0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 FRIDAY, DECEMBER 12, 2008 § 7 8 COMMISSION MEETING 9 FRIDAY, DECEMBER 12, 2008 10 11 BE IT REMEMBERED THAT on Friday, the 12th 12 day December 2008, the Texas Lottery Commission 13 meeting was held from 9:07 a.m. to 3.53 p.m., at the 14 Offices of the Texas Lottery Commission 611 East 6th 15 Street, Austin, Texas 78701; before CHAIRMAN JAMES A. 16 COX, JR., and COMMISSIONER DAVID SCHENCK. The 17 following proceedings were reported via machine 18 shorthand by Lou Ray, a Certified Shorthand Reporter 19 of the State of Texas, and the following proceedings 20 were had: 21 22 23 24 25 0002 1 APPEARANCES 2 3 CHAIRMAN: Mr. James A. Cox, Jr. 4 COMMISSIONER: 5 Mr. David Schenck 6 COMMISSIONER: Ms. Mary Ann Williamson 7 GENERAL COUNSEL: 8 Ms. Kimberly L. Kiplin 9 DEPUTY EXECUTIVE DIRECTOR: Mr. Gary N. Grief 10 DIRECTOR, CHARITABLE BINGO OPERATIONS: 11 Mr. Philip D. Sanderson 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting called to order 8 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chair, possible discussion 5 and/or action regarding the Bingo Advisory Committee’s activities, including the 6 November 5, 2008 Committee meeting .......... 8 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on a demonstration 8 of an approved video confirmation of a pull tab winning ticket, as contemplated by 9 16 TAC §402.300 relating to pull tab bingo .. 11 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action on a 11 petition for rulemaking regarding to 16 TAC §402.300 relating to pull tab bingo WITNDRAWN 12 AGENDA ITEM NO. V - Consideration of and 13 possible discussion and/or action, including proposal on new 16 TAC §402.412 relating 14 to Signature Requirements ................... 78 15 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, including 16 proposal, on amendments to 16 TAC §402.402 relating to Registry of Bingo Workers ....... 79 17 AGENDA ITEM NO. VII - Consideration of and 18 possible discussion and/or action, including proposal, on new 16 TAC §402.409 relating to 19 Amendment for Change of Premises or Occasions due to Lease Termination or Abandonment ..... 85 20 AGENDA ITEM NO. VIII - Consideration of and 21 possible discussion and/or action, including proposal, on new 16 TAC §402.424 relating to 22 Amendment of a License by Telephone or Facsimile ................................... 86 23 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. IX - Report by the Charitable Bingo Operations Director and possible 4 discussion and/or action on the Charitable Bingo Operations Division’s activities, 5 including updates on staffing, Bingo Advisory Committee, Quarterly Reports and Allocations, 6 On-line Operator Training Program, and Bingo Service Center .............................. 90 7 AGENDA ITEM NO. X - Report, possible 8 discussion and/or action on lottery sales and revenue, game performance, new game 9 opportunities, advertising, market research, and trends .................................. 93 10 AGENDA ITEM NO. XI - Report, possible 11 discussion and/or action on transfers to the State ................................... 136 12 AGENDA ITEM NO. XII - Report, possible 13 discussion and/or action on the 2008 demographic report on lottery players ....... 63 14 AGENDA ITEM NO. XIII - Report, possible 15 discussion and/or action on the agency’s contracts ................................... 138 16 AGENDA ITEM NO. XIV - Report, possible 17 discussion and/or action on the agency's HUB program and/or minority business 18 participation, including the agency's Mentor Protégé Program ...................... 145 19 AGENDA ITEM NO. XV - Report, possible 20 discussion and/or action on the 80th and 81st Legislature ............................ 149 21 AGENDA ITEM NO. XVI - Consideration of and 22 possible discussion and/or action on external and internal audits and/or reviews relating 23 to the Texas Lottery Commission, and/or on the Internal Audit Department’s activities, 24 including the internal audit on charitable bingo licensing and/or the internal audit 25 on background investigations ............... 174 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XVII - Report, possible 4 discussion and/or action on the Mega Millions game and/or contract ............... 208 5 AGENDA ITEM NO. XVIII - Report, possible 6 discussion and/or action on GTECH Corporation ................................. 209 7 AGENDA ITEM NO. XIX - Report, possible 8 discussion and/or action on the role of the Ombuds and/or the Ombuds program ............ 211 9 AGENDA ITEM NO. XX - Consideration of and 10 possible discussion and/or action, repeal and proposal, on 16 TAC §401.101 relating 11 to Lottery Procurement Procedures, 16 TAC §401.102 relating to Protests of the 12 Terms of a Formal Solicitation, and/or 16 TAC §401.103 relating to Protests of 13 Contract Award ............................. 162 14 AGENDA ITEM NO. XXI - Report by the Executive Director and/or possible discussion and/or 15 action on the agency’s operational status, agency procedures, and FTE status ........... 210 16 AGENDA ITEM NO. XXII - Consideration of the 17 status and possible entry of orders in: 197 A. Docket No. 362-08-4293 – Four Star Quick 18 Pantry B. Docket No. 362-08-4278 – Cano Convenience 19 Store C. Docket No. 362-08-4279 – Ark Food Station 20 D. Docket No. 362-08-4280 – Speed Mart One E. Docket No. 362-09-0062 – FM Postal 21 F. Docket No. 362-08-4393 – Kimberly Food Mart G. Case No. 2008-856 – QuikTrip #927 22 H. Case No. 2008-136 – Hillcroft Grocers I. Case No. 2008-488 – Marcos Market 23 J. Case No. 2008-489 – Reno Quick Stop K. Case No. 2008-1164– Sunmart #416 24 L. Case No. 2008-1073 – Ambler Bingo, Inc. 25 AGENDA ITEM NO. XXIII - Public comment .......... 223 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXIV - Commission may meet in Executive Session: 172 4 A. To deliberate the appointment, employment, and duties of the 5 Executive Director pursuant to Section 551.074 of the Texas 6 Government Code B. To deliberate the duties and 7 evaluation of the Deputy Executive Director pursuant to Section 551.074 8 of the Texas Government Code C. To deliberate the duties and evaluation 9 of the Internal Audit Director pursuant to Section 551.074 of the Texas 10 Government Code D. To deliberate the duties and evaluation 11 of the Charitable Bingo Operations Director pursuant to Section 551.074 of the 12 Texas Government Code E. To deliberate the duties of the General 13 Counsel pursuant to Section 551.074 of the Texas Government Code 14 F. To deliberate the duties of the Human Resources Director pursuant to 15 Section 551.074 of the Texas Government Code 16 G. To deliberate the duties and evaluation of the Ombuds pursuant to Section 17 551.074 of the Texas Government Code 18 19 20 21 22 23 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 H. To receive legal advice regarding pending or contemplated litigation 4 pursuant to Section 551.071(1)(A) and/or to receive legal advice regarding 5 settlement offers pursuant to Section 551.071(1)(B) of the Texas Government 6 Code and/or to receive legal advice pursuant to Section 551.071 (2) of the 7 Texas Government Code, including but not limited to: 8 First State Bank of DeQueen et al. v. Texas Lottery Commission 9 James T. Jongebloed v. Texas 10 Lottery Commission 11 USA v. David Crawford and TLC Texas Lottery Commission v. Leslie 12 Warren, Texas Attorney General Child Support Division, Singer Asset 13 Finance Company L.L.C., and Great-West Life & Annuity Insurance Company 14 Employment law, personnel law, 15 procurement and contract law, evidentiary and procedural law, and 16 general government law 17 Lottery Operations and Services contract 18 Mega Millions game and/or contract 19 AGENDA ITEM NO. XXV - Return to open session 20 for further deliberation and possible action on any matter discussed in Executive 21 Session ..................................... 174 22 AGENDA ITEM NO. XXVI - Adjournment .......... 223 23 24 25 0008 1 P R O C E E D I N G S 2 FRIDAY, DECEMBER 12, 2008 3 (9:06 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. Today is 6 Friday, December 12th, 2008. It's 9:04. Commissioner 7 Schenck is here. Commissioner Williamson is here. 8 I'm Jim Cox. Let's call this meeting of the Texas 9 Lottery Commission to order. 10 AGENDA ITEM NO. II 11 Agenda Item No. 2, report by the Bingo 12 Advisory Committee Chair. Ms. Rogers? 13 MS. ROGERS: Good morning, 14 Commissioners. For the record, my name is Kimberly 15 Rogers. I'm the Vice Chair of the Bingo Advisory 16 Committee. Suzanne asked me if I would give this 17 report to y'all. Would you like me to read through 18 it, each one of them or -- 19 CHAIRMAN COX: It would be at your 20 pleasure, Kimberly. If you want to summarize it, 21 that's fine. We have it in our book. Or just however 22 you would like to do it. 23 MS. ROGERS: Thank you. I'll go over 24 each one just in summary. We had our meeting -- let 25 me get the right paper. We had our meeting 0009 1 November 5th here in Austin. It was called to order. 2 All of our members were present except for Markey 3 Weaver. We then, No. 2, passed and approved our 4 previous meetings minutes. 5 No. 3, we recognized Rosie Lopez -- if 6 y'all know, she did leave the BAC and -- for her good 7 work. She was a wonderful, wonderful member. She was 8 replaced by Francis -- and I don't know if that's -- 9 MR. SANDERSON: Francis Ciancarelli. 10 MS. ROGERS: -- Ciancarelli. There we 11 go. A very nice man, very, very interested in getting 12 in and helping with the bingo. 13 No. 4, BAC members reelected Suzanne 14 once again as our Chair. And Suzanne appointed myself 15 as the Vice Chair. 16 No. 5, Sandy Joseph gave a brief overall 17 view of the administrative procedures and things of 18 that nature. That was all included in our notebook. 19 No. 6, Nelda Trevino reviewed the dates 20 of interest for the legislators that are fixing to 21 come into session. 22 No. 7, Suzanne requested that the 23 chairs, each of them, get their workgroups together. 24 And 8, Earl reported on the market 25 conduct. He did not have anything new to let us know 0010 1 about. 2 No. 9, Bruce Miner reviewed the draft 3 about the signature requirements, which you'll be 4 talking about today. 5 No. 10, Bruce also reviewed the draft 6 about the workers' registry. And we did have a lot of 7 comment on that. Luckily, the Bingo Division listened 8 to us and talked amongst themselves, I'm sure, and 9 found that -- they altered and changed things, which I 10 read this morning and I find it very -- I would 11 approve of it. I would say yes. 12 No. 11 Bruce Miner reviewed the 13 abandonment lease terms. He also talked about the fax 14 and phone. Phil Sanderson reviewed the charitable 15 operations, and Emil (inaudible) from International 16 Game Co. showed us a new vending machine which was 17 very interesting for pull-tabs. 18 Also Commissioner Cox informed the BAC 19 of the very sad death of Mr. Anthony Sadberry. And 20 15, our next meeting was scheduled for February 4th 21 and we adjourned at 12 o'clock. 22 If you have any questions, I'll be more 23 than happy to -- 24 COMM. SCHENCK: I don't have any 25 questions. Thank you. 0011 1 CHAIRMAN COX: Okay. Kimberly, thank 2 you so much to that report. And thank you very much 3 for your service. That was one of the most efficient 4 meetings that I've seen of the BAC, and they seem to 5 become more and more efficient and we really 6 appreciate your service and your committee. 7 MS. ROGERS: Well, thank you. And we 8 appreciate when you come and listen. We know it takes 9 a lot to change things, but we're out there day-to-day 10 and I know it helps to inform y'all. I think the BAC 11 now, along with the Bingo Division, have really come 12 to work well together. 13 CHAIRMAN COX: Well, I think we owe that 14 certainly to Chairman Clowe and the work he did when 15 he was here, and we plan to continue it. 16 MS. ROGERS: Yes, sir, and yourself. 17 Thank you. 18 AGENDA ITEM NO. III 19 CHAIRMAN COX: Thank you. Item No. 3, 20 report, possible discussion and/or action, on a 21 demonstration of an approved video confirmation of a 22 pull-tab winning ticket as contemplated by 16 TAC 23 Paragraph 402.300 relating to pull-tab bingo. This is 24 a demonstration that was requested several months ago 25 by Ms. Paynter, and we are pleased to do this. We 0012 1 wish we had done it sooner, Ms. Paynor, and yet here 2 we are and we appreciate your request. 3 MR. SANDERSON: Thank you, 4 Commissioners. For the record, Phil Sanderson 5 Director of the Charitable Bingo Operations Division. 6 Today I'm going to demonstrate for you 7 the video confirmation device. We have one -- this is 8 the device that was approved. Now it's manufactured 9 by International Game Co. We've had one other device 10 submitted which we have denied, and they have not 11 resubmitted at this time, and then we have one other 12 manufacturer that has expressed an interest and they 13 presented us their equipment for video confirmation. 14 The video confirmation is utilized with 15 an event ticket that is part of the instant ticket 16 pull-tab break open. The first game that I'm going to 17 show you is called Break the Bank -- 18 CHAIRMAN COX: Phil -- 19 MR. SANDERSON: Yes, sir. 20 CHAIRMAN COX: Would you, for everyone's 21 edification, tell us what an event ticket is and what 22 those things you are holding are? 23 MR. SANDERSON: The event ticket is a 24 play style for the instant bingo or pull-tab ticket. 25 And the game types vary, but the concept is about the 0013 1 same for all of them. 2 For example, this ticket here is called 3 Break the Bank, and they are $1 a piece and there are 4 several different types of winners in here. There's a 5 ticket that is a losing ticket and doesn't have any 6 winning information on it. It's just a regular losing 7 ticket. Then you have another ticket that's an 8 instant winner, and in this case here it's a dollar 9 and five cents, so when you open it up you get a 10 dollar five. 11 And then they're got what's called a 12 hold ticket for the event, and it will have a red 13 number on it. In this case this one here is 213. And 14 if you had the No. 213 in this case, you would go in 15 and sign up on this board under the 213 and put your 16 name. Once all the tickets are sold, the operator or 17 the conductor will indicate that they're ready to play 18 Break the Bank and they'll scan in those two to start 19 the game. 20 CHAIRMAN COX: Let me stop you one more 21 time. I understand now what -- this is called a 22 pull-tab? 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN COX: Now, what about this 25 makes it an event ticket as well? 0014 1 MR. SANDERSON: The event ticket is what 2 we're in the process of playing. After you sell all 3 the tickets in the deal -- this particular deal has 4 1260 tickets in it. So they sell the 1260 tickets, 5 some of which are losers, some are instant winners 6 like the dollar five. And the other ones are called 7 hold tickets. And in this game there's 18 tickets 8 that have that red number on it from 013 to 1713. 9 CHAIRMAN COX: And it says "hold" on the 10 back. 11 MR. SANDERSON: It says hold on the 12 back. 13 CHAIRMAN COX: Okay. 14 MR. SANDERSON: So they hold that ticket 15 and they say, "We're ready to play the event." And so 16 they -- 17 CHAIRMAN COX: So this, because it has a 18 red number on it and hold makes this an event ticket? 19 MR. SANDERSON: Yes. 20 CHAIRMAN COX: Thank you. 21 (Mr. Sanderson attempts to play the 22 video) 23 MR. SANDERSON: Well, that's what 24 happens when you play these things. 25 (Video not transcribed) 0015 1 MR. SANDERSON: So in this case, if you 2 were holding 013, you'd win $526.32. And all that 3 does is confirm what's already on the sale card. 4 (Video not transcribed) 5 MR. SANDERSON: And in this game there 6 are also four other tickets that have a safe number, 7 1, 2, 3 or 4. So if you had one of those safes, then 8 you also won $21 or $52, whichever corresponding safe 9 you have. 10 CHAIRMAN COX: Okay. Now, Phil, this 11 game may have been stacked, but it seems that the 12 Commissioners have won. 13 (Laughter) 14 CHAIRMAN COX: Now, I have this ticket 15 that apparently No. 13, which is the big winner of 16 $526.32. Is that correct? 17 MR. SANDERSON: Yes, sir. 18 CHAIRMAN COX: How did I know before you 19 put that up there that I had won $526.32? 20 MR. SANDERSON: At that point you would 21 not know. 22 CHAIRMAN COX: Okay. I thought this was 23 confirmation. 24 COMM. ANDERSON: Well, it is. If you 25 look on here, I open this -- the board up and it's got 0016 1 the number on there. 2 CHAIRMAN COX: Okay. 3 MR. SANDERSON: So all I did -- I could 4 have opened this up and said, "Okay, 13 is the winning 5 number," and that would be the game. I could have 6 opened up this sealed card and it showed what the 7 winning number was and that would be the event. 8 That's the game and it's over. 9 CHAIRMAN COX: Okay. Now, let's go back 10 from this for just a moment. 11 MR. SANDERSON: Okay. 12 CHAIRMAN COX: Now, the board won -- got 13 this ticket, and it says 13 on the back. And I'd like 14 to know whether it wins -- it won, but I don't have 15 time to stay around for this. How do I find out that 16 I won? 17 MR. SANDERSON: Well, for the event, you 18 have to wait until the game is played. You have to 19 wait until the event occurs. 20 CHAIRMAN COX: Okay. 21 MR. SANDERSON: They sell all the 22 tickets -- I guess they -- at the end when all the 23 tickets are sold, the caller will say, "We're going to 24 play Break the Bank." They'll name out -- they'll 25 call the serial number that's on the ticket. They can 0017 1 open this up and the winner -- 2 CHAIRMAN COX: So this is where I think 3 is what I was looking for. They open that up. They 4 call it out. 5 MR. SANDERSON: They could call it 6 out -- 7 CHAIRMAN COX: They could or they do? 8 MR. SANDERSON: Well, if you're using 9 video confirmation, you wouldn't call it out because 10 that's what the video would show. People watch it to 11 see if they're holding the winning ticket. 12 CHAIRMAN COX: Okay. So the name video 13 confirmation would -- could lead one to believe that 14 it's only confirming what was already known. That's 15 what I believed. And yet, what I hear you telling me 16 now is that it actually announces the winner rather 17 than confirming the winner. 18 COMM. SCHENCK: Well, it -- 19 CHAIRMAN COX: Go ahead, please. 20 COMM. SCHENCK: Phil, isn't the 21 winner -- the big card you hold in your hand will 22 always show the winner. 23 MR. SANDERSON: Yes. 24 COMM. SCHENCK: And the winner is 25 already on the card, but the public hasn't seen the 0018 1 winner yet. 2 MR. SANDERSON: Right. 3 COMM. SCHENCK: And the public out in 4 the audience -- and because it's more exciting 5 watching the bank vault collapse than watching some 6 man pull back a tab, they watch that, but that will 7 always shows the winning number on it. 8 MR. SANDERSON: Yes. 9 CHAIRMAN COX: Okay. But if I decided 10 to go outside and buy a Coke while this was taking 11 place, I still won. 12 MR. SANDERSON: If you came back in 13 during the regular session, yes. 14 CHAIRMAN COX: Okay. What would happen 15 if I didn't come back in during the regular session? 16 MR. SANDERSON: They would either -- 17 probably not pay anybody out for that prize. It 18 depends on how the house rules are set up. 19 CHAIRMAN COX: Okay. 20 MR. SANDERSON: For pull-tab tickets 21 they have to be sold and redeemed at the same 22 occasion. 23 CHAIRMAN COX: Okay. 24 MR. SANDERSON: So they have to take 25 place during the two to four-hour session that they 0019 1 are playing. 2 CHAIRMAN COX: Okay. So if I were 3 outside buying a Coke and this took place and I came 4 back in and said, "Did I win," somebody would have 5 that and would be able to tell me I won. 6 MR. SANDERSON: Yes. 7 CHAIRMAN COX: And I'd get my $526.32, 8 provided I got back in before the session ended. If I 9 didn't, something else would happen, but we don't know 10 exactly what it would be, but probably that isn't 11 going to happen. 12 MR. SANDERSON: That -- usually that 13 doesn't happen. 14 CHAIRMAN COX: Okay. 15 MR. SANDERSON: I've got a couple of 16 different styles of games. The next one is called the 17 Speed Ball. And this game is similar to the one we 18 just played. It's got losing tickets that don't have 19 any winning information on them. It's got instant 20 winners. In this case it's a $1 instant winner, and 21 then this one has the same red numbers except they use 22 the zero zero at the end. So it's from 100 to 1700 23 would be the winning numbers. 24 And I guess to kind of show you the 25 difference between processes, this game here, the 0020 1 organization has the option of paying -- one ticket 2 for $150, they can pay two tickets $50, or they can 3 pay -- I'm sorry three winners $50 or they can pay six 4 winners 25. Most of the organizations I'm aware of 5 use it to pay the six winners $25. 6 So they could start the game, say we're 7 going to play Speed Ball, and I'll give you the 8 difference -- they could -- okay, if you've got 1000, 9 1300, 1200, 1700, 100 or 200, you're a winner. 10 That's -- the game's over. 11 Or they can open it up -- 12 CHAIRMAN COX: Okay. Say those numbers 13 again? 14 (Laughter) 15 MR. SANDERSON: 1000, 1300, 1200, 1700, 16 100 and 200. I think you had 8 and 700. 17 CHAIRMAN COX: The board didn't win this 18 time. 19 MR. SANDERSON: So, yeah, that's -- 20 that's how the game was played before this video 21 confirmation. So now they can come in and they can -- 22 it's also got a feature where you can't play a game 23 more than once. So once that card is played, it can't 24 be played again. 25 COMM. SCHENCK: So we might win this 0021 1 time? 2 MR. SANDERSON: You may win this time. 3 Let's see who wins this one, 500, 1500, 800 -- 4 COMM. SCHENCK: Bingo. 5 (Laughter) 6 MR. SANDERSON: I knew I gave you the 7 right ticket. 8 So to play the game. 9 (Video not transcribed) 10 MR. SANDERSON: Now, that's -- the 11 resolution on the big screen is off. On TV there's 12 six numbers up there and those are the six numbers 13 that I called out for the second card that I opened 14 up. So that's how they would play the Speed Ball game 15 using the video confirmation. 16 CHAIRMAN COX: Okay. Now, Phil, we've 17 got No. 800 here. How much did we win? 18 MR. SANDERSON: $25. 19 CHAIRMAN COX: Okay. Now, how do we 20 know that? 21 MR. SANDERSON: That's what's on the -- 22 it's not on the board up there, but it's on the sealed 23 card that you're playing. When they open this tab up 24 there's three tabs that indicate the card that I'm 25 holding like this. They open and they can give one, 0022 1 $150 winner, three $50 winners or six $25 winners. 2 CHAIRMAN COX: Okay. 3 MR. SANDERSON: So they open up the one 4 with the six $25 winners and it's got those six 5 numbers on there. And they announce they're playing 6 for $25, six winners. 7 CHAIRMAN COX: Okay. Now here then, I 8 don't know from looking at the video how much I won. 9 MR. SANDERSON: That's correct. 10 CHAIRMAN COX: I know I'm a winner and I 11 need to check in with somebody, but I don't know 12 whether I got 150, 50 or 125. 13 MR. SANDERSON: Other than the fact -- I 14 might ask Ms. Rogers since she has a bingo hall to 15 correct me -- 16 CHAIRMAN COX: No -- 17 MR. SANDERSON: -- but there's six 18 numbers -- 19 CHAIRMAN COX: Oh, I see, okay. 20 MR. SANDERSON: So on the ticket it will 21 say six winners, $25, something like that. 22 CHAIRMAN COX: Okay. So there may -- 23 how does it determine whether there's one winner or 24 three winners or six winners? 25 MR. SANDERSON: That's the choice of the 0023 1 conductor of the organization. 2 COMM. SCHENCK: Can you hold up the card 3 up again, Phil? 4 MR. SANDERSON: See, when they play the 5 card, they're got the choice of opening one of the 6 three windows. 7 CHAIRMAN COX: Oh, okay. They don't 8 know what's under it? 9 MR. SANDERSON: They don't know what's 10 under it. 11 CHAIRMAN COX: And it they -- 12 MR. SANDERSON: And if they want to play 13 the 150, they open it up and there's just -- well, 14 y'all won the 150 if we played it. 15 COMM. SCHENCK: I want to play that now. 16 (Laughter) 17 COMM. SCHENCK: But where -- again this 18 is the confirmation. Where on the card is it 19 confirming who the winning oh, it says right on there. 20 MR. SANDERSON: Yeah, it's under the 21 tab. 22 COMM. SCHENCK: Okay. So in this game 23 it would -- the video really would be confirmation 24 because when you scan the card it played that, but it 25 was already on there. So if the person running the 0024 1 scanner wanted to ruin the surprise for everyone, he 2 could have just called out -- 3 MR. SANDERSON: Called out the numbers 4 before the game played. 5 COMM. SCHENCK: I see. 6 CHAIRMAN COX: Okay. Now since I'm an 7 auditor, I'm interested in what I would be able to 8 audit 10 days after this game. If I came 10 days 9 after this game and wanted to see, as an auditor, what 10 was your basis for paying $25 to these particular six 11 numbers, would I find that these two were still 12 sealed? I could access this card out of the files of 13 the operator. These two have never been broken and 14 this was the only one that was broken? 15 MR. SANDERSON: Yes, sir. And they have 16 to keep the winning tickets and the card. 17 CHAIRMAN COX: Okay. 18 COMM. SCHENCK: Now, Phil, prior to 19 video confirmation the game was played exactly the 20 same way, is that right, just without the video? 21 MR. SANDERSON: Yes. 22 COMM. SCHENCK: So we would have had a 23 roomful of anywhere from ten to a hundred people 24 sitting quietly peeling back cardboard and having 25 someone like you read the cardboard number back to 0025 1 them? 2 MR. SANDERSON: Yes, sir. 3 COMM. SCHENCK: So the whole idea of 4 video confirmation was to add some more drama than -- 5 MR. SANDERSON: Something other than a 6 person standing up here and saying, "All right. The 7 winners are 500, 1500," and so forth. 8 CHAIRMAN COX: Okay. Again, on this 9 particular play style, I don't know whether I'm a 10 winner until this is shown? 11 MR. SANDERSON: Until this is shown or, 12 in absence of showing it, I call the numbers out. 13 CHAIRMAN COX: Okay. So I could know. 14 And if I went and got that coke and came back, I would 15 still know. So this is not nonessential to the 16 determination of winners, nor to the awarding of 17 prizes? 18 MR. SANDERSON: That is correct. 19 CHAIRMAN COX: Okay. 20 MR. SANDERSON: Now, there's another 21 game that's similar to horse -- it's Go-Go Balls. And 22 it's like a horserace and I think people have talked 23 about that game a little bit. Once again, it's an 24 event ticket. It's got an instant winner of $1 and 25 it's got -- we have two $1 tickets. It's got 0026 1 non-winning with no winning information on it. 2 I only had a few samples of these 3 tickets, and I don't actually have what's called the 4 hold ticket in this case, but it would be a ticket 5 with a bingo ball on it that would say either B-1 to 6 O-75, and there would be another -- another ticket on 7 it that would have between 1 and 15, which would be 8 the horserace winner or, in this case, it's another 9 Go-Go Ball. 10 (Video not transcribed) 11 MR. SANDERSON: Now, I can say, "Okay, 12 the winners are," you want me to tell you up front or 13 do you want to watch the game? 14 FROM THE AUDIENCE: Watch the game. 15 MR. SANDERSON: So they'll say, "We're 16 playing Go-Go Balls and... 17 (Video not transcribed) 18 MR. SANDERSON: Okay. And I can -- I 19 knew the winner was No. 15 and 36 was the bingo ball 20 before I started the race because that's what's on the 21 card. Now, I don't have any hold tickets for you in 22 this game. We only had a few samples of it left over 23 from testing. 24 CHAIRMAN COX: It's a pretty long race. 25 MR. SANDERSON: They do take some time 0027 1 in the bingo halls. And it's kind of like the -- at 2 the UT game or Texas Ranger games. They've got the 3 little ball and people start hollering for the red and 4 the blue and the green. So it's similar here. I've 5 got No. 15, so I'm hollering for 15 every time it 6 moves up. 7 CHAIRMAN COX: Okay. 8 MR. SANDERSON: And that's -- unless you 9 have any other questions, that's what we have for -- 10 like I said, this device here is the third submittal. 11 They revised it three times with additional versions 12 of it and it's been the same. You know, they've just 13 added the games to it. I believe they've got 34 -- 14 37 -- they've got 37 games that are played in 15 conjunction with this device currently. 16 And I believe all of these that I just 17 showed you were approved before the video confirmation 18 rule. No, this last game was approved in December 19 '07. The Break the Bank was in June of '07. And the 20 speed ball game -- I want to say it was in July of '05 21 is when it was approved. 22 CHAIRMAN COX: So, Phil, I heard you say 23 that they were approved before this was approved, so 24 the video confirmation is an add-on to games. They 25 just placed it -- once the rule approved it, they went 0028 1 back and developed video confirmation for that 2 particular equipment application? 3 MR. SANDERSON: Yes, sir. 4 CHAIRMAN COX: And that is exactly what 5 would be used in a bingo hall for the video 6 confirmation purposes and they'd project it on a wall 7 or on a screen or -- 8 MR. SANDERSON: -- on the monitors that 9 they have around the bingo hall. 10 CHAIRMAN COX: Okay. So that is your 11 presentation. 12 MR. SANDERSON: Yes, sir. 13 CHAIRMAN COX: Okay. Commissioners, do 14 you any questions? 15 COMM. SCHENCK: How many of these 16 different play-style confirmations do we have now? 17 You just mentioned three, is that pretty much -- 18 MR. SANDERSON: There's 37 games -- 19 COMM. SCHENCK: I'm sorry. 20 MR. SANDERSON: Yeah, there are 37 games 21 that are approved with this game here. There's 22 basically three play styles. There's the race game 23 like the Go-Go Balls, and then there's a sealed card 24 game that is the first two that we played -- or 25 showed, demonstrated. The third is what they call a 0029 1 daub ticket. And that's one where they -- they call a 2 bingo ball out and they'll daub the ticket. In that 3 game there, it will show then what the winning number 4 is on that. It will confirm -- somebody will holler 5 "bingo" and they'll scan it and it will show it's the 6 winning card. 7 COMM. SCHENCK: What reports are you 8 getting back from the bingo halls about whether the 9 players like and prefer this to having someone tell 10 them what the numbers are. 11 MR. SANDERSON: We really haven't gotten 12 much feedback that I'm aware of. I know Kimberly had 13 mentioned just briefly about her hall in San Antonio 14 that the players really like the animation and the 15 excitement. So if you would like for her to give you 16 some more information on that -- 17 COMM. SCHENCK: I think that's fine. I 18 assume that watching something is more interesting 19 than watching other people peel the cardboard, but 20 perhaps not. 21 CHAIRMAN COX: Anything else? 22 COMM. SCHENCK: No, thank you. 23 CHAIRMAN COX: Anything? 24 COMM. WILLIAMSON: No. 25 CHAIRMAN COX: Phil, this piece of 0030 1 equipment, an operator would buy that, would rent it? 2 MR. SANDERSON: I think that this one 3 here, International Game Co, they have a -- whenever 4 you buy the tickets that have the information on it 5 for video confirmation, there's a -- I believe a very 6 small up-charge for those. They may cost a dollar 7 more a deal than without the video confirmation. 