0001 1 2 3 4 5 6 ****************************************************** 7 8 TEXAS LOTTERY COMMISSION 9 MEETING 10 11 FEBRUARY 28, 2005 12 13 14 ****************************************************** 15 16 17 18 BE IT REMEMBERED that the Texas Lottery 19 Commission meeting was held on the 28th day of 20 February, 2005 from 8:00 a.m. to 3:02 p.m., before 21 David Bateman, RPR, CSR in and for the State of Texas, 22 reported by machine shorthand, at the Offices of the 23 Texas Lottery Commission, 611 East 6th Street, Austin, 24 Texas 78701, whereupon the following proceedings were 25 had: 0002 1 A P P E A R A N C E S 2 3 Chairman: 4 Mr. C. Tom Clowe, Jr. 5 6 Commissioners: 7 Mr. James A. Cox, Jr. 8 9 10 General Counsel: 11 Ms. Kimberly L. Kiplin 12 13 Executive Director: 14 Mr. Reagan E. Greer 15 16 Charitable Bingo Operations Director: 17 Mr. Billy Atkins 18 19 Deputy Executive Director: 20 Mr. Gary Grief 21 22 23 24 25 0003 1 I N D E X 2 PAGE 3 Appearances...................................... 2 4 5 AGENDA ITEMS 6 Item Number 1.................................... 6 Meeting called to order 7 Item Number 2.................................... 6 8 Report by BAC, possible discussion and/or action regarding BAC activities, including 9 the January 26, 2005 Committee meeting 10 Item Number 3.................................... 8 Consideration, possible discussion and/or 11 action on appointment to the BAC 12 Item Number 4.................................... 10 Consideration of and possible discussion and/or 13 action on the reorganization of the charitable bingo administration rules, including the 14 adoption of the repeal of current rules and adoption of new rules 15 Item Number 5.................................... 13 16 Report and possible discussion on bingo financial information and statistics 17 Item Number 6.................................... 12 18 Consideration of and possible discussion and/or action, including adoption, on proposed rule 19 16 TAC 403.110 relating to petition for adoption of rule changes 20 Item Number 7.................................... 37 21 Report, possible discussion and/or action on lottery sales, game performance and trends 22 Item Number 8.................................... 69 23 Report, possible discussion and/or action on the agency's drawings 24 25 0004 1 Item Number 9.................................... 165 Report, possible discussion and/or action on 2 Mega Millions, including possible contract amendment and/or proposal of amendments to 3 16 TAC 401.315 relating to Mega Millions on-line game 4 Item Number 10................................... 90 5 Report, possible discussion and/or action on HUB and/or minority business participation, 6 including the agency's mentor/protege program and/or the agency's FY 2004 minority business 7 participation report 8 Item Number 11................................... 93 Report, possible discussion and/or action on 9 the agency's contracts 10 Item Number 12................................... 93 Report, possible discussion and/or action on 11 the agency's financial status 12 Item Number 13................................... 95 Report, possible discussion and/or action on 13 lottery advertising and promotions 14 Item Number 14................................... 101 Report, possible discussion and/or action on 15 the 79th Legislature 16 Item Number 15................................... 105 Consideration of and possible discussion and/or 17 action on external and internal audits and/or reviews relating to the Texas Lottery Commission 18 and/or the Internal Audit Department activities 19 Item Number 16................................... 106 Consideration of and possible discussion 20 and/or action on the instant ticket testing procurement 21 Item Number 17................................... 111 22 Consideration of and possible discussion and/or action on the broadcast studio and 23 production services procurement 24 Item Number 18................................... 112 Report, possible discussion and/or action on 25 the agency's Survey of Organizational Excellence 0005 1 Item Number 19................................... 165 Executive Session 2 Item Number 20................................... 165 3 Return to open session 4 Item Number 21................................... 161 Consideration of the status and possible 5 entry of orders in: A. Docket No. 362-05-2045 Lopez Super Market 6 B. Docket No. 362-05-2048 Davalo Grocery C. Docket No. 362-05-2049 GAB Beer & Ice 7 D. Docket No. 362-05-2050 Michael's Supermarket E. Docket No. 362-05-2967 Best Convenience 8 F. Docket No. 362-05-2965 Midtown Market G. Docket No. 362-05-2966 Sunny's Food Store 9 H. Docket No. 362-05-1611 Arco Grocery I. Docket No. 362-05-1612 Cowboys Quick Stop #6 10 J. Docket No. 362-05-1615 Mr. N Food Store #3 K. Docket No. 362-05-1616 First Market 11 L. Docket No. 362-05-1099 New Waverly Citgo M. Docket No. 362-05-1101 99 Cent Plus Grocery #2 12 N. Docket No. 362-05-1211.B Foe Aerie 0228 O. Docket No. 362-05-1612.B American Legion 13 Post 517 P. Case No. 2005-386 VFW Post 8235 14 Q. Case No. 2004-1480 VFW Post 2205 Phil Miller R. Case No. 2004-1242 Foe Aerie 48 15 Item Number 22................................... 210 16 Report by the executive director and/or possible discussion and/or action on the agency's 17 operational status, FTE status, and retailer forums 18 Item number 23................................... 213 19 Report by the charitable bingo operations director and possible discussion and/or action 20 on the Charitable Bingo Operation Division activities 21 Item number 24................................... 150 22 Public comment 23 Item number 25................................... 218 Adjournment 24 25 Reporter's Certificate........................... 219 0006 1 AGENDA ITEM NO. 1 2 CHAIRMAN CLOWE: Good morning. It's 3 eight a.m., February the 28th, 2005. Commissioner Cox 4 is here. Commissioner Olvera is absent. My name is 5 Tom Clowe. I'll call this meeting of the Texas Lottery 6 Commission to order. 7 AGENDA ITEM NO. 2 8 CHAIRMAN CLOWE: We'll begin with item 9 number two, report by the Bingo Advisory Committee 10 chairman, possible discussion and/or action regarding 11 Bingo Advisory Committee's activities, including the 12 January 26, 2005 committee meeting. 13 Phil, do you have any comments on that? 14 MR. SANDERSON: Yes, sir. Commissioners, 15 Ms. Taylor had not previously indicated whether or not 16 she'd be in attendance today or not. And you have in 17 your notebook the written report from the chair, 18 Suzanne Taylor, from the last BAC meeting. 19 There are two items in her report that 20 I'd like to expand on briefly. The first is item 21 number seven, the administrative penalty rule. The 22 staff has been working on this item with the BAC work 23 group and members of the public for a considerable 24 amount of time. 25 In fact, the BAC work group held a 0007 1 meeting last week to work on this item. This is the 2 staff's intent to take this item to the BAC at their 3 next meeting on March the 30th and, after that meeting, 4 bring it to the commissioners for publication in the 5 Texas Register. 6 The other item I'd like to discuss is 7 item number eight, one of the specific recommendations 8 that Carol Lauder had made earlier regarding the setup 9 of the auditorium for the BAC meeting. Carol had 10 suggested that the BAC be set up in a format similar to 11 the way the joint meeting was set up so the BAC members 12 would be able to face each other and interact with each 13 other. 14 Although some of the BAC members 15 expressed concern about not being able to see the 16 audience, the staff feels that this setup definitely 17 improved the communication between the BAC members. 18 While we may change the orientation of the setup, the 19 staff would suggest that this new setup be used for 20 future meetings. 21 And Commissioners, that's all I have. 22 CHAIRMAN CLOWE: Any comments? 23 COMMISSIONER COX: Phil, when you say 24 change the orientation, now they were set up in a U 25 with the opening of the U facing the street. 0008 1 MR. SANDERSON: Yes, sir. 2 COMMISSIONER COX: And -- and only Pete 3 had his back to the audience and he was very 4 uncomfortable. So are you thinking of re-orienting it 5 this way so that none of them will have their back to 6 the audience? 7 MR. SANDERSON: Keeping it in the U-shape 8 and maybe turning it more towards the center of the 9 auditorium, yes, sir, but keep it in the U-shape, just 10 change the direction which way it's facing. 11 COMMISSIONER COX: Okay. Well, I think 12 it's real important that the committee itself be able 13 to decide how it sits. And the staff can advise all 14 you want to, but they need to be comfortable. They -- 15 they serve -- perform a valuable role for us. They 16 serve without pay. They pay their own expenses. 17 They need to at least be comfortable 18 while they're here at the meeting. 19 MR. SANDERSON: Yes, sir. 20 CHAIRMAN CLOWE: Very good. And Phil, I 21 know that Commissioner Cox has read the report. I've 22 read it. And I believe we have no other questions in 23 that regard. 24 AGENDA ITEM NO. 3 25 CHAIRMAN CLOWE: So we'll go on to item 0009 1 three, consideration, possible discussion and/or action 2 on appointment to the Bingo Advisory Committee. 3 MR. SANDERSON: Commissioners, Thomas 4 Weekly has been recommended to you by the BAC to fill 5 the vacant charity position. Mr. Weekly is a member of 6 the American Legion Post 37 in McAllen. This position 7 was originally made vacant by the resignation of 8 Virginia Brackett of Lubbock. Ms. Brackett's term was 9 scheduled to end in February of 2005. 10 Therefore, this appointment would be for 11 a full term to run from February 1st of 2005 to 12 February 1st of 2008. I understand that each of you 13 have had an opportunity to individually interview Mr. 14 Weekly. And -- 15 CHAIRMAN CLOWE: That's correct. 16 MR. SANDERSON: Is Mr. Weekly -- 17 CHAIRMAN CLOWE: He's present here this 18 morning. 19 MR. SANDERSON: Okay. And you -- if you 20 have any questions, you know, you might ask him any 21 questions. 22 CHAIRMAN CLOWE: Do you have any 23 questions? 24 COMMISSIONER COX: No, sir. 25 CHAIRMAN CLOWE: I have none. What is 0010 1 the term that he would be appointed for, Phil? 2 MR. SANDERSON: He would be the charity 3 representative, and the term is for three years. 4 CHAIRMAN CLOWE: Three years? I move, 5 Commissioner Cox, that Mr. Weekly be appointed to that 6 term in that position. 7 COMMISSIONER COX: I second the motion. 8 CHAIRMAN CLOWE: All in favor, please say 9 aye. 10 COMMISSIONER COX: Aye. 11 CHAIRMAN CLOWE: Aye. 12 Opposed, no. 13 The vote is two-zero in favor. 14 Mr. Weekly, we're glad to have you on the 15 Bingo Advisory Committee and we thank you for your 16 service. 17 MR. WEEKLY: Thank you. 18 AGENDA ITEM NO. 4 19 CHAIRMAN CLOWE: Next item four, 20 consideration of and possible discussion and/or action 21 on the reorganization of the charitable bingo 22 administration rules, including the adoption of the 23 repeal of the current rules and adoption of new rules. 24 Ms. Joseph. 25 MS. JOSEPH: Good morning. 0011 1 CHAIRMAN CLOWE: Good morning. 2 MS. JOSEPH: Good morning, Commissioners. 3 I'm Sandy Joseph, assistant general counsel for the 4 Legal Services Division. 5 At the January 7th, 2005 meeting, the 6 commission voted to initiate rulemaking proceedings 7 concerning 16 TAC Chapter 402 to repeal the existing 8 bingo rules and simultaneously propose adoption of new 9 rules. These changes made no substantive changes. 10 The purpose of the reorganization is to 11 reorganize the rules into subchapters, update the legal 12 citations, and delete obsolete dates. A public hearing 13 was held on these proposed rules on February 3rd, 2005. 14 No comments were received at that hearing and no 15 written comments were received. 16 So the staff recommends that the repeal 17 of the rules be adopted and simultaneously the adoption 18 of the new rules. 19 CHAIRMAN CLOWE: Any questions? 20 COMMISSIONER COX: No. 21 CHAIRMAN CLOWE: Is there a motion? 22 COMMISSIONER COX: So move. 23 CHAIRMAN CLOWE: Second. 24 All in favor, please say aye. 25 COMMISSIONER COX: Aye. 0012 1 CHAIRMAN CLOWE: Aye. 2 Opposed, no. 3 The vote is two-zero. 4 MS. JOSEPH: With your permission, I'll 5 do the next item and then bring the orders up for you 6 to sign. 7 CHAIRMAN CLOWE: Certainly. 8 MS. JOSEPH: Did you want to call item 9 six? 10 AGENDA ITEM NO. 6 11 CHAIRMAN CLOWE: Six? 12 MS. JOSEPH: Yes. 13 CHAIRMAN CLOWE: Please. 14 MS. JOSEPH: All right. The next item 15 concerns also rulemaking. This was proposed Rule 16 16 TAC Section 403.110 concerning petition for adoption of 17 rule changes. 18 At the December 13th meeting, the 19 commission voted to initiate rulemaking proceedings 20 concerning this new rule. The rule prescribes the form 21 for petitions for rulemaking procedures for submitting, 22 considering and disposing of a petition for rulemaking. 23 This rule was published in the Texas 24 Register on December 31st, 2004 for a period of 30 25 days. No comments were received. Adoption of this 0013 1 rule will bring us into compliance with the 2 Administrative Procedures Act, Section 2001.021, which 3 requires a state agency to adopt a rule prescribing the 4 form for petition of a rule. 5 Therefore, I recommend adoption of this 6 rule. 7 CHAIRMAN CLOWE: Any questions? 8 COMMISSIONER COX: No, sir. 9 CHAIRMAN CLOWE: Is there a motion? 10 COMMISSIONER COX: So move. 11 CHAIRMAN CLOWE: Second. 12 All in favor, please say aye. 13 COMMISSIONER COX: Aye. 14 CHAIRMAN CLOWE: Aye. 15 Opposed, no. 16 The vote is two-zero in favor. 17 MS. JOSEPH: I have three orders for you 18 to sign. 19 CHAIRMAN CLOWE: We'll do that right now. 20 Thank you, Ms. Joseph. 21 AGENDA ITEM NO. 5 22 CHAIRMAN CLOWE: Now we'll go to item 23 five, report and possible discussion and -- on bingo 24 financial information and statistics. 25 MR. SANDERSON: Commissioners, in your 0014 1 notebook this morning is information relating to the 2 fourth quarter of 2004 financial information as 3 reported by organizations conducting bingo. 4 You have copies of the spreadsheets that 5 have traditionally been provided to the commission 6 showing, on a cash basis, from calendar year 2003 to 7 calendar year 2004 the third quarter of 2004 compared 8 to the fourth quarter of 2004 and the fourth quarter of 9 2003 compared to the fourth quarter of 2004. 10 This information shows that total gross 11 receipts increased 27.5 million or almost five percent 12 from 2003 to 2004. Total prizes increased almost 26 13 million, or just over six percent. 14 Additionally, net revenue increased 3.3 15 million, which is over an 11-percent increase. Both 16 charitable distributions and expenses decreased by one 17 hundred thousand and the attendance decreased by 1.3 18 million, or over five percent. 19 Additionally, Commissioners, you had 20 asked for some more detailed and historical bingo 21 financial information. The Charitable Bingo Division 22 reached out to the staff of the Financial 23 Administration Division and asked for their assistance 24 in developing additional formats and methodologies for 25 looking at this information. 0015 1 I'd like to ask Betty Kirkpatrick and 2 Janet Malushcka to present the information that the 3 Financial Administration Division has started to 4 develop. 5 CHAIRMAN CLOWE: Good morning. 6 MS. KIRKPATRICK: Good morning, 7 Commissioners. 8 MS. MALUSHCKA: Good morning. 9 MS. KIRKPATRICK: I am Betty Kirkpatrick, 10 financial operations manager from the Administration 11 Division. 12 MS. MALUSHCKA: And I'm Janet Malushcka. 13 I'm a manager from Financial Administration. 14 MS. KIRKPATRICK: This morning we placed 15 a copy of a PowerPoint presentation on your desks. 16 Some months ago, Director Atkins requested that 17 Financial Administration work with Charitable Bingo 18 Operations Division to analyze activity and trends in 19 the Texas bingo industry. 20 Then at the November 16th commission 21 meeting, the commission requested that staff examine 22 the interaction between gross receipts, which is total 23 sales, and charitable distributions. 24 The commission further requested that 25 staff analyze the relationship between total sales, 0016 1 total expenses, net revenue, and charitable 2 distributions over a three- to five-year period. 3 Also, the commission requested that staff 4 look at the difference between required charitable 5 distributions and those distributions as reported by 6 bingo conductors. 7 This morning we will provide you some 8 initial high-level year-to-year observations, begin to 9 answer your questions, and to solicit your suggestions 10 for further analysis and presentation at future 11 commission meetings. 12 Now for our presentation. Today we will 13 discuss data acquisition, evaluation and aggregation, 14 charitable bingo trends, and future analysis. 15 To give you some background, source data 16 is collected quarterly from bingo licensees. The 17 Charitable Bingo Operations Division, the CBOD, 18 presents quarterly reports to the commission. 19 Financial information is stored in the automated 20 charitable bingo system, the ACBS. 21 The CBOD and Financial Administration are 22 working together to develop new reporting tools and 23 presentations. The CBOD and information resources 24 staff are assisting Financial Administration and 25 minding data from the ACBS and defining the data to be 0017 1 analyzed. It is to be noted that, in analyzing the 2 data, both cash and accrual bases were considered. 3 Our first graph illustrates the history 4 of gross receipts since the spring of 1982, when the 5 first licenses were issued. Gross receipts have 6 exceeded 11.5 billion dollars to date. 7 The next graph shows the history of bingo 8 prizes awarded and how they follow the gross receipts. 9 Bingo prizes awarded have exceeded 8.4 billion dollars 10 to date. 11 In November 1980, Texas voters approved a 12 constitutional amendment authorizing charitable bingo 13 and requiring proceeds to be spent for charitable 14 purposes. This graph illustrates these distributions. 15 Charitable distributions reported have exceeded 773.6 16 million dollars to date. 17 Now we will narrow our analysis to the 18 last five years comparing bingo gross receipts and 19 prizes. In the past two years, total gross receipts 20 have increased. Total prizes have also increased, but 21 at a higher payout percentage. 22 Let's first examine the instant bingo 23 games. Gross receipts have increased for instant bingo 24 due to the introduction of 34 new pull-tab games in 25 2002. Instant bingo prize payout percentages have also 0018 1 been increasing. It is to be noted that prizes paid 2 have doubled from 2000 to 2004 and gross receipts 3 almost doubled. 4 Next we will examine the regular bingo 5 games. Prize payout percentages have been increasing 6 for regular bingo games, as well. However, gross 7 receipts for regular bingo games continued to decline. 8 It is to be noted, whereas instant sales are responsive 9 to increasing prize payouts, higher prize payouts for 10 regular games show no sales response at all. 11 We will take it to the next level by 12 illustrating gross receipts, prizes and expenses. 13 Prizes have increased more than gross receipts. 14 However, total expenses have remained fairly constant. 15 Now we're comparing gross receipts and 16 charitable distributions reported. Gross receipts 17 continued to increase in 2004. However, charitable 18 distributions reported have been decreasing and leveled 19 off in 2004. It is to be noted in 2004 that charitable 20 distributions appeared to have stopped decreasing. 21 Examining net revenue and charitable 22 distributions, net revenue appears to be responding in 23 2004 to the increasing gross receipts. Charitable 24 distributions reported appear to track net revenue and 25 consistently exceed required distributions. It is to 0019 1 be noted that recorded distributions exceed required 2 distributions substantially. 3 The next graph shows all the 4 components -- 5 COMMISSIONER COX: Let's go -- 6 MS. KIRKPATRICK: -- together. 7 COMMISSIONER COX: Let's go back one, if 8 we could. 9 MS. KIRKPATRICK: Okay. 10 COMMISSIONER COX: One more. This is a 11 comparison that has been made around here for years and 12 I don't think it's a relevant comparison. Gross 13 receipts is not what distributions relate to most 14 closely. They most closely relate to net receipts. I 15 would lose that slot. 16 MS. KIRKPATRICK: Okay. 17 This graph shows all the components 18 together. It illustrates the rate of increase for 19 prize paid exceeding the rate of increase of gross 20 receipts. It also shows total expenses remaining 21 constant. 22 It demonstrates that net revenue and 23 charitable distributions declined until they appeared 24 to respond in 2004 to increasing gross receipts. 25 Our preliminary findings to date, gross 0020 1 receipts have been increasing since 2002 due to the 2 introduction of the 34 new instant pull-tab games. 3 Prizes have been increasing faster than gross receipts 4 due to increasing prize payout percentages. Net 5 revenue appears to have been declining as a result of 6 increasing prize payout percentages but increased in 7 2004. 8 Total expenses have remained fairly 9 constant over the past five years. Charitable 10 distributions reported appear to have been following 11 the decline in net revenue and leveled off in 2004, but 12 have consistently exceeded the required distributions. 13 CHAIRMAN CLOWE: And Commissioner Cox, in 14 regard to your comment, is net revenue defined as gross 15 revenue less prize payout? 16 COMMISSIONER COX: Yes. That's what you 17 can take to the bank. 18 CHAIRMAN CLOWE: Yeah. 19 COMMISSIONER COX: After you pay your 20 expenses. 21 CHAIRMAN CLOWE: Yeah. That's -- I just 22 want to make sure we were going on the same track. 23 Thank you. 24 MS. KIRKPATRICK: Our future analysis 25 will include monitoring quarterly trends and 0021 1 seasonality, examining regional and local trends, and 2 to consider population, impact of competing games, 3 outside influences and other variables. 4 Commissioners, that concludes our 5 presentation. Any questions? 6 CHAIRMAN CLOWE: Go back to your -- that 7 slide right there. The bottom item there, the last 8 item, the comment you made about prize or charitable 9 contributions reported exceeding required 10 contributions, do you have those numbers? 11 What is the requirement and what is the 12 percentage paid out? 13 MS. MALUSHCKA: You referred back to 14 slide 12. 15 CHAIRMAN CLOWE: Could we go back to 16 that, please? 17 MS. MALUSHCKA: Yes. Here are the 18 amounts in millions of the reported charitable 19 distributions and the required. 20 CHAIRMAN CLOWE: Okay. Help me. I'm 21 having just a little difficulty in reading that. 22 MS. MALUSHCKA: The required 23 distributions go from 11.3 million in 2000 down to 8.9 24 million in 2004. 25 CHAIRMAN CLOWE: And which column is 0022 1 that? 2 MS. MALUSHCKA: The required 3 distributions are the third column, the shortest one. 4 CHAIRMAN CLOWE: Okay. 5 COMMISSIONER COX: So if I see that 6 correctly, does that say that charitable distributions 7 reported in 2004 was 29.8 versus required of 8.9? 8 MS. MALUSHCKA: Yes, sir. 9 MS. KIRKPATRICK: That's correct. 10 COMMISSIONER COX: And it looks like all 11 the way across they're distributing close to three 12 times as much as they're required to distribute, maybe 13 more. 14 MS. KIRKPATRICK: Yes, sir. 15 COMMISSIONER COX: Okay. Can you help us 16 with what we're seeing there? 17 CHAIRMAN CLOWE: And let me help you. 18 The impression I think -- I know I have -- I'm not sure 19 about Commissioner Cox -- is that the Sunset 20 recommendation was to increase the required 21 contribution, which would have been a detrimental 22 impact on bingo. 23 Phil, am I correct in that or not? Could 24 you -- did you hear what I said? 25 MR. SANDERSON: No, sir. I didn't. I'm 0023 1 sorry. 2 CHAIRMAN CLOWE: I don't know about 3 Commissioner Cox, but I'm asking for clarification 4 following up on his question about the charitable 5 contributions being approximately three times the 6 minimum required relating back to the Sunset 7 recommendation. 8 MR. SANDERSON: The -- of course, the 9 required distribution -- 10 CHAIRMAN CLOWE: Is that on track? 11 COMMISSIONER COX: Yes, sir. 12 MR. SANDERSON: The required 13 distribution, the number comes from the 35-percent 14 calculation. And as we had given Sunset when they did 15 the Sunset commission report back in 2002 and also in 16 2004, there's almost on an average 300 to 350 17 organizations each quarter who the required 18 distribution is zero when you use the formula. 19 And of those, about 250 of them will make 20 some sort of distribution. So all -- for the most 21 part, organizations are distributing more than what the 22 35-percent calculation comes out to. 23 CHAIRMAN CLOWE: In the aggregate? 24 MR. SANDERSON: Yes, sir. 25 CHAIRMAN CLOWE: And this slide 0024 1 represents the aggregate? 2 MR. SANDERSON: And, of course, in this 3 slide here, net revenue is gross receipts minus prizes 4 and all expenses. So it's different than what 5 Commissioner Cox was looking at, his net revenue, which 6 is gross minus prizes. 7 So, as you can see in this slide here, 8 they are distributing fairly close to what their actual 9 net revenue is. 10 COMMISSIONER COX: So Phil, the -- I 11 remember there was great concern in the industry that 12 the required distribution formula that the Sunset staff 13 came up with would put a bunch of charities out of 14 business. 15 And the answer seems to be that, yes, it 16 would because you got a bunch of them that aren't able 17 to make any right now. And yet this shows us that, as 18 a group, they're doing quite well for charity. 19 MR. SANDERSON: Yes, sir. That is 20 correct. 21 CHAIRMAN CLOWE: That's an interesting -- 22 COMMISSIONER COX: It is. 23 CHAIRMAN CLOWE: -- situation. And you 24 wonder what the logic is. You know, the commission, if 25 I recall correctly, voted not to agree to that 0025 1 recommendation. And we were asked to come up with a 2 formula on our own. 3 I don't think we've done it yet. Have 4 we, Phil? 5 MR. SANDERSON: We did -- I think what we 6 came up with for the 78th session -- and I believe it's 7 also in one of the bills that's been filed for this 8 session -- is one that basically requires that the 9 organizations make some sort of distribution and that 10 they distribute all their -- all their funds over and 11 above a certain amount of the funds that are kept for 12 capital operating expense. 13 And so that -- that was in a previous 14 bill in 78th session. And I believe it's in one of the 15 bills for this session. 16 CHAIRMAN CLOWE: The question comes to 17 mind: For these entities that are not making any 18 charitable contribution at all, why are they continuing 19 to operate? 20 MR. SANDERSON: Because, based on the 21 35-percent formula, what's called the minimum required 22 distribution, it comes out to a zero dollar figure. 23 And so, as long as they -- if they ever have a quarter 24 where they have to make a distribution and they don't 25 make a distribution, then they could have 0026 1 administrative action taken against their license. 2 COMMISSIONER COX: As I understood 3 Chairman Clowe's question, it was: Are they doing this 4 for their health or what, because they're not making 5 any money? 6 MR. SANDERSON: We continually kind of 7 ask that question ourselves. It's -- you have to 8 wonder what they're doing. Now those organizations 9 that don't make distributions are very, very few, you 10 know, over a period of time. 11 Like I said, those numbers -- 12 CHAIRMAN CLOWE: This number? 13 MR. SANDERSON: Well, the numbers aren't 14 the same 300 organizations every quarter. Each quarter 15 it will change. There's -- I think over a period of 16 time, the information that we gave the Sunset, there 17 were just a handful of organizations that didn't make a 18 distribution over a two-year period, I believe it was, 19 like maybe five to 10. 20 And, of course, some of those we've, you 21 know, started doing audits on and looking at it to find 22 out why they're not making distributions. 23 COMMISSIONER COX: And have we looked at 24 those that aren't making distributions as -- and said 25 yeah, that looks about right, like gross sales 0027 1 retained, everything's -- or are there some of them 2 where gross sales are very large and it just seems that 3 none of it gets to the bottom line? 4 MR. SANDERSON: There's -- 5 CHAIRMAN CLOWE: In other words, could it 6 be managed? 7 COMMISSIONER COX: Could it be, yes, sir. 8 MR. SANDERSON: There are -- most of the 9 organizations are in the high-dollar amount of gross 10 receipts and prizes. 11 COMMISSIONER COX: Most of the ones that 12 don't make -- 13 MR. SANDERSON: That don't. 14 COMMISSIONER COX: -- distributions? 15 MR. SANDERSON: Yes, sir. Yeah, the -- 16 of the 10 or so organizations, there's probably about 17 five or six of them that are in that category. 18 COMMISSIONER COX: Help me with that. 19 CHAIRMAN CLOWE: Yeah. Help me, too. 20 MR. SANDERSON: They -- I don't exactly 21 have the numbers for me -- in front of me. But I can 22 get them for the next meeting, if you'd like. 23 I believe one of the organizations, there 24 was -- their gross receipts were in the neighborhood of 25 300 to 400 thousand dollars. And by the time they paid 0028 1 their prizes and their expenses, their -- their bottom 2 line was just barely above zero. 3 And they kept money in their bingo 4 account, you know, for future operating expenses, so to 5 speak. I don't have exact percentages of what their 6 expenses were to see if they were, you know, out of 7 line with other operations. 8 But we can certainly look into that and 9 get that for you at the next meeting. 10 CHAIRMAN CLOWE: Mr. Fenoglio, are you 11 willing to be an industry resource on this subject? 12 MR. FENOGLIO: Yes, Your Honor. 13 CHAIRMAN CLOWE: Come -- come and talk to 14 us about this, if you would, please. You understand -- 15 COMMISSIONER COX: Could we get a little 16 different lighting situation here? I feel like I'm 17 being questioned. 18 CHAIRMAN CLOWE: You want it to be the 19 other way around. Steve, the -- would you identify 20 yourself? 21 MR. FENOGLIO: Yes. I will, Mr. 22 Chairman. Steven Fenoglio, I've given an appearance 23 slip. I'm an attorney in Austin and I represent over 24 950 charitable business organizations. 