying, "This is what's happened." And if it's 2 reasonable to hope and we can get the letter of intent 3 and that's going to be forthcoming and it's going to 4 resolve the issue, I'm comfortable with that. But I 5 don't want these things to be done and then have 6 Auditor Keel and his people come in and say, "You have 7 been doing something that's bad and it's wrong." And, 8 you know, we promised Auditor Keel when he did his -- 9 what was it, five audits on us? 10 MS. PYKA: Yes, sir. 11 COMMISSIONER CLOWE: -- that we were 12 going to comply and we were going to be responsive and 13 the kind of things that he said that had gone on here 14 in the past would not occur in the future. So I think 15 now we're facing that kind of a promise we made, and I 16 want to fulfill it. 17 So my sense is, Mr. Chairman, you know, 18 if there is a reasonable hope of the letter of intent 19 coming out, it's reasonable to wait and hope in 20 anticipatory expectation that it's coming. But this 21 dilemma is there, and we can't act like it's not 22 there. We have the money but we don't have statutory 23 authorization. 24 MS. PYKA: Right. 25 COMMISSIONER CLOWE: Got to say it out 0210 1 loud. 2 CHAIRMAN COX: Yes. 3 Commissioner? 4 COMMISSIONER SCHENCK: I have quite a 5 few questions. As I'm understanding the problem, 6 there is a difference between a prohibition that the 7 Legislature has put on us and a lack of authorization. 8 And we've interpreted our enabling act -- am I 9 understanding this correctly? -- not to allow us to 10 spend appropriated funds on these activities, on bingo 11 activities? 12 MS. WOELK: Do you want me to address 13 that, Kathy? 14 MS. PYKA: Certainly. 15 COMMISSIONER SCHENCK: Do you want to 16 do that? Okay. 17 MS. WOELK: Normally you don't look for 18 express authority for the money in a statute; you look 19 for express authority for the activity. This is a 20 case in which we have a provision that lists the 21 purposes for which the state lottery account may be 22 used, and you have that in front of you. And 23 supporting bingo operations is not among the 24 identified purposes. 25 COMMISSIONER SCHENCK: Okay. I get 0211 1 that. Neither is it prohibited anywhere. The concern 2 is, there is a negative pregnant in this authorization 3 by listing a series of things that are authorized by 4 implication -- 5 MS. WOELK: If I can just -- I think 6 there is an "only" in the first -- 7 COMMISSIONER SCHENCK: Okay. 8 MR. SADBERRY: There is an "only" in 9 there. 10 COMMISSIONER SCHENCK: Now we have a 11 specific appropriation that's been passed by the 12 Legislature for us to spend money on the bingo 13 activities, but it's not amending this section. 14 MS. PYKA: Correct. Right. 15 COMMISSIONER SCHENCK: But there is an 16 appropriation. 17 MS. PYKA: There is an appropriation, 18 and the appropriation has been granted. This is the 19 third biennium where we have received the 20 appropriation, the third biennium in which this has 21 been laid out in the legislative appropriation request 22 as a funding issue. 23 COMMISSIONER SCHENCK: And it's 24 specifically addressed to these activities? 25 MS. PYKA: Yes. The indirect and -- 0212 1 COMMISSIONER SCHENCK: I don't know 2 that there's still a hole. It would certainly make me 3 more -- make us all more comfortable for them to amend 4 this section of the statute. But if we're talking 5 about negative implications by the word listing 6 "only," excluding other activities, and they've 7 authorized, whether there is an appropriation bill or 8 not, us to spend this money, we may have the 9 authorization already. 10 And if we don't -- and I don't know 11 what our conclusion would be on that. I would love to 12 see a memorandum or something addressing this issue -- 13 then I don't think a letter of intent is going to fix 14 it. The Legislature is a -- would have bicameralism 15 presentment. If the Governor vetoes what every 16 legislator thinks the law ought to be, it's not the 17 law. And if we get leadership in both houses that 18 tell us what they think the law ought to be, that's 19 very helpful and it solves potentially some political 20 problems, but it's not law. So either we have a legal 21 problem or we don't. 22 CHAIRMAN COX: One thing I might add, 23 Commissioner, to that is, we have been told that the 24 Governor's office supports the letter of intent. 