8 CHAIRMAN COX: And that includes the 9 equipment? 10 MR. SANDERSON: And they supply the 11 equipment, I believe. Is that correct? 12 MS. ROGERS: Yes. 13 CHAIRMAN COX: So the manufacturer of 14 those cards is -- it would seem -- subsidizing this 15 equipment to increase the sales of cards. So 16 apparently the manufacturer -- I'm just guessing -- 17 that a dollar a deal doesn't seem to cover all of that 18 and all of the development of all of this unless 19 they're advertised over a huge base. So there may be 20 some subsidy by the manufacturer in trying to increase 21 the sales of their product. 22 MR. SANDERSON: That's a possibility. 23 Like I said, I don't know if the dollar is the right 24 number. I know it's some little up-charge. But just 25 for example, most places that have the pull-tabs event 0031 1 tickets will probably play 10 to 15 deals a session, 2 you know, at least 15 deals a session. So they -- 30 3 deals a day over, you know, in a hall that has this 4 equipment -- 5 CHAIRMAN COX: So thirty deals a day, so 6 maybe a thousand a month, this all adds up to, maybe 7 it is a free-standing, profit generator for the 8 manufacturer. Okay. 9 Phil, anything else further on that 10 or -- 11 COMM. WILLIAMSON: No. 12 CHAIRMAN COX: Okay. And I have Rob 13 Kohler wishing to make public comment on Item 3. Oh, 14 and Ms. Paynter also? 15 MS. PAYNTER: I'm just listed on Item 16 IV. 17 CHAIRMAN COX: Well, welcome. 18 MR. KOHLER: Thank you. For the record, 19 my name is Rob Kohler, and I'm here representing 20 Christian Life Commission of the Baptist General 21 Convention of Texas. 22 MS. PAYNTER: I'm Suzii Paynter, 23 Director of (inaudible). Thanks for the demonstration 24 very much. 25 MR. KOHLER: I think what's important 0032 1 for everybody, and especially the new Commissioners, 2 this is the first time that -- in two years that we 3 have seen the games that were approved under the 4 rulemaking that was initiated by the Commission. It's 5 been almost two years. We've got a timeline that I'd 6 be happy to make available to the other Commissioners. 7 Since December 13th, two years ago, is when we learned 8 in a Commission meeting that this language would be 9 put into the rules. 10 And I think Nelda and I probably 11 remember that day very well, that morning. It was 12 fresh on our mind because in 2005, in the 79th regular 13 legislative session, this exact type of language, this 14 electronic representation of a pull-tab ticket, was 15 introduced or we really got wind of it and then 16 followed it. 17 And really what's at play here is an 18 animal known as electronic pull-tab bingo. And if you 19 go to any casino in the United States, there's a thing 20 called Class II games. And those Class II games to 21 the normal person -- even to me or somebody who swims 22 in this stuff, and Suzii -- it's a slot machine. So 23 these Class II games have spread across the United 24 States. And we have one here in the state that 25 operates down -- the Kickapoo, and they operate these 0033 1 type of machines. 2 So talking to -- 3 CHAIRMAN COX: Mr. Kohler -- 4 MR. KOHLER: Yes, sir. 5 CHAIRMAN COX: This kind of machine -- 6 now, I'm lost. I'm still with this little piece of 7 paper. 8 MR. KOHLER: And let me, if I can -- 9 CHAIRMAN COX: Sure. 10 MR. KOHLER: What this type of machine 11 does, if you take something like this, just an 12 individual ticket, and then what you do is you walk up 13 to a kiosk -- it says right now -- and I'll talk about 14 using the flare -- 15 MS. KIPLIN: I need you on the mic. 16 MR. KOHLER: I'm sorry. It's 17 important -- you've heard a lot of things throughout 18 these two years that there's no element of chance; 19 there's not a random number generator involved; the 20 games have already been approved prior to this. And 21 what's important is the way these games are played on 22 a slot machine in a kiosk is very simply you can scan 23 from the ticket the predetermined outcome, and then on 24 that kiosk on the screen that you see as a slot 25 machine, it's electronic representation of that 0034 1 outcome. 2 So what's -- to put this in just another 3 -- to add some more gravy to this, we had a phenomenon 4 called video lottery terminals. And if it is 5 acceptable and you can do it through rulemaking by 6 electronically representing the outcome of this 7 pull-tab ticket, which is an instant ticket, it is the 8 exact same thing for video lottery. Substitute this 9 for a lottery ticket, scratch ticket, allow the 10 scan-in, the representation of that outcome, which is 11 predetermined, there's no element of chance, and 12 you've got a video lottery terminal. 13 So when we talk about the -- you know, 14 why are we so up in arms and why have we not let go of 15 this, that's really what's at stake here, and the 16 jumping to Class III games, and we think that's very 17 important. 18 If I could real quick, I can make a 19 couple of statements about what you heard, just to 20 add -- address that Phil -- I will say that the thing 21 that's on my mind very quick is that we didn't see the 22 horserace game, which is really where this started. 23 And if I could, nobody disputes that 24 this is being played or has been -- being played. I 25 think Suzii can tell you her organization isn't taking 0035 1 task to this, but this is a flare. And when we first 2 started this process over two years ago, we weren't 3 going to use the flare. In fact, in rulemaking, we 4 were told that, okay, we solved y'all's problem, Rob, 5 because we took out the digital representation of a 6 flare. 7 CHAIRMAN COX: Rob, could you explain 8 what a flare is? 9 MR. KOHLER: Phil, would you like to 10 describe it? 11 MR. SANDERSON: What Rob Kohler has in 12 his hand is considered the -- in an event ticket game 13 it's called the sealed card. It's the sealed card for 14 the winning of the event ticket pull-tab. Instant 15 tickets that are nonevent tickets are a flare and, by 16 rule, it's required to have certain information 17 contained on that flare or sealed card. 18 MR. KOHLER: And during the rulemaking 19 process -- and one of the things -- and I would 20 encourage everybody to go look at the transcript -- 21 was that somehow or another our objections to this 22 entry of this game would be solved or remedied if you 23 weren't allowed to do the digital representation of 24 this. 25 And I would tell you, the first game -- 0036 1 what you saw is a digital representation. And just so 2 we're clear, if you don't have a letter that we wrote 3 on the 14th and kind of the gorilla in this room is 4 the AG opinion. What was represented to them of what 5 this was and in the letter we sent -- we actually 6 said, "You know what, if you do what you represented 7 to the AG and the AG said that you can do, we don't 8 have a problem with that." So that's really where, 9 you know, our analysis is at. 10 So I would just like to strongly make 11 the point that this is -- that game included the 12 electronic representation of the flare, which we were 13 told -- digital representation of the flare -- which 14 we were told was not going to be allowed. 15 CHAIRMAN COX: Rob, who told you that? 16 MR. KOHLER: Chairman, I think the 17 Commission did. 18 CHAIRMAN COX: I didn't. That doesn't 19 mean Chairman Clowe did. 20 MR. KOHLER: No, Chairman, I think out 21 of fairness, I'll represent that it's on the 22 transcript. And, Phil, you might be able to add that 23 the question was asked to you, I believe. 24 MR. SANDERSON: There was a -- in a 25 first draft of the rule that was published, there was 0037 1 a definition, I believe, for a flare to be an 2 electronic or digital representation. They could have 3 a flare that was a digitized flare. And after looking 4 at some of the product in the market, that's when we 5 determined to take that language out and just leave 6 the video confirmation in the bill -- in the rule. 7 The electronic representation would have 8 been allowing it to be on a screen, where it's a touch 9 screen and not in this -- this environment here is 10 just an animated video. 11 CHAIRMAN COX: So, now, get me from 12 there to where you were, Rob. 13 MR. KOHLER: I'm not quite sure what 14 Phil just said, Chairman. Can you -- well, what -- 15 the determination of whether a ticket on the first 16 game -- and we can replay it -- 17 CHAIRMAN COX: Well, let me -- 18 MR. KOHLER: -- is substituting the 19 use -- this flare is used in a bingo hall now -- or 20 was before video confirmation. It was a hard piece of 21 paper. And as Commissioner Schenck inquired, you 22 know, somebody sits up there and calls it out. That's 23 not -- but that's the way the game is played. 24 COMM. SCHENCK: And to be clear, that's 25 the way you would like to see it continue to be 0038 1 played. 2 MR. KOHLER: We don't have a problem. 3 We haven't raised a problem with that at all. 4 COMM. SCHENCK: But any other form of 5 signaling to the audience what the numbers are, you 6 have a concern with? 7 MR. KOHLER: If, as we represented in a 8 letter, if it's merely representing -- and I'll read 9 the language just so -- what y'all said to the AG. 10 "This rule merely permits video display of winning 11 numbers that have been otherwise determined by the 12 separate, nonelectronic play of the game." 13 COMM. SCHENCK: And that is still right. 14 I mean, the card says what the numbers are. 15 MR. KOHLER: Say that again. 16 COMM. SCHENCK: The card will always say 17 what the winning numbers are. 18 MR. KOHLER: That's right. And I think 19 what needs to be really flushed out is are you being 20 told by Phil that where this is being operated that 21 prior to the video -- every time -- prior to the video 22 confirmation of a particular game, that somebody is 23 standing up at home saying, "Hey, wait a minute, guys, 24 before you watch the video, I'm going to tell 25 everybody the winners." 0039 1 And that's what's important, 2 Commissioner Schenck, because one of the linchpins on 3 whether this was moving forward or not, whether you 4 knew by watching that confirmation of that video prior 5 to watching the video. And that's tremendously 6 important. 7 COMM. SCHENCK: Why is it important? I 8 don't understand. 9 MR. KOHLER: Because you get to -- Well, 10 there's an AG opinion that says electronic pull-tab 11 bingo requires a constitutional amendment. And the 12 electronic representation of the outcome of an instant 13 pull-tab bingo game requires a constitutional 14 amendment in this state. That's our belief. 15 And if you are -- if you are 16 substituting this, and you're electronically 17 presenting the outcome by then electronically -- just 18 by scanning it in, we would represent that that's 19 electronic pull-tab bingo. But I will tell you this 20 is the first time that we've had the opportunity to 21 know with certainty what you have approved. 22 COMM. SCHENCK: I appreciate that, and I 23 really want to understand what the core of the problem 24 is. And I understand that there would be a need for a 25 constitutional amendment for electronic pull-tab 0040 1 bingo. But I think, in fairness, I don't think Phil 2 misdescribed the fact that the numbers are on the card 3 as being played. But the fact that it's video or not 4 video, to be direct with you from a fairness of the 5 game and from any other perspective, I'm not quite 6 understanding why that's a concern. I mean, if they 7 hired gladiators to fight each other to the death, 8 knowing they would only allow No. 1 to stab No. 6 and 9 No. 4 to stab No. 5, as long as it was written down on 10 a piece of paper who was going to survive at the end, 11 the game hasn't changed. Do you -- 12 MR. KOHLER: Well, do you think 13 that that -- I would encourage you to take a couple of 14 steps back and ask yourself why is this being done. 15 Entertainment -- this is what has been talked about. 16 It makes the games more attractive. 17 Now, I think that we would be against 18 any attempt to introduce gladiator fighting -- 19 COMM. SCHENCK: I would hope. 20 MR. KOHLER: -- just to be on the 21 record. 22 COMM. SCHENCK: -- from your perspective 23 it would be better because it wouldn't be electronic, 24 right? 25 MR. KOHLER: Well, that's right. 0041 1 COMM. SCHENCK: So that's the whole 2 source of your argument. 3 MR. KOHLER: And I will tell you, 4 though, in the few discussions that we had over this 5 two-year period, your attorney Sandy Joseph told us 6 that this is basically the same as somebody getting in 7 front and drawing a picture on a chalk board. And I 8 told her then we would not oppose that amendment. 9 COMM. SCHENCK: But you oppose it 10 because -- 11 MR. KOHLER: -- it's introducing 12 electronic representation, which are slot machines. 13 COMM. SCHENCK: And that's more exciting 14 to the players and more enticing to keep them playing? 15 MR. KOHLER: Slot machines are 16 addictive, correct. 17 COMM. SCHENCK: So your concern is that 18 the video representation is going to cause people who 19 would not otherwise of their own free will play bingo, 20 either would keep playing or play more or something to 21 that effect. That's the root of the concern. 22 MR. KOHLER: It's bigger than that. It 23 swings the door open. 24 MS. PAYNTER: One thing, let me make a 25 reference back to Chairman Cox's initial question. He 0042 1 said, "Oh, this actually announces the game, the 2 winner of the game." To the players it actually 3 announces the winners of the game the way it's played 4 now. That opens the door to that kind of Class II 5 machine where the result of the game is hidden from 6 the player. Okay? It's been a predetermined number, 7 but the result of the game is hidden from the player. 8 So you're introducing winning information to the 9 players through an electronic means. 10 COMM. SCHENCK: That's the way we run 11 the lottery, right? 12 MS. PAYNTER: No. I mean, it's not the 13 way -- 14 COMM. SCHENCK: From the perspective of 15 the players, you can go watch at that window as those 16 balls pop up, but I'll bet less than one-tenth of one 17 percent are not watching it through an electronic 18 video display that comes into their home. 19 MS. PAYNTER: Well, this is a second 20 game. This is -- the event is a second game. So let 21 me back up and ask another just sort of detail 22 question. It was presented that when all of the 23 tickets have been sold, this second event, this second 24 game, begins. So what happens if all the tickets are 25 not sold? Does the game -- does the event happen? 0043 1 COMM. SCHENCK: That's a separate and 2 important question. 3 MS. PAYNTER: Yeah, I don't know. But 4 anyway, that does have a -- because then what you're 5 talking about is a second -- a second game, the event 6 is essentially a second game. It's not the reporting 7 of the first game or the outcome of the initial 8 ticket. It's the reporting of a second game. The 9 outcome is hidden from the players. It's introduced 10 to them in an electronic way, and that is -- that's 11 what our questions are is where does it cross the line 12 into electronic pull-tab bingo? And who -- when the 13 electronic pull-tab bingo is played in other venues 14 under other sites under these free standing kiosks and 15 things like that, what is the similarity -- what are 16 the similarities between the second event game and the 17 electronic representation of the winning to that -- so 18 that's where we're -- that's the gateway, the door. 19 One of the things that our concern, as 20 Rob said, is not the playing of the pull-tab games as 21 they are. Our concern is the expansion -- the 22 doorways that lead to expansion, towards Class III 23 games. 24 COMM. SCHENCK: Help me to understand. 25 When you say Class III games you're talking a code 0044 1 that I should know but I'll confess I don't. 2 MS. PAYNTER: It's like -- 3 COMM. SCHENCK: Aren't those random? 4 The winner is not predetermined in those games? 5 MS. PAYNTER: Not always. 6 MR. KOHLER: Not always. In fact, 7 that's where -- it used to be the bell weather for 8 legal -- you know, prudent advice would be whether 9 they had an element of chance, a random number 10 generator. And what happened was, you know, video 11 lottery is really what jumped off everybody's shoulder 12 -- when that was first introduced, the argument was, 13 very simply, you know what, you don't have to go get a 14 constitutional amendment at your state house because, 15 very simply, you're doing the same games that have 16 already been approved. And that flew in a couple of 17 states and they were able to make that argument and 18 get it in there. But once it got in there, folks said 19 this isn't video lottery. These are slot machines. 20 So it's blurred that -- it's blurred that -- 21 COMM. SCHENCK: From the perspective of 22 who is going to win and what the odds are of their 23 winning and how they are going to win in terms of the 24 numbers being -- determining the win, this is no 25 different, right? I mean, it seems to me that the 0045 1 manner of play can be more exciting and you're 2 describing this -- the bingo ticket where they walk up 3 and scan it and it shows some exciting numbers and 4 whistles and tells them a number. But that would be 5 like -- right now, we have balls popping up with hard 6 air in the lottery and people might find that 7 interesting. We could randomly have someone pick one 8 up and walk it over in a less exciting way, but it 9 doesn't change the nature of the game. 10 MR. KOHLER: But what is interesting is 11 we saw the game -- Phil, the game Fury, which is 12 pretty much -- you could substitute the horse game in 13 there. And on the bottom what Phil did is he 14 scanned -- he scanned the card. And I don't think it 15 should be overlooked throughout this process, we were 16 told there was going to be no servers, there were 17 going to be no computers, there wasn't going to be any 18 type of activity like that regarding this game. They 19 were simply going to use a bingo blower. 20 CHAIRMAN COX: Let me -- now, who is we 21 again? "We" were told by whom? 22 MR. KOHLER: It's on a transcript. 23 CHAIRMAN COX: Who said it? 24 MR. KOHLER: Chairman, I think -- it's 25 my from representation it's testimony that I gave to 0046 1 the Commission, and I think we need to go look. But 2 it's in the transcript that we were told that it 3 wouldn't involve any computers. 4 CHAIRMAN COX: Okay. Now, the proof of 5 the pudding I think is the action that the Commission 6 took, which was that it exposed a rule, took public 7 comment and voted to adopt that rule. Now, that's the 8 record that I know about. 9 MR. KOHLER: Yes, sir. 10 CHAIRMAN COX: Is there another record 11 that I don't know about? 12 MR. KOHLER: Unless it's transcripts -- 13 it would be transcripts of meetings. That's what I'm 14 talking about. 15 CHAIRMAN COX: I think the activity that 16 controls here is what the board did officially. Now, 17 if you have some comments that are on a transcript 18 that are contrary to the rule, I'd be pleased to look 19 at them or I would like you to inform counsel so we 20 can be more careful in the future. 21 MR. KOHLER: Sure. 22 CHAIRMAN COX: But the matter at hand is 23 what is the rule and what does it say and are the 24 practices of today in compliance with the rule. 25 Then the next issue is that Ms. Paynter 0047 1 has asked that we consider withdrawing that rule, and 2 in Item 4 that's what we will do. But I'm concerned 3 about these references to assurances you were given -- 4 I'm concerned about the inference that this was kept 5 secret from you for two years. There was a Bingo 6 Advisory Committee meeting I think well over a year 7 ago, which was a public meeting, where I saw these 8 things, and you could have been there, too. So I want 9 to be careful here that we don't get into an idea that 10 we've been working behind closed doors and in secret 11 and keeping things from you, because I don't believe 12 that's -- 13 MR. KOHLER: I tell you, I haven't made 14 that inference. I've just -- I indicated that we were 15 told that there weren't going to be any computers used 16 or servers, and that's what I... 17 But to go to that Game No. 3 where Phil 18 scanned in the results, there's balls on the side that 19 you see, individual balls. And it's been our 20 understanding -- and we haven't be been able for 21 sure -- but that some -- in some halls this game -- 22 and it's been approved by the Commission -- that this 23 game is okay to play with a bingo blower determining 24 what horse moves forward or not. 25 And to get to your point, Commissioner 0048 1 Schenck, that is an element of chance, which it looks 2 the same -- I mean, to a user, it looks the same, but 3 as far as when you come down to the nitty-gritty, 4 which, you know, I think I can attest and Suzii can, 5 too, that we have learned more about this than we ever 6 intended to -- but it's that element of chance in that 7 instance that doesn't make it electronic pull-tab 8 bingo. In fact, what it does is introduce an element 9 of chance and makes it keno. 10 CHAIRMAN COX: Now, let's stop right 11 there. You do know a lot more than I do about this, 12 so let's see if we can catch up with you. I'm still 13 at Phil's card. You called it a flare, I think? 14 MR. KOHLER: Yes. 15 CHAIRMAN COX: Which has the winners on 16 it? 17 MR. KOHLER: Yes. 18 CHAIRMAN COX: Now I'm not able to see 19 blowing balls up and advancing horses through a random 20 number generator would at the end sync-up with the 21 numbers that are on that flare? 22 COMM. SCHENCK: It's not. He's 23 suggesting it's a manner of play that's contrary to 24 our rules. 25 CHAIRMAN COX: Well, then that's a whole 0049 1 different issue. 2 MR. KOHLER: But to the user it's the 3 same. I mean the predetermined -- 4 COMM. SCHENCK: If they want to play 5 blackjack and three-card Monte in the halls, that 6 would be against our rules as well. We have rules. 7 We expect people to follow them. If they're playing 8 in that manner, they're not following our rules, as I 9 understand it. 10 CHAIRMAN COX: And certainly we want to 11 know the instances and we'll shut it down. 12 MR. SANDERSON: There are some locations 13 that play this -- the horserace game is the most 14 common term that's used. It could be Go-Go Balls, it 15 could be greyhounds or anything, but the horserace is 16 what it's called. The game originated with the -- if 17 you look at -- if you can visualize a representation 18 of the bingo flash board, which is the big board in 19 the hall that has all the numbers on it, it has 20 B-I-N-G-O down the side and along the top are the 21 numbers through 1 through 15, and then 16 through 22 30 -- 23 CHAIRMAN COX: That has nothing to do 24 with this. 25 MR. SANDERSON: I know, but I'm going to 0050 1 where -- he's talking about using the bingo ball 2 blower. 3 COMM. SCHENCK: There's bingo at which 4 the numbers are randomly selected and eventually 5 somebody gets bingo and then there's this, which isn't 6 randomly selected, but it's boring to watch somebody 7 peel cardboard back. And what they're suggesting is 8 any syncing up of the two where we don't have the 9 numbers actually being generated by bingo is something 10 neither fish nor fowl that we've not approved, if I'm 11 understanding correctly. 12 MR. SANDERSON: There is a pull-tab 13 ticket that's a horserace ticket that is used with the 14 bingo ball blower. 15 CHAIRMAN COX: Is it an approved game? 16 MR. SANDERSON: Yes. 17 CHAIRMAN COX: Is there a video 18 confirmation? 19 MR. SANDERSON: You can use video 20 confirmation or you can not use video confirmation. 21 CHAIRMAN COX: Is that what we're 22 talking about, Rob? 23 MR. KOHLER: Well, it's a big -- yes, on 24 one side you have the use of that particular game with 25 the bingo blower. 0051 1 CHAIRMAN COX: Okay. 2 MR. KOHLER: And then on the other side 3 you have the electronic representation just through 4 the predetermination of an individual ticket. 5 CHAIRMAN COX: Let's say that we had a 6 regular bingo game that has a caller and everybody has 7 a card and beans, just go back to the way I played it 8 when I was a kid at a place we went in the summer. 9 Okay. There's no display of any kind anywhere. The 10 caller calls out B-15 and I put this on there. And at 11 the end of the game, somebody yells bingo and they 12 read their numbers back to the caller and the caller 13 says that is a bingo, then they get their $2 and a 14 quarter, whatever we used to get. Okay. That's one 15 way. That's bingo. 16 MR. SANDERSON: That's regular bingo. 17 CHAIRMAN COX: Okay. Now, how can you 18 get from there to a number -- to a game where you're 19 putting those numbers -- you're pulling them out of 20 the blower, you're putting them up on a screen, I 21 guess, that has numbers from 1 to 75 on it? 22 MR. SANDERSON: Yes, sir. 23 CHAIRMAN COX: People can look up there 24 and know what's been called? 25 MR. SANDERSON: Yes, sir. 0052 1 CHAIRMAN COX: And at the end of that 2 somebody says "bingo" and somebody comes around and 3 checks it, if they have the cards that are up there. 4 Now, how do you do a video confirmation? 5 MR. SANDERSON: The video confirmation, 6 instead of the player looking up at the flash board 7 and watching the numbers that were being drawn -- you 8 know B-1 is drawn, so B-1 lights up. And the video 9 confirmation when B-1 is drawn, horse number one takes 10 a step forward. 11 CHAIRMAN COX: Okay. 12 MR. SANDERSON: And then as the balls 13 are being called, the different horses move forward 14 until there's a winner. 15 COMM. SCHENCK: It's just a different 16 way of tracking -- just randomly selected numbers? 17 MR. SANDERSON: Yes, that's correct. 18 CHAIRMAN COX: So you've got 75 rows? 19 MR. SANDERSON: Well, there's five rows, 20 15 numbers each. 21 CHAIRMAN COX: Okay. Oh, okay. So one 22 is called, the horse moves over one. 23 MR. SANDERSON: Yes. If two is called, 24 the horse moves over again. There's 15 horses. 25 CHAIRMAN COX: Well, there's 75 numbers. 0053 1 MR. SANDERSON: Each one has five 2 numbers down the -- 3 CHAIRMAN COX: Well, it doesn't mean 4 anything. It doesn't determine a winner. It's just 5 something to look at. 6 MR. SANDERSON: Yes. 7 COMM. SCHENCK: -- it's a horse running 8 across a row instead of a red dot jumping on top of -- 9 CHAIRMAN COX: I mean, it can't be the 10 same as the video monitor that's showing the numbers 11 through 75 because you couldn't tell since they're in 12 groups of 5 which one was called, looking back. 13 MR. SANDERSON: On the one that we 14 demonstrated -- 15 CHAIRMAN COX: No, the one you just 16 described. 17 MR. SANDERSON: The one just described. 18 If you have the flash board -- and like I said, 19 there's 15 numbers across and four additional numbers 20 under those. There's number one is 1, 16, 31, 46 and 21 61. That's the five numbers under No. 1. So as bingo 22 balls are called, if number one is called, then horse 23 number one will move up one spot. When 16 is called, 24 it will move up another spot and so forth until all 25 five of those numbers, 1, 16, 31, 46 and 61 have been 0054 1 called and that's the first row to light up, then 2 horse number one is the winner. 3 CHAIRMAN COX: So you only have five 4 horses in the game? 5 MS. SANFORD: No, there's 15 horses. 6 CHAIRMAN COX: But not 75 horses? 7 MR. SANDERSON: Each horse has five 8 numbers associated with it. 9 CHAIRMAN COX: I don't think that's -- 10 MS. PAYNTER: Can I make a comment? 11 CHAIRMAN COX: Please. 12 MS. PAYNTER: I think from this 13 conversation you can see why we were asking where are 14 the criteria? Where are the written rules? Why 15 aren't we looking at right now -- "Well, let's look at 16 regulation No. 1 through 7. This is how this game 17 fits in. This is how this game fits in." The kind of 18 confusion in trying to describe all this and trying to 19 see where things begin to cross the line, that is what 20 prompted us to be concerned about this, because we 21 didn't see written regulations, criteria where all 22 games have to meet, where there are -- where there is 23 in language a fine line that says -- a bright line 24 that says, "You know what, here's the line and these 25 are things that would have to be determined by the 0055 1 Legislature and not by rulemaking, and here's how 2 we're going to use that meter to kind of measure 3 against games." 4 I think you can see that over -- you 5 know, we see the horse racing game, it was the same up 6 here. Then we see this game up here, we see that -- 7 what's happening with the Indian tribe is essentially 8 very close to this game. There's an algorithm 9 difference. There's a kiosk difference. 10 So I think that you're getting the 11 picture from our point of view of wanting to be able 12 to say, you know, show us the rules and regulation of 13 which games fit which categories and why, just clear 14 and simple. And this is a technological -- there's a 15 whole wave of technology -- what's called technology 16 creep -- where Class I games become Class II games. 17 Class II games become Class III games. They all begin 18 to look alike to the players, feel alike to the 19 player. Because our technology has allowed us to do 20 things with speed and with a reinvestment kind of key 21 or element to it that can create games because of 22 speed that feel and play very similar -- have the same 23 addictive effect, even though the algorithms are not 24 the same. 25 So all I'm saying is that's what -- 0056 1 that's the 30,000-foot view of why we're looking 2 for -- as we move into more advanced technology, 3 higher speed playing, more use of video, where are the 4 actual rules? What do they say? What's predicated 5 those things? So that's, I think, the sort of 6 discussion today has led us -- that's what led us to 7 be concerned about something that was happening in 8 rulemaking that wasn't being clearly vetted and 9 clearly expressed. 10 With that in mind and since this is the 11 first time we've seen this -- in moving to Item No. 4, 12 I would like to withdraw our petition for -- to -- 13 about the rulemaking. I think that this, you know, 14 shows a lot of things for today that gives us a lot of 15 information to look at. It also, you know, opens a 16 lot of new questions just about all the -- what is 17 required? If I was going to submit a game, what type 18 of criteria would there need to be? And how specific 19 do those rules need to be? So that -- I guess I'm 20 moving, I guess, to Item 4 to say that, but just to 21 say that I would like to withdraw our petition. 22 CHAIRMAN COX: Let me address a couple 23 of things there. Counsel has advised me that on 24 public comment, we don't have to say a word. We can 25 sit here and let y'all say what you want to and say 0057 1 thank you very much. And the reason we've chosen to 2 be interactive here is because we really want to 3 resolve your concern. And if it looks like we're a 4 little confused, well, we are. You know, I had not 5 seen these before. I would suspect that Commissioner 6 Williamson had not. 7 COMM. WILLIAMSON: I had no idea. 8 COMM. SCHENCK: I actually have seen 9 these -- the confirmation. 