0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 JANUARY 7, 2005 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 7TH of JANUARY, 19 2005, from 8:00 a.m. to 1:55 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. Rolando Olvera Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly Kiplin 8 Executive Director: Mr. Reagan E. Greer 9 Deputy Executive Director: 10 Mr. Gary Grief 11 Charitable Bingo Executive Director: Mr. Billy Atkins 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX - January 7, 2005 2 PAGE 3 Appearances.................................... 2 4 5 AGENDA ITEMS 6 Item Number I.................................. 6 The Texas Lottery Commission will call the 7 Meeting to order 8 Item Number II................................. 6 Consideration, possible discussion and/or action 9 on the Bingo Advisory Committee and Texas Lottery Commission December 20, 2004 meetings 10 Item Number III................................ 16 11 Consideration of and possible discussion and/or action on the reorganization of the charitable 12 bingo administration rules, including the proposal of the repeal of the current rules and proposal 13 of new rules 14 Item Number IV................................. 22 Report, possible discussion and/or action on 15 lottery sales, game performance, and trends 16 Item Number V.................................. 39 Report, possible discussion and/or action on HUB 17 and/or minority business participation, including the agency's mentor/protege program 18 Item Number VI................................. 41 19 Report, possible discussion and/or action of the agency's contracts 20 Item Number VII................................ 41 21 Report, possible discussion and/or action on the agency's financial status 22 Item Number VIII............................... 44 23 Report, possible discussion and/or action on the demographic report on lottery players 24 25 0004 1 INDEX - CONTINUED - January 7, 2005 2 PAGE 3 Item Number IX................................. 146 4 Report, possible discussion and/or action on the agency's lottery security study 5 Item Number X.................................. 167 6 Report, possible discussion and/or action on lottery advertising and promotions 7 Item Number XI................................. 168 8 Report, possible discussion and/or action on the 78th and/or 79th Legislature 9 Item Number XII................................ 93, 10 Consideration of and possible discussion and/or 145 action on external and internal audits and/or 11 reviews relating to the Texas Lottery Commission and/or on the Internal Audit Department's activities 12 Item Number XIII............................... 170 13 Consideration of and possible discussion and/or action on the Instant Ticket Testing procurement 14 Item Number XIV................................ 174 15 Consideration of and possible discussion and/or action on the Broadcast Studio and Production 16 Services procurement 17 Item Number XV................................. 143 Commission may meet in Executive Session 18 Item Number XVI................................ 145 19 Return to open session for further deliberation and possible action on any matter discussed in 20 Executive Session 21 Item Number XVII............................... 170 Consideration of the status and possible entry 22 of orders 23 Item Number XVIII.............................. 175 Report by the Executive Director and/or possible 24 discussion and/or action on the agency's operational status, FTE status, and retailer forums 25 0005 1 INDEX - CONTINUED January 7, 2005 2 PAGE 3 Item Number XIX................................ 177 4 Report by the Charitable Bingo Operations Director and possible discussion and/or action on the 5 Charitable Bingo Operations Division's activities 6 Item Number XX................................. 148 Public Comment 7 Item Number XXI................................ 184 8 Adjournment 9 Reporter's Certificate......................... 185 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0006 1 CHAIRMAN CLOWE: Good morning. It's 2 8:00 a.m., January the 7th, 2005. Commissioner Olvera 3 is here. Commissioner Cox is here. My name is Tom 4 Clowe. I will call this meeting of the Texas Lottery 5 Commission to order. 6 We'll begin with item two on the 7 agenda: Consideration, possible discussion and/or 8 action on the Bingo Advisory Committee and the Texas 9 Lottery Commission, December the 20th, 2004, meetings. 10 Commissioners, I -- I would like, if it 11 meets with your approval, to call on Billy to ask him 12 to give his remarks and report on the meeting, and 13 then, certainly, your comments would be appropriate. 14 And a discussion of future action, I think, might be 15 a -- a goal that we have this morning. Billy. 16 MR. ATKINS: Thank you, Mr. Chairman, 17 members. I've had the opportunity since the meeting 18 on the 20th to speak -- speak to at least five of the 19 BAC members and get their impressions of the joint 20 meeting that the Commission held with the BAC on 21 December 20th, and the most comments -- the most 22 common comments that I've heard from the BAC members 23 are great, super, very positive, and very productive. 24 And one of the biggest benefits from the meeting that 25 the members identified was the fact that they had the 0007 1 opportunity to meet with the three of you at the same 2 time. Additionally, almost all of the members that I 3 spoke to stated that they really enjoyed the format of 4 the meeting, especially the fact that the people at 5 the meeting were almost -- the word they used was 6 forced to talk. They felt that they really benefited 7 from having a chance to hear the comments provided by 8 the others in the meeting. And all of the members 9 that I spoke to -- now, keep in mind that I'm speaking 10 to each one of them individually -- expressed a desire 11 and felt that it would be a continued benefit to have 12 additional joint meetings in the future. And the 13 suggested frequency of those meetings ranged from 14 twice a year to once every two years. 15 Several of the members I talked to 16 commented that they had heard some concerns from 17 members of the public regarding the format. One 18 concern was that the meeting was too structured, and 19 some of the public members had hoped for more of an 20 open forum. 21 Another issue was one that was actually 22 discussed at the end of the meeting and dealt with the 23 desire that the participants to be better advised of 24 what the discussion topics were going to be before the 25 meeting so that they would have had the opportunity to 0008 1 provide what they considered to be more thoughtful 2 comment during the meeting. 3 I personally was very encouraged by the 4 comments I received from the BAC members. And, again, 5 I'm confident that they were not only pleased with the 6 meeting, but also very appreciative of your 7 demonstrating commitment to the bingo industry. 8 As a follow-up, Commissioner Clowe and 9 I met with Carol Lauder and Sandy Joseph earlier this 10 week and discussed our impressions of the meeting and 11 discussed ways to keep this momentum moving forward. 12 And just like the BAC members, I think 13 the format was very successful in drawing out comments 14 from folks who may not normally participate very 15 much during a formal meeting. Additionally, I think 16 the commitment that each of you demonstrated at the 17 meeting has helped to reenergize the BAC members. 18 I think that Carol has also enjoyed the 19 process and has expressed an interest in continuing 20 her work with us. Commissioner Clowe has asked Carol 21 to follow up with the BAC at their next meeting on the 22 26th. And we also discussed with Carol the comment we 23 received after the meeting, regarding the desire of 24 the members to be a little more prepared. And Carol 25 will be sending a letter to each of them prior to the 0009 1 meeting, outlining the topics she intends on 2 discussing. 3 Our plan now is to finish transcribing 4 the notes made on the flip charts. We've received a 5 draft from Kimberly Rogers, who volunteered to do that 6 for us. We will be distributing those meetings -- or 7 those notes to the members for their review prior to 8 the meeting late -- later this month. And, hopefully, 9 with Carol's help and the enthusiasm that the meeting 10 on the 20th created, we'll be able to identify ways to 11 continue to improve the -- the effectiveness of the 12 Bingo Advisory Committee. 13 CHAIRMAN CLOWE: Any comments? 14 COMMISSIONER COX: I -- I thought the 15 meeting was worthwhile, and I certainly agree with the 16 thought that getting the information more ahead of 17 time and understanding more of it, perhaps even having 18 some briefing on some of those issues, could have 19 helped me have been more effective at the meeting. 20 The one thing that I continue to 21 believe was -- I got out of the meeting that was very 22 important is the need to emphasize charity, the 23 charitable beneficiaries of the proceeds of bingo. 24 For the first two years I was on this board I heard 25 very little about charity, then I started hearing 0010 1 about charity, and I heard a lot about charity in that 2 meeting, and I think that's a real important shift of 3 emphasis. 4 CHAIRMAN CLOWE: I -- I couldn't agree 5 with you more, Commissioner Cox. And I guess I would 6 like to say that I have reviewed the notes, the 7 discussion notes that came out of the meeting, and I 8 would urge the Commissioners and the members of the 9 BAC to do the same. I think it refreshes your memory 10 and helps you focus on what were the points of 11 discussion. I do not have any disagreement or problem 12 with these notes. I think they maintained a high 13 degree of accuracy for a -- a meeting that moved along 14 as rapidly as this one did. And I want to thank Sandy 15 and Carol for their work in that regard. 16 There was a weakness, I think, in the 17 format of the meeting, and I want to apologize to the 18 two Commissioners and to the members of the BAC. 19 Billy and I met with Carol prior to that meeting, and 20 we understood, I think, generally, what the structure 21 was going to be. And somehow we failed to get that 22 information to the Commissioners and to the BAC so 23 that it wasn't a surprise. And I take responsibility 24 for that. My focus was on making a format that would 25 be productive and trying to combine this public 0011 1 meeting and a facilitated meeting, which I see as some 2 higher degree of difficulty than if you do that in the 3 private sector, and I let my attention focus on that 4 and -- and failed to get the word out in a way that I 5 think would have made the discussion more effective. 6 But everybody was, frankly, pretty light on their 7 feet, and I think that they -- they rallied to the 8 format, and Carol did a good job, and we ended up with 9 worthwhile results. 10 My sense is that the Commissioners have 11 had the interest in bingo for some time, but it was 12 heightened by that meeting, and my sense is, the 13 Commissioners will continue to be willing to commit to 14 what we said we would do in these discussion notes. 15 I -- I want to concentrate on the BAC 16 side of the equation and help them fulfill their goals 17 and objectives, and that was the discussion that Carol 18 and Sandy and Billy and I pursued earlier this week. 19 To that end, Billy has contacted the members of the 20 BAC, as many as possible. Carol is communicating with 21 them, and then she has agreed to meet on the 26th. 22 Now, she has some concerns, Billy, about her 23 continuation. She termed it "forced facilitation." 24 And I think that's natural for a person not wanting to 25 put themselves in a place where the BAC would not want 0012 1 them to be involved. My sense is that they would 2 welcome her participation, and I'm going to talk with 3 her about that and try to assure her that I think it's 4 the right thing to do. And -- and I hope that you 5 will offer your support, not only with her, but with 6 the members of the BAC. 7 I would hope, Commissioner Cox, that 8 you and I can also, depending on what your schedule -- 9 I know you have some personal things that are -- 10 you're involved in right now, but at their next 11 meeting on the 26th, if you're available, let's 12 communicate to Billy about our availability to attend 13 that meeting. I know now that I can be there at 10:00 14 a.m., and if you're available at some point in time or 15 if you would like to be there at 10:00 a.m., you can 16 let Billy know, and we'll arrange it so that we don't 17 attend there at the same time. 18 COMMISSIONER COX: This is January 19 26th? 20 CHAIRMAN CLOWE: Yes, sir. 21 COMMISSIONER COX: Okay. I'll be 22 there. 23 CHAIRMAN CLOWE: And, Billy, it'll be 24 up to you to coordinate with the two Commissioners 25 that are here. And I know, Commissioner Olvera, you 0013 1 can't come from the Valley, but -- but we should 2 continue that participation. 3 And then, Billy, between you and Carol, 4 I think the Commission is going to look to a continued 5 level of increased activity and involvement to foster 6 what was started last month in this joint meeting. 7 We discussed in our meeting a more 8 informal structure, physically, of the BAC when they 9 meet, more like we had at the Commission's business 10 planning session where we all sat around a table and 11 more like that meeting which we had with the joint 12 BAC/Commission meeting. And I would recommend that 13 you discuss that with the Chair of the BAC, and if she 14 agrees to it, maybe you adopt that physical layout, 15 which we think will be more conducive to better 16 communication for that next meeting. I think the 17 Chair ought to agree to that and approve that before 18 it's adopted, but I think that's a good idea. I think 19 it would be beneficial and it would encourage, I 20 think, participation not only of the members of the 21 BAC but of the public as appropriate. 22 And then, finally, I for one would be 23 in favor of another meeting. I think it is important, 24 and we recognize the Commission has -- has a 25 requirement to vote on the continuation of the BAC at 0014 1 the end of August of this year. And with that in 2 mind, as we approach that date, maybe the 3 Commissioners would like to consider where they are on 4 the issue at that time, as opposed to giving a firm 5 answer at this time. 6 Are there any other issues that you 7 raised that need to be addressed by the Commission at 8 this time? 9 MR. ATKINS: No, sir. There are just 10 two points that I would like to clarify. In my 11 comments, it was not my intent to give the impression 12 that the BAC members had given any kind of expression 13 that the Commission hadn't expressed an interest in 14 bingo beforehand. As a matter of fact, their comments 15 were -- were very appreciative of how involved these 16 Commissioners had been in the past. This meeting was 17 more like the icing on the cake. So they -- they have 18 recognized to me that they are aware of and 19 appreciative of the interest that the Commission has 20 had in bingo for some time. And also -- 21 CHAIRMAN CLOWE: And -- and just on 22 that, before you leave it, I -- I think I understand 23 that and thank you for that clarification. And I 24 think my remark goes more to, then, the level of 25 interest, the ability of the Commissioners to be 0015 1 active. And I think our discussion about advocacy 2 versus responsiveness and being a resource, for my 3 mind anyway, put a finer point on that issue. And 4 that was beneficial. I hope the members of the BAC 5 and the members of the public who were there better 6 understand now what interested Commissioners can do 7 and what they may not do. 8 MR. ATKINS: And I -- I believe there 9 is a better understanding. 10 The other clarification point I wanted 11 to make, because I did -- the -- the members that I 12 have spoken to individually on the BAC, I had 13 discussed your recommendation of having Carol at the 14 meeting of the 26th, and they were all supportive of 15 that, also. 16 CHAIRMAN CLOWE: Well, that's good, and 17 that will rest her concern. She doesn't want to not 18 be a positive influence. So I'll pass that on to her 19 when I see her. Okay. Very good. 20 Commissioner Cox, have you got a 21 preference? We might just settle that issue while 22 we're talking about it on what portion of that meeting 23 you would like to attend? 24 COMMISSIONER COX: You live out of 25 town. Why don't you pick? I'm okay. 0016 1 CHAIRMAN CLOWE: I -- I like to go 2 early. So I'd be happy to be there at 10:00 and turn 3 it over to you after the lunch break if that's all 4 right with you. 5 COMMISSIONER COX: Sounds good. 6 CHAIRMAN CLOWE: Commissioner Olvera, 7 was I correct that you will probably not be able to -- 8 COMMISSIONER OLVERA: That is correct, 9 sir. 10 CHAIRMAN CLOWE: Anything further, 11 Billy? 12 MR. ATKINS: No, sir. 13 COMMISSIONER CLOWE: Okay. Well, we'll 14 go on to item number three on the agenda: 15 Consideration of, possible discussion or action on the 16 reorganization of the charitable bingo administration 17 rules, including the proposal of the repeal of the 18 current rules and proposal of new rules. 19 MS. JOSEPH: Good morning, 20 Commissioners. I'm Sandy Joseph, Assistant General 21 Counsel. Before you are draft documents prepared for 22 submission to the Texas Register in order to 23 simultaneously propose the repeal of the existing 24 charitable bingo rules and the adoption of new rules. 25 The purpose of these rulemaking actions would be to 0017 1 make the charitable bingo rules more user-friendly and 2 up-to-date. There would be no substantive changes to 3 the rules. Non-substantive changes to the existing 4 rules would include the following: Renaming the 5 chapter to Charitable Bingo Administrative Rules. The 6 current title is Bingo Regulation and Text. 7 Second, the rules would be organized 8 into subchapters. Currently there are no subchapters, 9 just a long list of rules. 10 Third, we propose to update legal 11 citations. And, finally, delete references to 12 obsolete dates. 13 Now, there are two -- excuse me, four 14 changes that we noticed that we would like to make in 15 addition to what is in your notebooks. On page 45, 16 there is a date of June 1st, 2004. That date is no 17 longer needed, and so we would propose to delete that 18 also. And on page 47, the date of May 1st, 2004 is no 19 longer needed as it appears in the rules. We would 20 want to also include deletion of that. 21 In the preamble for both of the rules 22 there is a phrase "at the public" -- it -- the phrase 23 is "at the public hearing," which was inadvertently 24 added onto the end of a sentence. And we would delete 25 that phrase from the submission to the Texas Register 0018 1 because it is incorrect. 2 Now, at the same time that we propose 3 the rules, we plan -- or recommend that we include a 4 notice for a public hearing to be held on these 5 proposals on February 3rd, 2005, at 10:00 a.m. At 6 that time we can take any public comments that people 7 wish to make. Of course, we will also be accepting 8 written comments. 9 So my recommendation is that the 10 Commission initiate rulemaking proceedings by 11 submitting the proposed repeal of the existing bingo 12 rules, and at the same time, submitting proposed 13 adoption of new rules to the Secretary of State, for 14 publication in the Texas Register, in order for public 15 comment to be received for at least 30 days. 16 CHAIRMAN CLOWE: Are there any 17 questions? 18 COMMISSIONER COX: Yes, sir. 19 CHAIRMAN CLOWE: Yes, sir. 20 COMMISSIONER COX: Sandy, I applaud 21 what you're doing here. I think the rules are to be 22 much better organized as a result of this effort. 23 Were there -- was there consideration to looking at 24 substantive changes as well? I'm surprised to find 25 that anything this thick doesn't have a need for some 0019 1 substantive change -- changes. 2 MS. JOSEPH: Yes. What we plan to do 3 is just -- of course, there are substantive changes 4 that are being considered. However, it will be much 5 simpler to just simply reorganize the rules first, and 6 then we'll go back with individual rulemakings to 7 address substantive changes within the rules. We feel 8 it would be, you know, extremely complicated to try to 9 do the substantive changes at the same time, and we 10 would like to just get the rules reorganized in a 11 format that is more, you know, accessible and 12 understandable and -- for the public before we go into 13 making those substantive changes. 14 MS. KIPLIN: Commissioner Cox, if I 15 could make one comment on that. When we sought 16 guidance from the Texas Register Division of the 17 Secretary of State, in particular their division 18 chief, Dan Proctor, on the best way to approach a rule 19 reorganization, recognizing that the -- there are 20 substantive changes that need to be accomplished as 21 well, and Mr. Proctor's recommendation was, get your 22 rule reorganize -- substantive rule reorder 23 accomplished first, and, then, in the new format, 24 begin the substantive changes. And that's why we're 25 moving, frankly, this quickly, to try and get the 0020 1 rules or the non-substantive rules re-org before you 2 all and then adopted, so that we can begin to do the 3 substantive changes thereafter. 4 COMMISSIONER COX: The only concern I 5 would have, and I'm sure y'all have addressed this, is 6 are there any substantive changes that are really 7 important that are being delayed and are going to hurt 8 somebody or -- or us or the like because of this 9 delay? 10 MS. JOSEPH: What -- we did evaluate 11 that. Billy Atkins, Kim, we -- we all met and -- as 12 well as Billy's managers, to evaluate what rules need 13 to be addressed. And it was the -- the judgment of 14 the group that it would be best to go ahead and do 15 this first. 16 COMMISSIONER COX: Good. Thank you. 17 CHAIRMAN CLOWE: Any other questions? 18 MS. KIPLIN: Commissioners, if I could, 19 I would like to recognize -- this was a huge 20 undertaking in a very quick period of time, and I 21 would like to recognize Tamara Fowler, the legal 22 assistant who spent endless hours getting this format 23 together, as well as working with Billy's staff. 24 CHAIRMAN CLOWE: Thank you, and thank 25 you all. Is there a motion? 0021 1 COMMISSIONER OLVERA: So moved. 2 COMMISSIONER COX: Second. 3 CHAIRMAN CLOWE: All in favor, please 4 say aye. Opposed, no. The vote is three zero. Do 5 you have a T bar on this or -- 6 MS. JOSEPH: I didn't bring a clean 7 one. Can I bring it to you just a little bit later? 8 CHAIRMAN CLOWE: I wonder if we could 9 just use one out of the notebook. 10 MS. JOSEPH: That would be great, 11 perfect. 12 CHAIRMAN CLOWE: Okay. 13 MS. JOSEPH: I've written on mine. I'm 14 sorry. 15 CHAIRMAN CLOWE: I'm going to -- does 16 it need to be dated, Sandy? 17 MS. JOSEPH: It has today's date on it 18 already. 19 CHAIRMAN CLOWE: Just the cover page? 20 MS. JOSEPH: Yes. Thank you. 21 CHAIRMAN CLOWE: Thank you. 22 MS. KIPLIN: Mr. Chairman, just for 23 clarification. Your action had to do with both the 24 proposal of the repeal and proposal of the new rules. 25 Correct? 0022 1 CHAIRMAN CLOWE: That was her request, 2 wasn't it? 3 MS. KIPLIN: I believe so. I just 4 wanted to make sure the motion was clear. 5 MS. JOSEPH: Yes. That's correct. 6 CHAIRMAN CLOWE: Next item: Report, 7 possible discussion and/or action on lottery sales, 8 game performance, and trends. 9 MR. DEVINEY: Good morning, 10 Commissioners. I'm Lee Deviney, Financial 11 Administration Director, and Robert Tirloni, Products 12 Manager, Dale Bowersock, Product Coordinator. And I 13 will present this month's lottery sales and trends 14 report. 15 We'll start off, as we did last month, 16 discussing sales for instant products and our on-line 17 products. Our instant products make up almost 74 18 percent of sales currently. Our on-line products make 19 up just over 26 percent of our sales. Comparing the 20 first four months of fiscal year 2005 to fiscal year 21 2004, our instant products sales have increased by 21 22 percent. Our on-line sales are down a bit. They're 23 down about 5.1 percent, compared to where we were in 24 fiscal year 2004. I would note, in the first four 25 months we've not had any super jackpots that tend to 0023 1 drive the on-line sales up. 2 Looking at this graph, you can see the 3 same information, and that is what our sales were in 4 '04 and '05 for the two different product types. We 5 were at 328 million dollars for on-line sales a year 6 ago. Right now we're at 312 million. Our instant 7 sales were at 727.5 million, and with the 21 percent 8 increase, we've sold 880 million dollars worth of 9 instant tickets in the past four months. 10 Looking at our overall sales, through 11 January 1, we're at 1.2 billion dollars. This is 12 almost a 13 percent increase over fiscal year 2004 13 sales for the same time period. 14 Here we've broken out sales by product 15 for the first four months of the fiscal year. Again, 16 our instant tickets are leading with 880 million 17 dollars or almost 74 percent of sales. Lotto Texas is 18 just under 100 million dollars at this point in time. 19 Mega Millions is at 56.8 million dollars. And, again, 20 the total is 1 -- almost 1.2 billion. 21 The next slide, we've taken the same 22 information, we've broken it out into a pie chart for 23 you to give you a graphical representation of what our 24 sales are. You'll note our -- our Megaplier is 25 still -- still holding strong, along with Mega 0024 1 Millions, and the two combined are just almost 69 2 million dollars. 3 MR. TIRLONI: Good morning, 4 Commissioners. For the record, my name is Robert 5 Tirloni. I am the Products Manager for the Texas 6 Lottery Commission. 7 Commissioners, we showed you this pie 8 chart for the first time last month, and we've updated 9 it. This shows our instant sales by price point. 10 And, Commissioners, you do have a hard copy of this 11 presentation on your tables if you need that to follow 12 along. So this takes us -- this is current for this 13 fiscal year from September through December. And it 14 shows that our total instant sales are 872.9 million. 15 And, again, this is through the end of December of 16 2004. 17 We made a reference to instant sales. 18 There was an extra day of sales in -- in the chart 19 that he just referred to, and -- and that's the reason 20 for the slight difference. But you'll see that the 21 two-dollar price point and the five-dollar price point 22 continue to be our strongest price points in the 23 overall instant product mix. Our one-dollar price 24 point follows closely behind, making up 13.5 percent 25 of the total. And it's followed pretty closely after 0025 1 that by the ten-dollar price point, which is 2 approximately 12 percent of the total. You'll notice 3 our higher price points in this region -- our 20, our 4 25, and our 30. Of course, our 30-dollar price point 5 is a -- is a brand new price point that was introduced 6 this past fall, and that is a holiday ticket. 