0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, MAY 16, 2007 § 8 9 10 COMMISSION MEETING 11 WEDNESDAY, MAY 16, 2007 12 13 14 BE IT REMEMBERED THAT on Wednesday, 15 the 16th day of May 2007, the Texas Lottery Commission 16 meeting was held from 9:00 a.m. to 2:30 p.m., at the 17 Offices of the Texas Lottery Commission, 611 East 6th 18 Street, Austin, Texas 78701, before CHAIRMAN JAMES A. 19 COX, JR., and COMMISSIONER C. TOM CLOWE, JR. The 20 following proceedings were reported via machine 21 shorthand by Patricia Gonzalez, a Certified Shorthand 22 Reporter of the State of Texas, and the following 23 proceedings were had: 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 DEPUTY EXECUTIVE DIRECTOR: Mr. Gary Grief 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting called to Order..... 8 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chairman, possible 5 discussion and/or action regarding the Bingo Advisory Committee's activities, including 6 the May 2, 2007 Committee meeting.............. 8 7 AGENDA ITEM NO. III - Report by the Bingo Advisory Committee Chairman, possible 8 discussion and/or action on the 2006 BAC Annual Report.................................. 11 9 AGENDA ITEM NO. IV - Report, possible 10 discussion and/or action on the implementation of recommendations contained 11 in the Internal Audit Report on bingo audit services, including development of rules....... 40,152 12 AGENDA ITEM NO. V - Report by the Charitable 13 Bingo Operations Director and possible discussion and/or action on the Charitable 14 Bingo Operations Division's activities......... 54 15 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, including 16 adoption, on new Rule 16 TAC §401.316, relating to "Daily 4" on-line game rule........ 56 17 AGENDA ITEM NO. VII - Consideration of and 18 possible discussion and/or action, including adoption of repeal, on Rule 16 TAC §401.307 19 relating to "Pick 3" on-line game rule......... 56 20 AGENDA ITEM NO. VIII - Consideration of and possible discussion and/or action, 21 including adoption, on new Rule 16 TAC §401.307, relating to "Pick 3" on-line 22 game rule...................................... 56 23 AGENDA ITEM NO. IX - Report, possible discussion and/or action, including adoption 24 of amendments, on Rule 16 TAC §401.302 relating to instant game rules.................. 64 25 0004 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. X - Consideration of and possible discussion and/or action, 4 including proposal of amendments, on Rule 16 TAC §401.310 relating to Payment of Prize 5 Payments Upon Death of Prize Winner............ 70 6 AGENDA ITEM NO. XI - Report, possible discussion and/or action on lottery sales 7 and revenue, game performance, new game opportunities, market research, advertising, 8 dissemination of prize and game information, and trends..................................... 91 9 AGENDA ITEM NO. XII - Report, possible 10 discussion and/or action on transfers to the State...................................... 106 11 AGENDA ITEM NO. XIII - Report, possible 12 discussion and/or action on the FY 2008-09 Legislative Appropriation Request.............. 107 13 AGENDA ITEM NO. XIV - Report, possible 14 discussion and/or action on Request for additional FY 2007 Rider 2 Capital Budget 15 Authority...................................... 111 16 AGENDA ITEM NO. XV - Report, possible discussion and/or action on the 80th 17 Legislature.................................... 114 18 AGENDA ITEM NO. XVI - Report, possible discussion and/or action on the agency's 19 contracts...................................... 119 20 AGENDA ITEM NO. XVII - Report, possible discussion and/or action, including 21 extension, on the drawings studio and production services contract................... 119 22 AGENDA ITEM NO. XVIII - Report, possible 23 discussion and/or action, including amendments, on the statistical consulting services, lottery 24 drawings audit services, drawings studio and production services, and/or security systems 25 and services contracts.......................... 120 0005 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. XIX - Report and possible discussion and/or action on the agency's 4 HUB program and/or minority business participation, including the agency's Mentor 5 Protege Program................................ 123 6 AGENDA ITEM NO. XX - Consideration of and possible discussion and/or action on external 7 and internal audits and/or reviews relating to the Texas Lottery Commission and/or on the 8 Internal Audit Department's activities......... 126 9 AGENDA ITEM NO. XXI - Report, possible discussion and/or action on the Mega Millions 10 game and/or contract........................... 127 11 AGENDA ITEM NO. XXII - Report, possible discussion and/or action on GTECH Corporation.. 133 12 AGENDA ITEM NO. XXIII - Commission may meet in 13 Executive Session: 14 A. To deliberate the duties and evaluation of the Executive 15 Director and/or Deputy Executive Director pursuant to Section 551.074 16 of the Texas Government Code. 17 B. To deliberate the duties and evaluation of the Internal Audit 18 Director pursuant to Section 551.074 of the Texas Government Code. 19 C. To deliberate the duties, appointment, 20 and/or employment of the Charitable Bingo Operations Director pursuant 21 to Section 551.074 of the Texas Government Code. 22 D. To deliberate the duties, appointment, 23 and/or employment of an Acting Charitable Bingo Operations Director 24 pursuant to Section 551.074 of the Texas Government Code. 25 0006 1 TABLE OF CONTENTS 2 PAGE NO. 3 E. To deliberate the duties of the General Counsel pursuant 4 to Section 551.074 of the Texas Government Code. 5 F. To receive legal advice regarding 6 pending or contemplated litigation pursuant to Section 551.071 (1) (A) 7 and/or to receive legal advice regarding settlement offers pursuant 8 to Section 551.071 (1) (B) of the Texas Government Code and/or to 9 receive legal advice pursuant to Section 551.071 (2) of the Texas 10 Government Code, including but not limited to: 11 Cynthia Suarez v. Texas Lottery Commission 12 Shelton Charles v. Texas Lottery 13 and Gary Grief 14 Stephen Martin v. Texas Lottery Commission 15 First State Bank of DeQueen et 16 al. v. Texas Lottery Commission 17 Employment law, personnel law, procurement and contract law, 18 evidentiary and procedural law, and general government law 19 Lottery Operations and Services 20 contract Mega Millions game and/or contract................... 149, 158 21 AGENDA ITEM NO. XXIV - Return to open session 22 for further deliberation and possible action on any matter discussed in Executive 23 Session...................................... 151, 159 24 25 0007 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. XXV - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-07-2009 and 5 362-07-2011 Quick Way Food Stores Inc. 6 B. Docket No. 362-07-2014 - Quik Mart 7 C. Docket No. 362-07-2017 - Lake Air 8 Texaco 9 D. Docket No. 362-07-2018 - Texoma Gasoline Co. 10 E. Docket No. 362-07-2019 - Texoma 11 Gasoline Co. 12 F. Docket No. 362-07-2020 - Texoma Gasoline Co........................... 133 13 AGENDA ITEM NO. XXVI - Report by the Executive 14 Director and/or possible discussion and/or action on the agency's operational status, 15 activities relating to the Charitable Bingo Operations Division, agency procedures, and 16 FTE status..................................... 135 17 AGENDA ITEM NO. XXVII - Public comment......... 158 18 AGENDA ITEM NO. XXVIII - Adjournment........... 160 19 REPORTER'S CERTIFICATE......................... 161 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, MAY 16, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 nine o'clock. Today is May 16th, 2007. Chairman 7 Clowe is here. I'm Jim Cox. Let's call this meeting 8 of the Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Second item on the 11 agenda, report by the Bingo Advisory Committee 12 Chairman, possible discussion and/or action regarding 13 the Bingo Advisory Committee's activities, including 14 the May 2, 2007 Committee meeting. 15 Ms. Taylor. 16 MS. TAYLOR: Good morning. 17 CHAIRMAN COX: Good morning. 18 MS. TAYLOR: My name is Suzanne Taylor. 19 I'm Chair of the BAC. 20 The report is pretty short; so I'm just 21 going to go ahead and read it to you, if that's okay 22 with you. 23 CHAIRMAN COX: Uh-huh. 24 MS. TAYLOR: The Item No. I, the Bingo 25 Advisory Committee to the Texas Lottery Commission met 0009 1 on May 2, 2007 in Austin at 10:00 a.m. All members, 2 except Mark Weaver, were in attendance. BAC members 3 welcomed Commissioner Clowe to the meeting. 4 It was moved, seconded and unanimously 5 approved to approve the February 7, 2007 Bingo 6 Advisory Committee Meeting Minutes as posted on-line 7 with no changes. 8 Nelda Trevino reviewed the activities of 9 the 89th Legislature that could have a potential 10 impact to the agency. Members were shown a news 11 release highlighting the April 24th Charity Day at the 12 Capitol. 13 Terry Shankle reviewed the Fourth 14 Quarter 2006 and Calendar Year 2006 bingo conductor 15 information with BAC members. She noted gross 16 receipts have been increasing since 2002 due to the 17 introduction of event tabs; however, the prizes have 18 been increasing faster due to gross receipts 19 increasing prize payout percentages. Attendance has 20 continued to decline; however, player spend has 21 continued to increase. Reported distributions have 22 consistently been three to four times more than the 23 required amount. 24 Catherine Melvin reviewed the possible 25 amendments to 16 TAC 402.192 relating to the Bingo 0010 1 Advisory Committee. The goal is to write the rule in 2 plain language which is easy to understand and comply 3 with. BAC members commented positively on the 4 proposed changes. 5 Phil Sanderson reviewed the new 6 nomination process with BAC members. Applications for 7 positions on the BAC will be reviewed for eligibility; 8 sent to the Commissioners; applicants will be ranked; 9 staff recommendations will be submitted to BAC; BAC 10 members will have the opportunity to discuss their 11 recommendations; and the recommendations of the staff 12 and BAC will be submitted to the Commissioners at the 13 following Commission Meeting. There are four openings 14 on the BAC at this time: Commercial lessor, conductor 15 lessor, charity and general public. 16 Committee members reviewed the draft 17 2007 Bingo Advisory Committee 2007 Workplan which had 18 been previously approved at the February 7, 2007 BAC 19 Meeting. Members were asked for additional input 20 since the workplan can continue to be changed until 21 the final presentation to the Commission at their 22 August meeting. It was moved, seconded and 23 unanimously passed to add No. 8 to the draft workplan, 24 "Advise the Commission on the needs of the industry 25 for operator training." 