10 CHAIRMAN COX: Okay. But because this 11 board is responsible for policy and rules. And then 12 enforcement of those rules is the responsibility of 13 management. Now, what -- where we come into that is 14 that from time to time when management and our various 15 publics don't sync-up, sometimes we're called to help. 16 And certainly this is one of those situations I think 17 where you have asked us to help and we want to help in 18 whatever way we can to resolve your concerns. 19 I understand, Ms. Paynter, that you're 20 concerned about gateways and opening doors. And I'm 21 concerned that you see this as a continuum that we're 22 creeping toward something that is illegal. And I see 23 it, I think, as discrete events, one of which does not 24 necessarily lead to another. 25 You know, there is a line that the 0058 1 Legislature draws with the laws. And then we pass 2 rules that we believe are supportive of and within the 3 laws. And then the Attorney General is there to 4 determine if it's -- if a member of the public 5 objects, which I think there's been an AG opinion in 6 this particular case. And certainly we are open to 7 the process of reconsidering our rules and are fully 8 prepared to do that if you would like for us to go 9 forward. 10 I hear you saying that you think that 11 the vetting that we've gotten here today has taken you 12 in the direction you want to go, and, you know, we're 13 happy to do whatever you wish on this thing. So I 14 guess what -- counselor, help me. She would like to 15 withdraw, I believe I heard her say, her petition for 16 a rule -- 17 MS. PAYNTER: Yeah, at this time just to 18 withdraw that and if we need to come back and revisit 19 it, we can. But that would be my desire. 20 CHAIRMAN COX: Is that permission -- 21 MS. KIPLIN: Yes, sir, it is. And we'll 22 take your representation on the record that you are 23 withdrawing your petition for rulemaking. So if 24 that's the case, then it really doesn't require action 25 on the case of the Commission since she's withdrawn 0059 1 it. 2 CHAIRMAN COX: One of the things that 3 the Commissioners are for is to help members of the 4 public move forward with the staff. And if you find 5 that there's any kind of apparent impasse, 6 misunderstanding, lack of response, I want you to call 7 one of us. And we will make sure -- I think our 8 record is very good about making sure that these 9 things get resolved on a timely basis. 10 The staff has, as you know, a number of 11 openings right now. They're really limited in 12 manpower. Much of the time that they have is spent 13 trying to fill the openings that they have and respond 14 to the audit that the auditors put before us about two 15 years ago. Not by way of apology, but by way of 16 explanation, that we try to get to things on a timely 17 basis and we certainly share the concerns that you 18 have. 19 The Governor has made it very clear that 20 he does not want an expansion of gambling. And we 21 don't want an expansion of gambling either. And we 22 appreciate you're expressing your concerns and we hope 23 that you will continue to do so as you have them with 24 either our staff, with our rules or with us. 25 MS. PAYNTER: Thank you, sir. 0060 1 MR. KOHLER: Thank you. 2 COMM. WILLIAMSON: I just had one quick 3 question. Has video lottery been presented as a bill 4 in the Legislature in times past? I don't know the 5 answer to that. 6 MS. PAYNTER: Yes, ma'am, it has. 7 COMM. WILLIAMSON: And it's never been 8 successful. So it's against the law any way. 9 MR. KOHLER: Right. 10 COMM. WILLIAMSON: I appreciate your 11 concern but I think legally -- I think the Chairman 12 said it all. We can't do it -- video lottery. 13 MR. KOHLER: Yeah. And we're just -- 14 we're not concerned about video lottery. We're just 15 drawing the parallel of the two, which they're really 16 the same. So what we're concerned with is electronic 17 representation of a bingo -- 18 COMM. WILLIAMSON: So you just want 19 people to hear stuff rather than see stuff? 20 MR. KOHLER: We just don't want it to 21 turn into something that it wasn't intended to when 22 the voters of this state passed the constitutional 23 amendment to allow it. 24 CHAIRMAN COX: And, Rob, I assure you 25 that we want the same thing. We don't intend to be 0061 1 opening any doors. It's not our job. It's our job to 2 interpret the laws, to supplement the laws, but stay 3 within them, and to be sure that those laws and rules 4 are enforced by our staff. And that's all we're 5 trying to do. 6 MS. PAYNTER: We enjoy a good 7 relationship -- working relationship with the staff 8 that has been something that, you know, I want to say 9 that clearly, that we call and we visit with people 10 and that we have access to that and we appreciate that 11 very much. And I don't want to leave the impression 12 of anything other than that. 13 CHAIRMAN COX: Well, we appreciate your 14 concern and your being active in this. It helps us to 15 understand. I've learned a lot today, and we 16 appreciate it. 17 MS. PAYNTER: And, you know, that's 18 my -- my final comment is we have learned a lot today. 19 And that was really the reason that we -- we know that 20 there is distance between what you-all see and know 21 and what happens. So I think that's why we were 22 asking for things to be brought before the Commission. 23 There was a purpose in our request. 24 CHAIRMAN COX: Sure. 25 MS. PAYNTER: It was not frivolous or in 0062 1 any way an opportunity to get down to something that 2 is -- well, I don't know -- negative. It is about 3 there truly are gray areas. There truly are needs for 4 rules. And when -- that's our commitment is to be 5 diligent about watching for those things, because 6 there are places where, for other reasons, sometimes 7 lines are breached. And that would not be what -- as 8 you said, that's not what you want. And that would be 9 a shame if it were to happen and you would be unaware 10 of it. 11 CHAIRMAN COX: I assure you that we will 12 do everything we can to see that it doesn't, and we 13 appreciate your efforts in that directions as well. 14 MS. PAYNTER: Thank you-all so much. 15 CHAIRMAN COX: Thank you very much. 16 MR. KOHLER: Thank you. 17 CHAIRMAN COX: Okay. Mr. Fenoglio, do 18 you still want to speak on Item 3? 19 MR. FENOGLIO: No, Commissioner. 20 CHAIRMAN COX: Item 4 then I believe has 21 been withdrawn. Would that be correct, counsel? 22 MS. KIPLIN: Yes, sir. That's my 23 understanding. 24 CHAIRMAN COX: Okay. Mr. Fenoglio, did 25 you still want to speak on Item 4? 0063 1 MR. FENOGLIO: No. 2 3 AGENDA ITEM NO. XII 4 CHAIRMAN COX: Okay. I'd like to 5 move -- with your permission, Commissioners -- to 6 Agenda Item No. 12, report, possible discussion and/or 7 action on the 2008 demographic report on lottery 8 players. 9 Mr. Fernandez? 10 MR. FERNANDEZ: Good morning, 11 Mr. Chairman, Commissioners. My name is Mike 12 Fernandez. I'm the Director of Administration. 13 As you know, the government code 14 requires the executive director to conduct a survey, a 15 demographic study, of lottery players in the state of 16 Texas. And that, as you also know, that survey will 17 be presented to the Governor, members of the Texas 18 Legislature, prior to the regular convening session. 19 As you also recall, we do this 20 demographic study every two years. This year the 21 study, as last year, has been conducted by the 22 University of Houston Center for Public Policy. With 23 me this morning I have Dr. Jim Guirado, who's the 24 Director of the Center for Public Policy to present 25 the study. I also have with me David Veselka who is a 0064 1 member of our research staff. 2 With that, I would like to turn the 3 presentation over to Dr. Guirado. 4 MR. GUIRADO: Good morning, 5 Commissioners. 6 CHAIRMAN COX: Welcome. 7 MR. GUIRADO: This study is -- has an 8 element of continuity from prior studies. In 9 addition, since we did it last year, we had access to 10 our own data. So house effects now are controlled 11 for. One other thing we did -- 12 CHAIRMAN COX: Excuse me, I have my 13 first question. 14 MR. GUIRADO: Yes. 15 CHAIRMAN COX: What are house effects? 16 MR. GUIRADO: House effects are specific 17 to your survey -- how the survey group that's going to 18 do it. So, for example, if you have another 19 university doing it, they're going to have a different 20 survey firm or actors taking the survey for you. And 21 there's always concern that one house has is a 22 different type of sampling technique than others. I 23 mean, there's a well-established criteria, but you 24 still have place, personnel differences and things of 25 that sort. 0065 1 CHAIRMAN COX: So this is not a 2 commodity? 3 MR. GUIRADO: No. No, sir. 4 CHAIRMAN COX: We're not going to get 5 the same answer if we bring in a different university 6 every year. We get a fresh look, but we don't get 7 continuity of method. 8 MR. GUIRADO: The continuity, that is 9 correct. But the personnel will be different. So the 10 house effects are controlled for. In addition, this 11 is the second year we now have cell phones as part of 12 the sample. So with landlines -- this is a concern 13 about cell phones. A proportion of the sample 14 contains a cell phone list. 15 COMM. SCHENCK: How did you manage that? 16 MR. GUIRADO: We worked with a firm in 17 Connecticut which has access to cell-phone-only users. 18 And the firm is called, I believe, Survey Sampling 19 International. And our Center has been working with 20 them for years. They have been around for a long time 21 and very good representation. So we've always gotten 22 landline survey numbers from them but now we have cell 23 phone lines from them as well. 24 COMM. SCHENCK: My understanding is it's 25 always been a great challenge trying to get a 0066 1 representative sample, particularly among younger 2 people. I know it was a problem with the presidential 3 sampling was the cell phone -- there are a lot of 4 people who have only cell phones at this point. 5 MR. GUIRADO: That's correct. In fact, 6 when you look at the margins, even though the cell 7 phone sample is only 10 percent of our sample, there's 8 definitely age effects. People between the ages of 18 9 and 24, a third of them in the cell phone sample were 10 cell phone only. But when you get to people over the 11 age of 65, it's only 4 percent. So there's definite 12 age effects. And it's a -- in the future we're going 13 to have to increase the proportion of our sample that 14 are cell phone only, and lots of firms are aware of 15 there. We're looking at -- we're predicting within 16 the next 10 years looking at 30 percent cell phone 17 only, and it's generational. 18 CHAIRMAN COX: And, Mr. Fernandez, if I 19 remember correctly, when the University of Houston did 20 the survey last year, they were the first ones that 21 were able to include cell phone data in the study. 22 MR. FERNANDEZ: That's correct. 23 MR. GUIRADO: The survey was conducted 24 in late August and ended in early September, just 25 before Ike. The sample size, consistent with other 0067 1 samples, is about 1700 people, 1531 were landline 2 respondents and 174 cell phones, a 90-10 frame. We 3 chose 10 percent because that's considered within the 4 range of a proportion of people out there that are 5 cell phone only. The margin of error is 2.4 percent 6 in the general sample for the total. And again the 7 firm that did the survey for us was Survey Sampling 8 International. 9 The revenue forecast we have from our 10 results is that in the coming year -- I'm sorry, for 11 this particular study was a little over $3 billion 12 forecasted. The upper bound is 2.14 (sic) billion. 13 The lower bound is 3.01. 14 Now, a word on sensitivity here. These 15 forecasts are based on people's recollection of what 16 they spent. So if they're off by -- in this case it's 17 down. We're down in the average spent. But the 18 recollection of the average spent is down -- it was 19 $53; this year the recollection was $38. And the year 20 before in 2006 it was $51. So there's been a drop in 21 how much people recollect spending. If they're off by 22 $5, that would raise the revenue forecast by $500 23 million. If they're off by 10, $10, that would raise 24 it by a billion. 25 CHAIRMAN COX: So if they were off by 0068 1 $5, you would be about right? 2 MR. GUIRADO: Yes. 3 CHAIRMAN COX: Where our actual revenue 4 was about 3.6 billion. And this, Commissioners, is 5 one of the questions I have consistently asked is if 6 you blew up your results, would you get revenue? If I 7 remember right, last year, you blew it up and it was 8 over. 9 MR. GUIRADO: It was a little over 10 4 billion. 11 CHAIRMAN COX: Yes. And this year it's 12 under. So, excuse me, I just wanted to provide that 13 background for the others. 14 COMM. SCHENCK: It seems to me also you 15 have some other control issues here. I mean, not 16 everyone at every income level presumably is willing 17 to talk to you and complete this survey. And I see 18 that you have a response of 23.78 percent are over 19 $100,000 a year. It cannot be that 24 percent of the 20 public in Texas is earning $100,000 a year or more. 21 Is that a household income number? 22 MR. GUIRADO: It's household, yes. 23 COMM. SCHENCK: That seems wrong to me. 24 I don't think 24 percent of the households in Texas 25 are making $100,000 or more. 0069 1 MR. VESELKA: If I may for the record, 2 I'm David Veselka, research specialist for the 3 lottery. And the most recent census estimates for 4 2007 show for those 18 -- age 18 and over, it was 5 about 19 percent of the households made $100,000. 6 COMM. SCHENCK: That's about 4 percent 7 over represented. What about people earning less than 8 12,000? Do you have that data in front of you? What 9 percentage of Texas households are less than 12? 10 MR. VESELKA: I actually have less than 11 10,000. That's a slightly different measure. 12 COMM. SCHENCK: That's a big difference. 13 How about between 20 and 29,900. 14 MR. VESELKA: That would be -- it's 15 about 12 percent, 11.8 percent. 16 COMM. SCHENCK: So we're 17 underrepresented there. We've overrepresented at the 18 high end. 19 MR. VESELKA: That is correct. 20 MR. GUIRADO: I think we have to be 21 careful, because we talk about point estimate and 22 there's a margin of error around these. And since our 23 sample size -- we start getting specific gains in 24 particular, those margins of error are going to go up. 25 And you'll see it in a couple of gains. 0070 1 So the answer to all of this is in the 2 sample size, we have 1700 people total. If we had a 3 sample size at 3,000, you might be able to start 4 getting these margins -- they would be in the range of 5 what you think -- are correct with census data and 6 things of that sort. So again, if you do that, it's 7 going to cost -- 8 COMM. SCHENCK: I'm just looking here at 9 the demographic groups that you selected as your 10 sample, and it seems to me that if we're coming in 11 about 800 million short, the group over -- earning 12 over $100,000 a year reports at least that they play 13 somewhat less often as a group. They're 23 percent of 14 the sample, or 24, and they're playing 1 percent less. 15 And at the other end, those earning less than 12,000 16 are 23.9 percent of the sample and they're playing -- 17 5.2 percent -- actually, I'm wrong. I'm sorry. That 18 group is also not playing much. 19 But between 12 and 19 is playing a 20 little bit over. So that might explain something of 21 where we're losing revenue on the estimate. If we're 22 talking disproportionately the people who are 23 reporting that they're not playing. 24 MR. GUIRADO: Right. Right. One thing 25 I'll restate but I think it's very important, 0071 1 recollections are tough, especially on dollar amounts. 2 So since -- that's something that this survey -- this 3 type of survey is not really geared towards specific 4 behaviors. It's a perception survey at this point. 5 We're not tracking the same people over time. If we 6 do that, we would get a much more accurate read on how 7 much a person spends because we would track the same 8 folks. 9 In terms of the general finding, the 10 participation rate is the same as last year, roughly. 11 It's about 38 percent. Again, last year was down from 12 the prior year, which I believe -- let me go to that 13 figure for you. Here's the graph showing the 14 participation rates for all games. As you can see, it 15 was 38 percent last year, it's about 38 -- 39 percent 16 this year. It was 45 percent in 2006. So it's 17 steady. It's stabilized at least this year from last 18 year. The monthly average spent has dropped from 19 $53 -- $54 to about $38. 20 Demographic differences, in this survey 21 we were looking at players versus nonplayers. The key 22 variables that show a statistically significant 23 difference or effect were gender and employment 24 status. For gender, it was males playing more than 25 females. And the difference in increase -- not by 0072 1 chance. 2 And for employment what we're talking 3 about here it's full employed people. They have a 4 tendency to play more than people who are unemployed. 5 In addition, we put a little asterisk at the bottom of 6 the column, demographic variables for individual games 7 are a little different. There's going to be some that 8 pop up for a specific game that don't pop in the 9 general survey itself. 10 For the games themselves, the change 11 from last year's survey, participation rates, actually 12 we find Pick 3 Day, Texas Lottery Scratch Off, and 13 Mega Millions participation rate is up. In our survey 14 the difference between last year -- the games where 15 participation has dropped -- is Pick 3 Night, Cash 5, 16 Lotto Texas, Texas Two-Step and Megaplier. 17 Interestingly enough, monthly rates of 18 purchase are up. Average time played is up. The 19 exception is the Texas Lottery scratch-off. Again 20 with a dollar spent, there's been a downward shift in 21 all games. 22 Now, we talk about specific games, 23 looking at what demographics seem to drive changes. 24 For Pick 3 Day there's a significant difference 25 between this year and last year in terms of 0073 1 participation. What's happening is people are playing 2 that more. Income and race is also a deciding factor 3 for Pick 3 Day. Income is a negative relationship. 4 As people's income goes up, they play less. The race 5 and ethnicity we find some differences here. African 6 Americans are playing Pick 3 Day more than the other 7 ethnic groups. But I want to be careful about -- when 8 you look at Table 6 where this is represented, the 9 sample size for those particular groups is quite 10 small. So be careful when you talk about this. 11 Cash 5, education and income are the 12 drivers in terms of demographics. Both have negative 13 relationships. That is, as education goes up and 14 income goes up, willingness to play Cash 5 goes down. 15 Lotto Texas, there's a big difference 16 between this year and last year. There's been a drop. 17 That Lotto Texas has consistently been the game which 18 participation was highest. But there's been a drop 19 and it is statistically significant. 20 Scratch Off games, education and age all 21 have negative relationships. Two-step, each has a 22 positive relationship. So for this case, for 23 Two-Step, as you get older you're playing more. 24 For Mega Millions, education is the 25 driver. And for Mega Millions education is a positive 0074 1 relation. As your education level increases, you're 2 more willing to play this game. And for the other 3 games, there was no statistical -- statistically 4 significant findings. 5 Now, just to go through a couple of 6 figures here again, this is the figure for the portion 7 of folks that played historically. And you can see 8 again it's stabilized. Participation has stabilized. 9 For Pick 3 Day -- 10 CHAIRMAN COX: What -- '98 was the 11 earliest year that we had? 12 MR. GUIRADO: '93 -- 13 CHAIRMAN COX: '93, I'm sorry. Let me 14 just have a second to look at that. 15 MR. GUIRADO: Sure. 16 CHAIRMAN COX: Thank you. 17 MR. GUIRADO: You're welcome. For Pick 18 3 Day you can see that the percentage playing now has 19 increased, but let's be careful here. The sample size 20 for Pick 3 Day in our survey is 145. That means that 21 the margin of error if you're going to use 95 percent 22 confidence level is about -- rule of thumb -- plus or 23 minus 8.5 percent. So if you look at the difference 24 between 22 and by 18, that's within the margin of 25 error. So even though now you see a difference, 0075 1 statistically there's probably no change between 2007 2 and 2008. 3 Now Pick 3 Night -- this one there's a 4 big drop. But what's interesting about this is the 5 number of people in the sample that we had, the number 6 was quite small. There was only 28 people this year. 7 So that drop -- the margin of error on this is because 8 the sample is so small the margin of error here is 9 plus or minus -- hold on to your hat -- 20. So that 10 drop is probably because the sample is so small and 11 the sample we have of the people playing is probably 12 no different. And if you look at the revenue figure, 13 you may see that the revenue here hasn't changed too 14 much. Now, I want to warn you, I think that's 15 probably a sample characteristic of the sample size. 16 For Cash 5, there's no difference. For 17 Lotto Texas -- now, is this within the margin of 18 error? For Lotto Texas the number of people that said 19 they were playing was 445. That gives us a margin of 20 error of plus or minus 5. This time it is different. 21 So there's -- and we did find this in our straight 22 results as well as in our table -- in this Table 15 23 where the year has an effect. You can see it -- in 24 fact, there is a statistically-significant drop in 25 Lotto Texas between this year and last. 0076 1 And for Scratch-off the sample size is 2 345. So the difference is plus or minus 5.5 roughly. 3 So this one, again, there is a statistically 4 significant increase. 5 Texas Two-step, no change in 6 participation. 7 Mega Millions, no change in 8 participation. 9 Megaplier, no real difference. 10 And that concludes the presentation. 11 I'm open for questions. 12 COMM. SCHENCK: Well, I did see for a 13 number of those games that we don't have statistically 14 significant drop-off 2007 and 2008. But 2005, 2006 15 were in each case larger. Now, there seems to be a 16 statistically significant drop-off in those two years 17 than the next two years, and the fact that they're 18 coinciding over and over again suggests that there's 19 an overall decline in the play over that broader 20 period. 21 MR. GUIRADO: I think you could infer 22 that, but since we don't have access to that data -- 23 we didn't have the data sets from those prior studies, 24 we couldn't make those determinations -- statistical 25 determinations. But it appears that there was -- as 0077 1 you said there has been a drop. 2 COMM. SCHENCK: Yea, a recurrent pattern 3 there in that -- those data sets -- 4 MR. GUIRADO: That's correct. 5 COMM. SCHENCK: Thank you. 6 CHAIRMAN COX: Commissioners? 7 COMM. WILLIAMSON: No, thank you. 8 CHAIRMAN COX: If you could tell us what 9 you thought were the most significant things you 10 observed, as you think back over the work you did and 11 the report you made, Dr. Guirado, what would those be? 12 MR. GUIRADO: Participation -- I would 13 stick with the biggest samples you have, so I would 14 stick with the general. So these I feel most 15 comfortable about saying participation has stabilized 16 and the mean amount spent is dropping. 17 CHAIRMAN COX: Okay. 18 MR. GUIRADO: So those are the two 19 big -- those are the two things I'm most comfortable 20 with, given the sample size we have. 21 CHAIRMAN COX: Thank you very much. 22 MR. FERNANDEZ: That's all. 23 CHAIRMAN COX: Why don't we take a short 24 break, be back at about a quarter till. 25 (Recess: 10:35 a.m. to 10:59 a.m.) 0078 1 AGENDA ITEM NO. V 2 CHAIRMAN COX: Okay, let's come back to 3 order, please. Agenda Item No. 5, consideration and 4 possible discussion and/or action including proposal 5 on new 16 TAC Paragraph 402.412 relating to signature 6 requirements, Ms. Joseph. 7 MS. JOSEPH: Good morning, 8 Commissioners. My name is Sandra Joseph, special 9 counsel in the legal division. 10 The proposed rule, 402.412, as well as 11 the next three proposed rules on the agenda, have been 12 reviewed by the BAC. That's the Bingo Advisory 13 Commission. The Bingo Advisory Collision comments 14 were considered in preparing all of these recommended 15 rules. I just wanted to state that at the beginning 16 so you'll know they have been reviewed by the BAC. 17 The purpose of this new rule is to 18 provide the requirements for a valid signature and to 19 clarify the signature requirements for forms 20 prescribed by the Commission. The submission prepared 21 for the Texas Register does include notice of a public 22 hearing to be held on the proposed new rule on 23 January 21st at 10:00 a.m. 24 Staff recommends that the Commission 25 initiate the rulemaking proceedings by publishing the 0079 1 attached -- excuse me, the attached rule in your 2 notebooks in the Texas Register in order to receive 3 public comments for a period of 30 days. 4 CHAIRMAN COX: Commissioner? 5 COMM. SCHENCK: I have no questions. I 6 like -- other than I'll just state I like that we're 7 now explicitly allowing for photo copy facsimile of 8 PDF to function as a signature. I think that's a step 9 in the right direction. 10 MS. JOSEPH: Okay. 11 COMM. WILLIAMSON: I have no questions. 12 MS. JOSEPH: With your permission, I'll 13 hold -- 14 CHAIRMAN COX: Do you -- 15 MS. JOSEPH: -- voted -- 16 CHAIRMAN COX: You want us to take 17 action on this one or do you want to take action on 18 all of them at once. They're all for exposure, are 19 they not, the proposals? 20 MS. JOSEPH: Each of them -- 21 CHAIRMAN COX: Can we do them all in 22 one? 23 MS. KIPLIN: Certainly. 24 AGENDA ITEM NO. 6 25 CHAIRMAN COX: Okay. Agenda Item No. 6. 0080 1 This is registry of bingo workers. 2 MS. JOSEPH: This item concerns 16 TAC 3 Section 402.402. The purpose of the proposed 4 amendment is to remove reference to a primary operator 5 and to clarify the consequences of failing to renew a 6 worker's registration timely and submission of an 7 incomplete worker registration application. 8 Additionally, the proposed amendment includes 9 explanation of when fingerprint cards are required, 10 the option of requesting a hearing when someone is 11 found nonqualified to be listed on the registry, and 12 also when a worker who's listed on the registry has 13 been denied or revoked may reapply. 14 Again notice for -- of this rulemaking 15 does include a public hearing to be held on 16 January 21st at 10:00 a.m., and staff recommends that 17 the rulemaking proceedings be initiated to receive 18 comments for a period of 30 days. 19 CHAIRMAN COX: Commissioner? 20 COMM. SCHENCK: I have one question. We 21 define most of these people, but we don't -- the one 22 that seems to be missing to me is usher. Am I just 23 missing that? 24 MS. JOSEPH: A definition for usher? 25 COMM. SCHENCK: Yeah. 0081 1 MS. JOSEPH: I don't believe that there 2 is a definition for usher. 3 COMM. SCHENCK: Is there a separate 4 definition somewhere else in our rules that would -- 5 MR. SANDERSON: I believe there is in 6 the -- where we have a definition rule, and I can go 7 up to the -- 8 COMM. SCHENCK: So then I'll ask the 9 question, Phil, wherever the definition for usher 10 appears, are there also definition for operator, 11 managers or other things? And if there is, why do we 12 need multiple sets of definitions? 13 MR. SANDERSON: I will research that and 14 if that's a change that you would like to make in this 15 case here we can make that revision and have it 16 brought back to you later. 17 COMM. SCHENCK: I mean -- but I'll just 18 ask the question for my own edification: What is an 19 usher? I mean, I think of an usher -- 20 MR. SANDERSON: The usher is a floor 21 worker. It's a person that walks the floor and sells 22 paper and pull-tabs on the floor of the bingo hall. 23 COMM. SCHENCK: And so there's some 24 functioning as a salesperson also? 25 MR. SANDERSON: They could be a 0082 1 salesperson. 2 COMM. SCHENCK: Okay. Well, I think 3 that might be useful -- I mean, if it's worth defining 4 these people, at least for the purposes of this -- of 5 the registry rules, I think it's worth having a 6 complete list. Or if they're defined elsewhere, we 7 can just say, you know, in Subsection 6 the following 8 six categories of people, as defined in rule whatever 9 must have -- be on the registry. 10 MR. SANDERSON: We can definitely add a 11 definition for usher. It is not in another location 12 in the rules. 13 COMM. SCHENCK: I think we need to have 14 a definition, in my opinion -- just my view. 15 COMM. WILLIAMSON: That's fine with me. 16 CHAIRMAN COX: Okay. Sandy, my question 17 is very similar to Commissioner Schenck's, and that is 18 we have six persons -- that is categories of persons 19 as I read it -- that are required to be licensed. Is 20 that intended to be an inclusive list of all people 21 working? Should there be a seven, anybody else? Have 22 we missed anybody here? 23 MS. JOSEPH: I don't believe we've 24 missed anybody that we feel that we have authority to 25 include. There has been talk about including 0083 1 bookkeepers, but there's doubtful authority to include 2 bookkeeper. 3 CHAIRMAN COX: Okay. Well, I would ask 4 you to think about -- as you're thinking about 5 Commissioner Schenck's question -- whether we should 6 add seven, "any other person involved in the conduct 7 of bingo"? 8 MR. SANDERSON: The statute -- these six 9 individual names are enumerated in the statute as 10 being required to be on the worker registry, and 11 that's where that stops at. 12 CHAIRMAN COX: Okay. So what we've got 13 is if somebody wants to call himself a director, he 14 can be a director and not be -- have to be on the 15 registry. If he wants to call himself a barker 16 instead of a caller, then he doesn't have to be on the 17 registry. Is that what we've got? Or somebody 18 creates an organization chart that's different from 19 anybody else's that doesn't have ushers but instead 20 has monitors, then the monitor doesn't have to be 21 registered. You see where I'm going with this? 22 MR. SANDERSON: Yes, sir, I do. 23 MS. JOSEPH: I do see that we need to 24 define the terms because I believe it should go to the 25 function of the person rather than -- 0084 1 COMM. SCHENCK: But there needs -- there 2 must be another section of our rules that excludes 3 people who are not functioning as an usher or a caller 4 from performing those functions, I would assume. 5 MS. JOSEPH: I don't think so. 6 MR. SANDERSON: Well, you know, the 7 definition, for example, of a salesperson is, "An 8 individual who monitors bingo players, sells bingo 9 cards, pull-tabs, verifies winners and/or awarding 10 prizes and may be referred to as a floor worker, 11 runner or usher," is what we have in the definition. 12 COMM. SCHENCK: But there needs to be 13 some positive statement in the rules to the effect 14 that those functions cannot be carried out by someone 15 who is not either a salesperson, an usher or something 16 else. 17 CHAIRMAN COX: Or otherwise listed on 18 the registry. 19 MS. KIPLIN: I think we know where 20 you're going, and what I would suggest -- with your 21 permission -- is that we not continue on this 22 rulemaking at this Commission meeting, go back, rework 23 the rule in light of the comments and we'll bring it 24 back to you. 25 0085 1 AGENDA ITEM NO. VII 2 CHAIRMAN COX: Excellent. Agenda Item 3 No. 7, this is amendment for change of premises or 4 occasions due to lease termination or abandonment. 