7 COMMISSIONER COX: Robert, let me ask a 8 question back on that slide. 9 MR. TIRLONI: Yes, sir. 10 COMMISSIONER COX: This seven-dollar 11 price point at two percent, at what point does a price 12 point become so small that it isn't profitable and 13 that's -- shelf space should be devoted to other 14 products? 15 MR. TIRLONI: Actually, we just talked 16 about that this past week when we were meeting with 17 GTECH. The thought process right now is that the 18 seven-dollar price point is serving a specific niche 19 in the market. It's bringing us approximately four 20 million dollars a week. We only have two seven-dollar 21 games available right now, so there is not a huge 22 amount of them out there. There seems to be a sales 23 trend that shows that it's a popular price point in 24 the summer months, right around June and July, and it 25 seems to be a popular -- if the theme involves sevens, 0026 1 it seems to be a -- it seems to be a popular price 2 point. So for right now, where we're at, it would -- 3 we -- it -- it's not a huge part of their overall mix, 4 but it is an important price point to keep out there 5 at this time. 6 COMMISSIONER COX: But we do consider 7 diminishing returns and look at that kind of thing as 8 we consider the mix? 9 MR. TIRLONI: Absolutely, sir. 10 COMMISSIONER COX: Thank you. 11 MR. TIRLONI: Commissioners, last month 12 when we were talking about our instant products, I 13 gave you some insight into how we work our game plan 14 and the factors that go into our game plan, keeping a 15 good variety of price points, a good variety of 16 themes, color schemes, and we feel that this chart 17 shows the -- the good results of our efforts in that 18 area. 19 This chart shows the top ten sales 20 weeks for instant products since the Lottery started 21 in '92. And you'll notice that the -- the yellow 22 dates and sales figures are weeks that were achieved 23 here just in the past month. Starting with the first 24 week in December, the 4th, the 11th, the 18th, the 25 25th, and the very last week of the month, the last 0027 1 week of December -- our -- our sales weeks end on 2 Saturday, so the January 1st date is -- is -- is 3 pretty much the very last week of December for us in 4 our -- in our sales week. You'll notice that out of 5 the top ten, five of those -- five of those top ten 6 sales weeks just occurred here over the past four to 7 five weeks. We attribute that to our -- some of our 8 higher price points, our very successful holiday 9 seasonal games that we've had out, and we're -- we're 10 very proud of these results. You'll see the last week 11 of December, the week that ended 1-1-05, ranks number 12 three, and it was only off of the -- the second 13 ranking by about a million dollars. So we wanted to 14 share that information with you. 15 Commissioners, in the hard copy that 16 you have in front of you, I did flag this page for you 17 in -- in case that -- I -- I realize this is somewhat 18 difficult to see. It's -- it's pretty clear on my 19 computer screen, but when we blow it up to this size, 20 it -- it can become a bit difficult to read. What 21 I've done also, besides giving you the hard copies, is 22 the -- the next two slides I focus on one pie chart at 23 a time. 24 The -- the main point that we're trying 25 to illustrate, and to carry forward on the message I 0028 1 was just showing on the previous slide, is that if we 2 compare December 2003 instant sales to December of 3 2004 instant sales, there is a -- there is a huge 4 difference in our success. This time last year, in 5 December of '03, our instant sales totaled just over 6 201 million dollars. And this past month, December of 7 2004, our instant sales were 248.8 million. I'll keep 8 this slide up for a second. I -- I think it helps to 9 be able to look at them side by side. 10 You'll notice, in December of 2003, we 11 did not have a 25- or a 30-dollar price point 12 available. The 25-dollar price point was introduced 13 this past summer, and then, as I said a few minutes 14 ago, the 30-dollar price point was introduced this 15 past fall. Looking at the dollars, practically every 16 price point has increased from December of '03 to 17 December of '04 in terms of dollars. Commissioner 18 Cox, interestingly enough, the seven-dollar price 19 point is really the only price point that saw a 20 decrease in terms of dollars. I think the -- this 21 section of the chart shows the success that we have 22 had with the higher price point tickets here recently. 23 And I'll -- I'll flip to the next chart 24 because this will be -- this will be December of '03. 25 And I -- I want to just -- I wanted to show them side 0029 1 by side, but this gives you the clearer picture of 2 where we stood a year ago by price point. And again, 3 as I referenced, we did not have a 25- or a 30-dollar 4 price point last year. 5 And I'll forward on to December of 6 2004. And again, we're -- we're happy -- very happy 7 with these results, and we attribute it to the very 8 thorough planning and analyzing that takes place on 9 our instant product side in terms of game 10 introductions and launches. 11 I'm going to turn it over to Dale, 12 Commissioners. He's going to walk you through some of 13 the games that we've introduced here recently, and 14 we'll show you some other games that are -- are coming 15 up in the near future. 16 MR. BOWERSOCK: Good morning, 17 Commissioners. For the record, my name is Dale 18 Bowersock. I'm the Instant Products Coordinator. 19 Robert and Lee have just discussed the sales and 20 success of our holiday season. We believe that a 21 major influence in this success is due to the great 22 mix of games that we offer. So we thought the 23 Commissioners would like to see the games that were 24 introduced during the past month, as well as some of 25 the new and exciting games that we plan to launch in 0030 1 the future. We have provided you with voided tickets 2 for each of the game -- each of these games so that 3 you can see them in more detail. That's pretty large 4 there. These games performed amazingly well during 5 this month. As you can see, we offer a wide variety 6 of play styles and themes to keep the games exciting 7 and fresh for our players. Here are a few of our 8 games that are soon to be released. 9 Monthly Bonus is our latest addition to 10 our suite of annuity games. This game will offer two 11 top prizes of 10,000 dollars per month for 20 years, 12 not to exceed 2,400,000 dollars. Even the second 13 level of -- in this game offers five winning tickets 14 in the amount of 20,000 dollars. These are incredible 15 prizes for a five-dollar price point. 16 The brand recognition of the popular 17 game show, Wheel of Fortune, should drive the success 18 of our upcoming two-dollar ticket. I have more 19 information on this game in an upcoming slide, but we 20 are looking forward to this being a strong performer. 21 CHAIRMAN CLOWE: And you can do that 22 without patent or copyright infringement? 23 MR. BOWERSOCK: We -- Scientific Games 24 is producing this ticket for us, and the rights are 25 obtained through Scientific Games. 0031 1 I'm excited to be able to announce that 2 in February the Texas Lottery will launch its first 3 commemorative ticket. This ticket celebrates the 4 anniversary of the one-hundredth birthday of Bob 5 Wills, the King of -- the King of Western Swing. This 6 launch happens to coincide with other events being 7 planned by a division -- by a division of the 8 Governor's office, the Texas Music Office. 9 Our upcoming ten-dollar game, Wild 10 Tens, plays on the numbers theme. We've historically 11 seen that the numbers theme tickets index well, and we 12 expect no less of this game. Even the top prize of 13 110,000 dollars ties into the theme of tens. 14 Going to the licensed properties that 15 you were just asking about, in the past Texas has 16 released several licensed property games. With brands 17 such as Harley Davidson, Chevrolet, and Monopoly, the 18 players' interest was piqued each time, as was 19 demonstrated by the sales from each game. Harley 20 Davidson and Instant Monopoly did so well on their 21 first print run that we relaunched both of these games 22 in Texas. 23 Our next scheduled licensed property 24 game is Wheel of Fortune. The Wheel of Fortune game 25 has been focus-group tested in Texas and performed 0032 1 very well in those groups. Wheel of Fortune games 2 have been some of the most successful licensed games 3 in North America. Games have run in 22 North American 4 lottery jurisdictions such as New York, Florida, 5 Illinois, New Jersey, and Rhode Island. 6 We have scheduled Wheel of Fortune to 7 launch on February 23rd. This launch date coincides 8 with the scheduled Scratch Dance advertising flight 9 and will allow us to insert the Wheel of Fortune game 10 into the Scratch Dance ads. On this slide, we see 11 that the game offers exciting prize packages as well, 12 four of which are trips for two to Hollywood with a 13 chance to audition for the Wheel of Fortune television 14 show. We believe that this game should perform well 15 for us as well, and we plan to bring you figures after 16 this -- after the game has a few weeks of sales 17 history. 18 And if there is no questions on this, 19 I'll turn it over to Robert for on-line. 20 CHAIRMAN CLOWE: Well, that's 21 interesting. You've gone way beyond where I thought 22 you were with this. 23 An audition doesn't mean that you're 24 going to get on the show, does it? 25 MR. BOWERSOCK: That -- that's correct. 0033 1 No, but -- but I will mention that if they do get on 2 the show, Scientific Games then picks up the rest of 3 the cost for them to stay on the show during their 4 run. 5 CHAIRMAN CLOWE: Well, you know, you've 6 got to win something on Wheel of Fortune. You get on 7 Oprah, it seems like you win something every day. 8 Now, I might want to be on Oprah's show. Keep that in 9 mind. 10 COMMISSIONER COX: Robert? 11 MR. TIRLONI: Yes, sir. 12 COMMISSIONER COX: Is there a 13 noticeable difference in the cost of this game, which 14 would be attributable to the license paid to Wheel of 15 Fortune, as opposed to the lucky duck type games? 16 MR. TIRLONI: There -- there is an 17 additional cost to -- to producing these type of 18 games. What we have found on -- on the licensed 19 property games that Dale referred to, such as Harley 20 and Corvette Cash, and -- and I think we're going to 21 see it with Wheel of Fortune as well -- is that the 22 brand awareness and the strong brands that these games 23 have ensure a quicker sell-through. So these games 24 are put out and, because of the strong brand awareness 25 or product awareness, the game sells through quicker. 0034 1 So this is a two-dollar price point, for example. The 2 strong brand awareness allows us to sell through the 3 game quicker, which allows us to introduce another new 4 two-dollar price point. So the sell-through is the -- 5 is the main points on these type of games. It allows 6 us to open up that bin space to put another new 7 two-dollar game in there. 8 COMMISSIONER COX: So I think I just 9 heard you say that they are more profitable? 10 MR. TIRLONI: Yes. 11 COMMISSIONER COX: Okay. Does the -- 12 that would indicate, then, that we're going to look 13 for as many of these as we can to replace the generic 14 games that we've been running? 15 MR. TIRLONI: I -- I think we need 16 to -- we have to -- need to have a mix. I will tell 17 you that launching these games is a lot of extra work 18 for our staff because there are a lot of licensing 19 agreements. It is a lot of extra work for our legal 20 staff to review all the documentation. Then there are 21 second-chance drawings that are conducted, as -- as 22 Dale referred to. So there -- there is a lot more 23 work involved with these -- with these game launches. 24 I think what we're trying to do at this point in time 25 is find a good balance between these type of games and 0035 1 our regular generic type of -- of games. The -- 2 the -- I'm sorry. I lost my train of thought. The -- 3 the biggest -- like I said earlier, the -- the biggest 4 positive is the fact that it has a very quick 5 sell-through. I don't know that all of the licensed 6 property games that we have available to us through 7 our contracts with our vendors are games that we would 8 want to introduce. On these types of games, we have 9 been focus-group testing them before we introduce them 10 to make sure there is strong enough appeal, so to 11 speak, with -- with those types of games for our Texas 12 players. Some licensed properties that have been run 13 in other states, I don't know if they would be 14 successful in Texas. And that's why, as part of our 15 focus group research, we have introduced licensed 16 property games, so that we're sure that they're going 17 to be successful here. 18 COMMISSIONER COX: Well, the casinos, 19 with their devices, have found that licensed games are 20 much more attractive than the generic games. And I 21 would encourage you to look at this it's-more-trouble 22 kind of thing from a cost-benefit relationship. We 23 can hire more staff, and we can hire lawyers, 24 including outside lawyers, if these are significantly 25 more profitable than the generic games. 0036 1 MR. TIRLONI: Absolutely. We'll 2 continue to look at those. 3 CHAIRMAN CLOWE: And, Robert, define 4 "sell-through" for us, please. 5 MR. TIRLONI: When I say sell-through, 6 I mean the number of weeks that this game would be 7 occupying bin space in a retail location. So, for 8 example, you may put out a two-dollar generic ticket, 9 is -- is what we've been calling it this morning -- 10 a -- a regular two-dollar ticket, and it may take, you 11 know, five to six months before that game is sold 12 through, where that bin space would become available. 13 What we find on this -- 14 CHAIRMAN CLOWE: And that's when you 15 take it off the market? 16 MR. TIRLONI: Correct. When -- when 17 the inventory has pretty much been depleted. And so 18 then that bin -- bin space becomes available. With 19 these types of games, we find that the sell-through is 20 three to four months, depending on the game. So, 21 basically, we've -- we've found that new game launches 22 are interesting -- are interesting and attractive to 23 players because they always like to see the new game 24 that's coming out. So if you can achieve a quicker 25 sell-through and open up that bin space quicker and be 0037 1 able to put new product in there, we've found -- we -- 2 we seem to think that that's been successful for us in 3 the past and will continue to be successful for us in 4 the future. 5 CHAIRMAN CLOWE: Thank you. 6 MR. TIRLONI: Commissioners, next month 7 we are going to provide you with a one-year recap on 8 the Mega Millions game and how it has performed in 9 Texas, but I do have two brief slides that we have 10 looked at on a regular basis over the past year. This 11 is our Mega Millions sales in red and our Megaplier 12 sales in blue. And the -- the trend continues, as it 13 has for the past year, and you do see that the 14 Megaplier sales follow the sales trend of Mega 15 Millions. This is through December 31st, when we were 16 at a 58-million-dollar jackpot. We have rolled since 17 then, and we are currently advertising an 18 80-million-dollar jackpot for tonight's drawing. And 19 Megaplier sales do continue to stay consistent, at 20 approximately 19 percent of the total sales. 21 Again, this slide we have looked at 22 pretty regularly over the past year. It shows all of 23 our roll cycles for both Mega Millions, which is the 24 blue bars, and Lotto, which is the red shading in the 25 background. You can see our 149-million-dollar Mega 0038 1 Millions jackpot that took place earlier in the year. 2 The game has been hit somewhat regularly. As I said, 3 this was through the end of December. So that's the 4 58-million-dollar jackpot we were advertising last 5 week. We're now at 80. 6 And Lotto has been on a pretty 7 consistent roll, and we are currently advertising a 8 45-million-dollar jackpot for tomorrow night. 9 Commissioner Cox, last month you asked 10 a question towards the end of the meeting, and Reagan 11 asked that I follow up with you this month about where 12 Texas ranks in terms of Mega Millions sales. And 13 we'll have some detailed slides for you next month. 14 The -- the conversation at last -- at the last meeting 15 talked about New York and New Jersey being ahead of 16 us. And -- and depending on the drawing, you know, 17 it -- it can vary, but typically, what we've looked at 18 in this -- in these meetings in the past has been for 19 our complete roll cycle, where we start at ten and 20 actually roll all the way through until the jackpot is 21 hit. And typically, New York and New Jersey have been 22 the two states that have been ahead of us in those 23 roll cycles. 24 COMMISSIONER COX: So they're ahead in 25 absolute sales? 0039 1 MR. TIRLONI: Correct. 2 COMMISSIONER COX: And if I recall, 3 we're pretty near at the bottom in -- in per capita 4 sales? 5 MR. TIRLONI: In per capita, we are 6 near the bottom. That's correct. 7 CHAIRMAN CLOWE: And, Robert, does the 8 migration figure of the data that you have right now 9 remain consistent from Lotto Texas to Mega Millions? 10 MR. TIRLONI: I haven't seen that in 11 the past month. What I had seen previous to that 12 showed that it was consistent, yes. And we will have 13 that for you for next month in the one-year recap. 14 CHAIRMAN CLOWE: Good. 15 Any questions? Thank you. 16 Next we'll move to the item number 17 five: Report, possible discussion and/or action on 18 HUB and/or minority business participation, including 19 the agency's Mentor/Protege program. Ms. Bertolacini. 20 MS. BERTOLACINI: Good morning, 21 Commissioners. For the record, my name is Joyce 22 Bertolacini, and I'm the Coordinator of the TLC's 23 Historically Underutilized Business program. The 24 TLC's subcontracting report submission deadline did 25 not allow time to complete the December monthly HUB 0040 1 activity, contracting activity report for this 2 meeting. However, included in your notebooks today is 3 the November monthly HUB minority contracting activity 4 report, and this includes all fiscal year 2005 5 expenditures paid from September 1st of 2004 through 6 November 30th, 2004. During that time our total 7 qualifying expenditures were 39.1 million dollars, and 8 our estimated HUB minority utilization was nearly 8.9 9 million dollars, which equates to 22.76 percent. 10 I currently don't have any updates for 11 you on the Mentor/Protege program. I did want to 12 mention that our minority business participation 13 report is being worked on, and I will probably have 14 that -- I plan to have that to present to you at the 15 February meeting. And, of course, following up on 16 your comment from last month, Chairman, we will be 17 providing you an advanced copy of that, all the 18 Commissioners. 19 So I would be happy to answer any 20 questions that you might have. 21 CHAIRMAN CLOWE: Well, we urge you to 22 continue your work in this area, and I'll ask you, in 23 an ongoing way, do you have the resources and the 24 support that you need to maintain our outstanding 25 record? 0041 1 MS. BERTOLACINI: Yes, Commissioner, I 2 do. And I appreciate your concern and -- and your 3 ongoing support of the program as well. 4 CHAIRMAN CLOWE: Thank you. 5 MS. BERTOLACINI: Thank you. 6 CHAIRMAN CLOWE: Next we'll move to the 7 report, possible discussion and/or action on the 8 agency's contracts. 9 Mr. Fernandez, good morning. 10 MR. FERNANDEZ: Good morning. Good 11 morning, Mr. Chairman, Commissioners. My name is Mike 12 Fernandez. I'm the Director of Administration. Tab 13 six in your notebooks has a status report regarding 14 contracts with an estimated value of over 25,000 15 dollars. If you have any questions, I'll be happy to 16 try and answer them. 17 CHAIRMAN CLOWE: Are there any 18 questions? Thank you, sir. 19 Next, report, possible discussion 20 and/or action on the agency's financial status. Mr. 21 Deviney. 22 MR. DEVINEY: Good morning. Again, 23 Commissioners, if you'll turn to tab seven of your 24 notebook, you'll find the monthly report on transfers 25 and allocations. I'll point out a couple of figures 0042 1 to you. The amount of funds transferred for the month 2 of December, which we made that transfer early 3 January, was 83 million dollars, and that reflects 4 the -- the high sales we had in November and December. 5 Turning to the next page of the report, 6 we're still at the same place in terms of -- 7 COMMISSIONER COX: Lee? 8 MR. DEVINEY: Yes, sir. 9 COMMISSIONER COX: How does that number 10 compare to the highest we've ever sent over? 11 MR. DEVINEY: I can't tell you. I'd 12 have to look that up and report back to you. 13 COMMISSIONER COX: You might take a 14 look at that next time, just a one-time deal. 15 What's -- what -- like what Robert did with the top 16 ten months. 17 MR. DEVINEY: Okay. We'll provide that 18 for you. 19 Turning to the next page, we -- there 20 is nothing new to report on transfers of unclaimed 21 prizes. We do that on a quarterly basis. So far this 22 fiscal year, we've transferred 10.7 million, and after 23 we complete the next quarter, then we'll have 24 additional information on unclaimed prize transfers. 25 Behind the orange divider page you'll 0043 1 find the budget report, and this is through the month 2 of December or the first four months of the fiscal 3 year. Currently, both the Lottery operations and 4 Bingo operations were operating within our budget. We 5 have no significant -- no issues to report to you. 6 Things are just rolling along, you know, towards -- if 7 our sales stay up, and we'll have more to report on 8 the budget. As you know, we -- we do have a 9 performance funding rider that appropriates additional 10 funding to pay our contracts if sales stay up, but 11 right now we're staying within our appropriated 12 budget. 13 And then behind that you'll find the 14 detail of our expenditures and commitments for both 15 Lottery operations and Bingo. 16 If you have any questions, I'll try to 17 answer them. 18 COMMISSIONER COX: Do -- are there 19 still salary cap and travel cap issues out there? 20 MR. DEVINEY: We do have travel caps. 21 We have a travel cap, an overall cap on travel that's 22 tied back to travel that was in fiscal year 1998. We 23 are, you know, staying within the travel cap. There 24 is also an out-of-state travel cap, too, that we also 25 have to be mindful of. I know just periodically we 0044 1 check that. Right now we don't have any difficulties 2 with, you know, exceeding our out-of-state travel cap. 3 The salary cap is not -- we don't 4 really have a salary cap like we did, you know, once 5 upon a time. We have more flexibility now on -- on 6 salaries, with the one exception specific, and that is 7 that the executive director of the agency, that salary 8 is capped by line item in the Appropriations Act. 9 COMMISSIONER COX: Thank you. 10 CHAIRMAN CLOWE: Any other questions? 11 Thank you, Lee. 12 The next item, number eight: Report, 13 possible discussion and/or action on the demographic 14 report on lottery players. And Mr. Fernandez is going 15 to present that. And we have Mr. Brian Cannon, I 16 believe, with the Texas Tech University, here with 17 him. And, Mr. Cannon, you're going to represent the 18 university, and are you going to talk football to us 19 or are you going to talk demographics? You would 20 probably like to talk a little football, wouldn't you? 21 MR. CANNON: I would. I feel I might 22 get some hostile responses, though. 23 CHAIRMAN CLOWE: We'd probably have to 24 give the University of Texas equal time, wouldn't we? 25 MR. FERNANDEZ: He's going to talk 0045 1 about the next quarterback. 2 Good morning, Mr. Chairman, 3 Commissioners. My name is Mike Fernandez. I'm the 4 Director of Administration. As each of you know, 5 there is a requirement statute that the Executive 6 Director, every two years, commission a study 7 regarding the dem -- or a demographic study of the 8 Texas Lottery players. This year we have engaged the 9 Texas Tech Earl Research Survey Center, and with us 10 this morning we have their director, Brian Cannon. So 11 I'm going to turn it over to him and let him point out 12 the highlights of the study. 13 MR. CANNON: Thank you. Good morning. 14 My name is Brian Cannon. I am the Director of the 15 Earl Survey Research Laboratory at Texas Tech 16 University. And what I'm going to do this morning is 17 present the highlights of the -- of the demographic 18 study that we conducted this year. There is more 19 detail in the report, but I don't want to go through 20 that page by page. And I will attempt to answer any 21 questions that you might have about the -- about the 22 results. 23 The survey was conducted in late 24 November and early December of 2004. We completed a 25 total of 1255 interviews with adult residents of the 0046 1 state of Texas. That figure is somewhat lower than in 2 previous years. That was due to a condensed field 3 period that we had to deal with. Essentially, it was 4 a late start this year compared to previous years, so 5 we settled on a figure of 1200 that would give us a 6 valid sample that we could make statewide inferences 7 from, but also, complete the report on time. 8 The demographics of our sample, in 9 terms of income, you can see the distribution here. 10 And I'll note that it's kind of difficult to get -- to 11 obtain comparable census data on income because they 12 tend to -- to release that data by state over time. 13 And so what I can tell you is that most of the income 14 categories are representative of the state of Texas 15 except for the lowest income category and the highest 16 income category. We have some under-representation of 17 individuals in the less than 20,000 dollar category, 18 and we have over-representation in the more than 19 100,000 dollar category. This can be due to a couple 20 of factors. One, it could be just -- it's simply the 21 fallibility of human interaction and -- and giving us 22 inaccurate income information, but probably more so, 23 it's that condensed field period that we had. If we 24 have more time to try and -- and complete more 25 interviews with a -- with a more representative 0047 1 sample, then those figures tend to even out. But none 2 of our demographics are -- 3 COMMISSIONER COX: How were your -- how 4 were your sample items selected? 5 MR. CANNON: I'm sorry. Would you -- 6 COMMISSIONER COX: How did you select 7 these 1200 people? 