0011 1 The 2006 Bingo Advisory Committee Annual 2 Report was reviewed by BAC members. It was moved, 3 seconded and unanimously passed to present the 2006 4 Bingo Advisory Committee Annual Report to the 5 Commissioners at their next meeting. 6 BAC members welcomed Commissioner Cox to 7 the meeting. Phil Sanderson reported to the committee 8 on the activities of the Charitable Bingo Operations 9 Division. Public comment was received. 10 The next meeting is tentatively 11 scheduled for July 17th. All items for the agenda 12 need to be in by July 2nd and items for the placement 13 in the notebook need to be in by July 9th. The 14 meeting was adjourned at 12:00 p.m. 15 If you have any questions or comments -- 16 CHAIRMAN COX: Suzanne, I would like to 17 make clear that before I came to the meeting, Chairman 18 Clowe had left -- 19 MS. TAYLOR: Yes, sir. 20 CHAIRMAN COX: -- the meeting. 21 Thank you very much for that report. 22 MS. TAYLOR: Thank you. 23 AGENDA ITEM NO. III 24 CHAIRMAN COX: Item III, Report by the 25 Bingo Advisory Committee Chairman, possible discussion 0012 1 and/or action on the 2006 BAC Annual Report. 2 Ms. Taylor. 3 MS. TAYLOR: Yes, sir. I believe that 4 you have a copy of the report, which was given to you 5 at the meeting, and I believe there's been one placed 6 into the notebook. So I'm going to go ahead and touch 7 on the highlights of the report. 8 We worked on several different areas. 9 We worked on gross receipts, net receipts, charitable 10 distributions, expenses and attendance. 11 Gross receipts, if you look at the 12 charts on Pages 4, 5, and 6, gross receipts have 13 continued to improve because of increased instant 14 bingo sales due to event tabs and an increase in 15 electronic sales. Card sales entrance fees in 2006 16 decreased from 2005 by 9,642,524. Electronic sales in 17 2006 showed a slight increase of 3,484,979 over the 18 2005 electronic sales. And instant bingo sales 19 increased by 29,903,283, resulting in an increase in 20 instant bingo sales of approximately 13.3 percent from 21 2005 to 2006; thus, creating an overall increase in 22 gross receipts of approximately 3.7 percent or 23 23,745,737. 24 Although instant bingo sales have 25 continued to increase due to the introduction of event 0013 1 tabs, it should be noted that instant sales increased 2 in 2005 by 28 percent; therefore, a significant 3 slowdown in the increase of instant bingo sales was 4 noted between 2005 and 2006. More income would be 5 derived from an increase in card sales since the prize 6 payouts are limited to $2,500 per session. And with 7 an increase in instant bingo sales, there's an 8 increase in prizes paid out also. 9 If you note the charts on Pages 7, 8, 9 10 and 10, they all have to do with the net receipts. 11 Although gross receipts have shown an increase of 12 75,405,747 from 2000 to 2006, net receipts have 13 decreased 1,710,529 during the same time period. This 14 anomaly has occurred due to a decrease in card sales 15 that have a fixed prize payout and an increase in 16 instant bingo sales with a corresponding increase in 17 prize payouts, leaving the adjusted gross receipts 18 with a decrease of 2,898,198 during this period. 19 However, the adjusted gross receipts did increase by 20 6,052,939 from 2004 through 2006. 21 The next item was the charitable 22 distribution. The chart on that is on Page 11. 23 Charitable distributions have continued 24 to follow the trend begun in 2004. Charitable 25 distributions in 2004 were 30,044,665. They increased 0014 1 to 30,380,607 in 2005 and increased again to 2 31,992,821 in 2006. This is a third year in a row to 3 see a slight increase in charitable distributions even 4 though there has been a decrease in conductors and in 5 attendance during the same time period. Increasing 6 the gross revenue from card sales and electronic sales 7 through increased attendance would allow more income 8 to be available for charitable distribution. 9 The next item was expenses. The charts 10 on expenses are on Pages 12, 13, 14 and 15. 11 One interesting thing to note on these, 12 if you flip the chart from Page 12 -- or -- I'm sorry. 13 Let me go back to -- I'm sorry -- the net receipts. 14 If you flip the chart on 2004 on Page 8 to 2005 on 15 Page 9, it looks like the same chart because there's 16 only a 1 percent change in any of these expenses. And 17 when you flip it from 2005 to 2006, once again, it 18 looks like the same chart because the -- it's changed 19 by 1 percent, the expenses. So the expenses are 20 remaining relatively the same. They're stable; same 21 amounts being spent in the same areas. It's just not 22 changing our pie charts. 23 The expenses increased by $2,247,076 24 from 2005 to 2006 but have remained relatively stable 25 throughout the last six years and are still $1,187,669 0015 1 less in 2006 than in 2000, confirming the conductors 2 have been managing their expenses well. 3 There was an increase in expenses of 4 $2,247,076 from 2005 to 2006. This increase was due 5 largely to an increase in payroll of 1,055,468, 6 increased licensed -- bingo license fees, janitorial 7 utility supplies and services. Because expenses have 8 remained quite stable, conductors should be focused on 9 revenue enhancement. 10 The last item that we looked at was 11 attendance. Those charts can be found on Pages 16 and 12 17. 13 Attendance decreased by 625,294 from 14 2005 to 2006 with a decrease in attendance of 15 approximately 24.5 percent from 2000 through 2006. 16 One reason for the continued decline in attendance is 17 due to a decrease of approximately 17.6 percent in the 18 number of organizations conducting bingo games from 19 2000 to 2006. This decrease may be due to the 20 increased competition for the gaming dollar, a lack of 21 advertising bingo in Texas and because current prizes 22 and games are no longer exciting to the general 23 public; therefore, making bingo -- the operation of 24 bingo games unproductive for nonprofits conducting the 25 games. 0016 1 Recommendations for improvement include 2 more charity involvement in requesting local radio and 3 TV stations to run bingo public service announcements 4 and in working to make bingo more exciting to players 5 in the local halls. Improving attendance remains the 6 key issue to the success of charitable bingo in Texas. 7 One item that should be noted is that 8 the number of conductors that are listed here in 2006, 9 the 1,265, it's my understanding that about 50 of 10 those are actually in administrative hold; so they're 11 not actively conducting bingo at this time either. So 12 looking at the conductors conducting bingo on Page 17, 13 you can see there's less bingo games; so, obviously, 14 the attendance is going to continue to go down as the 15 bingo conductors quit operating bingo games in Texas. 16 If you have any questions, I will be 17 glad to answer them for you. 18 COMMISSIONER CLOWE: I do, Mr. Chairman. 19 CHAIRMAN COX: Yes, sir. 20 COMMISSIONER CLOWE: Suzanne, thank you 21 for that report, and I think it's an appropriate time 22 to point out and go on the record, that, clearly, the 23 bingo industry is experiencing game fatigue and 24 similar impacts from the playing public that the 25 Lottery is experiencing. Your report points out that 0017 1 we have fewer conductors, we have fewer sessions, we 2 have fewer players playing a little bit more per 3 person. That's tracking similarly to what the 4 experience is at the Lottery. And depending on where 5 you are in this, you're either pleased or, I guess, 6 displeased with that. Those who are opposed to 7 legalized gaming in the state would probably be 8 pleased, and they're opposed to any attraction of 9 players to bingo. On the other hand, the charities 10 are first in not receiving more monies from this 11 activity, and then the operators would say, "We're not 12 experiencing growth that's substantial." 13 I think it's important, in all of the 14 information and data that you have given us, for us to 15 clearly state on the record that this industry and 16 this activity, these charities are just treading 17 water, and we are not making progress, if progress is 18 what the people of Texas and the Legislature wants in 19 this activity, towards creating a substantive increase 20 of payments from this gaming to charities. 21 And that's just the way I see it. And I 22 want that on the record, Mr. Chairman, and I'd like to 23 know whether -- not necessarily asking you to agree or 24 disagree, but what your thoughts are, because I think 25 it's important, as we receive this annual report, that 0018 1 we clarify what the real situation is and we state 2 that for the benefit of those who make the rules, the 3 Bingo Enabling Act, that we follow at this agency. 4 CHAIRMAN COX: Uh-huh. Well, I think 5 that you're right in the farewell on those comments. 6 I'd like to know what some of the causes 7 are. I think some of the causes are that our games, 8 the bingo game and the Lottery games, are very 9 traditional. They're not electronic. They're not 10 instant gratification kinds of games. They require 11 that you go some place; you can't do them in the 12 comfort of your home. I think there's plenty of 13 gambling on the Internet for those people who would 14 rather not leave home. I know there's plenty of 15 illegal gambling available. I know that it's not very 16 far to legalized gambling where the odds are much 17 better than our games and where there's a nice place 18 that you can sit down and have a drink and a steak and 19 stay the night if you'd like. 20 So we've got a lot of competition out 21 there of all kinds and I think that it's probably 22 affecting our games in much the same way it's 23 affecting bingo games. 24 COMMISSIONER CLOWE: That's right. And 25 I think it's reflected in the returns to the charities 0019 1 in the bingo operation, and that has been, in my 2 opinion, just sort of maintained. It's not really 3 seen a substantial increase. And we see that in the 4 Lottery return to the Foundation School Fund as well. 5 I think it's, this year, probably on the verge of 6 turning towards a reduction, historically. 7 CHAIRMAN COX: Unless something really 8 special happens in the remainder of the fiscal year, 9 that's exactly right. 