25 COMMISSIONER SCHENCK: As a political 0213 1 matter, I think that we're doing everything we can, 2 obviously, but then there is this question of whether 3 we still have a legal problem or not. And I'm not 4 sure I understand what our conclusion is on that. 5 MR. SADBERRY: Commissioner, your 6 comment is very pertinent to very recent meetings that 7 I've had, and there's some homework assignments that 8 will pursue the very line of reasoning you are 9 raising. 10 For example, what our problem is, is 11 allocation, for example, how do we reallocate common 12 resources -- lease space, computer service and 13 professional services, legal services, accounting or 14 independent audits, et cetera -- and one of the issues 15 is whether there is a legal requirement for such an 16 accounting. And if there is not, then the question 17 becomes: That's the only issue we have is, we're not 18 charging, if you will -- Lottery is not charging Bingo 19 for those services. 20 And the question becomes: Is that 21 legally required? And, if so, is it mandated how it 22 should be done and in what quantity? And I have to 23 tell you that it's certainly been raised recently as 24 well, what you just said; and that is, does the letter 25 of intent cure the legal problem, if the legal problem 0214 1 is what you have as opposed to an intent question? 2 As of today, those are on the table and 3 will be looked at it very critically. And if I hear 4 you calling and asking for a legal memorandum, and 5 that will be definitely provided real soon. I'll make 6 that a matter of most urgent priority to do that. I 7 understand our legal counsel has points on 8 appropriation law in general. 9 MS. WOELK: Well, you raised several 10 points. I want to make sure that you were clear on -- 11 you can have your own book. 12 COMMISSIONER SCHENCK: Fine. That's 13 great. I look forward to it. 14 MS. WOELK: An appropriation, something 15 in the Appropriations Act can't change general law. 16 There's a whole history -- 17 COMMISSIONER SCHENCK: Okay. 18 MS. WOELK: -- of the one-subject rule. 19 So if you have general law -- let's say the general 20 law is crystal clear: "You may not do this" -- there 21 is nothing you can do in an appropriations bill that 22 changes that. 23 As to the specific question, is it a 24 prohibited expenditure, I think you may be asking have 25 we had an AG opinion or any kind of official 0215 1 interpretation of that? And I don't believe -- and I 2 wasn't here -- I don't believe there was even an 3 official agency memorandum on the issue, but the 4 concern has been raised. 5 MS. PYKA: The concern is -- I'm not 6 aware of an opinion request. The concern has been 7 raised and it was raised by a memorandum. And there's 8 several documents I have found that raise the concern. 9 MS. WOELK: Right. 10 MS. PYKA: And it was more the 11 administration and operation of lottery versus 12 administration and operation of Lottery Commission -- 13 MS. WOELK: Right. 14 MS. PYKA: -- and the use of the funds, 15 is where the concerns -- 16 COMMISSIONER SCHENCK: So we have been 17 authorized to receive the money and we've been 18 authorized to spend the money, but we've not been 19 authorized to spend it out of the account into which 20 it goes in? 21 MS. WOELK: No. The appropriation is 22 from this account cited in the statute that says -- 23 the statute says -- 24 COMMISSIONER SCHENCK: I am not 25 persuaded that this appropriations bill is 0216 1 ineffective. I would really like to look at whatever 2 that case law is that suggests that an appropriation 3 bill can't in itself have effect. It's a later-in- 4 time statute; it is a more specific statute than that 5 statute is, and it can't be that the Legislature 6 intends to do a thing and intends the opposite of the 7 thing at the same time. 8 MS. WOELK: Well, we can take you 9 through the many, many years of -- the appropriations 10 bill is a statute. But because of the one-subject 11 rule, there are hundreds of AG opinions -- maybe not 12 hundreds; tens -- AG opinions that make clear that to 13 the extent an Appropriation Act rider attempts to 14 amend general law, it's unconstitutional. 