8 MR. CANNON: Okay. It was a -- a 9 random sample of -- of households with telephones 10 is -- is what we begin with. These are not listed 11 telephone numbers. These are randomly-generated 12 telephone numbers, represented about the state 13 geographically. And when we attempt to reach a 14 household, it can be -- it might be a disconnected 15 number; it might be a business; or it might be a 16 household. And when we -- when we do make contact 17 with the household, we then randomly select an adult 18 within the household to participate in the survey. So 19 that -- that individual is -- is essentially 20 representing the household rather than simply 21 themselves. 22 Education demographics, again, are -- 23 are pretty close to -- to what we can gather from 24 census data, although again, we have a slight 25 under-representation of people with less than a high 0048 1 school diploma, and an over-representation of people 2 with a college or a graduate degree. I'd like to note 3 that that category labeled College Degree is -- is -- 4 includes college and graduate degrees. There does 5 tend to be in -- in survey research, an overreporting 6 of education. In other words, people tend to inflate 7 their -- their reported educational attainment level. 8 A lot of people that have attended college but didn't 9 graduate consider themselves as having a college 10 degree. So that -- that would explain that 11 over-representation in there. 12 Our ethnic breakdown. Census data 13 indicate that statewide the population of -- of 14 White -- White residents is about 56.3 percent, as 15 opposed to 66.7 in our sample. African-American or 16 Black residents represent about 10.9 percent, 17 according to the census, so we're right on there. The 18 Hispanic or Latino residents make up closer to about 19 29 percent, as opposed to the 17 and a half percent we 20 have here. And the Other category, census data say 21 that that is at 4.2 percent as opposed to 5.4. 22 So, really, the -- the category that 23 we were the farthest off on was the Hispanic and 24 Latino category, and I attribute that to, again, a 25 condensed field period where we weren't able to make 0049 1 contact, especially with a number of Spanish-speaking 2 households. We have Spanish-speaking interviewers, 3 and we had a -- a Spanish version of the -- of the 4 survey instrument that we administered to 5 Spanish-speaking households, but we do have -- we did 6 have a portion of households that we simply couldn't 7 track those people down in time to include them in -- 8 in the report. And so I think if we had a longer 9 field period, those numbers would -- would much more 10 closely match census data. 11 But the important thing to keep in 12 mind, when looking at this, is when we make 13 comparisons within a category, say, for example, if we 14 want to compare ethnic groups, the proportion of 15 respondents isn't quite as important as the number of 16 respondents. Okay? Because essentially we're 17 controlling for ethnic group, so what we -- we need to 18 make sure is that we have enough members of each group 19 to make a valid comparison. And in this case we do 20 have enough members of each group to make valid 21 comparisons within this category. 22 COMMISSIONER COX: So you're going to 23 be telling us that you adjusted these results so that 24 even though the Hispanic group here was only 17 and a 25 half percent of the total, they actually were blown up 0050 1 to 29 point whatever that other -- other number was? 2 MR. CANNON: No, sir. No, sir. These 3 are unadjusted. We did not -- we did not adjust the 4 figures. Let me clarify my previous point. And that 5 is, that when we make comparisons between ethnic 6 categories, the important thing is having enough 7 members of each category to make a valid comparison. 8 Okay? Where the percentage comes in is when we make 9 projections to the statewide population overall -- 10 okay -- just as a group, Texas residents. That's 11 where you become a little more concerned with -- with 12 representation. But when we're comparing within 13 groups, it's more important that we have a large 14 enough number, an absolute number, within each group 15 to make a valid comparison. 16 COMMISSIONER COX: Are you going to 17 help us understand, as you go through this, how the 18 fact that the Hispanic representation was 17 and a 19 half, rather than 27 and a half -- if that's the right 20 number -- didn't bias the results of your survey? 21 MR. CANNON: I -- I can't guarantee 22 that it did not bias the results because -- because -- 23 COMMISSIONER COX: But you're going to 24 tell us what you did to try to keep it from biasing? 25 MR. CANNON: Well, what we did was -- 0051 1 was we used -- we -- we didn't -- okay. First of all, 2 we could weight the data, is -- is an adjustment that 3 you referred to, to essentially give Hispanic and 4 Latino respondents heavier weight so that it would be 5 as if we had 27 or 28 percent. 6 COMMISSIONER COX: But you say you 7 didn't do that? 8 MR. CANNON: We did not do that. The 9 reason was that we wanted to maintain consistency 10 with -- with previous reports. Because if you -- if 11 you weight the data after all these years of not 12 weighting the data, that can cause all kinds of 13 misleading conclusions about what happened between 14 2002 and what happened, you know, between 2002 and 15 2004. I would -- I would suggest consideration of -- 16 of weighting the data in future iterations of -- of 17 the -- of this study. 18 COMMISSIONER COX: Well, it -- it 19 sounds like that when you say you didn't weight the 20 data to stay consistent with previous studies, you're 21 saying that they were inconsistent, too, because they 22 may have had this same kind of aberration. And it 23 seems to me like that -- it seems intuitive that you 24 would weight the data to get the best results. And I 25 understand your sensitivity to comparability as well, 0052 1 but it seems like your recommendation that we should 2 weight the data is one that we should carefully 3 consider. 4 MR. CANNON: I -- I would -- I would 5 urge consideration of that. And it's particularly 6 important when making inferences to the statewide 7 population of adults. It isn't as important when 8 you're comparing within this group, like I said. 9 But -- but it would help, I believe, because as you 10 mentioned, we can't guarantee that there wasn't a bias 11 because we essentially have some -- some censorship 12 there because of the short field period. We weren't 13 able to get all of the respondents we would have 14 normally gotten from particular categories. 15 CHAIRMAN CLOWE: Would you direct me to 16 the page in the written report where this chart 17 appears? 18 MR. CANNON: Page four, table one. 19 It's not in this same format, but table -- table one 20 on -- on page four, the second column, says 21 Respondents in Sample. 22 CHAIRMAN CLOWE: Okay. 23 MR. CANNON: Under Ethnic Group. 24 CHAIRMAN CLOWE: Okay. Great. Thank 25 you. That's what I needed. 0053 1 MR. CANNON: Now, to the substantive 2 results. What we found was that about 47 percent of 3 those that we surveyed report having played a Texas 4 Lottery game within the past year. And the average 5 amount spent per month was 76 dollars and 16 cents, 6 and I will have additional remarks on that figure 7 coming up. 8 Overall participation, as I noted, is 9 under 50 percent, which continues a recent trend of 10 decline in lottery play among Texans, which as we saw 11 from the previous presentation, revenues are, in fact, 12 up. It's -- it's -- rates of participation are down. 13 So we have fewer people reporting having played, but 14 they're actually spending more money when they're 15 playing. 16 And we have an issue of outliers in 17 this data set. As I -- as I noted before, the average 18 amount spent per month on lottery games among those 19 playing was 76 dollars and 16 cents. However, when 20 outliers are removed, it drops to 45 dollars and 52 21 cents a month. Now, when I say outliers, what I mean 22 is that we have a few cases of extreme -- reports of 23 extreme spending that are questionable. We wonder 24 about the -- the validity or the veracity of those 25 reports. People that report spending, you know, in 0054 1 excess of two, 3,000 dollars a month on lottery games. 2 In the report, we did keep the -- the -- the outliers 3 in for most of the analysis. But we did note 4 throughout the text of the report how the results 5 changed when we removed those outliers. We didn't 6 want to make a subjective judgment on what was a 7 reasonable amount of money to spend for money -- on 8 the Lottery, so we left a -- left those people in 9 there, but we did want to highlight what happened to 10 the results when you take those few extreme cases out. 11 Okay? And the people that we removed were people that 12 fell more than two standard deviations above the -- 13 the average spent per month. 14 COMMISSIONER COX: Now, what did you do 15 with outliers to attempt to verify the plausibility of 16 their reports? 17 MR. CANNON: What we -- 18 COMMISSIONER COX: If -- if they 19 reported 3,000 a month of play, did you look to see if 20 they had at least, say, double that in income? 21 MR. CANNON: Yes, sir. Those that -- 22 those that reported the extreme high end of spending 23 on the Lottery did, in fact, report earning more than 24 a hundred thousand dollars a year. And that's why we 25 didn't want to just drop them from the analysis. But 0055 1 they also -- I believe there was one -- one respondent 2 that -- that was in that group reported over hundred 3 thousand dollars in income, less than a high school 4 education, and -- and a very large expenditure per 5 month on lottery games. So while that's certainly 6 possible, if -- you know, it does raise a bit of a red 7 flag. And so we wanted to sort of present the 8 analysis both ways, with those folks and without them. 9 COMMISSIONER COX: Now, you're -- 10 you're dealing with a very difficult issue there. And 11 I'm glad you didn't ignore them, but I am glad you 12 have told us what it would have been if -- if they had 13 been fibbing to us. 14 MR. CANNON: Yes, sir. Okay. These 15 charts that I'm going to present will show the impact 16 of the outliers. In this figure here, we have overall 17 Lottery played by income category. The orange bars 18 represent the percentage of people within that 19 category playing the Lottery in the last year. And 20 the darker columns represent the amounts spent per 21 month on all games among those playing. So the scale 22 does exceed 100 because we wanted to fit both 23 percentage playing and also amount spent per month. 24 Then you can see, across income 25 categories, the rate of play is -- is quite stable. 0056 1 There is -- there is very little difference between 2 any two categories in the proportion of people 3 playing, but there is quite a bit of variation in the 4 amount spent per month. You can see that when we 5 include these extreme cases, a few of them did fall 6 into the lower income categories. And you can see 7 that there is quite a bit of variation in the amount 8 spent per month. And it -- and it appears from this 9 chart that lower -- people on the lower half of the 10 income range here are spending much more than people 11 in the -- in the upper half. However, when we remove 12 the outliers, those bars flatten out quite a bit. 13 There are still some observed differences there, but 14 the differences are not -- not statistically 15 significant. 16 Here is a chart that summarizes overall 17 lottery play and expenditure by education. You can 18 see the impact of those few cases that reported less 19 than a high school diploma, but a rather extreme level 20 of expenditure on the -- on the Lottery each month. I 21 don't believe I have a chart with the outliers 22 excluded for this one, but what I can say and we note 23 in the report is that when we exclude the outliers 24 from this chart -- and I don't have a good answer as 25 to why I don't have that chart -- but the less than 0057 1 high school diploma spending per month drops down to a 2 level that is almost identical to those with a high 3 school degree when we take out those -- those extreme 4 outliers. So, again, we see a flattening out of -- of 5 those bars. 6 In terms of ethnic group, we see that 7 there is some variation among ethnic groups in 8 reporting having played the Lottery in the last year 9 and, also, variation in the amounts spent per month on 10 games among players, between the ethnic groups. And 11 we did find a significant -- a statistically 12 significant difference here, and that is that Hispanic 13 or Latino residents are significantly more likely to 14 play the Lottery or to -- to report having played the 15 Lottery than other ethnic groups. However, 16 African-American or Black players spend more when they 17 do play. They're -- they're the least likely to play, 18 but they tend to spend more when they play. I will 19 note, however, that the differences in amounts spent 20 per month across the ethnic groups is not 21 statistically significant, and we can discuss that 22 later if -- if you would like. 23 By age category, again, here is an 24 outliers versus non-outliers. The impact of outliers 25 becomes more evident when you have -- when you split 0058 1 the data up into more groups because there are fewer 2 people per group. So outliers falling in -- into the 3 group are going to have a greater impact. Here we see 4 that there is not a great deal of variation across age 5 categories in reporting having played. There is 6 variation in amount spent per month. But, again, this 7 is with the outliers included. When we remove them, 8 we can see it flattens out quite a bit. And there is 9 not a lot of variation across age categories in the 10 amount spent per month among lottery players and no -- 11 no statistically significant differences. 12 Gender. The genders are quite 13 comparable in terms of both likelihood of play and 14 also amount spent per month. A slightly higher 15 percentage of -- of males report having played the 16 Lottery than females, and males also report spending a 17 little bit more per month on the Lottery when they do 18 play. 19 Individual game play statistics. This 20 is, again, because we -- we have relatively smaller 21 categories here because we split it up into several 22 games, we wanted to compare the outliers included 23 versus the outliers excluded. You can see that Lotto 24 Texas and scratch games were the two highest reported 25 plays. And scratch games by far were -- show the 0059 1 greatest expenditure per month. When we exclude the 2 outliers, we see those expenditures come down almost 3 across the board, but the -- that variation remains 4 that scratch games still appear to have the highest 5 amount spent per month. And Lotto Texas and scratch 6 games have the highest reported playing rate. 7 Here is a -- a chart that summarizes 8 the percentage of respondents reporting having played 9 the Lottery over the last several years, from 1992 to 10 2004, and you can see the peak was 1994 with 71 11 percent. There has been a gradual but -- but 12 noticeable decline since that time. However, as -- as 13 was noted before, revenues are -- are up, so we can -- 14 we can discuss that if you would like as well. 15 COMMISSIONER COX: Do you have any 16 observations about why this might be the case? 17 MR. CANNON: Well, it would be, you 18 know, somewhat speculative, but I would -- I would 19 have to believe that there is some impact of the 20 proliferation of competing games, such as on-line -- 21 on-line games, sort of low risk, such as on-line poker 22 tournaments and, you know, on-line gambling. Can I -- 23 COMMISSIONER COX: Such as 24 eight-liners? 25 MR. CANNON: Excuse me? 0060 1 COMMISSIONER COX: Such as 2 eight-liners? 3 MR. CANNON: Correct. And -- and 4 Internet-based as well. And I know that, you know, 5 between 2002 and 2004, the revenues for Internet-based 6 gambling increased from, I believe, about four billion 7 dollars a year to seven billion dollars a year, so 8 that's a fairly substantial increase. 9 COMMISSIONER COX: Did you have any 10 questions that might say, five years ago did you play 11 the Texas Lottery and if you don't play it now, can 12 you tell me why? 13 MR. CANNON: No, we did not. We had -- 14 there was a question about how long they had been 15 playing a particular game, but we didn't find it all 16 that useful because a lot of the games just haven't 17 been around long enough to -- to get anything useful. 18 So everybody is basically saying they've been playing 19 it since it started, so there was very little 20 variation. But that would be -- that would be a -- a 21 very useful avenue, I think, to explore, is -- is 22 whether they've stopped playing the Lottery but maybe 23 gone to other -- other games, or stopped completely 24 playing these types of -- of games. 25 COMMISSIONER OLVERA: And do you 0061 1 contemplate -- well, if you do this in the future, do 2 you contemplate asking that type of question, in terms 3 of where your gambling dollars are going and are you 4 playing something else, vis-a-vis Internet gambling or 5 something like that? 6 MR. CANNON: Yes. I would -- I would 7 definitely urge consideration of that. You know, 8 we -- we sort of follow the lead of -- of the 9 Commission on -- on the content of the questionnaire. 10 And I know that there are comparability issues across 11 yours. You want to be able to -- to put together 12 charts like this, where you have the exact same 13 question over time. But I do believe that -- that it 14 would benefit from a close looking-over and 15 adjustment. I know that this year the big adjustment 16 we made was an adjustment to the income categories 17 because, previously, the -- the upper income level was 18 50,000 dollars and over, and with the median income 19 in -- in Texas at about 43,000 dollars, that's 20 unreasonably low as -- as an upper limit. So we did 21 expand our -- our income categories. But that was 22 the -- the major change we made. But I would -- I 23 would suggest adding some questions to, you know -- to 24 react to -- to what we see here. 25 COMMISSIONER OLVERA: Was that 0062 1 seven billion dollar figure nationwide? 2 MR. CANNON: Yes. 3 MR. GREER: Commissioner, I would like 4 to address this slide specifically. What you went 5 into is an area that I think we'll continue to look 6 at. This is an opportunity to address the challenge, 7 because of the competition, and, specifically, in our 8 re-org plan we do have research, marketing-oriented 9 minds that will be coming into a mode where we can 10 address some of these issues. Eight-liners, 11 obviously, is a -- is a major role that we did do some 12 study last year on and will continue to pursue, as 13 well as what was mentioned in reference to on-line 14 gaming. So there are some challenges that are out 15 there for our industry as a whole, and we're not just 16 acting alone on them. I know that NASPL was looking 17 at this as well. So, you know, we'll certainly take 18 advantage of the information that's come forward in 19 this report and be monitoring that and getting back to 20 you as we move forward on some of these research 21 projects. 22 COMMISSIONER OLVERA: Okay. 23 MR. CANNON: In conclusion, again, we 24 saw that with -- less than half of Texas residents 25 have played the Texas Lottery game in the past year, 0063 1 according to those residents, which continues the -- 2 the decline in participation trend in recent years. 3 Participation in the Lottery in pure amount of 4 spending are fairly consistent across income 5 categories, especially when we remove those outliers. 6 Those in lower income categories spent on average 7 about the same amount in real dollars as those in 8 higher income categories. Of course, that -- that 9 also equates to a higher proportion of income being 10 spent, but in terms of real dollars, it's -- it's 11 stable across income categories. 12 And also, lottery participants with 13 higher levels of education tend to spend less per 14 month on lottery games, but we do address that in 15 detail on that chart there. But that was something 16 that we found, that -- that those with higher levels 17 of education tend to spend less per month on lottery 18 games. 19 COMMISSIONER COX: Now, was that with 20 or without the outliers or both -- in both cases? 21 MR. CANNON: I believe it was in both 22 cases. Hispanic residents are more likely to report 23 participating in lottery games than residents from 24 other groups, and that result was statistically 25 significant. And among lottery participants, 0064 1 African-American or Black residents report spending 2 more per month on lottery games than residents from 3 other race or ethnic groups. Now, it's not 4 significantly more. It was not a statistically 5 significant result, but it was notable because Black 6 residents are the least likely to participate, but 7 they report the highest level of spending, so we 8 thought that was -- 9 COMMISSIONER COX: Now, let -- let me 10 be sure I understand what you're saying when you say 11 statistically significant. We're all accustomed to 12 hearing that one Presidential candidate is ahead of 13 another by 49, 48, but there is a plus or minus three 14 percent error, so you can really conclude nothing. 15 Are you saying the same kind of thing? 16 MR. CANNON: Yes, sir. It's -- it's -- 17 it's analogous. Essentially, when I say statistically 18 significant, we do tests of significance because we're 19 working with samples. Okay? If we're working with -- 20 with a -- a census, where we interviewed everybody, 21 margin of error isn't even an issue, obviously. But 22 because we're working with a sample, we use statistics 23 to determine what the probability is that the 24 difference we see, say, in spending per month would be 25 found if we were to interview every resident in the 0065 1 state. In other words, when I say it was 2 statistically significant that -- that Hispanic 3 residents were more likely to play the Lottery, then I 4 can say with confidence that if we were to repeat this 5 survey a hundred times with a hundred different 6 randomly selected populations, we would find that same 7 difference 95 times out of a hundred. But when it's 8 not significant, we can't say that. If we -- if it's 9 not significant, what we're saying is that we can 10 repeat this survey a hundred times, and -- and the 11 difference we see there might disappear one time; it 12 might reappear and might reverse, so we -- we don't 13 have any confidence in making a -- a conclusion. 14 COMMISSIONER COX: So both of these 15 conclusions, you said, fall into the category of if 16 you did it a hundred times, it might not be that way 17 the other 99? 18 MR. CANNON: The first conclusion up 19 here is -- is statistically significant. 20 COMMISSIONER COX: So that one -- we 21 get that every time? 22 MR. CANNON: That one -- we -- we would 23 find that if we repeated this over and over again. 24 COMMISSIONER COX: Okay. 25 MR. CANNON: The second one is not 0066 1 statistically significant. So we might -- we might 2 not find that -- that same result, but -- 3 COMMISSIONER COX: In your written 4 report, you indicated these things? 5 MR. CANNON: Yes, sir. 6 COMMISSIONER COX: This was a 7 conclusion, but it -- the difference was not 8 statistically significant? 9 MR. CANNON: Yes, sir. Can -- 10 COMMISSIONER COX: And anyone reading 11 this report will understand what statistically 12 significant means? You have helped them with that? 13 Your explanation here has really helped me. 14 MR. CANNON: Thank you. I -- I hope we 15 did. There were three of us that worked on this, and 16 I -- and I hope one of us addressed that issue. We -- 17 we try to be careful about that. If -- if additional 18 clarification is -- is needed for approval of the 19 report, I can certainly write that up and -- and 20 include it. 21 I would be happy to answer any 22 additional questions that you have at this time. 23 COMMISSIONER COX: I have one more. 24 If -- if you took the results that you 25 had from -- from this sample and blew it up, how close 0067 1 would you come to Texas Lottery revenues? 2 MR. CANNON: I'm not sure that I 3 understand the question. 4 COMMISSIONER COX: Well, you have -- 5 you have spending per person representing, and each 6 person represents some segment of the population. So 7 let's say that it's strictly numerical and you had 8 1200 people, and there are 24 million people in Texas. 9 Then you would divide 1200 by 24 million, give me a 10 number, multiply that times income. How close would 11 you come to 3.5 billion? 12 MR. CANNON: Since I didn't do that, I 13 can't say, you know, for sure, but because we have a 14 valid sample, I would say it would -- it would come 15 very close. 16 COMMISSIONER COX: And would it be 17 difficult to do that? 18 MR. CANNON: No. It's -- it would be a 19 matter of mathematics. 20 COMMISSIONER COX: The -- I ask this 21 for a couple of reasons. One is just kind of a sanity 22 check on -- on your results. The other is, we had a 23 meeting recently with some other folks who gather data 24 for us, and they indicated to us that this would be 25 very difficult to do because people tend to 0068 1 underreport their spending on the Lottery, that there 2 is a downward bias. Other people have told me there 3 is an upward bias. And I would really be interested 4 in seeing what you find. 5 MR. CANNON: Uh-huh. And -- and I 6 think we would be able to -- to at least provide a 7 partial answer to that because I've heard -- I've 8 heard the same thing. There is underreporting and 9 overreporting, and I'm not sure what is actually true. 10 What I do know is that, obviously, your revenue 11 figures, you can have confidence in, because they're 12 objective. 13 COMMISSIONER COX: Okay. 14 MR. CANNON: We would be basing ours 15 on -- on, you know, self-reports, which -- which are 16 obviously fallible to a degree. But -- but I don't 17 think it would be difficult to -- to do the math on 18 that and -- and -- and see how close we actually are. 19 COMMISSIONER COX: One of the things it 20 might help with, although I know that there -- I don't 21 know whether you can draw a statistical conclusion 22 from it, is if you blow it up with the outliers and 23 it's way over the top, and without them, it's right 24 on, that might give you some worthwhile information 25 about -- 0069 1 MR. CANNON: Sure. Absolutely. 2 COMMISSIONER COX: -- where the 3 outliers really are. Thank you very much. 4 CHAIRMAN CLOWE: Mr. Cannon, I want to 5 thank you for being here this morning and giving us 6 this presentation. I also want to thank the Texas 7 Tech University for this study. We do appreciate it. 8 Some of the questions I'm going to ask you might seem 9 unfriendly, and I want you to understand that the 10 reason I'm asking you these questions is that you're 11 talking about the people who play the games of Texas. 