25 CHAIRMAN CLOWE: The question has been 0029 1 longstanding that there are those organizations, you 2 know, that are conducting bingo and are not making 3 contributions to the charities. And I think, if my 4 memory serves correct, that was the basis of the Sunset 5 recommendation that we'd been dealing with for almost 6 three years. 7 And the commission did not agree with 8 that recommendation. And you heard what Phil said. It 9 didn't sound like we've done anything on that 10 recommendation. There's nothing concrete in place that 11 I can see. 12 Help us understand the logic of these 13 operations that are high-dollar in nature but are not 14 making charitable contributions. Why shouldn't some 15 threshold be established in the rules that would 16 require them to make charitable contributions or go out 17 of business? 18 From the industry standpoint -- 19 MR. FENOGLIO: Sure. 20 CHAIRMAN CLOWE: -- help us understand 21 that. 22 MR. FENOGLIO: And a little -- 23 CHAIRMAN CLOWE: Is that a fair question? 24 COMMISSIONER COX: Sure. 25 MR. FENOGLIO: A little brief background, 0030 1 the Sunset recommendation or the staff recommendation, 2 according to our records, would have put out of 3 business approximately three-quarters of the charities 4 in its initial recommendation. 5 I believe Phil Sanderson stated at a 6 meeting that that was a little high, it would only have 7 been about 54 to 58 percent of the charities would have 8 been out of business, which lent to y'alls conclusion 9 not to adopt that recommendation. 10 However, we did work with staff in the 11 Lottery Sunset Bill in the '03 session and I put 12 forward language. And, as you know, the Sunset process 13 kind of spiraled downward and it never got adopted. 14 We have since supported, along with 15 staff, additional language that would require a minimum 16 charitable distribution for every charity within a 17 licensing period. And, as you may know or I guess 18 you're going to hear, House Bill 1138, Kino Flores' 19 cleanup bill, if you will, contains that 20 recommendation. 21 I met Friday with staff. And we've -- 22 we've made some recommendations to tweak that language. 23 And I'm sure it will get tweaked again and again. Now 24 to the issue, I don't know. 25 I was busy writing notes on Phil's 0031 1 comments that you're looking at approximately 10 of 15 2 hundred licensed charities that apparently 3 consistently, at least over a two-year period, have 4 never made a charitable distribution. 5 I think you'd have to look at those 6 operations. It could be that some of those 7 organizations are in Dallas. And as you're aware, with 8 the stringent nonsmoking ordinance, I believe there 9 have been three bingo halls that have been closed in 10 Dallas since the '03 time frame. 11 One of them was North Dallas Bingo, which 12 was looked upon as a beneficial charity-run hall. 13 There was no traditional commercial lessor. In that 14 sense, the charities were the lessor. That hall went 15 out of business. It did not have the staying power. 16 So it's possible that some of that 17 analysis looked at markets that were contracting as 18 opposed to expanding. And I was interested in the 19 data, and I think that will -- I filed an open records 20 request last week. 21 And I understand staff didn't quite 22 finish this data until sometime over the weekend. And 23 so I'd like to look at that data. And I will be happy 24 to respond with my observations as to, you know, the 25 five or 10 charities that seemingly have a lot of 0032 1 revenue. But until you drill down, as you know, and 2 look at it, it may be difficult to make a 10,000-foot 3 analysis. 4 The other thing I'd like to observe, and 5 it's something that we've heard from some of the 6 organizations that, you know, in private business, 7 businesses come and go. And businesses are less 8 than -- less profitable than expected. 9 There's no statutory standard that a 10 business make a, quote, profit every year. And yet, 11 we're heading down the road requiring that with 12 charities. And that's not to say we're backing away 13 from our commitment to ensure that charities do make a 14 charitable distribution. 15 But it's kind of against the grain, if 16 you will, if you look at it from a business 17 perspective. And charity bingo, in many respects, is a 18 business. When you've got bingo halls that are -- 19 gross receipts -- and we appreciate the changing dialog 20 to adjusted gross receipts, but certainly gross 21 receipts are three to five million. 22 And it's a -- to the extent allowed by 23 law, a full-time business. So having said that, Mr. 24 Chairman, I don't know. It's hard to justify from a -- 25 an initial analysis why 10 charities are never making a 0033 1 charitable distribution. 2 And I'll be happy to meet with staff and 3 give you our observations. I'll be happy to respond to 4 any questions. 5 MR. SANDERSON: Commissioners, I'd also 6 like to add that those numbers, five to 10 numbers, 7 were from the calendar years probably 2000, 2001. And, 8 you know, we'll go back and look at the last two years, 9 2003 and 2004, and see if there's any other 10 organizations at this time that are not making 11 distributions over that period. 12 CHAIRMAN CLOWE: Steve, thank you for 13 your comments. And I'd like to say to you that I think 14 you need to help us on this and your colleagues need to 15 help us, as well. There are two continuing issues 16 about bingo, in my mind, that are focused on in the 17 Sunset review. 18 And one is the industry, I think, has 19 brought up correctly. And that is the declining market 20 and the fact that bingo, under the current Enabling 21 Act, which is over 20 years old, is not suited to the 22 market that is in Texas today. 23 And those issues need to be dealt with 24 that would expand that market for bingo operations. 25 And I think this commission has agreed to be a resource 0034 1 on that issue, not an advocate, but a resource. And I 2 met with the representative two weeks ago who's going 3 to carry the Sunset bill. And we had a discussion 4 about that very issue at that time. 5 The other side of that is these lack of 6 contributions to charities and why is that so. And the 7 Sunset recommendation covered that. The commission has 8 taken a different position. We have not, in my opinion 9 based on the answer that we have this morning, come 10 back with a successful answer to that question. And 11 we're sort of in the position that you're in: I don't 12 know. 13 And -- and that's -- if that question 14 persists, it's not satisfactory. I will tell you that 15 I would argue with your answer about -- you know, if a 16 business doesn't make money, it shouldn't be put out of 17 business. 18 In our history together in the trucking 19 industry, if a carrier filed an operating ratio and it 20 was negative over a hundred percent at Railroad 21 Commission, we didn't go out and pull their public 22 convenience and necessity certificate. 23 But a license to conduct bingo is based 24 on justification that charities will benefit from that. 25 That's the difference I see in the business aspect. I 0035 1 don't think the State would put any business out of 2 business that it licensed if it doesn't make money 3 except where it's licensed for the purpose of making 4 contributions to a charity. 5 And that's what we have here. And that's 6 why this aspect of the discussion is so troubling to 7 me. I'm not comfortable with having so many operators 8 not making contributions to charities because, in my 9 mind as I've stated, that's the reason we do bingo is 10 to get these charitable contributions. 11 So I'd like to see this go forward. And 12 it's not answered. It's still on the table. And, you 13 know, as we go through the Sunset process, I think we 14 need to be able to give good answers on this. 15 So if you would and your colleagues and 16 your clients help us drill down into this and get some 17 better answers than we have as of today. 18 MR. FENOGLIO: You bet. And we will. 19 And, again, but I think it's important to recognize, 20 based on the data that we have at least in the room 21 today, that we're less than one-half of one percent of 22 the charities. 23 And that's not to, to recycle an old 24 phrase, throw the baby out with the bathwater. So 25 we'll get back to you. We will -- I'll commit, Mr. 0036 1 Chairman, we'll have a report to you and Commissioner 2 Cox and Commissioner Olvera before the next Lottery 3 Commission meeting. 4 CHAIRMAN CLOWE: That would be helpful, 5 because I think our Sunset Bill is coming along. 6 MR. FENOGLIO: It is. 7 CHAIRMAN CLOWE: And I would anticipate 8 some questions from legislators in this area. 9 MR. FENOGLIO: And we, again, anticipated 10 that. And that's why, in Ms. Kino Flores' bill, there 11 is a requirement that charities will be required to 12 make a charitable distribution within their licensing 13 period and, absent exigent circumstances, they would be 14 out of business. 15 And those are statutorily defined 16 circumstances. So -- and, again, I'll get with Phil 17 short -- well, sometime later today and start cranking 18 on those numbers. Thank you. 19 CHAIRMAN CLOWE: Thank you for doing 20 that. Anything further? 21 COMMISSIONER COX: No, sir. 22 CHAIRMAN CLOWE: Okay. Anything further, 23 ladies? 24 MS. MALUSHCKA: Thank you. 25 MS. KIRKPATRICK: Not unless you have 0037 1 anything. 2 CHAIRMAN CLOWE: Good report. What are 3 you going to do to keep us current on this? Will you 4 keep these numbers current and -- 5 MS. KIRKPATRICK: We'll continue cranking 6 it out. 7 CHAIRMAN CLOWE: Okay. 8 MS. KIRKPATRICK: We'd like to apply a 9 regional and local trend, maybe by organization -- VFW, 10 medical and so forth -- and drill down to a lower level 11 to see what we can come up with. 12 CHAIRMAN CLOWE: A personal contention I 13 have, and I think Commissioner Cox shares, is that we 14 don't know enough about our business. And, you know, 15 we're really working hard to learn more about the 16 person who buys a lottery ticket. And we need to know 17 more about the person who buys a bingo card. 18 And the more we know about those people, 19 the better we can regulate or market and answer 20 questions to the legislature. So this work that you're 21 doing, in my mind, is very important. I'd like to see 22 it kept current and developing. 23 MS. KIRKPATRICK: We'll continue it. 24 Thank you. 25 AGENDA ITEM NO. 7 0038 1 CHAIRMAN CLOWE: Next item seven, report 2 and possible discussion and/or action on the lottery 3 sales, game performance and trends. Good morning, 4 gentlemen. 5 MR. NAVARRO: Good morning, 6 Commissioners. 7 MR. TIRLONI: Good morning. 8 MR. NAVARRO: For the record, my name is 9 Benito Navarro. I'm the financial accounting and 10 reporting manager for the Texas Lottery Commission. 11 MR. TIRLONI: Good morning, 12 Commissioners. For the record, I am Robert Tirloni, 13 the products manager for the Texas Lottery Commission. 14 MR. NAVARRO: Commissioners, attached in 15 your notebook is a report of lottery sales and trends. 16 In your notebook you'll find the three memos dated 17 February 28th, 2005, which summarizes the recent 18 lottery sales and fiscal year sales to date. 19 In addition to the sales information 20 contained in your manuals, this morning we will also be 21 discussing and identifying net revenue generated for 22 the Foundation School Fund resulting from lottery 23 sales. 24 Our fiscal year 2005 year-to-date sales 25 through the week ending February 19th are $1.729 0039 1 billion. That's a 10 -- 10.9 percent increase over 2 fiscal year 2004 sales of $1.559 billion for the same 3 time period. 4 Our fiscal year 2005 year-to-date revenue 5 for the week fending February 19th is $4.23 million. 6 This is a 1.1 percent decrease over fiscal year 2004 7 revenue of $4.34 million. 8 I point your attention to the asterisk 9 down -- the footnote down to the left. The fiscal year 10 2004 numbers includes two additional days of sales. 11 So, as a result, they also include two additional days 12 of revenue. 13 In our analysis, what we were trying to 14 accomplish was: Give you the sales information through 15 the week ending corresponding for both fiscal years 16 and, in doing that, starting September the 1st, 2004 we 17 included two additional days. 18 But in an attempt to -- 19 COMMISSIONER COX: We've never seen 20 revenue before. And it's in there somewhere from time 21 to time, but -- 22 MR. NAVARRO: Right. 23 COMMISSIONER COX: -- it hasn't been 24 focused on. 25 MR. NAVARRO: Right. 0040 1 COMMISSIONER COX: What I'm seeing, the 2 first time you show it to us, is that sales, which are 3 dollars of tickets sold, are up. But our take is down. 4 MR. NAVARRO: Correct, sir. And -- and 5 we'll go through that. And I just want to point out, 6 if you look at bullet number three, bullet number three 7 is our attempt to, you know, equalize the number of 8 days by calculating average year-to-date revenue for 9 the week ending February the 19th. 10 And you'll see that our average daily 11 revenue for 2005 for the week ending February the 19th 12 is actually 2.5 million dollars a day compared to an 13 average of 2.49 million dollars a day. 14 COMMISSIONER COX: I'm having a hard time 15 understanding how that helps me with my first 16 observation, which is that sales are up 10.9 percent 17 and sales less prizes paid are down 1.1 percent. 18 MR. GRIEF: Commissioner, could I offer a 19 -- hopefully some points of clarification on that? 20 COMMISSIONER COX: Okay. 21 MR. GRIEF: The main factor for what you 22 see was an increase in sales yet a basically flat net 23 revenue is the pretty dramatic shift of sales from the 24 on-line product to the instant product. And as sales 25 go up in the instant product and go down in the 0041 1 on-line, the prize payout percentage overall for our 2 instant games is significantly higher. 3 Therefore, a bigger percentage of our 4 overall sales revenue is being given back to the 5 players in prizes. 6 MR. NAVARRO: And I think the other thing 7 that I think I need to clarify is, Commissioner Cox, 8 for the purpose of calculating net revenue, we're not 9 simply taking sales minus prizes paid. It is also our 10 seven-percent administrative portion taken out, as well 11 as the five-percent retailer commission. 12 When we calculate our monthly transfer to 13 the Foundation School Fund, that is the formula that we 14 -- that we use to retain or to calculate the revenue 15 transferred to the Foundation School Fund. 16 COMMISSIONER COX: Okay. So the term 17 you're using -- the thing you're calling revenue is 18 what I would call net income. 19 MR. NAVARRO: Net income or gross profit. 20 COMMISSIONER COX: So we don't even -- 21 I'm not even seeing the number that would be reported 22 in a casino, which is win-less-loss. 23 MR. NAVARRO: No, sir. We've always -- 24 since I -- since I've been here, Commissioner Cox, 25 we've always referred to net revenue as the bottom 0042 1 line, sales minus product minus retailer commission 2 minus -- 3 COMMISSIONER COX: And I understand why 4 you do that, because that's the revenue to the State. 5 MR. NAVARRO: Correct. 6 COMMISSIONER COX: And yet, there's an 7 important operating number that's not being observed 8 here. 9 MR. NAVARRO: And that's the -- that's 10 the gross profit margin. 11 COMMISSIONER COX: Let's find something 12 to call that, and let's report it. 13 MR. NAVARRO: Okay. 14 COMMISSIONER COX: Win less losses. 15 MR. NAVARRO: Okay. 16 CHAIRMAN CLOWE: And before you move on, 17 back to your point in regard to bingo, what we see 18 here, if I'm reading you correctly, is the sales are up 19 over 10 percent. But even after the anomaly of the 20 two-day difference in the periods compared, net income, 21 the way we're seeing this, is flat? 22 COMMISSIONER COX: Yes, sir. It's flat 23 and down. 24 CHAIRMAN CLOWE: Flat and down? 25 MR. NAVARRO: Yes, sir. 0043 1 CHAIRMAN CLOWE: So -- 2 COMMISSIONER COX: And Gary says because 3 of the change in the sales mix. 4 CHAIRMAN CLOWE: The shift has been away 5 from the on-line games to the instant tickets where the 6 payout is higher. 7 COMMISSIONER COX: Yes, sir. 8 CHAIRMAN CLOWE: So we're selling more 9 product where there's less profit. 10 MR. NAVARRO: Correct. 11 CHAIRMAN CLOWE: And although we're very 12 pleased with sales being up, the revenue that is 13 reported and given to the Foundation School Fund is 14 flat or down. 15 COMMISSIONER COX: Yes, sir. 16 CHAIRMAN CLOWE: Okay. 17 MR. GRIEF: I have a question. I'm not 18 quite as quick on these accounting issues as Mr. 19 Navarro is. What -- what number is it exactly that you 20 were looking for? 21 COMMISSIONER COX: The -- the traditional 22 revenue or sales reported for a gambling organization 23 is win-less-loss. That is ticket sale -- for a 24 lottery, ticket sales less prizes paid out. Why the 25 lottery industry has chosen to report a bigger number 0044 1 while the casino has not, I don't have the history on 2 it. 3 But that's the number that I would like 4 to see is what are we having a chance to turn over to 5 the State and then what are we turning over. 6 CHAIRMAN CLOWE: Yeah. So you could call 7 it sales and then gross income would be sales less 8 loss. 9 COMMISSIONER COX: Uh-huh. 10 CHAIRMAN CLOWE: And then net income 11 would be at the 12 percent. 12 MR. NAVARRO: Right. 13 CHAIRMAN CLOWE: It comes out. 14 MR. NAVARRO: We're thinking about 15 calling it gross revenue and then -- 16 COMMISSIONER COX: Why don't you call it 17 something that we can all understand. 18 MR. NAVARRO: Okay. 19 COMMISSIONER COX: Let's call it win. 20 MR. NAVARRO: Okay. 21 MR. SANDERSON: Commissioners, and we can 22 do the same thing in the bingo side, take the gross 23 receipts minus prizes and give you a number that would 24 be the hold or something that -- 25 COMMISSIONER COX: That's the kind of 0045 1 number that people can relate to. As Mr. Fenoglio and 2 I have talked, and Mr. Bresnen, when we show that great 3 ole big gross receipts number in bingo, people start 4 thinking send it in. 5 And that's not a number that you can send 6 in, because you got to pay out your prizes and your 7 expenses, as well. But the prizes are a huge portion 8 of that. So it's even more important, I think, in 9 bingo that you focus on that win than it is in the 10 lottery. 11 But in the lottery, that shows here's 12 what we had a chance to take to the bottom line after 13 the decision as to what prize payouts were and then 14 here's how efficiently we operated our business, how 15 much of it got to the bottom line. 16 MR. SANDERSON: Yes, sir. And I think 17 traditionally in the bingo industry that's been 18 called -- we've called that number adjusted gross, has 19 been the gross minus the prizes. 20 COMMISSIONER COX: Okay. Just as long as 21 we know, at least parenthetically, that that's win. 22 MR. TIRLONI: Commissioners, we've had to 23 reboot our laptop to ensure it was communicating with 24 the projector. So it will just be a second until it 25 comes back up. 0046 1 MR. NAVARRO: We'll just -- we'll 2 continue through our presentation, you know, given the 3 conversation we just had, and we'll update future 4 presentations with the information you requested along 5 with, you know, the bottom line and net income line. 6 CHAIRMAN CLOWE: Okay. Before you go 7 ahead. 8 MR. NAVARRO: Yes, sir. 9 CHAIRMAN CLOWE: Gary, what's your 10 comment on this net income situation relative to gross 11 sales? How do you view that in regard to our marketing 12 plan? 13 MR. GRIEF: I view it as both a positive 14 and a negative. I think we are doing an outstanding 15 job on the instant product side. I think we're working 16 with our vendors to develop new and exciting games that 17 are very attractive to our players. 18 On the other hand, we're fighting an 19 industry trend of a downward trend in on-line games. 20 And we're actively engaged in looking at all of our 21 on-line products to try to make any changes that are 22 appropriate that could increase the sales on the 23 on-line side. And we have many different things in 24 motion right now looking at the on-line products. 25 MR. NAVARRO: And just in addition to 0047 1 that, you know, we mentioned the big focus is on 2 instant tickets. 3 COMMISSIONER COX: This is the first time 4 I... 5 CHAIRMAN CLOWE: Yeah. First time it's 6 really come out this way. It's a real disappointment 7 to me to see that the contribution is flat or down. 8 And, you know, I've been so pleased about the instant 9 ticket increase. 10 And I knew the prize payout was higher. 11 But, frankly, it didn't impact me that it was doing 12 this to the terms. 13 COMMISSIONER COX: And I asked for these 14 numbers, but I didn't expect to see what I just saw. 15 CHAIRMAN CLOWE: Yeah. Well, I think it 16 shows that we've got a situation. I won't say it's a 17 problem. I think it's a situation that we need to know 18 more about. We need to analyze and see where we're 19 going. 20 MR. GRIEF: Commissioners, that prize 21 payout percentage not just for instant ticket games, 22 but for on-line games, is something that we're looking 23 at very closely. We have been for some time -- and 24 drawing on the knowledge of Commissioner Cox and his 25 background, as well. 0048 1 And we'll continue to keep that at the 2 forefront of the research that we do. 3 COMMISSIONER COX: And Gary and I have 4 had several discussions on not this relationship but on 5 management of that ratio. 6 CHAIRMAN CLOWE: Okay. Thank you. 7 MR. NAVARRO: We've been talking a lot 8 about instant tickets. And -- and you -- we look up 9 here in the first bullet in this graphic, and we see 10 that, you know, instant ticket revenue makes up 62.6 11 percent of all revenue. And that's up 12.6 percent. 12 Conversely, on-line games make up only 13 34.7 percent of revenue. But that's down 17.7 percent. 14 COMMISSIONER COX: Okay. And Ben, let me 15 be sure I understand what's up 12.6 percent. Is 62.6 a 16 number that used to be 50 and it's up by, in effect, 17 12.6 percentage points or was it a number that was more 18 like 52, 53? 19 MR. NAVARRO: Right. 20 COMMISSIONER COX: So it is -- whatever 21 the -- if I divide -- 22 MR. NAVARRO: You want the dollars? I'll 23 give you the dollars. Revenue for -- 24 COMMISSIONER COX: What I'm trying to get 25 is: What percentage of revenue was instant tickets 0049 1 before that is now 62.6? Was it 52? So has it gone 2 up -- has the mix changed from 52/48 to 62/38 or what 3 has the mix changed from? 4 MR. NAVARRO: I didn't calculate that, 5 sir. But I do have the -- I do have the dollars. The 6 dollars -- 7 CHAIRMAN CLOWE: No. He's not asking for 8 the -- he's asking -- 9 MR. NAVARRO: I don't have that. 10 CHAIRMAN CLOWE: Which is it? Can you 11 answer that? Is it the amount of increase or the 12 percentage of increase? 13 MR. NAVARRO: The percentage of increase. 14 COMMISSIONER COX: Okay. 15 MR. NAVARRO: From one year to the next 16 is 12.6 percent. 17 COMMISSIONER COX: So if I multiplied 18 62.6 by 87.4, I would know what the old percentage was? 19 MR. NAVARRO: Correct. 20 COMMISSIONER COX: Would you do that for 21 me? Do you have a calculator? 22 MR. NAVARRO: No. I don't, sir. 23 CHAIRMAN CLOWE: Here. I do. 24 COMMISSIONER COX: Okay. So it was 55 25 percent. And so it was 55/45 and now it's 63/37. 0050 1 Thank you. 2 MR. NAVARRO: And the same statistic is 3 down for on-line games. It's -- the 17.7 percent is 4 the percent of decrease from one year to the next. 5 Go to the next graph. And this just 6 shows a graphical depiction of the numbers that we 7 talked about. Sales are up 10.9 percent from fiscal 8 year 2004 to fiscal year 2005 for the period ending 9 2/19. 10 And then we have revenue -- next graph -- 11 is down to 1.1 percent from fiscal year 2004 to fiscal 12 year 2005 to date for the week ending 2/19. 13 Next graph. Here's sales by game, as 14 you've seen them in the past, totaling 1.729 billion, 15 instant tickets making up 74.2 percent of total sales. 16 Next in line is Lotto Texas at 8.4 17 percent of sales. Very closely behind is Pick 3 for 18 the revenue numbers now. And this is a corresponding 19 revenue generation from those sales. 20 And you'll notice that, you know, 21 although instant tickets make up almost three-quarters 22 of our sales, they only make up about two-thirds of our 23 revenue. 24 Next in line is Lotto Texas, followed 25 very closely by Pick 3. 0051 1 COMMISSIONER COX: Okay. Now what we've 2 done here is we've allocated all of the expenses of 3 operation into the portion of revenue? 4 MR. NAVARRO: Yes, sir. 5 COMMISSIONER COX: You can see that 6 there's a step missing, can't you? 7 MR. NAVARRO: Yes, sir. And we'll -- and 8 we'll clarify that step for the next presentation. 9 COMMISSIONER COX: But you really can't 10 show what you're calling revenue -- 11 MR. NAVARRO: Right. 12 COMMISSIONER COX: -- by product line. 13 MR. NAVARRO: Right, sir. 14 COMMISSIONER COX: It requires 15 allocations that we're just not able to make. 16 MR. NAVARRO: Right. 17 MR. GRIEF: May I ask a question, 18 Commissioner, on that? 19 COMMISSIONER COX: Yes, sir. 20 MR. GRIEF: Are you looking for us to 21 make those types of allocations? 22 COMMISSIONER COX: No. No. 23 MR. GRIEF: Okay. 24 COMMISSIONER COX: I think -- I think 25 what we should see is a little different than what 0052 1 we've got up here. We should see sales by product 2 line. We should see win by product line. 3 And if there are expenses that can be 4 rationally allocated by product line, they should be 5 allocated. And then that lump called overhead that 6 really doesn't have any logical basis for allocation to 7 product lines would then be deducted from that overall. 8 MR. NAVARRO: Correct. 9 CHAIRMAN CLOWE: But even if you had to 10 allocate a large portion of that expense after you drew 11 the win line, you'd still get a much more accurate 12 picture than we have today. 13 COMMISSIONER COX: Yes, sir. 14 MR. NAVARRO: And we can do that. We'll 15 provide that for you. Go to the next slide. This is 16 just a graphical depiction, again, of total sales by 17 games, nothing different. 18 You'll see the 74.2 percent of sales are 19 made up by instant tickets. If you'll go to the next 20 graph, this is the net revenue depiction of allocation. 21 Next graph. And this is what Gary was 22 talking about. I think this kind of makes it clearer. 23 The broken lines are the actual lines of sales and 24 prize expense and revenue for instant tickets. And the 25 solid lines are the trends. 0053 1 And you see how the red line, the instant 2 prize payout trend line, is growing at a faster rate 3 than our instant sales trend line. So if we did 4 nothing else and just kind of got rid of that line, 5 you'd see that our prize payout or our prize expense is 6 increasing at a faster rate than -- than our sales are. 7 Eventually, that -- that starts eating 8 into what we call our win number. 9 CHAIRMAN CLOWE: Talk to us, if you know, 10 about the determination that's made on the prize payout 11 for the instant tickets. 12 MR. NAVARRO: Robert? 13 MR. TIRLONI: We -- Commissioners, we -- 14 we pretty much have a set prize payout based on the 15 price point. Sometimes it varies slightly. But, 16 basically for each price point, there's an established 17 prize payout. 18 So, for example, for our one-dollar price 19 point, the prize payout is 16 percent. For the 20 two-dollar price point, it's about 65 percent. The 21 five-dollar price point, it averages at about 67. And 22 as you move up in price point, the prize payout moves 23 up, as well. 24 CHAIRMAN CLOWE: Who makes that 25 determination? 0054 1 MR. TIRLONI: That's made in the -- 2 CHAIRMAN CLOWE: Where you get that 3 ratio. 4 MR. TIRLONI: It's been made in the -- in 5 the product section, Commissioner, in collaboration 6 with our vendors as to come up with an effective prize 7 payout for the price point. And there are various 8 factors that are looked at. 9 You have to consider -- you have to come 10 up with a prize payout that's going to be able to give 11 you enough prizes in the game at the different levels 12 in the game. The challenge is, as we move players and 13 as we have moved players to higher prize points, the 14 10-dollar price point and the 20-dollar price point and 15 even the 30-dollar price point, a lot of those games 16 have much higher top prizes. 17 So in order to fund those top prizes and 18 also have enough other prize levels in the game in 19 order to have, you know, good overall odds, you -- we 20 have followed the industry tend of increasing the prize 21 payout on those higher price point games. 22 MR. GRIEF: Mr. Chairman, could I offer 23 up a comment on that? 24 CHAIRMAN CLOWE: Sure. 25 MR. GRIEF: I want to make you aware that 0055 1 Commissioner Cox has been working with me, and we are 2 taking a new look at that prize payout percentage in -- 3 in light of the fact that is it actually true and 4 correct that we should increase the prize payout 5 percentage just because the price point increases. 6 Based on Commissioner Cox's background 7 and what we know happens in the casino environment, 8 prize payout percentage does not necessarily increase 9 just because of the price point that's being placed. 10 So we're taking a new look at that, as well. 11 CHAIRMAN CLOWE: Where do you get that, 12 Robert? Do you get that from Gtech? Where does that 13 expertise -- who are you drawing on for this philosophy 14 that you've adopted? 15 MR. TIRLONI: It's a combination of 16 sources. Part of it is from Gtech. Part of it is also 17 from the instant ticket vendors, Scientific Games 18 International and Pollard Banknote. 19 CHAIRMAN CLOWE: So the providers 20 themselves are giving you recommendations and telling 21 you this is what other entities are doing? 22 MR. TIRLONI: Yes, sir. That's correct. 23 COMMISSIONER COX: Robert, have you ever 24 been to Las Vegas? 25 MR. TIRLONI: Once. 0056 1 COMMISSIONER COX: Did you go into the 21 2 pit? 3 MR. TIRLONI: Yes. 4 COMMISSIONER COX: Did you notice that 5 they had two-dollar tables and they had five-dollar 6 tables and they had 10-dollar tables and they had 7 hundred-dollar tables and they had 500-dollar tables? 8 MR. TIRLONI: Yes, sir. 9 COMMISSIONER COX: Did you notice the 10 odds were the same at every table? 11 MR. TIRLONI: I did not at the time. We 12 also -- to follow up on a point that Gary made, we 13 are -- we -- apparently, the state of New Jersey has 14 recently made a change in their philosophy on prize 15 payout on instant tickets. 16 And we are reaching out to the state of 17 New Jersey to see what information we can garner from 18 them and put that to use here in Texas. 19 CHAIRMAN CLOWE: Well, I really 20 appreciate this presentation and these numbers. And I 21 think it's the first time we've focused on this to this 22 extent. My concern is that we're selling a product 23 that we're not making a profit on. 24 And I've been to Las Vegas and I wasn't 25 smart enough to know which pit I was in. But I got out 0057 1 as quick as I could. 