10 COMMISSIONER CLOWE: That's right. And, 11 Suzanne, you know, I think you had a good discussion 12 in your BAC meeting about this, and now Chairman Cox 13 and I are discussing it with you. In your role as an 14 Advisory Chair, do you have any following comments 15 about this discussion or do you see this any 16 differently than we're viewing it at this time? 17 MS. TAYLOR: No. I believe you're 18 absolutely correct in that. 19 Bingo games, when it first started, 20 maybe because it was the first legalized form of 21 gambling that we had in Texas, were widely accepted 22 and there was just awesome participation. And getting 23 into bingo games 15 years ago was -- it was a definite 24 money-making opportunity for organizations. I can 25 understand now the reluctance of some of the 0020 1 organizations to continue because they don't want to 2 use funds that they've previously been able to make, 3 and -- you know, good money following bad, I guess, 4 you know, by losing them with bingo games. 5 I don't know what the answer is. I 6 do -- I believe the answer lies, part, in advertising. 7 We need to make bingo more exciting. We need to work 8 on getting more attendance there. I'm sure you've all 9 seen the commercials where business with no sign is a 10 sign of no business. And, unfortunately, I think, 11 with bingo, that when organizations cut expenses, and 12 expenses as -- I don't know another business that I'm 13 aware of that from 2000 to 2006 the expenses have not 14 gone up. I mean, that's just amazing. 15 But the problem is a lot of the 16 expenses -- everything that's been cut -- you can't 17 cut payroll. You can't cut the electricity. And most 18 of the expenses that we're currently paying -- you 19 have to pay the electronics and the paper -- are 20 expenses that have to be paid if you want to continue 21 in business. The place where a lot of charities have 22 cut expenses is their bingo advertising because they 23 don't have to advertise. It's not something they're 24 required to do, but cutting the advertising is cutting 25 public awareness of bingo. The older generation, 0021 1 which is aging out of bingo -- we're not attracting 2 the younger players to continue to bring new players 3 in because of lack of advertising. 4 It is appropriate to talk about National 5 Bingo Night in the form of advertising? 6 MS. KIPLIN: Well, we're on the annual 7 report, and so if it's part of a discussion that goes 8 into the annual report, I think -- I think you can. I 9 mean, you'll have to draw the connection on that, 10 but -- 11 MS. TAYLOR: Okay. 12 MS. KIPLIN: It's really -- it's 13 you-all's Commission meeting; so -- 14 CHAIRMAN COX: How do you feel about 15 that? 16 COMMISSIONER CLOWE: I think it's a 17 related topic. 18 CHAIRMAN COX: Okay. Go ahead, Suzanne. 19 MS. TAYLOR: I am anxiously awaiting 20 Friday to see how it affects the bingo attendance, and 21 I'm more interested to see what happens next week to 22 see how it affects the attendance. We couldn't pay 23 for the advertising we're getting from National Bingo 24 Night. 25 Now -- 0022 1 CHAIRMAN COX: Now, this is the ABC -- 2 MS. TAYLOR: Yes, sir. 3 CHAIRMAN COX: -- program, new game show 4 that's going to start off Friday night. 5 MS. TAYLOR: Absolutely. It's a seeded 6 sweepstakes, from what I read on-line. Bingo halls 7 have received the copy of -- I'm sorry. 8 What is that called, Phil? 9 MR. SANDERSON: The advisory opinion. 10 MS. TAYLOR: That they can show the -- 11 let people view National Bingo on a TV set in the 12 hall. And I don't know if there's a way to play off 13 of that for the halls, but I believe that this could 14 very possibly be an opportunity handed to us that is 15 not something that any of us can afford to pay for. 16 CHAIRMAN COX: Okay. I should point out 17 that Director Sadberry is over at the Capitol 18 available as a resource for a Senate Committee hearing 19 and Deputy Director Grief is sitting in for him. 20 Gary, is there anything you'd like to 21 add to this discussion? 22 MR. GRIEF: No, sir. 23 CHAIRMAN COX: Okay. Phil? 24 MR. SANDERSON: No, sir. I just -- 25 well, I would like to just confirm and agree with what 0023 1 you said earlier about the games are starting to 2 just -- the traditional games themselves, need to try 3 to find some new excitement in the games or some new 4 opportunities to try to get the trend turned around, 5 so to speak, and the bottom line more so than -- the 6 gross receipts are going up, but because of the 7 regular sales for regular bingo going down and still 8 giving away the high prize amounts, it's cutting into 9 the increase that the pull tabs have caused. So need 10 to find a way to increase that bottom line. 11 CHAIRMAN COX: Mr. Fenoglio, did you 12 have anything you wanted to throw into this? 13 MR. FENOGLIO: For the record, my name 14 is Stephen Fenoglio. I'm an attorney in Austin, 15 Texas, and I'll file an appearance slip. I agree with 16 what Ms. Taylor said about bingo appears to be at a 17 plateau right now, and we are concerned that it will 18 turn down. 19 A number of charitable organizations and 20 other industry representatives are starting to focus 21 on what we call prize board management, in that the 22 regular bingo is starting, in many instances, to not 23 pay for just the prizes, much less much in the way of 24 overhead, and that is a high degree of concern, as you 25 might imagine. 0024 1 At River City Bingo, we have continued 2 our aggressive advertising campaign -- the bingo hall 3 at I-35 and Braker in North Austin -- with some 4 success, but we're starting to see, Commission -- 5 Chairman Cox and Commissioner Clowe, the identical 6 thing that you-all have raised repeatedly where there 7 are fewer customers and you're getting more money from 8 those customers. Part of that is very misleading 9 because of the increased play on pull tabs and just 10 the churn, if you will. 11 We worked with, by the way, your staff 12 on this bingo advisory opinion. And thanks to Phil 13 Sanderson and Kim Kiplin and Commissioner Sadberry and 14 others about getting a quick turnaround on an advisory 15 opinion so that charities have a green light as to how 16 they can promote their bingo hall in connection with 17 the bingo night. I think that will be a short-term 18 bump, if, in fact, it turns out to be a bump. 19 Most of our legislative initiatives in 20 the Capitol are just about dead, and so we'll have to 21 turn back to the Commission as far as, perhaps, some 22 rulemaking and some innovative ways to promote our 23 existing product mix. 24 Thank you for your interest. 25 CHAIRMAN COX: Yes, sir. 0025 1 COMMISSIONER CLOWE: Mr. Fenoglio, since 2 you brought it up and Phil had mentioned it, that 3 advisory opinion was a product of cooperation, I 4 understand, and was arrived at fairly quickly. 5 Wouldn't -- 6 MR. FENOGLIO: Amazingly quickly, 7 Commissioner Cox, thanks to the staff. 8 COMMISSIONER CLOWE: And I was made 9 aware of that as the progress was being created. Was 10 the industry satisfied with that advisory opinion and 11 did they feel like that was going to have a beneficial 12 result? What was the reaction there? 13 MR. FENOGLIO: To the -- I mean, this 14 happened so quickly that there wasn't a lot of 15 opportunity to poll all of the industry, but it is a 16 green light. I don't necessarily -- and I think some 17 of the industry don't share some of the concern -- or 18 some of the finer points of the issue, and Ms. Kiplin 19 and I talked about consideration and chance in prize. 20 There is an AG opinion on that issue that I think the 21 opinion follows. I don't think that that's the 22 correct measure of Texas law, but there is an AG 23 opinion on that. 24 So bottom line, we were pleased that the 25 staff promptly got on the issue, gave us direction. 0026 1 It's something we can work with and live with. 2 And I hope I answered your question, 3 Commissioner Cox. 4 COMMISSIONER CLOWE: Yeah. I'm Clowe. 5 (Laughter) 6 MR. FENOGLIO: I'm sorry. Commissioner 7 Clowe -- 8 COMMISSIONER CLOWE: He's Cox. 9 MR. FENOGLIO: -- Chairman Cox. Who's 10 on first? 11 COMMISSIONER CLOWE: Just so we're 12 square on the record. 13 (Laughter) 14 COMMISSIONER CLOWE: Well, I think they 15 gave you a pretty good effort on that. 16 MR. FENOGLIO: They did. 17 COMMISSIONER CLOWE: It was an 18 interesting legal question because the Attorney 19 General's opinion spoke in that direction but not, 20 maybe, as precisely as we would have liked. And there 21 were other issues from the Attorney General that were, 22 maybe, clearer in other situations. But I think 23 you're correct in your comment, that if it's going to 24 be beneficial, it'll probably be short-lived, one 25 season at the most. 0027 1 These are things that happen, and I 2 think that came up, really, as a surprise to everybody 3 in this state. Apparently, that network worked on 4 that and then announced it with a very short time 5 frame before it became effective. So that happened 6 very rapidly. But those are not the kinds of things 7 that, over a long period of time, make an impact on a 8 business, whether it's gaming or whatever it might be. 9 And my point -- and I think it's 10 appropriate at the time of this annual report -- is 11 for us to step back from maybe events like this or any 12 other specific occurrence and look very objectively at 13 what the long term is. And it's a junction over time, 14 at the best, holding for some periods of the 15 contribution, in the case of bingo, to the charities, 16 or to the Foundation School Fund on the part of the 17 Lottery. And it's very important for me, and I think 18 for the Chairman as well, that everybody see that 19 clearly, the players, the Legislature, the 20 leadership -- everybody, because that's the trend that 21 we're dealing with, and we don't want anybody at any 22 point in time saying, "Well, we were surprised. We 23 didn't see this coming." 24 MR. FENOGLIO: Agreed. Thank you, 25 Commissioner Cox. 0028 1 CHAIRMAN COX: Suzanne and Stephen, is 2 it true that within the bingo industry in Texas or 3 outside, that there are pockets of prosperity, there 4 are folks that are doing quite well with their 5 operations, and while their results are disguised 6 within the overall decline, that there are folks that 7 are doing well? 8 MR. FENOGLIO: Yes. And, Commissioner 9 Cox, you've raised that as a point and I've agreed 10 with you. I mean, the overall numbers are not good, 11 but, sure, there are. And most of that is geography, 12 I'm convinced. You have some very good hall managers 13 in Dallas, Texas, but they're so close to the Oklahoma 14 border and Winstar and other casinos have buses coming 15 through there for either free or $10, and when you get 16 to the casino, you get your $10 back -- that type of 17 stuff. You see it advertised in the Austin paper 18 every day. They're taking you to Winstar or Coushatta 19 in Louisiana. And so Austin is, I believe, an island. 