12 It's our market. This is about a three billion dollar 13 a year, three and a half billion dollar a year 14 operation, and to know the players and to understand 15 who is giving the Lottery their dollars is very 16 important to this Commission. And what I see in your 17 report is a sea change from the last report we had. 18 We do this every two years. I think that report was 19 done by the University of Texas. 20 And I would like to talk with you about 21 two areas here this morning. One is the validity of 22 your numbers, and I'll ask you to defend that. And on 23 the second area, what the results are really telling 24 us. And there is very interesting implications there, 25 and you just really concerned me when you put two 0070 1 conclusions up there, and you said one was 2 statistically supportable and the other wasn't, but 3 you didn't show it on that slide. Commissioner Cox, 4 fortunately, went to the qualification. I'm concerned 5 about people that are going to look at this and draw 6 their conclusions, and I drew conclusions from your 7 last two conclusions that was radically changed when 8 Commissioner Cox asked you those qualifying questions. 9 My understanding is that you came into 10 this project late and that there was a time constraint 11 in order to meet the deadline. And in the 12 qualification of your statistical work, you've 13 mentioned two areas more than once. One was the size 14 of the sample and the other was the study period. And 15 to the layperson, in sampling, that suggests to me 16 that you feel like it might have been better done if 17 you didn't have the time constraint and you had more 18 people in the sample. Is that a correct assumption on 19 my part or not? 20 MR. CANNON: Well, if you talk to 21 anybody in -- that -- that does survey research for a 22 living, they always want a larger sample, first of 23 all, because the larger -- the larger your sample, 24 obviously, the more -- the closer you're getting to 25 interviewing everybody in the population. Yes, I 0071 1 would have preferred to -- to have more respondents in 2 the sample. I believe we -- I saw it was 1700 is a -- 3 is a typical number from -- from previous reports. We 4 were able, in the time allowed, to get 1200, which, in 5 essence, the -- the difference between those two -- 6 there is -- is really twofold. First, we would have 7 gotten more respondents in each of the relevant 8 categories, demographic categories; and, secondly, it 9 would lead to a somewhat smaller margin of error. So 10 we're dealing with about a 2.9 percent plus or minus 11 margin of error with the 1255; whereas, if we go out 12 to 1700, that would come down to maybe two and a half. 13 And so you -- you know, with a larger sample you can 14 have more confidence in the data. It's as simple as 15 that. However, having said that, that does not mean 16 I'm not confident in the results that -- that we have 17 here. We did have an adequate sample size. I would 18 have preferred a larger sample size, but I'm -- I'm 19 still -- I -- I stand by the results that we have 20 here. 21 CHAIRMAN CLOWE: And the time 22 constraint dictated the sample size. Is that correct? 23 MR. CANNON: Yes. That's correct, sir. 24 CHAIRMAN CLOWE: And when you pointed 25 out the anomalies to us in the respondents in the 0072 1 sample -- and one of the most glaring to me is the 2 ethnic group, the Hispanic 17 and a half percent as 3 opposed to what it is actually statewide, that gives 4 me discomfort about the validity of the results, and 5 you seem more comfortable. Is that correct? 6 MR. CANNON: Yeah. We did receive 7 responses from 200 respondents in the Hispanic Latino 8 category, which for statistical comparisons is -- is 9 an adequate number. You can talk to statisticians 10 or -- or survey research professionals, and they're 11 comfortable with a sample size of -- of 75 to a 12 hundred, and we have 200. The only -- the only real 13 reason to have any concern there is, as I said before, 14 when you're making generalizations about the 15 population of Texas as a whole, because it might 16 change slightly if we got that representation up. 17 However, it -- it's not going to change substantially 18 because it's still a relatively small number that 19 you're talking about. And then when you parse that 20 out into players versus non-players, it becomes even 21 less of an impact. So I am -- I'm still comfortable 22 with -- with the distribution that we had. Again, I 23 would have -- I would have liked to have -- to have 24 received more responses, but it simply wasn't 25 possible. But I still stand by the results that -- 0073 1 that we were able to get. 2 COMMISSIONER COX: Could I ask a 3 question? 4 MR. CANNON: Sure. 5 COMMISSIONER COX: Further to that 6 point, what I understood you to say is that while 7 you -- your -- the Hispanic people were 8 underrepresented in your sample, there were a 9 sufficient number of them that you believe you can 10 draw statistically significant -- or valid inferences 11 about the percentage of those people that participated 12 and to the extent they participate, but you may be 13 less sure when you go to blowing up the sample to 14 the -- what percentage of Texans play? 15 MR. CANNON: Yes, sir. That -- that's 16 well put. 17 COMMISSIONER COX: Thank you. 18 COMMISSIONER OLVERA: And -- and to 19 further that, you said overall with the group study at 20 1255, I think you mentioned plus or minus 2.9 percent. 21 How does that change with respect to the Hispanic 22 issue of 30 percent versus 17 percent? Would it still 23 be -- what range would you give there? 24 MR. CANNON: Well, the -- you can come 25 up with a margin of error for any particular subgroup. 0074 1 Now, for a sample of 200, obviously, the -- the margin 2 of error is going to be -- is going to be larger. I 3 don't know off the top of my head what it is. It's -- 4 it involves a square root, and so I can't calculate it 5 in my head. So that, yeah, the -- the margin of error 6 within any particular subgroups, because they're 7 simply smaller than the -- than the full sample, is 8 going to be -- is going to be wider than that 2.9 9 percent, but the sample as a whole is -- is about, you 10 know, two, 2.8, 2.9 percent. 11 CHAIRMAN CLOWE: And were you furnished 12 a copy of the University of Texas study that we 13 received two years ago? 14 MR. CANNON: Yes, sir. 15 CHAIRMAN CLOWE: And if you know, off 16 the top of your head, what was the response that they 17 had in the Hispanic category, for example, since we're 18 talking about that group? 19 MR. CANNON: Off the top of my head, 20 I -- I can't remember. It was -- it was closer to 21 the -- the census data than -- than this year. I do 22 know that, but I -- I can't give you the exact figure. 23 CHAIRMAN CLOWE: And do you happen to 24 know -- Mike, maybe you know -- what the total sample 25 size was in that study? 0075 1 MR. FERNANDEZ: No, I don't. 2 MR. CANNON: I -- I believe it was 3 around 1700. 4 CHAIRMAN CLOWE: Well, this is your 5 report. It is not the Commission's report. And as I 6 said, I appreciate your being here and your answers, 7 and I know you're a creditable professional. I will 8 have to say to you that, as a layperson, comparing 9 what we're seeing, because it is such a great change, 10 I am less than satisfied to accept the results. I'm 11 going to accept them because this is the report, and 12 we're going to deal with it. But I would be more 13 comfortable if you had had more time and if you had 14 had a broader sample. And, yes, I understand 10,000 15 would be great, but that probably is prohibitive for a 16 number of reasons. But a larger sample size would 17 give me greater comfort. 18 But nonetheless, having argued with you 19 now about the validity of the sample, let's move into 20 what the indications are. I don't think I'm going to 21 argue with that, but maybe I will. My recollection 22 from the last study that we had -- and this is the sea 23 change that I think I am seeing -- was that our 24 predominant player was an Anglo male whose income was 25 40,000 dollars and more per year, and had some college 0076 1 education. And what I'm seeing in this report is our 2 predominant player is either a member of the Hispanic 3 or the African-American ethnic group, particularly the 4 African-American is playing less but spending more 5 dollars. And I am uncomfortable with the outliers 6 being taken out, but in or out, the lesser-educated, 7 lower-income group is the predominant player. 8 MR. CANNON: I think we need to -- to 9 be cautious here when we -- when we talk about 10 predominant player. When you note that from the 2002 11 report that the predominant player was White male, 12 40,000 dollars or more, in absolute numbers that's 13 still true. 14 CHAIRMAN CLOWE: That is still true? 15 MR. CANNON: In absolute numbers, 16 because -- but it's a function of the fact that -- 17 that the state is made up of more White residents than 18 any other group. So in absolute numbers, we're -- 19 we're talking about proportions here. So 20 proportionally, yes, Hispanics are more -- more likely 21 to play. But in absolute numbers, that's still not 22 true because they make up somewhere around 30 or a 23 little bit less than 30 percent of the population, 24 whereas Whites make up well over half of the 25 population. So, you know, it -- it's kind of tricky 0077 1 to -- to say, if -- if somebody was to ask, who is the 2 typical lottery player. 3 CHAIRMAN CLOWE: And that's the 4 question. 5 MR. CANNON: Well -- 6 CHAIRMAN CLOWE: That is exactly the 7 question. 8 MR. CANNON: Well, it's still -- in 9 absolute numbers, it's still the -- the White male, 10 you know, in the -- in the sort of middle income 11 range. 12 CHAIRMAN CLOWE: Where -- where is that 13 in this report? Point that out to me. 14 MR. CANNON: There is nowhere in the 15 report where -- where there is a statement that says, 16 the average lottery player. Okay? Because -- 17 COMMISSIONER COX: Let me stop you 18 there. 19 MR. CANNON: Yes. 20 COMMISSIONER COX: You saw the Texas 21 report, so you knew how they were reporting, and you 22 chose to report it differently. Can you help us with 23 that transition? 24 MR. CANNON: Yes, sir. We had -- we 25 had received some documentation from the Commission 0078 1 that essentially was a reaction to the -- to the 2 previous report by -- I'm trying to remember who -- 3 who actually wrote that, but they -- they were not 4 satisfied with -- with the way the -- the results were 5 reported. We looked over it and we came to the same 6 conclusion, that the approach that was taken before 7 led to some -- what I would characterize as 8 potentially misleading conclusions. 9 One of the big problems was the way 10 income was defined. You had a very large upper income 11 category because it was defined -- the upper income 12 category was 50,000 dollars or more a year. That 13 included an awful lot of people. And so the -- the 14 conclusion that people in the highest income category 15 are more likely to play was rather misleading in -- in 16 our estimation, because when you break it down into 17 more specific income categories, you see that -- that 18 it -- it's -- that's not quite the case. It's just 19 that you have so many people in that income category 20 that they sort of swamp the results on everybody else. 21 COMMISSIONER COX: So you broke that 22 one into four? 23 MR. CANNON: Yes. And the lower income 24 group, I believe they had it defined as something like 25 less than 10,000 dollars a year, which is -- is a 0079 1 pretty extreme lower end of the category. And so you 2 had -- essentially, what you had in a lot of the 3 charts that -- that were presented were some bars like 4 on a bar chart where one bar contained several hundred 5 respondents and another bar might contain two or 6 three, and it wasn't noted in the report. And 7 that's -- that's kind of the problem that we had with 8 that is that it was not explicit about who -- who is 9 being represented here. And you had some very small 10 cell sizes, essentially, is what it comes down to. 11 When you break it down, say, race by income, they had 12 some cell sizes that contained so few people, but 13 there was still a -- there was still a bar 14 representing those people on the chart, and then 15 another bar might represent a huge number of people, 16 and they're drawing conclusions based on that. And we 17 found that misleading. 18 CHAIRMAN CLOWE: Well, back to your 19 comment about, in absolute terms, the predominant 20 player still is the Anglo male who is over 40,000 a 21 year in compensation and who has some college 22 education. I want you to understand that -- and at 23 this point in time maybe I'm taking a -- a position 24 based on people who are not at this meeting. There is 25 a segment in this state of thinking that don't want 0080 1 legalized lottery operations, and the criticism of 2 this operation is that we are taking money from people 3 who are -- we, being the Lottery operation -- we are 4 taking money from people who are least able to play 5 the games of Texas. And they have identified in that 6 criticism minority ethnic groups, lower-educated 7 groups, lesser-income groups. And in reading this 8 report, that concern surfaced in my mind. Would you 9 speak to that? 10 MR. CANNON: Yes. I believe in the -- 11 in the report we tried to be careful about noting 12 where definite conclusions were warranted and -- and 13 where they were not. In our brief conclusion at the 14 end, we summarized the -- the results that -- that 15 came out as statistically significant, and thus were 16 drawing a conclusion based on -- on the results. And 17 those results did not show a difference between 18 education levels or -- or income levels in 19 participation in the Lottery or in spending. And we 20 noted that in the report. What we did find was that 21 Hispanic and Latino residents, as a population, are 22 more likely to play the Lottery, but they're not 23 spending significantly more. 24 CHAIRMAN CLOWE: Well, I read your 25 conclusion, and I -- I read that statement, but I 0081 1 didn't see the verbiage to back that up. And I can 2 assure you that there will be those who will see this 3 report, read it, and will not understand that 4 conclusion or will choose to take a conclusion, I 5 think, from the data that they see and deal with it as 6 they see it, which is certainly their right. 7 My questions in -- in this line of 8 discussion is for clarity. I want there to be no 9 mistake about the fact that you don't have a sentence 10 in this report that says, still, the predominant 11 player is one, two, three, four. And I just wonder 12 if, because Texas is such a low per capita participant 13 compared to other states, that doesn't exacerbate the 14 results that we're talking about where the minority 15 player, for example, the African-American, which you 16 pointed out is a higher dollar player for a smaller 17 percentage of the total population, that can have a 18 bearing on that. And I -- I think it's mind -- it's 19 my role to be mindful of both sides of this issue. 20 And I want a study like this, when it comes out, to be 21 fully understood by everybody who reads it so that it 22 is used for the benefit of the people of the state. 23 And there are those who are pro and those who are con. 24 Now, let's talk about a pro side of it. 25 We spend upwards of 30 million dollars a year 0082 1 advertising. And a criticism I think that we heard, 2 Reagan, of this Commission, this agency, is that we 3 are directing dollars at minority players. And there 4 is a philosophical issue here in my mind. You know, 5 if you're not targeting your players, what is the 6 sense of spending dollars for advertising. And yet, 7 if we are targeting those members of our player group 8 that are lesser educated and have a lower per capita 9 income, is that fair? And is that something that the 10 State agency should be doing? That's a philosophical 11 question. Do you feel philosophical this morning? Do 12 you want to take a crack at that? 13 MR. GREER: Well, certainly the -- the 14 whole aspect of what you've talked about is something 15 that we do look at when we do spend advertising 16 dollars. The fact of the matter is that we have two 17 advertising groups that we work with, one in the 18 general market and one in the minority market. When 19 you look at the spending, based on this report, you 20 know, we're in an environment that I think shows, in 21 general -- and Robert Tirloni may need to help me with 22 some of the numbers on this -- the DDB contract 23 overall, in my mind, is around 16 to 17 million. Is 24 that correct, about what we spend in that venue? 25 MR. TIRLONI: The DDB contract is -- we 0083 1 spend approximately 23 million with DDB and 2 approximately nine million, nine and a half million 3 with The King Group. 4 MR. GREER: Right. So from that 5 perspective, DDB being the general market, and The 6 King Group being the minority market, this is going to 7 give us a chance to, you know, take a look at that but 8 continue to be sensitive toward the issue that you 9 talked about. 10 Philosophically, I'm very tuned in to 11 that, and I want there to be a clear understanding 12 that we are sensitive to the issue and are going to 13 address advertising dollars properly so that there 14 can't be any conclusions drawn that say that we are 15 prone toward one group or another from an ethnic 16 perspective, to try to lure them into purchasing the 17 product. 18 CHAIRMAN CLOWE: And -- and that's a 19 very important issue, I think, to this Commission, 20 Mr. Cannon, which you may or not -- may or may not 21 have been aware of, but there is a lot of criticism of 22 billboards, for example, of alcoholic beverages in 23 minority racial neighborhoods. And whether that's 24 justified or not, we don't want to see this agency 25 come under that sort of a color. And it's important, 0084 1 I think, to the Commission to be well balanced, and 2 this report should help us maintain a balance as we 3 further identify who our player is and what that 4 player wants. 5 I had another question, and it just 6 flew out of my mind. 7 COMMISSIONER COX: While you're 8 thinking of it. 9 CHAIRMAN CLOWE: Good. Good. Give me 10 a minute. 11 COMMISSIONER COX: Reagan, just so 12 that -- so that everyone here who reads this record 13 understands, would you explain why we have different 14 advertising agencies for the different markets? 15 MR. GREER: Specifically, there are 16 cultural differences and other issues that come 17 forward in a minority capacity that I think you 18 need -- you need to be very sensitive toward, and so 19 the decision was made -- recently we've re-upped, but 20 prior to me coming on board, that having a 21 minority-focused advertising agency would assist us to 22 have a better handle on what it is that, you know, 23 minority markets are -- are attracted toward or not 24 attracted to, cultural issues that may come into play. 25 We utilize different actors in each. 0085 1 COMMISSIONER COX: Yeah. That part I 2 understand, but I -- I thought I had an understanding 3 that we -- this was required by the Lottery Act. 4 MR. BENNETT: No. 5 COMMISSIONER COX: That's not correct. 6 So this is policy of this agency, as opposed to policy 7 made by the legislature? 8 MR. GREER: And apparently it's been 9 like that for many years. I don't know how long the 10 contracts have been divided out that way, but to be 11 frank with you, that's something that, with this 12 report, I want to relook at, the way that we do that. 13 How long have we had a split group, 14 Gary? 15 MR. GRIEF: Years. And I -- I can't 16 recall exactly when, but several years. 17 MR. TIRLONI: I -- I can't remember the 18 exact year. I -- I want to say, off the top of my 19 head, approximately '97 or '98 was when there was a 20 split from one agency handling the entire advertising 21 for the Commission to -- to two. At -- 22 CHAIRMAN CLOWE: That's right. It's 23 happened since I've been on this board. 24 MR. TIRLONI: Yes, sir. 25 CHAIRMAN CLOWE: I remember when it 0086 1 occurred. And I think it's been a very beneficial 2 thing. 3 MR. GREER: And I think part of the 4 sensitivity goes back to the HUB participation and, 5 you know, the issues that go on with that. And I 6 think it's been positive. And I've enjoyed working 7 with both groups because they bring different 8 perspectives to the table. And the way that we 9 approach each advertising agency might be subject to 10 whatever, you know, ideas that they come up with, and 11 they do have different ideas. So I think it's been a 12 good thing overall. 13 COMMISSIONER OLVERA: And -- and 14 Mr. Chairman, it -- it's coincidental, though, we had 15 a very similar conversation along these lines 16 yesterday with -- at least I did with Mr. Greer and 17 Mr. Grief and Mr. Fernandez, in that there is a fine 18 line or a fine area of distinction between, quote, 19 targeting with a negative connotation and yet 20 sensitive marketing in terms of it having positive 21 connotation. And I -- and I gathered from all the 22 heads involved that this Commission is very sensitive 23 to those needs of the -- the ethnic groups that we are 24 marketing. 25 CHAIRMAN CLOWE: We are indeed. And -- 0087 1 and, you know, we're not selling Coca-Cola, and we're 2 not selling Budweiser beer. We're selling a State 3 product to the citizens of the state, to the benefit 4 of the State. And I would hope we're not spending 32 5 million dollars if we don't think we're getting some 6 result for it. But on the other hand, as you pointed 7 out, in the negative connotation, I would hate to see 8 a lot of billboards in what are considered to be 9 economically downside communities, urging them to buy 10 lottery products. I -- and that is a fine line, and 11 they -- and we're trying to walk that line. I think 12 we're doing a good job. But I want to be mindful and 13 respectful of those people who don't want any lottery 14 operation in the state at all. And when this report 15 comes out, I would rather have had a discussion in 16 this meeting, airing all of these questions and these 17 issues, and have it up front, than I would having to 18 come back and say, well, now, what about this and, you 19 know, we didn't think about that. 20 In regard to the report, is this report 21 mandated by the legislature, or -- 22 MR. GREER: Yes, sir. 23 CHAIRMAN CLOWE: It is? 24 MR. GREER: It is a statutory report 25 that is done and has to be delivered prior to the 0088 1 convening of the legislature and is a part of my 2 position to be sure that this follows through and 3 happens. 4 CHAIRMAN CLOWE: So that's the reason 5 it comes every two years? 6 MR. GREER: Yes, sir. 7 COMMISSIONER COX: And I might add, I 8 think the constraints that you would prefer not be on 9 your work resulted from the fact that we put out an 10 RFQ -- correct me if I'm wrong, Mike -- and nobody 11 responded. 12 MR. FERNANDEZ: That's correct. 13 COMMISSIONER COX: And so we had to 14 modify it and do it again. 15 MR. FERNANDEZ: That's correct. 16 COMMISSIONER COX: And Texas Tech 17 stepped up to the plate. And we appreciate Texas 18 Tech stepping up to the plate, because we had to do 19 this report and were behind the eight ball on time 20 because no one responded to the first RFQ. 21 MR. FERNANDEZ: That's correct. Now, 22 Mr. -- Mr. Tirloni and his staff worked very hard on 23 identifying universities or -- or consulting with 24 groups that could do this, and because of the -- the 25 short duration of the requirements in that, Texas Tech 0089 1 did step up. 2 CHAIRMAN CLOWE: My understanding is we 3 kind of went and got them, didn't we? 4 MR. FERNANDEZ: Yes, we did, 5 Mr. Chairman. 6 CHAIRMAN CLOWE: Within legal bounds. 7 MR. FERNANDEZ: Robert did it. All 8 proper -- 9 CHAIRMAN CLOWE: We had to have the 10 report, and we felt very good that Texas Tech stepped 11 up and did it. And, again, you know, I sort of 12 apologized to you at the beginning about the tone of 13 my questions, but this is a very important subject to 14 us. And to that end, now, I would say, if this is a 15 draft, that you could clarify some aspects of your 16 report, based on this, I think, very productive 17 discussion that we've had here this morning. We've, I 18 hope, shown you what our sensitivities and what our 19 interests are. And maybe now you can craft your 20 report to answer questions that have been asked today, 21 not in any way change the outcome of your report -- 22 it's your report -- but cover areas that you now see 23 are of interest to the agency. 24 MR. CANNON: Yes, sir. 25 CHAIRMAN CLOWE: And additionally, I'm 0090 1 just -- you can go ahead. 2 COMMISSIONER COX: No, go ahead. 3 CHAIRMAN CLOWE: I just wonder how we 4 can have a continuing relationship with Texas Tech. 5 You know, just to get this information once every two 6 years, it just sort of seems like a long interval for 7 such vital information. Is there any way that we 8 could be more constant and current on the development 9 of this kind of information so that we know where we 10 are with our players? 11 COMMISSIONER COX: Let me supplement 12 that question. Mike, I know that you have planned a 13 meeting this month, I think, of the various people 14 that gather information for us. 15 MR. FERNANDEZ: That's correct. 16 COMMISSIONER COX: Is it possible that 17 Texas Tech could be included, representing this 18 particular study, and so that data gathering can be 19 coordinated with all of the rest of our data 20 gathering? 21 MR. FERNANDEZ: Yes. Absolutely, 22 Commissioner. And, in fact, you know, just following 23 up on the Chair's comment. Because we do monthly 24 surveys, and I think that perhaps there are questions 25 or things that could be included in that to keep us 0091 1 abreast of these changes. 2 MR. GREER: And while we're talking 3 about that whole issue, I want to bring to the table 4 the fact that we've already talked about that -- that 5 on this next round, when we get there, we're going to 6 start much earlier. And six months from now, we're 7 going to look at a scenario -- because I've heard your 8 comments and appreciate them and know that we were 9 diligent in trying to, you know, follow through, and 10 you mentioned that, in reference to we didn't have 11 anybody to step up. But I think we need to start a 12 lot sooner, and Mike and Gary and I talked about that 13 yesterday, and -- and we are already planning, in our 14 2005 scheduling, the opportunity to get to this much 15 sooner and have a longer period of time, and 16 hopefully, that that will create more comfort in some 17 of the comments that came earlier. 