2 COMMISSIONER COX: Smart man. 3 CHAIRMAN CLOWE: And it just seems, from 4 a business standpoint, Robert, we're -- we're promoting 5 a product that our net income or our profit, which is 6 the contribution to the Foundation School Fund, is 7 diminishing. 8 And I'm not so interested in growing that 9 market, quite frankly. And I've been very pleased to 10 see that segment growing and our sales increasing. And 11 that's made me feel very good, but I'm not happy now. 12 MR. TIRLONI: Well, I think this -- I 13 understand what you're saying, Commissioner. And we're 14 -- as Gary said, we are closely scrutinizing the 15 situation, as you called it. I think that this issue 16 is more pronounced during years where our on-line sales 17 are trending down or are on a downward trend. 18 CHAIRMAN CLOWE: That's exactly right. I 19 agree with that. 20 MR. TIRLONI: Because we don't have -- 21 on-line games tend to pay out around 50 percent. Our 22 highest payout on-line game is Lotto Texas, which has a 23 52-percent prize payout. 24 So when those games are trending downward 25 and we're not getting the big jackpots on those games 0058 1 that are generating higher sales, this situation is 2 more pronounced than in years when on-line sales are 3 high and you have that 50-percent payout on on-line 4 balancing out the higher payout in instant. And I -- 5 CHAIRMAN CLOWE: I understand that. 6 MR. TIRLONI: Okay. 7 CHAIRMAN CLOWE: But what I'm saying is 8 what I, as one commissioner, am interested in is the 9 increase in net contribution to the Foundation School 10 Fund. That's the reason, in my mind, we have the 11 lottery in this state. 12 MR. TIRLONI: Yes, sir. 13 CHAIRMAN CLOWE: And if it's flat to 14 down, then I think we need to be focused on that and 15 how to increase it. I don't care whether we're third 16 in the nation in lottery sales or not, quite frankly. 17 That's not what I'm looking for. 18 COMMISSIONER COX: It doesn't buy books, 19 does it? 20 CHAIRMAN CLOWE: It doesn't buy books. 21 And I -- if we're creating products that are giving us 22 less return, then I think we ought to be refocused in 23 another area. 24 MR. TIRLONI: Absolutely. 25 CHAIRMAN CLOWE: This is helpful. Thank 0059 1 you. 2 MR. NAVARRO: And to your point, 3 Chairman, I think this next graph is one of the things 4 that, in addition to looking at instant tickets prize 5 payout, is one of the things that we also need to look 6 at. This is the same trend analysis for the on-line 7 games. 8 And I think the important thing to note 9 here is this is when we had our $290 million Mega 10 Millions jackpot and our $145 million jackpot for Lotto 11 Texas. And you can see the corresponding spike in 12 revenue. That's the one month we had that $136 million 13 transfer to the Foundation School Fund from those 14 sales. 15 So, as Robert was saying, you know, when 16 you have this kind of activity in a fiscal year, that 17 kind of tends to balance some of the other negative 18 aspect of the instant tickets out a little bit. But we 19 haven't had such luck in the current year. 20 And so, you know, you see that flatlining 21 of revenue for on-line games. And I think the entire 22 mix is what we need to kind of look at and concentrate 23 on. 24 CHAIRMAN CLOWE: Well, this might be a 25 good time right now to ask you about the roll on Lotto 0060 1 Texas last Saturday light. It rolled and we were at 14 2 million. And we're only at 15 now for the drawing 3 Wednesday night. 4 I was disappointed when I saw that. I 5 would have thought, when we get to that level, we'd see 6 more than a million-dollar increase of a roll. What -- 7 what's your comment on that? 8 MR. TIRLONI: That would be a combination 9 of lower sales for that drawing plus interest -- plus 10 the interest factor that was received on the day that 11 the estimate was done, which was last Friday. 12 I believe that, because of the Mega 13 Millions jackpot, that is the reason that we saw less 14 sales for the Lotto drawing for that -- the period that 15 you're referencing. We were at 96 million dollars for 16 Mega Millions last Friday night. And we believe that 17 did have an impact on the Lotto drawing for Saturday. 18 So when you -- when you couple the -- 19 when you couple the lower sales and then the interest 20 factor and the way our rule is drafted, that was the 21 reason for the $1 million roll. 22 COMMISSIONER COX: Robert, would it be 23 helpful -- I think it would be helpful -- if, on 24 schedules like this, you put that interest factor on 25 there? 0061 1 MR. TIRLONI: We certainly can do that. 2 COMMISSIONER COX: You know, I don't 3 think that -- I don't think I've ever seen a graph of 4 what a interest factor has done. And I've maybe been 5 making assumptions that I shouldn't have been about how 6 that's moving around. 7 MR. TIRLONI: We can certainly do that. 8 We can chart the interest factor for you going back a 9 few years, actually, if you'd like to be able to see 10 the variation. 11 COMMISSIONER COX: Okay. 12 MR. TIRLONI: I think that's very -- very 13 helpful to see, actually, because it does have a major 14 impact in how we roll the Lotto Texas jackpot. 15 CHAIRMAN CLOWE: Good. 16 MR. NAVARRO: And I think this is the 17 last -- the last graph that we have here is a 18 year-to-year audited analysis of net revenue to the 19 State, cash basis transfers. And, you know, one thing 20 we want to point out that, although we -- this is our 21 highest -- our second highest transfer year since 22 1997 -- I think 1998 was -- our highest in 1997 in the 23 current five years is our highest transfers to the 24 Foundation School Fund. 25 You'll notice that it's also lowest 0062 1 percentage of sales in the last five years. So that, 2 again, you know, kind of brings to the forefront the 3 whole prize payout issue that, you know, we're 4 generating a lot of sales. 5 And, yes, we're generating higher 6 revenue, but the percentage of sales, it's actually 7 lower than it has been in the past. Robert? 8 MR. TIRLONI: Commissioners, this is a 9 slide that we've seen for the past few meetings. We 10 continue to update it for you. And this is just to 11 illustrate from which price point instant tickets we're 12 seeing the bulk of sales. 13 And there's not much difference. We do 14 continue to see the bulk of our instant ticket sales 15 come from the two- and the five-dollar prize points, 16 followed closely by the one-dollar prize points. And 17 you see the total year-to-date instant sales for this 18 fiscal year through the week ending last Saturday has 19 been mentioned earlier, 1.282 billion. 20 We're going to translate that to revenue 21 for you and show you, once again, the bulk of the 22 revenue is coming in from the two- and the five-dollar 23 price point with the one closely behind there, showing 24 the total year-to-date instant revenue of 268.8 25 million. 0063 1 And, as we just discussed, we will 2 continue to focus on developing a game plan that 3 focuses on revenue to the State. 4 Just to give you a brief update on our 5 sales weeks, the -- out of the top 10 sales weeks for 6 the instant products since lottery inception, seven of 7 the 10 have been achieved during this fiscal year, the 8 highest sales week at the very first week of lottery 9 startup. 10 CHAIRMAN CLOWE: I think, based on 11 Commissioner Cox's comment, in the future in these 12 types of presentations, we're going to want to see the 13 win right next to the sales. 14 MR. TIRLONI: Absolutely. 15 Moving ahead, Commissioners, I have two 16 brief presentations relating to on-line. Back in 17 December, I talked to you-all about a Cash Five free 18 ticket player promotion that we ran. And at the time 19 that I showed you that slide, we had some very 20 preliminary numbers. 21 And so I have some more definite numbers 22 to show you today. And then Reagan had asked us to 23 provide you with a one-year Mega Millions update. And 24 so I also have some slides on that. 25 We ran a promotion for the Cash Five game 0064 1 in November during weeks ending 11/6 and 11/13. And we 2 now have a apple-to-apples comparison that we're 3 making. The average Cash Five sales for the nine weeks 4 before the promotion were just slightly over two 5 million, 2.03 million. 6 We did see an increase during the two 7 weeks of the promotion. And the average sales for that 8 promotional period was 2.19 million. The average sales 9 for the nine weeks post promotion were 2.04 million. 10 Now I will note that we did exclude the weeks of 11 Thanksgiving and Christmas due to some abnormally low 12 sales due to those holidays. 13 When I showed you this slide back in 14 December, I told you that we were considering this 15 promotion to be a loss leader. We still are 16 considering it a loss leader. And I'm going to show 17 you a slide after this one that shows, while we did 18 take a loss on this promotion, we do believe that we 19 have reversed the trend on the Cash Five game. 20 You can see from this slide the -- this 21 red line is the Cash Five sales before the promotion. 22 And you can see the solid line is the trend line. And 23 then during these two weeks, these are the actual sales 24 during the promotional period. And you see we did 25 achieve a spike during those -- during those 0065 1 promotional weeks. 2 Then when the promotion ended, sales did 3 drop back down. But, as you can see from the green 4 solid line, the trend after the promotion is on a 5 rebound. So we did feel that this promotion was a loss 6 leader. But we do feel that we were able to stabilize 7 the sales on the Cash Five game. 8 And, as Gary also mentioned earlier, we 9 are looking at our entire on-line product mix. And 10 hopefully we've stabilized this game for a while, while 11 we go through that evaluation and analysis period. 12 Now an update on Mega Millions. These 13 numbers are for the first 52 weeks of the Mega Millions 14 game in Texas. So you see Mega Millions draw sales for 15 the first 52 weeks totaled just over 234 million, and 16 our draw sales were just over 55 million. That's 19 17 percent of the total. And we've added in the revenue. 18 The revenue from both games combined is 115 million 19 dollars. 20 And during that first 52-week period, the 21 average jackpot was 58 million dollars. The highest 22 jackpot was 290 million dollars. We had 19 draws where 23 the jackpots were at least 100 million dollars. And 46 24 draws where the jackpots were at least 50 million 25 dollars. 0066 1 In terms of winners, again, for the first 2 104 draws, there were over 5.5 million Mega Millions 3 winners in Texas. 1.3 million of those winners 4 Megaplied their prizes. We paid out over 104 million 5 dollars in Mega Millions prizes and over 22 million 6 dollars in Megaplier prizes. 7 And, as you see, we had one jackpot 8 winner during that first year, 83 second-tier winners 9 -- that's a $175,000 prize -- and 14 of those 83 10 winners Megaplied their prize. 11 This shows the Mega Millions Megaplier 12 sales relationship. And you can see that Megaplier -- 13 the Megaplier is the blue line. Mega Millions is the 14 red line. And you can see Megaplier does follow the 15 sales trend for Mega Millions. And Megaplier sales 16 continue to be right around 19 percent of the first 17 year's total draw sales. That number has been 18 consistent. 19 This shows all of the jackpot cycles on 20 Lotto and Mega Millions for that first year. This was 21 the highest jackpot I just referred to that we 22 experienced in Mega Millions, 290. Mega Millions 23 jackpots are in blue. The Lotto Texas jackpots are in 24 red in the background. 25 And Ben referred to that one month where 0067 1 we had those two large roll cycles. And that was over 2 the summer of '04 where we rolled up to 145 on Lotto 3 and 290 on Mega. We are currently advertising a $112 4 million jackpot for Mega Millions for tomorrow night's 5 drawing. 6 This -- these next few slides are a 7 comparison. It's a comparison of 24 draws from 8 December of '03 to February of '04, the first few 9 months we were in the game, to December of '04 to 10 February of '05, the past few months that we've been in 11 the game. 12 You see for December '03 to February '04 13 our Mega Million sales were 71 million. And you see 14 for this current period they are 38. Megaplier sales 15 for the prior period when we first started in the game 16 were 18.2. The sales for the current period, 8.3. 17 And I'm going to drop in the reasoning 18 behind that. You see for December '03 to February '04 19 the average Mega Millions jackpot was 79.1 million 20 dollars. For the current period, the average is 21 slightly over 47 dollars (sic). And also, the highest 22 Mega Millions jackpot for the '03/'04 period was 230 23 million dollars as opposed to 130 for the current 24 period. 25 And you also see that, the previous year 0068 1 , we had eight draws where the jackpot was at least a 2 hundred million and 16 draws where the jackpot was at 3 least 50. And in this current period, we've only had 4 two draws where the jackpot has been a hundred million 5 dollars. 6 So for a long time we've been talking 7 about how Mega Millions is seen as a triple-digit 8 jackpot in the state. And these -- the numbers for 9 this recent period certainly do illustrate that. 10 This basically graphically represents 11 what we just discussed on that tech slide. This is the 12 Mega Millions and the Megaplier sales for the period 13 December '03 to February '04. So you see this was a 14 $230 million jackpot. 15 Again, this was for the first 24 draws 16 when we were first in the game. And then we're going 17 to drop in the current period, December '04 to December 18 '05. And you can see, because of the lack of those 19 triple-digit jackpots, we have not attained the levels 20 that we did the prior year. 21 And that ends our presentation for today. 22 We'd be happy to answer any remaining questions that 23 you may have. 24 CHAIRMAN CLOWE: Thank you both very 25 much. 0069 1 MR. NAVARRO: Thank you. 2 AGENDA ITEM NO. 8 3 CHAIRMAN CLOWE: Next we'll take up item 4 number eight, report, possible discussion and/or action 5 on the agency's drawings. Mr. Anger, good morning. 6 MR. ANGER: Good morning, Chairman, 7 Commissioner Cox. For the record, my name is Michael 8 Anger, and I'm the Lottery Operations director. I'm 9 here this morning to report to you on some projects 10 currently being performed by staff related to the 11 agency's drawings. 12 As you know, the agency currently 13 broadcasts a live satellite feed drawings broadcast for 14 our day and evening drawings. Over the years, the 15 agency has gathered research to determine the amount of 16 broadcast coverage received. This research has shown a 17 general decline over time in the amount of coverage in 18 the lottery's live broadcast drawings. 19 Staff has recently requested DDB Dallas, 20 our general market advertising vendor, to complete a 21 new survey of television stations across the state to 22 determine the current level of coverage that we're 23 receiving. We anticipate that this survey will show 24 that there's very little coverage of the live drawings 25 broadcast. 0070 1 Two factors have occurred since the 2 inception of the lottery that have limited coverage of 3 the live drawings. 4 The first is that the commission has 5 added new on-line games over time, and this has 6 resulted in a broader product mix that results in 7 longer and more frequent live drawing broadcasts. The 8 other factor is that there have been a general decline 9 in the coverage of the lottery's live drawings as 10 television affiliates have chosen to sell this time as 11 commercial advertising space. 12 Related to this project, the staff has 13 also begun some preliminary research on animated 14 drawings and graphic winning result screens that are in 15 use in some lottery jurisdictions. Animation or 16 graphics can be used to represent the lottery ball 17 machine drawings and can be aired for broadcasts in a 18 condensed window of time that may be more appealing to 19 television affiliates to broadcast. 20 In short, there is a concern that there's 21 very little coverage of the live drawing broadcast that 22 the commission is paying to make available to the 23 public. The staff is collecting information to 24 determine the extent of our current coverage and 25 reviewing and collecting information on alternatives 0071 1 that may provide greater broadcast coverage of lottery 2 on-line drawing results to the public in the future. 3 I wanted to brief you on these efforts by 4 staff and receive your feedback regarding this work. 5 When this work is completed, we'd also like to brief 6 you on our findings. 7 COMMISSIONER COX: Michael, the issue 8 here, I guess, is twofold. I guess we're talking about 9 exposure and the perception of integrity. Are there -- 10 are there other issues here, as well? 11 MR. ANGER: Those are the main issues. 12 COMMISSIONER COX: Okay. 13 MR. ANGER: And primarily, it's the 14 coverage that we're receiving. We -- we spend a lot of 15 money and resources to make the live drawing broadcast 16 available. And, quite honestly, we're not receiving 17 the coverage for those drawings on a very extensive 18 basis. 19 The survey will tell us to what degree 20 we're receiving that. But over time, that's declined 21 greatly. And in the beginning, we only had Wednesday 22 and Saturday night Lotto Texas drawings. Those 23 broadcasts were about 30 seconds long. 24 That has changed with the introduction of 25 new on-line games. And so now we have multiple games 0072 1 available, at least on our night -- evening drawings. 2 And the broadcasts run anywhere from 90 seconds to two 3 minutes. And that's a -- as I understand it in the 4 broadcasting industry, a tremendous burden to eat out a 5 segment of, say, a newscast where they could possibly 6 be selling that as commercial advertising space. 7 COMMISSIONER COX: Sure. That's -- 8 that's very important time for television stations. 9 Lots of folks watch the 10 o'clock news. 10 I wonder here how much of the decline is 11 a decline in interest of the lottery drawing. When -- 12 when Texas first had a lottery, that was important -- 13 important thing for people to see. 14 And at that time, I think we had Price 15 Waterhouse as the auditors. Maybe it was Coopers and 16 Lybrand, but it was one of the Big Eight firms. Now we 17 don't have one of those firms. Those firms aren't 18 interested in doing our work. 19 Maybe they liked that exposure. And 20 since it isn't there, it's not attractive enough to do 21 that work for them. So it may be that the fact that 22 they don't pick that up is because it's old news. 23 It may also be because our integrity is 24 well established and people no longer feel they have to 25 watch that. They feel they can trust the Texas 0073 1 Lottery. I don't know which it is or it may be a 2 combination of both. 3 But as you look at it, I hope you'll look 4 at all those aspects. Do the people think that, 5 because they're no longer seeing the drawing, that the 6 drawing is no longer honest and, therefore, they're not 7 buying tickets or do they think they've watched it for 8 enough years and that they can trust it and they're 9 buying their tickets based on that trust? 10 I don't want us to jump to any 11 conclusions without asking all the right questions. 12 MR. ANGER: We'll explore all those 13 issues. 14 CHAIRMAN CLOWE: Michael, I think what I 15 heard you say is that you've determined that the 16 coverage is decreasing. 17 MR. ANGER: That's correct. 18 CHAIRMAN CLOWE: You have not made a 19 determination at this point as to why. 20 MR. ANGER: No, sir. 21 CHAIRMAN CLOWE: And you will ask a 22 television station why and that will be part of your 23 continuing activity, right? 24 MR. ANGER: Yes, sir. We -- we have 25 received some feedback over time that indicates that 0074 1 there's competition for time and, the fact is, is that 2 time is being used by the stations to sell advertising 3 space. So we're hearing some of that. 4 But as a part of this survey in measuring 5 how much coverage we're receiving, we're going to be 6 going a step further to ask in a more formal way and 7 get additional feedback from some of the affiliates and 8 get a better feel for what their reasons are and what 9 their issues are. 10 CHAIRMAN CLOWE: Okay. And at some time 11 during your remarks, you said something about a 12 simulated drawing. 13 MR. ANGER: Animation, yes, sir. 14 CHAIRMAN CLOWE: Animation? And I'm just 15 wondering: Are we talking about two things at one time 16 now? Are we talking about a live broadcast and are we 17 talking about simulation or random number generator as 18 opposed to live drawings? 19 MR. ANGER: Let me draw a distinction for 20 you. The live broadcast drawings we do now, of course, 21 are the ball machines and the actual drawing that takes 22 place here at our studios. Now there's -- there's two 23 different paths that a lottery can take. 24 They can do ball machine drawings or they 25 can use random number generators, which is a computer 0075 1 generation or -- or pulling or drawing of the numbers 2 for a particular game. In fact, we do a form of that 3 with the Megaplier feature on the Mega Millions game. 4 Those are -- are mutually exclusive 5 processes. You do one or you do the other. What the 6 animation would be is, it's separate from that. And 7 that's just a graphical representation of the drawing 8 results. 9 And that can be done with either live 10 ball drawings being done in a backdrop or with random 11 number generators drawing the numbers in the backdrop. 12 CHAIRMAN CLOWE: I didn't want to take 13 you to someplace that you weren't going, but I just 14 needed exactly the explanation you just gave me. 15 MR. ANGER: Yes, sir. 16 CHAIRMAN CLOWE: And we do use a random 17 number generator when a person asks for a Quick Pick on 18 Lotto Texas, don't we? 19 MR. ANGER: That's correct, for all Quick 20 Pick features on all games, yes. 21 CHAIRMAN CLOWE: Okay. Thank you. 22 MR. ANGER: Thank you. 23 CHAIRMAN CLOWE: We have a witness 24 affirmation form from Dr. Gerald Busald. And Doctor, I 25 think you wanted to speak on this item? 0076 1 DR. BUSALD: That's correct. 2 CHAIRMAN CLOWE: Come forward, please. 3 DR. BUSALD: If I could, I'd like to give 4 you something to follow along. 5 CHAIRMAN CLOWE: Thank you. 6 COMMISSIONER COX: Thank you. 7 CHAIRMAN CLOWE: Would you begin by 8 identifying yourself, please. 9 DR. BUSALD: Yes. For the record, my 10 name is Gerald Busald. I'm a professor of mathematics 11 at San Antonio College. And I'm here to talk about the 12 random number generators and the numbers generated that 13 way. As you're aware, Megaplier is currently generated 14 using a random number generator. 15 Now -- I'm going to find the page -- back 16 in October, the October 1st meeting, there was a report 17 about that. The first drawing up until that time given 18 by Dr. Eubanks that was presented to you that that -- 19 those draws, there -- quote, there's no evidence that 20 the drawings are not random. 21 Notice it doesn't say the random 22 numbers -- the drawings are random, because that's 23 impossible to say. There is no way to prove that 24 something is random. You can only prove that it's not, 25 okay? There are certain things involved, like 0077 1 significance level and so on. 2 One of the things I want to talk about is 3 specifically on the generator for Megaplier that there 4 has been a total of 129 drawings so far. And of those 5 129 drawings, I have the frequency distribution of how 6 the numbers have come up. I also have a copy of 16 TAC 7 401.315(e)(3), which says the relative frequency that 8 should come up on those. 9 As of this time, using exactly the same 10 test that Dr. Eubanks used called the chi-square 11 goodness of fit test, which is a standard test, my 12 students and I worked on this. And we found out 13 there's something called a P value. 14 And a P value is the probability that I'm 15 wrong if I say those numbers are not being generated in 16 the proportions that are stated in that legislation. 17 And I can say at this time there's only an 18 eight-percent chance I'm wrong when I say the drawings 19 are not being generated in the proportions. 20 So there's a 92-percent chance there is a 21 problem with that program. Now that doesn't prove 22 there is a problem with the program. It says a 23 probability. In statistics, we a lot of times talk 24 about significance. And significance is a lot of times 25 defined as 92 -- I mean 95 percent or 99 percent. 0078 1 So you could say, well, that this is not 2 a significant finding. Excuse me. However, I think a 3 92-percent chance that these are not random is pretty 4 significant. And, as a added thing about this, the 5 number two has not appeared for the last 51 consecutive 6 drawings. The likelihood of this happening is only one 7 in 165. 8 Can it happen? Of course, it can happen. 9 People win Lotto when the odds are much, much worse 10 than that. So I cannot say for sure that the drawings 11 are not random. But I know for sure that the Lottery 12 Commission cannot say they are. 13 Now they can look at the program, and 14 that's part of the problem with any computer 15 generation. You talk about integrity. I think any 16 switch to machine generation is an error because of 17 that, if people know that there is a chance to see the 18 drawing, whether they see it or not, they can have some 19 confidence in that. 20 If it's generated by a computer, they 21 cannot see that. Now I understand -- and I thought 22 there might be some move to change some of the other 23 games to computer -- computer generated drawings. And 24 I know that they cannot guarantee that all 435,897 cash 25 -- Cash Five combinations are possible, because there 0079 1 is no way to prove that. I don't care how many times 2 they simulate it. And, of course, if you go to Two 3 Step, 1,832,000 combinations. 4 In Arizona -- I gave you a copy of it -- 5 in 1998, they had the Pick 3 game and they were 6 confident that it was okay. And it turned out it 7 wasn't. The number nine was not in the program and 8 could not be picked. 9 Players complained to the Lottery 10 Commission there. And they said oh, no, there's no 11 problem. But, of course, eventually they had to back 12 off and withdraw the game temporarily and change back 13 to numbers drawn by machine. 14 And, of course, they admitted that the 15 number nine was not in the program. They also said it 16 was extensively tested. And in -- in Pick 3, realize, 17 there's only a thousand combinations. So, obviously, 18 that extensive testing was not very extensive. 19 Without seeing the code, it's really hard 20 to know. There really is no such thing as a random 21 number generator. There are things called pseudo 22 random number generators, and they may appear to be 23 random. 24 One of the other issues, and one of the 25 things I want to say about what I discovered here -- 0080 1 CHAIRMAN CLOWE: Professor Busald? 2 DR. BUSALD: Yes? 3 CHAIRMAN CLOWE: Commissioner Cox has a 4 question. 5 DR. BUSALD: Yes, sir. 6 COMMISSIONER COX: I've heard this 7 several times, this distinction drawn between a random 8 number generator and pseudo random number generator. 9 Could you bring that into sharp focus for us? 10 DR. BUSALD: Well, my calculator has a 11 random number generator on it. If I reboot it and ask 12 for a random number, I will get the same random number 13 every time. If all my class that all has a set of 14 calculators reboots and clears RAM, they all get the 15 same random number. And the next random number they 16 get will be the same. 17 It's very difficult to make that happen 18 in programming. It can happen. But I think the issue 19 you have to look at more is this perception of honesty 20 that you talked about and reliability of the lottery. 21 Now let me say that the numbers drawn -- 22 CHAIRMAN CLOWE: Did that answer your 23 question? 24 DR. BUSALD: I'm sorry. 25 CHAIRMAN CLOWE: Was that your answer? 0081 1 COMMISSIONER COX: So what I hear you 2 saying that's in your calculator -- 3 DR. BUSALD: Uh-huh. 4 COMMISSIONER COX: -- is a table of 5 numbers that were perhaps drawn randomly, but that 6 there's no way for your computer to be smart enough, 7 your calculator to be smart enough to enter that array 8 at different times or at different points. 9 DR. BUSALD: Correct. It -- it all -- 10 COMMISSIONER COX: It all became -- 11 DR. BUSALD: All the computer -- 12 COMMISSIONER COX: -- without a -- 13 without a random starting point? 14 DR. BUSALD: Right. All the computers or 15 all the calculators have the same chip in them. So 16 they're all going to operate the same way. 17 COMMISSIONER COX: So let's -- let's say 18 that we take a little bigger computer. 19 DR. BUSALD: Uh-huh. 20 COMMISSIONER COX: Is it possible that 21 the little bigger computer could do what I could do if 22 I reach into my pocket and take out a dollar bill and 23 look at the fifth digit and see that it's an eight? I 24 think I just picked a random number. 25 DR. BUSALD: Not necessarily. There are 0082 1 certain things that are not generated sequentially. 2 Some things are done by regions of where they're 3 printed. 4 So -- I know that's the case with social 5 security numbers. You can't just pick a digit out of a 6 social security number, because they're not really 7 random. 8 COMMISSIONER COX: Okay. 9 DR. BUSALD: But you know -- 10 COMMISSIONER COX: So if I took the 11 initial digit, the units digit, that would probably be 12 a random number. 13 DR. BUSALD: Possibly. I don't know 14 their method of generating those numbers. So I really 15 can't address that. 16 COMMISSIONER COX: Okay. 17 DR. BUSALD: But yes, it's possible to 18 come up with a method that's very close to random. The 19 problem is no one can see what's happening inside the 20 computer. So they do have to have this faith that 21 you're talking about. 22 Now let me say that, because the number 23 four has come up more than the number two, actually it 24 means that the lottery is actually paying more than the 25 Megaplier would say. I'm saying there's a problem with 0083 1 programs that generate these things, and there can be. 2 It could be in the long run this comes out the same. 3 Now the other problem with generating 4 this with a computer -- and I'm not saying this has 5 happened or will happen. And I -- but the lottery has 6 a financial interest in the number two and three coming 7 up when sales are very high and the number two coming 8 up when the sales are low. 9 So I would much rather have the ability 10 to see what's happening than not see that. 11 CHAIRMAN CLOWE: So you'd like to see 12 that. You're saying that you like to see that, a ball 13 drawn? 