5 MS. JOSEPH: The purpose of this new 6 rule, 16 TAC Section 402.409 is to clarify the process 7 and the timelines for licensed authorized 8 organizations and commercial lessors when submitting 9 an amendment application for a change in bingo 10 premises or occasion due to lease termination or 11 abandonment. This submission also includes notice for 12 a public hearing to be held on January 21st, 2009, and 13 the staff recommends that the Commission initiate 14 rulemaking proceedings by voting to publish the rule 15 in the Texas Register in order to receive comments for 16 a period of 30 days. 17 COMM. SCHENCK: I don't have any 18 immediate questions. 19 CHAIRMAN COX: Okay. 20 COMM. SCHENCK: So we're giving 21 ourselves ten days to act on these, and if we don't 22 act we're saying that the -- these event -- 23 notification to us that we haven't acted and that they 24 win and if we don't respond is that basically the way 25 it works? 0086 1 MR. SANDERSON: That 10 days is in the 2 statute. 3 COMM. SCHENCK: Okay. 4 MR. SANDERSON: We have -- from 10 days 5 from the date they submit the application for 6 amendment to act on it, or they can continue or they 7 can go ahead and operate as if we had acted on it. 8 This was put in the statute in 2003 and we've not had 9 any instances where it's actually kicked into play. 10 COMM. SCHENCK: So you're -- within 10 11 days you're acting on -- 12 MR. SANDERSON: Yes, sir. 13 COMM. SCHENCK: Okay. I have no further 14 questions. 15 CHAIRMAN COX: Commissioner? 16 COMM. WILLIAMSON: No, I have nothing. 17 AGENDA ITEM NO. VIII 18 CHAIRMAN COX: Okay, Sandy. Agenda Item 19 No. 8, and this would be amendment of a license by 20 telephone or facsimile. 21 MS. JOSEPH: Yes, this is proposed new 22 16 TAC Section 402.424. The purpose of this new rule 23 is to clarify for licensees the process and timelines 24 to follow when submitting by telephone or facsimile an 25 amendment to a license to conduct bingo. This also 0087 1 includes notice of a public hearing to be held on 2 January 21st, 2009, and staff recommends that this 3 rule be published for public comment. 4 COMM. SCHENCK: I need to understand how 5 this is going to work. Under this rule, any licensed 6 organization will have the ability to make these 7 changes by phone or by facsimile, they don't need to 8 signify their interest of doing it -- if they make a 9 call to us to make a change, we notify them by virtue 10 of this PIN number, which goes back, presumably, to 11 somebody ultimately responsible for the organization. 12 If they fail to notice it and they call us three 13 months later and say we didn't make this change, it 14 was some rogue employee acting ultra virus, it's their 15 problem. 16 MR. SANDERSON: We use a PIN number for 17 identification purposes that when a license is issued 18 we send the PIN to the primary operator. And whenever 19 they call in and want to change their playing times 20 over the phone, we ask for the PIN number. We do 21 prepare, you know, documents and there is 22 documentation in the system that it was a phone call 23 that changed the playing times and what time the call 24 came in and when the times were changed to. Does 25 that -- 0088 1 COMM. SCHENCK: Is there any bounceback 2 to the organization to confirm with them that they 3 intended to make that change? 4 MR. SANDERSON: We print out what's 5 called a letter of authority that changes the playing 6 times and we either fax it or we PDF e-mail it back to 7 them. 8 COMM. SCHENCK: Is there a fee 9 associated with that? 10 MR. SANDERSON: It's a $10 fee. 11 COMM. SCHENCK: Okay. And presumably 12 everybody -- have you ever had a complaint about 13 that -- that somebody made a change that -- some aide 14 in the organization had made a change over the phone 15 and "B" wasn't aware of it, they get in trouble for 16 conducting out of time -- 17 MR. SANDERSON: We've had probably more 18 the other way around where they thought they had made 19 the change and it wasn't approved or hadn't gone 20 through the process and they went ahead and played 21 without being authorized to play. 22 COMM. SCHENCK: Okay. Thank you. I 23 don't think I have any further questions. 24 CHAIRMAN COX: Commissioner? 25 COMM. WILLIAMSON: (No audible response) 0089 1 CHAIRMAN COX: Okay. So we have Agenda 2 Items 4, 5, 7 and 8. 3 MS. JOSEPH: That would not include No. 4 4. That was the petition for rulemaking that was 5 withdrawn, so -- 6 CHAIRMAN COX: Okay. Pardon me. Okay. 7 So we have 5, 7 and 8 -- 8 MS. JOSEPH: Yes. 9 CHAIRMAN COX: -- 6 y'all will do a 10 little more work on and bring it back? 11 MS. JOSEPH: Yes. 12 COMM. SCHENCK: So I'll make a motion if 13 I can. I'm going to propose we adopt the staff's 14 recommendation and publish for comment rules amending 15 16 TAC 402.412, 402.409 -- 16 MS. KIPLIN: The first one is a new 17 rule -- 18 COMM. SCHENCK: Okay. The new rule 402, 19 publish for public comment -- notice and comment -- 20 for a new rule, 16 TAC 402.412, signature 21 requirements; new rule 16 TAC 402.409, abandonment of 22 premises and 16 TAC 402.424. 23 CHAIRMAN COX: Is there a second? 24 COMM. WILLIAMSON: Second. 25 CHAIRMAN COX: All in favor say "aye". 0090 1 COMM. SCHENCK: Aye. 2 COMM. WILLIAMSON: Aye. 3 CHAIRMAN COX: The motion carries three 4 zero. 5 Thank you, Ms. Joseph. You want us to 6 sign those? 7 MS. JOSEPH: Thank you. 8 AGENDA ITEM NO. IX 9 CHAIRMAN COX: Agenda Item No. 9, report 10 of charitable bingo operations director. Phil? 11 MR. SANDERSON: Commissioners, in your 12 notebook is the activity report of the bingo division. 13 I would like to bring you up to date on the staffing. 14 We have recommendations pending for the Inspector 5 15 and Inspector 7 positions. We have made the -- have 16 an individual hired for the operational planning and 17 performance coordinator position. We have 18 recommendations pending for the audit manager. We're 19 going to repost the Auditor 3 position once the audit 20 manager is in place so they can interview for that 21 position. 22 The BAC meeting is tentatively scheduled 23 for February the 4th. I'll work with each individual 24 Commissioner on scheduling a time if you would like to 25 attend the BAC meeting. 0091 1 Quarterly reports and allocations, 2 allocations were released on November the 13th and 3 attached is a memo indicating the amount of money 4 allocated as well as the top five counties and cities. 5 And then we continue to have success with the online 6 operator training program. As of yesterday, 170 7 individuals had taken and passed the test for the 8 training program, and that concludes my report. 9 CHAIRMAN COX: Questions, Commissioners? 10 COMM. SCHENCK: So, Phil, we still 11 haven't filled this audit manager position? And how 12 close are you? 13 MR. SANDERSON: I've got a 14 recommendation memo to HR to begin the background on a 15 successful candidate. 16 COMM. SCHENCK: So are there odds we'll 17 get that filled before the end of the year? 18 MR. SANDERSON: It's possible, but with 19 the holidays I would say probably after, like 20 January 5th. 21 COMM. SCHENCK: Well, in any event, that 22 will be an important addition for you. 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN COX: Now, you say a successful 25 candidate, does that mean we've made an offer and it's 0092 1 been accepted subject to the background check? 2 MS. SANFORD: We haven't made the offer. 3 We do the background checks first and then we'll make 4 the offer. 5 CHAIRMAN COX: Oh, you do? Okay. 6 COMM. SCHENCK: I would -- 7 CHAIRMAN COX: Go ahead, please. 8 COMM. SCHENCK: I'd want to communicate 9 to keep that person interested -- 10 MR. SANDERSON: Well, when they get the 11 request for the background, I think that's when 12 they'll know that they're at least in the running to a 13 certain extent. 14 CHAIRMAN COX: Okay. I don't know 15 whether it would be appropriate to do this, but I'll 16 tell you what I would do if I owned the place -- and I 17 don't, of course -- and that is I'd tell this person, 18 "I'm going to make you an offer for this position, and 19 if you accept it I'm going to do a background check 20 and your employment would be --" but Kim is shaking 21 her head we can't do it that way. 22 MS. KIPLIN: No, the Commission has 23 established a policy that you do background checks 24 before offers are made. I think HR can work with Phil 25 in terms of communicating the fact that this person is 0093 1 a top candidate, background needs to be completed. 2 CHAIRMAN COX: Okay. Well, I certainly 3 share Commissioner Schenck's concern that we let the 4 best one we've talked to off the hook, because we're 5 in the holiday season and checks may go slowly. I 6 would also urge you to ask whoever is doing the 7 investigation could they possibly expedite it. 8 MR. SANDERSON: I will definitely do 9 that, yes, sir. 10 CHAIRMAN COX: Great. 11 Commissioner? 12 COMM. WILLIAMSON: I agree with both of 13 you. 14 CHAIRMAN COX: Thank you, Phil. 15 MR. SANDERSON: Yes, sir. 16 AGENDA ITEM NO. X 17 CHAIRMAN COX: Agenda Item No. 10, 18 report, possible discussion and/or action on lottery 19 sales and revenue, game performance, new game 20 opportunities, advertising, market research and 21 trends. Ms. Pyka and Mr. Tirloni. 22 MS. PYKA: Good morning, Commissioners. 23 My name is Kathy Pyka, controller of the Lottery 24 Commission. To my right this morning is Robert 25 Tirloni, our products manager. 0094 1 The first chart that we have for you 2 this morning reflects the revenue from net sales 3 through the week ending December 6th, 2008. Total 4 sales through this 14-week period amounted to $918.4 5 million with prize expense of $575.6 million, for a 6 sales contribution of $342.8 million. 7 Our net revenue to the state reflects a 8 2.6 percent decrease as compared to the $238.8 million 9 figure for the same period in fiscal year 2008. And 10 the $575.6 million reported as prize expense as a 11 percentage of sales is 62.7 percent as compared to the 12 63.3 percent for the same period in fiscal year 2008. 13 Our next slide summarizes the change in 14 sales by game from fiscal year 2008 to 2009. As noted 15 before, the total sales decline is $50.6 million or 16 5.2 percent. And, Commissioners, the last time we 17 met, our year-over-year sales decline was 10.7 18 percent. So as you can see, within the seven-week 19 time period, that sales decline has gone from 10.7 20 percent to 5.2 percent. The overall sales decline 21 includes $12.6 million, or 5.5 percent, on our online 22 games and $38 million or 5.1 percent in instant 23 tickets sales. 24 The jackpot games are portrayed for you 25 with the white font, and those include a $5.6 million 0095 1 year-over-year decline. But at this point we are now 2 showing a year-over-year increase for Mega Millions, 3 Megaplier and Two-Step as compared to fiscal year 2008 4 sales. Our Mega Millions game is currently advertised 5 at $207 million for tonight's jackpot. This is the 6 largest jackpot we've had advertised since February of 7 2008. 8 COMM. SCHENCK: Kathy, say that again. 9 What's the jackpot right now? 10 MS. PYKA: The jackpot advertised for 11 tonight is $207 million, and we haven't been over the 12 $200 million range since February of 2008. So this 13 increase -- once we hit the $100 million mark for Mega 14 Millions, as you can see, we've been able to generate 15 some sales as a result of the increased jackpot and 16 now have a positive year-over-year increase. 17 We just actually set the jackpot this 18 morning. Should we not have a winner tonight, the 19 jackpot will be advertised Tuesday night at 20 $250 million. So very, very good news for the online 21 games. 22 I also want to note that Two-Step shows 23 a 5.7 percent increase over fiscal year 2008 sales. 24 We've had three jackpots that have been significantly 25 high for Two-Step, one at 600,000, another at 975,000 0096 1 and the third at 750,000, which have allowed us to 2 generate those increased sales. 3 Moving down to our daily game subtotal, 4 you'll note that they are down 6.3 percent or 5 $7 million, and then again our instants are down 6 38 million or 5.1 percent. But again, significant 7 gains over the last five weeks -- seven weeks since we 8 last met. 9 COMM. SCHENCK: In the last couple of 10 weeks have we been able to track whether instant sales 11 are down as the Mega Millions game is up? 12 MS. PYKA: What we've seen is it's been 13 about a five-week period for instants in which we have 14 shown year-over-year increases as compared to fiscal 15 year 2008. So when we look at the instant ticket 16 sales, we had a (cough interruption) million-dollar 17 week last week -- excuse me, a 56 almost $57 million 18 week last week. And the last time we were at that 19 period in fiscal year 2008, again, was I believe last 20 spring. 21 MR. TIRLONI: Commissioners, for the 22 record, my name is Robert Tirloni. I'm the products 23 manager for the Commission. I think part of the 24 benefit that we've seen in instant sales for, roughly, 25 the past four -- we had one down week, the week -- 0097 1 right, that was the Thanksgiving week -- but our 2 holiday suite of games has been doing extremely well 3 this year. And those have been strong products for 4 us, so I believe that's been contributing to the 5 success we've seen over the past few weeks in 6 instants. 7 MR. GRIEF: Back to your question, 8 Commissioner, I'll just offer generally when we see 9 these large jackpots for Lotto or Mega Millions, we 10 also see that somewhat lift the boat for instant sales 11 as well as it's driving more players into the stores 12 and then they make those impulse buys. 13 COMM. SCHENCK: Well, that's a very 14 interesting point, because I believe at our last 15 meeting we had a conversation with Ms. Nettles about 16 the decline in playing and whether the higher 17 jackpots, fewer winners, is affecting traffic to the 18 games overall. And at least with respect to this 19 potentially small frequency of events of very high 20 jackpots, our experience is that just the large 21 jackpot is not just affecting the foot traffic to the 22 bigger prize, but to other scratch-offs, for instance 23 and other instants. 24 MR. GRIEF: That's correct. 25 MR. TIRLONI: And potentially for other 0098 1 online games as well. 2 COMM. SCHENCK: Is Lotto Texas, for 3 instance, not being cannibalized at this moment by the 4 enormous jackpot on Mega Millions? 5 MS. PYKA: It is -- we just had a winner 6 on it, but -- 7 COMM. SCHENCK: Yeah, I know. And I 8 noticed that she took the -- she did not get cash 9 value. 10 MR. TIRLONI: Annuity payments -- 11 COMM. SCHENCK: God bless her. 12 MS. PYKA: But at that point when that 13 jackpot was won, we were seeing higher than useful 14 Lotto Texas jackpot sales, which we believe can be 15 attributed to the increase in the Mega Million 16 jackpot. 17 COMM. SCHENCK: So just -- is it word of 18 mouth? Is that what's happening is when one of the 19 games gets very high people just tend to go out and 20 stop to buy lottery tickets? 21 MR. GRIEF: I believe that's a fair way 22 to put it. It just -- again, it just drives people 23 who either, one, may not normally buy a ticket into 24 the stores where our other products are being sold or, 25 two, those players who normally buy a ticket to feel 0099 1 somewhat excited and carried up in the big jackpot 2 amount and want to buy some other products while 3 they're -- 4 COMM. SCHENCK: How long is this run-up 5 from Mega Millions beyond -- I mean, as I recall, you 6 know, 20 or 30 million is sort of a normal for this. 7 How long has it taken to get from that level to this 8 207? Are we talking weeks, months -- 9 MS. PYKA: No, it's definitely weeks. 10 We were at 86 million, 96 million, 111 million, then 11 128 million, 146 million -- 12 COMM. SCHENCK: Well, the reason I ask 13 is that I would be very curious to know before that 14 jackpot was up and potentially driving interest in the 15 game, whether we could go look backwards and look at 16 gas prices, which have been declining precipitously, 17 and see whether in fact the traffic to the instants 18 and other games was up -- if we could do a reverse 19 correlation between the gas prices and our sales. 20 Because I know our sales are up and we've been groping 21 with this question of whether high gas prices and the 22 decrease in discretionary spending has been affecting 23 people's willingness to play the game. But you would 24 think but for this anomalous Mega Millions number, we 25 might be able to see if there's a correlation over the 0100 1 last two or three months between the gas price moving 2 from $4 and something cents to a dollar fifty. I 3 would assume it has, but it would be nice to see the 4 proof in the data. 5 MR. GRIEF: We will take a look at that. 6 I'll tell you that's definitely been a factor, the gas 7 prices dropping. And again I want to point out on the 8 Mega Millions, we don't really see this phenomenon of 9 increased sales at the other levels until it at least 10 passes the $100 million mark and usually up until even 11 in the upper hundreds or even past two. So I believe 12 we're just now experiencing that with the jackpot. 13 But gas prices, on a separate note -- 14 and then also there's some who would say the 15 presidential election coincided with the uptake in 16 sales, too, for various opinionated reasons. But 17 we'll take a look at all that and come back to you. 18 CHAIRMAN COX: Commissioner, I saw an 19 article a couple of weeks ago talking about what gas 20 prices does to convenience store sales, which is a 21 similar issue. We being how many -- what percent of 22 our outlets in terms of sales are convenience stores 23 with gas? 24 MR. TIRLONI: 60 percent. 25 CHAIRMAN COX: 60 percent and this 0101 1 article said that there are two reasons, time and 2 money, why lower gas prices increase sales in 3 convenience stores. In times of high prices, people 4 stay out at the pump and put in a small amount of gas 5 because $20 is all they can afford and they don't even 6 go in the store. When gas prices are low, they put it 7 on fill 'er up, go into the store and they've got 8 money left to buy the tickets. 9 COMM. SCHENCK: Well, I wonder if 10 Hostess could track this for us, too. Twinkie sales 11 ought to be -- 12 CHAIRMAN COX: Well, I think we can 13 track convenience store sales and probably do. We 14 certainly have a relationship with the people who are 15 with that association. 16 COMM. SCHENCK: Yeah, it stands to 17 reason, but it would be nice to see it borne out by 18 statistical correlation. 19 CHAIRMAN COX: Yeah, I wasn't offering 20 that as an explanation to your question. 21 (Laughter) 22 MR. TIRLONI: Commissioners, if I could 23 add, we were hearing from the GTECH sales staff -- and 24 I think you alluded to this, Commissioner Schenck, 25 that the fuel price and grocery prices were impacting 0102 1 sales and it was also impacting how much people were 2 spending. So what we were hearing was people that 3 might have been spending $20 were now spending 10; or 4 people that were spending 10 or buying $10 tickets 5 were now buying 3 or $5 tickets. 6 And I believe our research group put 7 into your weekly packets a few weeks back some monthly 8 tracking that we did. We included questions in the 9 tracking that Ipsos Reid does on a monthly basis to 10 try to see if the increase in gas and the increase in 11 grocery prices did have an impact. 12 COMM. SCHENCK: That's self-reported, 13 right? 14 MR. TIRLONI: That is -- yes, sir, that 15 is self-reported, definitely. But from the -- from 16 those monthly tracking questionnaires, the people that 17 did respond did report that both gas and grocery 18 prices did have an impact on their lottery spending. 19 COMM. SCHENCK: Yeah, but, of course, I 20 mean, if you're responding to a survey from the 21 government, you're going to scream, "Everything costs 22 too much, I want you to do something about it. I'm 23 not going to play your game unless you get my grocery 24 bill down." The cynic in me suggests that maybe. But 25 it is hopeful. And I would assume with commodity 0103 1 prices falling as they are, then we'll see grocery 2 prices decline as well. I hope we do. 3 CHAIRMAN COX: That would be nice. 4 COMM. SCHENCK: Which, if this is true, 5 suggests we'll have a further uptake in the games. 6 MR. TIRLONI: Yes. 7 MS. PYKA: Are you ready to move to the 8 next chart? 9 CHAIRMAN COX: Kathy, I have a question 10 on the last one. And it's not specific to the last 11 one. On Mega Millions we have Megaplier, Pick 3, we 12 have Sum It Up, Pick 4, we have the Daily 4, we have 13 Sum It Up. We don't have an add-on game, whatever 14 y'all call that -- for Lotto Texas. 15 MS. PYKA: We do not have an add-on 16 feature for Lotto Texas. 17 CHAIRMAN COX: Have we considered that? 18 I'm sure we have. 19 MR. TIRLONI: We have considered it. 20 We're actually working on one right now. We're 21 working with a -- on a multiplier concept and we're 22 working with GTECH on that. It has been reviewed by 23 Dr. Eubank, our statistician. We have an idea in mind 24 that we would like to bring to you. What we're doing 25 right now is soliciting feedback from the retail base 0104 1 about how that feature might work, and GTECH is in the 2 process of doing that now. I hope to have something 3 within the next two weeks. They're waiting on two 4 more major accounts, I believe, to weigh in on how 5 they think that feature might impact their business, 6 and once we get that, we'll be hopefully -- we'll be 7 reviewing that. And if we feel it has merit, we'll be 8 coming forward with that. 9 CHAIRMAN COX: Excellent. Thank you. 10 MR. TIRLONI: Commissioners, this next 11 pie chart depicts the fiscal year sales of $918.4 12 million. Again, this is through the week ending 13 Saturday, December 6th. As you can see, instants 14 continue to make up the bulk of our total sales. 15 They're coming in at 76 percent, with online making up 16 almost the other 24 percent. This has been pretty 17 consistent. 18 COMM. SCHENCK: Do we know if there's a 19 holiday increase, just generally? Are people buying 20 scratch-off for Christmas gifts? 21 MR. TIRLONI: We typically tend to see 22 that that is true, which is why we start to put our 23 holiday themes out when we do right at the end of 24 October, beginning of November. We introduced the new 25 holiday price point this year. It's a $30 price 0105 1 point. That was very successful. It sold out very 2 quickly. 3 We tried a new strategy this year at the 4 $5 price point. We introduced our first $5 holiday 5 game towards the end of October, and this year we 6 actually came out with a second $5 holiday game that 7 started right at the end of November to ensure that we 8 would have enough $5 inventory throughout the month of 9 December. And that has also seemed to work very well 10 for us. 11 CHAIRMAN COX: By "very well" Robert, 12 would it be fair to say that those look like 13 incremental sales, that the other five stay about the 14 same and those add on to the top? 15 MR. TIRLONI: I'm looking at our top 10 16 for the week ending 12/6, and those two $5 price 17 points for the holiday games rank No. 1 and rank 18 No. 3. So I would say that's -- that that would be 19 incremental. Based on the sales increases that we've 20 also seen over the past four to five weeks, I would 21 think that that's incremental. 22 CHAIRMAN COX: Okay. Would y'all do a 23 little work on that and tell us a little more next 24 time? 25 MR. TIRLONI: We can look into that to 0106 1 verify that. 2 CHAIRMAN COX: Okay. We might be 3 thinking of other special events we could create 4 tickets for. I know you have some of those. 5 MR. TIRLONI: Yes, sir. 6 CHAIRMAN COX: But Christmas might not 7 be the only occasion that people would like to buy 8 gifts for, but it's not immediately coming to me what 9 the other ones might be. 10 MR. TIRLONI: We'll definitely look into 11 that. 12 CHAIRMAN COX: Do we have a birthday 13 ticket? 14 MR. TIRLONI: Actually we have a ticket 15 that we're coming out with -- I can't remember when; I 16 believe it's in the spring -- that's called the 17 celebrate ticket. That's kind of a generic ticket -- 18 CHAIRMAN COX: Good. 19 MR. TIRLONI: -- that you would be able 20 to use for -- if you wanted to buy a ticket for 21 somebody for their birthday you would definitely be 22 able to do that. 23 CHAIRMAN COX: Good. 24 COMM. SCHENCK: We don't have -- well, 25 this would be for scientific games, I suppose, but, 0107 1 you know, you can put a picture of yourself on your 2 credit card or cat or whatever. You could get a 3 picture of your friend from last year, burn it onto an 4 instant ticket and -- wouldn't that make a great gift 5 for somebody? 6 MR. TIRLONI: We would have to talk 7 to -- 8 (Laughter) 9 COMM. SCHENCK: Or kittens or puppies, 10 whatever people would like. 11 CHAIRMAN COX: There you go. 12 MR. TIRLONI: Actually, there are quite 13 a few states that run pet tickets where they actually 14 have contests for people to submit photos of their 15 pets, and then the winner of the pet contest ends up 16 on the ticket. So there are states that are doing 17 that as well. 18 This next slide, Commissioners, shows 19 you total online game sales through the week ending 20 Saturday the 6th of December. That total is 21 217 million, broken out by individual products. You 22 see Pick 3 continues to be our best selling online 23 game. 24 Now, at the time that this pie chart was 25 created, Lotto would be our second best-selling online 0108 1 product, with Mega Millions ranked third. But as 2 Kathy talked about a few minutes ago, based on the 3 sales that we have seen this week because of the large 4 jackpot, probably by the week ending tomorrow, Mega 5 Millions will be in the second place in terms of 6 online game sales right behind Pick 3. 7 COMM. SCHENCK: Where is the power ball 8 jackpot right now? Do we know? 9 MR. TIRLONI: I don't know off the top 10 of my head. 11 MS. PYKA: I know it's under $100 12 million. They were hit recently. 13 COMM. SCHENCK: So in theory, people in 14 Louisiana and Shreveport might be driving over to 15 Waskom to buy gas and lottery tickets. 16 MR. GRIEF: We hope. 17 COMM. SCHENCK: Are we advertising? I 18 keep going back to this. Are we targeting our 19 advertising -- increasing our wattage -- in the 20 ArkLaTex right now and -- 21 MR. TIRLONI: I believe we have 22 billboards in a lot of our -- in our border cities and 23 towns. I don't believe we are actually increasing any 24 of our buys. What we have done, once the jackpot gets 25 up to a certain level is we switch all of our 0109 1 advertising to be tagged with the Mega Millions 2 jackpot amount. So all of our live traffic report 3 reads, all of our radio spots, those are all tagged to 4 say that the jackpot is over "x" amount. So right now 5 they're most likely reading the jackpot is over $200 6 million. 7 COMM. SCHENCK: But we're not buying ad 8 space in neighboring states? 9 MR. TIRLONI: I don't believe we're 10 permitted to do that. 11 MR. GRIEF: We don't. 12 CHAIRMAN COX: You said we don't or we 13 can't? 14 MR. GRIEF: I'd defer to counsel, but I 15 don't -- it's never been contemplated. 16 COMM. SCHENCK: Well, I can assure you I 17 see Oklahoma casino ads in Dallas-Fort Worth. 18 CHAIRMAN COX: And Las Vegas casino ads 19 and Louisiana casino ads and -- 20 COMM. SCHENCK: Yes. So they're here. 21 I guess we're not there, whether it's because we can't 22 or because we aren't I think is a separate question. 23 I keep coming back to this and forgetting the answer 24 perhaps, or not getting it. I'm not sure which. 25 MS. KIPLIN: Well, let me take a look at 0110 1 that. I think we've written a memo on that, but I 2 want to go back and review it on what the issues are. 3 There are limitations, but I want to go back and 4 refresh my memory on that and get with you. 5 MR. GRIEF: And you had asked about 6 power ball, Commissioner, it's 40 million right now, 7 the jackpot. 8 CHAIRMAN COX: And, Kim, I wish you'd 9 report that back to the Commission -- 10 MS. KIPLIN: We will. 11 CHAIRMAN COX: -- I'd like to hear that 12 as well. 13 MS. KIPLIN: Sure. We'll put it on, if 14 you like. We'll put that on and -- 15 CHAIRMAN COX: Okay. 16 MR. TIRLONI: Commissioners, the next 17 slide is the instant sales broken down by price point. 18 The total for the fiscal year is 701 million. Again, 19 that's through the week ending the 6th of December. 20 Not much change here. Again, the $5 price point 21 continues to be the best selling, followed by the 2, 22 the 10 and the 3. And again, that sequence has not 23 changed. 24 Commissioners, I have an update for you 25 this month on a new pilot program that we are going to 0111 1 be launching in the next few weeks. And I've given 2 you a sample of what we're calling an easy play card. 3 I also have up here a couple of samples of some 4 displays for those cards. I want to walk you through 5 what the pilot is about today. 6 So basically what is an easy play card? 7 You have one in front of you. I've given you each 8 one, and there's one up on the screen. Basically an 9 easy play card is a bar coded card. And when the bar 10 code that is on that card is scanned, the -- a Quick 11 Pick ticket generates. And it's the Quick Pick logo 12 painted on the card. 13 So, for example, if you look at the card 14 on the screen, if this bar code is scanned, this bar 15 code would then generate a $5 Cash Five Quick Pick. 16 These can be used by the clerk. The player can pick 17 these up out of the display, hand it to the clerk, the 18 clerk can scan it on the ISYS terminal and this Quick 19 Pick ticket will generate. Or if you're at a grocery 20 store type location where we have self-service 21 equipment, the player could pick this up themselves, 22 put their money into the machine and scan at the 23 self-service terminal and the ticket would generate. 24 We have these -- or we're going to have 25 these for our Two-Step Cash 5 Lotto and Mega Millions 0112 1 game. For Two-Step Cash 5 and Lotto they'll be in the 2 denominations of $1 and $5. On Mega Millions we're 3 also emphasizing the add-on feature of Megaplier. So 4 the Mega Millions card would give you a $2 wager or a 5 $10 wager. It would give you a Mega Millions wager 6 with the Megaplier wager. That would be your $2 one. 7 Your $10 one would be five Mega Millions Quick Picks, 8 and they would all have Megaplier on them. So that 9 would be your $10 wager. 10 COMM. SCHENCK: I'm confused. How is 11 this easier than telling the clerk -- 12 MR. TIRLONI: It's not. It's not 13 easier. The premise of this is to get more exposure 14 and more visibility for the online games at the point 15 of purchase at retail. And when we've talked to 16 retailers about this, they've said the exact same 17 thing you did, Commissioner. You know, "I can 18 generate a Quick Pick just by pushing a key on my 19 terminal. This doesn't help me in terms of making my 20 job easier or quicker." 21 Then when we explain the premise to them 22 about getting more visibility for the online product 23 category, they realize then, you know, the underlying 24 premise for this initiative. 