18 COMMISSIONER COX: And, Mr. Chairman, 19 as to my thoughts on this report. I don't know 20 whether it's final or not. If -- if I were writing 21 it, I think I would put page 14 right up front, 22 because the conclusions are at the end after people 23 have looked at the data and drawn their own 24 conclusions. And they have probably read these and 25 drawn conclusions that some of these things you 0092 1 present are statistically significant, whereas you 2 imply in your conclusion that they are not, but you 3 don't come right out and use those terms. To me, that 4 was very helpful. Up here, you showed conclusions 5 that I believe Black residents spend more per month 6 and Hispanic residents are more likely to participate. 7 But here, in your conclusions, that latter one, which 8 you told us was not statistically significant, is not 9 included. So I would see the conclusions as a road 10 map for the reader to consider as they look at the 11 accompanying data. That's just a thought that I would 12 have. And I would amplify on what "statistically 13 significant" means, so that people understand that 14 that is relevant here, that while you see this bar a 15 little bit higher than the other one, if we had done 16 it a hundred times, that might have been reversed. 17 MR. CANNON: I appreciate that, and 18 we'll definitely take that into consideration in -- in 19 a reorganization of -- of the report. 20 CHAIRMAN CLOWE: Anything further? 21 Mr. Cannon, thank you again. It's been 22 very informative and very helpful. We appreciate the 23 work you've done and your colleagues as well. 24 MR. CANNON: Thank you. 25 COMMISSIONER COX: Thank you very much. 0093 1 CHAIRMAN CLOWE: Thank you, gentlemen. 2 I'm going to ask for a short recess 3 for a break for our reporter, and I'm going to 4 announce, Commissioners, with your approval, that when 5 we return, I'll call item number 12 next on the 6 docket, because I want us to go into executive session 7 at least by 11:00 a.m. Commissioner Olvera, you'll -- 8 that will give you an hour and a half, won't it, in 9 executive session? 10 COMMISSIONER OLVERA: Yes, sir. 11 CHAIRMAN CLOWE: Is that all right? 12 COMMISSIONER OLVERA: Yes, sir. 13 CHAIRMAN CLOWE: All right. Then we're 14 recessed for approximately ten minutes. 15 (RECESS.) 16 CHAIRMAN CLOWE: We'll come back to 17 order. As I announced, we will now take up item 18 number 12: Consideration of, possible discussion 19 and/or action on external and internal audits and/or 20 reviews relating to the Texas Lottery Commission 21 and/or the Internal Audit Department's activities. 22 Ms. Melvin, good morning. 23 MS. MELVIN: Good morning, 24 Commissioners. For the record, my name is Catherine 25 Melvin, Director of the Internal Audit Division. 0094 1 I do have one item that -- on which I 2 would like to update you today. It is regarding the 3 internal audit of Lotto Texas jackpot highest winner 4 awards. The final report was issued on December 31st. 5 If it pleases the Commissioners, I would like to 6 briefly go over my conclusions contained in that 7 report. 8 The objective of this audit was to 9 assess the accuracy, completeness, and compliance of 10 jackpots awarded to Lotto Texas jackpot prize winners. 11 To this end, we examined Lotto Texas jackpots awarded 12 since the inception of the game in 1992 through August 13 2004. We found no instances of noncompliance. Based 14 on the results of our review, we believe that 15 management has established an adequate system of 16 control over the accuracy, completeness, and 17 compliance of Lotto Texas jackpot prize awards. As 18 reported in the prior internal audit report, dated 19 September 2002, regarding the payment of these prize 20 winners, the applicable administrative rules in place 21 at the time allowed for the exercise of discretion in 22 determining the amount of the prize award. 23 Overall, internal audit identified no 24 material weaknesses which would compromise current 25 operations. However, our review did identify 0095 1 opportunities for the agency to strengthen internal 2 controls over the administration and management of 3 Lotto Texas jackpot prize awards. 4 Lastly, we would like to express our 5 appreciation to Financial Administration and other 6 staff for their cooperation and assistance during this 7 engagement. Their courtesy, the responsiveness 8 extended to us allowed us to complete our work 9 effectively and efficiently. 10 And also, Commissioners, I do have a 11 few slides that go into some discussion about the 12 different methodologies that were used to pay jackpot 13 prize winners. If you would like, I can share those 14 slides with you. 15 CHAIRMAN CLOWE: Yes. Thank you. 16 MS. MELVIN: From the inception of the 17 game in March 2002 {sic}, the rules did not 18 specifically address how jackpot prizes would be 19 captured, and during this time period, several 20 different methodologies were used. But however, there 21 were two primary methodologies. And this is the first 22 one. And this paying the estimated advertised jackpot 23 was utilized in the majority of the instances that -- 24 during the time period we looked at. In the situation 25 where the estimated jackpot was greater than the 0096 1 future value of sales, you will see that we pulled 2 from the prize reserve fund to equal the estimated 3 jackpot announced. In cases where the estimated 4 jackpot was less than the future value of the 5 available allocated sales, we would take the 6 difference and increase the prize reserve fund. 7 COMMISSIONER COX: Catherine, the 8 terminology here, estimated advertised, if we just 9 said advertised, would it mean the same thing? 10 MS. MELVIN: Yes, it would. 11 COMMISSIONER COX: That's what went up 12 on the bulletin -- 13 MS. MELVIN: Yes, sir. 14 COMMISSIONER COX: -- billboards? 15 MS. MELVIN: Yes. 16 COMMISSIONER COX: Thank you. 17 MS. MELVIN: I use that word 18 "estimated" because it is always an estimated jackpot. 19 COMMISSIONER COX: Well, estimated and 20 advertised. 21 MS. MELVIN: And advertised. True. 22 CHAIRMAN CLOWE: Well, help me 23 understand. I think I've been told it's always 24 referred to as the estimated jackpot because we don't 25 know exactly what it's going to be, and that is 0097 1 legally correct. Could the General Counsel speak to 2 that and help me get some clarification? 3 MS. KIPLIN: Mr. Chairman, I'm going to 4 defer your questions -- 5 CHAIRMAN CLOWE: I -- I -- that's 6 right. Andy Marker. 7 MS. KIPLIN: -- to counsel, and Andy 8 Marker -- 9 CHAIRMAN CLOWE: That's right. You 10 have recused yourself from this matter, if I remember 11 correctly. 12 MS. KIPLIN: That's correct. 13 CHAIRMAN CLOWE: Andy, Commissioner Cox 14 brought up a good point. Can you help me clear my 15 need to understand? Is it referred to, legally, as 16 the estimated jackpot? 17 MR. MARKER: Good morning, 18 Commissioners. My name is Andy Marker, Assistant 19 General Counsel. 20 I believe that -- that is correct, 21 Chairman. It is the jackpot that is estimated by the 22 Lottery and is advertised for the upcoming draw. 23 CHAIRMAN CLOWE: So it needs to be said 24 "estimated" every time, and it can be the -- it's 25 always the estimated jackpot. It can be the estimated 0098 1 advertised jackpot. But we have paid in the past 2 at -- 3 MS. MELVIN: What was -- we paid what 4 was advertised, in this methodology used. 5 CHAIRMAN CLOWE: Does that make it 6 worse or does that -- 7 COMMISSIONER COX: And that's from -- 8 then, from -- from the beginning of the Lottery until 9 March 5, '02, we paid -- 10 MS. MELVIN: No. Let me back up a 11 little bit. From the inception of the Lottery to 12 March '02, we paid in a number of methodologies, in a 13 number of ways. But there were -- I mean, but it's 14 fundamentally -- 15 COMMISSIONER COX: So I'm getting ahead 16 of you here. Let me -- 17 MS. MELVIN: That's okay. 18 Fundamentally, it boils down two primary calculation 19 methodologies. And the first one was to pay what was 20 advertised. And that is what this slide shows -- 21 COMMISSIONER COX: Oh, okay. And so 22 you're -- you're going to have two slides covering 23 that period? 24 MS. MELVIN: Yes. Yes. 25 COMMISSIONER COX: Okay. 0099 1 MS. MELVIN: So this just depicts, when 2 we pay what is advertised, there is two things that 3 can happen. The advertised could be greater than 4 actual sales, or it could have been less than actual 5 sales. And under each of those scenarios, this is 6 what might have occurred. 7 The second was -- 8 CHAIRMAN CLOWE: Do you want questions, 9 or do you want us to be quiet? 10 MS. MELVIN: Oh, absolutely. No. 11 Please. I -- I'm happy to take questions. 12 CHAIRMAN CLOWE: I don't want to be 13 disruptive. 14 MS. MELVIN: Okay. 15 CHAIRMAN CLOWE: Well, maybe a little 16 bit. 17 From inception through March the 5th of 18 '02, were there not cases where we paid a jackpot that 19 was estimated and more than the advertised jackpot? 20 MS. MELVIN: Yes. Yes. 21 COMMISSIONER COX: Maybe you could show 22 us slide two, and we can -- 23 CHAIRMAN CLOWE: Yeah. 24 COMMISSIONER COX: -- come back and 25 forth between those two. 0100 1 MS. MELVIN: Okay. Absolutely. Slide 2 two will get to the scenario you're describing. 3 The second general methodology used was 4 paying sales. Okay. And as you stated, sales could 5 be greater than the advertised jackpot. Okay? So in 6 a situation where sales are greater than -- and to 7 make a -- the comparison, it's the present value of 8 the advertised jackpot, that prize winner would 9 receive a prize that's greater than what was 10 advertised. Okay? And then, correspondingly, if 11 sales fell short of the advertised jackpot amount or 12 the present value advertised jackpot amount, that 13 prize winner would receive a prize that's less than 14 advertised, under this methodology. 15 COMMISSIONER COX: So thinking back to 16 the previous audit report that was done back in '02, I 17 think, that said that we used different methodologies 18 to pay under the same rule. 19 MS. MELVIN: Yes. 20 COMMISSIONER COX: And you're -- it 21 looks like you're telling us the same thing. 22 MS. MELVIN: Uh-huh. During -- from 23 the inception of the game to March '02, the rules did 24 not specifically address the calculation of the 25 jackpot. The rules talked about the -- how monies are 0101 1 made available from sales. It talked about how there 2 is an indirect amount, and I have another slide for 3 that, which the Executive Director has the discretion 4 to add to the actual -- the jackpot amount. That 5 indirect pool come -- some of the monies from that 6 indirect pool come from the prize reserve funds, so as 7 you see, that's what happened when we pulled from 8 prize reserve to supplement the actual jackpot. 9 COMMISSIONER COX: Now, there were -- 10 there was more than one rule, I believe your report 11 said, from inception to March 5, 2002? 12 MS. MELVIN: Yes. There were several 13 rule changes. 14 COMMISSIONER COX: But under all of 15 those rules, there was discretion that would have 16 permitted paying in these various methods? 17 MS. MELVIN: That is correct. Under 18 each change of rule, the actual discretion that the 19 executive director had never changed. The rule 20 changes might address what sales the contribution may 21 be. Those percentages might change, but ultimately, 22 the actual calculation and the actual prize was never 23 specifically spelled out in the rule. And to be even 24 more clear, the language that allowed the Executive 25 Director to exercise discretion was specific in the 0102 1 rule. 2 Effective March '02, we published a 3 rule -- or we -- a rule became effective that actually 4 for the first time defined what the jackpot amounts 5 would be. And so from '02 to -- 6 COMMISSIONER COX: Catherine, let me 7 stop you for just a second. 8 MS. MELVIN: Sure. 9 COMMISSIONER COX: Going back to the 10 previous ones, all of these -- regardless of what rule 11 or what time or how we paid the jackpot, all of the 12 things you saw, you believed, were in compliance with 13 the rules? 14 MS. MELVIN: Oh, absolutely. Right. 15 The -- there were different -- I mean, it's absolutely 16 true, there were different methodologies that were 17 used, but none of them would be noncompliant. 18 COMMISSIONER COX: So they might have 19 been inconsistent, but they complied with the rules? 20 MS. MELVIN: Yes. 21 CHAIRMAN CLOWE: Well, you know, the 22 word "inconsistent" maybe is a negative. And -- 23 COMMISSIONER COX: Would you accept 24 "different"? 25 CHAIRMAN CLOWE: Yeah. 0103 1 COMMISSIONER COX: Okay. 2 CHAIRMAN CLOWE: I -- I would be a lot 3 more comfortable with "different" because they weren't 4 inconsistent compared to something, they were 5 different based on the rule and the determination the 6 Executive Director made. 7 COMMISSIONER COX: Thank you. 8 "Different" is a better word. 9 MS. MELVIN: That's -- that's fair. 10 And actually, that's a good point of clarification. 11 We looked at -- like I said, we actually looked at 12 every single jackpot prize awarded. I think the total 13 was like 351 from inception to the end of August. We 14 did detailed test work on sample -- a representative 15 sample of -- of those. But in just looking at the 16 entire population, you could easily see trends where 17 the Lottery was paying sales for a period. And then 18 at some point that policy may have changed internally, 19 and we said, okay, we're going to pay advertised, and 20 for a long stretch of period you'll see it's 21 advertised that's paid. 22 Now, again, like I said, these two are 23 the fundamental methodologies used, but there was also 24 a time period where we said, you know what, we're 25 going to pay the greater of and give the winner the 0104 1 benefit of the amount. So, you know, that's just a 2 slight variation on, are you going to pay advertised 3 or sales. But that was another methodology that was 4 also used. 5 And that kind of brings us to the March 6 2002 rule change, where the first time we define what 7 the jackpot -- the amount will be. And so from '02 8 to -- March '02 to May '03, the calculation was that 9 the winner would receive the greater of the advertised 10 jackpot or the allocated sales. And once the rule 11 changed, we actually looked at every single -- not 12 just a sample, every single jackpot after that, and 13 found that every jackpot was paid in accordance with 14 this rule, this more specific rule. 15 And then, in May of '03, the rule 16 changed. And I would like to point out a 17 typographical error in your report. The reports in 18 front of you are correct, but I believe I sent you a 19 soft copy that has an incorrect date on page five. I 20 say that the rule changed in May '04, and the correct 21 date is May '03. But this is our current rule, and 22 the current rule states that for the first four draws 23 in a roll cycle, the winner receives the greater of 24 the advertised or the allocated sales. And then for 25 all subsequent draws, the winner receives the 0105 1 allocated sales. And, again -- 2 CHAIRMAN CLOWE: Would you define 3 "allocated sales," please? 4 MS. MELVIN: Absolutely. The entire 5 sales revenue that comes in to build that jackpot -- 6 in rule, there is amounts that are defined as what 7 will go into each prize category, and so a certain 8 percentage is allocated to go into the top tier, the 9 top prize, the jackpot prize. 10 CHAIRMAN CLOWE: Thank you. 11 COMMISSIONER COX: So, Catherine, what 12 I think I see here is that from May 4th, 2003, there 13 is only one way to compute it? 14 MS. MELVIN: Yes. 15 COMMISSIONER COX: And was it your 16 observation, in looking at the jackpots for that 17 period, that they were computed correctly? 18 MS. MELVIN: Every time. 19 COMMISSIONER COX: Every time. And 20 that was your -- was it your observation, from May of 21 '02 through May of '03, that in every case it was 22 either -- was the higher of -- 23 MS. MELVIN: Yes. 24 COMMISSIONER COX: Okay. 25 MS. MELVIN: Any other questions? 0106 1 I would just -- perhaps I should make 2 this my last slide and just kind of clarify something 3 that may have been unclear. What makes up the prize 4 category contribution -- and the rule defines several 5 prize categories: The first prize, which is the 6 jackpot, second, third, fourth, several -- several 7 tiers. But for each of those, it defines a direct 8 contribution amount and an indirect contribution 9 amount. The direct contribution amount can be 10 considered the sales, the amount that's allocated from 11 the prize pool. And the prize pool is, again, an 12 amount from sales. The indirect contribution is made 13 up of amounts allocated -- or amounts that the 14 Executive Director can pull from the prize reserve 15 fund or not. This -- this formula has basically 16 always existed in rule. The percentages have changed, 17 whether or not the amounts are mandatory to go into 18 these certain categories. At one point the rule said 19 they "shall" be, then it changed to "may," and then it 20 went back to it "shall" be. So those things have 21 changed. But this fundamental formula has existed. 22 Now, when we are paying -- when our 23 rule says, after the first four rolls, we pay sales, 24 obviously, the indirect contribution amount will not 25 pay -- play a factor in that. But I think it's 0107 1 important to know that the Executive Director always 2 had the discretion to increase or decrease amounts 3 pulled from prize reserve. 4 COMMISSIONER COX: Okay. Now, let's go 5 back to one of your slides there that talked about 6 what we have been doing since May of '03. 7 MS. MELVIN: Okay. 8 COMMISSIONER COX: Where it says 9 "allocated sales," allocated means a percentage of 10 sales. Is that correct? 11 MS. MELVIN: That is correct. 12 COMMISSIONER COX: And from page nine 13 of your report, I see that, currently, that percentage 14 is 75.2 percent. 15 MS. MELVIN: Yes. Shall be no less 16 than. 17 COMMISSIONER COX: But it says, no less 18 than. 19 MS. MELVIN: Uh-huh. 20 COMMISSIONER COX: Now, that seems to 21 permit the discretion to pay more than that. Have you 22 observed any case in which more than that was paid? 23 MS. MELVIN: I would have to look at my 24 test work. I don't believe you have. You're right. 25 That language does seem to allow, although I would 0108 1 have to say it might impact the percentages on the 2 other prize category contributions. 3 COMMISSIONER COX: And it -- it would. 4 MS. MELVIN: Yeah. And so you'd -- I 5 mean, it has to equal a hundred, so -- 6 COMMISSIONER COX: So I -- what I 7 think, saying this, I may be a little concerned about 8 our present rule, and even though we've been reading 9 it as "shall be," what it says is "shall be no less 10 than," which seems to still provide some discretion. 11 MS. MELVIN: Yes. 12 COMMISSIONER COX: Even though I 13 understand, I believe, that no discretion has been 14 used. 15 MS. MELVIN: That's true. There are -- 16 and to clarify, there are other places in the rule 17 that allow for discretion on the part of the Executive 18 Director. Under 401.305 of the Administrative Rules, 19 the very first paragraph of that rule, there is a 20 statement, and I quote it in my report under page 21 four -- 22 COMMISSIONER COX: Okay. And I'm going 23 to get to that one. 24 MS. MELVIN: Okay. I'll let you, then. 25 COMMISSIONER COX: Okay. The -- this 0109 1 audit began based on a question from a citizen of 2 Texas as to whether we were overpaying or underpaying 3 jackpots. Do -- specific to that point, do you have 4 any conclusions? 5 MS. MELVIN: Well, Commissioner, I 6 can't attest to that because using those terms 7 "overpayment" and "underpayment" denotes or connotes 8 or implies that an error was made. And what I can say 9 is that the jackpots that we reviewed, we were 10 compliant with the rules in effect every time. 11 COMMISSIONER COX: So -- so what I 12 think I heard you say is that "overpaid" and 13 "underpaid" are not, to you, terms of art. 14 MS. MELVIN: Uh-huh. 15 COMMISSIONER COX: And you translated 16 that into your terms of art and said, you don't 17 believe they were overpaid or underpaid? 18 MS. MELVIN: No, sir. To say that a 19 player was overpaid or underpaid, you would have to 20 establish that this is the methodology that you must 21 use. And I -- I showed earlier, there was quite a 22 long period of time where the Texas Lottery Commission 23 had broad discretion, and how jackpots were calculated 24 were left up to the discretion of the agency. It was 25 not defined in rule. 0110 1 COMMISSIONER COX: So we've got -- if I 2 want to compute a jackpot, I'm going to need to know 3 what were sales, and that's a number that the Texas 4 Lottery gets through our system from GTECH? 5 MS. MELVIN: Yes. 6 COMMISSIONER COX: Okay. So GTECH 7 reports those sales to us. So that number is 8 determined independently of anything that goes on in 9 this building? 10 MS. MELVIN: Yes. 11 COMMISSIONER COX: Okay. Now, the 12 other number I need to know is the interest factor. 13 MS. MELVIN: If the -- if the winner 14 selects an annuity payment option -- 15 COMMISSIONER COX: Yeah. Okay. So if 16 the winner selects an annuity option -- go ahead. 17 MS. MELVIN: If the winner selects an 18 annuity payment option, the interest factor comes into 19 play. 20 COMMISSIONER COX: Tell me how that 21 works. 22 MS. MELVIN: Well, by rule, the -- the 23 Commission must use an interest factor provided by the 24 Comptroller of Public Accounts. 25 COMMISSIONER COX: Again, a number that 0111 1 is not determined within this house. 2 MS. MELVIN: Oh, no, it is not. We do 3 not have any authority or discretion or latitude in 4 selecting that interest factor. It -- by rule, it 5 says that we will obtain that from the Treasury -- or 6 from the Comptroller's Office in which the Treasury is 7 housed. 8 COMMISSIONER COX: Okay. So that's 9 the -- that's -- interest rate determines the number 10 you plug in for I in the annuity formula to determine 11 what that annuity is going to be? 12 MS. MELVIN: It determines -- well, one 13 thing that it might help determine is what the future 14 value of your award is. 15 COMMISSIONER COX: Exactly. So if 16 they're taking the cash option, it's the same number 17 that's going to be I in the formula to determine the 18 present value? 19 MS. MELVIN: If it's -- if it's -- 20 well, if we're talking about the first four draws, 21 it'll matter. You're right. Because we're trying to 22 determine the greater of advertised or allocated. 23 So -- 24 COMMISSIONER COX: No, I'm not getting 25 to that yet. 0112 1 MS. MELVIN: Oh, okay. 2 COMMISSIONER COX: I'm just getting to, 3 once we've got a number, how we translate that number 4 into what we pay the person, depending upon whether 5 the person selects the annuity option or the cash 6 payment option. 7 MS. MELVIN: Yes. The interest -- like 8 I said, the interest factor only comes into play if 9 they select an annuity option if they're getting paid 10 sales. 11 COMMISSIONER COX: Okay. Now, help me 12 with that, because I see -- I see advertised, let's 13 say, 40 million -- 14 MS. MELVIN: Right. 15 COMMISSIONER COX: -- and when the 16 person comes in for cash option, and Reagan presents 17 them a facsimile check for 26. 18 MS. MELVIN: Right. 19 COMMISSIONER COX: So, obviously, there 20 is an interest factor applied there? 21 MS. MELVIN: Well, there -- 22 COMMISSIONER COX: Or was it applied in 23 determining the 40 estimate? 24 MS. MELVIN: That's a great question. 25 There are actually -- there is an interest factor that 0113 1 is used to determine the estimated jackpot amount. 2 There is a separate interest factor that is then used 3 to calculate the payment to the prize winner, 4 depending on if they chose an annuity value option. 5 And that -- that interest factor is obtained the day 6 after the draw, per our rules, from the Treasury. 7 COMMISSIONER COX: Okay. Now, there -- 8 at this point, the interest factor that is used to 9 determine advertised, the estimated advertised, 10 Mr. Chairman -- 11 CHAIRMAN CLOWE: Thank you. 12 COMMISSIONER COX: -- is not important 13 because we pay based on actual sales? 14 MS. MELVIN: Yes, sir. 15 COMMISSIONER COX: But there is a time 16 that it was important. 17 MS. MELVIN: Yes. Well -- 18 COMMISSIONER COX: Where does that 19 number come from, the interest rate that's used to 20 determine the estimated advertised? 21 MS. MELVIN: I'm going to ask another 22 member of the agency to answer that. That's not 23 something that I looked at because it wasn't relevant 24 to my review. I'm -- I -- I care about how we paid -- 25 in this audit, I cared about how we paid our players, 0114 1 our winners. But that -- you know, you're right. 2 There is a separate interest factor that is used to 3 calculate estimated, and perhaps Mr. Tirloni might 4 answer how that's -- 5 MR. GREER: Would that be Robert or 6 Lee? 7 MR. DEVINEY: Commissioner Cox, I'm Lee 8 Deviney, Financial Administration Director. 9 Is your question where we obtain -- or 10 when do we obtain the interest factor to estimate the 11 jackpot in advance of the drawing? 12 COMMISSIONER COX: Exactly. 13 MR. DEVINEY: That is done -- we obtain 14 that on the -- on days when we have drawings. For 15 instance, we have drawings on Wednesday and Saturday, 16 and so we would obtain that information from the 17 Comptroller of Public Accounts, Safe -- Texas 18 Safekeeping Trust Company, on Wednesday morning and 19 then again on Friday morning. We're not open for 20 business Saturdays, so we do that -- the estimation 21 for Saturday on Friday. 22 COMMISSIONER COX: Okay. So there is 23 no number that we're pulling out of The Wall Street 24 Journal or getting out of a book or anything. We're 25 getting all of these numbers straight from the 0115 1 Comptroller's Office? 2 MR. DEVINEY: Right. They're 3 contractually obligated to provide those to us. 4 COMMISSIONER COX: Okay. So what I've 5 heard you say, then, Catherine, is that now we are 6 using no discretion, and we are using no number that 7 comes from within this agency when we compute 8 jackpots? 9 MS. MELVIN: That's exactly right. 10 COMMISSIONER COX: Okay. And you also 11 said that while there was a time when we were using 12 discretion, that the discretion that was exercised was 13 within the rule that was approved by this Commission 14 that was in effect at that time? 15 MS. MELVIN: That's also correct. And 16 just to add to, since you brought up the subject of 17 the interest factor and how that impacts the actual 18 amounts. Even in that -- since the inception, the 19 interest factor was obtained from the Comptroller's 20 Office, from the Treasury. 