15 COMMISSIONER CLOWE: Well, Sarah, I 16 think the Commissioner has made an offer. 17 MS. WOELK: Yes. 18 COMMISSIONER CLOWE: And he has a fine 19 legal mind. 20 MS. WOELK: Right. 21 COMMISSIONER CLOWE: And I think we 22 should avail ourselves of his offer. 23 And, Mr. Chairman, if you would be 24 satisfied -- here is an asset that has just been given 25 to the board -- we ought to ask the Commissioner to 0217 1 work with the legal staff and put this on the agenda 2 for the next meeting and hear his counsel. 3 CHAIRMAN COX: Okay. I think that 4 that's certainly one thing that we should do. 5 And do you have further questions, 6 Commissioner? 7 COMMISSIONER SCHENCK: No. 8 MS. WOELK: That would be great. 9 CHAIRMAN COX: Okay. I think we need 10 to go at this thing in several ways. And, Director 11 Sadberry, I understood you to say that the letter of 12 intent was only one of the options that was available 13 to us as some kind of a safe harbor and that, in fact, 14 there might be other actions that would be a much 15 safer harbor than the letter of intent might be? 16 MR. SADBERRY: Are supplemental to it, 17 yes, sir. 18 CHAIRMAN COX: And what I would ask you 19 to do is to pursue all of those with all possible 20 vigor between now and the next meeting. And sooner 21 rather than later would be helpful, if you can provide 22 a briefing to individual commissioners on your 23 progress and if it is made. 24 Mr. Sanderson -- 25 MR. SANDERSON: Yes, sir? 0218 1 CHAIRMAN COX: -- do you have a plan 2 for implementing the reduction, should that become a 3 reality? 4 MR. SANDERSON: I have mentally 5 prepared a plan. I have not put one in writing. And 6 I would have to get with the Human Resources 7 Department on any action that would be taking place. 8 CHAIRMAN COX: Okay. Would you do 9 that, please? 10 MR. SANDERSON: Yes, sir. 11 CHAIRMAN COX: So the activities that I 12 understand we're going to have is, Sarah, the General 13 Counsel is going to work with Commissioner Schenck and 14 reach an agreement with him on whether or not we even 15 have a problem. 16 Director Sadberry is going to pursue 17 all reasonable and viable alternatives for getting us 18 in the safe harbor with the present activity. 19 And, Mr. Sanderson, you're going to 20 prepare a plan for implementation should that become 21 necessary? 22 MR. SANDERSON: Yes, sir. 23 COMMISSIONER CLOWE: And I think, 24 Mr. Chairman, I would like to add to that -- and I 25 agree with everything you've said -- that the action 0219 1 that Mr. Sanderson is going to codify is an absolute 2 last resort. And I don't want -- and I assume the 3 board doesn't want it to be thought that this is 4 imminent action. We're just doing prudent planning in 5 the ultimate event of some inability to continue in 6 our present form in the Charitable Bingo Operations 7 Division. My sense is that as a result of the recent 8 reorganization, you need every FTE you have. 9 Is that correct, Phil? 10 MR. SANDERSON: That is correct, yes, 11 sir. 12 COMMISSIONER CLOWE: And you have a 13 workplan now that's going to achieve the levels of 14 auditing, enforcement, regulation that is beneficial 15 to the state and to the operators of bingo operations. 16 And so I would not want a wave of concern to occur in 17 this agency about any imminent action. 18 I think this Commission is inclined to 19 do everything correctly possible to maintain the 20 organization that you have to create a work product 21 that is that which we've been discussing in this 22 meeting all day. You're doing that as a contingency 23 but not imminent action. 24 And, Mr. Chairman, I hope that's okay 25 to state it in that way. 0220 1 CHAIRMAN COX: And I appreciate your 2 stating it that way. That was my secondary purpose. 3 My primary purpose in asking Mr. Sanderson for that 4 was so that when Director Sadberry goes and talks to 5 leadership offices, he can tell them what would be the 6 result should we not get relief -- 7 COMMISSIONER CLOWE: Yes. 8 CHAIRMAN COX: -- because I think that 9 would be a natural question: Well, what happens if 10 you get it? What happens if you don't get it? 11 COMMISSIONER CLOWE: That's exactly 12 right. And my sense is that we would have a shortfall 13 in our ability to create the work product that we've 14 been striving for in the division for sometime. 