20 The -- and there's some halls in the Valley and then 21 there's some halls out in the Panhandle area who 22 have -- that have done well. 23 Corpus Christi where Suzanne is, you'll 24 recall, Chairman Cox, you asked us to look at -- Phil 25 Sanderson and me, why there were a large -- seemed to 0029 1 be a large number of halls in -- or a large number of 2 charities in Corpus that did not make any charitable 3 distribution for a period of time. And my conclusion 4 on that -- and I think it was Mr. Sanderson's as well, 5 was that there are probably too many halls in Corpus. 6 I think there are the same number of large, commercial 7 halls -- or large halls in Corpus that there are in 8 Austin, and, yet, the population in Austin is almost 9 double what it is in Corpus. 10 And so it's not just geography, happen 11 to be close to the border in Oklahoma or on the east 12 side or west side where there's a lot casino-style 13 gaming that's an hour drive away or hour and a half, 14 but you also have an area like Corpus where, for 15 whatever reason, there's the same number of halls 16 there. And if you look at -- drill down and look at 17 their numbers, you know, some of those halls are 18 getting 80 to 100 people a night. And, again, they're 19 paying out the same prize board as we are in Austin at 20 River City Bingo, which is a daytime hall -- not 21 nearly as many customers. Our average numbers are 22 around 130 attendance -- and we're paying out $2,500 a 23 session and they've got 80 to 100 a session and paying 24 out $2,500. 25 So you've got that phenomenon in Corpus 0030 1 that's not good. And, of course, you know, if you 2 were the king, you'd say, "Okay. Well, two of those 3 halls have to close," but it would be difficult to 4 make that call. 5 So I think geography makes a big 6 difference, and, obviously, hall management always 7 makes a big difference, but sometimes it's just where 8 you were born or where you happen to be that's 9 extremely beneficial. Dallas, San Antonio is a good 10 example. Waco. 11 CHAIRMAN COX: Suzanne, does your 12 committee consciously seek out these better management 13 techniques that Mr. Fenoglio referred to and try to 14 disseminate them in the industry? 15 MS. TAYLOR: Absolutely. I believe that 16 several of the committee members -- if you look at the 17 different halls that are represented on the committee, 18 some of those halls are ones in Dallas, which are 19 having a tough time because of the smoking ban, but 20 you've got other ones from -- Kim's hall from San 21 Antonio, you know, does very well. Those -- some of 22 the best managers in the state are probably on the 23 BAC. So, absolutely, they know how to manage a hall. 24 In addition to the items that he talked 25 about, the large number of halls in Corpus Christi, we 0031 1 also have the Texas Treasure that's about a 20-minute 2 drive. In addition to that, we also have the 3 Greyhound Racetrack in Corpus Christi. So bingo in 4 Corpus Christi is hard, and I -- that's why several 5 years ago we had a thing that there was a two-year 6 moratorium on any new bingo halls being established, 7 because, unfortunately, I think one of the things that 8 happens is that operators will look and say, "Well, 9 the halls" -- "River City is doing really well and 10 look at how much money they make. Let's go open a 11 hall pretty close to them so we can, you know, get 12 some of that money also." So I think people look at 13 where halls are doing well and open additional halls 14 in the same area, and that is a problem and I believe 15 that's why we had that moratorium for those two years, 16 to try to stabilize the halls that were already there. 17 We have some great operators on the BAC. 18 My hall does not make full payouts. We already saw a 19 while back that if we continue to pay out $2,500 a 20 session that we were not going to make it. So we're a 21 full-pay/half-pay hall, and, you know, our payouts are 22 very seldom $2,500. So we're doing what we need to do 23 to be able to derive income off of the bingo games. 24 Last quarter for us was a very good 25 quarter. This quarter is not as good, but it never is 0032 1 as good when we look back historically. And we know 2 that we're going into the summer, which is, 3 historically for us, not been a good quarter. So a 4 lot of it has to do is -- it's time of year also. You 5 know, if you live in an area where you have a beach to 6 go to and you've got some gorgeous weather and it's 7 hot, it's pretty hard to get people to come on into 8 the bingo hall when there's a lot to do. 9 CHAIRMAN COX: Sure. 10 COMMISSIONER CLOWE: I'd like to ask a 11 question of Mr. Fenoglio, Mr. Chairman. 12 You made a comment that your legislative 13 efforts were, for the most part, dead, and I'd like to 14 hear your opinion about that effort. I think it's 15 clear that when the BAC or members of the bingo 16 industry have come to their meeting or to the 17 Commissioners' Meeting, we have constantly said to 18 them we are not the lawmakers and we are the 19 administrators of the statute and the rulemakers. And 20 your solutions to many of your problems lie in the 21 Legislature and in the leadership, and I'm aware of 22 some efforts you've made. 23 Under the agenda item of this report and 24 the discussion that has ensued, you've been involved 25 in that process, I assume, and have some knowledge of 0033 1 which the Commission, I think, would like to be 2 enlightened. And if you would care to give us your 3 opinion about those efforts and -- or where you ended 4 up on that, I think it might be enlightening to us. 5 MR. FENOGLIO: Sure. It was puzzling. 6 We have the Bingo Clean-up Bill that was a joint work 7 product of Phil Sanderson and Kim Kiplin's staff and 8 industry, no expansion of gaming whatsoever -- 9 CHAIRMAN COX: This was the effort that 10 Chairman Flores brought together. 11 MR. FENOGLIO: Yes. Yes. 12 COMMISSIONER CLOWE: He asked for the 13 staff to participate in that. 14 MR. FENOGLIO: Yes. Yes. I should have 15 made that clear. I apologize. 16 And we got it out of his committee 17 promptly. We had some significant changes that 18 delayed it a bit, but we got it out in time and it's 19 been locked in Calendars. And I believe the 20 out-of-state casino interests are -- have opposed that 21 in Calendars, because, you know, part of that would 22 have just -- again, no expansion of gaming, but it 23 would have simplified and -- both from the regulator's 24 viewpoint and from charities, a number of items which 25 would have helped bingo, and my concern and 0034 1 observation is they don't want bingo to succeed at 2 all. And so anything they can do to encourage the 3 debilitating effect of the existing regulatory 4 scheme -- not all of it is debilitating, but there are 5 changes that we've identified that we've agreed on 6 need to be made, and they've kept it locked up in 7 Calendars Committee. 8 The Progressive Bingo Bill did pass the 9 House with a cap of 2,500 per progressive game, and 10 only one progressive game at a time, much narrower 11 than when it came out of committee. The industry has 12 united in support of that with one exception. That 13 bill is over in the Senate and we're not sure if it 14 will make it to the goal line. It's had one committee 15 hearing, and so that's where that bill is. There were 16 a number of other bills that -- one got out of 17 committee but never got out of Calendars and the other 18 was -- never got out of committee. And I think that's 19 the limit of things that would have helped, in one way 20 or another, charitable bingo. 21 The out-of-state casino interests play a 22 very good game, and then the Indian tribe in Del Rio, 23 whose name I'm going to draw blank on right now, 24 they've got -- they have the ability of operating 25 Class III gaming, at least they believe they do -- 0035 1 Kickapoo Tribe, and they've also been at the forefront 2 of trying to keep any expansion of gaming bottled up. 3 COMMISSIONER CLOWE: And I just want to 4 reiterate, that's your personal opinion, and, clearly, 5 what you're portraying to us in your opinion is that 6 there is a conflict among people who are in this 7 industry in regard to potential legislation. 8 MR. FENOGLIO: In the industry of 9 gaming, yes. Not within the bingo industry, but, yes, 10 there are. I mean -- and that's this case in any 11 trucking regulation, Commissioner Cox, or what have 12 you, energy, there's always competing interests. 13 COMMISSIONER CLOWE: Would you sit over 14 here and I'll sit over there? 15 (Laughter) 16 MR. FENOGLIO: Commissioner Clowe. 17 COMMISSIONER CLOWE: Get where we're 18 supposed to be. 19 MR. FENOGLIO: I apologize. 20 CHAIRMAN COX: When we moved over, did 21 it confuse you, Stephen? 22 (Laughter) 23 MR. FENOGLIO: It's -- I'm in a state of 24 perpetual confusion and sleep deprivation right now. 25 COMMISSIONER CLOWE: That doesn't apply 0036 1 to all attorneys, does it? 2 (Laughter) 3 MR. FENOGLIO: Of course not. There's 4 one who I'm looking at right now, Kim Kiplin, who -- 5 COMMISSIONER CLOWE: I think you got an 6 off-the-record answer on that question. 7 (Laughter) 8 MR. FENOGLIO: So there's, obviously, a 9 healthy debate in any legislative initiative, either 10 within an industry -- although, again, on the Chairman 11 Flores bill, everyone, to my knowledge, in the 12 industry supported it, wanted it to pass, pushed it, 13 and we couldn't get it out of House Calendars. 14 COMMISSIONER CLOWE: In Texas? 15 MR. FENOGLIO: Yes. Yes. In Texas. 16 COMMISSIONER CLOWE: Well, I think it's 17 educational for us to have these discussions and this 18 understanding so that people like you, Suzanne, can 19 discuss these discussions with your colleagues. This 20 is not a proper subject for the BAC to address. I 21 think it's educational from the standpoint of the 22 Commissioners inquiring of a representative of the 23 bingo industry -- a paid representative about his 24 opinion, and this is the reality of dealing with 25 problems within the industry and it's an awareness 0037 1 that I think is beneficial. And the Commissioners are 2 not in a position to do anything about this and I 3 don't think intend to -- I can speak for myself -- but 4 we want a level of awareness in the industry because 5 that's the important thing in order to face the 6 realities of what the industry is dealing with. You 7 know, if you have a problem and you don't understand 8 it, you certainly can't deal with it. 9 COMMISSIONER CLOWE: Thank you, 10 Mr. Chair. 11 CHAIRMAN COX: Yes, sir. 12 Suzanne, if I could, I'd like to ask 13 Phil to comment on one of the items in your report. 14 This would be Item VI about the nomination process -- 15 thank you very much, Mr. Fenoglio. 