21 COMMISSIONER COX: Okay. Mr. Chairman, 22 that's all the questions I have. I'm going to have 23 a -- a statement, if you will, at the end of this, but 24 I want to -- 25 CHAIRMAN CLOWE: That's fine. 0116 1 COMMISSIONER COX: -- give y'all the 2 opportunity to ask questions. 3 CHAIRMAN CLOWE: Are you open to 4 questions now? Have you completed your presentation? 5 MS. MELVIN: I have. 6 COMMISSIONER OLVERA: Catherine, I -- I 7 do have a question just for clarification. Maybe I 8 lost this. It was my understanding from -- from not 9 only your report but these -- these -- these slides 10 that, in the past, prior to 2002, that the reserve 11 fund would be funded when the estimated advertised 12 amount was greater than -- I'm sorry. When the sales 13 amount was greater than the estimated advertised 14 amount, the prize winner would be paid the -- the 15 advertised amount, and that excess would go to the 16 reserve fund. Now, with the formula that we have in 17 place, how is the prize reserve fund being funded, 18 since that can no longer exist? 19 MS. MELVIN: Great question. Just to 20 clarify, the example that you gave, again, that only 21 occurred when the methodology was selected to pay 22 sales. No matter -- or to pay advertised. Excuse me. 23 So you're right. If the methodology was to pay 24 advertised, in those instances when there were excess 25 sales or sales above the advertised amount, they would 0117 1 be moved into reserve. So you're asking now, how is 2 the reserve increased now? How would it be increased? 3 In rule -- 4 COMMISSIONER OLVERA: Well, obviously, 5 since the formula now dictates that the winner will 6 get the greater of advertised versus sales, well, in 7 the event the -- the sales don't equate to the 8 advertised, where is the excess coming from? 9 COMMISSIONER COX: Let -- let me 10 clarify that. I thought I understood you to say that 11 the current rule says we pay based on sales, not on 12 the higher of? 13 MS. MELVIN: The current rule says, for 14 the first four draws is the greater of. But after the 15 fourth -- 16 COMMISSIONER COX: Okay. 17 COMMISSIONER OLVERA: Right. So 18 during -- 19 COMMISSIONER COX: So the first four -- 20 COMMISSIONER OLVERA: Where the -- in 21 the -- during the first four, there is that variable 22 that comes into play, so I want to know, how does the 23 reserve fund -- 24 COMMISSIONER COX: Which would always 25 be drawing from either -- taking nothing from the 0118 1 reserve if sales are adequate, or taking from the 2 reserve. So how does the reserve ever get 3 replenished? Is that where you're going? 4 COMMISSIONER OLVERA: Exactly. Yes. 5 COMMISSIONER COX: That's a good 6 question. 7 COMMISSIONER OLVERA: Yes. 8 MS. MELVIN: Okay. How does the 9 reserve get replenished, sir? In rule -- 10 COMMISSIONER OLVERA: That's where I'm 11 going. 12 MS. MELVIN: In rule, it's defined. A 13 certain percentage from sales goes directly to the 14 prize reserve fund. 15 COMMISSIONER OLVERA: Okay. 16 COMMISSIONER COX: So -- 17 MS. MELVIN: Yeah. For every draw, 18 we've got an amount of money that's going -- I think 19 it's right now 1 point -- 1.93 percent, just a little 20 under 2. 21 COMMISSIONER COX: So that 20 -- 75.2 22 that goes to the winner doesn't have anything to do 23 with the reserve fund. There is a specific allocation 24 to the reserve fund that's independent of the 75.2 25 percent that goes to the winner? 0119 1 MS. MELVIN: Yes, sir. That is -- 2 that -- 3 CHAIRMAN CLOWE: What is the current 4 value of the prize reserve fund now, Lee? 5 MR. DEVINEY: It's in excess of 12 6 million dollars. 7 CHAIRMAN CLOWE: Thank you. 8 COMMISSIONER OLVERA: That answered my 9 question. 10 CHAIRMAN CLOWE: Okay. I have a couple 11 of questions. I hope you'll consider them friendly. 12 COMMISSIONER OLVERA: You have had to 13 qualify that quite a number of times. 14 CHAIRMAN CLOWE: Yeah. People think 15 I'm antagonistic, but, you know. 16 Catherine, you have looked back from 17 the beginning. You've looked at every instance. And 18 would it be a simple statement to say that in some 19 cases, during this period of time, some -- some 20 players could have been paid more or less under a 21 different methodology of the computation of the payout 22 than they were? 23 MS. MELVIN: That's difficult to 24 answer. Perhaps. You're -- you're saying that, given 25 the same jackpot, given the same amount of sales, 0120 1 let's say that -- that, you know, under two different 2 scenarios, would one be paid more than the other? 3 Perhaps. 4 CHAIRMAN CLOWE: More or less. 5 MS. MELVIN: Uh-huh. More or less. 6 CHAIRMAN CLOWE: If an executive 7 director, under the rules that were in effect at any 8 given time, under those rules, the Executive Director 9 had the discretion to pay out a different amount than 10 we paid out, and it could have been in some cases 11 more, or in other cases it could have been less than 12 was paid out. 13 MS. MELVIN: Yes. 14 CHAIRMAN CLOWE: It's as simple as 15 that. But in every case, under the rule, an amount 16 was paid out which was correct? 17 MS. MELVIN: Yes. 18 CHAIRMAN CLOWE: Now, I know that you 19 have not been in the position of internal auditor for 20 a great many years, and we're looking back to a period 21 of 1992 and coming forward. Did you see anything in 22 your audit that was a cause of concern, from a 23 perception standpoint, about the methodology under the 24 rules that the Executive Director implemented in the 25 payouts that gave you cause for concern? 0121 1 MS. MELVIN: Well, as you stated, 2 Commissioner, our review went back to the inception, 3 1992. And so, accordingly, we wouldn't expect to 4 find, you know, a thorough documentation for practices 5 that happened 12 years ago. If we had such strong 6 record retention and -- and we kept every piece of 7 paper, what would have been nice from the auditor's 8 perspective, and I -- I just say this because it 9 allows for an audit trail -- was to see some clear 10 documentation of why these different methodologies 11 were used, and that's just one thing I can't speak to. 12 It's possible that there were business decisions that 13 came into play about, you know, for this time period 14 we will always pay sales, for this time period we are 15 going to move to always paying advertised. 16 We found instances where we have heard 17 that there were certain anniversary or birthday 18 celebrations for the Lottery, where they wanted to 19 guarantee some amount, and, again, that's a business 20 decision. I think it would have been helpful in our 21 review to see the documentation that kind of explained 22 the thinking behind that methodology, but quite 23 frankly, because of the passage of time, I didn't 24 anticipate that I would find anything like that. And 25 further, you know, our rules don't necessarily require 0122 1 the -- the Executive Director or whom they delegate 2 that discretion to to document those types of 3 decisions. 4 CHAIRMAN CLOWE: So I think the short 5 answer to my question is, no. 6 MS. MELVIN: Yes. 7 CHAIRMAN CLOWE: You didn't see 8 anything that gave you cause for concern -- 9 MS. MELVIN: No. 10 CHAIRMAN CLOWE: -- that you want to 11 share with the Commissioners at this time? 12 MS. MELVIN: No, I did not. 13 CHAIRMAN CLOWE: Mr. Marker, you're the 14 attorney advising in this audit. 15 MR. MARKER: That's correct. 16 CHAIRMAN CLOWE: And I know that you 17 attorneys like to give the Commissioners legal advice, 18 properly so, in executive session regarding matters 19 that require legal advice. I want to ask you a 20 question, being respectful of that, and if you don't 21 want to answer the question, feel free to tell me that 22 you don't. But my understanding of any State 23 official's position and any State employee is that 24 they must perform their duties in compliance with the 25 law, the statutes as enacted by the legislature, and 0123 1 the subsequent rules which evolve from that law, 2 governing their activities. As a general statement, 3 is that correct? 4 MR. MARKER: Yes, I believe so. 5 CHAIRMAN CLOWE: Now, would you see, at 6 this point in time, any legal authorization for the 7 Commission, in retrospect, to go back and make 8 payments, if they decided that some players had 9 been -- some players had been paid a different amount 10 than they wanted to pay, and conversely, to bill some 11 players for an amount that they felt like they had 12 been paid, because it was calculated in a different 13 way, to change those two amounts, in some cases, 14 giving State money to certain players, in retrospect, 15 and in other cases, instituting collection proceedings 16 against other players? Do you understand my question? 17 MR. MARKER: I -- I do understand your 18 question. 19 CHAIRMAN CLOWE: Are you comfortable 20 answering it? 21 MR. MARKER: I -- I'm not sure I can 22 give you a -- a full answer at this point. I -- I 23 think I would like to research this further. I -- I'm 24 not aware of anything in the State Lottery Act or the 25 Administrative Rules that talks about the type of 0124 1 collection that -- that you're contemplating. What 2 the State Lottery Act and Administrative Rules talk 3 about is actually paying a jackpot and not necessarily 4 accounting for differences or errors in calculation. 5 So I -- I would, I think, reserve a full answer on 6 that. 7 MR. BENNETT: Commissioner, for the 8 record, my name is Ridgely Bennett. I'm the Deputy 9 General Counsel. I've reviewed this also. And 10 because we believe that the payments were made 11 properly under the rules and statutes in place at the 12 time, I don't see any reason to contemplate taking any 13 type of action like that. 14 COMMISSIONER COX: So what I just heard 15 is that your legal opinion as to these payments 16 coincides with Catherine's auditor's opinion? 17 MR. BENNETT: Correct. 18 CHAIRMAN CLOWE: And I just -- you 19 know, to put a fine point on it, there is no 20 authorization for these Commissioners or the Executive 21 Director to write a check and disburse State funds, 22 nor can we hire a collection agency and say, go after 23 these people and bring that money back in. 24 MR. BENNETT: Under the circumstances 25 presented today, I don't see any authority or reason 0125 1 to do that. 2 MR. MARKER: The only thing I would 3 add, Commissioners, this is different than an 4 overpayment or overbilling by a vendor, where I think 5 that authority would exist and the Commission and the 6 Attorney General's Office -- 7 CHAIRMAN CLOWE: I certainly understand 8 that, but -- but I don't think that's relevant here. 9 An overpayment or an underpayment has to do with a 10 contract that is in force and an agreed, stipulated 11 performance and funds received for that performance. 12 We're talking about something entirely different here. 13 We're talking about a rule that must be either 14 followed correctly or it is not followed correctly, 15 and then any resulting action from that. 16 That's very helpful and I appreciate 17 your study on that and advising us in that regard. 18 Judge, have you got any comment on that 19 aspect of this? 20 COMMISSIONER OLVERA: Just shooting 21 from the hip, Mr. Chairman, I agree. I don't think 22 there is any valid legal status to -- to contemplate 23 some kind of payment to the past because the 24 underlying premise is that all payments were legal, 25 and you then have issues of, number one, statute of 0126 1 limitations, offer and acceptance. And the whole 2 issue is moot legally as long -- as long as I can see 3 because the prize winner accepted a legal payment. 4 That -- I guess that does bring up the 5 question, though. I can only -- in terms of three 6 viable options, there is a prize winner who -- who 7 received more than was advertised, there is a prize 8 winner that received what was advertised, so I don't 9 see any feasible complaints from there. Now, if a 10 prize winner received less than was advertised, it 11 was -- was there some kind of data as to how many 12 times that occurred? 13 MS. MELVIN: There is. I -- I can give 14 you that number, but, again, we never -- at -- in 15 those time periods, we never promised the advertised 16 amount. 17 COMMISSIONER OLVERA: Understood. 18 MS. MELVIN: Right. So, you know, I -- 19 I guess my question is, then, what base -- you know, 20 you asked the question, should the Commission consider 21 looking back in time and evaluating whether or not 22 something needs to be done. Then this is a legal 23 question, but what basis would you have to do that? 24 COMMISSIONER OLVERA: Right. 25 CHAIRMAN CLOWE: Commissioner Cox, I 0127 1 know you have a statement you want to make. I -- I 2 would suggest we give the Executive Director an 3 opportunity if he has a question or comment. Can we 4 do that? 5 MR. GREER: Thank you. 6 First off, from my perspective, I want 7 to thank the audit staff for their work on this. I 8 know they spent a lot of time on it. I went down 9 there to check on the progress of the audit throughout 10 this time period, which has been substantial, was 11 excited about the fact that I thought they were being 12 very thorough in their thinking process, and I saw a 13 number of charts and graphs and color coding and, you 14 know, all kind of things that they did to create a 15 clear and thorough understanding of the system. 16 When this came to my attention back in 17 July at a hearing that we were testifying at, through 18 a member of the public, there was obvious questions 19 that came to my mind as well as legislators that were 20 sitting in at that hearing. And my level of comfort 21 at that point was in question because I wanted to be 22 sure that the first audit was done correctly and I 23 wanted to look at the methodology, I wanted to be sure 24 that any other question that could be vetted out was 25 vetted out. And I accept the findings of our internal 0128 1 audit group and appreciate what they did. Their 2 comfort level of clarity, as far as the fact that we 3 operated within the rules, is significant to me. And 4 it's an important part of what I do because I do sign 5 off on the sheets that come forward from the 6 recommendations in financial and from marketing on 7 sales that they get from GTECH, which you pointed out 8 a moment ago, and certainly look to legal advice, you 9 know, when it's needed, when we get into scenarios 10 like this. But they did make some recommendations and 11 we're going to concur with those recommendations. We 12 are moving forward with -- with the report in mind, 13 and I am comfortable, based on the conversation that 14 you've had and that I've had and that has come out in 15 this report and what we found, and will move forward 16 and utilize my discretion under, you know, what we've 17 discussed very carefully. And in the time that I've 18 been here, which is almost two years, this has not 19 been an issue because the rule is clear, and we follow 20 the rule. 21 CHAIRMAN CLOWE: And in that regard, 22 Reagan, I would like your opinion on the current rule 23 and whether the discretion you have as Executive 24 Director is such that you feel it is comfortable. I 25 guess that's the word I think you used. And I would 0129 1 like for you to answer that in regard to your 2 knowledge of other state lotteries and what discretion 3 is given to those executive directors by their boards, 4 and what the reasons are, perhaps, for leaving it like 5 it is or perhaps considering a rule that would create 6 a very structured, bright line that would contain the 7 determination of the jackpot. Are you prepared to do 8 that? 9 MR. GREER: Yes, sir. And I'll ask 10 Gary to give input as well from his past experience 11 here at the Lottery and his current experience as 12 Deputy Director and his former experience as acting -- 13 Acting Executive Director. He dealt with this issue 14 as well. 15 We have done some phone calling around 16 the country in reference to the way other states do 17 it, and specifically, California, Florida, Maryland, 18 Michigan, New York, and Pennsylvania. We hit some of 19 the bigger states. And the research that has come 20 back shows that the executive directors in those other 21 lotteries do have discretion, and primarily the reason 22 it was given to not only look at marketing issues, 23 which we touched on earlier, I think -- Kim and I have 24 talked about it as well that was done in the past -- 25 but also in the case of some kind of disaster or 0130 1 emergency or some unforeseen type scenario that might 2 have an impact on the -- the way that the jackpot is 3 paid or estimated. And I like the way it is now, in 4 answer to your question whether I am comfortable with 5 it or not. My answer would be yes, because you're 6 looking at a scenario in the -- in the first four 7 draws where we can utilize the fund, but I take a very 8 conservative approach to this. And in the subsequent 9 draws, it's already pretty much laid out. The advice 10 that I have gotten up to this point has been very 11 good, and, again, this has not been an issue. So I do 12 have a comfort level with what the rule is now and 13 appreciate the fact that in my position as Executive 14 Director, I have that discretion, and also in other 15 states they have that discretion for unforeseen 16 circumstances. 17 I would like to ask Gary if he would 18 give some input from his perspective as well. 19 MR. GRIEF: Thank you, Reagan. 20 I have -- I have thought about this a 21 lot, and -- and my approach to this is -- is I think 22 the most appropriate thing is to have a rule in place 23 that serves the agency well, no matter who the 24 Executive Director is. There is -- staff come and go, 25 and there are conservative approaches to managing this 0131 1 and there are aggressive approaches. And I think some 2 of the history that Catherine has gone through today 3 shows that there were some different approaches to 4 managing the Lotto Texas jackpot. I think the current 5 rule that we have now is a good one. I think it more 6 or less, day to day, dictates the manner in which the 7 Executive Director will pay the Lotto Texas jackpot. 8 But at the same time, I think there is some broad 9 language at the beginning of the Lotto Texas rule that 10 Catherine alluded to that leaves just the right amount 11 of discretion in the hands of the Executive Director 12 where that person may be able to react to some 13 unforeseen situations that can arise. 14 One example might be an outage in, for 15 example, the Houston area on a draw night. And in an 16 extraordinary situation, it -- it might behoove the 17 agency to pay the advertised jackpot rather than come 18 out and pay a significantly lesser amount due to sales 19 that might have been lost due to some factors out of 20 our control or out of the control of the lottery 21 operator. 22 There also might be occasions where the 23 Executive Director, in consultation with the 24 Commission, might want to approach this with some 25 promotion in mind. I know in years gone by there was 0132 1 an anniversary celebration that the agency 2 participated in where we rolled the jackpot at ten 3 million increments. And I'm not saying that that 4 promotion was right or wrong, but I'm just thinking 5 that there may be situations that occur where 6 discretion could be helpful. 7 It's difficult to change a rule. It's 8 time consuming, and I think this rule provides, in my 9 opinion, just the right amount of flexibility to be 10 able to quickly react to unforeseen opportunities or 11 situations that might come up. 12 COMMISSIONER OLVERA: Gentlemen, my 13 review of the rule, though, is -- and I think it's 14 important to note -- that the public understand that 15 there is no discretionary decision that I can see from 16 the formula that is in place now that would have a 17 downside to a prospective winner. Any discretionary 18 decision would only be a positive to any prospective 19 winner. Isn't that correct, based upon the rule that 20 we have in place? 21 COMMISSIONER COX: Would it not be 22 true, though, that if -- the discretion that seems to 23 be in place now is that the amount paid to the winner 24 is not less than 75.2 percent of the pool? 25 COMMISSIONER OLVERA: Right. So if the 0133 1 Executive Director decided to give 80 percent, that's 2 only going up. 3 COMMISSIONER COX: But it's going to 4 down what the other winners get. 5 COMMISSIONER OLVERA: I see your -- I 6 see your point. Okay. 7 MS. MELVIN: Commissioner Cox, I'm 8 sorry to interrupt, but just to be clear. That amount 9 that you're talking about, that percentage, reflects 10 the amount that goes into the direct contribution 11 amount. The rule doesn't necessarily make that next 12 step that says, that amount must be paid. It says 13 that's the amount that shall be available -- or that's 14 the amount that goes into the -- to the direct portion 15 of the calculation. 16 COMMISSIONER COX: Okay. So what I'm 17 reading here is -- it says, five to four 2003, shall 18 be no less than 75.2 percent of the prize pool. 19 MS. MELVIN: Right. But that's just -- 20 COMMISSIONER COX: And what was your 21 point? 22 MS. MELVIN: My point is, is that that 23 directs how much will be allocated to this formula, 24 but get to the end, nowhere does it say that -- that 25 the prize category contribution is what would actually 0134 1 be awarded to the winner. We define that under 2 jackpot. We say, the jackpot will be the first four 3 draws; subsequent draws, it's the greater of. 4 COMMISSIONER COX: You lost me, 5 Catherine. I'm sorry. 6 MS. MELVIN: And I hope I'm reading 7 this correctly, and maybe our lawyers can advise 8 otherwise. 9 The rule sets out this formula about 10 direct contribution plus indirect equals that prize 11 category contribution. 12 COMMISSIONER COX: Okay. 13 MS. MELVIN: But the rules don't make 14 the next step that say that we must pay that amount. 15 It just says, this is how you calculate these amounts, 16 or this is how you get to it -- a contribution. 17 COMMISSIONER COX: Give me an example 18 of what could happen under what you just described. 19 COMMISSIONER OLVERA: And -- and, for 20 example, in our recent discussion, if for some 21 reason -- my understanding was that this amount is 22 going to the prize pool. If you decided to go 23 greater, there would be no downside. And you were 24 thinking that perhaps there could be because the 25 entire amount is going to the prize pool. 0135 1 COMMISSIONER COX: Well, there's -- 2 there is going to be a downside to somebody, whether 3 it's another winner or whether it's the people of 4 Texas. If there is discretion, if somebody gets more, 5 somebody is going to get less. 6 MR. GRIEF: Commissioner, if I could, 7 I -- I would like to clarify what I was referring to 8 when I was talking about discretion. I'm going to 9 401.305(a) in the Lotto Texas rule. And I think 10 Catherine touched upon that earlier. 11 COMMISSIONER COX: Yeah. 12 MR. GRIEF: And -- and what discretion 13 I'm referring to is, I believe, more broad discretion 14 than what we're talking about now, as far as 15 percentages going to individual prize categories. And 16 I'm reading the -- that section that talks about 17 further instructions and -- and directives, as an 18 example. 19 COMMISSIONER COX: I'm concerned about 20 that one, too, but I'm concerned about something else 21 now. 22 MS. MELVIN: In -- in my report, there 23 is a -- a text box on page four of the report that 24 kind of gives you a little more analysis about direct 25 plus indirect. And in italics, let me read that to 0136 1 you. It says: While the direct plus the indirect 2 contributions equal the prize category contribution, 3 the agency rules authorize the Executive Director to 4 issue instructions and directives regarding the 5 calculation and payment and did not compel the agency 6 to pay this amount to the prize winner. 7 COMMISSIONER COX: Did not? 8 MS. MELVIN: Right. 9 COMMISSIONER COX: But what about "do 10 not"? 11 MS. MELVIN: Obviously, that's still 12 true today, too, because, again, the rules talk about 13 a contribution, but they don't say that's the amount 14 to be paid. Where that's defined is, now we have a 15 definition of jackpot. 16 COMMISSIONER COX: Okay. Well, 17 Mr. Chairman, maybe this is the time for me to put my 18 statement out there. 19 CHAIRMAN CLOWE: Certainly. 20 COMMISSIONER COX: And let's see if it 21 has to do with anything other than what we talk about 22 in the future, because I think what we've talked about 23 here today is that, as far as anything that has 24 happened in the past, you find nothing that causes you 25 to believe that we -- anything that was done was 0137 1 outside the rule? 2 MS. MELVIN: No, sir. 3 COMMISSIONER COX: And Ridgely, you 4 concluded similarly, from a legal perspective, that 5 you saw nothing that had been done here that was 6 outside the rules or the law. 7 MR. BENNETT: Based on the work that 8 Catherine did, yes. 9 COMMISSIONER COX: Okay. Now, looking 10 specifically at the point that Catherine referred to 11 earlier and Gary referred to in 16 TAC 401.305. And 12 I'm reading from Catherine's report here on page four: 13 A Texas Lottery on-line game, to be known as Lotto 14 Texas, is authorized to be conducted by the Executive 15 Director under the following rules and -- and she has 16 italicized this -- under such further instructions and 17 directives as the Executive Director may issue in 18 furtherance thereof. 19 Now, Gary, I -- I hear your point about 20 the power outage in Houston, and I think that if we 21 need to address what we do in the case of a 22 catastrophe, that we should address it in the rule. 23 But, to me, I think that we can further improve this 24 rule by providing total transparency, so that we could 25 post the Web -- the rule on our Web site, and a winner 0138 1 could calculate the jackpot given only sales that come 2 from GTECH and the interest factor that comes from the 3 Comptroller. That seems to me like -- to me, it's a 4 basic tenet of a gambling operation, a game of chance, 5 that the winner know what first prize is. And the 6 only way I can see that the winner can know for sure 7 what first prize is, is that it be totally 8 transparent, totally simple, and that the only 9 exceptions be in the case where the system, because of 10 some catastrophe, doesn't permit the calculation in 11 that manner. Now I'll shut up. 12 CHAIRMAN CLOWE: Thank you. Good 13 point. 14 Gary, do you or Reagan have a response 15 to Commissioner Cox's comment? 16 MR. GREER: You go first. 17 MR. GRIEF: Thanks. 18 I will just say that's certainly within 19 your prerogative, Commissioner, to -- to make that 20 decision. I -- I think I laid out my points. I -- if 21 you think it's important to have some flexibility in 22 the event of a -- a disaster type situation. But I 23 just want to restate, I think there also may be some 24 value to having additional flexibility regarding some 25 promotional opportunities that may or may not come 0139 1 about. 