15 CHAIRMAN COX: Exactly. 16 Okay. Is everybody clear on where 17 we're going? 18 COMMISSIONER SCHENCK: Thank you. 19 COMMISSIONER CLOWE: Thank you, Kathy. 20 CHAIRMAN COX: Excellent. Thank you 21 very much. 22 COMMISSIONER CLOWE: Thank you, 23 Anthony, for this good discussion. 24 AGENDA ITEM NO. XII 25 CHAIRMAN COX: Item No. XII, report, 0221 1 possible discussion and/or action on the 80th 2 Legislature. 3 Ms. Trevino. 4 MS. TREVINO: Good afternoon, 5 Mr. Chairman and Commissioners. For the record, I'm 6 Nelda Trevino, the Director of Governmental Affairs. 7 I mentioned at the last Commission 8 meeting, during the legislative interim, the 9 Governmental Affairs staff would be coordinating and 10 developing agency legislative briefings similar to 11 those that we have held in the past. We held our 12 first briefing for this interim on October the 10th. 13 And included in your meeting notebook is a copy of the 14 briefing agenda. And you will note that we provided 15 updates on several subjects. Executive Director 16 Sadberry, Phil Sanderson and myself made the 17 presentations during the briefing. You should have 18 also received a copy of the presentation material. 19 Lastly, during the legislative interim, 20 the Speaker of the House and the Lt. Governor assigned 21 charges to each committee to study particular issues 22 and possibly conduct committee hearings for the 23 purpose of making recommendations to the next 24 Legislature. It is anticipated that the Speaker and 25 the Lt. Governor will be issuing these committee 0222 1 interim charges in the very near future. We will 2 certainly keep you advised of any charges that are 3 issued that are of interest to the Commission. 4 This concludes my report, and I'll be 5 happy to answer any questions. 6 CHAIRMAN COX: Thank you, Nelda. 7 AGENDA ITEM NO. XIII 8 CHAIRMAN COX: Agenda Item No. XIII, 9 report, possible discussion and/or action, including 10 procurement, on the agency's lottery security study. 11 Mr. Fernandez. 12 MR. FERNANDEZ: Mr. Chairman, 13 Commissioners, good afternoon. My name is Mike 14 Fernandez. I'm the Director of Administration. 15 In accordance with the State Lottery 16 Act, at least once every two years the Executive 17 Director shall employ an independent firm to conduct a 18 comprehensive study of all aspects of lottery 19 security. The last study was completed in May 2006 by 20 the State Auditor's office. 21 The State Auditor has recently 22 delegated authority to the agency to contract for 23 these services. And this is to advise you that staff 24 intends to issue a new solicitation for the lottery 25 security study. 0223 1 If you have any questions, I would be 2 happy to try and answer them. 3 COMMISSIONER CLOWE: No questions. 4 COMMISSIONER SCHENCK: No questions. 5 CHAIRMAN COX: Mr. Fernandez, if you 6 know, does this delegation evidence further confidence 7 in this agency than the State Auditor had previously? 8 MR. FERNANDEZ: Catherine Melvin might 9 be able to answer that better than I. But I would 10 tell you -- I will be happy to give you my opinion. 11 And my opinion, I suspect that that's based on the 12 work load of the State Auditor's office. I'm sure 13 they built their audit plan and they take a look at 14 the audits they have to do and so set their course. 15 CHAIRMAN COX: And, Catherine, do you 16 have any different observation? 17 MS. MELVIN: Well, I just have one 18 comment. For the record, Catherine Melvin. 19 And I add this, because as an auditor 20 myself, I'm sure they would also say it's based on 21 risk to the state. So maybe somewhat yes, in answer 22 to your questions, but certainly driven by what 23 Mr. Fernandez has said. 24 CHAIRMAN COX: Well, when they 25 delegated the procurement of the financial audit to 0224 1 us, I specifically asked Mike Apperley, "Is this an 2 indication of further confidence in the agency"? And 3 he had, "Yes, it is." 4 MS. MELVIN: He did. That's true. 5 CHAIRMAN COX: Thank you very much. 6 COMMISSIONER CLOWE: But don't get too 7 confident. 8 AGENDA ITEM NO. XIV 9 CHAIRMAN COX: Okay. Item XIV, report, 10 possible discussion and/or action, including 11 procurement, on the agency's market research. 12 Mr. Fernandez. 