25 COMM. SCHENCK: Because they're not 0113 1 making you ask -- 2 MR. TIRLONI: Correct. They're not 3 making you ask. And I've got a few picture to show 4 you that will show the presence, so to speak, of the 5 online game at retail versus the instant product 6 category at retail. 7 Again, this is just one of the displays. 8 These are mockups. These aren't final. We still have 9 a little bit of tweaking to do. The one on the Power 10 Point slide is the larger display. We realized that 11 that could be a challenge to get placement for the 12 larger display at locations, so we also have a smaller 13 display that I have here on the table. I don't have a 14 picture of it on the Power Point. But we believe that 15 will give us some flexibility in getting placement. 16 You'll also notice the cards and are 17 hole punched. So we believe that there's also 18 opportunities to get these cards placed in other 19 locations within the stores. 20 COMM. SCHENCK: When the GTECH 21 representative walks into the store, is he carrying 22 both of those or does he just start with the bigger 23 one? 24 MR. TIRLONI: I believe they'd be 25 starting their way with the bigger one and working 0114 1 their way down. 2 COMM. SCHENCK: Okay. So he's not going 3 to suggest that there's an alternative when he -- 4 MR. TIRLONI: No. They're starting with 5 the bigger and if they get resistance from the 6 retailer, they would move down to the smaller one. 7 CHAIRMAN COX: And then what? 8 MR. TIRLONI: And then that -- to be in 9 the pilot, you have to accept one of these. If you're 10 going to be one of the retailers in the pilot, you've 11 got to agree to place one of these in your store. 12 CHAIRMAN COX: Okay. What's the 13 incentive to be a retailer in the pilot? 14 MR. TIRLONI: To increase your online 15 game sales. 16 CHAIRMAN COX: Or reduce your counter 17 space. 18 MR. TIRLONI: Potentially. 19 COMM. SCHENCK: Just explain that 20 they're showing too many cigarettes and Snicker's 21 Bars. 22 (Laughter) 23 MR. TIRLONI: And, I mean, you know, I 24 know where y'all are going. We hear this from 25 retailers all the time. Getting our product placed at 0115 1 the point of purchase is a huge challenge for us. 2 CHAIRMAN COX: Sure it is. 3 MR. TIRLONI: I was at a retail meeting 4 in Marble Falls in late October and I had a retailer 5 tell me that Philip Morris brought a display into his 6 location. I believe it was probably smaller than our 7 big display. And if he left that display in place for 8 three weeks, that was worth $95 to him to do that. 9 CHAIRMAN COX: Now, Robert, I think I 10 remember one thing from my undergraduate marketing 11 course. 12 MR. TIRLONI: Yes, sir. 13 CHAIRMAN COX: And that was the impulse 14 items that you put at the counter are the ones with 15 the highest margin. 16 MR. TIRLONI: Uh-huh. 17 CHAIRMAN COX: We're not that. 18 MR. TIRLONI: We are not. 19 CHAIRMAN COX: And I'm not discouraging 20 you from trying. 21 MR. TIRLONI: Yes, sir. 22 COMM. SCHENCK: But they don't have the 23 chance. Here's the argument to -- for the GTECH sales 24 rep. They don't have the chance for the big winner on 25 which they will get the big commission selling -- 0116 1 MR. TIRLONI: The bonus. 2 COMM. SCHENCK: -- Snickers Bars. 3 MR. TIRLONI: Right. 4 CHAIRMAN COX: There you go. 5 MR. TIRLONI: Right. And, you know, if 6 the retailer can see an increase in their game sales, 7 it may not be the highest margin, but they do have the 8 ability to increase their lottery commissions and 9 potentially sell more online games or, our hope is, to 10 potentially bring in new players to the online games, 11 to familiarize them with the different products that 12 we have. 13 CHAIRMAN COX: To pick an example, will 14 7-Eleven, Southland Corporation, be in your pilot? 15 MR. TIRLONI: GTECH -- the pilot is 16 going to include 150 location. GTECH has firmed up 17 about 120 to 130. They're still working on finalizing 18 that list. I think -- 19 COMM. SCHENCK: So this is by location, 20 not by vendor, necessarily? So not every Valero or 21 every -- 22 MR. TIRLONI: That's correct. 23 COMM. SCHENCK: Okay. 24 CHAIRMAN COX: I hope that we'll try 25 this not only with some of the mom and pops, which I'm 0117 1 sure will fit into this, but some of the corporate 2 lines -- 3 MR. TIRLONI: Absolutely. 4 CHAIRMAN COX: -- who have full-time 5 people by the hundreds, probably, deciding exactly 6 what items go on that counter. 7 COMM. SCHENCK: Why couldn't we put that 8 at the pump? Why couldn't you velcro that to the pump 9 where they can just walk in the store and scan it 10 and -- 11 MR. TIRLONI: You could. That's a good 12 idea. I mean, that's another huge challenge for us 13 like we talked about a few minutes ago, pushing people 14 from the pump into the location is a very big 15 challenge for us due to pay-at-the-pump. 16 COMM. WILLIAMSON: But I think that 17 would be an easier sell than at the counter. Because 18 if they're not coming in the store anyway, they're not 19 going to have a chance to sell a Coke or -- 20 COMM. SCHENCK: Yeah. Then they're in 21 to see the cigarettes and the sunglasses. 22 MR. TIRLONI: Sure. GTECH is in the 23 room, so I'm sure they're taking note. 24 This is what I was alluding to a few 25 moments ago. This is an actual Texas lottery 0118 1 retailer, a licensed retail location. And the reason 2 I wanted to show you this photo, I know that you-all 3 know this, but I thought it was -- I thought it was an 4 interesting photo that we had because it really shows 5 the presence of the instant tickets right at the 6 counter, right at the point of purchase. 7 And I believe this was cropped a little 8 bit, but you see their instant tickets displayed on 9 over here, and they're using our four-by-four point of 10 sale pieces and that looks really good. It's a little 11 hard to see, but they do also have instant ticket 12 towers on the other side of the terminal as well. So, 13 you know, this store is very well merchandised in 14 terms of displaying their instant games. 15 And here's where our online game is 16 merchandised. It's the blue lottery terminal that 17 actually generates the tickets. So that's 18 basically -- other than the LED sign that scrolls 19 messages about our jackpots and about our products, 20 this is really our representation of the online games. 21 And that's what, you know, that's what we're trying 22 obviously to increase. You know, this would be the 23 perfect location for our large display of easy-play 24 cards. 25 Just to paint another picture -- 0119 1 CHAIRMAN COX: Robert, let's go back to 2 that one for just a second. 3 MR. TIRLONI: Sure. 4 CHAIRMAN COX: Now, that's the ISYS 5 machine, the blue fellow right behind the fried pies, 6 right? 7 MR. TIRLONI: Yes, sir, that's right. 8 CHAIRMAN COX: Now, is the sign there 9 that says "Texas Lottery Winner" is that a part of the 10 ISYS machine? 11 MR. TIRLONI: No, that's separate. 12 CHAIRMAN COX: Okay. Is there any kind 13 of advertising, if you will, product identification on 14 the back of the ISYS machine? 15 MR. TIRLONI: There are -- this location 16 doesn't have it. Some of the ISYS machines do have 17 what I call like a plaque that can fit onto the back 18 of that machine that we can utilize. A lot of the 19 ISYS machines are not as front and center as this 20 location is. So that's really not an opportunity. 21 But it -- 22 COMM. SCHENCK: Yeah, but a sticker is 2 23 cents, right? I mean -- 24 MR. TIRLONI: Yes. 25 COMM. SCHENCK: I mean like a bumper 0120 1 sticker. 2 MR. TIRLONI: Yeah. I mean, what we 3 have is actually much bigger than that. It's a frame, 4 basically, that we can fit point of sale into. 5 CHAIRMAN COX: Well, the idea that 6 Commissioner Schenck and I, I think, are headed 7 towards is why isn't the back of that machine painted, 8 if you will, a sticker that says whatever we want, 9 whatever message we want to it to say? And if people 10 see it through that, great. But it looks like that 11 space we have if we wanted to use it. 12 MR. TIRLONI: Absolutely. 13 COMM. SCHENCK: Do we have, like, a just 14 generic sticker "Texas Lottery supports education"? 15 MR. TIRLONI: Yes, we have a variety of 16 what we call generic POS that can be used at any time 17 of the year. That's always applicable. And then we 18 have specialized POS that is out for a specific 19 reason. Like right now in stores you'll see holiday 20 point of sale that's out. 21 But typically when you have a terminal 22 facing out like this, what GTECH places -- and in this 23 location it just doesn't happen to be placed -- and I 24 believe that's probably because they are trying to 25 increase winner awareness in their store by putting 0121 1 this acrylic piece up. But typically there's a plaque 2 that would go across the back of the terminal -- or a 3 frame is probably a better description of it. And 4 then what we typically place in there is point of sale 5 related to the online games. And it's usually our 6 drawing schedule for the week. So when players come 7 in, they know which games are drawn on which days. 8 CHAIRMAN COX: Okay. So if you thought 9 the presence of instant games was large at the 10 location that I just showed you, this is another 11 lottery retailer. This retailer has 40 slots. So 12 again, just to emphasize that, you know, when you walk 13 into this location, the instant ticket presence is 14 great, and you can imagine again the representation of 15 the online game is typically going to be the ISYS 16 terminal with the LED message. 17 COMM. SCHENCK: What kind of retailer 18 would this be typically? This is not an Exxon 19 station -- 20 MR. TIRLONI: No, sir, this is not -- I 21 would guess that this is -- and somebody from GTECH 22 could correct me -- I would say this is probably an 23 independent location that would allow this -- a lot of 24 your corporates also have the end counter displays. A 25 lot of your corporates with not have dispensers on top 0122 1 of the counter in this manner. It's the ones where 2 you look down through the glass into the counter. 3 COMM. SCHENCK: I think we really ought 4 to be pushing on those people harder. 5 MR. TIRLONI: And GTECH -- yes, 6 absolutely. And sales statistics show that dispensers 7 on top of the counter like this or in the previous 8 picture I showed you will definitely increase sales as 9 opposed to the tickets that are in the counter. 10 CHAIRMAN COX: Well, there's not a lot 11 of wear on the outsides of these, but there's a lot of 12 wear on that counter. And I don't know how long it 13 takes, but it isn't long before you can't see through 14 that very well. 15 MR. TIRLONI: That plexiglass gets 16 scratched and it gets scraped. There's other items 17 that end up covering -- covering up that end counter 18 display. And the way the tickets are positioned in 19 that -- in those end counter displays, they're often 20 difficult to actually see. You have a much clearer 21 representation of all the games and what's available 22 on the on-counter, absolutely. 23 COMM. SCHENCK: How often -- can you 24 remind me -- are the GTECH representatives in each one 25 of the retail locations? 0123 1 MR. TIRLONI: It takes them two weeks to 2 make a complete cycle of the entire state, so twice a 3 month. Each store should be visited twice a month. 4 COMM. SCHENCK: Well, I'll share -- I 5 once worked as -- behind the counter at a convenience 6 store dodging gun fire and everything else. But my 7 experience was at least that -- that would be a pretty 8 frequent trip. The M&M Mars people, the others that 9 were looking for counter space, weren't there nearly 10 as often. So I think that relationship, just to be 11 pushing to the kid behind the counter -- I'm sure 12 that -- I don't know how many corporate policies -- 13 this company I worked for had -- there were quite a 14 few. But I didn't care if somebody came in with 15 something to put next to the cash register, you know, 16 fine by me. So if we keep trying, it seems to me we 17 can get space just by virtue of the frequency with 18 which we're there. 19 MR. TIRLONI: And that's all we have to 20 rely on, Commissioners. We have to rely on the sales 21 rep developing a very positive rapport, a positive 22 relationship with the retailers, pointing out the 23 benefits of these things, pointing out the benefits 24 of, you know, increasing their instant tickets 25 inventory as their sales warrant them doing that. 0124 1 And, as you said, continually talking to the retailer 2 and pointing out why it's beneficial for them to 3 allocate us additional counter space. 4 But as we've talked about it, it is a 5 challenge. And you're right, the corporates have far 6 more policies and procedures that we have to abide by 7 than the independents do. 8 COMM. SCHENCK: Yeah, but the kid behind 9 the counter -- if you say this is important to sit 10 next to the register, I think it will stay there for a 11 week no matter what. 12 MR. TIRLONI: Until the district manager 13 comes in -- 14 COMM. SCHENCK: That's right -- 15 CHAIRMAN COX: And fires him. 16 COMM. SCHENCK: -- and then the cycle 17 starts again. 18 MR. TIRLONI: Right. So this is pretty 19 much now, at this point, a summary slide. But 20 obviously our objective in doing this is to get 21 greater visibility and then, therefore, sales for the 22 online games -- for the entire online product 23 category. As I said, GTECH is firming up the list. 24 They have made very good progress. We hope to start 25 this in mid-January, maybe late January and run it 0125 1 through May. Then we'll be evaluating the results 2 that we see and determining statewide implementation 3 at that point. 4 I did want to let you know that this 5 pilot is costing the agency approximately $10,000 for 6 the design of the cards, the layout of the cards, the 7 design of the displays. We're printing also some what 8 we call sell in sheets or informational sheets that 9 the sales staff will use to actually bring out to the 10 retail locations to talk to them about this. 11 We have to remember that even though 12 we're piloting this in 150 stores, players can leave 13 with these and take them to other stores. So while 14 it's only 150 locations, the entire base has to be 15 aware of how these work and what they are. 16 GTECH has agreed to pick up the rest of 17 the cost for this pilot. Their cost on this is 18 approximately $35,000. They are doing the actual 19 printing of the cards and the production of the 20 displays that you see here. So if this pilot is 21 successful, we'll need to revisit with GTECH the 22 long-term costs associated about rolling this out or 23 keeping this initiative going on a statewide basis. 24 I did want to take a moment to thank Tom 25 and Ramon at GTECH and Tracy Lock. We also have had 0126 1 two or three staff members that have been working on 2 this very diligently for about two-and-a-half to three 3 months, Julie Terrell our online product coordinator, 4 Andrew Leeper, our creative coordinator, and Teresa 5 Edwards, our retailer development coordinator, have 6 been spending a lot of time on this. So I just wanted 7 to note who had put a lot of effort into this. 8 I have two other brief slides to -- 9 CHAIRMAN COX: Just a moment. 10 Have you got anything further on that 11 one? 12 COMM. SCHENCK: No. 13 COMM. WILLIAMSON: I look forward the 14 hearing the results. 15 CHAIRMAN COX: Is this a first? Is this 16 something that Texas Lottery has developed and will be 17 the first state to use it or is this all over the 18 place? 19 MR. TIRLONI: We'll be number two. 20 CHAIRMAN COX: Okay. 21 MR. TIRLONI: Arizona started this, the 22 people in Arizona -- quite extensively. They launched 23 it on a -- I'll say a larger scale basis. They had 24 quite a few denominations. So they had denominations 25 of, let's say for one game, $1, $2, $3, $4, and $5. 0127 1 And what we learned from them was that was way too 2 many -- way too many cards. So we scaled down for our 3 launch purposes. So we will be number two behind 4 Arizona. 5 My understanding is the state of 6 Washington is in development on similar type cards, 7 and they're going to be going into production in March 8 or April of this year. And Virginia has the 9 functionality in their gaming system. They're not 10 using it as of yet. And there are a couple of other 11 states that use it for other types of games, their G-3 12 games, which are a little different. So we're not the 13 first, but we're close. 14 CHAIRMAN COX: And, Gary, I would say 15 that having -- being the first to implement a new idea 16 like this is great, almost as good as that is being 17 cognizant of what our competitors or the other states 18 are doing, our contemporaries are doing, and picking 19 their good ideas as quickly as we possibly can. So my 20 compliments to your staff on being so diligent on this 21 and getting on it so early. 22 MR. GRIEF: Thank you. I think they've 23 done a great job. Appreciate those comments. 24 MR. TIRLONI: Commissioners, just two 25 updates on Lotto Texas. Since we last met here in 0128 1 late October, we have had actually two jackpot tickets 2 sold, one in Center, Texas for the November 1st 3 drawing. That was a $7 million drawing -- I'm sorry, 4 $7 million jackpot that was advertised. That was a 5 cash value option prize valued at 4.3 million. That 6 winner has already been processed and they've been 7 paid their prize. We are continuing to work with the 8 retailer on their $70,000 bonus. That was a Quick -- 9 that was a Quick Pick ticket. 10 And just last week on Saturday the 11 6th -- Commissioner Schenck, I think this is the one 12 you were referring to a few moments back -- we sold a 13 ticket in Lewisville that was advertised at 14 $13 million. The player did choose their own numbers. 15 It was not a Quick Pick. They chose to get the 16 annuity payments, the installments. They will be 17 receiving $520,000 a year. We've had an initial 18 contact. This prize has not been -- or this claimant 19 has not been processed. And the retailer in 20 Lewisville is eligible for $130,000 bonus. 21 CHAIRMAN COX: Okay. Robert -- 22 MR. TIRLONI: Yes, sir. 23 CHAIRMAN COX: -- when we sell a ticket 24 on Lotto Texas, the buyer is required to select the 25 installment option or the default -- is it the cash 0129 1 option or is it the other way around? 2 MR. TIRLONI: You're right. The player 3 does have to make their selection at the time of 4 purchase. The default is the annuity. 5 CHAIRMAN COX: Okay. So the default is 6 the annuity. Somebody buys this that isn't real good 7 with numbers -- and there's a lot of people in the 8 world that aren't and I'm not knocking them at all -- 9 and they win. And they find -- they go then to their 10 accountant or to their lawyer and they find out that, 11 oh, my gosh, the worst -- or their financial planner. 12 The worst choice you could have possibly made was to 13 take the annuity because rates -- interest rates are 14 nonexistent right now, surely in 25 years they'll be 15 higher and you'll be able to invest this money to 16 return a whole lot more than that annuity is going to 17 return to you. They're stuck, aren't they? 18 MR. TIRLONI: I'll let Ms. Kiplin 19 address the issue of the jackpot payment option, but 20 according to our rules and policies right now, you 21 cannot change your selection, whichever you choose, 22 that is what you receive when you come in to be 23 processed. 24 MS. KIPLIN: That's correct. Our rules 25 are the way they are right now -- it's certainly up to 0130 1 revision at the request of the Commission. It's a 2 policy matter. There were issues that were discussed 3 that led to the Commission deciding to retain that 4 requirement. And I know that this matter has been 5 brought to the Commission -- certainly a different 6 compliment of Commissioners -- but it's been brought 7 to the Commission's attention for their consideration 8 and deliberation, but it is Commission policy and it 9 would require a change in the game rules. 10 CHAIRMAN COX: Well, I heard 11 Commissioner Schenck's comment earlier that he was sad 12 for the person who chose the annuity option, and I am, 13 too. And what I'd like to do -- and I'd like to say 14 it's a new day and a new time, because interest rates 15 have changed so drastically. And so drastically 16 perhaps that even people that really understand things 17 might not make an informed choice on this. 18 If there is a way, without creating 19 constructive receipt or the like, that we can give the 20 player the option to elect that at the time they 21 claim, rather than the time they bet, I would sure be 22 interested in that being brought to the Commission. 23 COMM. SCHENCK: Or perhaps a shorter 24 period of time so that we don't have to change our 25 accounting -- how long do people have to claim a 0131 1 prize? 2 MS. KIPLIN: They have 180 days from the 3 drawing on the online side and 180 days from the date 4 of the closing of the game on the instant side. 5 That's by statute. 6 COMM. SCHENCK: But even now, giving 7 them 10 days would be a move -- a substantial change 8 from where they are? 9 CHAIRMAN COX: And that's a great point. 10 Kathy, when does the Comptroller buy the securities? 11 MS. PYKA: At the time that we're 12 notified or that we are aware that we have an actual 13 winner, we purchase the annuity the next day. 14 CHAIRMAN COX: That's a great point. 15 COMM. SCHENCK: Yeah. 16 CHAIRMAN COX: So that's certainly 17 something that you would need to take into account in 18 determining that, and that may kill the idea. 19 MS. KIPLIN: With your permission, I'd 20 like to work with Gary and the staff. I think there 21 are legal considerations as well as business 22 considerations and financial considerations and maybe 23 get back with you on this. 24 CHAIRMAN COX: Okay. And, Kathy, it 25 might be worthwhile, too, to touch base with the 0132 1 comptroller to see if they have flexibility. Maybe 2 they don't. 3 MS. PYKA: Well, I'm certain if we had a 4 policy or rule that allowed us the concept of possibly 5 waiting 10 days -- I mean, this is our guideline to 6 them and this is our practice that we're using with 7 our Lotto Texas game that we purchase it the following 8 day. 9 CHAIRMAN COX: Okay. So they might be 10 able to change theirs depending -- because right now 11 ours is fixed. Once we know there is a winner we know 12 what kind it is, we send them a notice and they buy? 13 MS. PYKA: Exactly. 14 CHAIRMAN COX: Maybe we could work it 15 out with them to do it different. 16 MS. PYKA: I think that is subject to 17 our business requirements. 18 CHAIRMAN COX: Sure. Okay. Great. 19 COMM. SCHENCK: You can see there might 20 be rationalizations for why someone would prefer on an 21 informed basis the annuity, but -- 22 CHAIRMAN COX: Yes. 23 COMM. SCHENCK: -- it's hard to imagine 24 it. The only thing I can think of would be tax 25 implications of the working your way through the 0133 1 margins to the top rate every year. 2 CHAIRMAN COX: That's exactly the kind 3 of thing -- and when you point that out, I'll tell you 4 that I'm not an informed buyer. If I could buy one, I 5 wouldn't know whether to select that. I'd have to 6 call my accountant and ask him which one should I 7 pick. 8 COMM. SCHENCK: Yeah, although I think 9 the top marginal rate now is, what, 33 percent, 10 something like that or -- 11 CHAIRMAN COX: -- 36-and-a-half -- 12 COMM. SCHENCK: Yeah, in the future that 13 might be different. 14 MS. KIPLIN: Are these subject to taxes 15 the year that they receive them or are they subject -- 16 in other words, it's going to be subject to whatever 17 their current tax rate is for that year? 18 MS. PYKA: That's correct. 19 COMM. SCHENCK: That's what I'm saying. 20 For some people, if you can spread it out -- if this 21 annual payment was 150,000, most of it would be taxed 22 well below the top marginal rate; whereas, if they got 23 it all at once they would be -- there was a time when 24 the top rate was 80-something percent? 25 CHAIRMAN COX: The top rate was 91 at 0134 1 one time. 2 COMM. SCHENCK: -- 91 percent. That 3 would make a very different analysis here for a lot of 4 people. 5 CHAIRMAN COX: I think all good reasons 6 that we revisit this thing, Gary, and see if something 7 else makes sense. 8 MR. GRIEF: Certainly we'll do just 9 that. I'll just offer this up anecdotally -- and I 10 think maybe many of our winners, winners from other 11 states, from one of the multi-jurisdictional games -- 12 may not have the -- may not be as sophisticated in 13 these numbers as many others might be. But the 14 reasons I've mainly heard over the years as to why 15 people choose the annuity versus the cash option -- 16 and I think this runs pretty consistent when I read 17 articles about it -- is people don't want the worries 18 of having to manage that much money all at once. 19 CHAIRMAN COX: Sure. 20 MR. GRIEF: That's the reason generally 21 given. 22 COMM. SCHENCK: That wouldn't 23 necessarily be being unsophisticated. That could be 24 somebody with a very self-actualized lottery -- 25 CHAIRMAN COX: A perfect word. They 0135 1 understand themselves. 2 COMM. SCHENCK: That could be a wise 3 choice -- or their spouse. 4 CHAIRMAN COX: Yes, or their relatives. 5 COMM. SCHENCK: And neighbors. 6 MR. TIRLONI: That wraps up the 7 presentation today. We're happy to answer any 8 additional questions you have. 9 COMM. SCHENCK: I have none. Thank you 10 very much. 11 COMM. WILLIAMSON: None. 12 CHAIRMAN COX: Kathy, we had a 13 discussion the other day -- I believe Gary was 14 involved as well -- about whether there is a 15 correlation between a decline in interest rates and 16 the resulting decline in Lotto Texas jackpots and the 17 Lotto Texas sales. I'd like to ask you if it's the 18 province of Mike's staff people to take a look at a 19 two-variable analysis. 20 MS. PYKA: Okay. 21 CHAIRMAN COX: One is the inflation rate 22 and two is the relevant interest rate to the interest 23 factor on Lotto Texas and see how those factors as 24 they have changed over time correlate with sales of 25 Lotto Texas product. 0136 1 MS. PYKA: We will certainly do that, 2 Mr. Chairman. 3 CHAIRMAN COX: Great. 4 MR. TIRLONI: Thank you very much. 5 AGENDA ITEM NO. 11 6 CHAIRMAN COX: Thank you. Okay, 7 Ms. Pyka, I think the next item is yours, transfers to 8 the State. 9 MS. PYKA: Yes. Item 11 includes 10 information on the agency's transfers to the State. 11 The first report in your notebook reflects transfers 12 and allocations to the Foundation School Fund, and the 13 allocation of unclaimed prize for the period ending 14 October 31st, 2008. Total cash transfers to the State 15 amounted to $154.9 million for the first two months of 16 2009. 17 The second page of your notebook 18 reflects the detailed information for the transfers, a 19 $54.9 million transfer to the State, 154.2 million was 20 transferred to the Foundation School Fund with a 21 balance of $700,000 transferred to general revenue. 22 This represents a 2.7 percent decrease in the amount 23 transferred to Foundation School Fund in October of 24 2007. 25 The final document in your notebook 0137 1 includes the tools of transfers, sales, expenditures 2 from 1992 to date. Our cumulative transfer to the 3 Foundation School Fund through October of this year 4 totaled $10.8 billion. 5 Commissioner, I'd be happy to answer any 6 questions that you might have. 7 COMM. SCHENCK: Can you just remind me 8 where the revenues are coming from that are going to 9 the general revenue? Are those unclaimed prizes? And 10 isn't some of that going to UTMB and someplace else? 11 So it's not really just -- 12 MS. PYKA: That is correct. 13 COMM. SCHENCK: -- general revenue. 14 MS. PYKA: Unclaimed prizes are actually 15 transferred to the general revenue fund with the first 16 $10 million that we transfer dedicated to the State 17 Department of Health Services to the Multicategorical 18 Teaching Hospital. After we make that $10 million 19 transfer, the balance of any unclaimed prizes go into 20 the general revenue unappropriated fund. 21 And as we've mentioned before, there are 22 many other states that the unclaimed prizes are, you 23 know, they turn right back into the program. 24 COMM. SCHENCK: Am I remembering -- I 25 don't know if anyone knows -- but UTMB is in Galveston 0138 1 and that's where this money is going. Has the State 2 made a decision what it's doing with the medical 3 school at Galveston after the hurricane? Not that it 4 matters from our perspective -- 5 MS. PYKA: I'm not aware of the details 6 of the hospital and the future plans for it. And once 7 we make the transfer, it's simply an appropriation to 8 their budget with many other methods of finance that 9 are used for that hospital. So we're one very, very 10 small component of their overall appropriation. 11 MR. GRIEF: I can't offer up anything 12 other than what I read in the newspaper. 13 COMM. SCHENCK: Yeah. 14 MR. GRIEF: That was -- 15 CHAIRMAN COX: Yeah. 16 MS. PYKA: Commissioners, I'd be happy 17 to answer any other questions that you might have. 18 CHAIRMAN COX: Commissioner? 19 COMM. WILLIAMSON: No, no questions. 20 CHAIRMAN COX: Thank you, Kathy. 21 MS. PYKA: Thank you. 22 AGENDA ITEM NO. XIII 23 CHAIRMAN COX: Okay. Mr. Fernandez, the 24 agency's contracts. 25 MR. FERNANDEZ: Good morning, 0139 1 Mr. Chairman, Commissioners. My name is Mike 2 Fernandez. I'm the Director of Administration. 3 Item No. 13 in your notebook is a 4 listing of both the prime contracts and high-risk 5 contracts. And as you recall, we have discussed this 6 with the Commission and have defined those contracts 7 and also recommended that we bring those to you on a 8 quarterly basis. If there's any change in the prime 9 contracts they'll be noticed up that there is going to 10 be action taken. 11 I did have the opportunity, 12 Mr. Chairman, to brief Commissioner Williamson on the 13 history -- 14 CHAIRMAN COX: Excellent. 15 MR. FERNANDEZ: -- of the prime 16 contracts in our routine briefing. So if you have any 17 questions, we'd be happy to answer. 18 CHAIRMAN COX: Commissioner? 19 COMM. SCHENCK: I don't have any 20 questions, Mike, a fine presentation. I'm glad to see 21 this expanded list. Every time it, I see that lease 22 payment for the building and I keep thinking that we 23 could buy this building every five years, but I won't 24 bring it up again. 25 (Laughter) 0140 1 CHAIRMAN COX: Let me say this about 2 that -- and somebody who knows more about it than I 3 do, I just read about it in the paper -- the State is 4 studying a significant facility that would -- where a 5 number of the state agencies occupy downtown space 6 would be moved. 7 MR. FERNANDEZ: They're looking at a 8 campus. That's correct. That's my understanding of 9 what I've read and discussions I've heard with staff 10 is that they're looking at -- at creating a state 11 agency campus -- or state government campus, probably 12 on some property in the surrounding area outside of 13 the city, outside of the downtown area. That's our 14 information. 15 I suspect that -- that will probably be 16 a topic -- although I don't know it -- in this 17 upcoming session. 18 CHAIRMAN COX: And then we just saw a 19 state agency lease 55,000 square feet yesterday 20 downtown, right? 21 MR. FERNANDEZ: That's correct. 22 CHAIRMAN COX: So your point is very 23 well taken. My experience with the issue is that the 24 leadership of the Legislature -- the past leadership 25 of the Legislature -- would not permit leases with an 0141 1 option to purchase or outright purchases of property, 2 and that that hasn't been changed since. 