2 COMMISSIONER COX: And, Gary, I would 3 add to that that I don't disagree with that. But I 4 would want opinion of counsel that that was legal, 5 because what I'm seeing there is that -- the question 6 I would ask is, if the rule is specific as to what is 7 paid, what authority did the legislature give us to do 8 that? And I would need to know that we had the 9 authority to go into either some other winner's money 10 and reduce it or the money that would otherwise be 11 transferred to the Foundation School Fund for that 12 purpose. 13 MR. GRIEF: Or, I would add, the prize 14 reserve fund. 15 COMMISSIONER COX: Yeah. Whatever. 16 MR. BENNETT: And, Commissioner, I hate 17 to interrupt, but the lawyer in me is -- is saying 18 speak. But before we go down the path, I think staff 19 would appreciate the opportunity to look at your -- to 20 review your comments and then to do further research 21 to find out to make sure that -- look at all possible 22 outcomes from any subsequent rule change. So I don't 23 think that we're in a position here today to say that 24 that is the way to go. I think what we can do is say 25 that we can look into that and present you with -- 0140 1 with our findings. 2 COMMISSIONER COX: And certainly, what 3 I'm thinking here is from a business standpoint. And 4 legal and other issues may certainly change the view 5 that I have of this when I hear them. 6 MR. GREER: And that was along my train 7 of thought as well. I mean, we did this just in the 8 last few days. I want to look at -- to give you some 9 better specific examples maybe across the country and 10 what executive directors have been faced with that 11 brought them to the point of having discretion. And 12 as a part of that research, you know, I would offer 13 that up and be able to give you a more substantive, 14 specific aspect of what the discretionary aspect is. 15 Because, as was stated earlier, I mean, I haven't 16 really had to address that. I've followed the 17 recommendations, and it's gone well and has not been 18 an issue. So that's what I would offer as well, that 19 I will call my counterparts around the country, see 20 specifically what I can add to this idea that we 21 talked about, and get back with more information. 22 CHAIRMAN CLOWE: Any further comments, 23 Commissioner? 24 COMMISSIONER OLVERA: I -- I agree 25 with -- with both you. I think I need more 0141 1 information, both from legal and staff. I think just 2 on the issue, though, that I was trying to make on the 3 discretionary issue, I think it should be important 4 that it only be a potential upside to the player, so 5 that there is no -- that there is no issue of some 6 kind of downside in terms of some -- the TLC making a 7 discretionary call that would harm a player, because 8 that's just bad for Texas. And that's all. 9 CHAIRMAN CLOWE: I think we're all 10 three in concurrence, and I like, particularly, 11 Commissioner Cox's comment about the business approach 12 to doing business so that everybody understands what 13 the -- the rules are. 14 I think the point that I would ask you 15 to look at very carefully is that I don't think the 16 Commission wants -- as one commissioner, I don't think 17 I want to vote to bind myself into a rule that doesn't 18 provide equity for all involved. And -- and there are 19 a number of interests here that should receive equity, 20 equal, fair treatment, in other words, and that is any 21 and all players and the recipients of the funds on 22 behalf of the State -- behalf of the State. And if we 23 can research this and come up with a rule that is 24 properly balanced -- and I think that's what the 25 Commissioners are asking for -- we would like to 0142 1 ponder it and perhaps consider moving in that 2 direction. And we respect, Reagan, your and Gary's 3 comments. I'm hopeful that they can be taken into 4 consideration and provided for with whatever solutions 5 you -- any changes contemplated from where we are now 6 with that regard. 7 I would like to join in thanking you 8 all for the hard work that you've done, not only the 9 internal auditor's office but the legal staff. Lee 10 has been involved. 11 We have a time issue, and, 12 Commissioners -- 13 MR. BENNETT: Commissioner, before you 14 move on, I would like to just clarify a point that 15 Commissioner Olvera made when we were talking about 16 concepts such as offer and acceptance. We do not 17 enter into contracts with our players or our prize 18 winners. That's not a contractual relationship. And 19 I just wanted to make that clear. 20 COMMISSIONER OLVERA: Oh, and -- and I 21 was not trying to imply there was a contract. I was 22 just trying to say that they entered into this -- the 23 Lottery voluntarily and accepted the prize. 24 MR. BENNETT: Thank you. 25 CHAIRMAN CLOWE: Now, this discussion 0143 1 is not closed, but we have a time issue, and we have 2 some individuals that we need to see in executive 3 session. 4 Commissioners, if you're agreeable, 5 I -- I would propose that we go into executive 6 session, in respect, Commissioner Olvera, to your time 7 constraints. And I would say to you that we are going 8 to come back and revisit this after we come back from 9 executive session, but I think a good portion of the 10 discussion has been held in your presence. 11 COMMISSIONER OLVERA: Yes, sir. 12 CHAIRMAN CLOWE: Are you comfortable 13 with that? 14 COMMISSIONER COX: Yeah. 15 CHAIRMAN CLOWE: Then at this time I 16 move the Texas Lottery Commission go into executive 17 session: 18 To deliberate the duties and evaluation 19 of the Executive Director and/or Deputy Executive 20 Director, Internal Audit Director, and Charitable 21 Bingo Operations Director, pursuant to Section 551.074 22 of the Texas Government Code. 23 To deliberate the duties of the General 24 Counsel and Security Director, pursuant to Section 25 551.074 of the Texas Government Code. 0144 1 To receive legal advice regarding 2 pending or contemplated litigation and/or to receive 3 legal advice pursuant to Section 551.071 (1) (A) or 4 (B) of the Texas Government Code and/or to receive 5 legal advice pursuant to Section 551.071 (2) of the 6 Texas Government Code, including but not limited to: 7 Patsy Henry versus Texas Lottery Commission 8 Sandy Surber et al. versus GTECH Corporation 9 Linda Cloud versus Mike McKinney, et al. 10 James T. Jongebloed versus Texas Lottery Commission 11 Felipe Chavez versus Texas Lottery Commission and 12 Sergeant Marvin J. Collins 13 Russell Vierney versus Carol Keeton Strayhorn and Greg 14 Abbott and Reagan E. Greer, in their individual and 15 official capacities 16 Employment law, personnel law, procurement and 17 contract law, evidentiary and procedural law, and 18 general government law. 19 Is there a second? 20 COMMISSIONER COX: Second. 21 CHAIRMAN CLOWE: All in favor, please 22 say aye. The vote is three-zero. The Texas Lottery 23 Commission will go into executive session. The time 24 is 11:15 a.m. The date is January the 7th, 2005. 25 (EXECUTIVE SESSION.) 0145 1 CHAIRMAN CLOWE: We'll come back to 2 order. And Ms. Melvin, if you'll come forward, we 3 were on item number 12: Consideration of and possible 4 discussion and/or action on external and internal 5 audits and/or reviews relating to the Texas Lottery 6 Commission and/or on the Internal Audit Department's 7 activities, at the time that the Commission went into 8 executive session. 9 And I would like to announce that the 10 Commission is out of executive session, and the time 11 is 12:55 p.m. Is there any action to be taken as a 12 result of the executive session? 13 If not, let's move back to your item on 14 the agenda, and we will continue the discussion 15 relative to your audit relating to Lotto Texas. 16 I think Commissioner Cox had made a 17 statement and had concluded that statement, and do you 18 have anything further to discuss with us relative to 19 your audit? 20 MS. MELVIN: No, Commissioner, I don't 21 at this time. 22 CHAIRMAN CLOWE: And do you have 23 another item that you want to cover with the 24 Commission? 25 MS. MELVIN: I do. It's related to the 0146 1 bi-annual security review, and I -- I need to ask the 2 vendors to join me in that presentation. 3 CHAIRMAN CLOWE: And I think they are 4 ready to come forward. 5 MS. MELVIN: This will be item nine. 6 CHAIRMAN CLOWE: Item nine? Very good. 7 The security study. 8 MS. MELVIN: Yes, sir. 9 CHAIRMAN CLOWE: Okay. 10 MS. MELVIN: Thank you again, 11 Commissioners, for -- 12 COMMISSIONER COX: Catherine, do we 13 have any papers in here on this or -- 14 MS. MELVIN: No, we don't. 15 COMMISSIONER COX: Okay. 16 MS. MELVIN: We don't. But our vendor 17 will present some information to you today. 18 I would like to provide a brief update 19 on the bi-annual security audit -- or, sorry, security 20 study. As you are aware, under the State Lottery Act, 21 the agency is required to undergo a comprehensive 22 study of all aspects of lottery security at least once 23 every two years, to be performed by an independent 24 firm. The firm Jefferson Wells International was 25 engaged to conduct the current study for the agency. 0147 1 They have concluded their review and are issuing 2 their -- or we're anticipating a final report to be 3 issued this afternoon. With me is Ms. Jill Sheehan, 4 from Jefferson Wells, and Carlton Wilkes, who will 5 present their overall conclusions. 6 CHAIRMAN CLOWE: Thank you. Good 7 afternoon. 8 MR. WILKES: Good afternoon. 9 MS. SHEEHAN: Good afternoon. Is this 10 on? I have to thank Catherine for doing all my prelim 11 stuff. Thank you, Catherine. 12 So in conclusion to Catherine's 13 comments, we did not identify any issues that would 14 materially impact the integrity and overall security 15 of Texas Lottery operations, gaming services, and 16 instant and on-line ticket productions. We did 17 conduct our review here at Texas Lottery headquarters, 18 at GTECH operations, and at Scientific Games. If you 19 have any questions. 20 CHAIRMAN CLOWE: Any questions? 21 COMMISSIONER COX: That was right to 22 the point, wasn't it? No, I don't think so. 23 Did -- did -- did you find any lack of 24 cooperation? Did you have any difficulties? Were 25 there any unresolved issues that are underneath the 0148 1 surface that we're going to hear about later? 2 MS. SHEEHAN: The cooperation was 3 great. Helpful, courteous, Everyone helped. We have 4 a couple of things we're still kind of looking into, 5 and there won't be any surprises. 6 MR. WILKES: It will not change our 7 overall opinion. Our overall opinion remains the 8 same. 9 COMMISSIONER COX: That's excellent. 10 CHAIRMAN CLOWE: Thank you very much. 11 MS. SHEEHAN: Thank you. 12 MR. WILKES: You're very welcome. 13 CHAIRMAN CLOWE: Thank you, Catherine. 14 MS. MELVIN: Thank you. 15 CHAIRMAN CLOWE: Now in regard to item 16 number 12 and item number one -- or nine, rather, Ms. 17 Dawn Nettles has requested to appear before the 18 Commission. Ms. Nettles, if you'll come forward, 19 please. Good afternoon. 20 MS. NETTLES: Good afternoon, 21 Commissioner Clowe. 22 For the record, my name is Dawn 23 Nettles, and I'm the publisher of The Lotto Report out 24 of Dallas. And before I start, I guess I need to say, 25 I hope you all take this as friendly conversation, 0149 1 comments. They may sound like they're not friendly, 2 but I am trying to be friendly. 3 You all have just concluded your audit 4 report for the allegations that I made back in 2001, 5 with regard to the payment to the Lotto Texas winners. 6 And there is a number of things that were said earlier 7 and that was in -- that is in this report that I would 8 like to comment on. 9 First and foremost, when Catherine said 10 that she did a complete audit, going back to the 11 inception of Lotto Texas, she made it real clear that 12 she only did a few hit and miss -- you know, spot 13 check. She just did random picks for -- for testing. 14 There have been four different rules, I 15 believe, for Lotto Texas, and there were winners under 16 each of the rules. Between 1992 and 1996 -- or I'm 17 sorry -- the beginning of 1997, when that second rule 18 came into effect, apparently she failed to find the 19 consistency for paying the Lotto winners because all 20 of them were paid the amount in the prize pool up 21 until late '96, when the problems up here or the -- 22 the fear began that there would not be enough money in 23 the prize pool to fund. There was winners that 24 collected only the amount of the prize pool, and it 25 was not sufficient to pay the advertised amount. 0150 1 The rule, from 1992 to 1997, never 2 stated that the Lottery Commission was going to pay 3 the advertised amount. The rule stated that it was a 4 pari-mutuel game, based on the -- the percentages for 5 each one, each prize level, is what was -- was what 6 they got. And that's exactly how they paid. They 7 never varied, and they never paid more. And there are 8 winners that did win, that I have identified with, 9 that did complain because they did not receive enough 10 money to give them a return of the amount advertised. 11 And that's where the beginning -- going way back in 12 the history, where that came to surface. 13 The -- the question here is twofold. 14 Y'all have two issues at hand. You have the issue of 15 the overpayments, and you have the issue of the 16 underpayments. Where the overpayments are concerned, 17 Commissioner Clowe, when -- when you said, what 18 would -- would happen if we set out to collect those 19 that -- money from those that we overpaid, and what 20 would happen if we set out to pay those -- 21 CHAIRMAN CLOWE: I -- I did not say, 22 those we had overpaid. 23 MS. NETTLES: Okay. 24 CHAIRMAN CLOWE: I -- I want to correct 25 you on that verb. 0151 1 MS. NETTLES: I don't know your exact 2 verbiage, but that was the basis to the whole deal 3 was, could we go back and -- and collect, you know, 4 monies where we overpaid and then do whatever. I -- I 5 wanted to say that the rule very clearly said that the 6 Executive Director could increase the payments. So I 7 don't think you would have a leg to stand on, and I 8 think that's what -- what counsel said to you, too. 9 Counsel also made it very clear that, 10 based on Catherine's report, that he concurred with 11 her findings. And based on her report, I, too, would 12 have to concur with her findings. However, I sent you 13 all a rebuttal back in December, and I trust that you 14 got it and read it. Did you? 15 CHAIRMAN CLOWE: I did. 16 MS. NETTLES: You did? Okay. Then you 17 saw Section 401.305 is the Lotto Texas rule. And it 18 is the -- I'll call it the Bible of the game. That -- 19 that is what the Executive Director has to follow is 20 that rule. And I want to cover only a given time 21 period, and that is what I'm terming as the cheated 22 winners. Winners, in my opinion, and I allege that 23 winners were cheated, did not receive all that was in 24 the prize pool between 1997 and February of 2000. 25 During that time frame, there was only one rule in 0152 1 effect, and this is it, the rule in its entirety. 2 I heard notation earlier of the very 3 first sentence in the rule. Catherine brought that to 4 the attention that read: 401.305(A) Lotto Texas -- a 5 Texas lottery on-line game, to be known as Lotto 6 Texas, is authorized to be conducted by the Executive 7 Director under the following rules -- which is the 8 rest of the rules -- and under such further 9 instructions and directives as the Executive Director 10 may issue in furtherance thereof. 11 Well, first and foremost, the Executive 12 Director had to follow the rules. She had to follow 13 the rules. For Lotto Texas, it very clearly states 14 that Lotto Texas is a pari-mutuel game and that all 15 prizes are based on pari-mutuel calculations with the 16 exception of the fourth prize and it was a guaranteed 17 three dollars. 18 Wait one second. I've got to pull some 19 more papers. 20 Catherine pointed out that -- she 21 pointed out to you all the indirect prize categories, 22 such as in her report, if I have the -- I don't think 23 I have her entire report, but what I have of it, for 24 me, page eight -- I'm sorry -- it's page nine, where 25 it has the figure of the direct contribution and the 0153 1 indirect contribution. It's this -- this page if 2 y'all can see it. And the very first thing it says 3 is: Any amounts allocated from the prize reserve 4 fund. 5 The 1997 rule did not give you that 6 option, between 1997 and the rule that became 7 effective in July of 2000. The indirect prize 8 category says: The indirect prize category 9 contribution, which may be increased by the Executive 10 Director, will include -- will include the rollover 11 from the previous drawing, if any. 12 There was nowhere that money was to 13 roll over. When there is a winner, then that money is 14 paid out. Between 1992 and 1996, that's the very 15 specific figure that they paid out, was what was here. 16 It didn't make any difference what was advertised or 17 if there was enough to bring in. They did not pay the 18 advertised amount. Nowhere in this rule and nowhere 19 in the 1992 rule does it even mention paying the 20 amount advertised. It states that it is a pari-mutuel 21 game and prizes are based on pari-mutuel calculations. 22 And it also very clearly states that 23 the percentage due is 64 percent of the prize pool. 24 The prize pool at that time was 50 percent of draw 25 sales. So that meant that the winner was entitled to 0154 1 32 percent of total sales or 64 percent of the prize 2 pool. 3 In Catherine's statement, her report, 4 she has a statement that says: While the rule 5 addressed the amount to be dedicated to the prize 6 pool, the rule did not specify whether the entire 7 amount available for prizes must be paid. In fact, 8 the rule defined the prize pool as the amount 9 available for prizes. And she has "available" in 10 quotes. 11 That sentence is in there, but that's 12 only half of that sentence. The other half of that 13 sentence reads -- the entire sentence reads: The 14 total amount of money available for prizes as a 15 percentage of the total sales for the current draw 16 period. 17 It's very emphatic that it says, a 18 percentage of the draw sales. The definition of prize 19 pool -- oh, wait. I'm not going to go there on that 20 one. 21 The definition -- or not the 22 definition, the rule, 401.305, section E, prizes for 23 Lotto Texas, says: Number one, the prize amounts for 24 each drawing paid to each Lotto player who selects a 25 matching combinations of numbers will vary due to a 0155 1 pari-mutuel calculation, with the exception of the 2 fourth prize, which is a guaranteed three dollars. 3 The calculation of a prize shall be rounded down so 4 that prizes can be paid in multiples of whole dollars. 5 Each prize breakage, with the exception of the fourth 6 prize, will carry forward -- and it says "will" -- 7 "will" is a very specific word -- to the next drawing 8 for each respective prize category. Well, we're 9 talking about the six of six share. The fourth prize 10 category breakage will be placed in the prize pool. 11 No prize amount shall be less than three dollars. And 12 the last sentence that's very important says: The 13 prize amounts are based on a total amount in the prize 14 category for that Lotto Texas distributed equally over 15 the number of matching combinations for the prize 16 category. 17 The rule was very specific, it was a 18 pari-mutuel game. Lotto Texas is pari-mutuel. The 19 jackpots were called estimated jackpots because they 20 never knew what sales were going to justify, and that 21 is what the Commission has told the people since the 22 beginning of the Lotto -- since the beginning of Lotto 23 Texas. They've never missed a beat. It's the 24 estimated amount because we don't know what sales is 25 going to bring in. 0156 1 I have no problems with any prize 2 payments because I've calculated each -- each win, and 3 I know for a fact that since March of 2000, you 4 all have -- the Commission has paid the exact amount 5 in the prize pool. Each winner has received at least 6 that amount of money. But prior to the time that I 7 put it up on my Web site, they weren't. And at no 8 time did the rule ever say that they were paying the 9 advertised amount. 10 Now, she didn't address issues in her 11 report. She just seems to center on the fact that the 12 Executive Director had the ability to increase 13 payments, but she -- the Executive Director did not 14 have the right to decrease anything, not based on the 15 definitions here of rollover, of the -- what are the 16 definitions? The prize category, the definitions 17 of -- of all of that -- it defines rollover as the 18 amount not won because there is no matching 19 combinations or prize breakage from the previous 20 drawing in a prize category. The prize breakage is 21 referring to the five of six, four of six prizes. 22 It's not even referring -- and -- and I guess the 23 three of six, too, because the money that's been 24 placed in reserve has -- has come as a -- early -- in 25 the early years, it came from the three of six prize 0157 1 level because it was over-allocated, and there was too 2 much money allocated for that particular prize. And 3 that's what really built or helped build the prize 4 reserve fund. 5 Under the price of tickets and prizes 6 rule -- this is 401.304, which is in the definition 7 section -- price of tickets and prizes: The total 8 amount of prize money allocated to the prize pool for 9 on-line games from total on-line sales shall be a 10 minimum of 50 percent. Notice that it says that it's 11 the total amount of prize money. Under the prize 12 breakage deal, it was very emphatic in that it said, 13 leftover from rounding down can only apply -- or it -- 14 leftover from rounding down can only apply to the 15 first, second, and third prizes, as they were 16 pari-mutuel prizes. 17 I don't understand how this Commission 18 can take this whole rule and have the people believe 19 it is a pari-mutuel game and not pay them all that was 20 in there that they won for their share and say that on 21 a pari-mutuel game with a very set percentage of sales 22 due, that the Executive Director can lessen that. And 23 it does not say that. And the rule between 1997 and 24 2000, when these winners were cheated -- and they were 25 cheated; they did not receive all that was in the 0158 1 prize pool -- it was intentional. The Commission knew 2 exactly what they were doing when they did it. And if 3 those people were called forward, they would tell you 4 what the motive was. And I am hoping, although I 5 don't have any faith that you're going to, but I was 6 really hoping that you all were going to just make 7 good on this mistake and take care of it and pay these 8 people what they really won when they won. I -- I 9 don't understand how you can come out with an audit 10 report and not cover these definitions and acknowledge 11 the fact that it's a -- a pari-mutuel game. 12 This report and the discussion I heard 13 today had so much to do with so many different time 14 frames and concerns about today's rule. And I realize 15 that, from the legislative standpoint, that you all do 16 need to make sure that this Commission is paying out 17 no more than it needs to, that you need to -- to 18 receive -- the State needs to receive their share of 19 moneys, which I don't have any problems with. I had a 20 problem, and -- and, Commissioner Clowe, you were here 21 at the time that you made that 2002 rule change. And 22 you know I -- I fought that tooth and nail. And then 23 you said, okay, how about if we just pay the greater 24 of either. And I said, don't care, so long as the 25 winner gets his full share and it's guaranteed it in 0159 1 that rule to where there is no problem with it. And 2 you all, as a result of paying the -- the greater of, 3 you all continued to -- to pay out more money than 4 ever necessary. It is a pari-mutuel game. You don't 5 go to the horse races and say -- and see them say, 6 ooh, we've got too much money on him, that prize is 7 too big for that one; so we're going to alter the 8 pari-mutuel amount or the percentage due that's 9 supposed to be divided amongst the winners. But 10 that's exactly what this Commission has done. And -- 11 and I -- I know that you all refuse to admit any 12 wrongdoings. I know that it is the intent of this 13 Commission to try to justify their actions. But Lotto 14 Texas is a pari-mutuel game, and there is no getting 15 around it. And it's throughout this rule. 16 How come her audit report did not have 17 anything to that nature? How can you have a rule and 18 admit that there was various ways of calculating? 19 There was only one rule. And each set of winners -- 20 there was four winning groups -- the jackpot, five of 21 six, four of six, and the three of six. Supposedly, 22 they're supposed to get 50 percent of sales, but they 23 don't. They only get 48 percent because you keep two 24 percent in reserve. But yet the press releases on 25 those rule changes came out, and we're increasing our 0160 1 prize payment to the people to 55 percent. The 2 people's share never even equaled 55 percent. It 3 equaled 53 percent. 4 Today you've done the same thing with 5 the five and 44. You say, we've lowered it from 55 to 6 52, but we're returning 52 percent of sales. Prize 7 allocations don't even equal 52 percent or a hundred 8 percent. It only equals 98 percent of the players' 9 share because of that reserve money. 10 This Commission did not pay, and y'all 11 know it. And I -- and you won't admit it. And that's 12 what really irritates me the most is that you won't 13 say, yeah, we overpaid one player by two million 14 dollars, but we're going to cheat him out of 900,000 15 because, gee, he's got enough. We've got to try to 16 offset that. We're going to pay the advertised 17 amount. 18 Somebody just show me in this rule 19 where it says that you're going to pay the advertised 20 amount. Can anyone up there do that? I know this 21 book backwards and forwards. So how can that even be 22 in the internal policies and the rule supersedes all 23 other things, including the Administrative Code, where 24 the Executive Director -- it says, the Executive 25 Director has to follow the rule. The employees who 0161 1 worked here were responsible for knowing the rule and 2 for doing exactly what the rule said by abiding by the 3 law. 4 CHAIRMAN CLOWE: I think you have made 5 that point. 