13 MR. FERNANDEZ: Again, Commissioners, 14 my name is Mike Fernandez, for the record. 15 Administration Director. 16 The agency currently contracts for 17 market research -- the agency's current contract for 18 market research expires August 31, 2008. This item is 19 to advise you the staff's intent to develop and 20 publish an RFP for the acquisition of market research 21 services. 22 If you have any questions, 23 Commissioners? 24 COMMISSIONER CLOWE: No questions. 25 CHAIRMAN COX: Commissioner Schenck, I 0225 1 will tell you that this is a million-dollar plus kind 2 of procurement. This is maybe -- it's certainly one 3 of our larger outside contracts. And this market 4 research is something that is used very carefully 5 here. The use of it is coordinated among the 6 different departments in the agency. We have scrubbed 7 it. It was I think a million 4a couple of years ago. 8 MR. FERNANDEZ: That's correct. 9 CHAIRMAN COX: And it wasn't being used 10 very well. But I think now we're getting not only a 11 lower price because we have descoped and zeroed in on 12 the work they're doing, but we're getting a lot better 13 use of the information that we get. 14 MR. FERNANDEZ: That's correct. 15 AGENDA ITEM NO. XV 16 CHAIRMAN COX: Item No. XV, report, 17 possible discussion and/or action on the agency's 18 contracts. 19 Mr. Jackson. 20 MR. JACKSON: Good afternoon, 21 Commissioners. Good afternoon, Commissioners. For 22 the record, my name is Tom Jackson. I'm the 23 Purchasing and Contracts Manager for the Commission. 24 Commissioners, in your notebook under 25 Tab No. XV is a report on prime contracts that has 0226 1 been updated for your review. I would be happy to 2 answer any questions. 3 COMMISSIONER CLOWE: No questions. 4 COMMISSIONER SCHENCK: No questions. 5 CHAIRMAN COX: No questions. Thank 6 you, Mr. Jackson. 7 AGENDA ITEM NO. XVI 8 CHAIRMAN COX: Item No. XVI, report and 9 possible discussion and/or action on the agency's HUB 10 program and/or minority business participation, 11 including the agency's Mentor Protégé Program. 12 Mr. Jackson. 13 MR. JACKSON: Good afternoon again, 14 Commissioners. For the record, my name is Tom 15 Jackson. And I'm here today to report on behalf of 16 Joyce Bertolacini, coordinator of the HUB program for 17 the Texas Lottery Commission. 18 A copy of the agency's August HUB 19 Minority Contracting Activity Report has been provided 20 in your notebooks today. The report includes all 21 Fiscal Year 2007 expenditures paid from September 1, 22 2006 through August 31, 2007. Our total qualifying 23 expenditures as of August 31st were approximately 24 $156.7 million. And our estimated HUB minority 25 utilization was $42.4 million, which equates to 0227 1 27.1 percent. 2 A monthly HUB minority report will not 3 be presented at the November meeting, due to our 4 transition to an automated HUB contract database that 5 interfaces with the agency's newly acquired financial 6 accounting system. We anticipate having a cumulative 7 report to present in December but will keep you 8 informed of progress at the next meeting. 9 The Fiscal Year 2000 statewide HUB 10 report was released on October 15th. Joyce will be 11 providing summary reports and an analysis for you at 12 the November Commission meeting. 13 Regarding the agency's Mentor Protégé 14 Program, it's unfortunate that Joyce couldn't be here 15 to present this information personally, but I am 16 pleased to report that we have now received five 17 mentor protégé agreements. These agreements are 18 between Scientific Games and their Protégé, Business 19 Assets Enterprises; Tracey Locke and their protégé, 20 Creative Printing; and GTECH and their three protégés, 21 Business Asset Enterprises, C-Serv Commercial Moving 22 Services and Flores & Associates. 23 We hope to have formal documents for 24 Anthony to sign at both the November and December 25 Commission meeting when we will anticipate that the 0228 1 various parties can be present for acknowledgment. 2 I would be happy to answer any 3 questions. 4 COMMISSIONER CLOWE: That's very good 5 news. And I hope you'll tell Joyce how pleased we are 6 to hear it. And we'll look forward to having those 7 mentors and protégés introduced at the next meeting. 