16 COMMISSIONER CLOWE: That was Chairman 17 Cox who thanked you. 18 (Laughter) 19 MR. FENOGLIO: Thank you. 20 CHAIRMAN COX: Item VI was the new 21 nomination process for BAC members. And, Phil, you've 22 reported to us on this process. Could you tell us 23 where we are as far as timing? I think part of what 24 you were doing -- what we're trying to do here is get 25 the workplan of the committee and the terms of the 0038 1 committee members on the same fiscal year. And if I 2 remember right, that was fiscal year September 1 to 3 August 31. 4 MR. SANDERSON: Yes, sir. 5 CHAIRMAN COX: So where are we as far as 6 getting things on that year, getting the vacancies we 7 have filled, et cetera? 8 MR. SANDERSON: We have -- we've 9 received the nominations and we've done the initial 10 eligibility check on the individuals that have been 11 nominated. And the process now will call for -- 12 depending on the BAC rule that will come before you in 13 the June meeting, hopefully, that if it gets proposed 14 for publication, then we'll move forward with the 15 process, because we've incorporated the process in the 16 rule itself. So between June and July, we would 17 schedule some meetings -- or interviews for the 18 Commissioners. We'd provide our list to the BAC so 19 they could contact the individuals. The BAC meeting 20 right now is tentatively scheduled for June the 17th, 21 and they can discuss their recommendations at that 22 meeting. Hopefully, they will have something they can 23 bring to you at the August meeting -- 24 CHAIRMAN COX: Would that be July 17th? 25 MR. SANDERSON: I'm sorry. Yes, sir. 0039 1 July 17th. And so at the August meeting is when the 2 staff would make the formal recommendation to the 3 Board and also the BAC would have input, if you so 4 desired, into those recommendations. So the August 5 meeting is when that would take -- the appointment 6 process will take place. 7 CHAIRMAN COX: Okay. Now, Ms. Kiplin, 8 the rule is going to be espoused next month. 9 MS. KIPLIN: Yes. That's my 10 understanding. 11 CHAIRMAN COX: We're able to work under 12 that rule while it's in the process of being adopted? 13 MS. KIPLIN: Yes. I think you can, 14 because what we're talking about is the nomination and 15 appointments process, and I think -- I'm not hearing 16 anything that would be inconsistent even under the 17 current rule. 18 CHAIRMAN COX: Okay. So what Phil is 19 talking about would work under the current rule; the 20 new rule would just make it clearer? 21 MS. KIPLIN: Yes. I think so. 22 MR. SANDERSON: Yes, sir. 23 CHAIRMAN COX: Thank you, Phil. 24 MR. SANDERSON: Thank you. 25 CHAIRMAN COX: Thank you very much, 0040 1 Suzanne. It's a very good report. 2 MS. TAYLOR: Thank you. And I really 3 want to tell you how much we all appreciate your 4 concern with the bingo industry. Thank you. 5 AGENDA ITEM NO. IV 6 CHAIRMAN COX: Item IV, Report, possible 7 discussion and/or action on the implementation of 8 recommendations contained in the Internal Audit Report 9 on bingo audit services, including development of 10 rules. 11 Mr. Sanderson. 12 MR. SANDERSON: Good morning, 13 Commissioners. For the record, Phil Sanderson, 14 Assistant Director of the Charitable Bingo Operations 15 Division. 16 In your notebook is the monthly status 17 update of the implementation of the internal audit 18 recommendations of the audit department of the 19 Charitable Bingo Operations Division. I would like to 20 just let you know that everything is still moving 21 forward. We're still, I feel, pretty much on the 22 timeline that we discussed back in March. 23 One of the things, the Risk Analysis 24 Program that has been developed by Information 25 Resources has been moved out into the user acceptance 0041 1 testing and we're testing that at this point in time. 2 We're continuing to develop the rules as requested or 3 recommended in the internal audit recommendation. We 4 have sent the letter up to -- for the look-back of the 5 audits, the recommendation to review those audits. 6 The letter that will go out to the organizations has 7 been submitted to the Legal Services Division for 8 review; so we can hopefully get that letter out soon 9 to those organizations to give them an opportunity to 10 have their audits re-examined. And the 11 recommendations for the restructuring are still 12 pending at this point in time. 13 And I'll be glad to answer any questions 14 on that part. And if you have no questions, then 15 Internal Auditor Catherine Melvin and myself would 16 like to present to you a format that we're looking at 17 in developing these new rules. 18 CHAIRMAN COX: Phil, I'd like to ask you 19 to do something for me. This is a very thorough and 20 comprehensive report, and it's very much the same from 21 month to month. Could you, just for me -- and perhaps 22 Chairman Clowe would like it as well -- have a little 23 Gantt chart that has each of the action items and what 24 is the timeline you've set out that you would meet, 25 and right underneath that, a timeline as to where you 0042 1 now see it finishing -- 2 MR. SANDERSON: Yes, sir. 3 CHAIRMAN COX: -- so I can just quickly 4 see "Are we on time here? Are we not on time"? I 5 pretty much understand what we're doing. And there 6 may be others who would like to have that rather than 7 receiving this comprehensive report on a periodic 8 basis. 9 MR. SANDERSON: Yes, sir. Be glad to. 10 CHAIRMAN COX: And, Catherine, you want 11 to come up and you-all make that presentation? 12 MS. MELVIN: Good morning, 13 Commissioners. For the record, my name is Catherine 14 Melvin. I'm the Internal Audit Director. And as Phil 15 mentioned, I'm here to provide a brief background on 16 plain language. 17 Mr. Sanderson had mentioned the 18 extensive work that is going on in his division now 19 related to rewriting rules and clarifying existing 20 requirements, and Internal Audit is working closely 21 with the Bingo Division in those efforts and we're 22 very supportive of that. And as you recall, one of 23 the findings or one of the issues that we had in the 24 Internal Audit Report related to improving the 25 licensee experience, and one of the issues 0043 1 specifically related to ensuring that we had clear, 2 consistent communication of all requirements to the 3 licensees regarding what they were expected to do. 4 And so, as I've stated, we have a very 5 brief presentation related to plain language. Before 6 I start that, I'd like to give a little bit more 7 background related to how this movement got underfoot. 8 Plain language is a concept that is very 9 familiar in the federal government environment, and 10 that is because in the mid '90s, the president at that 11 time, issued an executive memorandum that went to the 12 heads of all federal agencies and federal departments 13 requiring them to write all their communications to 14 their public in plain language and gave guidelines as 15 to what that would entail. And, in fact, the 16 vice-president at the time, Al Gore, had a "No 17 Gobbledygook" award that I think he issued monthly 18 showing good examples of how federal agencies changed 19 their communications to better communicate with their 20 public, to better clarify their need and what was 21 expected. I'll have to say that, at the state level, 22 currently, our Secretary of State does refer state 23 agencies to consider plain language in their rule 24 drafting also. 25 Plain language in all communication is 0044 1 the very foundation of good service to our customers; 2 so I'll go ahead and begin this presentation. 3 So, first, "What is plain language?" 4 Plain language is also called plain English. And, 5 fundamentally, it's communication that the audience 6 can understand the first time they read it or hear it. 7 It is in plain language if your audience can find what 8 they need, if they can understand what they find and 9 if they use what they find to meet their needs. 10 Many definitions related to this. This 11 one I thought was a pretty strong definition, and I 12 particularly like the underlined text. "Writers of 13 plain English let their audience concentrate on the 14 message instead of being distracted by complicated 15 language." 16 So "Why plain language?" Well, clearly 17 the benefits of plain language are both tangible and 18 intangible. Fundamentally, the public deserves plain 19 language communication from its government. 20 I won't read this all to you. 21 There are many techniques to get us to 22 plain language, and we'll show some examples of those 23 techniques and Phil will then show an example of how 24 our rules might look using some of these techniques, 25 but here are some key features: 0045 1 One is logical organization with the 2 reader in mind. And this is critical to making sure 3 our rule layout or other communications that we have 4 with our licensees is understandable, using "you" and 5 other pronounces, using the active voice, short 6 sentences, common everyday words and easy-to-read 7 design features. And this should all look familiar to 8 all of us because this is probably those very 9 principles that we learned in our English classes in 10 school that talked about good writing in any venue. 11 No one technique, though, defines plain 12 language. Rather, plain language is defined by its 13 results. It's easy to read, understand and use. 14 Okay. So I'm going to provide three 15 very quick examples of plain language and each of 16 these examples will show a different technique that's 17 being utilized. 18 The first example comes from a Medicare 19 fraud letter. You can see the before paragraph is 20 fairly ominous sounding, a lot of strong words. 21 "Investigators at the contractor will review the facts 22 in your case." If you read towards the end, "This can 23 lead to expulsion from the Medicare program, civil 24 monetary penalties and imprisonment." The Medicare 25 Beneficiary Services changed this simply to "We will 0046 1 take two steps to look at this matter: We will find 2 out if it was an error or fraud. We will let you know 3 the result." And that was the change they made to 4 that letter that they had. 5 This is another example. First example 6 used conciseness, and this example shows plain 7 language addressing form. This is a favorite example 8 of mine because this is something we're probably all 9 familiar with. This is a label from some 10 over-the-counter medicine, a familiar label that we 11 probably used to see, and this is how the labels look 12 now. This was a result of plain language. So this is 13 an example of using formatting and organization to 14 more directly communicate information. 15 And the third example is using a Q&A 16 technique in rule writing. This is from the Bureau of 17 Land Management, and you can see how using the Q&A 18 format is certainly more reader focused or licensee 19 focused to communicate the information and using a 20 very direct Q&A style. "Can I use timber on my oil or 21 gas lease for fuel?" "You must file an application to 22 use the timber on your oil or gas lease for fuel," and 23 et cetera. 