14 DR. BUSALD: Correct. I know -- I know 15 there's an expense and we can buy -- and, of course, 16 there's a story from Indiana that I gave you, as well, 17 about that. They switched to the same situation. And 18 they said well, I can spend 40 thousand dollars on a 19 machine or I can spend 700 dollars on a computer. And, 20 of course, it's less expensive. 21 But, as a billion-dollar industry, you 22 have to consider should I nickel-and-dime something 23 that's so important to the perception of what's 24 happening. 25 So -- and I -- of course, I couldn't tell 0084 1 exactly from the way the item was written on the agenda 2 if there actually was forthcoming a proposal to switch 3 the draws. It was my understanding that that might be 4 a possibility. So I wanted to address that so maybe 5 you really consider very carefully before you switch 6 those games. 7 CHAIRMAN CLOWE: I think his testimony is 8 within the agenda item. Isn't it, counselor? 9 MS. KIPLIN: Yes. The point of Mr. 10 Anger's presentation was to bring to you on work that 11 the staff is undertaking but not for an action item. 12 And I've listened very carefully with regard to 13 Dr. Busald's testimony. 14 And I think, not only does it meet that, 15 but also public comment. The problem with public 16 comment is you're limited in your deliberations. But I 17 do think it falls within -- within the focus of agency 18 drawings. 19 CHAIRMAN CLOWE: We -- we understand 20 that. And you understand we have to stay within the 21 agenda -- 22 DR. BUSALD: Oh, certainly. Certainly. 23 CHAIRMAN CLOWE: And your comments are 24 appreciated. Are you concluded now? I have a couple 25 things. 0085 1 DR. BUSALD: I'll answer any questions. 2 I'd be happy to. 3 CHAIRMAN CLOWE: Commissioner Cox, do you 4 have any? 5 COMMISSIONER COX: Go ahead. 6 CHAIRMAN CLOWE: First of all, on what 7 you gave us here my first page starts with item number 8 three. Was there a prior page where there's one and 9 two? 10 DR. BUSALD: With item three? I'm sorry. 11 I'm not -- 12 CHAIRMAN CLOWE: In parenthesis, it's 13 problems with the Megaplier pseudo -- 14 DR. BUSALD: Okay. I -- yeah. I just 15 withdrew from the TAC code the parts that, in -- 16 CHAIRMAN CLOWE: Okay. 17 DR. BUSALD: -- particular pertained -- 18 CHAIRMAN CLOWE: Okay. 19 DR. BUSALD: -- to the Megaplier and how 20 it would be generating -- 21 CHAIRMAN CLOWE: So this is -- 22 DR. BUSALD: -- a change -- 23 CHAIRMAN CLOWE: -- something you've 24 taken from some -- somewhere else. 25 DR. BUSALD: From the TAC, yes. 0086 1 COMMISSIONER COX: Yeah. This is three 2 right here. 3 DR. BUSALD: Three, four and five are 4 from -- 5 CHAIRMAN CLOWE: Okay. 6 DR. BUSALD: -- the TAC. 7 CHAIRMAN CLOWE: I got you. 8 MS. KIPLIN: I hate to do this, because 9 you guys are on a roll, but I'm seeing the court 10 reporter shaking his head. He can't pick up three 11 voices at one time. 12 CHAIRMAN CLOWE: Thank you, counselor. I 13 see you picked it up from the TAC. 14 And Gary, if you know, or Doctor, if you 15 know, who was the operator in Arizona at the time this 16 problem occurred? 17 MR. GRIEF: I'm unsure. 18 CHAIRMAN CLOWE: Do you know, Doctor? 19 DR. BUSALD: No. I certainly don't. 20 CHAIRMAN CLOWE: Would you find out -- 21 MR. GRIEF: I'll find out, yes, sir. 22 CHAIRMAN CLOWE: -- who the operator was? 23 And I'd like to hear more about that Arizona problem. 24 Commissioner Cox? 25 COMMISSIONER COX: I'd like to hear a lot 0087 1 more about this whole situation, Gary. I, perhaps, 2 have not gone deeply enough into this, but I've heard 3 these terms pseudo random number generator and I 4 believe I heard Dr. Eubank say that there was no such 5 thing as a random number -- computer random number 6 generator. 7 I think that, for Megaplier, we can't be 8 using something that isn't reliable. And the work that 9 Dr. Busald has done here would indicate that we need to 10 look at that very carefully. 11 DR. BUSALD: May I make one other comment 12 about this? 13 CHAIRMAN CLOWE: Sure. 14 DR. BUSALD: At the time that 15 Dr. Eubank's report came forward, which was through a 16 fewer number of drawings, at that time the probability 17 that the drawings were not following the pattern 18 prescribed was right at 50 percent. 19 There was a 50/50 chance that they were 20 reliable. And -- 21 COMMISSIONER COX: Would that be the 22 percentage you would expect to see or want to see? 23 DR. BUSALD: Well, over the long run, you 24 want to see a hundred percent of the -- the balls fall 25 within those prescribed percentages -- 0088 1 COMMISSIONER COX: And you're saying -- 2 DR. BUSALD: -- of the -- 3 COMMISSIONER COX: -- that when 4 Dr. Eubanks did it, it was 50. You're saying eight. 5 DR. BUSALD: Yes. Correct. There's only 6 an eight-percent chance that they're being done 7 correctly. They may be. I don't know. But I know 8 that's not enough to give people confidence. 9 COMMISSIONER COX: Gary, what's the 10 latest? Is there later information than Dr. Eubanks on 11 this? Is -- does he do this regularly? 12 MR. GRIEF: On the Megaplier? 13 COMMISSIONER COX: Yes. 14 MR. GRIEF: I'll ask Michael to speak to 15 that. 16 MR. ANGER: Commissioner, we've recently 17 requested that an additional review be done of all the 18 data dating back to the beginning so we have adequately 19 refreshed those results. So when those results are 20 available, we'll make them available to you. 21 COMMISSIONER COX: Okay. I think that 22 whatever -- whatever the most frequent observations 23 that he can make that are useful, whether that be 24 weekly, monthly or whatever, we should have him do. 25 MR. ANGER: We'll look into that and set 0089 1 a regular schedule. 2 COMMISSIONER COX: Did your -- did your 3 class just take this on as a interesting-looking 4 project? 5 DR. BUSALD: Well, Commissioner Cox, you 6 haven't been here for a long, long time but 7 Commissioner Clowe knows that my students over time 8 have done several things with the lottery. 9 COMMISSIONER COX: Right. 10 DR. BUSALD: And just historically, my 11 students look at something every semester. This 12 semester we looked at the demographic report. We 13 looked at the random number. 14 And under public comment at the end of 15 the thing, I would like to address what my students 16 discovered on the demographic report. 17 COMMISSIONER COX: Great. 18 DR. BUSALD: So that's on my agenda. 19 COMMISSIONER COX: Thank you for your 20 help. We appreciate it. 21 CHAIRMAN CLOWE: Thank you very much. 22 Let's take a short 10-minute recess. 23 (Recess from 9:45 a.m. to 9:55 a.m.) 24 CHAIRMAN CLOWE: Okay. We'll come back 25 to order. I have a witness appearance form from 0090 1 Ms. Dawn Nettles. Is she here? 2 We'll pass over that then and we're going 3 to pass over item number nine because the executive 4 director and the charitable bingo operations director 5 have been called to the Capitol to appear before a 6 legislative committee. 7 And we'll take that up at the end of the 8 session. Hopefully they will have returned by then. 9 AGENDA ITEM NO. 10 10 CHAIRMAN CLOWE: Next we'll go to item 11 number 10, Mr. Fernandez, report, possible discussion 12 and/or action on HUB and/or minority business 13 participation, including the agency's mentor protege 14 program and/or the agency's fiscal year 2004 minority 15 business participation report. Good morning. 16 MR. FERNANDEZ: Good morning, Mr. 17 Chairman, Commissioner and Mr. Grief. I have with me 18 Ms. Bertolacini, who did the work on this report, and 19 she's going to present this morning. 20 CHAIRMAN CLOWE: Good morning. 21 MS. BERTOLACINI: Good morning, 22 Commissioners. For the record, my name is Joyce 23 Bertolacini, and I am the coordinator of the TLC's 24 Historically Underutilized Business program. 25 Included in your notebooks today are the 0091 1 December and January monthly HUB minority contracting 2 activity reports, which include all fiscal year 2005 3 expenditures paid from September 1st of 2004 through 4 December 31st, 2004 and February 7th, 2005 5 respectively. 6 Our total qualifying expenditures, as of 7 February 7th, 2005, were 62.1 million. And our 8 estimated HUB minority utilization was nearly 14.8 9 million, which equates to 23.78 percent. 10 In addition, our fiscal year 2004 11 minority business participation report is included for 12 your approval. The report, which is required by 13 Section 466.107 of the State Lottery Act must be made 14 available annually to the Governor, Lieutenant 15 Governor, Speaker of the House and members of the 16 legislature. 17 The report documents -- excuse me -- the 18 commission's level of minority and historically 19 underutilized business participation both in 20 contracting and in the licensing of sale agents and 21 requires your formal approval prior to being printed 22 and published on our Web site. 23 This is an action item. And Kim isn't 24 here to prompt you, but -- well, here she is. Kim, 25 would you like to prompt them? 0092 1 MS. KIPLIN: I apologize for my absence. 2 I think you're doing quite fine. 3 MS. BERTOLACINI: Okay. 4 MS. KIPLIN: I'll take over if you'd 5 like. Commissioners, staff is looking for a motion for 6 you-all to approve this report and a vote on this 7 action. 8 CHAIRMAN CLOWE: Any questions? 9 COMMISSIONER COX: No, sir. 10 CHAIRMAN CLOWE: I move we adopt the 11 report. 12 COMMISSIONER COX: Second. 13 CHAIRMAN CLOWE: All in favor, please say 14 aye. 15 COMMISSIONER COX: Aye. 16 CHAIRMAN CLOWE: Aye. 17 Oppose, no. 18 The vote is two-zero. 19 MS. BERTOLACINI: And Chairman Clowe, 20 there should be a cover letter there prepared for your 21 signature in front of you and -- 22 CHAIRMAN CLOWE: There is, and I'm 23 signing it. 24 MS. BERTOLACINI: Okay. And, finally, 25 there are no updates regarding the mentor protege at 0093 1 this time, but I'd be happy to answer any questions 2 that you might have. 3 CHAIRMAN CLOWE: We continue to be 4 appreciative of your good work and results. And we 5 urge you to continue to give this a high priority, 6 please. 7 MS. BERTOLACINI: Thank you, Chairman. I 8 will. 9 CHAIRMAN CLOWE: Thank you. Mike, I 10 believe you have the next item number 11, report, 11 possible discussion and/or action on the agency's 12 contracts. 13 AGENDA ITEM NO. 11 14 MR. FERNANDEZ: Yes, sir. Tab 11 in your 15 notebooks is a -- is a status report on the contracts 16 and -- in excess of 25 thousand. If you have any 17 questions, I'll be happy to try and answer them. 18 CHAIRMAN CLOWE: I don't believe we have 19 any questions, Mike. Thank you. Who's going to sit in 20 for Mr. Deviney? Ben, are you going to do that? 21 MR. NAVARRO: Yes, sir. 22 AGENDA ITEM NO. 12 23 CHAIRMAN CLOWE: Next item number 12, 24 report, possible discussion and/or action on the 25 agency's financial status. 0094 1 MR. NAVARRO: Good morning, 2 Commissioners. Again, for the record, my name is 3 Benito Navarro. I'm the financial accounting and 4 reporting manager. 5 If I may, under tab number 12 entitled 6 agency's financial status, you'll find several reports. 7 The first report is a report on transfers made to the 8 Foundation School Fund and allocations of unclaimed 9 prize money. 10 Through the month of January, Foundation 11 School Fund transfers to 2000 -- February 2005 amounted 12 to 82.3 million. There was no unclaimed prizes 13 transferred in that month. 14 Behind the transfer report, you'll also 15 find a report of lottery revenues, expenditures and 16 transfers from fiscal year 1992 to the present. Total 17 cash basis transfers to this date through January of 18 this year total 12.2 billion dollars. Of that, 7.01 19 have been transferred to the Foundation School Fund. 20 Lastly, you'll find behind the blue 21 divider the Texas Lottery Commission's budget report 22 for the period September 1st, 2004 through January 1st, 23 2005. 24 Both lottery and charitable bingo 25 operations expenditures and commitments are tracking as 0095 1 expected, with the -- with the exception of 2 expenditures for the lottery operator contract, which 3 is running at approximately 44 percent of budget due to 4 higher than expected lottery sales so far in fiscal 5 year 2005. 6 Because the agency has appropriated 7 additional funds through Rider Four for the event of 8 higher sales, there is no budget concerns to report to 9 you at this time. And I -- I will answer any questions 10 you may have regarding these reports. 11 CHAIRMAN CLOWE: Are there any? 12 COMMISSIONER COX: No, sir. 13 CHAIRMAN CLOWE: Thank you. 14 MR. NAVARRO: Thank you. 15 AGENDA ITEM NO. 13 16 CHAIRMAN CLOWE: Next item number 13, 17 report, possible discussion and/or action on lottery 18 advertising and promotions. 19 MR. ANGER: Commissioners, this agenda 20 item is noticed up for Ms. McCullough, and she's a new 21 member of our team. With your permission, I -- I'll 22 give you a brief introduction. 23 CHAIRMAN CLOWE: Good. 24 MR. ANGER: For the record, my name is 25 Michael Anger, and I'm the Lottery Operations director. 0096 1 And beside me is Ms. McCullough. 2 Ms. McCullough has joined our team in 3 Lottery Operations following the reorganization that we 4 underwent in the fall. And she is joining us in a new 5 position as creative coordinator. And she will be 6 noticed up to deliver information to you under this 7 agenda item today and also in the future. 8 And so I just wanted to give you a brief 9 introduction on that. 10 CHAIRMAN CLOWE: And do you have a report 11 for us, Ms. McCullough, this morning? 12 MS. MCCULLOUGH: Yes, sir. I do. 13 CHAIRMAN CLOWE: Would you tell us a 14 little bit about yourself so we could understand what 15 your history is before you make that report? 16 MS. MCCULLOUGH: Absolutely. I'd be 17 happy to. 18 CHAIRMAN CLOWE: Would you move the 19 microphone a little closer, please. 20 MS. MCCULLOUGH: Is this better, 21 Commissioner? 22 CHAIRMAN CLOWE: Much better. Thank you. 23 MS. MCCULLOUGH: My name is Chelsea 24 McCullough, and my background is in marketing and 25 advertising. I transferred directly from the 0097 1 governor's office, where I was marketing for the 2 Economic Development and Tourism Division. Prior to 3 that, I had an advertising agency which was focused in 4 gaming. 5 CHAIRMAN CLOWE: Very good. We're happy 6 to have you on the team here, and we'll look forward to 7 your report. 8 MS. MCCULLOUGH: Thank you. Happy to be 9 here. For the record, my name is Chelsea McCullough. 10 I'm creative coordinator in the Lottery Operations 11 Division. 12 In regards to the current advertising 13 campaigns, we are focused on the Wheel of Fortune 14 promotion for the month of March. In regards to the 15 general market advertising, TV and radio has been 16 running since February 21st and will continue through 17 the week of March 7th. Minority market advertising 18 will run March 7th through the 21st. 19 And I'd be happy to provide information 20 or answer any questions you may have. 21 CHAIRMAN CLOWE: Were you present in the 22 Capitol when this agency gave testimony to the House 23 Finance Committee and we had questions about 24 advertising and how we could be more effective? 25 MS. MCCULLOUGH: No, sir. I was not 0098 1 present, but I did watch that testimony. 2 CHAIRMAN CLOWE: If you would read that 3 testimony -- I'm sure it's available by now or hope 4 it's available. If it isn't, it should be before too 5 long. I think we have the need to have effective 6 advertising and market the games of Texas. And I think 7 the members of that committee expressed a desire to 8 have effective advertising on behalf of the Lottery 9 Commission. 10 At the same time, there was a question of 11 whether we have reached out to different members of the 12 Texas community based on some breakdowns, and I think 13 there were two or three, and whether our advertising 14 was equitable through the media sources that are 15 available to us and if we're doing a proper job in that 16 area. 17 Additionally, there was an issue brought 18 up regarding our demographic survey about who's playing 19 the games of Texas. And, particularly, I think it 20 related to the socioeconomic classifications and to 21 educational classifications. 22 And I think Professor Busald is going to 23 address the commission later in this meeting about work 24 his students have done on that. And I think it would 25 be well for you, if you can, to be present and hear his 0099 1 remarks. 2 I have seen a letter -- Counselor, tell 3 me if I have strayed too far from the agenda on this 4 now. I've seen a letter from the executive director of 5 Texas Tech asking for a revision of the report that 6 they issued. 7 And I'm hoping, at this point in time or 8 later in the meeting when the executive director 9 returns, perhaps we can have a discussion and we can 10 get a clear understanding of the meaning of all that. 11 MS. KIPLIN: Commissioner, can I ask you: 12 Are you talking about the demographic report? 13 CHAIRMAN CLOWE: Yes. 14 MS. KIPLIN: It is not specifically 15 noticed. There are certain items that fall under -- I 16 do think, though, that this has been such a matter of 17 public interest it's probably better that it be 18 specifically noticed. 19 And once it comes -- comes to our 20 attention that, you know, there's a -- more of a public 21 interest... 22 CHAIRMAN CLOWE: Sure. Sure. You don't 23 have any objections to recognizing Professor Busald, do 24 you, in the public comment? 25 MS. KIPLIN: No. I think -- I think 0100 1 that's what the public comment -- 2 CHAIRMAN CLOWE: Okay. 3 MS. KIPLIN: -- item is about. I will 4 say, though, that unless we can find another agenda 5 item that it can go into -- and I'm looking and I'll 6 ask Ms. Joseph, who's my backup making sure I'm 7 straight on Open Meetings Act, can take a look at it. 8 But I think under public comment the -- 9 there is a limitation that's on you-all. 10 CHAIRMAN CLOWE: Yeah. I understand. 11 MS. KIPLIN: Okay. That's -- 12 CHAIRMAN CLOWE: I understand. Okay. 13 Well, this all is in your area of activity. And I want 14 to, by my remarks, broaden your awareness and your 15 interest in our marketing efforts. 16 I think Commissioner Cox shares and is 17 leading the effort to better know who our customer is, 18 our player, and effectively reach that person in good 19 balance with good taste and in a proper way. And 20 that's your area, if I understand, and your task. 21 Is that correct, Michael? 22 MR. ANGER: Yes, sir. That's correct. 23 CHAIRMAN CLOWE: So we're glad to have 24 you on board and look forward to seeing some good 25 results. 0101 1 MS. MCCULLOUGH: Thank you very much. 2 CHAIRMAN CLOWE: Anything further, 3 Commissioner Cox? 4 COMMISSIONER COX: No, sir. 5 CHAIRMAN CLOWE: Thank you both. 6 AGENDA ITEM NO. 14 7 CHAIRMAN CLOWE: Next is item 14, report 8 and possible discussion and/or action on the 79th 9 Legislature. Is Mr. Haza here or did he go to the 10 Capitol? 11 MR. GRIEF: I'll be making the report -- 12 CHAIRMAN CLOWE: Very good. 13 MR. GRIEF: -- for the Governmental 14 Affairs Division. They are all busy with other 15 activities at the Capitol today. 16 Beginning with the most important item 17 under this agenda item, Commissioner Olvera appeared 18 before the Senate Nominations Committee on February 19 21st. And following his appearance, the committee 20 moved unanimously to send his name to the full senate 21 with the recommendation that his nomination be 22 approved. 23 And on February the 24th, the full senate 24 voted 31 to zero to approve his nomination as a lottery 25 commissioner for a term that ends February 1st, 2007. 0102 1 Moving on to other legislative matters, 2 more than -- 3 CHAIRMAN CLOWE: And I would like to 4 point out that he did not take a holiday because he was 5 confirmed. He is in court today. 6 MR. GRIEF: More than 25 hundred bills 7 have been filed thus far in the 79th Legislature. And 8 the bill deadline has been set for March 14th, two 9 weeks from today. We anticipate that as many as three 10 thousand more bills will be filed between now and then. 11 We are currently tracking and monitoring 12 63 bills for possible impact to our agency. And 13 because the status of bills changes daily, we have 14 provided each of you this morning with an updated 15 tracking report to replace the ones that were in your 16 notebook. 17 The bills that have direct impact on the 18 State Lottery Act or the Bingo Enabling Act include: 19 House Bill 897 by Representative Turner 20 relating to the operation of video lottery games at 21 pari-mutuel racetracks; 22 House Bill 1112 and 1138 by 23 Representative Flores that relate to the operation and 24 regulation of charitable bingo; 25 House Bill 1434 by Representative Hamric, 0103 1 which is the House version of our agency's Sunset Bill; 2 House Joint Resolution 25 by 3 Representative Raymond, which would amend the state 4 constitution to dedicate money from the state lottery 5 to public education; 6 House Joint Resolution 38 by 7 Representative Turner, which would amend the state 8 constitution to permit video lottery at pari-mutuel 9 racetracks; 10 Senate Bill 405 by Senator Jackson, which 11 is identical to House Bill 1434 and it's the senate 12 version of our agency's Sunset Bill; 13 Senate Bill 442 by Senator Hinojosa, 14 which would provide a level of immunity from civil 15 liability to lottery retailers for an act or omission 16 within the course of their scope as an agent's 17 licensee. This bill was scheduled to be heard this 18 afternoon by the Senate State Affairs Committee, but we 19 understand that this hearing has now been postponed to 20 a later date; 21 Senate Joint Resolution by Senator Ellis 22 would amend the state constitution to authorize casino 23 gaming and would abolish the Texas Lottery Commission 24 and the Texas Racing Commission and move those 25 operations into a newly-formed Texas Gaming Commission. 0104 1 And, in addition to those bills, there 2 are several other bills related to the authorization of 3 casino gaming. These are House Bill 1337, House Joint 4 Resolution 49 and House Joint Resolution 51, all of 5 which are authored by Representative Kino Flores. 6 The appropriations bills, House Bill 1 7 and Senate Bill 1, have been moving through their 8 respective processes at a much more rapid pace than we 9 normally see. 10 The agency has been participating and 11 appearing as appropriate to testify in response to 12 concerns regarding our agency's legislative 13 appropriations request. 14 On February 3rd, Chairman Clowe, as well 15 as Reagan, Billy Atkins and Lee Deviney, all testified 16 before the Senate Finance Committee. And on February 17 10th, the agency testified before the House 18 Appropriations Subcommittee, General Government 19 Subcommittee. 20 Subsequent to those appearances, we have 21 attended three markup sessions of the General 22 Government Subcommittee and two markup sessions for the 23 Senate Finance Work Group. We've also submitted 24 supplemental information to both of these committees as 25 requested and we have visited with the appropriate 0105 1 staff and the individual members to continue to provide 2 them with information regarding our legislative 3 appropriations request. 4 This morning the agency's budget is being 5 taken up in the House Appropriations Committee, as well 6 as the Senate Finance Committee. And we have 7 appropriate staff in attendance to respond to any 8 questions that may arise. 9 On February 2nd, Reagan provided 10 testimony on behalf of the agency to the House 11 Committee on Ways and Means, which was gathering 12 information on the subject of video lottery. 13 And finally, House Bill 1138, relating to 14 the operation and regulation of charitable bingo, is 15 scheduled for a hearing before the Licensing Committee 16 this Wednesday, March the 2nd. 17 And that concludes this report and I will 18 be happy to try and answer any questions. 19 CHAIRMAN CLOWE: Thank you, Gary. 20 AGENDA ITEM NO. 15 21 CHAIRMAN CLOWE: Next we'll take up item 22 25, consideration of and possible discussion and/or 23 action on internal and external audits and on reviews 24 relating to the Texas Lottery Commission and/or the 25 Internal Auditing Department's activity. Mr. Royal? 0106 1 COMMISSIONER COX: Mr. Chairman? 2 CHAIRMAN CLOWE: Sir? 3 COMMISSIONER COX: Were you looking at 4 item 15? 5 CHAIRMAN CLOWE: I'm sorry. It's 15, not 6 25. Thank you very much. Good morning, Greg. 7 MR. ROYAL: Good morning, Commissioners. 8 For the record, I'm Greg Royal, the assistant director 9 of the Internal Audit Division. And I don't have any 10 information at this time for this agenda item to 11 report. 12 But I'll be happy to answer any questions 13 for you. 14 CHAIRMAN CLOWE: Thank you, sir. 15 MR. ROYAL: Yes, sir. 16 AGENDA ITEM NO. 16 17 CHAIRMAN CLOWE: Next item 16, 18 consideration of and possible discussion and/or action 19 on the instant ticket testing procedure. Mr. Marker, 20 good morning. 21 MR. MARKER: Good morning, Commissioners. 22 For the record, my name is Andy Marker, deputy general 23 counsel for the Texas Lottery Commission. 24 With regard to item 16, on February 18th, 25 the commission announced that Affiliated Forensic 0107 1 Laboratory from Phoenix, Arizona became the apparent 2 successful proposer on the request for proposal for 3 instant ticket testing services. 4 The commission and staff is in the 5 process of negotiating and finalizing the contract with 6 the proposer. And, at that time once the contract is 7 finalized, the other proposers will be notified. 8 I'll be happy to answer any questions. 9 COMMISSIONER COX: Andy, are we doing any 10 of this kind of work in-house anymore or is it all 11 going to be farmed out? 12 MR. MARKER: I will defer to Michael 13 Anger. This RFP covers ticket testing, some of which 14 -- most of -- the bulk of that had been done in-house. 15 I believe that Lottery Operations will retain some 16 operations. 17 But with regard to the testing that will 18 be done, that will be outsourced. But I'll let Michael 19 address that. 20 MR. ANGER: Commissioners, we will 21 continue to maintain the in-house laboratory that we 22 have used for instant ticket testing in the past. The 23 focus of most of those efforts by staff that will be 24 working in the laboratory will be with regard to 25 tickets that we received through the claims process 0108 1 that are either damaged or have other issues and then 2 conduct analysis for both determining the payment of 3 those claims and also internal investigations that we 4 conduct. 5 So it's more shifting of the focus of the 6 work that's being done. And we won't have -- under the 7 previous organizational structure, we had staff that 8 were assigned purely as chemists. The staff that we 9 have now will be forensic staff and will also perform 10 analyst functions and evaluation of those claims. 11 COMMISSIONER COX: Okay. Draw a line for 12 me, if you will, of what we're going to do in-house and 13 what Affiliated Forensic Laboratory is going to do. 14 MR. ANGER: Absolutely. Affiliated 15 Forensic Laboratory, following contract negotiations if 16 the contract is executed, will be focused on testing of 17 our instant ticket games before they're made available 18 to the public. 19 There's a series of tests that we usually 20 conduct in-house. And in coordination with that 21 vendor, they would conduct that testing and do an 22 evaluation and assessment and provide us with a report 23 to determine whether we proceed with the particular 24 game. 25 COMMISSIONER COX: And what kind of work 0109 1 will they be doing with those tickets before they're 2 released? 3 MR. ANGER: They do a series of tests, 4 basically, to determine the level of security of the 5 tickets that we're getting ready to release for sale to 6 the public. They ensure that the -- the latex is 7 applied properly. 8 There's scratch testing that takes place. 9 They evaluate the layers. An instant ticket has a 10 number of layers of different types of paper that are 11 applied to the ticket to create security features that 12 protect, basically, the security and integrity of the 13 games. 14 And they will do an evaluation and 15 assessment based on those tests and then provide us 16 with that report. 17 COMMISSIONER COX: So it will be strictly 18 related to the physical ticket itself? 19 MR. ANGER: Yes, sir. 20 COMMISSIONER COX: Not to whether or not 21 the payout structure might conform to the anticipated 22 payout structure. 23 MR. ANGER: That's correct. 24 COMMISSIONER COX: So that's done only on 25 a post basis? 0110 1 MR. ANGER: The payout structure is 2 actually evaluated -- the instant ticket manufacturers 3 are required to put together the prize structure for 4 the game. We -- we approve the prize structure and the 5 tier structure for the game. 6 And then they hire a external audit firm 7 to come in and evaluate that information. And they 8 provide us with a report, the external audit firm does. 9 COMMISSIONER COX: Now is -- but that 10 report is general as to their controls and procedures 11 and not necessarily as to how well they worked in any 12 particular game. 13 MR. ANGER: I'm not sure I follow the 14 question, Commissioner. 15 COMMISSIONER COX: Okay. Do they give 16 you a report from the auditors on how Lucky Duck 17 conformed to the structure that we said that Lucky Duck 18 should conform to? 19 MR. ANGER: They do verify the prize 20 structure, yes, sir. 21 COMMISSIONER COX: How do they do that? 22 MR. ANGER: They -- basically, there are 23 prize structure parameters. And I -- I don't want to 24 speak too far down this path because I'm not an expert. 25 But there are prize structure parameters 0111 1 that we set up for a game when the game is created in 2 our working papers. And the game is printed and they 3 verify that, based on pools of tickets that are 4 created, that the way the printing takes place there 5 are a number of tickets and verify that the ticket 6 printing and the winning structure that's created that 7 that game follows with what was set up originally in 8 the working papers. 9 COMMISSIONER COX: And could you, at a 10 future meeting, get someone to make a presentation to 11 us on just what kind of pre-issue controls there are 12 over the game conforming to the prize structure that we 13 set? 14 I know we can look at it on a post basis, 15 but I'd like to know what we're able to do and what we 16 are doing before the game's issued. 17 MR. ANGER: Absolutely. 18 COMMISSIONER COX: Thank you, Mr. 19 Chairman. 