3 Commissioner? 4 COMM. WILLIAMSON: No, I was amazed at 5 the rent, too. 6 CHAIRMAN COX: Well, let's just talk 7 about the rent a little more. 8 MR. FERNANDEZ: Talk about what? 9 CHAIRMAN COX: The rent. How many years 10 do we have left? 11 MR. FERNANDEZ: I believe that's -- let 12 me find it here -- through 2010. 13 COMM. SCHENCK: -- 10, 5/7/2010. 14 MR. FERNANDEZ: And I think we have a 15 renewal on that, too. 16 COMM. SCHENCK: Five-year extension. 17 CHAIRMAN COX: Okay. Why don't we get, 18 Mike, if we could a presentation at the next meeting 19 on how much we're paying per foot, how much -- what 20 the market rate is per foot, those kinds of things. 21 MR. FERNANDEZ: Absolutely. And you 22 know, I'll -- I'll throw myself in this fire, but, you 23 know, one of the things that we might want to discuss 24 simply because of the comments that Commissioner 25 Schenck has raised in terms of the sale -- is that we 0142 1 might want to talk about the process to purchase, what 2 that entails. And just -- we can prepare that 3 presentation for the next Commission meeting. Right 4 now our Austin campus is -- my notes are -- it's at 5 2.51 a square foot. So that's what we're paying right 6 now. 7 CHAIRMAN COX: -- 2.51 -- 8 MR. FERNANDEZ: -- $2.51 -- 9 CHAIRMAN COX: So that's $30. 10 MR. FERNANDEZ: That's for, I believe, 11 75,000 -- nearly 76,000 square feet. 12 MR. GRIEF: And that's -- 13 CHAIRMAN COX: Is that full service? 14 MR. GRIEF: That's full service. 15 COMM. SCHENCK: Except for security, 16 we're paying for security. 17 MR. FERNANDEZ: That's correct. 18 COMM. SCHENCK: And ADT monitoring 19 and -- 20 MR. GRIEF: That encompasses taxes, 21 utilities, insurance and also -- we'll be happy to 22 make that presentation, but there will be several 23 other factors that we'll need to bring into that. We 24 received a pretty substantial tenant finish-out 25 allowance here that we're still in the process of 0143 1 depleting over the years. We've got 2 multi-million-dollar infrastructure investment of our 3 own capital in this building over time. So there's 4 many things we need to take into consideration as 5 we're trying to recreate this facility somewhere else. 6 I just want us to all be aware; we'll be talking about 7 those things when we -- 8 CHAIRMAN COX: Absolutely. And by no 9 way of limitation on what you present, I'd just like 10 for this board to have an awareness of the history 11 behind this and the rationale as well. 12 COMM. WILLIAMSON: And are we utilizing 13 all the space? 14 MR. GRIEF: Yes, ma'am, we are. 15 COMM. WILLIAMSON: Efficiently? 16 MR. GRIEF: I would say that we are. I 17 think we're within state guidelines in that regard. 18 CHAIRMAN COX: Are we really? 19 MR. FERNANDEZ: I believe we are. 20 CHAIRMAN COX: Isn't that 150 square 21 feet per person, 135? And we're within that? 22 MR. GRIEF: And the way we're able to do 23 that is because we qualify for numerous exemptions for 24 square footage throughout this facility because of 25 many of the special unique needs that we have that 0144 1 fall within those -- 2 CHAIRMAN COX: That would be a great 3 addition to the presentation. 4 MR. GRIEF: Maybe we can talk -- we 5 procured this building with the guidance -- or a lot 6 of input from, at the time, the General Services 7 Commission, and the gentleman who helped us through 8 all that is still with them. It may be helpful to 9 bring Mike Lacey -- I think you're familiar with Mike, 10 Chairman Cox. 11 CHAIRMAN COX: Very familiar. That's 12 right. 13 MR. GRIEF: We might ask Mike to come 14 in. He would probably enjoy appearing before this 15 board once again. 16 MR. FERNANDEZ: I'm sure he will. 17 COMM. SCHENCK: Now, when did we move 18 into this building? 19 MR. GRIEF: 1997. 20 COMM. SCHENCK: Okay. So 11 years, 21 right? And by my math that would be $23 million we've 22 spent on rent. 23 MR. GRIEF: I wouldn't question that 24 calculation. 25 CHAIRMAN COX: It's a frog strangler. 0145 1 (Laughter) 2 CHAIRMAN COX: But they did put our name 3 on the building. 4 (Laughter) 5 MR. FERNANDEZ: I believe we have 6 extensions out to 2015. 7 CHAIRMAN COX: It used to say Grant 8 Plaza or some such thing. At Gary's request they put 9 our name on it. 10 MR. FERNANDEZ: That's my understanding. 11 CHAIRMAN COX: Anything further? 12 Mike -- boy, here's a nit. The fact 13 that a contract is prime does not preclude it being 14 high risk as well, and you would put it on the prime 15 list rather than the high risk? 16 MR. FERNANDEZ: Absolutely. 17 CHAIRMAN COX: So this is other 18 contracts that have high risk? 19 MR. FERNANDEZ: Again, anything by 20 definition listed as prime -- if we make a change or 21 if we amend or if we put out an RFP, we'll notice that 22 up as a separate agenda item that we're going to take 23 an action on one of those contracts. That's correct. 24 AGENDA ITEM NO. XIV 25 CHAIRMAN COX: Okay. Report on the HUB 0146 1 program, Agenda Item No. 14. Ms. Bertolacini? 2 MS. BERTOLACINI: Good morning, Chairman 3 Cox, Commissioners. For the record my name is Joyce 4 Bertolacini, Coordinator of the Texas Lottery 5 Commission Historically Underutilized Business 6 Program. 7 The fiscal year 2008 statewide HUB 8 report was released on October the 15th by the 9 Comptroller of Public Accounts. Included in your 10 notebooks today are some -- are summary reports that 11 compare and analyze the TLC's fiscal year 2008 12 performance to that of the previous fiscal year. The 13 agency's overall HUB percentage for fiscal year 2008 14 was 26.9 percent. This represents HUB expenditures as 15 a percent of total agency expenditures that are 16 captured by the Statewide HUB Report. 17 And for the benefit of Commissioner 18 Williamson, I'll just explain that not every 19 expenditure that the agency makes is included in that 20 Statewide HUB Report. I'm happy to say leases are not 21 included, and neither are salaries, so those are just 22 two examples. 23 Our fiscal year 2008 performance is 24 tracking very closely to our fiscal year 2007 HUB 25 participation, which was 27 percent. The agency did 0147 1 increase its HUB participation in the commodity 2 purchasing category from 23.7 percent to 34.7 percent. 3 So that was a good positive gain there. 4 In addition, there were several reports 5 included as part of the Statewide HUB Report, and the 6 TLC was included on the list of -- and it's kind of a 7 long title -- but "The Top 25 Agencies Spending More 8 Than $5 million With the Largest Percentage Spent With 9 HUBs," rather. 10 For this report period -- and we always 11 talk about how we rank amongst the top-spending 12 agencies of the state -- for this report period, the 13 TLC was ranked 14th by total expenditures captured by 14 the Annual Statewide HUB Report. And typically we 15 like to look at how we rank amongst the other agencies 16 that out-spent us. So of the 14 larger spending state 17 agencies, the TLC still ranged No. 1 by its overall 18 HUB percentage. And again that's not by dollars spent 19 but by the percentage of total expenditures. In fact, 20 the TLC did have an overall HUB percentage that 21 exceeded 21 of the other largest-spending state 22 agencies for that time period. 23 Regarding the agency's Mentor Protege 24 program, I wanted to mention that we still currently 25 have five mentor protege relationships in place, and 0148 1 they are Scientific Games as the mentor with Business 2 Assets Enterprises LP as the protege; Tracy Lock as 3 the mentor with Creative Printing Limited as the 4 protege; and GTECH corporation is mentoring three 5 companies. They are Flores and Associates, C Serve 6 Commercial Moving Services and Business Assets 7 Enterprises LP. That's all I have, but I'd be happy 8 to answer any questions. 9 COMM. SCHENCK: I continue to be 10 impressed by this report. This is not the first one 11 I've seen. It's a very good work. I know, Mike, you 12 and others have been working very hard on this and 13 it's obviously showing. I'm impressed with your work. 14 MS. BERTOLACINI: The purchasing staff 15 and the contracts that we put in place primarily all 16 play into how our numbers fall out. So I would like 17 to say that the efforts that purchasing and contracts 18 makes -- I'm not, you know, making these contracts 19 happen the way they are. So I try to influence how 20 they happen, but they're the ones who are doing the 21 work. 22 COMM. WILLIAMSON: When you get a 23 chance, I would be interested to see what comprises 24 your expenditures since you mentioned the things not 25 included. I would just -- you know, for education 0149 1 purposes, if you could provide me some more 2 information -- 3 MS. BERTOLACINI: There is a -- the 4 determination is made by the Comptroller in terms of 5 what expenditures are reported. And they do that by 6 listing the object codes, which are the four-digit 7 payment codes that are used by the State. And I have 8 list of which ones are included -- 9 COMM. WILLIAMSON: Okay. 10 MS. BERTOLACINI: -- and what categories 11 they fall into on the report that I can provide to 12 you. 13 CHAIRMAN COX: Thank you very much, 14 Joyce. 15 MS. BERTOLACINI: Thank you. 16 CHAIRMAN COX: Excellent report. 17 MS. BERTOLACINI: Thank you. 18 AGENDA ITEM NO. XV 19 CHAIRMAN COX: Okay. Ms. Trevino, the 20 80th and 81st Legislature. And Ms. Pyka. 21 MS. TREVINO: Good afternoon, 22 Commissioners. For the record, I'm Nelda Trevino. 23 I'm the Director of Governmental affairs, and I have a 24 few updates to provide you today. 25 With regard to interim committee 0150 1 reports, on November the 13th, 2008, the House 2 Licensing and Administrative Procedures Committee met 3 to consider and adopt its recommendations related to 4 interim charges and agencies under its jurisdiction 5 for the 81st Legislature. You may recall that at the 6 request of the committee chairman, the agency provided 7 recommendations for the committee's consideration. A 8 copy of the letter to Chairman Flores noting the 9 agency's recommendation is included in your notebook, 10 and these items were considered by the committee at 11 their November 13th hearing. And Gary Grief, Phil 12 Sanderson and Kathy Pyka served as agency resources to 13 the committee. 14 Also included in your notebook is a copy 15 of the committee's meeting minutes from their 16 November 13th hearing. And beginning at the bottom of 17 Page 6, you will note two recommendations adopted 18 regarding the committee's interim charge specifically 19 related to the bingo enabling act. And for the 20 record, I'd like to read those recommendations that 21 were adopted. 22 Again, if you look at the bottom of Page 23 6, the interim charge is noted there, and then going 24 on to Page 7 there were two recommendations adopted, a 25 recommendation that is numbered as No. 17 which 0151 1 states, "Pass the recommendations made by the 2 committee to the 80th Legislature as refined by the 3 committee staff, working with the Lottery Commission 4 and bingo groups to streamline the bingo accounting 5 and licensing systems, reduce unnecessary regulatory 6 costs imposed on charities and improve enforcement of 7 the bingo laws." 8 The second recommendation adopted, which 9 is noted as Recommendation No. 18 states, "In light of 10 the fact that total revenues paid to state and local 11 governments from taxes and fees imposed on charitable 12 bingo far exceed appropriations for enforcement, 13 increase of appropriations to the charitable division 14 to allow full enforcement of the Bingo Enabling Act." 15 On Page 10 of the meeting minutes, you 16 will find the recommendations adopted relating to the 17 Lottery Commission, and again for the record I'll read 18 those. The recommendation that's numbered as No. 25 19 states, "Items related to the agency's legislative 20 appropriations request for 2010 to 2011, which 21 included addressing the funding of certain bingo 22 indirect and administrative expenses, increase the 23 lottery advertising budget from 30 million to 24 40 million per year, authorize the agency's ability to 25 increase retailers' commissions, and grant the 0152 1 agency's capital budget authority for the replacement 2 of lottery drawing equipment, upgrades to the agency 3 software and hardware, acquisition of surveillance 4 equipment for the drawing studio, upgrades to the 5 agency telephone system and a redesign of the 6 automated charity bingo system. 7 The additional recommendations adopted 8 include Recommendation No. 26, which states -- 9 CHAIRMAN COX: Nelda, if I could 10 interrupt -- 11 MS. TREVINO: Yes, sir. 12 CHAIRMAN COX: Kathy, is the increase 13 from 30 to 40 million -- I know the 30 is the result 14 of a formula that's in the law. Is the 40 what we 15 asked for if the cap or the tie-in to price payout 16 percentage is eliminated? 17 MS. PYKA: That is correct. The current 18 appropriation is $30 million, which is as a result of 19 the current prize pay-out percentage. So we asked for 20 an extra $10 million above and beyond that which would 21 require -- 22 CHAIRMAN COX: Okay, so -- 23 MS. PYKA: -- to the advertising budget. 24 CHAIRMAN COX: -- then by recommending 25 increasing the lottery budget from 30 to 40, that 0153 1 includes the concept that they will delink the prize 2 pay-out percentage and the advertising expenditures? 3 MS. PYKA: That is our exceptional item 4 note is that it's contingent upon the delinking. 5 CHAIRMAN COX: Thank you. 6 MS. TREVINO: And, Chairman Cox, you'll 7 see the recommendation 26 that was also adopted by the 8 House Licensing Committee, and that is to repeal the 9 section in the State Lottery Act relating to the 10 correlation of prize pay-out percentages in the 11 advertising budget. And the last recommendation 12 adopted, which is noted as No. 27, states clarifying 13 the State Lottery Act that the definition of minor 14 means an individual who is younger than 18 years of 15 age. 16 We are also monitoring the action of 17 other House and Senate committees for recommendations 18 adopted that may be of interest to the agency, and 19 we'll certainly keep you advised of these actions as 20 committee reports are issued. 21 As reported at the last Commission 22 meeting, prefiling of legislation for the 81st 23 Legislature began on November the 10th, and the 24 Legislature will convene its regular session on 25 January the 13th, 2009. We have begun our practice of 0154 1 providing you legislative bill tracking reports of 2 bills filed that impact the agency, and have provided 3 you this morning with a copy of an updated report. 4 There have been approximately 753 bills that have been 5 prefiled, and we are currently tracking 26 of these 6 bills. 7 Then just very briefly on the format of 8 the report for purposes of Commissioners Williamson 9 and Schenck, the way the report is laid out -- and I 10 know you-all have been receiving them, but they have 11 just -- again to give you a little overview -- they 12 are listed in bill number sequential order with the 13 House bills being listed first and then Senate bills. 14 The bill author will be noted, the caption of the bill 15 will be noticed on the report, and you'll see on the 16 bill history -- right now obviously the only thing 17 that's on the bill history is the bill being filed. 18 And as these bills go through the legislative process, 19 any sort of action that's taken on that bill will be 20 noted in the bill history -- so you'll be able to see 21 the latest action that's occurred on these bills. 22 COMM. SCHENCK: Nelda, there's a series 23 of empty boxes to the left. Are these going to be 24 darkened as these things -- as the bills make their 25 way through -- 0155 1 MS. TREVINO: That's correct. 2 COMM. SCHENCK: Okay. 3 MS. TREVINO: The little legend on 4 top -- 5 COMM. SCHENCK: So the darker it is, the 6 more risk there is of it -- 7 MS. TREVINO: -- the further it's 8 progressed through the process, that's correct. 9 There are several bills that we're 10 tracking related specifically to the agency that I 11 would like to note, and these include House Bill 222 12 by Representative Jose Hernandez. This bill relates 13 to authorizing poker gaming -- a poker gaming division 14 at the Lottery Commission for the regulation of those 15 activities. 16 House Bill 357 by Representative 17 Quintanilla. This bill amends the Lottery Act to 18 allow the sale of lottery tickets at locations. For 19 which a person holds a permit issued under the 20 alcoholic beverage code for on-premise consumption of 21 alcoholic beverages. 22 Senate Bill 210 by Senator Eliot 23 Shapleigh, and this bill relates to prohibiting the 24 sale of scratch-off tickets for which the price is 25 greater than $25. 0156 1 And Senate Bill 227 by Senator Royce 2 West, this bill relates to authorizing a 5 percent 3 prize fee or tax on a lottery prize of $600 or more to 4 fund the Texas Grant Program. 5 We will continue to provide you bill 6 tracking reports on a regular basis throughout the 7 legislative session. We would also provide you 8 separate notifications of bills that are filed with 9 specific interest to the agency. 10 Lastly, the Legislative Budget Board 11 requested responses from the agency on legislation 12 that may have an impact on the agency. And this is a 13 document that provides the estimated fiscal impact of 14 the bill, including the agency's administrative cost 15 estimates. These requests from the LBB are managed 16 through the Office of the Controller, and Kathy has 17 joined me to provide you some additional information 18 related to the fiscal note process. 19 This concludes my report, and I'll be 20 glad to answer any questions that you might have now 21 or at the end of Kathy's comments. 22 CHAIRMAN COX: Anything? 23 COMM. SCHENCK: I have no questions. 24 COMM. WILLIAMSON: Neither do I. 25 CHAIRMAN COX: I'm going to wait -- I 0157 1 have one, but I'm going to wait because Kathy may 2 cover it. 3 MS. PYKA: Thank you. State statutes 4 require that a fiscal note be prepared for any bill or 5 joint resolution as it goes through the legislative 6 process. A fiscal note is simply a written estimate 7 of costs, cost savings, revenue gain or revenue loss 8 that may result from the implementation of a bill or a 9 joint resolution. A fiscal note serves as a tool to 10 help legislators better understand how a bill might 11 impact the state budget and, in some instances, local 12 governments. 13 In preparing fiscal notes, the director 14 of the Legislative Budget Board may use information or 15 data supplied by any person, agency, organization or 16 governmental unit that the director deems reliable to 17 provide the LBB impact through a web-based fiscal note 18 system. 19 To give you a general idea of how it 20 works here at this agency, requests from the LBB are 21 routed through the Office of the Controller. We 22 develop the fiscal notes within our office. Each 23 budget is assigned appropriate divisions within the 24 agency and they coordinate their fiscal note 25 preparation with that division. 0158 1 The fiscal note includes the following 2 major components: We have a bill summary, the fiscal 3 impact summary, the methodology that we use to develop 4 the cost estimate as well as any local government 5 impact. 6 Once a fiscal note is completed in our 7 office, then it goes through various levels of review 8 in the agency. Following my approval, the Division 9 Director signs off on it as well as the Governmental 10 Affairs Director with the ultimate approval by the 11 Deputy Executive Director. At that point we load the 12 fiscal note in the LBB web-based system and then route 13 a copy of that fiscal note to the bill author and, in 14 many cases, to the Comptroller of Public Accounts 15 Revenue Estimation Team. 16 I'd be happy to answer any questions on 17 that process that you might have. 18 COMM. WILLIAMSON: In doing your 19 estimates -- for example, I'm thinking of Senator 20 West's bill -- where it is the 5 percent tax, do you 21 also go in and further estimate what you might 22 perceive as a reduction in sales or an increase of 23 sales? I mean, is that how deep you get in your 24 estimates when you're doing this? 25 MS. PYKA: Most certainly. And on that 0159 1 particular bill, we've actually pulled data from 2 GTECH -- we made a data request of them -- and we're 3 looking at the impact to sales. And another example 4 is a new game. Not only do we look at the impact of 5 that game, but we look at the impact to any other 6 online games or bingo. So you're looking at it from a 7 broad perspective, not simply just the bill that is 8 being filed. 9 CHAIRMAN COX: Kathy and Nelda, with 10 respect to HB 73 Representative Flynn, and SB 311 11 Senator Jackson, criminal offenses applicable to 12 gambling and gambling devices. I understand that, 13 among other things, the provisions of that bill would 14 outlaw anything that looks like a duck and walks like 15 a duck, without looking inside it to determine whether 16 it is a duck or not. 17 MR. TREVINO: I would say that I believe 18 our original analysis on that bill is to what you're 19 saying, Chairman Cox. 20 CHAIRMAN COX: So if it's a gambling 21 device and it looks like a slot machine, it's a slot 22 machine? 23 MR. TREVINO: Yes. 24 CHAIRMAN COX: Have we been asked to 25 fiscal note that? 0160 1 MS. PYKA: We have not received a 2 request on that particular bill to my knowledge. 3 CHAIRMAN COX: Okay. I don't know how 4 we go about letting people know that it impacts us, 5 but that impacts us significantly. And I would sure 6 like for us to be able to have input on that, if it's 7 appropriate to get us in that process. 8 MR. GRIEF: And there are -- it's fairly 9 common place that bills of that nature -- not that 10 particular bill, but bills of that nature -- get filed 11 and we and other state agencies have some pretty 12 standard language that we use when we come back and we 13 say we're unable to quantify the impact, per se, but 14 we can tell you it's going the hurt, that type of 15 thing -- 16 CHAIRMAN COX: That's probably the best 17 we could -- I'm not going to say we couldn't do 18 better. That's for Kathy to decide. But at least be 19 able to say that, that this is big. 20 MR. GRIEF: And we would have -- I know 21 Nelda and her team -- we would get together and there 22 would be some reach-out to individual members, 23 particularly if there's Commission interest in that, 24 and have some discussions about maybe some of the more 25 detailed parts of those issues. 0161 1 MS. PYKA: And, Chairman Cox, I want to 2 clarify, because we may not have received the request 3 as of now, it doesn't mean the request is not 4 forthcoming. 5 CHAIRMAN COX: Okay. 6 MS. PYKA: There are at times delays in 7 receiving those requests. And until the legislative 8 session begins in January, they'll not submit all the 9 requests. So we still have a few more days to go. 10 CHAIRMAN COX: Good. 11 COMM. SCHENCK: Yeah. 12 CHAIRMAN COX: Okay. Thank you very 13 much. 14 At this time, why don't we take about a 15 10-minute break, and then I'll announce how we're 16 going to go from here. 17 (Recess: 12:35 p.m. to 12:40 p.m.) 18 CHAIRMAN COX: Let's come back to order, 19 please. Commissioners, I've talked to Gary about how 20 we should proceed to take into consideration people's 21 need to get back to work versus their need to eat, 22 versus their need to rest. And what we've come up 23 with, with your permission, is we will hear Item 20, 24 then we'll go into executive session, and then we'll 25 come back and complete the remainder of the agenda. I 0162 1 believe that will get us to executive session at about 2 one o'clock. 3 COMM. SCHENCK: Okay. 4 AGENDA ITEM NO. XX 5 CHAIRMAN COX: Great. Okay. Agenda 6 Item No. 20, consideration and possible discussion 7 and/or action, repeal and proposal 16 TAC 401.101 8 related to lottery procurement procedures, 16 TAC 9 401.102, relating to protests of the terms of formal 10 solicitation, and/or 16 TAC 401.103 relating to 11 protests of contract award. 12 Ms. Erickson and -- my goodness, 13 counsel, good to see you. 14 MR. WASSDORF: Mr. Chairman, 15 Commissioners, my name is Pete Wassdorf, and I'm with 16 the -- Assistant General Counsel in the Legal Services 17 Division. I'm joined by Toni Erickson of the Support 18 Services Division. We're here to present the -- for 19 your consideration the repeal of three purchasing 20 rules or three rules dealing in the purchasing 21 section, and the adoption of three substitutions for 22 those rules. 23 The first one is the 401.101 of the 24 Texas Administrative Code relating to the lottery 25 procurement procedures. And the second one is Section 0163 1 401.102 relating to protests of the terms of a formal 2 solicitation. And the third one is 401.103 relating 3 to the protest of contract award. 4 The first thing I'd like to bring to 5 your attention is that yesterday evening late we were 6 informed that there was an inaccuracy in the 7 documentation that we had provided to y'all and that 8 we corrected that and substituted on Page 10, Line 7. 9 And you should find a loose paper there somewhere, 10 that -- that has what the substitution was. And what 11 happened with respect to that was that the statute had 12 a section dealing with minority participation and 13 certain goals for minority participation and that had 14 essentially been superceded by the Legislature 15 according to an Attorney General's opinion issued a 16 number of years ago. It was brought to the Attorney 17 General's opinion -- was brought to our attention by 18 Ms. Bertolacini, and she gets a notch in her junior 19 bar card for that. 20 CHAIRMAN COX: So this is Page 10 of the 21 second -- 22 MR. WASSDORF: No, sir, I'm sorry, 23 401.101, the procurement rules. 24 CHAIRMAN COX: Okay. Good. Thank you. 25 MR. WASSDORF: Yes, sir. Essentially 0164 1 the amendment of 401 -- or the new proposed 401.101 2 lottery procurement procedures is to provide mostly 3 for a procedure for best and final offer process, and 4 to provide for negotiations within the context of that 5 best and final offer process. 6 There have been a number of other 7 definitions that have been either modified or new 8 definitions that have been put into the -- into the 9 rule to provide for definition for proprietary 10 product, principal place of business, statewide 11 contract, state contract, and to clarify that -- how 12 the printing services would be purchased to provide a 13 new section for -- RFP -- to provide a new section for 14 RFQs that were not previously in our act -- in our 15 rules, I'm sorry -- and to generally bring the 16 purchasing rule up to compliance with the statutes and 17 the actual procedures that the Lottery Commission 18 uses. 19 If you don't have any specific questions 20 about that at this time, I'll just go on to the new 21 rule for the protest of a solicitation -- procurement 22 solicitation. 23 CHAIRMAN COX: Okay. So, Commissioners, 24 I would ask that y'all just ask questions as you 25 choose, as you see them come up, and we'll move 0165 1 through the -- 2 COMM. SCHENCK: I just have one very 3 quick question. We have emergency purchase authority 4 in this rule? 5 MR. WASSDORF: Yes, we do have emergency 6 purchase authority in this rule. We had an emergency 7 purchase procedure in the past. What we didn't have 8 was a definition of what an emergency was. It was 9 more or less presumed in the description of emergency 10 purchase, but we broke that out and gave a specific 11 definition to emergency in the definitions. And 12 you'll find the emergency purchase procedure on Page 6 13 at Line 3. 14 COMM. SCHENCK: Yeah, I did see that. 15 There's no method for the Commissioners themselves to 16 be informed that an emergency decision -- or emergency 17 purchases are being made? 18 MR. WASSDORF: No, not in the rules. 19 COMM. SCHENCK: So presumably we would 20 be informed of it after the fact? 21 MR. WASSDORF: I'm sure that if there 22 were an emergency that was significant that the 23 Executive Director would bring it to the attention 24 of -- 25 COMM. SCHENCK: I also -- somewhat 0166 1 likely our Executive Director would be working closely 2 enough with us that we would be aware of the fact that 3 he's declaring an emergency. Perhaps we don't need 4 that written into the rules. But I would be extremely 5 disappointed to find after the fact that there had 6 been an emergency acquisition made and I wasn't made 7 aware of the fact that there was an emergency in the 8 first place. So I'm not going to suggest that we need 9 a change in the written rule, but I would assume 10 whoever our Executive Director is will have enough 11 intelligence to make that decision for himself or 12 herself. 13 MR. GRIEF: I would offer -- I would 14 certainly see that as a performance issue for whoever 15 the Executive Director is. Absolutely. 16 CHAIRMAN COX: And also, Mike, since 17 some of these might not come to the attention of the 18 Executive Director, you would need to be aware of that 19 same thing. 20 MS. ERICKSON: I was going to clarify 21 just for the record -- for the record, Toni Erickson, 22 Support Services Manager. 23 There are -- there is a variety of 24 emergencies that could occur. A couple of years ago 25 we had the FM200 system go off in our disaster 0167 1 recovery site in the computer room. Obviously that 2 was a -- that was an emergency because of the nature 3 of trying to get it cleaned up and take care of the 4 equipment. And so we immediately brought on vendors 5 to assist us with that. So that was considered an 6 emergency. We go out and we hire the vendors that we 7 need to help us with that process. 8 Sometimes an emergency can be a very 9 small thing, we have water leaking in our computer 10 room, we need to get a vendor immediately to check out 11 and see, you know, why that the portable HVAC system 12 is leaking, et cetera. So they can be fairly minute. 13 And, again, when we say that that's an 14 emergency, we need to bring a vendor on immediately, 15 we go through the process. We try to go through the 16 normal procurement process of calling three vendors -- 17 COMM. SCHENCK: I understand. My 18 concern is -- if you've seen the movie Dr. Strangelove 19 and Wing Attack Plan R, the whole idea was it could be 20 an emergency, we don't want to rely on the president 21 to give the order and if Washington is decapitated and 22 the next thing you know we have bombers flying into 23 Soviet airspace to drop the bomb. I'm not worried 24 about there's a spill -- 25 CHAIRMAN COX: I'd forgotten that, but I 0168 1 want to go back and watch it again. 2 (Laughter) 3 COMM. SCHENCK: I'm not worried about 4 spillage in the computer room -- 5 MS. ERICKSON: Right. 6 COMM. SCHENCK: -- but I don't want to 7 learn after the fact that we've inked a 8 quarter-million-dollar contract with somebody and 9 there was an emergency that we didn't know about. 10 MR. FERNANDEZ: Absolutely. Mike 11 Fernandez for the record. 12 Absolutely, I think, as Toni pointed 13 out -- and it's Toni and her staff that deal with this 14 day-to-day -- but any -- you know, we try to operate 15 under the no-surprise rule to be honest with you. So 16 when anything occurs of any magnitude that we think 17 that -- other than a routine operational event -- that 18 goes right straight up the chain of command. 