24 Okay. And I'll let Phil take it from 25 here. 0047 1 MR. SANDERSON: If you go out to our 2 website and look at the Bingo Administrative Rules, it 3 will take you to the Secretary of State's website 4 where this is the page for the Chapter 402 Bingo 5 rules. If you look at Subchapter G, that's the 6 Compliance and Enforcement. Then currently out there 7 are the rules that fall under that subchapter. 8 Under the new plan -- or, first, here's 9 what the rule would look like, General Audit Rule. 10 It's in the format that's -- you know, Paragraphs (a), 11 (b), (c) and (d) with the information under each one 12 of those categories. Under the new format that we 13 propose, if you go to Chapter 402, you have Subchapter 14 G, Compliance and Enforcement. And when you go to 15 Subchapter G for Compliance and Enforcement, under 16 that, what are currently the rules that are under that 17 subchapter, will change those to divisions. And 18 Division 9 will be the Compliance Audit feature. And 19 when you go to Division 9, then the rules would be 20 broken out based on paragraphs or the sections. 21 Now, one thing that we have discussed is 22 the final format of these rules may change depending 23 on some of the rules that are conducive to this type 24 of a format and others that are not. We may just have 25 one rule number with several questions in an A-B-C 0048 1 format, but at least at this -- in this reference 2 here, if someone wants to, for example, find out "What 3 is a compliance audit," they would just check on "What 4 is a compliance audit" and it would bring up what the 5 compliance audit function is. It's a formal 6 examination to determine whether or not bingo is being 7 conducted in accordance with the act and rules. 8 And if they have another question -- for 9 example, if they want to know "What information do I 10 need to provide," they would click on that question 11 there and then come up with what information they need 12 to provide for the audits such as the Books and 13 Records Requirements. They'll also indicate that they 14 will be provided with a notification letter that will 15 include the same list of required records, a 16 questionnaire that needs to be filled out, and then, 17 of course, during the audit, the auditor would request 18 other records or information, if necessary, and 19 finalize the field work. 20 This format is one that, like I said and 21 like Ms. Melvin has indicated, is one that we feel 22 that would help with our regulatory objective that 23 we've, you know, started utilizing since September and 24 that we're, you know, trying to conduct our regulatory 25 requirements in a fair, consistent manner to the 0049 1 organizations and developing clear regulatory 2 requirements in an open environment to encourage some 3 sort of two-way communication, and I believe the 4 question-and-answer format does offer that type of 5 two-way communication. 6 We do know that there are some hurdles 7 that we have to overcome as it relates to the 8 Secretary of State and our Legal Services Division. 9 We're still working very close with General Counsel 10 and her staff on what the final process will be in 11 developing these rules, but we feel that some rules 12 are very conducive to this type of question-and-answer 13 format; other rules are not. And, you know, by no 14 means are we saying that all the rules have to fall 15 under this format. Additionally, we're not making any 16 implication that our current rules are not very clear 17 and concise. We're just trying to provide a better 18 product that we feel most of the organizations and our 19 customers will find easier to understand. 20 And with that, I'll be glad to answer 21 any questions. 22 CHAIRMAN COX: Ms. Kiplin, you're 23 obviously deeply involved in the rulemaking process. 24 And while we're talking here about an audit finding 25 that Catherine addressed to Bingo, certainly it's 0050 1 relevant to what we're doing with the Lottery side as 2 well. How do you see this and how do you think we 3 should be incorporating it in the work that we do on 4 the Lottery side -- or perhaps you're already doing 5 that. 6 MS. KIPLIN: Thank you. I -- we've had 7 an opportunity to discuss the concept of plain 8 language, and I think it's always good to try to look 9 at your rules and see if there's a way that you can 10 improve the language to where it's clear, it's 11 concise, it's easily understandable by all that are 12 involved in that particular rule and what it means. 13 We've had the opportunity to discuss 14 the -- I guess the push/pull or the inherent tension 15 on simplicity but also making sure that you've got 16 enough of the rule -- enough language so that people 17 under -- who are reading it who are being regulated 18 understand what they're being required to do and that 19 there is -- there is no confusion on what that 20 activity is and what the enforcement of that activity 21 will be. 22 I think where we've landed on a 23 consensus is that we'll need to evaluate the 24 particular format -- the question-and-answer format as 25 it relates to each subject matter of a rule -- some 0051 1 may be more conducive than others to that format -- 2 and then the other issue is "How far do you actually 3 drill down into a rule that's an existing rule and 4 then create multiple rules out of that?" So I think 5 we'll keep it in mind as we go forward. 6 In terms of its applicability throughout 7 the agency's rules, I can certainly see that -- the 8 applicability on all agency rules, but I think the 9 underdriver really isn't necessary in the 10 question-and-answer format so much as it is in making 11 sure that rules are written in a manner in which 12 they're easy to understand but yet still enforceable. 13 CHAIRMAN COX: Okay. And, Catherine, 14 this may not be a fair question and I know you'll tell 15 me if it isn't. Had you been addressing the 16 rulemaking process of the Texas Lottery as opposed to 17 Charitable Bingo, would you have had the same 18 observation or are the rules that we on the Lottery 19 side use different from the rules that we on the Bingo 20 side use in any meaningful way? 21 MS. MELVIN: Well, good question. I can 22 say that I've only looked at the Lottery Commission 23 rules probably in two instances. One, obviously, 24 related to the Bingo Division audit that we conducted 25 in looking at the licensees' obligations to comply 0052 1 with our requirements, but in a review related to the 2 Lotto Texas game, we looked at some rules in that 3 audit also. 4 I will say that at that time I did have 5 questions as to clarity related to that game, and I 6 think since then changes were made. So, true, the 7 objective of the more recent audit wasn't clarity of 8 rules or the rulemaking process, but what I did see 9 was the result and the impact. And in looking at the 10 staff's interpretations of existing rules and the 11 licensees' understanding of existing rules, I saw some 12 confusion and some conflict as to the implementation 13 of that, and so that took us back to, "Okay. Can we 14 examine the rules and look at it with fresh eyes and 15 see if there's a better way to lay out our 16 requirements?" 17 CHAIRMAN COX: Okay. Ms. Kiplin, do you 18 see any significant difference between the kinds of 19 rules that we're talking about in Bingo and the kinds 20 of rules we have in Lottery? I'm thinking perhaps 21 more of the Bingo rules relate to people -- to third 22 parties, regulated groups, beneficiary charities, et 23 cetera, whereas perhaps in the Lottery side most of 24 them relate to what our people and our subcontractors 25 are required to do. 0053 1 MS. KIPLIN: I think the rules on the 2 Bingo side are clearly all regulatory. By that I mean 3 they are the -- the audience are our licensees. It's 4 a regulated activity. That's what it is. 5 On the Lottery side, in terms of the 6 rules, there are different subchapters and there are 7 different audiences intended for those subchapters. 8 We do license our retailers; so we do have what would 9 be the more traditional, regulatory-focused rules. We 10 also have the game rules and we do -- we do, in fact, 11 have rules on -- that do relate to vendors in terms of 12 procurements. 13 I will say that it's pretty timely to 14 have this discussion, because every four years, the 15 agency has to -- an adoption of a rule, the agency has 16 to undergo a rule review, and so we'll be kicking off 17 that program and certainly be keeping this in mind as 18 we go through the program. And that's on all agency 19 rules. 20 CHAIRMAN COX: Phil, anything else on 21 this? 22 MR. SANDERSON: No, sir. 23 CHAIRMAN COX: Catherine? 24 MS. MELVIN: No, sir. 25 COMMISSIONER CLOWE: Mr. Chairman, I may 0054 1 have a statement in regard to these subjects later, 2 but I do not have it at this time. 3 CHAIRMAN COX: Okay. Good. Thank you 4 very much. 5 MS. MELVIN: Thank you. 6 AGENDA ITEM NO. V 7 CHAIRMAN COX: That brings us to Item V, 8 Report by the Charitable Bingo Operations Director and 9 possible discussion and/or action on the Charitable 10 Bingo Operation Division's activities. 11 Mr. Sanderson. 12 MR. SANDERSON: Commissioners, in your 13 notebook is the report on activities of the Bingo 14 Division. I'd like to update you on one of the 15 staffing sections there, the Licensing Services 16 Department. The vacancy for data entry clerk, the 17 offer was extended and the individual has accepted and 18 they will start on May the 29th. One other thing is, 19 the BAC meeting, as previously mentioned, is 20 tentatively scheduled for July 17th. They moved this 21 meeting up from their regularly scheduled meeting that 22 was scheduled for August the 2nd in order to have time 23 to review some of the nominations for the BAC 24 nomination process. And then the next page is the 25 Weekly Activity Report of Bingo activities as it 0055 1 relates to the Audit and Accounting and Licensing 2 Service Sections. 3 Another item I'd like to bring to your 4 attention is we are currently beta testing a revised 5 quarterly report for organizations that utilize only a 6 non-annual temporary license. This -- in your 7 notebook is a brochure that we have developed and also 8 a copy of that quarterly report. We've contacted 9 eight organizations that have a temporary license that 10 they were going to play either in the latter part of 11 April or the first part of May and asked that they 12 utilize this report and give us feedback on whether or 13 not it's simpler to fill out and to submit. And one 14 other thing that we've asked is for them to give us 15 some feedback as to whether or not it's easy to 16 understand, the instructions are easy to follow, is it 17 easier to complete and if there's any information that 18 needs to be added to the report or any information 19 that may need to be removed from the report. To date, 20 we have not received any input from these 21 organizations as the returns are not actually due 22 until July the 25th for this quarter. 