20 CHAIRMAN CLOWE: Thank you, sir. 21 AGENDA ITEM NO. 17 22 CHAIRMAN CLOWE: Mr. Marker, I believe 23 you have the next item number 17, consideration of and 24 possible discussion and/or action on the broadcast 25 studio and production services procurement. 0112 1 MR. MARKER: Thank you, Commissioners. 2 Last week the commission and the vendor, current 3 vendor, signed a contract extension which would extend 4 the current agreement through December 31 of this year. 5 Commission staff is working to reissue 6 the request for proposal for the drawing studio. I 7 don't have a release date. But, again, the current 8 contract has been extended. It was to expire at the 9 end of February. 10 It's been extended to allow staff 11 additional time to work on the draft of the request for 12 proposals and to get that issued. 13 I'll be glad to answer any questions. 14 CHAIRMAN CLOWE: Thank you, Mr. Marker. 15 MR. MARKER: Thank you. 16 AGENDA ITEM NO. 18 17 CHAIRMAN CLOWE: Next item 18, report, 18 possible discussion and/or action on the agency Survey 19 of Organizational Excellence. Mr. Greer? 20 MR. GRIEF: Good morning, Commissioners. 21 Our human resources director, Diane Morris, and I are 22 pleased to present you today with the results from the 23 latest Survey of Organizational Excellence. 24 This survey is a tool that has been 25 developed by the University of Texas School of Social 0113 1 Work. And it's designed to assess organizational 2 effectiveness and hopefully help us determine ways that 3 we can improve the quality of life in the workplace for 4 our staff. 5 The survey addresses workforce and 6 workplace issues that affect the organizations, 7 including quality of service, performance training, 8 cultural diversity, quality of work life, 9 organizational communication and creativity and team 10 effectiveness. 11 The survey also provides information to 12 state agencies about how well our agency functions. 13 The information that we tried to obtain from the survey 14 every time that we asked our staff to go through the 15 process is: 16 We want to discover points of reference 17 for organizational change efforts; we want to 18 incorporate some targeted areas of improvement in our 19 agency's mission or goals, if appropriate; and 20 sometimes even use the results to help us formulate our 21 legislative appropriations request. 22 This survey is normally administered 23 every other year by state agencies, and our agency has 24 followed that pattern in the past. However, our 25 commission asked us last year to conduct this survey on 0114 1 a more frequent basis. And the last two surveys have 2 been conducted only one year apart, in November of 2003 3 and then most recently in November of 2004. 4 And in the most recent survey, 70 percent 5 of agency staff responded. And we have a slide that 6 shows previous staff responses over time. I'd like 7 Diane to go -- there it is. If you look at the bottom 8 of that particular slide, you'll see past staff 9 responses. 10 So we are very encouraged by the 11 70-percent response rate, although we continue to look 12 for even better results in that area. 13 Due to the recent organizational changes 14 that we -- 15 COMMISSIONER COX: Hey, Gary? 16 MR. GRIEF: Yes, sir? 17 COMMISSIONER COX: Back to that last 18 slide. How many FTs do we have? 19 MR. GRIEF: We're authorized 325. I 20 believe at the current time we have around -- 310, 21 perhaps? 22 MS. MORRIS: Yes, sir. 23 COMMISSIONER COX: So how did we ask 326 24 people to take the survey? 25 MS. MORRIS: I'm thinking that it might 0115 1 have been some of the commissioners, as well as some of 2 the flux, if you will, of the staff. 3 MR. GRIEF: Due to the recent 4 organizational changes that we've made at the agency, 5 we have carefully reviewed the results of this latest 6 survey. And we are focusing our efforts on those items 7 that are appropriate and correct based on the way our 8 organization sits today and not on the way our agency 9 was structured three or four months ago. 10 To that end, we made a decision to focus 11 on the results of the survey without the responses from 12 the divisions formerly known as Marketing and Security 13 included. We feel that the majority of the responses 14 received from those divisions at the time the survey 15 was conducted were a result of issues that may have 16 been clarified or at least significantly changed as a 17 result of the recent reorganization. 18 We shared this information with agency 19 staff last week. I was very clear and up front with 20 staff about our approach. The responses that we 21 received from the former divisions of Marketing and 22 Security were generally negative. 23 We will need to understand many of the 24 underlying issues that led to those responses, and we 25 feel that we've addressed many of the issues with the 0116 1 recent organization. Therefore, we didn't want these 2 responses to skew or slant the areas of concern that we 3 want to focus our resources on to try and make things 4 better for our current employees. 5 At the same time, we wanted to provide 6 staff with all of the results from the most recent 7 survey, both including those two former divisions and 8 not including them. 9 And while we recognize that some staff 10 members of the former Security and Marketing divisions 11 are still with the agency today, our hope is that the 12 concerns that those employees might have expressed in 13 the most recent survey were either addressed in the 14 reorganization or will be addressed in our agency's 15 response and efforts to respond to the results of the 16 survey. 17 Again, the complete survey results from 18 both perspectives have been made available to staff. 19 And we've utilized our agency intranet to share that 20 information with them as of last week. 21 COMMISSIONER COX: Gary, can we go back 22 to that? 23 MR. GRIEF: Yes. I need to go back to 24 that, too, please. 25 COMMISSIONER COX: Could we zoom in a 0117 1 little on that? I can't read the line items. 2 MR. GRIEF: I'm afraid our technology 3 won't let us zoom in, Commissioner. But I want to just 4 use this slide from a visual perspective. You can see 5 the difference in the results if you include the former 6 divisions of Marketing and Security, which is the one 7 on the left. 8 COMMISSIONER COX: What are the colors? 9 MR. GRIEF: Those are the different 10 constructs, if I remember correct, Diane. 11 MS. MORRIS: Yes. 12 MR. GRIEF: They're grouped. Like the 13 first four, the purple, that's one what we call a 14 construct. And Diane will get into the details of that 15 as she goes through her summary. The next four, blue, 16 is one construct. The next -- yeah, every group of 17 colors is one what the survey calls a construct. 18 COMMISSIONER COX: Okay. And everything 19 left of the center line is -- has -- 20 MR. GRIEF: That means -- 21 COMMISSIONER COX: Deteriorated. 22 MR. GRIEF: It's a generally negative 23 response. 24 COMMISSIONER COX: Is it generally 25 negative or is it comparatively negative? 0118 1 MS. MORRIS: It's comparatively. 2 MR. GRIEF: Comparatively. 3 COMMISSIONER COX: Okay. So this is 4 measuring progress or lack thereof from the last time 5 we did one of these surveys. 6 MR. GRIEF: That's correct. 7 COMMISSIONER COX: And so what I see on 8 the left-hand side is got -- we were heading the wrong 9 direction. On the right-hand side, with a few folks 10 excluded, we're doing pretty well. 11 MR. GRIEF: Yes, sir. That's the way we 12 see it. 13 COMMISSIONER COX: And what are those two 14 blue ones that -- where we seem to have moved backward? 15 MR. GRIEF: Fair pay is the first one and 16 physical environment is the second one. And Diane can 17 actually get into the details of the questions on the 18 survey that led to those types of responses. 19 COMMISSIONER COX: If we have time, Mr. 20 Chairman, I'd like to hear that. 21 CHAIRMAN CLOWE: Certainly. 22 MR. GRIEF: That's our plan. 23 COMMISSIONER COX: Oh, so that's what 24 you're going to do? 25 MR. GRIEF: Yes, sir. Diane is going to 0119 1 get into the details with you. Again, I want to 2 re-emphasize all of the data from both perspectives was 3 made available to staff. But our efforts, in trying to 4 make improvements, are going to focus on the results 5 without including the former Marketing and Security 6 Divisions. 7 And I'll now ask Diane to take you 8 through the detailed results of the most recent survey 9 without those divisions. 10 MS. MORRIS: Good morning. This 11 PowerPoint starts with more of a basic explanation of 12 the Survey of Organizational Excellence. The survey 13 has been given by the state agency -- it's given by UT 14 but to the state agency for the last five years. We 15 skipped one year, but for the last couple years. 16 So we're going to call it the SOE. The 17 SOE consists of things that they define as items, 18 constructs and dimensions. I'll explain each of those 19 individually and I'll show them on the slides. 20 COMMISSIONER COX: Diane, is this 21 something UT does for every state agency or just for us 22 or for a bunch of them? 23 MS. MORRIS: They offer it to different 24 state agencies, to other government units and to local 25 government units, as well as to private corporations. 0120 1 COMMISSIONER COX: And is it a 2 cookie-cutter approach? Do they have the same items, 3 constructs and dimensions on each agency? 4 MS. MORRIS: The majority of it is a 5 cookie-cutter approach using even the same questions 6 year after year. Agencies are able to add their own 7 separate questions at the end of the survey. 8 COMMISSIONER COX: Thank you. 9 MS. MORRIS: Year after year, the results 10 are compared. What are survey items? Survey items are 11 actually statements that responders attribute strongly 12 agree, agree, neutral, strongly disagree or disagree. 13 We'll get so some statements or, if you will, items in 14 a second. 15 Constructs: Constructs broadly define 16 the organizational strengths and areas of concern. 17 Constructs are developed from the related survey items. 18 They're building an analysis here by building off of 19 survey items, building up what are called constructs. 20 And construct scores are calculated by 21 averaging the related item scores together. Finally, 22 you get to what are called the dimensions. There are 23 five dimensions: work group, accommodations , 24 organizational features, information, and personal. 25 Each dimension has several constructs. 0121 1 And again, many items make up each construct. The 2 dimension score is the average of the construct scores 3 belonging to that dimension. When you asked earlier 4 what are the colors, those are the different 5 dimensions. 6 Here they are. What makes up dimensions? 7 What are the constructs? 8 Work group: supervisory effectiveness, 9 fairness, team effectiveness and diversity. 10 Accommodations: fair pay, physical 11 environment, benefits and employment, development. 12 Organizational features: change 13 oriented, goal oriented, holographic, strategic and 14 quality. 15 Information: internal, availability, and 16 external. 17 Personal: job satisfaction, time and 18 stress, burnout, and empowerment. 19 We are compared to other agencies. We're 20 compared to other agencies that are called MACC 21 agencies, the midsize agency, coordinating counsel of 22 agencies. But those examples are: The Employees 23 Retirement System, Department of Information Resources, 24 Public Utility Commission and the General Land Office. 25 Again, as we stand, our FTE count is 0122 1 around 300. Similar missions, we are also compared to 2 them. There are three for the SAO purpose -- SOE 3 purposes, there are three other agencies in addition to 4 ourself: Texas Department of Transportation, Housing 5 and Community Affairs, and Workforce. 6 Here is a -- for what it's worth -- the 7 comparison between our organization and the other 8 organizations. And you can see loosely -- and this -- 9 frankly, I've always found this kind of a difficult 10 slide, if you will. 11 The yellow, that's our score. And our 12 score is over there on the right-hand side such as work 13 group, one of the five dimensions. Our score is 347. 14 O: The organizational score of your 15 whole organization, it's -- you can see where it's -- 16 it's kind of looking a little off from our score. 17 Again, if you look up top with the 18 modified results, that's what's throwing us off a 19 little bit. This was a screen that was created as far 20 as the secondary report, if you will, without the 21 Marketing and Security Divisions. 22 M: M is the mission. If you recall, 23 those were the three or four others. And all 24 respondents are -- now they're pulling in more of the 25 MACC agencies, as well as all other respondents. On 0123 1 this side, the UT folks did not put in the MACC agency 2 results for comparison. 3 As I understand, there were places for 4 four blocks or three blocks not four. 5 COMMISSIONER COX: Let's go back to that 6 one if we could, Diane. 7 MS. MORRIS: Yes, sir. Yes. 8 COMMISSIONER COX: As I understand that, 9 we would have liked to have had our alphabet blocks 10 over in the white, but instead they're in the yellow. 11 MS. MORRIS: Yes, sir, or at least, you 12 know, as long on that side as you get, yes, sir. 13 This is another way of looking at 14 construct scores. These are relative comparison to 15 ourself. We're not comparing to other state agencies 16 and we're not comparing to prior year surveys. 17 Blue are our highest scores. Red are our 18 lowest scores. And yellow are in between. UT picks 19 five high and five low to call your attention to. And 20 most importantly for our purposes, we'll get to the 21 five low and the items and the constructs that made up 22 those scores. 23 Comparison over time: These are UT's 24 values put to this survey and how to read the results. 25 The negative changes of greater than 50 points or 10 or 0124 1 more negative constructs should be a source of concern. 2 Here is the comparison over time. 3 According to the UT standard, if you will, agencies 4 should be concerned, again, when there are 10 or more 5 negative constructs or when there's more than a 6 50-point change. 7 This, again, is the modified results of 8 the agency as it sits today. And those are -- if you 9 look over to the left-hand side, you'll see the five 10 dimensions going down, the work group, accommodations, 11 and the constructs that form them. 12 This is UT's standards. They say that 13 scores above 300 suggest that employees perceive the 14 issue more positively than negatively. Scores of 400 15 or more indicate substantial strength, satisfaction. 16 Scores below 300 are viewed more negatively. And 17 scores below 200 should be a significant concern. 18 Our summaries: Our high constructs are 19 quality, 393, strategic, physical environment, 20 employment development, time and stress. The low 21 scores -- the low-scoring constructs, those areas that 22 UT says that agencies should focus on if you're less 23 than 300, is only fair pay at 292. 24 Frankly, from the UT's recommendations of 25 their surveys, scores over 300, if you will, agencies 0125 1 can attribute that the issue is seen more favorably 2 than not and there's satisfaction in the workplace. 3 However, we do have a low score in internal team 4 effectiveness, holographic and change oriented. 5 COMMISSIONER COX: What would holographic 6 be, Diane? 7 MS. MORRIS: Holographic is the measure 8 of how well an agency hangs together, how well agency 9 employees understand our mission, and how we're 10 accomplishing it. I have -- I have more questions on 11 how they measured holographic. 12 I'm just going to skip over these because 13 I have to be candid in that, from the agency's 14 perspective, we're far more interested in the lower 15 ones. But these are the higher ones again for repeat. 16 And these were the definitions of those 17 higher ones: Quality, the degree to which quality 18 principles such as customer service and continuous 19 improvement, are a part of the organization's culture; 20 Strategic, reflects employees' thinking 21 about how the organization responds to external 22 influences that play a role in the agency's mission and 23 vision, services and products, also includes the 24 ability of the organization to seek out and work with 25 relevant external entities. 0126 1 Physical environment reflects employees' 2 perceptions of the total work atmosphere and the degree 3 to which employees believe that it is a safe working 4 environment. 5 And the fourth of the five higher scoring 6 constructs is employment development, assesses the 7 priority given to employees' personal and job growth, 8 provides insight into whether the organization sees 9 human resources as the most important resource or as 10 one of many resources, directly addresses the degree of 11 which the organization is seeking to improve gains from 12 investment in employees. 13 And the final high-scoring construct is 14 time and stress, the extent to which employees feel 15 that job demands are realistic given time and resource 16 limitations and if the work environment supports 17 employees in balancing home/work demands. 18 Mid-range -- 19 COMMISSIONER COX: Diane? 20 MS. MORRIS: Yes, sir. 21 COMMISSIONER COX: Now you said you're 22 going to go through those but you're more concerned 23 about the low ones. But I think we ought to take a 24 moment and celebrate those. 25 I think those are some of the very, very 0127 1 important areas and some that we have focused on 2 intentionally. And I think we've done pretty well in 3 some of those areas. 4 MS. MORRIS: Yes, sir. I -- I have to 5 agree with you. It's -- the work is demanding at the 6 Texas Lottery Commission. 7 The mid-range, these are areas that I 8 really don't plan on focusing much, as far as this 9 PowerPoint is concerned: supervisor effectiveness, 10 fairness, benefits, goal-oriented, availability -- just 11 so you know, that means availability of information, 12 how do we share information amongst ourselves -- 13 external, that's communications, job satisfaction, 14 burnout and empowerment. 15 So you know benefits are a little bit 16 different than fair pay. We'll get into the fair pay 17 constructs and items. Benefits are -- if you will, 18 we're rather limited in this area -- the state 19 benefits, the benefits for working for a state 20 employer. 21 Lowest scoring constructs: Again, the 22 only one under 300 is fair pay. Internal, that's 23 communications. We'll talk more. Team effectiveness, 24 holographic and change-oriented. 25 Fair pay: Fair pay is an evaluation from 0128 1 the viewpoint of employees of the competitiveness of 2 the total compensation package. It addresses how well 3 the package holds up when employees compare it to 4 similar jobs in their own communities. 5 For purposes of comparison, and while 6 this is the lowest of all the constructs, in the prior 7 years, those were also the scores of that same 8 construct. It would appear that some of the 9 limitations of the sate salary structure and the 10 classification structure, we may be limited. 11 We may not be able to score as high as 12 we'll always want to be able to score on any of the 13 constructs. Here are the questions, what were people 14 asked, what were the employees asked whether they 15 agreed with or disagreed with or neutral. 16 People are paid fairly for the work they 17 do. Salaries are competitive with similar jobs in the 18 community. My pay keeps pace with the cost of living. 19 Internal, the second of the five lowest. And although 20 it has gone up over the year -- 21 COMMISSIONER COX: Diane, let's go back. 22 Okay. Those are the three items that were considered 23 in fair pay? 24 MS. MORRIS: Yes, sir. 25 COMMISSIONER COX: Of those, where did we 0129 1 get the worst parts? Was it on internal equity or 2 external equity, one or two? 3 MS. MORRIS: Are you talking bullet one, 4 two or three? Do you want to know those answers? 5 COMMISSIONER COX: Yes. 6 MS. MORRIS: Okay. 7 COMMISSIONER COX: Where -- what -- the 8 first one to me says internal equity or absolute. The 9 second one is external equity. And the third one is, I 10 guess, whether the State's doing a good job of keeping 11 up with this if it intended to. 12 MS. MORRIS: Or my pay does. 13 COMMISSIONER COX: I don't know whether 14 the State intended to do that. 15 MS. MORRIS: Or pay that they're given 16 within the range that the State allows pay. 17 COMMISSIONER COX: Right. 18 MS. MORRIS: Okay. On the data charts 19 for this, people are paid fairly for the work they do, 20 the frequency was 10 percent for strongly agree. For 21 agree, the frequency was 37 percent. I'm rounding up. 22 Neutral was 25. Disagree was 20. And strongly 23 disagree was five. 24 COMMISSIONER COX: Okay. So that's 25 skewed toward fair. Now what's -- what's the next one? 0130 1 MS. MORRIS: Salaries are competitive 2 with similar jobs in my community. The percentage, the 3 frequency of strongly agree was seven. Agree was 32. 4 Neutral was 20. Disagree was six. I'm sorry. 5 Disagree was 30. And strongly disagree was six. 6 COMMISSIONER COX: Okay. Little bit 7 weaker than the first one? 8 MS. MORRIS: Yes, sir. 9 COMMISSIONER COX: Okay. And then the 10 third? 11 MS. MORRIS: Because 30 percent 12 disagreed. 13 COMMISSIONER COX: And then the third 14 one? 15 MS. MORRIS: My pay keeps pace with the 16 cost of living. Agree is three percent. I'm sorry. 17 Strongly agree is three percent. Agree is 18 percent. 18 Neutral is 18 percent. Disagree is 39 percent. And 19 strongly disagree was 20 percent. 20 COMMISSIONER COX: Okay. That's the one 21 to track. So is there anything that we can do to 22 determine whether the State intends for us to keep up 23 with the cost of living and we're just not doing it or 24 whether the State pay structure is such that we 25 couldn't do it if we wanted to? 0131 1 MS. MORRIS: I think we can examine these 2 salaries on -- compared to the classification schedule 3 that does give the range of salaries to see if our 4 salaries are mid-point, average or high point. 5 I have to tell you that in the other 6 literature and the other information available about 7 the agency and our salary levels, our salary levels are 8 higher than the statewide average and they're higher 9 than the other agencies in our own benchmark areas. 10 COMMISSIONER COX: I think that there's a 11 tendency in state agencies to consider -- for employees 12 to consider themselves to be underpaid. And I wonder 13 whether -- how we compare on these items with other 14 agencies. 15 Is this something that it's just part of 16 being in the government business that you're always 17 going to have and you do the best you can but just 18 recognize you're going to have it or is this something 19 where we're not doing as well as the other agencies? 20 MS. MORRIS: I think there's more 21 information on the SOE Web site that I believe I can 22 answer the question, but right at this moment I don't 23 have it on the top of my head. But I do believe there 24 are a lot of comparisons over -- across the board on 25 this particular construct and on this particular item. 0132 1 CHAIRMAN CLOWE: Let me add, to be -- 2 attempt to be helpful to Commissioner Cox answer his 3 question. I've looked at this over the years. And I 4 think the answer is, compared to other agencies, the 5 compensation of our employees here is better. 6 I would appreciate a recheck on that and 7 verification. But I -- I have the general impression 8 that our employees are generally at least as well paid 9 or better, which I would like to see as long as we can 10 maintain that. 11 Whether or not we can examine the pay and 12 increase it is another question that I would like to 13 see entered into as a result of the questions that you 14 posed. And, of course, Commissioner Cox and I are 15 addressing this from a policy standpoint. 16 The executive director has to lead this 17 effort along with the deputy. But it is a sense that I 18 would like to send out that we want our employees to 19 feel that we're doing everything we can to compensate 20 them properly. 21 COMMISSIONER COX: Absolutely. 22 CHAIRMAN CLOWE: And I've had that 23 feeling over the time I've been on this board. But I 24 think it 's great to recheck it and make certain that 25 that's the case. We -- we can't get out in a pay range 0133 1 that is beyond a reasonable comparison to peer 2 agencies, I think. 3 We have to use good judgment. I'm just 4 trying to give you a sense of what my feeling has been 5 since I've been on this board. 6 COMMISSIONER COX: Diane, then why 7 don't -- a question that I would have liked to have 8 seen asked, which apparently wasn't, was: Do you feel 9 that the salary administration program reaches fair 10 results, as far as internal equity goes? 11 We've got external equity on bullet two, 12 but the first one is kind of an absolute concept with 13 no point of reference to spare. And fair in relation 14 to what comes to mind. 15 MS. MORRIS: Yes. And I was quickly 16 checking the benefits one to make sure it wasn't 17 captured there somehow. And I have to agree with you. 18 The preciseness of the question you would have wanted 19 -- and, thankfully, there's a transcript of this 20 meeting. 21 It may be a question for next year. We 22 can add more questions. It doesn't mean we don't 23 address it and look into it without the answers that -- 24 particularly, but the agency is free to add more 25 questions. 0134 1 I'll go on. Internal, this is the second 2 of the lowest five constructs or if you will, the 3 second lowest. Internal communication captures the 4 nature of communication exchanges within the 5 organization. It addresses the extent to which 6 employees view information exchanges as open and 7 productive. 8 And again, although those scores seem to 9 be trending up over the years, compared to the other 10 constructs, this year these are the lowest -- this is 11 one of the five lowest constructs. Here are the 12 questions that led to this or the items. 13 The right information gets to the right 14 people at the right time. Work groups receive adequate 15 feedback that helps improve their performance. 16 Information and knowledge are shared openly within this 17 organization. 18 Okay? Third, team effectiveness: Team 19 effectiveness captures employees' perceptions of the 20 effectiveness of their work group and the extent to 21 which the organizational environment supports 22 appropriate team work among employees. 23 Again, you'll see the trend up. It's the 24 third to the lowest. And I remind you again the SOE 25 would say anything below 300 is something that should 0135 1 be looked at. So, you know, we're looking at our own 2 scores here. 3 The items, the statements that were asked 4 whether employees agreed or strongly disagreed with 5 were: Work groups receive adequate feedback that helps 6 explain their performance. Decision making and control 7 are given to employees doing the actual work. There is 8 a basic trust among employees and supervisors. We are 9 efficient. There is a real feeling of team work. Work 10 groups are actively involved in making work processes 11 more efficient -- I'm sorry -- effective. 12 Holographic: Holographic refers to the 13 degree to which all actions of the organization hang 14 together and are understood by all. It concerns 15 employees' perceptions of the consistency of decision 16 making and activities within the organization. 17 These are the items that an employee 18 would say they agreed or strongly disagreed with. The 19 work environment encourage open and honest 20 communication. Decision making and control are given 21 to employees doing the actual work. We feel a sense of 22 pride when we tell people that we work for this 23 organization. We feel our efforts count. Within my 24 workplace, there is a feeling of community. An effort 25 is made to get the opinions of people throughout the 0136 1 organization. We know how our work impacts others in 2 the organization. 3 COMMISSIONER COX: Diane? 4 MS. MORRIS: Yes, sir. 5 COMMISSIONER COX: That second bullet, is 6 that the question? What was the question that they 7 asked? 8 MS. MORRIS: That was it: Do you agree 9 or strongly disagree or do you feel neutral? 10 COMMISSIONER COX: Well, then you got to 11 talk about whether you agree or disagree that it should 12 be. What's good? This -- you know, this is largely a 13 staff organization. Staff people normally do -- 14 prepare information for others to make decisions on. 15 So I don't know what's good or bad on 16 that. Just an observation. 17 MS. MORRIS: Yes, sir. Well, in a sense, 18 it's not really a 360 survey. And so -- another 19 observation. 20 COMMISSIONER COX: Uh-huh. 21 MS. MORRIS: Change oriented: They -- 22 they say it's -- change oriented secures -- I'm not 23 sure I understand the terminology of the word secures. 24 I'm thinking it displays or shows an employee's 25 perceptions of the organization's capability and 0137 1 readiness to change based on new information and ideas. 2 These are the items. We integrate 3 information and act intelligently upon that 4 information. We have an opportunity to participate in 5 goal setting processes. My ideas and opinions count at 6 work. When possible, problems are solved before they 7 become a crisis. An effort is made to get the opinions 8 of people throughout the organization. 9 The results of the survey have been 10 shared at an agency-wide staff meeting last week, all 11 the results, the original survey results, if you will, 12 and then what I have referred to in this PowerPoint as 13 the modified results, that have already been posted on 14 the agency's intranet. 15 I haven't received much input or response 16 back from the employees since the staff meeting. So I 17 have little to report on that. 18 This is what I'm looking forward to 19 having more to report on in the future. Where do we go 20 from here? The biggest part of the SOE's 21 recommendations, that work groups are formed to address 22 the five lowest-scoring constructs. 23 We're free to pick any constructs you 24 want. And, quite frankly, when all of them except that 25 one is above 300, I think it's fair to say we could 0138 1 pick any more or less or whichever we wanted. But at 2 this point, we're picking the five lowest which we just 3 looked at. 4 There will be five work groups formed. A 5 neutral facilitator will guide those discussions. 6 We're gathering volunteers from different divisions, 7 mostly non-supervisory staff. 8 The facilitator will be also addressing 9 the concept of brainstorming. What do we do to address 10 the concerns raised in the items of the constructs? 11 What can we do? This is where no good idea, no bad 12 idea, just give us your ideas. 