8 MR. JACKSON: Okay. I'll pass that on. 9 Thank you. 10 COMMISSIONER SCHENCK: Just a couple of 11 quick questions. We have complete responses from all 12 these companies, because we've got a lot of zeros down 13 here for Xerox and people below that level, so there's 14 just no subcontracting going on for those people? Or 15 if there's subcontracting, they're not subcontracting 16 the minorities? 17 MR. JACKSON: The subcontracting plan 18 is voluntary. We encourage it, highly encourage it. 19 However, we can't run the business for them. So we 20 try our best to get them to subcontract. Many times 21 they do; many times they don't. But, like I say, we 22 do encourage HUB participation. 23 COMMISSIONER SCHENCK: And Tracey Locke 24 is doing printing press. Is that what you said? 25 MR. JACKSON: They advertising. 0229 1 COMMISSIONER SCHENCK: Advertising. 2 Okay. Because there's quite a bit of Hispanic 3 subcontracting but zero African-American 4 subcontracting, it looks. I mean, have we asked them 5 to look at that? 6 MR. JACKSON: We have asked them to 7 look at that. Previously on an advertising contract 8 was with a minority company that has -- no longer have 9 a contract with that company which has created a 10 shortfall in that area, but we are working to try to 11 get that improved. 12 COMMISSIONER SCHENCK: Right. 13 MR. ANGER: Commissioners, for the 14 record, my name is Michael Anger, and I'm the Lottery 15 Operations Director. 16 And to add to what Tom shared with the 17 about the advertising contract, a significant -- and 18 I'm sure it's in your report there -- a significant 19 amount of the money is spent on HUB minority 20 contracting through that particular vendor, Tracey 21 Locke. 22 And a large part of the reason for that 23 change is that they subcontract and partner with under 24 the Advertising Services Contract a minority firm that 25 does our minority ethnic market advertising for us. 0230 1 And that firm is called Cultura, and it's a majority 2 owned Hispanic firm. So that's the reason for a large 3 number of dollars that are being spent under that 4 category, as opposed to advertising. 5 COMMISSIONER SCHENCK: So they 6 basically have two contracts, because it looks to me 7 like the total amount that we're paying them is being 8 subcontracted almost to Hispanic Americans and 9 American women and zero to somebody else. 10 MR. ANGER: The other big chunk of that 11 and the bulk of the advertising contract as a whole 12 gets spent on media dollars. So there's 13 administration expenses that both Cultura and Tracey 14 Locke receive for doing the services under the 15 contract. And there's production and things like 16 that. 17 But the bulk of the money actually gets 18 spent on media purchases for TV, radio, billboards, 19 et cetera. And those are purchased through a 20 subcontractor that they use called the Ward Group 21 which is the female on business that you see that 22 those monies are largely flowing through to. 23 There are some smaller expenditures 24 that come out, but those are the two larger sections 25 of that contract. 0231 1 COMMISSIONER SCHENCK: The bulk of 2 their -- is less than -- is about $700,000, I assume 3 is what they're keeping? 4 MR. ANGER: And not having the numbers 5 in front of me, I thought it was a little higher than 6 that, but the great majority of those monies flow 7 through basically in those two locations. 8 MR. SADBERRY: And, Commissioner, if I 9 may add -- and, Michael, you can certainly add to 10 this -- we are currently in meetings with Tracey 11 Locke, not necessarily along those specific number 12 lines but on the general concerns about 13 African-American spending, HUB spendings, et cetera. 14 In fact, was it two weeks ago, Michael, 15 we were in Dallas meeting with Sen. West who is a 16 member of the Senate Finance Committee, who has had a 17 long-standing interest in this. And we had actually a 18 meeting that was tentatively scheduled for Friday of 19 this week with the minority print media -- Texas 20 Publishing Association? 