6 MS. NETTLES: Okay. Well, is today 7 your -- is today the end of the discussion for this? 8 I mean, you can't go and take money back that you've 9 overpaid, which is nearly 100 million dollars. And 10 it's not -- well, yeah, it's overpaid because it 11 didn't even become in the rule, until 2002, that you 12 were going to pay the greater of either. Before it 13 was just left out there in the wide open. But this 14 Commission paid properly in the very beginning. And 15 there were winners that won that did not receive the 16 advertised amount. And they came here, and they have 17 complained about it. And that's when the discussion 18 started about, well, maybe we better do this. But you 19 see, the real truth is is that in New York and 20 California, they're the ones who told Texas, hey, this 21 is what we did to kind of counter that problem. And 22 while it's not exactly fair to the people, but what we 23 can do is if we have winners of four million or two 24 million or -- or whatever, then we will be able to pay 25 them and offset it on the -- on the higher end, when 0162 1 we -- when we don't have to estimate. 2 Just like right this minute. We're 3 sitting here with a drawing tomorrow night, and this 4 Commission has for less -- for Wednesday night's 5 drawing, they overestimated what they thought sales 6 were going to be. Now, of course, I'm not asking you 7 to confirm that or deny that. It doesn't matter. I 8 know the numbers. And I watch it. And you're always 9 keeping 400,000 up. And that's in that factor. Okay? 10 And I understand that. And it doesn't really matter 11 because the winner today will receive the amount in 12 the prize pool, and that's all that he is entitled to. 13 And that's what I've been fighting for, is just for 14 him to get that. But besides the fact that you can't 15 tell me where in here it says we're going to pay the 16 advertised amount -- I just lost my whole train of 17 thought. 18 Is this Commission going to give any 19 consideration to paying those winners that did not 20 receive, while it was in the prize pool, those 13 21 wins? 22 CHAIRMAN CLOWE: Ms. -- Ms. Nettles, 23 with respect, I want you to understand that we're not 24 here to answer your questions. We're here to take 25 your comment. 0163 1 MS. NETTLES: Uh-huh. 2 CHAIRMAN CLOWE: And -- and have you 3 made your statement now? 4 MS. NETTLES: No. Actually, I haven't. 5 I -- I just remembered this. I'm sorry. No. 6 Actually, I haven't. 7 CHAIRMAN CLOWE: If -- if you could go 8 forward and conclude, I think we would appreciate it. 9 I think you've made your points. 10 MS. NETTLES: Okay. Commissioners, I 11 will conclude on that particular subject matter, but I 12 want to comment on the security issue. 13 CHAIRMAN CLOWE: Just -- just a minute. 14 Is there any comment or question? 15 And you wanted to comment on item nine 16 on the agenda? 17 MS. NETTLES: Uh-huh. 18 CHAIRMAN CLOWE: Would you do so now, 19 please? 20 MS. NETTLES: Yes, sir. Sir, the 21 winners have already decided unanimously that we are 22 going to file a lawsuit on this issue. So that will 23 be forthcoming. I didn't want to go there and I 24 didn't want to do that, but the decision was made 25 yesterday amongst everybody that this would be the 0164 1 step we would take today if this is what you all ruled 2 on. So I really hate to do that or get involved in 3 that, but that is our -- that is what we will be 4 doing. That is our plan. 5 Security issue. I wanted to comment on 6 this last month, but I had to leave for some reason -- 7 wrong paper. About the reorganization. And the 33 8 RIF letters that went out to the security personnel, I 9 think that is the worst mistake that the Commission 10 has -- well, the second worst mistake the Commission 11 has ever made. Okay? I'm going to tell you why. 12 Now, I realize the people of Texas don't necessarily 13 know this, but I know do. I know that you all are 14 planning to go to computerized draws, and I know that 15 your line of thinking, because you're going to go 16 computerized draws, is that we don't need security in 17 there to check the balls and the machines and the 18 integrity of the drawings because it's going to come 19 out of a computer in the future. So we don't need 20 those people there. 21 Now, I am definitely opposed to the 22 computerized draws. You have no idea how much. And I 23 think when the Commission does that, y'all are going 24 to be sorrier that you were than when you went in it 25 for five and 44. But those security people, since 0165 1 they're now under legal -- I've got to find -- I'm 2 sorry. I got to find this because I have it in 3 writing. Found it. 4 Security people, one of their jobs and 5 one of their very important functions is that they 6 keep -- that GTECH keeps about a billion dollars' 7 worth of scratch tickets in their warehouse before 8 they're distributed to the people. There won't be 9 anybody over there watching over those scratch 10 tickets, not to the degree that it should be. The 11 certifying and testing of the balls and the machines, 12 that's something that the Lotto security folks 13 handled. And they did everything to make sure that 14 the drawings were secure and that integrity was 15 upheld. The police lab here at the Lottery that y'all 16 spent a whole bunch of money doing, and they 17 investigate the stolen and the altered tickets, and 18 that is a massive problem in Texas. And now you don't 19 have anybody in the outlying areas to help these 20 retailers. The security division investigates the 21 Lottery vendors, the employees, the store owners. And 22 how -- how are we going to -- with you cutting back 23 security, which was never intended when the Lottery 24 began, that was the last division to ever be cut back, 25 yet it's the first for a major overhaul. Who is going 0166 1 to keep their eye on all this stuff? Since the 2 Commission has moved under the legal division, they 3 used to be able to work auto-anonymously, but they can 4 no longer function that way. I just don't understand 5 how you could take security and get rid of them. 6 They're the ones who are supposed to be up here that 7 are supposed to really be able to -- if -- if they see 8 something going on up here, they're supposed to be 9 able to pounce on it. But they've -- they've lost it 10 all. And -- and I -- I didn't get to hear what he 11 said about the report, and his report is going to come 12 out that it -- that things are hunky-dory. I don't 13 know what he said. I didn't get to hear him in his 14 short report, but I'm quite certain that those people 15 identified problems up here. And I hope that you all 16 will rethink this reorganization, and especially in 17 putting it under legal, because that's really a 18 problem. And the people of Texas deserve -- if -- if 19 the people knew -- and they are beginning to learn 20 now -- that y'all got rid of all security and that you 21 didn't have anybody in the outlying forces and the 22 retailers, it's going to be a major problem from them. 23 You will be hearing from retailers, if you haven't 24 already, with problems in the outlying areas for not 25 having people out there, not having personnel. I -- 0167 1 I'm -- I'm -- really was disturbed over the security 2 division. I guess I probably shouldn't be, given 3 everything that I watch up here, but I was. 4 And that's about all I have to say 5 today that I can think of right now. 6 CHAIRMAN CLOWE: Thank you, 7 Ms. Nettles. 8 Are there any questions or comments? 9 Then we'll move on to item ten: 10 Report, possible discussion and/or action on lottery 11 advertising and promotions. Mr. Tirloni. 12 MR. TIRLONI: Good afternoon, 13 Commissioners. Once again, for the record, my name is 14 Robert Tirloni. I am the Products Manager for the 15 Texas Lottery Commission, and I have a brief report 16 for you this afternoon. DDB Dallas and The King Group 17 are both currently off air in terms of TV and radio 18 campaigns. There has been a slight change since this 19 memo was drafted. I had in the memo that both 20 agencies will begin their next flights in mid to late 21 January. That is true for DDB. The King Group is 22 doing some production work, and they requested that 23 their next flight move into the first week of 24 February. And so that has been approved, and we can 25 give you an update later in the month about what -- 0168 1 what campaigns will be airing. And I do not have any 2 updates on promotional activities at this time, but I 3 would be happy to answer any questions that you have. 4 CHAIRMAN CLOWE: Thank you, sir. 5 MR. TIRLONI: Thank you. 6 CHAIRMAN CLOWE: The Next item, number 7 11: Report, possible discussion and/or action on the 8 78th and/or 79th Legislature. Ms. Trevino, good 9 afternoon. 10 MS. TREVINO: Good afternoon, 11 Commissioners. For the record, I'm Nelda Trevino, the 12 Director of Governmental Affairs. 13 As you are aware, the 79th Legislature 14 will convene its regular session next Tuesday, January 15 the 11th, at 12:00 noon, and will meet for the next 16 140 days. The last day of the regular session will be 17 May 30th, 2005. We will certainly keep you apprised 18 of the committee assignments, once those assignments 19 have been made by the Lieutenant Governor and the 20 Speaker. 21 I provided you this afternoon an 22 updated copy of our legislative bill tracking report, 23 and I would like to note one bill that was just filed 24 yesterday by Representative Richard Raymond, and that 25 is HJR 25, which proposes a constitutional amendment 0169 1 to dedicate net revenue from the State Lottery to 2 public education. The bill also states that 3 advertising may not encourage or attempt to influence 4 a person to purchase a lottery ticket by supporting 5 education. This is a similar bill and piece of 6 legislation that Representative Raymond has filed in 7 the past. 8 As of this date no bills have been 9 filed that directly impact Charitable Bingo, and the 10 Sunset bill of the agency has not yet been filed 11 either. 12 Also for your information, we provided 13 you today a copy of a report issued by the Texas House 14 of Representatives House Research Organization, titled 15 Topics For the 79th Legislature. And I would like to 16 just bring to your attention the section that's 17 included on page nine, related to gambling. There are 18 several references to the Lottery Commission in some 19 of the initiatives that the Legislature might be 20 taking up this session. 21 And also, for the record, the House 22 Committee on Licensing and Administrative Procedures 23 committee issued its interim committee report, and we 24 previously provided you a copy of their 25 recommendations as it relates to the interim charge 0170 1 that was specifically related to charitable bingo and 2 the implementation of House Bill 2519. 3 And that concludes my report, and I'll 4 be happy to answer any questions. 5 CHAIRMAN CLOWE: Are there any 6 questions? Thank you, ma'am. 7 Next item 13: Consideration of and 8 possible discussion and/or action on the Instant 9 Ticket Testing procurement. Is this item going to be 10 discussed? 11 MS. KIPLIN: Mr. Chairman, I think 12 staff would -- would like to pass that item. 13 CHAIRMAN CLOWE: Then we'll go to item 14 14: Consideration of and possible discussion and/or 15 action on the Broadcast Studio and Production Services 16 procurement. 17 MR. GRIEF: Is Mr. Bennett in the room? 18 Andy, can you handle that? 19 CHAIRMAN CLOWE: We'll pass that until 20 he comes back. 21 And we go to item 17: Consideration of 22 the status and possible entry of orders in the cases 23 represented by the letters A through M. 24 MS. KIPLIN: Mr. Chairman, if we could 25 take up A through D, those are Lottery licenses. In 0171 1 each of those cases, the staff is recommending that 2 you adopt the findings of fact and conclusions of law 3 entered by the administrative law judge and revoke 4 each of those licenses for insufficient funds being 5 available at the time that we swept their accounts. 6 CHAIRMAN CLOWE: Did I understand you 7 to say A through D? 8 MS. KIPLIN: Yes, sir. A -- 9 CHAIRMAN CLOWE: D as in dog? 10 MS. KIPLIN: Yes, sir. 11 CHAIRMAN CLOWE: So moved. 12 COMMISSIONER COX: Second. 13 CHAIRMAN CLOWE: All in favor, please 14 say aye. Opposed, no. The vote is two-zero in favor. 15 And let's go ahead and go through these before we get 16 to signing orders. 17 MS. KIPLIN: Okay. Be glad to do that. 18 CHAIRMAN CLOWE: What is next? 19 MS. KIPLIN: Mr. Chairman, the 20 remaining dockets all have to -- have to do with the 21 contested case proceedings that went over to the State 22 Office of Administrative Hearings. This is a new 23 matter for the Commission to consider. This relates 24 to the -- the agency's maintenance of the Registry of 25 Bingo Workers. In that matter, the Commission, after 0172 1 notice and opportunity and -- and hearing, are in a 2 position of either removing a person's name from the 3 registry or refusing to add a person's name to the 4 registry for a disqualifying criminal conviction. In 5 each of these docket numbers that are before you, that 6 is the basis for the removal of the name from the 7 Registry of Bingo Workers. And the staff recommends 8 that you sign each of these orders, allowing the -- 9 the staff to remove that name from the Bingo Registry 10 of Workers. And that means that the organizations 11 will know that those people are not eligible to be 12 workers in their operations, bingo operations. 13 CHAIRMAN CLOWE: And these dockets are 14 represented on our agenda by the letters E, echo, 15 through M, more. Is that correct? 16 MS. KIPLIN: Yes, sir. That's correct. 17 CHAIRMAN CLOWE: So moved. 18 COMMISSIONER COX: Second. 19 CHAIRMAN CLOWE: All in favor, please 20 say aye. The vote is two-zero in favor. Now we'll 21 sign those orders. 22 And then next, Reagan, I'll call on you 23 for your report as soon as we finish signing these. 24 MS. KIPLIN: Mr. Chairman, this is our 25 first attempt to present those cases in connection 0173 1 with the Bingo Registry of Workers to the State Office 2 of Administrative Hearings, and we're going to try to 3 figure out a way to streamline that in the future. 4 And "that" being you all being required to sign each 5 one of those. We're going to do possibly a mass 6 docket. 7 I also will say, Mr. White, who is the 8 chief of our -- our Enforcement Department, is 9 available should you have any questions regarding the 10 process on these contested cases, in particular, 11 the -- 12 CHAIRMAN CLOWE: Ridgely, if you'll 13 come forward, we'll go back to your item on the agenda 14 as soon as we finish this task, please. 15 MS. KIPLIN: Just for your information, 16 the next time we'll see if we can't get one docket 17 number, one order, and an attachment, which is what I 18 thought we had discussed procedurally. So I apologize 19 for that. 20 CHAIRMAN CLOWE: It would be well for 21 you to check all of these orders and make sure that we 22 haven't missed one in this flurry, please. 23 MS. KIPLIN: Yes, sir, I will. 24 CHAIRMAN CLOWE: All right. 25 Mr. Bennett, thank you for returning. Can we now 0174 1 return to your item on the agenda? 2 MR. BENNETT: Thank you, Commissioners. 3 For the record, my name is Ridgely Bennett. I'm the 4 Deputy General Counsel for the Texas Lottery 5 Commission. 6 The Commission issued a request for 7 proposals for a drawing studio and production 8 services. The Commission received one proposal in 9 response to the RFP. That proposal failed the 10 business subcontracting requirements set forth in the 11 RFP, and as a result, the Commission canceled the 12 solicitation. The Commission anticipates issuing a 13 new RFP for a drawing studio and production services 14 in the near future. I'll be happy to answer any 15 questions you have. 16 COMMISSIONER COX: Are we under the gun 17 as a result of that? 18 MR. BENNETT: We would have to sit 19 down, as -- as staff and review the time schedule for 20 issuing a new solicitation, taking into consideration 21 that there may have to be some transition should a new 22 vendor be chosen. So time is short right now. 23 CHAIRMAN CLOWE: Who was the response 24 from that was not processed? 25 MR. BENNETT: The current vendor, M&S 0175 1 Works. 2 CHAIRMAN CLOWE: Thank you, 3 Mr. Bennett. 4 MR. BENNETT: Thank you. 5 CHAIRMAN CLOWE: Now we'll turn to item 6 18: Report by the Executive Director and/or possible 7 discussion and/or action on the agency's operational 8 status, FTE status, and retailer forums. 9 MR. GREER: Mr. Chairman, I -- 10 Mr. Chairman, I have just a few items to report to you 11 and Commissioner Cox. Now, the first one is, as we 12 start the new year out, we're excited about the fact 13 that we have two good jackpots rolling on Lotto Texas 14 and Mega Millions, 45 million and 80 million 15 respectively. I wanted to put on the record my 16 appreciation to the staff and marketing and in the 17 Lottery Operations group as a whole for the work that 18 they have done in reference to scratch-off tickets. 19 We noted earlier in our -- our report today that we 20 are reaching levels we haven't seen since -- since 21 1992, and that is a group effort that I'm happy to be 22 a part of and excited about, and look forward to 23 continuing to improve what we're doing in that realm 24 and see some numbers we haven't seen since the 25 beginning of the Lottery, possibly. 0176 1 I also wanted to recognize that group 2 in reference to the fact that we had some recent 3 awards that were given by NASPL in 2004 at their 4 conference. They were -- we were Batchy Award 5 finalists, which is an award that is given by NASPL in 6 three different areas. One -- and they're behind 7 me -- I brought them here so you could see them. One 8 was in the Corporate Communications area for our 9 player newsletter, The Winning Magazine. One is -- 10 actually, it's a brochure, Winning brochure. One is 11 the use of cinematography in our advertising campaign, 12 Blowing In, with the launch of Mega Millions. The TV 13 production drawings for the first Megaplier drawing 14 also received an award as a finalist in the Batchy 15 presentation. 16 I also wanted to go on record and just 17 thank the Government Affairs group for their work in 18 getting the legislative briefing put together on 19 December the 14th. We had good attendance at that and 20 got a lot of good information out to members of the 21 legislature and their staff. 22 And lastly, I wanted you to be aware 23 that I will be attending a Mega Millions directors 24 meeting -- this just came up in the last day or so -- 25 in New York, towards the end of the month, in 0177 1 reference to the fact that there are some new states 2 that are interested in getting in Mega Millions. And 3 the Mega Millions directors as a whole need to come to 4 a consensus on that and a number of other items. 5 And that is the end of my report, sir. 6 CHAIRMAN CLOWE: Any questions? Thank 7 you, Reagan. 8 Next item, number 19: Report by the 9 Charitable Bingo Operations Director and possible 10 discussion and/or action on the Charitable Bingo 11 Operations Division's activities. Mr. Atkins. 12 MR. ATKINS: Commissioners, the only 13 thing I wanted to draw your attention to in my report 14 is the quarterly reports for the fourth quarter of 15 2004 are due in our office on January 25th of this 16 month. And also, to let you know -- I touched on it 17 briefly at the last report -- the Bingo Division has 18 been working with Lee Deviney and the staff in the 19 Financial Administration Department of the 20 Administration Division on doing a much more detailed 21 analysis of bingo data. And they have come up with, I 22 believe, some very interesting information in the way 23 it is laid out. And we hope to begin to start 24 supplying you with those presentations, starting with 25 the data from the fourth quarter in 2004. And one of 0178 1 the things that we're going to be doing between now 2 and then is seeing if we can coerce Commissioner Cox 3 into meeting with us and looking at the data, and see 4 if there are any recommendations that he can make in 5 terms of the direction we're going and what we're 6 looking at. But I just wanted to thank Lee and his 7 staff for the work they've done and the information 8 that they have been putting together. It's been very 9 interesting for us to look at. 10 The other thing -- 11 CHAIRMAN CLOWE: Billy, in that regard, 12 where are you in regard to the historical data we -- 13 we requested? 14 MR. ATKINS: We -- we have included 15 that in what we've been working with -- with Lee on. 16 What we're trying to do is, I guess, come up with the 17 format that we want to put that in, and then they will 18 include the historical data in that also. 19 CHAIRMAN CLOWE: And -- and where are 20 you in regard to producing that? 21 MR. ATKINS: We are finalizing those 22 documents, and what we would like to do is get 23 together with Commissioner Cox and see if -- if he 24 agrees, kind of, with the direction we're going. 25 Where we are is, I think we would like to be able to 0179 1 present it at the -- depending on when the next 2 meeting is -- the next Commission meeting is, as a 3 point when we have had time to receive the quarterly 4 reports from the 25th and get them entered, and 5 include the -- starting with all of 2004 and the 6 historical data from there. 7 CHAIRMAN CLOWE: How far will it go 8 back? 9 MR. ATKINS: I believe you had 10 suggested about five years back. 11 CHAIRMAN CLOWE: And that's the term of 12 the report? 13 MR. ATKINS: That's what we have been 14 looking at -- at so far. Now, it may be, once we get 15 in and start looking at the data, conceivably there 16 could be anomalies or something that would cause us to 17 want to go back even farther. 18 CHAIRMAN CLOWE: Okay. Well, when you 19 get figures in a draft form, I would appreciate you 20 sending those to the Commissioners so all the 21 Commissioners could look at it and give you what their 22 reactions are, and the questions that might make the 23 final report more beneficial. I'm delighted that 24 Commissioner Cox is going to presumably have an 25 overview on that, but I would also like Commissioner 0180 1 Olvera and myself to see that as soon as possible 2 and -- and begin to understand where you're headed on 3 it. 4 MR. ATKINS: Okay. The other thing 5 that I was going to add to the quarterly reports is 6 that, starting with the first quarter of 2005, we will 7 be using our revised quarterly report form. And that 8 report form will capture some more detailed 9 information, specifically as it relates to both bingo 10 expenses and charitable distributions. So we're 11 working on the reports now, but our plan is to begin 12 receiving more detailed information, beginning with 13 this quarter of 2005, which may result in us providing 14 even more detailed information on our regular 15 quarterly reports. 16 CHAIRMAN CLOWE: Very good. 17 Any questions? 18 COMMISSIONER COX: One question. 19 Billy, we just signed a lot of orders related to 20 your -- I don't remember the correct term, but the -- 21 the list of -- 22 MR. ATKINS: Registry of Bingo Workers. 23 COMMISSIONER COX: Yeah. Tell us the 24 story about what happened here that caused all this -- 25 all these orders. 0181 1 MR. ATKINS: Well, during the last 2 session, the Legislature passed House Bill 2519, which 3 created the Registry of Bingo Workers. And the -- the 4 justification that members of the bingo industry gave 5 for wanting to create a registry of bingo workers was 6 to make it easier for organizations to keep a supply 7 of bingo workers. By an individual being listed on 8 the registry of workers, they were supposed to be able 9 to essentially go and work in any licensed bingo 10 location in the state of Texas without additional 11 paperwork having to be submitted to us. It required 12 individuals to submit to us an application form, and 13 they underwent a background check conducted by the 14 agency through the Department of Public Safety. And 15 the -- the orders that you just signed consisted of 16 those individuals who had a disqualifying conviction 17 as a result of the background investigation that was 18 conducted, and they were done in a mass docket. And 19 they were notified of the hearing, of the fact that 20 this was going to be occurring. If I recall 21 correctly, no one appeared at the hearings, but a 22 hearing was held, and this is the result of that 23 hearing, the judge agreeing with the staff's position. 24 COMMISSIONER COX: So do you believe 25 that what happened here was consistent with what was 0182 1 intended when that law was passed? 2 MR. ATKINS: Yes, sir. 3 COMMISSIONER COX: And was this a 4 result of persons reporting that, hey, I have a 5 conviction, and you're looking at that and deciding, 6 well, they have told us in their application that 7 they're not qualified, or did they leave this off 8 their application and we found it in the background 9 test or investigation? Or did the application they 10 filled out not even address this issue? 11 MR. ATKINS: I don't know if there is a 12 question specifically on the application that says, I 13 have or have not ever been convicted of a crime. I 14 believe the certification that they sign states that 15 they haven't been convicted of a crime or anything. 16 COMMISSIONER COX: So based on your 17 recollection, every one of these people signed a false 18 certification? 19 MR. ATKINS: Well, I believe that that 20 question has been raised. I don't know if the 21 legal -- a final legal opinion has been rendered yet 22 or not, so I would not want to preempt that. 23 COMMISSIONER COX: Okay. 24 CHAIRMAN CLOWE: Thank you, Billy. 25 Is there anyone wishing to make comment 0183 1 to the Commission? 2 I would like to state for the record 3 that Commissioner Olvera departed the Commission 4 during the executive session, shortly before 1:00 5 o'clock, 1:00 p.m., and he has been absent from the 6 Commission and not part of the record since we 7 reconvened in public session. 8 Commissioner Cox, is there anything 9 further that you want to discuss? 10 COMMISSIONER COX: No. 11 CHAIRMAN CLOWE: Is there any comment 12 the staff wants to give about our meeting in February 13 at this point in time, and you -- any time constraints 14 that you want to deal with in regard to setting our 15 next meeting? 16 MR. GREER: Not off the top of my head, 17 sir. 18 MR. ATKINS: The only thing from 19 Bingo's perspective would be the -- you know, the 20 later in the month, the more time we'll have to digest 21 the financial information that is submitted later this 22 month. 23 CHAIRMAN CLOWE: Then maybe we might 24 look at the third or fourth week of February as a 25 target. 0184 1 If there is nothing further to come 2 before the Commission at this time, it is 1:53 p.m., 3 and we are adjourned. Thank you very much. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0185 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 20TH day of 16 JANUARY, 2005. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 1801 N. Lamar Boulevard Mezzanine Level 23 Austin, Texas 78701 (512) 474-4363 24 JOB NO. 050107BJW 25