13 There hopefully will be recommendations 14 from the work group. Hopefully, they can be 15 implemented, the ones that can be done that are 16 possible physically, feasibly. 17 Separate from the work groups, part of 18 the information that SOE returned to the agency were 19 for different divisions. Each division had its own 20 separate report, if you will, except some divisions 21 that were smaller were combined. 22 And so the different division directors 23 may wish to focus on their scores for their unique 24 purposes. An example I have given before was, in the 25 Lottery Operations Division, there was a separate 0139 1 report for the Lottery Operations here at headquarters 2 and there was a separate report for Lottery Operations 3 for the claim center, for field staff, if you will. 4 Part of the concern, of course, is we had 5 a wonderful participation rate. Our rate over the 6 years has continued to climb and we hope it continues 7 to do so. 8 COMMISSIONER COX: Diane? 9 MS. MORRIS: Yes, sir. 10 COMMISSIONER COX: If I remember the 11 numbers right, we sent out 326 of these. We got 229 12 back. 13 MS. MORRIS: Yes. 14 COMMISSIONER COX: That doesn't seem so 15 great to me. I mean, I don't understand why we didn't 16 get a hundred percent back. 17 MS. MORRIS: Well, I suppose hundred 18 percent -- I don't know that any agency -- 19 COMMISSIONER COX: Or 98 -- 20 MS. MORRIS: Yes, sir. 21 COMMISSIONER COX: -- or 97 or 92, not 22 67. 23 MS. MORRIS: 70. 24 COMMISSIONER COX: 70? Okay. Seems -- 25 MS. MORRIS: Well -- 0140 1 COMMISSIONER COX: I'm concerned about 2 what those 30 percent of people think. Is there any 3 way that we know of that we can really encourage people 4 next time to let people know how important this is to 5 us and to get a much higher percentage of replies? 6 MS. MORRIS: I think one way is to keep 7 it talked about, to keep the fact that the results 8 matter and that the work groups mean business and that 9 the results matter, the recommendations matter. 10 If you can't implement recommendations, I 11 think it's important to explain why not. I think some 12 things are decisions that management is allowed to 13 make. But for the employees, they want to know that, 14 if you're going to ask me my opinions, will you at 15 least listen. 16 COMMISSIONER COX: Sure. 17 MS. MORRIS: Anybody would say we don't 18 know it all. None of us know everything. And some 19 things are out of our control. 20 I found the SOE Web site very 21 interesting. On the Web site, there is a link to the 22 actual survey itself. And you can get the feel for, if 23 you will, the cookie-cutter look to it. It is a 24 two-page survey. You bubble in your answers. It has 25 the same as I went through the items. 0141 1 Every construct has, you know, four to 2 six different items that build it to the dimension. 3 And so you can walk through and see where the questions 4 and the items would have been. 5 COMMISSIONER COX: So for one to 6 participate in this, one has to go to the Web and 7 navigate that and -- and answer? 8 MS. MORRIS: No, sir. That was there for 9 -- for anyone, such as the commissioners, to see an 10 example of the physical part of the survey. They have 11 a PDF file of the survey itself. 12 However, this agency, we did it on-line 13 through our own computers. You can go on-line or it 14 used to be by hand, mailed-in responses. 15 COMMISSIONER COX: Well, let's think 16 about whether they -- we might want to give people 17 multiple ways to respond should they choose. Maybe 18 some of those 30 percent were missing just don't like 19 going on the Internet and they'd rather have a hard 20 copy. 21 Could you go back to the one where we got 22 292? 23 MS. MORRIS: Fair pay. 24 COMMISSIONER COX: And if -- that's the 25 only one of the low items where the trend is not 0142 1 clearly upward. 2 MS. MORRIS: That's true. 3 COMMISSIONER COX: So this is the one -- 4 MS. MORRIS: Of the low items. I have 5 not examined all the other ones. 6 COMMISSIONER COX: Yes. But of the low 7 items -- 8 MS. MORRIS: Yes, sir. 9 COMMISSIONER COX: We're clearly making 10 progress on all the others. This one we're not. So 11 this is the one that I would be most concerned about. 12 MS. MORRIS: And I will say I -- I share 13 the concern, but we are looking at a five- and 14 six-point difference. 15 COMMISSIONER COX: Yeah. This one is 16 basically flat. 17 MS. MORRIS: Yes, sir. It's flat. 18 COMMISSIONER COX: The others we're 19 making clear progress on. 20 MS. MORRIS: Yes. Yes, it is. It's 21 flat. That's fair. 22 MR. GRIEF: And I'll add this, 23 Commissioner. It's flat even with the participation 24 rate having probably, what, doubled over time. 25 MS. MORRIS: Yes, from 39 percent to 60, 0143 1 70. 2 MR. GRIEF: Almost doubled. 3 MS. MORRIS: Well, that was my final 4 slide. 5 MR. GRIEF: And I'll speak to that one. 6 If Reagan were here, he would be telling you that this 7 was the message that he gave to employees at the 8 all-staff meeting that we held to roll out the results 9 of the survey, thanked the employees for participating, 10 reinforced that our staff's participation and opinions 11 do count, talked about how the responses go directly to 12 the four components of our mission, and also reinforced 13 to staff that positive results are expected from the 14 work groups. 15 I'll speak from my own personal 16 experience over the years. I've been a part of a 17 couple of those work groups. And from the employees' 18 perspective, I think the proof is in the pudding. What 19 comes out of those work groups and the response that 20 management has to the recommendations goes a long way 21 towards how willing the staff will be to participate in 22 the next survey. 23 And I think, as time has gone on, we've 24 done a better and better job each year. And we want to 25 do an even better job this year. 0144 1 CHAIRMAN CLOWE: Turn the lights on, 2 please. Any other questions? 3 COMMISSIONER COX: No, sir. 4 CHAIRMAN CLOWE: Diane, I want to give 5 you a comment. And I say "you," but it's also to Gary 6 and Reagan. I think you can tell from Commissioner 7 Cox's questions the high level of interest that he has 8 in this survey. I think, if Commissioner Olvera were 9 here, he would say that he's interested in it. And I 10 want to express my feelings of interest in it. 11 We have a relatively small agency here in 12 numbers of people. And every member of this 13 organization is extremely important. 14 You're relatively new in your job. And 15 the organization is relatively new. Reagan's only been 16 here approaching two years. And Gary is relatively new 17 in his job, two years. 18 And I think we can do better. I think 19 that your plan of implementing change in a positive way 20 is a good one. And to reach out and communicate with 21 all of the employees in this agency is the way to 22 improve the results of the survey but, more 23 importantly, what creates those results, which is the 24 environment and the feeling of being a part of a good 25 team effort that we want to see in this agency. 0145 1 I've had a lot of experience with these 2 surveys and have run organizations of four thousand 3 people and more. And I want to disagree with you a 4 little bit. And I don't want to make you mad, but I 5 have found in -- when you get right down to it, in most 6 organizations the three most important things that 7 employees want are communications, communications and 8 communications. 9 And then pay and benefits come in there 10 somewhere around fourth or fifth. So I want to be 11 aware of this pay thing, but I don't want to get just 12 focused on it only. And I want to say a word about 13 communications by way of directing you and Gary and 14 Reagan. 15 There are a lot of different kinds of 16 communications. And it's not just talking. It's 17 listening, as well. It takes those two functions to 18 have communications. And it's not just downward 19 communication. It's upward communication. And that's 20 vertical. Then there's horizontal communication among 21 departments and among peers that makes for the feelings 22 that are being described in this survey. 23 My view is, over the time that I've been 24 on this board, the communications have really improved. 25 But a function of leadership, not management -- we're 0146 1 talking about leadership now -- is to gather all of the 2 members of your team in and make them a real part of 3 what's going on, what is the objective of the 4 organization. 5 So as we work into this in this year -- 6 and I hope we'll do the survey again next year. I'd 7 like to see it in '05. I think we ought to judge how 8 we're performing and we ought to strive to improve. 9 And I'd like to add my comments for those 10 guidelines to whatever benefit they might be for you 11 and you, Gary, and for Reagan. 12 It's -- it's a difficult task to get 13 beyond 70 percent. It's not easy. And it's not easy 14 to get everybody to join in, you know. It's -- it's a 15 real challenge. But I would like to see us achieve 16 excellence in this organization. 17 And you say, well, define that. Well, my 18 definition of excellence would be participation in the 19 survey in excess of 90 percent and at a rate of 20 improvement that is constant. 21 And the one that I think we do have some 22 limitations in is the pay. And I -- I think you got to 23 get really judgmental about that. I've never taken one 24 of these surveys where I didn't ask for more money and 25 say I wanted more. And I think that's human and that's 0147 1 fair. And I'd like to see all of the employees of this 2 agency receive more money, but there's another side of 3 that that we have to be really objectively judgmental 4 about. 5 So those would be my comments. I'm 6 really glad to see the attention given to this survey 7 and I'm glad to see this presentation. And, as I said, 8 Commissioner Cox has expressed his deep interest in it. 9 I think Commissioner Olvera, if he were here, would do 10 the same. 11 COMMISSIONER COX: Mr. Chairman, I'll 12 tell you, not only did you not make me mad, but I 13 totally agree with you. 14 CHAIRMAN CLOWE: I don't want to make you 15 mad. 16 Anything further, Gary? Any further 17 comments from you? 18 MR. GRIEF: No, sir. 19 CHAIRMAN CLOWE: Okay. This is a 20 challenge now to you and Reagan and Diane and the other 21 directors, Kim, Mike. 22 MR. GRIEF: Michael. 23 CHAIRMAN CLOWE: Michael, Billy, Phil. 24 MR. GRIEF: Nelda. 25 CHAIRMAN CLOWE: Nelda. 0148 1 MR. GRIEF: Catherine. 2 CHAIRMAN CLOWE: Catherine, Bobby. You 3 know, let's see what kind of a job you-all can do to 4 gather your teams and move us towards excellence. Who 5 has the toughest job? Who has the most individuals? 6 MR. GRIEF: Michael Anger. 7 CHAIRMAN CLOWE: Michael Anger? Who has 8 second? 9 MR. GRIEF: Mike Fernandez. 10 CHAIRMAN CLOWE: They're up to the task. 11 They're up to the task. That's the measure of 12 leadership, in my mind. And I think Commissioner Cox 13 hit the nail on the head. This is a staff 14 organization. 15 There's more staff function here than 16 there is line function. What an opportunity if the 17 staff were to achieve excellent standing. And you need 18 to be the cheerleader, Diane, and implement through 19 your support and your help these division heads' 20 improvement. 21 Will you make that commitment? 22 MS. MORRIS: Yes, I will. 23 CHAIRMAN CLOWE: Okay. And we'll look 24 forward to the results of next year. Anything further? 25 COMMISSIONER COX: No, sir. 0149 1 MR. GRIEF: No, sir. 2 MS. MORRIS: Thank you. 3 CHAIRMAN CLOWE: Thank you. 4 COMMISSIONER COX: Thank you, Diane. 5 CHAIRMAN CLOWE: Commissioner Cox, if it 6 meets your pleasure, before we go into executive 7 session, we have some members of the public here that 8 have asked to comment. 9 And I'd like to accommodate them because 10 we may have a lengthy executive session and we want to 11 return to the item we passed over, item number nine, I 12 believe it is, as well as the reports from the 13 executive director and Charitable Bingo Division, if 14 that's agreeable. 15 COMMISSIONER COX: Absolutely. 16 MS. KIPLIN: Commissioners, and we also 17 have contested case proceedings and agreed orders and 18 Mr. White, chief of the Enforcement Department, is 19 here. 20 CHAIRMAN CLOWE: When do you want to 21 handle those? 22 MS. KIPLIN: Well, if you're okay with 23 it, if we could take that up now. 24 CHAIRMAN CLOWE: Yeah. Let's -- let's 25 have our public comment and then we'll go right to 0150 1 that. 2 MS. KIPLIN: Yes, sir. 3 AGENDA ITEM NO. 24 4 CHAIRMAN CLOWE: Is that okay? 5 Dr. Busald, you had indicated through a witness 6 affirmation form that you wanted to come back and speak 7 to us. And I believe this is the time for you to do 8 that. 9 DR. BUSALD: You know, in teaching 10 statistics, I -- do I need to state my name again? In 11 teaching statistics, we like to look at data. And so, 12 because this was fresh, we looked at the demographic 13 report. 14 CHAIRMAN CLOWE: Now would you identify 15 what you mean when you say the demographic report -- 16 DR. BUSALD: Yes. The -- 17 CHAIRMAN CLOWE: -- so we'll be clear on 18 that. 19 DR. BUSALD: The demographic study of 20 Texas lottery players done by Texas Tech dated January 21 2005 that's on the Web. 22 CHAIRMAN CLOWE: Thank you. 23 DR. BUSALD: Okay? We looked 24 specifically just at -- because we noticed some things 25 we said -- on certain things, for instance, the -- 0151 1 looking at income, the very second group, 20 to 29, the 2 sample size indicated on the report is 125. 3 And it says 41.3 percent played. If you 4 compute that, that's 51.63 players. So, obviously, you 5 have to round that to a number of players, which would 6 be 52, which couldn't possibly be 41.3 percent. 7 Now a lot of this is just nitpicking at 8 numbers that are arithmetically impossible. There's a 9 lot of bad arithmetic on this page. And arithmetic 10 that does not comply, some of it on page 19, doesn't 11 agree with what's on page seven, as far as the sample 12 size. 13 Everything in red is in question. 14 Something's wrong. We don't know because we don't have 15 the original data. All we can look at is arithmetic 16 and say a lot of these numbers are wrong. For my 17 students' sake, we kind of want to ask if when -- and I 18 understand you said that there was a letter asking for 19 some redo a part of this. Is that correct? 20 CHAIRMAN CLOWE: That's correct. 21 COMMISSIONER COX: Yes. 22 DR. BUSALD: That if we could have -- if 23 it's going to be posted, we -- I'd like my students to 24 look at it and reconfirm that some of the arithmetic is 25 correct because, if something's out there for the State 0152 1 of Texas, at least the arithmetic should be correct. 2 That's always been, as you know, 3 Commissioner Clowe, one of the things I said all along 4 is our numbers have to be correct. 5 One of the things that really is kind of 6 glaring is, if you look at gender and the average 7 monthly spending that was done on the report, the 8 amounts given were for males 77.86 and for females 9 70.41. And taking the number of each group of players 10 and doing something just simply called a weighted 11 average, it can't be 76.16. 12 Because those numbers are fairly equal, 13 the number has to be closer somewhere in the middle 14 between 77.86 and 70.41, either that or one of the 15 numbers is wrong. I don't know. We don't know what's 16 wrong. We just know something is wrong. 17 The -- if -- if you look at those 18 averages, they're closer to the overall average 19 spending computed from data on page nine, which listed 20 the spending by games, the dollar spending by games, 21 which was 73.50. 22 You know, we can't make any number add 23 up. And so, you know, as mathematicians and students 24 looking at a report, we kind of wondered, well, what's 25 wrong. One of the assignments I gave them was to look 0153 1 at this report and see what you discover. 2 And we started discovering arithmetic 3 mistakes. We really didn't discover a lot at first. 4 And then we said, well, if there's some mistakes, we 5 better start looking for others because the first thing 6 that jumped out at us was this weighted average. 7 Now one of the things on page nine that's 8 kind of interesting is that, of the group study, only 9 -- the scratch games only accounted for 41.2 percent of 10 the sales, whereas we've just seen the percentage is up 11 above 70 percent doing scratch games. 12 So those spendings on scratch games were 13 actually underreported. You were concerned about other 14 groups being underreported in this survey. But in my 15 mind, you know, the -- sometimes the people who buy 16 lots of scratch tickets -- and we have TV shows -- TV 17 stories about this where people are spending 150 18 dollars or whatever a week on scratch-off games. 19 They may not be available for phone 20 surveys or they're more difficult to survey or they're 21 more hesitant to respond. So in my mind and my 22 students -- and my students' mind, we actually think 23 that some of the sales to disadvantaged groups are 24 actually underreported in this survey, even though I 25 know that you're concerned with what the report showed. 0154 1 The one other thing that my students 2 looked at and we have issue with is the executive 3 summary and the executive summary agreeing with the 4 data in the report and not being slanted, okay? 5 Item number two on the executive summary, 6 the rate of participation in Texas lottery games is 7 consistent across income categories with no income 8 group more likely than any other group to play lottery 9 games, once again, it ignores the issue of how much is 10 spent. 11 And that's an issue that I hope will not 12 be dropped from future demographic studies because this 13 is the first study that really looked at it this way. 14 On page nine, the 20 to 29 age group spends 64.33 a 15 month, the 70 to a hundred thousand dollar -- 76 to a 16 hundred thousand dollar group spends 28.96. That's not 17 very consistent. 18 The rate of participation is consistent 19 across groups defined by level of education with no 20 group more likely than any other group to play the 21 lottery, that's not true for dollars. Once again, the 22 report, the executive summary, which seems carefully 23 crafted, does not reflect the dollars. 24 And I understand where this executive 25 summary goes. And so, you know, one of the things I've 0155 1 always told my students is: Any time you look at any 2 study, you have to look at who paid for it and what 3 they really want. And I think some of this is a case 4 of that. 5 The one other issue we took -- one other 6 item we took issue with was the white lottery players 7 report spending less per month on lottery games than 8 non-white lottery players. This result emerges when 9 cases at the extreme end of the monthly spending, the 10 outliers, are removed from the analysis but is not 11 found when these cases are included. 12 That's simply not true. It is a 13 difference on both. If -- if the outliers are 14 included, which is on page nine of the report -- no, 15 that's not right. Let me look here on my notes -- oh, 16 page 12. Let me look at the right place. 17 And I know I'm disadvantaging you by not 18 having the demographic report. But if the outliers are 19 included, the spending by the less than the high school 20 group and the high school group, even the high school 21 diploma spend over 80 dollars a month. Those with 22 college degrees spend 50 dollars a month. 23 And, of course, the less than high school 24 diploma is -- spend a great deal more. So, once again, 25 the report seemed to concentrate on participation 0156 1 rather than dollars. We all know it's dollars that 2 affect these groups and if they can afford it. 3 So I just wanted to comment on the 4 executive summary. And I have nothing further except 5 my students would like eventually, if this is going -- 6 to get a copy of whatever is revised. And -- 7 COMMISSIONER COX: Mr. Chairman, what can 8 we do at this point? Are we able to have a dialog with 9 Dr. Busald or do we just listen? 10 MS. KIPLIN: Commissioners, he's -- Dr. 11 Busald is here under public comment. And unless 12 Ms. Joseph's found one on demographic study -- I did 13 not -- your deliberation, any deliberation about the 14 subject shall be limited to proposing to place this on 15 the agenda for a subsequent meeting. 16 Now with Dr. Busald, you can respond to 17 providing a statement of specific factual information 18 in response to an inquiry he may have or a recitation 19 of existing policy in response to an inquiry he made. 20 But the deliberation between a quorum is 21 limited to a discussion on proposing it for a future 22 meeting. 23 COMMISSIONER COX: Okay. Is it 24 appropriate to tell him generally about this letter? 25 MS. KIPLIN: No, I don't think so because 0157 1 I don't think that's in response to an inquiry, unless 2 I missed it. And Dr. Busald, if I did, I apologize. 3 COMMISSIONER COX: He referred to it 4 generally already, the letter written to Texas Tech 5 asking for revisions. 6 MS. KIPLIN: That was under -- yeah. I 7 think -- I think at this point -- it's always good to 8 have another lawyer looking at something, Ms. Joseph. 9 MS. JOSEPH: This is a copy of the letter 10 that was referred to. Is that what this letter is? 11 MS. KIPLIN: Can you go to the mike? 12 MS. JOSEPH: I'm sorry. 13 MS. KIPLIN: I just want to make sure 14 we're on the -- it's good to consult. 15 COMMISSIONER COX: What's your advice, 16 Counsel? 17 MS. KIPLIN: You can inform him of the 18 letter. And I think that's about it. 19 CHAIRMAN CLOWE: You can make an open 20 records request for the letter. 21 COMMISSIONER COX: In general, some of -- 22 in general, some of the points -- I don't know whether 23 all of them have. But some of the points, particularly 24 the ones related to outliers, have already been 25 communicated to Tech and we've asked for a subsequent 0158 1 report. 2 DR. BUSALD: Correct. We were addressing 3 more just the arithmetic and the executive summary. 4 CHAIRMAN CLOWE: And I want to respond to 5 some of your comments. And I'll do that within the 6 context that I hope will be proper. If it's not at any 7 time, you stop me. 8 You were not here when the work was 9 presented by Texas Tech. 10 DR. BUSALD: That's correct. 11 CHAIRMAN CLOWE: There were extensive 12 questions that were asked and lengthy answers that were 13 given at the time of that presentation. And I think it 14 would have been beneficial for you and your students if 15 you had read the transcript on that. And you may have. 16 DR. BUSALD: We have. Yes, sir. 17 CHAIRMAN CLOWE: Good. 18 DR. BUSALD: We have read the transcript. 19 CHAIRMAN CLOWE: Then if you did read the 20 transcript -- you made a couple of comments that I hope 21 were made by you just now casually where you said, 22 well, you understood whoever paid for the survey would 23 sort of get the result they wanted. 24 DR. BUSALD: That's true in -- of most 25 surveys. 0159 1 CHAIRMAN CLOWE: And I will tell you it's 2 not true of this one, and that's a very important point 3 with me. Additionally, I think you made the comment 4 just now that you're careful about what you show in a 5 survey. 6 And let me tell you, on behalf of this 7 commission, this commission is interested in accuracy 8 and in truthfulness and correctness as it relates to 9 this survey. It was a new surveyor. There was a 10 question relative to the accuracy of it, which you 11 brought up, about the broad and the all-encompassing 12 nature of the survey sample. 13 And it was linked in trying to determine 14 what the results indicated. I appreciate you bringing 15 out what is possibly the incorrectness of the 16 mathematical calculations. That's -- you know, that's 17 so basic it never occurred to me -- 18 DR. BUSALD: Yeah. It didn't to -- 19 CHAIRMAN CLOWE: -- to go into that. 20 DR. BUSALD: -- me at first, either. 21 CHAIRMAN CLOWE: But this commission 22 wants to know who are play -- who is playing the games 23 of Texas to the extent that those players will divulge 24 that information. And what we want is the fact so that 25 everybody can know and then people will take that 0160 1 information and do with it -- that's their -- their 2 right. 3 So I just wanted to make certain that I 4 state on the record, for your benefit and anyone else 5 who is interested, that the purpose of this commission 6 engaging Texas Tech to do the survey -- it has to go 7 through the legislature. You know it's required every 8 two years -- is to get factual, correct representative 9 information. 10 And then whatever people want to do with 11 that, that's certainly up to them. Appreciate your 12 help on this. And we will see to it and we have put it 13 on the next month's agenda because now I think the 14 commissioners want to revisit this with the staff in 15 the open meeting. And your information will be made 16 part of that discussion. 17 DR. BUSALD: Thank you. 18 CHAIRMAN CLOWE: Thank you, sir. 19 COMMISSIONER COX: Thank you very much. 20 CHAIRMAN CLOWE: And then next is 21 Mrs. Dawn Nettles, who has filled out a witness 22 affirmation form in regard to item eight on the agenda. 23 Ms. Nettles, I called on you earlier and 24 you weren't here. And I'll call on you again at this 25 time. 0161 1 MS. NETTLES: Commissioner Clowe, I've 2 changed my mind. I don't have anything to say, but 3 thank you. 4 CHAIRMAN CLOWE: Thank you. Commissioner 5 Cox, if you are agreeable -- oh, no. Pardon me, 6 Counselor. 7 AGENDA ITEM NO. 21 8 CHAIRMAN CLOWE: I'll go back and we'll 9 go to item 21, consideration of the status and possible 10 entry of orders in cases represented on the agenda by 11 the letters A through R. 12 MR. WHITE: Yes, sir. Good morning, 13 Commissioners. My name is Steven White. I'm the chief 14 of the Enforcement Legal Services Division. You have 15 before you in your binder tabs A through R, which 16 are -- represent 15 proposals for decisions and 17 accompanied orders which require your signature and 18 three agreed orders. 19 The PFDs behind items A through M involve 20 lottery retailer sales agents' licenses. In each of 21 those cases, the administrative law judge has 22 recommended revocation of their license. The basis for 23 their recommended revocation in all cases with the 24 exception of two is based upon failure to maintain 25 adequate funds in their accounts to pay for tickets. 0162 1 In the other two cases, it's based upon 2 felony convictions. Item N is a PFD involving an 3 operator where the administrative law judge has 4 recommended revocation of his license based upon 5 failure to pay prize fees. 6 The order behind item O has been 7 withdrawn, as that organization has surrendered their 8 license. 9 Lastly, items behind P, Q and R, agreed 10 orders involving conductors involving various 11 violations of the act and rules, specifically 12 conducting bingo outside licensed period and no 13 operator on duty, not making available copies of the 14 commission's rules to patrons. 15 On each of these cases, the board has 16 negotiated a settlement with the organization for 17 payment of administrative penalties and required 18 attendance at the bingo training sessions. 19 And it's the staff recommendation that 20 you adopt the proposal for decisions of the 21 administrative law judge in each of these cases and 22 approve the agreed orders negotiated by the staff. 23 CHAIRMAN CLOWE: Are there any questions? 24 COMMISSIONER COX: No, sir. 25 CHAIRMAN CLOWE: So the motion is then to 0163 1 adopt in cases A through N and P through R the 2 recommended order for adoption by the commission? 3 MR. WHITE: Yes, sir. 4 CHAIRMAN CLOWE: Did I get those numbers, 5 those letters correct? 6 MR. WHITE: Yes, sir, specifically A 7 through N adopt the proposal for decision and the 8 recommendation of the administrative law judge and 9 enter an order accordingly, and in PQR, adopt the agree 10 -- negotiated agreed order of the staff. 11 CHAIRMAN CLOWE: So move. 12 COMMISSIONER COX: Second. 13 CHAIRMAN CLOWE: All in favor, say aye. 14 COMMISSIONER COX: Aye. 15 CHAIRMAN CLOWE: Aye. 16 Opposed, no. 17 The vote is two-zero in favor. 18 While Commissioner Cox is signing those 19 orders, I am going to move that the Texas Lottery 20 Commission go into executive session to: 21 Deliberate the duties and evaluation of 22 the executive director and/or deputy executive 23 director, internal auditor director and charitable 24 bingo operations director pursuant to Section 551.074 25 of the Texas Government Code; to deliberate the duties 0164 1 of the general counsel and security director pursuant 2 to Section 551.074 of the Texas Government Code; 3 To receive legal advice regarding pending 4 or contemplated litigation and/or to receive legal 5 advice pursuant to Section 551.071(1)(A) or (B) of the 6 Texas Government Code and/or to receive legal advice 7 pursuant to Section 551.071(2) of the Texas Government 8 Code including, but not limited to, Patsy Henry versus 9 Texas Lottery Commission, Sandy Surber et al. versus 10 GTECH Corporation, Linda Cloud versus Mike McKinney et 11 al., James T. Jongebloed versus Texas Lottery 12 Commission, Russell Vierney versus Carol Keeton 13 Strayhorn, Greg Abbott and Reagan E. Greer in their 14 individual and official capacities; 15 Employment law, personnel, procurement 16 and contract law, evidentiary and procedural law and 17 general government law, Mega Millions agreement and/or 18 gaming. 19 Is there a second? 20 COMMISSIONER COX: Second. 21 CHAIRMAN CLOWE: All in favor, please say 22 aye. 23 COMMISSIONER COX: Aye. 24 CHAIRMAN CLOWE: Aye. 25 The vote is two-zero. 0165 1 AGENDA ITEM NO. 19 2 CHAIRMAN CLOWE: The Texas Lottery 3 Commission will go into executive session. The time 4 is -- what is that -- it's 11:34 a.m. Today is 5 January -- today is February the 28th, 2005. 6 (Executive Session from 11:34 a.m. 7 to 1:58 p.m.) 8 AGENDA ITEM NO. 20 9 CHAIRMAN CLOWE: The Texas Lottery 10 Commission is out of executive session. The time is 11 1:58 p.m. Is there any action to be taken as a result 12 of the executive session? 13 AGENDA ITEM NO. 9 14 CHAIRMAN CLOWE: If not, let's move to 15 the item we skipped over on the agenda, number nine, 16 report, possible discussion and/or action on Mega 17 Millions including possible contract amendment and/or 18 proposal of amendments to 16 TAC 401.315 relating to 19 Mega Millions on-line game. 20 Mr. Greer. 21 MR. GREER: Thank you, Mr. Chairman. I 22 want to thank you for taking this item up. I've been 23 at the Capitol, at the House Appropriations and Senate 24 Finance Committee hearings. And I've been looking 25 forward to bringing this before you, so I appreciate 0166 1 you taking this up last so that I could be a part of 2 this conversation. 