21 MR. ANGER: Yes, sir. 22 MR. SADBERRY: -- Publishing 23 Association who were in attendance at that meeting 24 with Sen. West, and this follow-up meeting is being 25 conducted at his direction. Tomorrow Tracey Locke is 0232 1 meeting with that group in Dallas, independent of us. 2 I think the point being, we are 3 concerned about this and we're raising those 4 questions. Those questions are being raised to us. 5 And we are having these meetings and we're having 6 these discussions. And Michael and his group, Ray 7 Page and others, are meeting with me internally. 8 Those meetings are being set up now to discuss all of 9 these aspects. 10 We have a history here where at some 11 point, the contract itself was divided into two 12 components and problems arose. And I can go into that 13 in more detail. In a most recent procurement, we 14 engaged consultants to advise as to the most efficient 15 and effective way of getting at all of these goals, 16 including assuring the quality that the agency must 17 insist upon in the performance of its community that 18 participates in terms of print media, advertising and 19 otherwise. 20 We recognize the importance of it, and 21 we're working on it. We would be happy to receive any 22 additional interest that you have in it. But I just 23 wanted to let you know that it is definitely on the 24 table and actively being pursued as we speak. 25 MR. ANGER: And one thing, 0233 1 Commissioner, as we work to pursue that, one thing 2 that I want to point out that doesn't show up in those 3 reports are the downstream expenditures that take 4 place. So, for instance, the Ward Group that does 5 those media purchases and shows up on that report as 6 part of that spin, they're making placements with a 7 number of different firms that may be owned by various 8 different individuals that fall into one of the 9 various HUB categories, but those don't get captured 10 in our reportings. It's the one step removed 11 expenditure that really gets seen. And so -- 12 COMMISSIONER SCHENCK: Do we ask them 13 to track it in advance? 14 MR. ANGER: Well, we know what we're 15 spending with publications. For instance, in the 16 ethnic market, Anthony was talking about print 17 publications. We know what we're spending with Asian 18 print publications, with Hispanic print publications 19 and African-American print publications. Many times 20 those businesses that are advertising in those 21 communities are also owned by individuals who are of 22 those ethnicities. And so we do capture those 23 numbers; we do know those. But for reporting purposes 24 for the state's HUB subcontracting requirements, we 25 don't see those numbers in our reports. 0234 1 MR. SADBERRY: Joyce has provided to me 2 a report, I think as of yesterday, on some of the past 3 practices that the Senator has inquired about that we 4 might revisit and go back to doing more of a tracking 5 capability that you're talking about here so we'll 6 have a better idea of what we are spending downstream 7 even. 8 COMMISSIONER SCHENCK: Thank you very 9 much. 10 CHAIRMAN COX: Thank you. 11 AGENDA ITEM NO. XVII 12 CHAIRMAN COX: Item No. XVII, 13 consideration of and possible discussion and/or action 14 on external and internal audits and/or reviews 15 relating to the Texas Lottery Commission and/or on the 16 Internal Audit Department's activities. 17 Ms. Melvin. 18 MS. MELVIN: Good afternoon, 19 Commissioning. For the record, Catherine Melvin. I 20 would like to provide a brief update on external 21 audits of the agency. 22 First, as reported in the last 23 Commission meeting, the annual financial audit is 24 underway. The auditor is the firm Maxwell Locke & 25 Ritter. And we anticipate their final report in 0235 1 December. 2 Second, earlier this month we received 3 a notice of engagement from the State Auditor's 4 office, stating they will be auditing the Texas 5 Lottery Commission, conducting a follow-up audit on 6 three previously conducted audits. And the scope or 7 the objective of their audit will be to determine 8 whether the agency has made progress in implementing 9 recommendations to correct issues identified in the 10 following three reports: Those are an audit report on 11 procurement at the Texas Lottery Commission, which was 12 issued in August of '06; the audit report on workforce 13 management, which was issued in July 2006; and, 14 finally, the audit report on Lotto Texas activities, 15 which was also issued July '06. 