19 So once I'm aware of it, I'm going to 20 make Gary Grief aware of it. There's others in the 21 agency that are going to be aware of it -- our legal 22 counsel will be aware of it, our controller is going 23 to be aware of it. So if it's of a magnitude or if 24 it's outside of the scope of a normal routine 25 operation, I suspect you're going to hear it very 0169 1 quickly. 2 CHAIRMAN COX: Go ahead. 3 MR. WASSDORF: We'll move on to the two 4 protest sections. I would like to just cover them 5 together because they're very similar. One of them is 6 for protests of a competitive solicitation and one of 7 them is for a protest of an actual contract award. 8 Essentially what we did here is we have 9 provided that smaller type of a protest can be taken 10 to the Director of Administration and he can rule on 11 those. And if the person -- the protestant doesn't -- 12 isn't satisfied with that ruling, then they can take 13 it to the Director of Administration. If they're not 14 satisfied with that ruling, then they can take it to 15 the Commission. The Lottery Act provides that any 16 contractor that is aggrieved by an action of the 17 agency with respect to a solicitation or a contract 18 award can protest to the Commission. So we're 19 certainly not trying to keep them away from the 20 Commission, but we're trying to provide a mechanism 21 where things can be handled on a lower level that 22 don't rise to the significance that would need to come 23 to the Commission. And in the rules we provide that 24 the Executive Director at any time can pull something 25 out -- any protest out -- and send it directly to the 0170 1 Commission. 2 And that's -- that's the essential large 3 change with respect to those two protest procedures. 4 Is there -- anything else that you can think of there, 5 Toni? 6 COMM. SCHENCK: Can you remind me where 7 the protest would go after us? Would they go to 8 Travis County District Court? 9 MR. WASSDORF: Yeah, the statute 10 provides that they can then take it to district court. 11 COMM. SCHENCK: Is that a substantial 12 evidence review or is that -- 13 MS. KIPLIN: That will be the position 14 that we would be arguing, a substantial evidence 15 review and abuse of discretion standard. 16 COMM. SCHENCK: Have we ever had a big 17 protest go to court or -- 18 MS. KIPLIN: Yes, we have. It actually 19 was in the '98 -- 1998 lottery operator contract was 20 protested. It was filed by GTECH. Ultimately that 21 lawsuit was dismissed. We did make motions or 22 arguments on motions for summary judgment regarding 23 exactly the issue that you raised. We did not get 24 judicial guidance on that because the matter became 25 moot when the Executive Director at the time canceled 0171 1 that particular procurement. 2 COMM. SCHENCK: Thank you. 3 MR. WASSDORF: We have a -- 4 CHAIRMAN COX: Okay. So that covers all 5 of these? 6 MR. WASSDORF: Yes, sir. 7 CHAIRMAN COX: Okay. On a general 8 basis, Commissioner, any further questions? 9 COMM. SCHENCK: No, I have no further 10 questions. Thank you. 11 COMM. WILLIAMSON: I have no further 12 questions either. 13 CHAIRMAN COX: Okay. So you're asking 14 for a motion to propose this rule for public comment? 15 MS. KIPLIN: All three. 16 CHAIRMAN COX: All three rules for 17 public comment? 18 MS. KIPLIN: It would be proposed repeal 19 of existing rules and propose the new rules for public 20 comment. 21 CHAIRMAN COX: Okay. Commissioner? 22 COMM. SCHENCK: I'll move that we post 23 for public comment a proposal to remove the existing 24 rules and to publish the proposed new rules for public 25 comment. 0172 1 COMM. WILLIAMSON: I'll second that. 2 CHAIRMAN COX: Okay. Motion made and 3 seconded. All in favor say aye. 4 COMM. SCHENCK: Aye. 5 COMM. WILLIAMSON: Aye. 6 CHAIRMAN COX: Aye. Motion carries 7 three-zero. 8 MR. WASSDORF: Thank you. 9 AGENDA ITEM NO. XXIV 10 CHAIRMAN COX: At this time I move the 11 Texas Lottery Commission go into executive session: 12 A. To deliberate the appointment, employment and 13 duties of the Executive Director pursuant to Section 14 551.074 of the Texas Government Code. 15 B. To deliberate the duties, evaluation -- and 16 evaluation of the Deputy Executive Director, Internal 17 Audit Director, Charitable Bingo Operations and 18 Ombuds, and to deliberate the duties of the General 19 Counsel and Human Resources Director pursuant to 20 Section 551.074 of the Texas Government Code. 21 C. To receive legal advice regarding pending or 22 contemplated litigation pursuant to Section 23 551.071(1)(a), and/or to receive legal advice 24 regarding settlement offers pursuant to Section 25 551.071(1)(b) of the Texas Government Code and/or to 0173 1 receive legal advice pursuant to Section 551.071(2) of 2 the Texas Government Code, including but not limited 3 to: 4 First State Bank of DeQueen, et al v. Texas Lottery Commission 5 James T. Youngblood v. Texas Lottery Commission 6 USA v. David Crawford and TLC Texas Lottery Commission versus Leslie 7 Warren Texas Attorney General Child Support 8 Division, Singer Asset Finance Company, L.L.C. and Great West Life & Annuity 9 Insurance Company Employment law, personnel law, procurement 10 and contract law, evidentiary and procedural law, and general government law 11 Lottery operations and services contracts, Mega Million games and/or contract. 12 13 Is there a second? 14 COMM. SCHENCK: I second the motion. 15 CHAIRMAN COX: All in favor say "aye". 16 COMM. SCHENCK: Aye. 17 COMM. WILLIAMSON: Aye. 18 CHAIRMAN COX: Aye. The vote is 19 three-zero. The Texas Lottery will go into -- 20 Commission will go into Executive Session. The time 21 is 1:01 p.m. Today is December 12th, 2008. 22 (Recess for Executive Session from 1:01 23 p.m. to 2:49p.m.) 24 25 0174 1 AFTERNOON SESSION 2 FRIDAY, DECEMBER 12, 2008 3 (2:49 p.m.) 4 AGENDA ITEM NO. XXV 5 CHAIRMAN COX: The Texas Lottery 6 Commission is out of executive session. The time is 7 2:49 p.m. Is there any action to be taken as a result 8 of executive session? 9 COMM. WILLIAMSON: Yes, Mr. Chairman. I 10 move to increase the Deputy Executive Director's 11 salary by 27.82 percent for a salary equity adjustment 12 effective December the 1st, 2008. 13 CHAIRMAN COX: Is there a second? 14 COMM. WILLIAMSON: I second the motion. 15 CHAIRMAN COX: All in favor say "aye". 16 COMM. WILLIAMSON: Aye. 17 COMM. SCHENCK: Aye. 18 CHAIRMAN COX: Aye. Motion carries 19 three-zero. 20 AGENDA ITEM NO. XVI 21 CHAIRMAN COX: Okay. Agenda Item No. 22 16, consideration of and possible discussion and/or 23 action on external and internal audits and reviews 24 related to the Texas Lottery Commission and/or on the 25 Internal Audit Department's activities, including 0175 1 internal audit on Charitable Bingo Licensing and/or 2 the internal audit on background investigations. 3 Ms. Melvin? 4 MS. MELVIN: Good afternoon, 5 Commissioners. For the record, Catherine Melvin, 6 Director of the Internal Audit Division. 7 Today, Commissioners, I'd like to 8 present two recently-released internal audit reports. 9 But before we do that, if I may, I would like to give 10 a very brief update on two external audit reports that 11 I had mentioned in previous Commission meetings. The 12 first is the annual financial audit, and I just want 13 to report that that is tracking along. We should be 14 completed with that very soon, and the audited 15 financial statements are due December 19th. So that's 16 a week from today. 17 The security study I also mentioned in 18 previous meetings, that audit is completed. The field 19 work has been completed and we have received the draft 20 reports from the auditors. Those draft reports right 21 now are being reviewed by management and we are 22 working on -- they are working on management response 23 for that. 24 If there's no questions, I would like to 25 bring -- okay. Let me -- 0176 1 CHAIRMAN COX: I have a question. 2 MS. MELVIN: Go ahead. 3 CHAIRMAN COX: Do the security auditors 4 understand that we are expecting from them at least an 5 oral report on our procedures, policies, whatever, 6 related to the misuse of authorized access and the 7 specific instance we had of misuse of unauthorized 8 access? 9 MS. MELVIN: Yes, sir. You asked them 10 that question in the Commission meeting, and they will 11 be prepared to provide some comments about that when 12 they come and provide the -- their results of the full 13 security study. 14 CHAIRMAN COX: Good. Thank you. 15 MS. MELVIN: Okay. At this time let me 16 invite Susan Oballe to come join me. Susan was the 17 lead auditor on the internal audit of charitable bingo 18 licensing, and with that I'll turn that over to her to 19 present the results of that review. 20 MS. OBALLE: Good afternoon, 21 Commissioners. For the record, I'm Susan Oballe with 22 the Internal Audit Division. I'd like to present the 23 Charitable Bingo licensing report. 24 The Charitable Bingo Operations Division 25 is responsible for regulating bingo in the State of 0177 1 Texas. The division licenses authorized organizations 2 to conduct charitable bingo, as well as commercial 3 lessors, distributors and manufacturers. Our audit 4 focused on the conductor licensing. 5 The purpose of the audit was to evaluate 6 the effectiveness and efficiency of the licensing 7 processes, and to evaluate the reliability of data in 8 the charitable bingo system. 9 Overall, we found current licensing 10 activities and processes require improvement to ensure 11 licenses are processed effectively, efficiently and in 12 compliance with the Bingo Enabling Act. In addition, 13 the auditors feel that information contained in the 14 licensing ledger is not sufficiently reliable. 15 Now I'd like to provide a brief overview 16 of the detailed results. I'll start with the customer 17 service provided by the Division. As part of the 18 audit, we surveyed organizations that submitted an 19 application for a new annual conductor's license 20 during the period of January 2006 through April 2008. 21 The applicants surveyed responded that the customer 22 service provided by the Chartable Bingo Operations 23 Division exceeded their expectations. Our testing 24 revealed extensive communication with the applicant to 25 help them through the licensing process. 0178 1 Next I'd like to discuss areas in the 2 licensing processes that need improvement. Regarding 3 eligibility determination, we recommend that 4 Charitable Bingo Operations Division ensure all 5 eligibility requirements are derived from the current 6 Bingo Enabling Act and the division clearly define the 7 documentation required to determine eligibility. 8 Licensing processes. We recommend the 9 division improve its licensing processes to ensure 10 compliance with the Bingo Enabling Act, and to ensure 11 consistency in its verification procedures. 12 Specifically, we recommend the division review its 13 rules related to license processing timelines and 14 administrative holds to ensure compliance with the 15 Bingo Enabling Act. 16 License fees. We recommend the division 17 improve efforts to ensure the proper, compliant and 18 responsible administration of license fees. 19 And finally, opportunities exist to 20 improve the reliability and integrity of data in the 21 automated Charitable Bingo System. We recommend the 22 Charitable Bingo Operations Division commence a data 23 clean-up project to ensure accurate accounting of 24 licensing fees and implement a redesign of the 25 automated Charitable Bingo System to accurately 0179 1 account for the license fees. 2 We believe the changes recommended in 3 this report require the Charitable Bingo Operations 4 Division take an organized and thoughtful approach 5 while considering all licensing activities and 6 processes. 7 We would like to express our 8 appreciation to the Charitable Bingo Operations 9 Division management and staff, as well as other agency 10 staff for their cooperation and assistance throughout 11 our engagement. Management has expressed agreement 12 with the findings and recommendations provided in the 13 report, and has provided the responses as well as 14 corrective actions taken and/or planned. This 15 concludes my presentation, and I'd be happy to answer 16 any questions you have. 17 COMM. SCHENCK: I received a detailed 18 report in Dallas, and I really appreciated it and I 19 agree with your recommendations. 20 MS. MELVIN: Thank you. 21 COMM. WILLIAMSON: Nothing. 22 CHAIRMAN COX: Phil, what are your 23 thoughts? I know that you agreed with the 24 recommendations, that you have a plan for 25 implementation. When will you have for us a schedule 0180 1 of how long that's going to take and what kind of 2 assumptions will you be making about the level of your 3 staff when you prepare that schedule? 4 MR. SANDERSON: Well, the first -- you 5 should find in your packets -- today I laid out two 6 documents -- 7 CHAIRMAN COX: I'm sorry, but I didn't. 8 Oh, there they are. Okay. 9 MR. SANDERSON: One is the status of the 10 management corrective actions that we'll be taking. 11 This is similar to what we have provided in the 12 implementation of the internal audit on the Audit 13 Services Department, as well as a Gantt chart. We 14 just put this Gantt chart together. We're still 15 reviewing it to make sure it has -- touches on all the 16 items and the timelines that we're looking at for 17 implementing the recommendations. 18 Some of the recommendations are 19 contingent upon the LAR appropriations. We've 20 submitted requests to both the Office of the 21 Comptroller and Information Resources for some cost 22 analysis as relates to implementing some of the 23 recommendations. And we'll be updating this for you 24 at each Commission meeting. 25 CHAIRMAN COX: Excellent. So as I look 0181 1 through this quickly, Phil, I see that you intend to 2 have these completed and implemented by the end of 3 this year? 4 MR. SANDERSON: There's a lot of them -- 5 in fact, one of the rules that y'all voted to propose 6 is as a result of the internal audit, the signature 7 rule. We have several other rules that are going 8 through the process as it relates to the -- some of 9 the recommendations. 10 There are some revisions to forms which 11 we've already -- we finalized those and they are at 12 graphics being type setted right now. So we're moving 13 forward with the majority of the recommendations. 14 Like I said, there are some that are going to be 15 driven by the appropriation and if we get the 16 appropriation for a new system or remodifications of 17 the system. 18 CHAIRMAN COX: So, again, except for the 19 things outside of your control, this will be completed 20 by the end of this year? 21 MR. SANDERSON: Well, I think most of it 22 is '09. 23 CHAIRMAN COX: Well, I can't find '09 on 24 here. Maybe I'm not looking at this right. I don't 25 find any year other than '08. 0182 1 Okay. I was just looking at the Gantt 2 chart. Thank you. 3 MR. SANDERSON: Yeah, look at the 4 start/finish. 5 CHAIRMAN COX: Okay. Thank you. 6 MR. SANDERSON: Yeah, the Gantt chart is 7 about 15 pages -- 8 CHAIRMAN COX: The Gantt chart does goes 9 way out. 10 MR. SANDERSON: So I just put the start 11 and finish date for each task. 12 COMM. SCHENCK: That makes sense. 13 CHAIRMAN COX: I'm better with bars than 14 I am with numbers. 15 Okay. Catherine and Susan, you've 16 looked at all this, of course. Do the responses as 17 proposed and as implemented to date look like they'll 18 effectively deal with the recommendations that you 19 have made? 20 MS. MELVIN: Chairman, we did review the 21 management responses that are included in the report. 22 We were pleased with management's responses of course. 23 We had not seen the detail of the Gantt chart or the 24 current status. We just received that yesterday 25 actually. So I don't think it would be fair to 0183 1 comment on that. 2 CHAIRMAN COX: Of course, you'll be 3 working with Phil and you'll be working with them, 4 Phil -- 5 MR. SANDERSON: Yes, sir. 6 CHAIRMAN COX: -- Because certainly at 7 the end of the day we don't want to find out that 8 we've got a disconnect between what they recommended 9 and what you've implemented. 10 MR. SANDERSON: Yes, sir. And as 11 Ms. Melvin said, we finalized this Gantt chart 12 yesterday. 13 CHAIRMAN COX: I'm very pleased with 14 both what you've done and the timely manner you've 15 done it in. 16 MR. SANDERSON: Thank you. 17 CHAIRMAN COX: Okay. The next report, 18 Catherine? 19 MS. MELVIN: At this time I'd like to 20 call up both Nancy Walden and Dale Hernandez. They 21 will be laying out the internal audit of Background 22 Investigations. And on that project, Dale Hernandez 23 was lead on that, so I think she'll kick-start this. 24 MS. HERNANDEZ: Good afternoon, 25 Commissioners. For the record, my name is Dale 0184 1 Hernandez, and I'm with the Internal Audit Division. 2 We would like to present the results of our internal 3 audit on background investigations. 4 The enforcement division performs 5 background investigations of Texas Lottery sales 6 agents, bingo workers, bingo licensees, Bingo Advisory 7 Committee members, current and prospective Texas 8 Lottery Commission employees, and vendors and vendor 9 employees. The purpose of the audit was to evaluate 10 the effectiveness of controls in place for ensuring 11 policies, procedures and practices are in compliance 12 with the statutory requirements, background 13 investigations are conducted in a consistent, 14 efficient, effective and fair manner, and records are 15 adequately protected from inappropriate disclosure and 16 unauthorized access. 17 Our audit focused on background 18 investigations of Charitable Bingo licensees and 19 workers, lottery sales agents and prospective and 20 current employees. To accomplish our objective, we 21 reviewed current procedures, interviewed responsible 22 management and staff, and assessed management 23 controls. We also examined and reviewed supporting 24 documentation and electronic files, and performed 25 selected test work. In addition, we reviewed relevant 0185 1 audit work performed by the State Auditor's Office. 2 Based on the results of our review and 3 testing, we found that current procedures and 4 processes do not ensure background investigations are 5 conducted consistently, efficiently or fairly, nor do 6 they ensure records are adequately protected. In 7 addition, current background investigation efforts 8 sometimes go beyond that which is supported by agency 9 policy or statutory or administrative rule 10 requirements. Internal Audit recommends agency 11 management strengthen policies, procedures and 12 practices to improve controls over background 13 investigations. 14 At this point Nancy Walden will present 15 our detailed review results. 16 MS. WALDEN: Good morning, 17 Commissioners -- well, it's afternoon. Good 18 afternoon, Commissioners. My name is Nancy Walden. I 19 am with the Internal Audit Division. 20 Before I move into the specific findings 21 of our report, let me give you a general sense of what 22 we found. Overall there are 13 investigators who all 23 have a unique set of knowledge and experience that 24 they bring with them. As Dale mentioned before, 25 background investigations are conducted on a variety 0186 1 of subjects, and each type involves a significantly 2 different level of work to assess the eligibility 3 based on the statutory requirements and the 4 agency-approved policies. 5 While some investigations are more 6 straight forward such as conducting only criminal 7 history checks, others require extensive effort such 8 as assessing the eligibility requirements and 9 previously making on-site reviews. We noted the 10 agency has not clearly defined what is expected of 11 each type of background investigation; therefore the 12 investigators have been left to individually determine 13 what information was important to be review. This has 14 led to inconsistencies in the investigations conducted 15 between investigators and even in the investigations 16 conducted by the same investigator. 17 In addition, the background process has 18 evolved and expanded over time to include a review of 19 information that is not supported either statutorily 20 through the Bingo Enabling Act or through approved 21 agency policy. 22 In addition, in general we found that 23 there was confusion between the requesting division 24 and the Enforcement Division about their respective 25 roles in assessing the eligibility. This has led to 0187 1 duplicate work being performed and other 2 inefficiencies which has slowed the process, so let me 3 get into the specifics. 4 The first finding, content and 5 background investigation actually has four parts, so 6 I'll go through those -- each four parts. Defining 7 background investigations: Internal Audit found 8 agency management has not clearly defined what should 9 be or should not be included in a background 10 investigation. We recommend that the Enforcement 11 Division and agency management clearly define the 12 purpose of background investigations and the extent of 13 efforts to be performed by the investigators. 14 Improve support: Internal Audit found 15 the Enforcement Division accesses and requests 16 information for which the agency may not have approved 17 agency policy or other authority in place to 18 disqualify an individual. Internal audit recommends 19 the Enforcement Division focus efforts on defining 20 criteria regarding potential criminal history 21 disqualifications, and on criteria that is supported 22 by statute, administrative rule or through approved 23 agency policy. 24 Uniformity of investigations: Internal 25 Audit found investigations are performed differently 0188 1 among staff, and some staff perform more extensive 2 reviews than others. This places the agency at risk 3 as these inconsistencies could result in disparate 4 treatment among the subjects of the investigations. 5 We recommend the Enforcement Division 6 develop checklists with basic steps of background 7 investigations by type. In addition, investigators 8 should be encouraged to share knowledge and experience 9 among each other. 10 Streamlining the process: Improvements 11 are needed to reduce inefficiencies in the process and 12 duplication of work between divisions. We recommend 13 agency-wide adoption of a model utilized by the 14 Lottery Operations Division, limiting background 15 investigation efforts to criminal history checks only. 16 In our opinion, other eligibility verification and 17 assessment are more appropriately determined by the 18 requesting division. 19 Our other findings: Report 20 inconsistencies. The internal audit noted that 21 investigation reports contained extensive amounts of 22 information, including information that would not 23 potentially disqualify an applicant such as EEO 24 protected information. The agency could be at risk of 25 denial of licensing or employment if this is not 0189 1 consistently applied. 2 Therefore, we recommend background 3 investigation reports are standardized in both style 4 and content. Results should be objectively and 5 concisely stated and limited to only that information 6 which is necessary. 7 Review process: Our testing revealed 8 investigative reports contained errors that were not 9 discovered during the review process. Therefore, we 10 recommend that the review process be strengthened to 11 ensure accuracy and completeness and appropriateness 12 of investigations. 13 Use of investigative tools: 14 Investigators have a variety of subscription 15 validations available to use while conducting 16 background investigations and their other 17 investigative work. There is a potential for abuse of 18 approved access by -- there was a potential for abuse 19 of approved access by investigators due to the 20 extensive amount of detailed information available and 21 the limited oversight of the investigator searches 22 performed at the time of our audit. 23 Agency management has taken steps to 24 correct and reduce this risk. Internal Audit 25 recommends that access to databases be limited to 0190 1 approved individual and appropriate monitoring be 2 performed periodically. 3 And finally, our last finding, security 4 of information: Due to the extensive amount of 5 sensitive information requested, collected and 6 reviewed during the background investigation process, 7 it is important that the agency define the purpose for 8 what the information will be collected, how it will be 9 used, how the security of the information will be 10 managed and, finally, how the agency will ensure 11 proper disposition of those records. 12 In fact, the State Lottery Act requires 13 that the agency develop rules governing the custody 14 and use of criminal history information obtained by 15 the agency. Internal Audit found these rules have not 16 been adopted. 17 Internal Audit recommends the 18 Enforcement Division limit access to physical and 19 electronic versions of the investigative files, 20 follows the record retention policy and destroys 21 records timely, redacts banking information and other 22 personal identifying information from current 23 investigative files in both paper and electronic 24 formats, and develop rules governing the custody and 25 use of criminal history information in accordance with 0191 1 the State Lottery Act. 2 This concludes my portion of the 3 presentation, and I'll turn it back over to Dale. 4 MS. HERNANDEZ: We would like to thank 5 the Enforcement Division for their cooperation during 6 this audit. Management has agreed with our findings 7 and recommendations, and their responses with 8 corrective actions, planned or taken, are included in 9 our report. This concludes our presentation and we 10 would be happy to answer any questions about the 11 audit. 12 CHAIRMAN COX: Commissioner? 13 COMM. SCHENCK: Well, you know, I 14 appreciate your efforts here. I agree with you in 15 every respect except for one, which I think we've 16 spoken about. And that is -- and I'll share it for 17 the record -- I agree with you that standardization is 18 often useful and productive. I agree with you that 19 with respect to information gathering we should be 20 gathering only that information that we can actually 21 use. There's no point to be gathering information for 22 other purposes. We're talking about people's 23 eligibility for licenses and things of that nature to 24 make sure that they're the appropriate age, that they 25 have the licenses that they're required to have to 0192 1 obtain whatever benefits they want from us. I agree 2 with all that. 3 Where we're talking about employing 4 people here at the agency, I simply disagree with the 5 notion that we should be limiting ourselves as a 6 matter of routine to criminal background checks only. 7 I think we're an at-will employer. When we're making 8 the decision whether or not to hire someone in the 9 first instance, we have a lot more leeway than we do 10 once we've hired somebody and discovered that they 11 have -- there's something about them, their character 12 or their background, that makes us uncomfortable and 13 makes us not want them around other employees. 14 And I think we do ourselves a disservice 15 by limiting our access to information for -- I 16 understand that what you're suggesting is that the 17 requesting director should be in a position to make 18 that investigation. I would routinely undertake it if 19 the person has a series of arrests that seem to 20 suggest they're, for whatever reason, getting into bar 21 brawls very often, and that's a shame for their life, 22 but we don't have to employ them and I'd rather not. 23 And I think most people would agree with that. 24 So in my view, we shouldn't be 25 deliberately cutting ourselves off from information 0193 1 that we would act on. But I thank you for your 2 report, and I agree with the balance of it. 3 CHAIRMAN COX: Commissioner? 4 COMM. WILLIAMSON: No, I don't have any 5 questions. 6 CHAIRMAN COX: I think it's an excellent 7 report. The change -- let me see if I understand 8 precisely the change that's involved from going from 9 what we've been doing to the -- we're talking about 10 the federal fingerprint check. Is that the one that 11 we're talking about that you're recommending for 12 uniformity? That would be the one where we get the 13 potential employees' fingerprints, we submit them to 14 the Department of Public Safety, which in turn submits 15 them to the Federal Bureau of Investigation or some 16 federal agency, and then we have -- when we pay for 17 that, which is 25 to $45, somewhere in that range -- 18 one time that we buy also continuous feedback on 19 changes to those records that might occur from both 20 the federal agencies and the state agencies. Is that 21 correct? 22 MS. WALDEN: That's correct. 23 CHAIRMAN COX: Now, how far are we 24 backing off from what we're doing now or moving up 25 what we're doing now to get to that single standard? 0194 1 MS. MELVIN: Chairman, I don't think 2 that we're suggesting backing off, per se. And with 3 regard to Commissioner Schenck's comments, you know, 4 in our report we're suggesting that the better use of 5 the Enforcement Division, their staff and their 6 resources, is focused on the criminal history check. 7 You know, that said, I don't think we 8 would suggest limiting other information that might 9 not be obtained by other resources. I mean, certainly 10 the hiring supervisor might do some work on their own 11 to determine more information about their candidate. 12 But we're certainly not suggesting to not do criminal 13 history checks. We would anticipate that that would 14 continually -- continuously be performed. 15 CHAIRMAN COX: Okay. Specifically, 16 Commissioner, what more would you think -- beyond the 17 process that we go through in hiring where HR would be 18 interviewing, a committee would be interviewing and 19 they would be looking at things, perhaps among others, 20 including compatibility. What kinds of things would 21 you think should be added to the federal fingerprint 22 check to get to where you would like to be? 23 COMM. SCHENCK: Well, if I were -- I 24 guess I'll put this on the record. 25 CHAIRMAN COX: If you think it's an 0195 1 unfair question -- 2 COMM. SCHENCK: No, I think it's a fair 3 question. I think -- most of your hiring decisions 4 are made by people who don't have skills in 5 investigating people and their backgrounds. You have 6 people trained in law enforcement. If I were taking a 7 very difficult deposition from somebody, I would -- I 8 might use a private investigator, and that private 9 investigators has tools which I'm assuming our 10 background investigators have that would find arrests, 11 they would find bankruptcy filings, potentially 12 multiple bankruptcy filings, bad credit, if the person 13 is a member of the North American -- well, man-boy 14 love association, I'd want to know that. 15 There are all kinds of potentially 16 problematic things that can be found out about a 17 person that wouldn't necessarily be reflected in a 18 criminal history. And while you're making decisions 19 about who to hire, there are a number of suspect 20 classifications you can't act upon, but there are a 21 lot of other things that you can and I would suggest 22 that you should. 23 And once you have someone in as an 24 employee, it's much more difficult to act on 25 information than at the initial employment decision 0196 1 stage. I just wouldn't cut off the access to that 2 information that could be gathered. 