23 And, also, during the latter portion of 24 this summer, we'll begin testing Phase II of the Bingo 25 Services Center for electronic filing and tax payment 0056 1 of quarterly reports. 2 And that ends my report and I'll be glad 3 to offer any -- answer any questions. 4 CHAIRMAN COX: Thank you, Phil. 5 MR. SANDERSON: Thank you. 6 CHAIRMAN COX: That concludes the Bingo 7 items on our agenda. 8 AGENDA ITEM NO. VI, VII AND VIII 9 CHAIRMAN COX: Item VI, Consideration of 10 and possible discussion and/or action, including 11 adoption, on new Rule 16 TAC, Paragraph 401.316, 12 relating to "Daily 4" on-line games. 13 Sarah, you're going to tell us what you 14 just gave us, I bet. 15 MS. WOELK: Yes, I am. 16 CHAIRMAN COX: Okay. 17 MS. WOELK: I'm Sarah Woelk. I'm the 18 Special Counsel, and this is -- 19 MR. TIRLONI: Good morning, for the 20 record, my name is Robert Tirloni. I am the Products 21 Manager. 22 MS. WOELK: Robert and I have been 23 working together on these rules for a while. 24 First, I would suggest that we take 25 three items together, Items VI, VII and VIII, which 0057 1 are a package of rules. 2 CHAIRMAN COX: Okay. 3 MS. WOELK: And to give you a little 4 history of where we are on these rules, at the 5 December meeting, the staff brought to you a proposed 6 repeal of the current Pick 3 rule, a proposed new Pick 7 3 rule and a proposed rule for a new Daily 4 game. 8 You voted to publish those in the Texas Register. 9 They were published on December 29th. We had a public 10 comment hearing in which there was no public comment. 11 We did get a lot of written comment, mostly from Dawn 12 Nettles, and a lot of helpful suggestions, and so we 13 came back in February with a rule that we proposed to 14 adopt that had a fair number of changes, mostly based 15 on Ms. Nettles' suggestions, but, also, we had changed 16 the name of the add-on features of the game that was 17 originally called "Lucky Sum" and has evolved into 18 "Sum It Up." 19 You chose not to adopt the rules. You 20 chose to leave the proposed repeal of the current Pick 21 3 rule pending but to withdraw the proposed new Pick 3 22 and Daily 4 rules. Those were withdrawn. We came 23 back at the March meeting with new proposed Pick 3 and 24 Pick -- or Daily 4 rules, and those came forward with 25 the changes we'd made at Ms. Nettles' suggestion. 0058 1 When we sent out your notebooks last 2 week, I said we are recommending adopting the 3 published -- proposed and published rules without 4 change, but upon a very, very careful reading at the 5 dentist's office the other day, I realized that one 6 sentence didn't say quite what it needed to say. It 7 talked about purchasing a ticket with 12 advance 8 plays, but it wasn't quite clear that you could do 12 9 day or 12 night, which is the current way Pick 3 is 10 operated, and we had no intention of changing that but 11 the language was not clear. So I've handed you copies 12 of the Pick 3 and the Daily 4 rule. And on the Pick 13 3, I highlighted the change. 14 Originally, it said that we -- it was 15 adopted with no change. Now it says adopted with 16 changes, and then the change, I explain, has to do 17 with making very clear that the possibility of playing 18 12 consecutive plays means -- includes 12 consecutive 19 night or 12 consecutive day, which actually would 20 extend over 24 total plays. 21 So we don't think that that change is 22 the kind of change that requires you to republish; so 23 with that changed language, we are recommending that 24 you vote to repeal the current Pick 3 rule, vote to 25 adopt the proposed new Pick 3 rule and vote to adopt 0059 1 the proposed Daily 4 game rule. 2 And both of us are happy to answer 3 questions. 4 COMMISSIONER CLOWE: I think it would be 5 a good idea, Sarah, for the record, for you to go and 6 do just a little bit more detail about this change 7 that you've explained, if that's possible, so -- 8 MS. WOELK: Sure. 9 COMMISSIONER CLOWE: -- that it's clear 10 on the record -- 11 MS. WOELK: Sure. 12 COMMISSIONER CLOWE: -- that your 13 position is that this is an issue of clarification and 14 not substantive relative to the publishing of the rule 15 and it is not necessary to republish. I think -- 16 MS. WOELK: Okay. I'm happy to do that. 17 The standard rule, as we've discussed 18 before, is that you can adopt a rule with changes as 19 long as those changes aren't -- don't make a material 20 change in the subject matter of the rule and you 21 don't -- you're not reaching to a new audience that 22 wouldn't have been put on notice by the original 23 publication. 24 And in the original Pick 3 rule, it's 25 very -- in the proposal, it was very clear that the 0060 1 game -- the features of the game that were intended to 2 change were identified in the description at the 3 beginning of the proposal and the current Pick 3 game 4 operates with the possibility of 12 -- you can buy 5 tickets and say "I want to play 12 consecutive night 6 draws" or "12 consecutive day draws." 7 Robert and I had been reading our new 8 draft all along that the proposed new language 9 actually said that, but when I read it very carefully 10 and I said, "Robert, we've got to really think through 11 this," I think it doesn't quite capture that. I think 12 it -- it could be read to limit you to just to the 12 13 next drawings. We just wanted to make crystal clear 14 that the game would continue as it had been played and 15 that Daily 4 would have the same possibilities as 16 Daily 3. We don't think that's a material change. 17 The game, as was explained in the preamble, is 18 intended to be played more or less as it was, with the 19 add-on feature, and Daily 4 is intended to be the same 20 play style as Pick 3. 21 Clearly, the audience that needed to be 22 reached is the audiences interested in the fact that 23 we were reconsidering -- we were changing Pick 3 to 24 add a new feature and we are adopting a new game that 25 was similar to the new feature, and I don't think the 0061 1 fact that there was some ambiguous language in the 2 original proposal -- changing that to clear it up and 3 make it very tight, I don't think that's the kind of 4 change that raises an issue to require republication. 5 COMMISSIONER CLOWE: So what you're 6 advising the Commissioners is that this is a matter 7 for clarification and the practice remains the same, 8 the rule remains the same, and the intent is as laid 9 out in the proposed rule change originally for public 10 comment and this is a matter, one might say, of good 11 housekeeping and clarification. Nothing more. 12 MS. WOELK: That was very well put and 13 that's -- I would adopt those words as my own, and I 14 think -- yeah. I think -- Kim and I discussed this at 15 length. I think Kim is in agreement that this is an 16 acceptable change to make in the adopted rule. 17 CHAIRMAN COX: Okay. Sarah, let me just 18 be sure that I understand exactly what we're doing 19 here. I think I'm looking at the version which is in 20 my book, which was the one that you suggested that we 21 clear up. 22 MS. WOELK: Right. 23 CHAIRMAN COX: And I'm looking at the 24 one that you handed us, Item 14 on Page 9, and both of 25 them say "A player may purchase one or more plays for 0062 1 any one or more of the next 12 drawings after the 2 purchase." And the one where you are clearing things 3 up, you have eliminated the period and added "and may 4 purchase up to 12 consecutive night plays or 12 5 consecutive day plays." 6 MS. WOELK: Right, because when we 7 originally said "12 plays after the purchase," you 8 could argue that means the next six days with two 9 plays each, and, therefore, we wanted to make clear, 10 when we said "the next 12 plays," that included the 11 next 12 night plays and the next 12 day plays. 12 CHAIRMAN COX: And I think that the 13 original language would have permitted that, which 14 would seem to me to be the test. 15 MS. WOELK: Yeah. I mean, the test -- 16 there's even more room than that to change. I mean, 17 you are definitely allowed to make changes once you 18 hear comments and think about a proposed rule, but, in 19 this case, I really think it's -- Robert and I really 20 thought we had had it right in the first place and 21 then I started picking at it and I thought "I think 22 that you can debate what that means; so let's make it 23 crystal clear," and that's what we were trying to do. 24 CHAIRMAN COX: Okay. 25 COMMISSIONER CLOWE: I think she's 0063 1 exercising an abundance of caution, and I'm 2 comfortable with it. 3 CHAIRMAN COX: I am, too. 4 COMMISSIONER CLOWE: And if you'd like a 5 motion, I'm prepared. 6 CHAIRMAN COX: Yes, sir. I would like 7 one. 8 COMMISSIONER CLOWE: I move the adoption 9 of the staff recommendation. 10 CHAIRMAN COX: Second. 11 Is there any further discussion? 12 (No response) 13 CHAIRMAN COX: All in favor say "aye." 14 COMMISSIONER CLOWE: "Aye." 15 CHAIRMAN COX: "Aye." 16 Any opposed? 17 (No response) 18 CHAIRMAN COX: Motion passes 2-0. 19 MS. KIPLIN: Mr. Chairman, I'm taking 20 that motion to adopt the staff recommendation to be 21 the staff recommendation to adopt all three 22 rulemakings. 23 CHAIRMAN COX: To adopt two and repeal 24 one. 25 MS. KIPLIN: Okay. 0064 1 CHAIRMAN COX: To adopt Item VI, Daily 4 2 rule; repeal the old Pick 3 rule; and adopt the new 3 Pick 3 rule. 4 MS. KIPLIN: Great. Thank you. I have 5 three orders for you. 6 (Brief Pause) 7 MS. KIPLIN: Thank you, sir. 8 CHAIRMAN COX: Chairman Clowe, 9 remembering my commitment to be considerate of the 10 court reporter, why don't we take about a ten-minute 11 break. 12 COMMISSIONER CLOWE: Yes, sir. 13 (Recess: 10:14 a.m. to 10:26 a.m.) 14 AGENDA ITEM NO. IX 15 CHAIRMAN COX: Let's come back to order. 16 Item IX, Report, possible discussion 17 and/or action, including adoption of amendments, on 18 rule 16 TAC Paragraph 401.302 relating to instant game 19 rules. 20 Ms. Rienstra and Mr. Tirloni again. 21 MR. TIRLONI: Again. 22 MS. RIENSTRA: For the record, Deanne 23 Rienstra, Assistant General Counsel. 24 Commissioners, on March 23rd, 2007, the 25 Commission voted to propose amendments to 16 Texas 0065 1 Administrative Code Section 401.302, Instant Game 2 Rules. The purpose of the amendments is to require 3 that agency procedures initiate the process to close 4 instant ticket games when all top-level prizes have 5 been claimed and to shorten the time from when -- from 6 the beginning of the closing process to the end of 7 sales. 