16 Since then, an entrance conference was 17 held. We met with the auditors. And the state 18 auditors have begun their work. They have currently 19 on-site. We anticipate their field work to run 20 through the end of November. And they have stated 21 that they anticipate a resulting report in January of 22 '08. 23 And that's all the comments I have, 24 unless you have any questions. 25 CHAIRMAN COX: Thank you, Catherine. 0236 1 MS. MELVIN: Thank you. 2 AGENDA ITEM NO. XVIII 3 CHAIRMAN COX: Item No. XVIII, report, 4 possible discussion and/or action on the Mega Millions 5 game and/or contract. 6 Director Sadberry. 7 MR. SADBERRY: Commissioners -- and for 8 the record, my name is Anthony Sadberry, Executive 9 Director. And for Commissioner Schenck's information, 10 on each Commissioner's update there are two basic 11 multi-state games, Power Ball and Mega Millions. 12 Texas is a member of the Mega Millions game, and there 13 are 12 states that are members of that particular 14 game. 15 The meeting structure is not very 16 structured, I will say. We had our most recent 17 meeting two weeks ago. And by that, I mean we don't 18 have set meeting times. Two times per week we have a 19 drawings conference call among the directors, and we 20 will conduct business during those calls that may be 21 needed. And then we might have meetings from time to 22 time. 23 The most recent meeting was held in 24 connection with the NASPL conference which occurred in 25 Louisville about two weeks ago. Out of that meeting 0237 1 no particular items occurred of significance, in my 2 judgment, for reporting purposes. But I will be happy 3 to answer any questions about the state of our Mega 4 Millions participation under the contract and any 5 related interest that you might have. 6 COMMISSIONER CLOWE: No questions. 7 COMMISSIONER SCHENCK: No. 8 CHAIRMAN COX: Thank you, Director 9 Sadberry. 10 AGENDA ITEM NO. XIX 11 CHAIRMAN COX: Item No. XIX, report, 12 possible discussion and/or action on GTECH 13 Corporation. 14 Director Sadberry. 15 MR. SADBERRY: Commissioners, we have a 16 standing committee that the Commission requested us to 17 establish to conduct the general monitoring of 18 activities by GTECH and not by Lottomatica, who is the 19 successor of our merged company, GTECH lottery 20 operator. That committee is comprised of a member of 21 the Office of Attorney General, a member of the 22 Department of Public Safety, and James Carney, who is 23 the Director of our Enforcement Division, who was here 24 today. 25 We monitor, among other things, our 0238 1 consultant contracts in terms of what is occurring in 2 other jurisdictions as well as general developments 3 with regard to GTECH. I don't have any items to 4 report at this meeting of that nature. But again, 5 Chairman, I would be happy to answer any questions you 6 might have in that regard. 7 CHAIRMAN COX: Thank you, Director 8 Sadberry. 9 AGENDA ITEM NO. XXI 10 CHAIRMAN COX: Okay. I see that we're 11 at Item XXI, consideration of the status and possible 12 entry of orders. The General Counsel had to go to an 13 appellate court hearing and has requested that this 14 matter be deferred until the next meeting. She said 15 that none of these orders will be jeopardized by that 16 lapse in time. So with your permission, we will pass 17 on Item XXI. 18 COMMISSIONER CLOWE: Certainly. 19 AGENDA ITEM NO. XXII 20 CHAIRMAN COX: Item XXII, report by the 21 Executive Director and/or possible discussion and/or 22 action on the agency's operational status, activities 23 relating to the Charitable Bingo Operations Division, 24 agency procedures and FTE status. 25 Director Sadberry. 0239 1 MR. SADBERRY: Commissioners, in your 2 notebooks you have a general report on the FTE status. 3 Other than that information, I have no report to add 4 at this time but would be happy to answer any 5 questions. 6 CHAIRMAN COX: Thank you. 7 AGENDA ITEM NO. XXIII 8 CHAIRMAN COX: All right. Item No. 9 XXIII, public comment. Is there any public comment? 10 AGENDA ITEM NO. XXVI 11 CHAIRMAN COX: Okay. There being no 12 further business, the meeting is adjourned at 3:56 13 p.m. 14 (Meeting adjourned: 3:56 p.m.) 15 16 17 18 19 20 21 22 23 24 25 0240 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 7th day of November 2007. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25