3 Now, whether you get that in a routine 4 employment case, I don't know. But there are some 5 people, some positions that are sensitive in the 6 agency, and I just wouldn't want to limit the 7 information that's available to the decisionmakers. 8 CHAIRMAN COX: Okay. I'm very 9 sympathetic with that idea. If one of the things 10 that -- one of the analogies I've made here is the 11 federal system of security clearances that at one 12 level of access there's a certain amount of work done. 13 At the highest level of access, there's much more work 14 done. And I asked the same question that you're, I 15 think, raising right now. 16 And, Gary, I would suggest that -- would 17 ask that you talk to Commissioner Schenck about this 18 after we complete the meeting and see what we can do 19 to get these recommendations and the agency's policies 20 to take into account Commissioner Schenck's concerns. 21 MR. GRIEF: Will do. 22 CHAIRMAN COX: Will that do for you? 23 COMM. SCHENCK: Yes, thank you. 24 CHAIRMAN COX: Okay. We don't need any 25 action on these reports. Is that -- 0197 1 MS. MELVIN: Yes, sir, Commissioner. 2 CHAIRMAN COX: Catherine and your 3 excellent staff, we really appreciate your work. 4 MS. MELVIN: Thank you very much. 5 AGENDA ITEM NO. XXII 6 CHAIRMAN COX: Okay. Let's go, if we 7 can, to Agenda Item No. 22, consideration of status 8 and possible entry of orders. Ms. Kiplin? 9 MS. KIPLIN: Commissioners, what you 10 have before you as it relates to A through F are 11 lottery cases, and in those cases -- those are 12 insufficient fund cases. The Administrative Law Judge 13 at the State Office of Administrative Hearings has 14 recommended revocation of those licenses -- 15 CHAIRMAN COX: Now, which of these 16 are -- A through what, Kim, I'm sorry? 17 MS. KIPLIN: I'm sorry, A through F. 18 CHAIRMAN COX: A through F. Those are 19 all NSFs? 20 MS. KIPLIN: Yes. 21 CHAIRMAN COX: Thank you. 22 MS. KIPLIN: And the Administrative Law 23 Judge has recommended revocation of those licenses, 24 and the staff would request you adopt the 25 Administrative Law Judge's recommendations in each of 0198 1 those cases. 2 CHAIRMAN COX: Is there a motion to 3 adopt the -- 4 COMM. SCHENCK: I move we adopt staff's 5 recommendations. 6 COMM. WILLIAMSON: I second. 7 CHAIRMAN COX: All in favor say "aye". 8 COMM. SCHENCK: Aye. 9 COMM. WILLIAMSON: Aye. 10 CHAIRMAN COX: Aye. Motion carries 11 three-zero. 12 MS. KIPLIN: Commissioner, the letter G, 13 Quik Trip, that's an agreed order between the staff 14 and the respondent, the licensee. It's an employee 15 who was engaged in trying to determine whether a 16 ticket was a winning ticket and, if not, then selling 17 it to a customer. That employee is no longer with the 18 licensee. The staff has agreed to a 30-day suspension 19 and staff would recommend -- staff and licensee agreed 20 to a 30-day suspension and the staff would recommend 21 that you adopt that agreement. 22 COMM. SCHENCK: This is one of those 23 things where I think we've -- 24 MS. KIPLIN: -- 10 days -- 25 COMM. SCHENCK: -- about the need for 0199 1 the Legislature to give us some device other than 2 punishing the school children of Texas for this. 3 But -- so the employee is no longer there? 4 MS. KIPLIN: That's right, the employee 5 is no longer with the licensee. And there was no 6 evidence to suggest that the owner was involved in 7 that. 8 CHAIRMAN COX: Okay. Anyone want to 9 move that we -- 10 COMM. SCHENCK: I move we accept the 11 Staff recommendation. 12 COMM. WILLIAMSON: Second. 13 CHAIRMAN COX: All in favor say "aye." 14 COMM. WILLIAMSON: Aye. 15 COMM. SCHENCK: Aye. 16 CHAIRMAN COX: Aye. Motion carries 17 three-zero. 18 To Commissioner Schenck's point, I've 19 discussed with Gary and Kim the possibility that we 20 might offer to someone who is going to be sanctioned 21 the opportunity to receive -- to pay a monetary 22 penalty as opposed to receiving a suspension in our 23 negotiations with them and possibly reach that 24 agreement. 25 Now, Gary you indicated that if there 0200 1 were further questions on that that your staff would 2 be prepared to respond to them? 3 MR. GRIEF: That's correct. 4 CHAIRMAN COX: Would you like to let us 5 know how that would work. I think we've got -- 6 MR. GRIEF: I'd be happy to try to lay 7 that out -- the concept for you, Commissioner -- 8 COMM. SCHENCK: I understand, the way 9 it's been described, it's within our existing 10 authority to do that? 11 MR. GRIEF: We would need to enter into 12 agreed orders. 13 COMM. SCHENCK: I see. Well, would they 14 be incented -- is there enough in the way of 15 commissions -- 16 MR. GRIEF: We would try to look at that 17 on a case-by-case basis and come to some conclusion in 18 the situation based on, for example, an eight-week 19 sales average, 50 percent of that. Something along 20 those lines. We would come up with some type of 21 formal -- that's the discussions that we've had on a 22 very preliminary basis. 23 MS. KIPLIN: And my continuing advice to 24 the staff and to the Commission would be that should 25 the Commission want to go forward on this as a matter 0201 1 of attempting to reach agreed orders really ought to 2 consider a rule so you're establishing a standard 3 penalty guideline and you're applying a general 4 policy. 5 CHAIRMAN COX: And I have asked Gary 6 that in the future that he consider making a 7 presentation to us and possibly proposing such a rule. 8 MR. GRIEF: That's fine. 9 COMM. SCHENCK: Very good. Okay. We've 10 gotten through G, I think, Kim -- 11 MS. KIPLIN: If I can take up letters I, 12 J and K -- no, I'm sorry, H, I and J, Hillcroft 13 Grocers, Marcos Market, Reno Quick Stop -- in each of 14 these cases they're an incorporation in which one of 15 the persons -- for example, an officer had a 16 disqualifying criminal conviction. These are all 17 agreements where the licensee -- the corporation has 18 agreed to remove the person as an officer and not have 19 them serve in any capacity that triggers an agreement. 20 I think if you went forward on a contested case, I'm 21 not sure we would be able to exact that kind of 22 language, but there are agreements, so I think if 23 they're willing to agree to it, then the Commission 24 can adopt that and enforce that order. Staff 25 recommends that you enter these orders. 0202 1 COMM. SCHENCK: I move we accept Staff's 2 recommendation. 3 COMM. WILLIAMSON: I second. 4 CHAIRMAN COX: So as to Staff's 5 recommendation on Items H through J -- Is that 6 correct, Kim? 7 MS. KIPLIN: Yes, it is. 8 CHAIRMAN COX: All in favor say "aye". 9 COMM. SCHENCK: Aye. 10 COMM. WILLIAMSON: Aye. 11 CHAIRMAN COX: Aye. Motion carries 12 three-zero. 13 MS. KIPLIN: The next case, Sunmart, it 14 is a case where we had the president who was charging 15 a fee -- president of the company -- charging a fee 16 for cashing in the winning lottery tickets. This is 17 part of the -- your standard penalty guideline on 18 these kinds of cases. The staff entered into an 19 agreement with the company for a 10-day suspension and 20 staff recommends that you adopt that agreement. 21 CHAIRMAN COX: I have a question on that 22 one. Is this a result of the fact that our retailers 23 don't have to redeem tickets of certain amounts 24 because they will be required to keep excess amounts 25 of cash on hand. And so somebody said, "Well, we 0203 1 don't have to do that, but we'll do it if you'll 2 discount it." 3 MS. KIPLIN: I can't answer that 4 question specifically. And I can say that the statute 5 does not actually require a retailer to redeem any 6 ticket. 7 CHAIRMAN COX: Okay. 8 MS. KIPLIN: They're authorized by the 9 director. 10 CHAIRMAN COX: Looks like we've got a 11 volunteer. 12 MR. ANGER: Commissioners, for the 13 record my name is Michael Anger, I'm the Lottery 14 Operations Director. 15 While we didn't determine from the 16 information that was yielded during the investigation 17 whether that was the practice, this case initiated 18 from a complaint from a player who indicated that they 19 had taken a larger-sized instant ticket at $200 prize 20 in this location, and they had been charged a fee, a 21 $1 fee, to cash it and redeem the ticket. And the 22 owner explained to them that they had a processing fee 23 related to, you know, paying out a higher prize like 24 that to cover their costs. 25 CHAIRMAN COX: They had a processing 0204 1 fee, huh? 2 MR. ANGER: We were able to go in and 3 conduct an investigation, replicate that event also 4 associated with a higher-level mid-tier prize. You 5 know, a significant prize. So it appears that at 6 least from the investigative report that there may be 7 some reason to believe they weren't doing this for all 8 tickets that they were validating for players, but for 9 larger tickets that they were validating they were 10 collecting a fee. 11 CHAIRMAN COX: Well, I understand the 12 business side of it. I guess the legal side of it is 13 you can't do that? 14 MR. ANGER: Exactly. Exactly. And 15 we've since had that discussion with this licensee. 16 COMM. SCHENCK: They understand now? 17 MR. ANGER: Yes. 18 COMM. SCHENCK: I move we adopt Staff's 19 recommendation. 20 COMM. WILLIAMSON: Second. 21 CHAIRMAN COX: All in favor say "aye." 22 COMM. WILLIAMSON: Aye. 23 COMM. SCHENCK: Aye. 24 CHAIRMAN COX: Aye. Motion carries 25 three-zero. 0205 1 MS. KIPLIN: Commissioners, the last 2 matter is a bingo matter, and it's an agreement with 3 the licensee who is a commercial lessor for the 4 commercial lessor to pay a penalty for allowing an 5 employee of the commercial lessor, while acting in the 6 scope of his employment with this commercial lessor, 7 to assist him in selling bingo pull-tabs. 8 The employee is not on the registry of 9 approved bingo workers. The commercial lessor was 10 represented by counsel -- able counsel in my view -- a 11 local firm here in town, and that is the agreement 12 that was reached. The administrative penalty is in 13 the amount of $200. Staff would recommend that you 14 adopt that agreement. 15 CHAIRMAN COX: Now bring into sharp 16 focus what happened here? We got somebody who isn't 17 on the registry selling pull-tabs? 18 MS. KIPLIN: Yes. 19 CHAIRMAN COX: And for this case they 20 didn't understand their job description to be one of 21 those specifically listed in the rule that required 22 inclusion on the registry or were they just fast and 23 loose with the rule? 24 MR. SANDERSON: I would guess it was 25 probably the second part, because the individual that 0206 1 was involved is very familiar with what the worker 2 registry is and what the job functions are. And he 3 was actually assisting the organization in selling the 4 pull-tabs. He was not listed on the registry, but he 5 was -- at the time we had sent him a letter for 6 working without being on the registry, the commercial 7 lessor who was his employer negotiated with us 8 indicating that he was acting on their behalf and that 9 the penalty should be assessed against the commercial 10 lessor for having an employee participate and assist 11 in the conduct of bingo with someone who wasn't on 12 the worker registry. 13 CHAIRMAN COX: Okay. So I'll take that 14 as a -- he wasn't trying to get through a loophole, it 15 was just an oversight other than intentional failure 16 to file? 17 MR. SANDERSON: Yes, sir. 18 CHAIRMAN COX: And you dealt with it 19 with the sanction? 20 MR. SANDERSON: Yes, sir. 21 MS. KIPLIN: Against the commercial 22 lessor. 23 CHAIRMAN COX: Right, because the 24 commercial lessor, as I understand it, agreed to 25 handle that; whereas, usually would it be the case 0207 1 that the penalty's assessed against the person who 2 failed to register? 3 MS. KIPLIN: You know, that's an 4 interesting issue in the sense does the agency have 5 the authority to impose an administrative penalty 6 against somebody that is not on the registry and you 7 wouldn't necessarily have that authority, but against 8 the licensee. We have not tried that case I think to 9 its fruition in reaching an -- in the concept of a 10 proposal for decision in a contested case proceeding. 11 And, frankly, I think even within the members of the 12 legal division, you know, we're mixed on whether we 13 would or would not have that authority. 14 CHAIRMAN COX: Okay. 15 MS. KIPLIN: So, you know, if we had 16 pushed this with the employee through a contested case 17 and he said, you know, you can't, you might be here 18 with a proposal decision, but you had the commercial 19 lessor step up and said he's my employee and I should 20 have controlled him. I didn't, I'm willing to pay the 21 penalty for that. 22 CHAIRMAN COX: Is there a motion on 23 Agenda Item L? 24 COMM. SCHENCK: Yes, I move we adopt 25 staff's recommendation. 0208 1 COMM. WILLIAMSON: I second. 2 CHAIRMAN COX: All in favor say "aye". 3 COMM. SCHENCK: Aye. 4 COMM. WILLIAMSON: Aye. 5 CHAIRMAN COX: Aye. Motion carries 6 three-zero. 7 COMM. SCHENCK: Kim, have we signed all 8 but one? 9 MS. KIPLIN: Yes, thank you. 10 AGENDA ITEM NO. XVII 11 CHAIRMAN COX: Okay. Agenda Item No. 12 17. Gary, report, possible discussion or action on 13 Mega Millions games and game and/or contracts. 14 MR. GRIEF: Commissioners, I attended 15 the Mega Millions directors' meeting in New York on 16 November 17th, and I want to inform you that the main 17 topic of discussion focused on the concept of a new 18 game that might also include some members of the Power 19 Ball states. These discussions have continued over 20 the telephone since that November meeting and the 21 directors plan to meet again in person in the month of 22 February to continue those discussions. And I'll plan 23 to keep you posted if any significant developments 24 occur. 25 COMM. SCHENCK: Okay. 0209 1 CHAIRMAN COX: Any questions? 2 COMM. SCHENCK: No, thank you, Gary. 3 CHAIRMAN COX: Gary, are those meetings 4 always in New York? 5 MR. GRIEF: No, sir. They move around 6 the country. I understand that the next may be in the 7 State of Washington. 8 COMM. SCHENCK: On the coast it will be 9 all right. 10 CHAIRMAN COX: Is there any light in the 11 State of Washington in the month of February? 12 MR. GRIEF: I'll have to find out for 13 you. 14 AGENDA ITEM NO. XVIII 15 CHAIRMAN COX: Item No. 18, report, 16 possible discussion or action on GTECH Corporation. 17 MR. GRIEF: Commissioners, other than 18 the documents that are in your notebook under this 19 particular tab, which includes various bits of 20 information on GTECH, I have nothing else to report. 21 CHAIRMAN COX: Okay. We have a 22 distinguished guest from GTECH today. Would you like 23 to introduce him. 24 MR. GRIEF: Certainly. We have actually 25 two distinguished guests today. We have Mr. Alan 0210 1 Eland and Mr. Scott Gunn (phonetic) who have been 2 visitors and presenters to our Commission in the past. 3 CHAIRMAN COX: In addition to our 4 regularly-attended individuals -- 5 (Laughter) 6 CHAIRMAN COX: Thank you for being here. 7 UNIDENTIFIED SPEAKER: Thank you. 8 CHAIRMAN COX: Kim -- 9 MS. KIPLIN: Yes, sir. 10 CHAIRMAN COX: Check with me. I think 11 we are down to Item 21 is the only -- is it 21? 12 MR. GRIEF: 19. 13 MS. KIPLIN: 19. 14 CHAIRMAN COX: -- 19, thank you. And 15 it's the only remaining item -- 16 MS. KIPLIN: Yes, they are -- 17 CHAIRMAN COX: -- Executive Director's 18 report -- 19 MS. KIPLIN: -- and public comment. 20 AGENDA ITEM NO. XXI 21 CHAIRMAN COX: Okay. So let's take the 22 report of the Executive Director, Item No. 21. 23 MR. GRIEF: Commissioners, I have 24 nothing further to report other than the FTE report 25 that -- you know, that's in your notebooks today. 0211 1 CHAIRMAN COX: Did you have any 2 questions? 3 COMM. WILLIAMSON: No. 4 AGENDA ITEM NO. XIX 5 CHAIRMAN COX: That leaves us with 6 Agenda Item No. 19, report, possible discussion and/or 7 action on the role of the Ombuds and/or the Ombuds 8 program. Ms. Bloom? 9 MS. BLOOM: I'm Lauren Bloom for the 10 record. I'm the agency ombuds. 11 CHAIRMAN COX: Ms. Bloom, if we could, 12 have about a five-minute break and then we'll get 13 right to your presentation. 14 MS. BLOOM: Sure. 15 CHAIRMAN COX: Thank you. 16 (Recess: 3:34 p.m. to 3:39 p.m.) 17 CHAIRMAN COX: Let's go back to order. 18 Commissioner Schenck's flight came upon him and he has 19 left us. Commissioner Williamson and I look forward 20 to this and you've given us a very thorough report 21 that I know Commissioner Schenck has read. 22 MS. BLOOM: Okay. Great. I'm glad to 23 have the opportunity to introduce and to reintroduce 24 to you the ombuds and how it works here at the 25 Lottery. It's great to provide this overview at this 0212 1 time. This presentation today is to cover the 2 highlights of what I provided you in that packet. And 3 it's also included in your Commission meeting liners. 4 So let me begin to give a little bit of the history of 5 the ombuds. 6 The concept began in 1809 in Sweden when 7 an office was designated by the Legislature to hear 8 citizen complaints about the government. There are a 9 few states in the United States that have this type of 10 ombuds. It is called a classical ombuds. And this 11 type of ombuds is appointed by the Legislature and 12 operating under legislative authority. 13 In the United States ombuds also work 14 within agencies, universities and corporations, and 15 they hear different types of constituents' concerns. 16 It's pretty common for them to hear employee concerns. 17 At the Lottery, the position is charged with hearing 18 employee concerns and working with the agency to 19 uphold the agency values. 20 Specifically, I work with the agency 21 management and staff to uphold ethical behavior as 22 outlined in the value of integrity and responsibility, 23 and team work where the Lottery is committed to 24 creating an environment of mutual respect for open 25 honesty and communication as our cornerstone. 0213 1 I mentioned the -- there was a charter 2 signed in April by the Commissioners and this is one 3 of the three documents that describe the ombuds role 4 in detail. The standards and practices, which is also 5 provided in your packets today and was originally 6 introduced in April, and then there's also Chapter 9 7 of the personnel policy handbook, which was updated 8 that reflects the ombuds role at this agency. These 9 are all accessible to employees on the Internet. 10 I'm going to review some of the function 11 of the ombuds as it is outlined in the charter and 12 standards and practices. I facilitate a neutral, 13 confidential, informal and independent process for 14 resolving employee-related concerns in a fair and 15 equitable manner. And you'll see those words fair and 16 equitable again in the presentation, and also the 17 confidential, neutral, formal and independent process, 18 because those are the real cornerstones of an ombuds 19 work. I'm going to talk about each one individually. 20 I also work with agency management to 21 solicit feedback from employees regarding workplace 22 issues, do surveys, informal discussion, employee 23 committees and/or other means. I provide 24 opportunities to offer input to the Commission and 25 management in regard to organizational and policy 0214 1 charges such as how to address issues raised by the 2 State Auditor's Office in the survey of organizational 3 excellence or other surveys regarding workforce 4 management at the Commission. 5 I also listen to employee concerns and 6 review them objectively and neutrally. I ensure that 7 the formal agency complaint processes and procedures 8 are applied fairly and equitably. I review these 9 procedures, and at my discretion provide comments and 10 recommendations regarding the fairness, consistency 11 and agency trends to the executive director or members 12 of the Commission. And I identify workplace problems, 13 suggest solutions and provide feedback to members of 14 the Commission about agency trends, patterns, policies 15 and procedures. 16 So these are the four principals as 17 outlined by organizational ombuds who work in many 18 different settings -- confidentiality, neutrality, 19 independence and informality. I'm going to go through 20 each one individually, and this language is pulled 21 from these documents that I've already referenced, the 22 charter here at the Texas Lottery Commission and the 23 standards and practices. 24 So when I work in particular cases, I 25 make all reasonable efforts to maintain 0215 1 confidentiality and anonymity of the visitor who came 2 to my office. There's instances in which I'm required 3 by law or agency policy to break confidentiality, and 4 that includes allegations of sexual harassment or 5 discrimination. And I strive to make employees aware 6 of the confidentiality and the limits before they 7 start divulging their situation to me. 8 I'm also neutral. I don't take sides in 9 any conflict dispute or issue. I impartially consider 10 the interests and concerns of all the parties involved 11 and the concerns brought forward. And I help 12 facilitate communication and assist the parties in 13 reaching mutually satisfactory agreements that are 14 fair and equitable and consistent with the mission and 15 policies. I may advocate, though, and recommend 16 changes in policies and practice on a larger systemic 17 level. 18 I operate independently of agency 19 management. That's the way I'm different from any 20 other employee here at the Lottery. I report directly 21 to the executive director. Currently I'm reporting to 22 Gary, and I have access to the Commissioners on an 23 as-needed basis. And I use my independent discretion 24 to address concerns of employees. 25 I also, on the fourth cornerstone of how 0216 1 I operate, is informality. I provide informal dispute 2 resolution, and that's outlined -- the definition is 3 outlined in Chapter 9 of the personnel policies 4 handbook. 5 The communication with me is voluntary 6 for all the parties. The initial person who comes in 7 can never be sent to my office or anything like that. 8 It is a voluntary process, and the other parties can 9 choose to be involved in a voluntary informal process. 10 The role in the complaint procedure and 11 process is to review and report on the process, but 12 not to be actually part of the formal process. In 13 other words, I'm not going to informally investigate, 14 I'm not going to arbitrate or decide who is right or 15 wrong in any internal or external formal process or 16 action. And I do not have the authority to make 17 decisions about how workplace issues are to be 18 resolved. I can offer suggestions and assist 19 employees in identifying means to address the problems 20 that they're bringing forward. 21 So here are the different things that I 22 do. I listen to concerns and problems and disputes 23 and gather facts for particular cases, if necessary. 24 I facilitate communication through a process called 25 shuttle diplomacy, which is going back and forth 0217 1 between the parties or full-on mediation. I provide 2 referrals and information. I identify relevant 3 policies and procedures given the situation they're 4 bringing forward, help them reframe the situation to 5 identify options and explore solutions. 6 Then the other aspect of my role is to 7 help with systems change. And that's by reporting 8 trends and major issues to upper level management, and 9 also to recommend changes to agency policies and 10 procedures. 11 Okay. I'm going to address specifically 12 the differences of the ombuds in the human resources 13 function, because I do deal with workforce management 14 type issues; however, I am here as a safety net and 15 not to help run the company. So I'm not involved in 16 hiring, firing or setting policy. I may suggest 17 particular policies or strengthening particular 18 policies or inconsistencies in policies, but I'm not 19 going to actually be the one writing or sitting on a 20 voting-type committee. 21 I'm also designated as a formal neutral, 22 and in some cases -- I lifted this chart from a source 23 that I cited in your memo, but in some cases ombuds 24 are set up to be able to provide complete 25 confidentiality to the employees. We've already 0218 1 talked about some of those limitations here at the 2 Lottery. 3 The nature of my investigations are 4 informal. I do not keep records for the organization 5 except for as required by state law. And I may be 6 privileged in terms of case law, some case law and 7 some statutory -- there's no statutory privilege, but 8 there has been some case law that ombuds operating in 9 particular settings under particular auspices are 10 privileged from being subpoenaed into court cases. 11 And the state auditor has outlined a 12 couple of things about the ombuds back in 2006 as part 13 of their workforce management audit. They said 14 that -- they suggested that the agency create an 15 ombuds position that would report directly to the 16 executive director with access to the Commissioners. 17 And the position should meet the minimum 18 qualifications of the state classification plan. And 19 they said that the ombuds would help potentially 20 provide a credible listener to employees and to help 21 them feel as if they're being treated fairly and also 22 potentially benefit the agency by helping them learn 23 outside of litigation the details of the employee's 24 concerns. 25 So the history of the ombuds here at the 0219 1 Texas Lottery Commission is actually a fairly new 2 position. In 2006 Dale Hernandez was appointed as the 3 agency ombuds. And at the same time they were 4 developing a job description and search and screen 5 committee, and I was hired then in August of 2007. In 6 2008 we had-- the agency has developed the ombuds 7 charter and statement of practices. 8 Here are some of the other duties that I 9 perform here: Survey employees, identify work issues 10 that may negatively affect the workplace. I 11 facilitate an ad hoc position for employees as needed. 12 And earlier this year I started something called 13 Coffee and Cookie Hour which is an informal time. I 14 use my own funds to -- and invite all staff to come 15 and meet with me to address any concerns or positive 16 things that they're -- that they experience as 17 employees here, or as just a chance to meet me so that 18 they can feel comfortable in the future if a problem 19 does arrive that they have a face with the name and 20 have been able to share some informal time with me. I 21 am also in charge of providing training and 22 information about my role as the ombuds. 23 So here are the methods in which I get 24 the word out about my services here at the Texas 25 Lottery Commission. I do it through staff meetings -- 0220 1 I make fairly regular announcements at staff meetings. 2 I send out agency-wide e-mails, hold those coffee and 3 cookie hours. I think I've had 18 of them this year. 4 I have fliers in break rooms. There's an Internet 5 description of it. There's been a newsletter article, 6 a team newsletter article, specifically addressing the 7 ombuds' role, and also word of mouth referral and 8 informal meetings. Here's just a picture of an 9 informal meeting -- and it's a mock picture. 10 You can expect in the near future that I 11 will be working with the agency for consistency in 12 policies and practices. I'll make periodic reports to 13 you as needed and you'll see an annual report within 14 the next couple of months. We are also starting a 15 survey of organizational excellence. That's a survey 16 that's conducted at a lot of different state agencies. 17 The last time we conducted it was two years ago. We 18 skipped a year intentionally because there were a 19 couple of other surveys that came in with the State 20 Audit Office's workforce management audit. 21 So this process is underway and you 22 should receive an e-mail from me in the next few weeks 23 asking for any feedback you have about questions that 24 you would like to add to the survey where we can add 25 up to 20 extra questions. I'll also be soliciting 0221 1 feedback from all employees for the survey of 2 organizational excellence if they think there's any 3 additional areas that should be measured. That will 4 be rolled out this spring -- that means starting in 5 January/February. 6 Then I just have a couple of concluding 7 comments. Under best standards of practice, as 8 outlined by the International Ombudsman Association, I 9 included their code of ethics and standards of 10 practice in your packet. Ombuds are not be set up to 11 take notice on harassment or discrimination before the 12 organization. And they do that in order to have a 13 position where people feel comfortable coming forward 14 and expressing -- and's potentially informally even 15 mediating these types of situations with a person who 16 would not be -- who would be set up to be able to make 17 an argument, to not be subpoenaed if it ended up being 18 a court case. 19 There was some ombuds legislation in the 20 last legislative session that could potentially 21 impact -- it may be reintroduced this session -- 22 related to creating privilege for ombuds operating to 23 particular standards of practice. And then there's a 24 little word about terminology in the field. The word 25 ombudsman, ombuds, ombudswoman and ombuds person are 0222 1 all used and accepted. 2 And I'm available to answer any 3 questions. And here's my contact information and you 4 can contact me privately at any time as well. 5 CHAIRMAN COX: Commissioner? 6 COMM. WILLIAMSON: Are you part-time or 7 full-time? 8 MS. BLOOM: I'm part-time. It's a 9 20-hour position here. 10 COMM. WILLIAMSON: And do you keep 11 regular hours? 12 MR. ROSENBLUM: I will be keeping 13 regular hours as of February. Now my hours are posted 14 on a weekly basis up at the -- on my door. 15 COMM. WILLIAMSON: Okay. So it changes 16 every week? 17 MS. BLOOM: It's generally consistent. 18 I'm generally working Mondays, Thursdays and half of 19 Wednesdays, but as you see I'm here on Friday, so I 20 adjust around needed meetings. 21 COMM. WILLIAMSON: Okay. 22 MS. BLOOM: And that's pretty much how 23 it has been working. 24 COMM. WILLIAMSON: Thank you. 25 CHAIRMAN COX: Lauren, thank you very 0223 1 much. That was a very thorough report and I 2 appreciate it. 3 MS. BLOOM: Sure. 4 CHAIRMAN COX: Ms. Kiplin, I show that 5 we are down to public comments. 6 MS. HAMM: Yes, sir. 7 AGENDA ITEM NO. XXIII 8 CHAIRMAN COX: Agenda Item No. 23. Is 9 there any public comments? 10 AGENDA ITEM NO. XXVI 11 CHAIRMAN COX: Okay. Thank you very 12 much. The meeting is adjourned. 13 (Proceedings concluded at 3:53 p.m.) 14 15 16 17 18 19 20 21 22 23 24 25 0224 1 C E R T I F I C A T E 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, LOU RAY, a Certified Shorthand 7 Reporter in and for the State of Texas, do hereby 8 certify that the above-mentioned matter occurred as 9 hereinbefore set out. 10 I FURTHER CERTIFY THAT the proceedings 11 of such were reported by me or under my supervision, 12 later reduced to typewritten form under my supervision 13 and control and that the foregoing pages are a full, 14 true and correct transcription of the original notes. 15 IN WITNESS WHEREOF, I have hereunto set 16 my hand and seal this 23rd day of December 2008. 17 18 19 ________________________________ 20 LOU RAY Certified Shorthand Reporter 21 CSR No. 1791-Expires 12/31/09 22 Firm Certification No. 276 Kennedy Reporting Service, Inc. 23 Cambridge Tower 1801 Lavaca Street, Suite 115 24 Austin, Texas 78701 512.474.2233 25