3 As you're aware from prior meetings and 4 reports, the Mega Million party lotteries extended an 5 invitation to the state of California to join the Mega 6 Millions game last year. And earlier this month, the 7 California Lottery Commission agreed to enter 8 negotiations for the California lottery to join us and 9 10 other states in the Mega Millions game. 10 Party lotteries are currently in 11 negotiations with California to make necessary changes 12 to the current Mega Millions game to allow them to 13 join. California's 30-plus million population size, 14 notable cities and successful lottery have great 15 potential to continue to enhance the Mega Millions game 16 as the 12th state. 17 We put together today a presentation to 18 give you some background information, as well as 19 potential changes to our current game that would be 20 necessary to accommodate California. And I feel that, 21 after you see this, you'll see that there is a 22 potential benefit for our state for additional revenue. 23 Patty and Robert are currently in place, 24 and they're going to walk us through a presentation. 25 And I'll be making points as we move through this. 0167 1 MR. TIRLONI: Good afternoon again, 2 Commissioners. For the record, my name is Robert 3 Tirloni. I'm the products manager for the lottery. 4 I'm going to begin this afternoon by just 5 giving you a brief history and brief overview of the 6 game to kind of paint the picture of where we are with 7 Mega Millions. As a refresher, the game originally 8 started as the Big Game in 1996 in the following 9 states: Georgia, Illinois, Massachusetts, Maryland, 10 Michigan and Virginia. 11 At the inception of the game, it was a 12 bonus ball matrix as it is today. It was a five of 50, 13 one of 25. And they were only drawing the game once 14 per week on Friday evenings. 15 In February of 1998, they added Tuesday 16 drawings. And in January of '99, they did make a 17 change to their matrix, their first matrix change. 18 They changed the game to a five of 50 plus one of 36. 19 Later that year in May of '99, New Jersey 20 launched. And about a year after that, the largest 21 jackpot in North American history was achieved by the 22 -- by the Big Game. And that was an advertised $363 23 million jackpot. 24 A major change in the game took place in 25 May of 2002. That was when the name was actually 0168 1 changed from the Big Game to Mega Millions. And that 2 name change was made when New York and Ohio launched. 3 And that is also when the game matrix was changed to 4 the current matrix that we are operating under today, 5 the five of 50 to one of 52. 6 A few months after that major change, the 7 state of Washington launched. And then, as you well 8 know, in December of 2003, Texas launched Mega 9 Millions. 10 We looked at some Mega Millions 11 information earlier this morning. This is a quick 12 one-slide summary. The numbers are different because 13 the presentation this morning was a one-year recap from 14 December through December. 15 This actually takes us through last 16 Tuesday's drawing. So you see the total sales are 17 upwards of 335 million dollars when you include Mega 18 Millions and Megaplier. You see the revenue is 19 approximately 133 million, over 6.4 million winners, 20 1.5 of those Megaplying. 21 And again, as we discussed this morning, 22 there has been one jackpot winner in Texas, 98 23 second-tier prize winners. And 16 of those 98 24 Megaplied their -- their prize amounts. 25 And for this time period, December 0169 1 through last Tuesday, February 22nd, the average Mega 2 Millions jackpot was 56. And once again, the highest 3 jackpot achieved while we've been in the game is 290 4 million dollars. 5 I wanted to go back to a little over a 6 year ago, fall 2003. At that time, there were 10 7 states in the Mega Millions game and 24 states in Power 8 Ball. And at that time, there were pretty much three 9 large states that were what I'm calling up for grabs at 10 the time, states with high sales, high population, 11 Texas being one of them, California and Florida being 12 the other two that were not currently in any type of 13 multistate game. 14 So there was an effort on behalf of the 15 Mega Millions group in March 2004 to communicate with 16 both California and Florida. And so letters of 17 interest were sent. At that time, California requested 18 presentations from both groups, Mega Millions and Power 19 Ball, and Florida declined involvement in the game at 20 the time. 21 In April of 2004, Mega Millions 22 representatives traveled to California and made a 23 presentation to California lottery staff. This next 24 bullet jumps to January of 2005. It probably is worth 25 noting that, during this time, California was without a 0170 1 permanent executive director in place. 2 So they had interim acting executive 3 directors. And that's probably a reason for this large 4 gap where there was no final decision made about a -- 5 about joining a multistate. So just last month, the 6 Mega Millions directors identified a revised game 7 matrix that would be implemented in the event that 8 California would join the game. 9 And then just earlier this month on 10 February 8th, California did, indeed, announce their 11 intent to join the Mega Millions game. 12 I wanted to briefly show you the current 13 game matrix that we are operating under, the five of 14 52, one of 52. We've looked at this a lot. The high 15 points to point out, of course, are the matching the 16 five plus the bonus ball to win the jackpot. 17 To win the second-tier prize of 175,000 18 you're matching five numbers from the -- from the first 19 field. The jackpot odds are one in approximately 135 20 million, with the overall odds being one in 43. And as 21 you know, we have our jackpots on Mega Millions start 22 at 10 million dollars. 23 I'm going to flip the slide and you'll 24 see the changes that are -- have been proposed. This 25 is the proposed matrix. It's a five of 56, one of 46. 0171 1 And most of the prize tiers remain the same. Those in 2 white are the changes from one matrix to the next. 3 So the big change is at the second-tier 4 prize. That $175,000 prize bumps up to 250 thousand. 5 And the third tier, the four plus one, goes from five 6 thousand to 10 thousand. All the other prize amounts 7 and the way that you play the game and the way that you 8 win remains the same. 9 The jackpot odds do increase from one in 10 135 million to one in 175 million. The overall odds 11 remain almost pretty much the same. They're one in 40 12 for this matrix. And there would be an increase in the 13 starting jackpot amount from 10 to 12 million dollars. 14 So a cost/benefit analysis was performed. 15 And I'm going to lay out the three options that were 16 reviewed. And then I'll ask Patty and Lee to actually 17 go into more detail. 18 But the three options that were reviewed 19 were -- the first one being California joins Mega 20 Millions with the proposed five of 56, one of 46 21 matrix. And it is estimated that there would be a 22 five-year revenue increase of approximately 67.3 23 million dollars. 24 The second option was to analyze 25 California joining Mega Millions with the existing 0172 1 matrix in place, so they would join under the five of 2 52, one of 52 just as Texas did. And that estimated 3 five-year revenue increase is eight million dollars. 4 And then to establish a baseline, there 5 was an analysis performed on the existing game with the 6 existing party lotteries, meaning no introduction of 7 California and no matrix change. And the five-year 8 revenue increase is zero dollars. 9 And I'm going to turn it over to Lee and 10 Patty, who will give you more detail on all of the 11 different options that were analyzed. 12 COMMISSIONER COX: Robert? 13 MR. TIRLONI: Yes, sir. 14 COMMISSIONER COX: On the last bullet and 15 relevant to the others as well, we hear that Lotto 16 games decline over time if nothing changes. Help me 17 understand why your model shows that the revenue will 18 be flat for five years with no matrix change. 19 MR. TIRLONI: I think we're going to -- I 20 think Lee has a slide on that. 21 MR. DEVINEY: Good morning, Commissioner. 22 Good afternoon, Commissioners. I'm Lee Deviney, 23 Financial Administration director. 24 And that -- the zero you see is for 25 comparison purposes. You are correct. On-line games 0173 1 do decline over time. You'll see that as we go 2 forward. But that was just to -- to give the other two 3 options with California joining the game giving -- 4 giving -- creating a benchmark to compare those 5 against. 6 But first what I'd like to do -- and 7 Patty will assist me as needed -- is to go through the 8 assumptions that were used in the cost/benefit 9 analysis. The first assumption was that there would be 10 a reduction in current Mega Millions players in the 11 base due to the increase in odds. 12 We've seen that with Lotto Texas. We 13 think it would be -- we'd have less of an impact on the 14 base-level players with Mega Millions. But we did 15 assume that there would be some reduction at the 16 beginning of each roll cycle. 17 We also assumed that California sales 18 will increase the jackpot more rapidly. We'll have 19 more players, more dollars coming in. The jackpot will 20 roll up faster. By increasing the matrix odds, the 21 roll cycle should be longer and produce high jackpot 22 levels. 23 Sales are assumed to decline through 24 time. And we also assumed that there would be an 25 impact on Lotto Texas sales. So that's factored into 0174 1 the CBA. And then, finally, our start date is assumed 2 to be June 15th of this year. 3 This next slide takes a look at per 4 capita sales. And this is based on Texas's actual 5 experience in the year-plus that we've been in the Mega 6 Millions game. And you'll note that, in the bottom of 7 the roll cycle, the $10 to $49 million jackpot level 8 are -- per capita sales are approximately eight cents 9 or .0795. 10 And you'll see the first significant 11 increase per capita sales happens at the hundred 12 million dollar mark, and we're up to 18 cents per 13 capita. And then again we have a very substantial jump 14 at the $200 million mark all the way up to nearly 49 15 cents per capita. 16 So looking at the numbers over the last 17 14 months or so, it appears that -- that this is a 18 triple-digit game, that when we roll to those, you 19 know, hundred and $200 million levels or perhaps even 20 300 million dollars, if we get there, that the players 21 respond significantly at those jackpot levels. 22 This slide shows our per capita sales for 23 the roll cycles since Texas has participated in the 24 game. The green line is the trend. And that's the 25 decline that you see over time with on-line lottery 0175 1 sales. 2 Now clearly, if we had, you know, some 3 more of these high roll cycles -- we haven't had one in 4 a while, $200 million-plus jackpot -- that would tend 5 to -- to stabilize that downward trend. But over time, 6 you should have a decline in sales over time. 7 COMMISSIONER COX: So that trend line was 8 constructed by defining the beginning and end point and 9 drawing a line between them? Because it -- if it were 10 a true trend line, it would go up when you have a big 11 pot, correct? 12 MS. LEO: It's a linear trend over this 13 period. 14 COMMISSIONER COX: Okay. 15 MS. LEO: Yeah. 16 MR. DEVINEY: This slide, what it does, 17 it graphically depicts the -- our expectations for 18 Texas Mega Millions sales with California joining and a 19 matrix change. That's the red line. And then, if you 20 look at the blue line, that would be our prediction of 21 Texas joining the Mega Millions game without changing 22 the matrix. 23 And with California joining getting the 24 higher jackpots, we would expect to see a pretty -- you 25 know, a substantial increase in revenue. And then 0176 1 slowly, over time, sales would decline as they do with 2 on-line games. 3 And we'd have the same thing without the 4 matrix change. However, we think that we -- we peak 5 out in our sales much earlier and we would decline more 6 rapidly. And then, at some point -- you'll see the 7 arrow pointing to, you know a point in time. 8 At some point in time, we would be no 9 better off than if we were in -- you know, in our 10 current situation, which is 11 states in the current 11 matrix. 12 Again, this -- this is an estimate. But 13 this is what the numbers in the cost/benefit analysis, 14 if you -- if you graph them out, this is what they 15 would show you. 16 COMMISSIONER COX: If you go back to the 17 last graph that Robert addressed, I thought that the 18 blue line would cross the baseline at five years out. 19 That said it would be zero at the end of five years. 20 MS. LEO: Let me -- let me explain kind 21 of how it was set up. We -- you have a handout there 22 that has the cost/benefit in it. The baseline is -- 23 was assumed to decline through time. And then the two 24 options, the estimate is the revenue compared to that. 25 So we -- the baseline does have sales and 0177 1 revenue declining through time because that's -- our 2 experience has shown us that. The option without the 3 matrix change, what actually in the -- would give it a 4 boost at the beginning. 5 COMMISSIONER COX: Oh, okay. So the 6 area -- 7 MS. LEO: Yeah. 8 COMMISSIONER COX: -- under those curves 9 and -- 10 MS. LEO: Right. 11 COMMISSIONER COX: -- above that curve 12 after it goes -- 13 MS. LEO: Right. 14 COMMISSIONER COX: I got you. Thank you. 15 MR. TIRLONI: Commissioners, the proposed 16 matrix that the directors voted on, we did send that to 17 Dr. Randall Eubank, our statistical consultant. He has 18 reviewed the matrix. He's reviewed the prize amounts, 19 the odds, the prize tier allocations, analyzed the 20 prize pool for that five of 56, one of 46 matrix. 21 Because we have had success with our 22 Megaplier feature and it was important to us to make 23 sure that that game feature would be able to function 24 with any type of change, we also asked Dr. Eubank to 25 review the Megaplier feature and how it would integrate 0178 1 with this new matrix. 2 His analysis has showed that this -- that 3 the Megaplier feature would function with the new 4 matrix and would have a payout similar to the way the 5 Megaplier game was designed under the five of 52, one 6 of 52 matrix. 7 And he has also performed a roll analysis 8 on the five of 56, one of 46 matrix, as well. I can 9 give you some of that information. Interestingly, we 10 went back to -- actually, it was July of 2003 when we 11 were making -- when we were in our multistate 12 discussions. 13 And he did an analysis of the Mega 14 Millions game with Texas joining without a matrix 15 change leaving the matrix as is. And Dr. Eubank did a 16 projection and said that we would expect to see about 17 five of the roll cycles extend into the $100 million 18 range. 19 And we went back and checked that this 20 weekend and there were actually six roll cycles that 21 extended into the $100 million range. So his roll 22 analysis has been pretty accurate. And his roll 23 analysis for this five of 52, one of 52 matrix has a 24 projection of, again, five roll cycles extending into 25 the $100 million range or beyond. 0179 1 He projected, if California were to join 2 the game without a matrix change, we would see 3 approximately three roll cycles extend into that range. 4 With the revised five of 56, one of 46, he's projecting 5 one run to extend to 300 million dollars or more. He 6 expects that to happen about every 16 months. 7 And if we were to introduce California 8 with the current matrix, he is thinking we would see 9 one roll cycle every two and a half years get up to 10 that level. 11 Just to give you a brief time line, 12 California has requested of the Mega Millions directors 13 a mid-June launch date. And to just kind of paint a 14 picture of what we would need to do in Texas, we would 15 need to have an on-line game rule. 16 The Mega Millions on-line game rule would 17 need to be adopted so that we could start to taper down 18 our 10-draw multidraw feature. So at two draws a week, 19 we have a five-week time period in which we need to 20 count down, so to speak, our multidraw feature. 21 And that would need to start with the 22 Friday May 13 drawing if we were to hit the requested 23 time line. 24 MR. GREER: These are some issues that I 25 want to go into. We had an opportunity not long ago, 0180 1 when we were talking about Mega Millions, to touch on 2 some of these. And I think it's an appropriate time to 3 give you an update because these are some of the things 4 that we are currently working on, from a negotiation 5 perspective, to get some of the language and some of 6 the issues included into the process. 7 The first thing is the audit area, and 8 there's really two aspects to that. One is the 9 subcommittee scenario. We had gone in initially and 10 asked for a separate committee versus a subcommittee 11 because the reporting structure. 12 This has all happened over the last few 13 months. And the current structure will be in place as 14 a subcommittee. And then they're going to analyze it 15 after a six-month to a year period and get their 16 mission statement in progress. 17 There's issues such as audit reports, 18 agreed upon procedures, and control issues that 19 auditors, including our auditor ^Kathryn Melvin, have 20 wanted to get involved with. And they're going to be 21 more focused on that in this subcommittee with the 22 long-range goal continuing to be that it become a 23 separate standing committee. 24 Another scenario that did come into 25 discussion was some of the language involved in the 0181 1 audit world is attestation. And there is a section of 2 the new negotiating that we are working on that will 3 include that language, which is significant in that 4 scenario. 5 The second point I wanted to go into is 6 disaster language. This is a point that we brought up. 7 Really it took precedent after the blackout in the 8 northeastern states which was about a year or so ago, 9 or brownout, whatever, up in that area. 10 We are working on incorporating some 11 disaster language into the documents to give direction 12 and clarity on any type of issue that may arise out of 13 a disaster from a earthquake, with California entering 14 in, or mudslides or blackouts, whatever it may be. 15 The next issue, Mike Anger has been 16 working with me. And we are working on creating an 17 environment where ticket validation will continue to be 18 a point of conversation. And that has currently been 19 moved into the finance committee of Mega Millions to 20 review our requests. 21 There is a scenario now, when we have to 22 validate a ticket, there are five means of doing that. 23 And they ask that three of the five be taken care of. 24 We're looking at moving the three to two, have two of 25 five taken care of. 0182 1 The next point is the prize tier and the 2 second structure, including the liability issue, as 3 well as jackpot management. I kind of want to talk 4 about those together. Jackpot management, with 5 California entering the game, will continue to be a 6 definite concept that we want to look at because we are 7 projecting, as Robert touched on a moment ago, that 8 we'll see more rolls in a higher fashion. 9 And we want to be able to have a clear 10 direction when those jackpot levels reach unprecedented 11 amounts, which it potentially could do. Some of the 12 things I've seen happen in the threes and fours, which 13 we've never seen that before, and we think jackpot 14 management will be -- will be a crucial part of that. 15 And then in reference to the second-tier 16 prize issue, there has been language added that 17 clarifies some of the existing issues in our 18 second-tier prize structure and liability mode that 19 we're in right now. 20 Lee and Ben have done a great job at 21 working with the Mega Million states to create an 22 environment where this has not been a problem for us up 23 to this point. One of the notable changes they've made 24 is there is a fixed prize settlement scenario that goes 25 with that second-tier prize structure. 0183 1 And they just raised that amount in this 2 new negotiating posture to 1.5 million. And, again, so 3 far this process has worked well. And I want to thank 4 our financial group for helping with that. 5 There is a consideration that is worth 6 discussing in reference to California joining the game. 7 They are in a scenario in California that, under 8 statute, it requires them to pay all of their prizes, 9 including any second-tier prizes or anything, any game, 10 on a pari-mutuel basis. 11 So as we move into negotiating with 12 California, the dialog and the language that's come out 13 of that is that they will be participating on the 14 second-tier prize area and liability for that on their 15 own, the exception being noted because of statutory 16 constraints. 17 We talked about this amongst staff and 18 are going to continue to monitor this issue 19 specifically because it was one of the things that we 20 brought up on our own, the differential being their 21 exception based on statutory constraints. 22 That's the update on that particular 23 area. 24 COMMISSIONER COX: Reagan, the 25 second-tier prize structure situation, with the base 0184 1 case being they were just like everybody else -- 2 MR. GREER: Right. 3 COMMISSIONER COX: -- and the other case 4 being they need to come in and be different. 5 MR. GREER: Yes, sir. 6 COMMISSIONER COX: Is that going to 7 potentially cost Texas any money or cause Texas any 8 additional potential liability? 9 MR. GREER: The -- and I'll -- I'll ask 10 Lee to follow up on that, too, because he's more 11 involved in that. But the discussion from Texas's 12 perspective, as far as cost, is that we'll continue 13 under the same vein that we're currently under, should 14 not be any cost. 15 The liability issue is part of what we're 16 clearing up with the language and negotiating the way 17 that the contract agreement is written. And that 18 should address that issue. 19 Lee, do you want to add to that? 20 MR. DEVINEY: Yes, sir. That's -- 21 that's -- that's where we're headed. You know, right 22 now we -- we share liability with 10 other party 23 lotteries. And with California coming in and not being 24 part of that, we would still be in a pool with 10 other 25 lotteries and California would be on their own. 0185 1 Now they've indicated -- California has 2 indicated they would like to participate in the shared 3 prize liability if they can -- if their legislature 4 changes their statute, they would choose to participate 5 in it if they could. 6 COMMISSIONER COX: But the short answer 7 is: We may not be as well off as if we got out, too, 8 but we're not any worse off. 9 MR. DEVINEY: That's correct, sir. 10 MR. TIRLONI: Commissioners, just a 11 summary of what we've looked at, we believe there are 12 some benefits to the proposed matrix. Patty and Lee 13 talked about increased revenue with the five of 56, one 14 of 56 matrix -- I'm sorry, I'm sorry -- five of 56, one 15 of 46. I apologize. 16 Higher jackpots based on the Eubanks 17 analysis, and we do believe that there is a potential 18 marketing opportunity with the second-tier prize on the 19 Mega Millions game. That game -- that prize going from 20 175 to 250 thousand dollars, when we promote the 21 Megaplier feature with a -- with a Megaplier number 22 drawn being four, that becomes a million dollar, a 23 million-dollar second-tier prize. 24 So we feel that there is some marketing 25 opportunity there. And it gives us a chance to come 0186 1 back out and educate players and retailers again 2 about -- about that feature of the game, which has been 3 pretty successful for us. 4 CHAIRMAN CLOWE: Robert, how are our 5 players going to react to a change in the matrix this 6 soon after the game was introduced? 7 MR. TIRLONI: You know, I think -- I 8 think we took that into consideration in the -- in the 9 actual cost/benefit analysis. And I -- I think we have 10 seen that some players do leave the game when we change 11 -- when we make changes. 12 We've seen that on Lotto Texas. And 13 that's why that was factored into the cost/benefit 14 analysis that -- that Patty did. She focused on a 15 decrease in the core Mega Millions player. And then 16 because of higher jackpots that are projected to be 17 obtained, she also decreased Lotto Texas sales. 18 MR. GREER: Can I add to that? 19 CHAIRMAN CLOWE: It migrated -- yeah. 20 Sure, Reagan, but I want to ask this. It migrated 21 players to Mega Millions from Lotto Texas? 22 MS. LEO: We would -- we would expect to 23 see some, not near like when Mega Millions came in. 24 But if we're going to have higher sales and higher 25 jackpots in Mega Millions, we would expect -- you know, 0187 1 more frequently we would expect that to have some 2 impact on the cannibalization of Lotto Texas. 3 CHAIRMAN CLOWE: And how do you factor 4 that in? How do you give that a value? When you -- 5 when you assign a value to make these projections, how 6 do you arrive at that value? 7 MS. LEO: I try and look at what actual 8 experience that we've seen and adjust from actual 9 experience to the differences between the scenarios. 10 It -- I felt that the -- the change in odds and the -- 11 on a multistate game were slightly different than what 12 we saw with Lotto Texas, for example, because of the -- 13 it's -- the Lotto Texas is kind of a closed player 14 base. 15 When those core players left, the amount 16 that was rolling from roll to roll decreased, too, 17 which has made our jackpot growth much slower. One 18 difference with the multistate is, even if some of the 19 core players leave, you've got this injection of new 20 players that you don't see in an in-state only. 21 And their sales will continue to roll the 22 jackpot, in fact, probably even higher. When I looked 23 at the Lotto Texas cannibalization, I looked at what 24 kind of happened when it came in all together. And I 25 tried to look at fluctuation and make an assumption. I 0188 1 mean, estimates are based on assumptions. 2 But I try to make mine based on whatever 3 statistics I can pull out of our usual -- I mean our 4 past experience. And, thank heavens, we had some past 5 experience for this estimate to use that made it a 6 little bit better than just coming in blind. 7 So I -- I made it a lesser amount of 8 cannibalization because it's just the increases in 9 jackpots rather than a whole new game. If -- did that 10 answer? 11 CHAIRMAN CLOWE: So you -- you had to do 12 that on a estimate basis? 13 MS. LEO: Oh, yes. 14 CHAIRMAN CLOWE: You didn't have any 15 focus groups or... 16 MS. LEO: No. 17 CHAIRMAN CLOWE: You didn't have any 18 player contact? 19 MS. LEO: No. I tried to look at the 20 experiences that we've seen with the -- the actual 21 revenue numbers have shown us. That's pretty much what 22 I would use. 23 CHAIRMAN CLOWE: I'm personally not 24 against a matrix change, but I like to consider always 25 what the negative reaction will be when you think about 0189 1 doing that. 2 MS. LEO: Yes. And I did decrease the 3 core player base by a percentage to reflect that there 4 will be people who will, you know, just not play that 5 were playing before. Now they may come back in on 6 higher jackpots, you know. 7 But there will be people that will exit 8 the game altogether that were regular players at the 9 base level. 10 CHAIRMAN CLOWE: Well, what I've heard 11 from players is that they have their favorite numbers. 12 And if they can't play them, they don't play. And they 13 may be going back at the higher level. But as regular 14 players, they just don't play for a while, maybe never. 15 Thank you. 16 COMMISSIONER COX: And this -- to stay 17 with that point, Mr. Chairman, this is -- we're going 18 from five of 52 and one of 52 to five of 56 and one of 19 46. So if somebody's lucky number is between 47 and 52 20 in the kicker category, he's -- might be leaving. 21 CHAIRMAN CLOWE: That's right. 22 COMMISSIONER COX: That's a good point. 23 CHAIRMAN CLOWE: Yeah. And, you know, 24 that's sort of -- as people have spoken to me about 25 Lotto Texas, that's the main thing that they can put 0190 1 their finger on. Some people just don't like change. 2 But one specific that's been repeated to 3 me more often is: I have my favorite numbers and I 4 can't play them now. And I don't know whether that's 5 generated through enough experience with Mega Millions 6 or not. 7 But, as I say, I think we always have to 8 give some value to the alienation of players when we 9 take some numbers away from them or change that up. 10 There are people who, I think, like to buy their 11 tickets at the same place every time and maybe at the 12 same day or the same hour. 13 It's -- it's a mystical magical thing, 14 lucky hats and lucky shirts. You have to be aware of 15 it and respectful of it. 16 MS. LEO: Yes. 17 MR. GREER: I just wanted to add a couple 18 of points to that. And Patty, you picked up on two or 19 three things that I was -- where my thought process 20 was, so thank you for that. 21 But two things that I think is worth 22 mentioning, and Robert touched on it earlier. What we 23 found about Mega Millions is it seems to be those 24 triple digits that brings out this whole new player. 25 Our hope is that, over time, we'll have 0191 1 more of those triple-digit players that will give them 2 a comfort level with the new prize structure to play 3 more often and to win these people back, not only 4 because of the -- the higher amounts and the quicker 5 rolls that I think we're going to see, because the 6 population base that's coming in, but specifically, and 7 I wanted to touch on it again with the 250 prize level 8 and the million-dollar potential, we'll be having more 9 players come here to Austin and can talk more about 10 creating new millionaires through the Megaplier 11 feature, which we currently can't do. 12 At that 700,000-level, they go into their 13 local claims center and there's some hit-and-miss kind 14 of publicity has come out of that. But I think with 15 the opportunity for people to win a million dollars on 16 the -- on the prize structure the way it's going to be 17 proposed will play well for us. 18 And we plan to really spend some time and 19 energy on that to offset what, I think, Patty put in 20 the cost/benefit analysis about a 10-percent decrease 21 up front. But I think over time we'll monitor that and 22 bring you updates on the process as we move through. 23 I think over time with the potential for 24 the million-dollar winner and the higher rolls that 25 that will be offset. So we'll bring you updates as we 0192 1 move through the process with California on that issue. 2 CHAIRMAN CLOWE: Is that the conclusion 3 of your report? 4 MR. GREER: No, sir. 5 CHAIRMAN CLOWE: Could we have the lights 6 and could we go back to the items that you reported to 7 us on relative to -- yes, the update. Do you have 8 questions, Commissioner Cox? 9 COMMISSIONER COX: No. 10 CHAIRMAN CLOWE: Reagan, you're not 11 bringing anything to us for consideration here today, 12 right? 13 MR. GREER: No, sir. 14 CHAIRMAN CLOWE: And I think when we went 15 into Mega Millions, the point was made that we were 16 going to be one of 11 and we couldn't run it like we 17 run our lottery and we're going to have to go along and 18 we hope some things will get worked out. 19 And what I see on the update is that the 20 audit was one of the items -- I can't remember whether 21 ticket validation was or not, but I think second-tier 22 prize structure liability was. 23 MR. DEVINEY: Yes, sir. 24 CHAIRMAN CLOWE: The disaster language, I 25 guess that came up as a result of the blackout. 0193 1 MR. GREER: Yes, sir. 2 CHAIRMAN CLOWE: And then jackpot 3 management, I don't believe that was one of the issues. 4 MR. GREER: We did bring that up front, 5 and it was a secondary issue, though, I would call it. 6 CHAIRMAN CLOWE: How do you feel about 7 these issues? You know, we've been in this game for 8 some time now and it looks like we're still working on 9 it. We haven't gotten anything like we want it among 10 these items exactly. 11 And I have some -- if not concern, some 12 question about what kind of a response are we getting 13 and who -- who makes these decisions. Talk to us about 14 where we are in this process. 15 MR. GREER: I'll be happy to. Thank you. 16 Looking back when we initially entered Mega Millions, 17 and you pointed out just then, we knew when we were 18 amongst a group of states that don't necessarily do 19 things just the way we do, that there was going to be 20 opportunities to understand more about the way other 21 states did business and give them the opportunity to 22 understand the way we did business. 23 And with all that, we knew there was 24 going to be some business risks that were pointed out 25 up front. These were some of them that we wanted to 0194 1 try and clean up. 2 The fact that California is coming into 3 the game has given us the opportunity to re-up these 4 issues. And we're going to continue to focus on these. 5 I've been involved -- we've been involved in Mega 6 Millions now for about over a year. I've been involved 7 in the committee structure for that same length of 8 time, have personally attended three meetings with the 9 Mega Millions directors. 10 Robert and I, and as well as Financial, 11 have participated in numerous conference calls. We 12 have biweekly calls where we set the jackpot. And a 13 lot of times after we set a jackpot amount, then we'll 14 sit down and talk through some of these issues. 15 What California brings to the table is, 16 not only the opportunity for these things that we've 17 identified as far as a benefit overall, but also to 18 re-look at these issues. And we're doing that. 19 Tomorrow, as a matter of fact, there's another call in 20 reference to some of the documents. 21 And Kim and Andy have been very great at 22 helping me. I want to thank them publicly for their 23 work because there's a lot that goes into a new state 24 joining the process. 25 But we're constantly going to be striving 0195 1 to create an environment of understanding on both 2 sides, what other states are doing and the way we do 3 it, and try to work with them to create the best game 4 that we can across the board and take care of these 5 risks that we've identified over time, as well as up 6 front on the negotiating with California right now. 7 CHAIRMAN CLOWE: Well, you know, that's 8 kind of what you said a year ago. And now I understand 9 California's going in with no second-tier prize 10 structure liability because they have a statute and we 11 don't. So we -- what are the odds of us getting that? 12 Are they better now than they were a year ago or what? 13 MR. GREER: Well, there are -- 14 CHAIRMAN CLOWE: Can you make it more 15 concrete? 16 MR. GREER: Not really. I mean, I'm 17 going to continue to work toward what we want and 18 what's in the best interest of our state. That's for 19 sure. And when I say not really, it's based on the 20 fact that there's an exception from the perspective of 21 their thinking process, and the Mega Millions directors 22 have talked about it as a group, because of their 23 statute because their law, the way it's written, 24 they're pari-mutuel. 25 We'll continue to keep that issue out 0196 1 there. Lee mentioned that they were open to looking at 2 trying to create an environment where they were a part 3 of the group on the liability is where as the -- as 4 well as the second-tier issue. 5 So all I can do is give you an assurance 6 that I'll keep this issue on the forefront and bring 7 you responses over time. 8 CHAIRMAN CLOWE: Well, I certainly think 9 the commission wants that. And you know our position 10 is policy oversight. It's your job to hammer out these 11 details. 12 But with my business background, I have 13 concerns understanding that we're one of 11 -- and we 14 may be one of 12. And we're -- Texans are different. 15 We're prickly and we like to do it the Texas way. And 16 other states don't necessarily like it that way. 17 But I'm not totally comfortable about the 18 business practice. You showed me what was supposed to 19 be some minutes of a meeting, and they didn't look like 20 minutes to me. And, you know, they're not like any 21 minutes of any business meetings that I've ever 22 attended. 23 MR. GREER: Yes, sir. 24 CHAIRMAN CLOWE: Votes weren't recorded 25 and -- and, you know, I understand the contract's got 0197 1 to be signed by all the states to constitute valid 2 action. And these are -- these are things that you 3 mentioned to me over a period of time. 4 And I'm just raising these questions for 5 your benefit -- 6 MR. GREER: Yes, sir. 7 CHAIRMAN CLOWE: -- at this point in 8 time, because I think I'm less-than satisfied with the 9 business procedures as you've described them to me. 10 I'm very pleased with the results. 11 I want to be quick to say that I think 12 the revenue that this game has produced for Texas is 13 beneficial and I'm not disappointed in that way at all. 14 But I think that we constantly have to guard the 15 state's interest and not be protective to the point 16 that it's got to be our way or no way. 17 But it's got to be well-run. And to that 18 end, I think you ought to -- when you sit in on these 19 directors meetings, I think you ought to have your 20 lawyer with you to protect the interest of the agency 21 and your interest, as well, Andy or Kim, you know, to 22 help you understand what the legal ramifications are, 23 not being an attorney, of when a vote is taken and how 24 it's taken and that sort of thing. 25 I just, from my many years of experience, 0198 1 have a concern about seeing that things go right. 2 MR. GREER: Yes, sir. 3 CHAIRMAN CLOWE: Because when you get, 4 for example, business practices examined in retrospect, 5 you want to be able to say I did everything that I 6 could that was reasonable and prudent to protect the 7 interest of, in this case, the state or the 8 shareholders in the case of private enterprise. 9 And love having the money, love the idea 10 that, you know, we'll have bigger jackpots more often. 11 But this is a business and it has to be run right. 12 MR. GREER: I agree. 13 CHAIRMAN CLOWE: So as you get into this 14 negotiation now about California coming in and what's 15 going to develop, I want you to have this policy 16 direction from at least one commissioner. 17 And Commissioner Cox can say how he feels 18 about it. You know, we -- we can't run this thing. We 19 understand that. But we need to make certain that good 20 practice is followed. 21 MR. GREER: I agree. 22 CHAIRMAN CLOWE: And that we're legally 23 doing the right thing in every case. Do you 24 understand? 25 MR. GREER: Yes, sir. I understand your 0199 1 -- your comments, and certainly the professionalism and 2 the opportunity that we have to add to the 3 professionalism of the way that Mega Millions is run is 4 something that we are all focused toward. 5 We want to help make it better. I think 6 some of the things that we've talked about here today, 7 we have made some strides in the right direction. But 8 we're not where we want to be. 9 And that's because, like you said, we're 10 Texas. And I appreciate that and we'll continue to be 11 focused on the business side of what we're doing. 12 CHAIRMAN CLOWE: Commissioner Cox, do you 13 have anything to add? 14 COMMISSIONER COX: Nothing to add. I'm 15 in total agreement. 16 MR. GREER: Thank you. There is another 17 point, Commissioners, that I would like to bring up. 18 One of the elements that came up in that presentation 19 was that California has expressed an interest in 20 joining the game in mid-June. 21 From our perspective, on the cost/benefit 22 side and the funds potentially that could come from 23 these higher jackpots and this new structure with the 24 new matrix, from the staff perspective, we also support 25 the idea of attempting to do everything that we can to 0200 1 help meet that. 2 With that in mind, we -- we've been in 3 negotiation for the last couple of weeks and we'll 4 continue to do that to try to get all the agreements 5 and the documents and everything that needs to take 6 place put together. 7 But I'm going to ask you if you would 8 consider the possibility of calling another commission 9 meeting soon within a couple of weeks, preferably, so 10 that we could continue on this time line to try to meet 11 what California has laid out, as far as mid-June, and 12 would allow us the opportunity then to work through the 13 proper procedures that we need to do, as far as getting 14 a rule out and the time period that is required with 15 that, as well as keeping in mind what Robert talked 16 about a moment ago on our multidraw feature that we 17 could draw back on. 18 So I would ask your consideration on that 19 item. 20 CHAIRMAN CLOWE: Well, I think Mary Beth 21 has already polled the commission. And I think you 22 nominated March the 11th as the date. 23 MR. GREER: If that's agreeable to you, 24 sir. 25 CHAIRMAN CLOWE: Is that good with you, 0201 1 Commissioner? 2 COMMISSIONER COX: I have it down. 3 CHAIRMAN CLOWE: And what I'd like to 4 suggest is that that meeting really be about Mega 5 Millions. And although I think it would be good to 6 post, Counselor, a broad enough agenda that we can 7 handle anything else that we might want to discuss, but 8 I'd really like to focus on Mega Millions and then have 9 another meeting for commission business later in the 10 month of March. 11 Because of this late date of our February 12 meeting, there may be rules and other issues. We don't 13 have to set that meeting now, but I'd like to plant the 14 idea that the March 11th meeting would be about Mega 15 Millions. 16 We'd start at nine o'clock and maybe deal 17 with that. And then we'd be finished. And then later 18 in March we'd have what might be considered our more 19 normal or regular meeting. 20 MR. GREER: That would be great. 21 CHAIRMAN CLOWE: Is that all right with 22 you, Commissioner Cox? 23 COMMISSIONER COX: You bet you. 24 MR. GREER: I appreciate that. You know, 25 our goal with Mega Millions all along is to continue to 0202 1 look for ways to grow the game and improve the game. 2 And bringing in the state of California ultimately will 3 be in our interest, which we showed here today for a 4 number of reasons. 5 And one of the things I'm looking forward 6 to is understanding how their lottery works. I will 7 say that one of the positive aspects of my experience 8 in Mega Millions is learning about how other states 9 operate, where they have successes, and what we can 10 learn from them and see their history. 11 And one of the areas that we're all 12 focused on right now is the on-line side. And there is 13 a trend, as you get into analyzing on-line games, that 14 they start high and then, you know, go over time in a 15 decreasing manner. 16 You've got to be refreshing these games 17 or renewing the games. And ultimately, that is what 18 Mega Millions has done for us over the last year with 19 300-plus million in sales. I think you mentioned 130 20 million in revenue. And I think this will continue to 21 enhance that. 22 So I appreciate your consideration on 23 that and look forward to getting the documents together 24 to bring before you on the 11th. 25 CHAIRMAN CLOWE: And also in that regard, 0203 1 Reagan, in your absence this morning, we had an 2 excellent discussion -- let's see -- under agenda 3 item -- it's on the marketing and sales. I can't pick 4 it out of the agenda right now. 5 I guess maybe it was item seven about the 6 increase in scratch-off ticket sales and the flat or 7 declining result in -- 8 COMMISSIONER COX: Bottom line. 9 CHAIRMAN CLOWE: -- bottom line revenue, 10 net income. 11 MR. GREER: Yes, sir. 12 CHAIRMAN CLOWE: You know, we need to 13 settle on some terms. Commissioner Cox pointed out a 14 very significant measure, sales versus prize paid out 15 is win in the gaming industry and the measure of that 16 relative to what your net income is, which would be the 17 term I would use for my business. 18 And looks like what we've been doing is 19 growing a less-profitable product, which is resulting 20 in increased sales but a decline in contribution to the 21 Foundation School Fund. 22 MR. GREER: Yes, sir. 23 CHAIRMAN CLOWE: And that came as a 24 surprise, I think, to Commissioner Cox and I know it 25 came as a surprise to me. We appreciated the 0204 1 identification of that situation. 2 And we have got to study that and got -- 3 we've got to understand that and deal with that, 4 fine-tune it and see where we want to go with that in 5 the future. 6 MR. GREER: Yes, sir. 7 CHAIRMAN CLOWE: And I'll ask Gary, who 8 was here, to brief you on that and give you a good 9 understanding of that description. 10 MR. GREER: Great. Great. Thank you. 11 I'll look forward to that. Can I follow up with just a 12 few -- 13 CHAIRMAN CLOWE: Sure. 14 MR. GREER: -- comments? We've been 15 watching this for a number of months as we've seen 16 these unprecedented numbers that we haven't seen since 17 the start of the lottery on the scratch-off side and 18 the payout. 19 CHAIRMAN CLOWE: You've known about this? 20 MR. GREER: We -- we have watched the 21 trend since maybe January or February and have brought 22 it, from a staff perspective, up amongst ourselves. 23 And that's why we wanted to bring it to the 24 commissioners' attention today in the presentation. 25 COMMISSIONER COX: Okay. 0205 1 MR. GREER: We focused more on -- 2 COMMISSIONER COX: It's just now February 3 and you said for several months. 4 MR. GREER: Well, that being January and 5 February. 6 COMMISSIONER COX: When did this thing 7 turn? 8 MR. GREER: I asked for a report to come 9 my way on that, and I'd say I got it sometime in 10 January. 11 COMMISSIONER COX: I didn't ask when you 12 got a report. I asked when it turned. 13 MR. GREER: I can't give you that -- 14 COMMISSIONER COX: When did we start -- 15 MR. GREER: -- specific answer. 16 COMMISSIONER COX: -- seeing that the top 17 line was growing but the bottom line was declining? 18 MR. GREER: I will analyze that for you. 19 I don't have that answer off the top of my head. 20 COMMISSIONER COX: Lee, do you know? 21 MR. DEVINEY: Well, I don't have the 22 numbers in front of me. But the percentage -- look at 23 it another way. The percentage of sales that are 24 contributed to the Foundation School Fund, the 25 percentage of total sales, has been declining for 0206 1 several years. 2 What was noticeable this month -- and a 3 lot of it had to do with the fact that there was a 4 two-day difference in comparative periods -- was that 5 we noted that sales up through February 19 were down or 6 revenue was down even though sales were up. Sales were 7 up 10.9 percent, but revenue was down 1.1 percent. 8 Now -- 9 COMMISSIONER COX: But since we're 10 talking about percentages, and I presume both have the 11 same number of days in them, why would two days make 12 any difference? 13 MR. DEVINEY: They -- they don't. In 14 this case, the two -- the two periods being compared, 15 there is a difference of two days. 16 COMMISSIONER COX: Right. 17 MR. DEVINEY: This -- 18 COMMISSIONER COX: But that -- that would 19 show up in absolute dollars. But we're looking here at 20 percentages. 21 MR. DEVINEY: It -- it affects the 22 percentages, too. If you adjusted for those two days, 23 we'd be about zero. In other words -- 24 CHAIRMAN CLOWE: Zero increase? Zero 25 increase? 0207 1 MR. DEVINEY: Zero increase, that's 2 correct. 3 COMMISSIONER COX: Does -- does that mean 4 there were two funny days in the week where sales were 5 up extraordinarily high or extraordinarily low? 6 MR. DEVINEY: It has to do with the fact 7 that we report on -- you know, week -- sales through a 8 week ending on a certain day -- well, September 1st may 9 not be a Sunday. 10 COMMISSIONER COX: Okay. I got you. 11 Okay. 12 MR. GREER: And I appreciate the 13 opportunity to continue to look at that issue. The 14 on-line side is a critical part of our overall makeup, 15 and we've been looking at a scenario on Lotto Texas 16 with slower rollups. 17 And what brought it up was that we were 18 having less high rolls. And so we were watching as the 19 numbers were not where we wanted them to be, from a 20 revenue perspective because, on the on-line games, the 21 percentage stays pretty steady at 36 cents on Lotto 22 Texas and 38 cents on Mega Millions. 23 So I appreciate the opportunity -- 24 CHAIRMAN CLOWE: Which is higher than the 25 return on your scratch-off -- 0208 1 MR. GREER: Yes, sir. 2 CHAIRMAN CLOWE: -- tickets, particularly 3 the higher-dollar scratch-off ticket. 4 MR. GREER: Right. 5 CHAIRMAN CLOWE: And that's where we've 6 concentrated our marketing and we've seen the growth. 7 MR. GREER: Yes, sir. 8 CHAIRMAN CLOWE: So, you know, the 9 question is: Are we pursuing the right goal? 10 MR. GREER: We have shifted from looking 11 at the marketing side on scratch-offs now to looking at 12 what I've been calling an on-line overview of all the 13 games on the on-line side, specifically at the 14 possibility of: Do we need to look at a possible 15 change to some of our games, including Lotto Texas or 16 Two Step or -- I really put everything out on the table 17 to analyze financially where we have been and where we 18 are now. 19 And what we've seen on the on-line side 20 is a decline. And we're going to have to bring that 21 back up again as a -- as a follow-up conversation to 22 give you a progress report on where we are with that. 23 The Mega Millions game has been positive, 24 and adding California is a positive because of the 25 spike that you saw in the sales there. The concern 0209 1 overall is shared from the perspective, as instant 2 tickets continue their success -- and I think they'll 3 move into that arena where we are now, which is 4 averaging much higher than we saw a year before, about 5 10 million dollars higher, which is why we should put a 6 lot of our energy into re-analyzing our on-line game 7 side so that potentially we can continue to have an 8 increase in revenue to the Fund. 9 CHAIRMAN CLOWE: But we haven't had an 10 increase in revenue. We've had an increase in sales 11 and a flat or decrease in revenue, the way you're using 12 the term. 13 MR. GREER: Yes, sir. And that -- that's 14 why we brought it up and we'll continue to bring it up 15 every month to show you what the numbers are doing -- 16 and I like the term, the win term -- I think we talked 17 about that before -- to have a better perspective on 18 what revenue -- our thinking process is oriented around 19 revenue and not necessarily around increased sales. 20 CHAIRMAN CLOWE: That's what we're 21 interested in. 22 MR. GREER: Yes, sir. I totally agree. 23 CHAIRMAN CLOWE: That's net profit to the 24 shareholders. 25 MR. GREER: Yes, sir. And as I was over 0210 1 at the Capitol today visiting with them in reference to 2 our budget, that's what they're interested in, too. So 3 our focus will remain there and we'll continue to keep 4 you updated on that. 5 CHAIRMAN CLOWE: Good. Anything further? 6 MR. GREER: No, sir, except I'm not sure 7 if you want me to go into my executive director 8 comments -- 9 CHAIRMAN CLOWE: Yeah. I do. 10 MR. GREER: -- now or later. 11 AGENDA ITEM NO. 22 12 CHAIRMAN CLOWE: Yeah. Let's just go 13 right on in from item nine to item 22, report by the 14 executive director. 15 MR. GREER: Thank you. As I stated 16 earlier, I've been spending quite a bit of time at the 17 Capitol and will continue to do that. Specifically 18 this morning, we were at the House Appropriations 19 Committee. Last week we worked with the subcommittee. 20 And prior to that, we had worked on the Senate side 21 with their subgroup, as well as the Senate Finance 22 Committee. 23 We will continue to keep you apprised of 24 how we're doing, as far as our Sunset Bill is 25 concerned, as well as our overall budget that they're 0211 1 currently giving consideration to. 2 I was asked a number of questions today 3 in the House Appropriations Committee oriented around 4 our demographic study and our advertising dollars, 5 specifically. And I did agree that I would give back 6 some information to a couple of reps over there 7 addressing some of their concerns about that and 8 reinforced to them where we are, as far as the 9 sensitivity level on our advertising dollars and 10 minority markets, specifically, and that we are very 11 focused on creating a balance in utilizing consensus 12 numbers and everything. So I wanted you to be aware of 13 that conversation today. 14 The jackpots continue to be a focus, as I 15 just mentioned, on Lotto Texas, specifically roll from 16 14 to 15 million here recently. So that's a part of, 17 you know, why our focus is on that area and will 18 continue to be. 19 On the flipside, Mega Millions, we're at 20 112 million and hopefully we'll get one of those 21 rollups that we talked about a moment ago. When you -- 22 when we break that 100-million mark, we see some new 23 players come out. So I'm hoping that that will 24 continue to help give a lift on the on-line side. 25 We touched on the fact last month that we 0212 1 were close. And in February, as far as the date, 2 February the 2nd, we went over the $7 billion mark to 3 the Foundation School Fund. And that's kind of a 4 milestone that I thought was worth noting and something 5 I know we're all proud of here in the agency that we 6 have delivered those dollars to the State and wanted to 7 reinforce that to both of you. 8 The theme this month has been -- 9 COMMISSIONER COX: Let me say something. 10 I recognize your emphasis there on what we've given to 11 the School Fund. But if we looked at what we've turned 12 in, including before we were going to the School Fund, 13 it's more like 12. Isn't it? 14 MR. GREER: Yes, sir. It is. 15 COMMISSIONER COX: Did we hit both of 16 those numbers? 17 MR. GREER: Yes, sir. Specifically, 18 there's three numbers that I go after. One is 38 19 billion in sales since we started, 12 billion overall 20 that's come into the state. And seven of the 12 21 billion has gone into the School Fund. 22 And I will say that's received very 23 positively by members of the legislature, just looking 24 at the overall perspective of what we've done and how 25 much has gone into the State. So thank you for 0213 1 clarifying that. 2 We're talking about customer service this 3 month. That's our theme. And we always look at 4 customer service as a part of our mission statement. 5 But my remarks and many of the things internally that 6 are going on are oriented around that over the last 7 month. 8 I also wanted to note that it was two 9 years ago today that I became the executive director, 10 and I want to thank you for the opportunity that I've 11 had in these last two years to learn a lot about the 12 Texas Lottery, hopefully add something back. And I 13 appreciate the opportunity that I have on a daily basis 14 to represent our agency. 15 CHAIRMAN CLOWE: Thank you. Happy 16 anniversary. 17 AGENDA ITEM NO. 23 18 CHAIRMAN CLOWE: Next item 23, report by 19 the charitable bingo operations director. And Mr. 20 Atkins, you were before the legislature, as well, I 21 reckon. 22 MR. ATKINS: We were, Commissioner. And 23 one of the items that they asked about specifically in 24 the House Appropriations Committee were Texas Hold 'Em 25 tournaments and their conduct in other states and what 0214 1 potential revenue could be to the state of Texas from 2 the conduct of those games. 3 Representative Menendez asked that we 4 supply additional information showing what we believe 5 the different revenue strings to the State would be 6 based on varying amounts of buy-in to the tournament, 7 as well as different frequency amounts of the 8 tournament. 9 So we will be compiling a spreadsheet to 10 submit to him. And he also asked that we include with 11 that if there were any policy considerations that we 12 felt that they should take into consideration as they 13 work on filing the legislation. 14 CHAIRMAN CLOWE: Did he see that under 15 the auspices of the Bingo Enabling Act? 16 MR. ATKINS: I believe so. He was 17 talking specifically today in terms of the -- or the 18 organizations conducting the poker tournaments being 19 those organizations conducting bingo. 20 CHAIRMAN CLOWE: Very interesting. Thank 21 you. 22 MR. ATKINS: In my report, you have 23 information in your notebook. The items I'd like to 24 draw your attention to is we did, on February 24th of 25 this year, make allocations to local jurisdictions. I 0215 1 believe the memo outlining those allocations was 2 provided to you earlier. 3 Also, on February 23rd, we issued a press 4 release highlighting the fact that, since bingo was 5 first authorized in 1982, charitable distributions for 6 organizations have exceeded three-quarters of a billion 7 dollars. And with the almost-30 million dollars that 8 was distributed last year, total distributions have 9 exceeded 773 million dollars since 1982. 10 And that press release went out. We're 11 currently working on a press release with the Media 12 Relations Division highlighting the recent allocations 13 that we made. 14 Another item that I wanted to draw your 15 attention to -- or two items, we did conduct a seminar 16 for the American Legion back in January. And you have 17 the survey results from that seminar in your notebook. 18 Also, we have been asked to perform another seminar for 19 the Red Men organization in March. 20 And that will be in the Waco area, if 21 you're interested, Commissioner Clowe. I believe you 22 have attended one of those in the past. Otherwise, I'd 23 be happy to answer any questions you may have about the 24 information in my report. 25 COMMISSIONER COX: What -- what is the 0216 1 Red Men organization? 2 MR. ATKINS: The Red Men organization is 3 a fraternal organization who traced their roots back to 4 the Boston Tea Party. And I believe that they have a 5 federal charter -- 6 MR. SANDERSON: Yes. 7 MR. ATKINS: -- from the United States 8 Congress. 9 COMMISSIONER COX: Really? 10 MR. ATKINS: And their national -- 11 national headquarters? 12 MR. SANDERSON: National and State. 13 MR. ATKINS: Is located in Waco. 14 CHAIRMAN CLOWE: They have an interesting 15 museum. 16 COMMISSIONER COX: Are you a member of 17 that organization? 18 CHAIRMAN CLOWE: I am not, but I've 19 attended their meetings with Mr. Atkins. 20 And Billy, in your absence this morning, 21 I want you to know the commission voted Mr. Weekly onto 22 the BAC. And he was here and present and was 23 introduced. 24 MR. ATKINS: And there are two other 25 positions that have become vacant effective February 0217 1 1st of this year. One's the charity position held by 2 Pete Pavlovsky. The other one is commercial lessor 3 position held by Mario Manio. 4 We have received nominations that have 5 been provided to the BAC Nominations Committee for 6 their review. We expect them to take that item up at 7 their next meeting, which is tentatively scheduled for 8 March 30th, and then be able to bring those 9 recommendations to the commission for your 10 consideration. 11 CHAIRMAN CLOWE: Very good. 12 COMMISSIONER COX: Billy, what has been 13 our policy about reappointing? 14 MR. ATKINS: In the past, Commissioner 15 Cox, there was a provision in the administrative rule 16 relating to the Bingo Advisory Committee that, I think, 17 limited an individual to serving two terms. When that 18 rule was most recently amended, I believe that 19 provision was deleted. 20 COMMISSIONER COX: So when you make your 21 recommendation -- and I don't know whether Pete and 22 Mario would be willing to serve further or whether -- 23 what you may think about that being a good idea, but I 24 hope, when you make your recommendation to us, you'll 25 consider that as a possibility. 0218 1 MR. ATKINS: And I don't believe that 2 either one of them submitted a nomination form. And 3 they have kind of been indicating that they -- they're 4 appreciative for the time they've been able to serve 5 and they're ready to move on. 6 COMMISSIONER COX: Okay. 7 CHAIRMAN CLOWE: Anything further, Billy? 8 MR. ATKINS: No, sir. 9 CHAIRMAN CLOWE: Thank you. We have 10 covered public comment, item number 24. And this 11 completes the agenda. Is there anything further to be 12 brought before the commission as covered by the agenda 13 at this time? 14 AGENDA ITEM NO. 25 15 CHAIRMAN CLOWE: Then we are adjourned. 16 It is 3:02 p.m. Thank y'all very much. 17 (Meeting adjourned at 3:02 p.m.) 18 19 20 21 22 23 24 25 0219 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, David Bateman, RPR, Certified Shorthand 7 Reporter in and for the State of Texas, do hereby 8 certify that the above-captioned matter came on for 9 hearing before the Texas Lottery Commission as 10 hereinafter set out, that I did, in shorthand, report 11 said 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 16 Witness my hand this the 7th day of March, 17 2005. 18 19 ___________________________________ 20 David Bateman, RPR, Texas CSR #7578 Expiration Date: 12/31/05 21 Wright Watson STEN-TEL Firm Registration No. 225 22 1801 North Lamar Boulevard Mezzanine Level 23 Austin, Texas 78701 (512) 474-4363 24 25 JOB NO. 041001DPB