8 Staff recommends adopting these 9 amendments with changes from the text proposed for 10 publication. The changes do not require republication 11 because the changes do not materially alter issues 12 raised in the proposed rule or affect persons other 13 than those previously on notice. The authority for 14 this is a case out of the Supreme Court, Texas 15 Workers' Compensation Commission vs. Patient Advocates 16 of Texas and Allen J. Meril, M.D., found at 136 17 S.W.3rd 643, decided by the Texas Supreme Court in 18 2004. 19 The changes include rewording, quote, 20 "after the 46th day," close quote, to, quote, "within 21 45 days," close quote, so that Subsection (j) conforms 22 with the proposed Texas Lottery Commission Rider 14 to 23 the General Appropriations Act, House Bill 1. This 24 language setting out the contingency requirements had 25 not been received by the agency prior to the March 23 0066 1 Commission Meeting. Thus, with changes, the proposed 2 rule amendments meet the requirements in the proposed 3 Appropriations Rider which makes $3 million in 4 dedicated funds annually contingent upon the adoption 5 of the rule amendments. 6 The rule amendment, as proposed and 7 published, was intended to track the language in 8 legislation filed by Senator Patrick, SB 1200. This 9 bill passed in the Senate and was referred in the 10 House to the Licensing and Administrative Procedures 11 Committee. The committee passed the substituted 12 version with stronger language to prohibit sales after 13 46 days after the Commission initiates procedures to 14 close the game. As of today, staff has amended the 15 game closing procedures which conform to the rule 16 amendments as proposed and as presented to you today. 17 The proposed amendments were published 18 in the April 6th, 2007 issue of the Texas Register. A 19 public comment hearing was held on April 20, 2007. 20 There were no appearances at the comment hearing and 21 no written comments were received during the comment 22 period. The proposed rule amendment is ripe for the 23 Commission's consideration to adopt. 24 The draft presented to you today 25 contains the text that will be submitted to the Texas 0067 1 Register if the Commission votes to adopt the 2 amendments to the rule. The affected Subsection (j) 3 is underlined for your convenience. I'll be happy to 4 answer any questions. 5 COMMISSIONER CLOWE: Would you 6 specifically restate the difference which you are 7 recommending to the Commission for approval in the 8 rule that was published and what you are now 9 proposing? 10 MS. WOELK: Yes, sir. In Subsection 11 (j), Part (1), Subpart Capital (B), it stated "after 12 the 46th day." We have changed that to state "within 13 45 days." 14 COMMISSIONER CLOWE: And you are 15 representing to the Commission that this change is not 16 substantive relative to the rule that was published 17 and the Commissioners approved for publishing at our 18 prior meeting; that, additionally, it tracks the 19 intent of the bill, which you have referred to in your 20 testimony, and that we are clearly within good 21 practice and it is your legal opinion that this 22 offering of rulemaking is legal? 23 MS. WOELK: Yes, sir. 24 COMMISSIONER CLOWE: No further 25 questions. 0068 1 CHAIRMAN COX: Okay. Deanne, let me be 2 sure I understand what we did here. 3 We started with after the 45th -- -6th 4 day because we thought that that's what the Senate 5 bill language was and we wanted to track the Senate 6 bill language. 7 MS. WOELK: Yes, sir, and that is still 8 within the Senate bill language. 9 CHAIRMAN COX: But the appropriations 10 bill contains more restrictive wording, 45 days, which 11 arguably, depending on how you interpret it, is one 12 day earlier. 13 MS. WOELK: Correct. 14 CHAIRMAN COX: So what we're doing here, 15 given that that -- the LAR gives us $6 million over 16 the biennium for extra game closings caused by this 17 rule, making absolutely certain that we're in 18 compliance with the language that appropriates that 19 $6 million. 20 MS. WOELK: Yes, sir. 21 CHAIRMAN COX: Okay. Are you okay with 22 that? 23 COMMISSIONER CLOWE: I'm ready to make a 24 motion. Yes, sir. 25 CHAIRMAN COX: I'd love to have your 0069 1 motion. 2 COMMISSIONER CLOWE: Move the adoption 3 of staff recommendation. 4 CHAIRMAN COX: Second. 5 All in favor say "aye." 6 COMMISSIONER CLOWE: "Aye." 7 CHAIRMAN COX: "Aye." Motion passes 8 2-0. 9 MS. KIPLIN: Mr. Chairman, I have an 10 order. 11 (Brief Pause) 12 CHAIRMAN COX: Chairman Clowe, this is 13 the final item, I think, in the adoption of the 14 recommendations that Professor Busald made to us back 15 at our October meeting. I commented on that at the 16 last meeting and got myself confused and I want to be 17 sure that I have the record clear on that. 18 Professor Busald made eight 19 recommendations. Seven of them related to our 20 advertising practices and one of them related to the 21 closing of games after all the top prizes were gone. 22 Staff initially recommended that we 23 approve five of the seven advertising changes, and you 24 and I asked them to approve the other two as well. 25 The involvement of GTECH in those matters was minimal. 0070 1 The eighth item, which is this item right here, we did 2 not adopt then and ultimately came to see that it was 3 wise to adopt that. 4 The -- on the one hand, I want to thank 5 Professor Busald for taking the time to find out what 6 he determined -- he thought were best practices in 7 advertising, looking at lotteries throughout the 8 country. Secondly, though, I want to encourage our 9 staff and GTECH to be doing the same things that 10 Professor Busald did, to constantly be looking for 11 better ways to do all the things that we do. 12 So I wanted to make that clarification 13 and emphasize that -- my point was: Let's don't wait 14 for the public to bring recommendations to us. Let's 15 have our staff and our contractor out there looking 16 for better ways to do things. 17 COMMISSIONER CLOWE: Thank you, 18 Mr. Chairman. I understand what you said and I 19 appreciate that clarification. I was not quite clear 20 on it myself, and that gives me a full understanding 21 and I appreciate that clarification very much. 22 CHAIRMAN COX: Thank you, sir. 23 AGENDA ITEM NO. X 24 CHAIRMAN COX: Okay. Item X, 25 Consideration of and possible discussion and/or 0071 1 action, including proposal of amendments on Rule 16 2 TAC Section 401.310 relating to Payment of Prize 3 Payments upon Death of Prize Winner. 4 Ms. Rienstra and Ms. Pyka. 5 MS. RIENSTRA: Yes, sir. Again, for the 6 record, Deanne Rienstra, Assistant General Counsel. 7 Commissioners, today, I am presenting 8 proposed rule amendments to 16 Texas Administrative 9 Code 401.310, Payment of Prize Payments Upon Death of 10 Prize Winner. Staff recommends that the Commission 11 vote to publish the proposed amendments to this rule 12 in the Texas Register on June 1, 2007. I have 13 provided you a detailed background memo in your 14 notebook. 15 To summarize, in 1997, the Commission 16 adopted this rule to assist the families of deceased 17 prize winners when the estate tax burden was so great 18 that the only way the estate could pay taxes was to 19 take out a loan or to pay penalty and interest on the 20 estate taxes due. This rule provides that upon 21 receiving a Probate Court order with all of the 22 necessary requirements contained in the rule, the 23 personal representative of the estate of a deceased 24 prize winner could petition the Executive Director to 25 make a lump sum payment of the remaining unassigned 0072 1 prize payments due to the winner. 2 In a recent experience when applying 3 this rule, we found a need to refine and clarify the 4 language and requirements. The amendments make the 5 following primary changes: 6 It rewrites the first section to make it 7 easier to read and apply by dividing it into 8 subsections and clarifying the availability of this 9 option even if a portion of the future prize payments 10 have been assigned to third parties. 11 It requires a more thorough 12 investigation and report to be submitted to the 13 Probate Court by the ad litem regarding the potential 14 interest of unknown heirs, beneficiaries and claimants 15 of the estate, as well as requiring Court approval of 16 the proposed release and indemnification provided to 17 the Commission. 18 It also allows additional language to be 19 requested in the Probate Court order if the Executive 20 Director determines it is needed due to the 21 circumstances in the underlying probate matter. 22 Finally, the proposed amendments remove 23 the current administrative fee since it is not 24 expressly authorized by statute. 25 Therefore, based upon the foregoing, 0073 1 staff recommends the Commission vote to publish the 2 proposed amendments in the Texas Register on June 1st, 3 2007. The public will have 30 days from the date of 4 publication to submit written comments. 5 I will be happy to answer any questions. 6 COMMISSIONER CLOWE: You mentioned a 7 recent experience. How often has this been a problem? 8 MS. RIENSTRA: It hasn't been a problem, 9 but we have had two estates since the rule was adopted 10 file a petition for a lump sum payment. It came about 11 when two estates came to the Commission back in 1996 12 with the problem. One of the estates was able to cash 13 out by Court order and the next two estates followed 14 the rule. One was this past year and one was several 15 years ago. 16 COMMISSIONER CLOWE: And what do other 17 states do in this regard? 18 MS. RIENSTRA: I have not researched 19 that. I'll be glad to if you'd like to know. 20 COMMISSIONER CLOWE: I think that's 21 something that would be a benefit to the 22 Commissioners, that -- regardless of whatever action 23 is taken today, we'd like to know that in regard to 24 best practice concerns. 25 What is the staff opinion about the 0074 1 burden of responsibility this rule puts on the 2 Executive Director if this rule were enacted? 3 MS. RIENSTRA: It's not actually 4 changing his approval. It's just -- the Executive 5 Director has the ability to determine the valuation 6 based on the lower of the net present value. 7 Kathy might be able to address that. 8 MS. PYKA: It would be based on the net 9 present value, which is the lower of the fair market 10 value or the book value. And that portion of the rule 11 has not -- is not being modified in this proposal, but 12 it's clarifying the process within the first 13 paragraph. 14 COMMISSIONER CLOWE: So that's not a 15 judgmental issue? 16 MS. PYKA: No, sir. 17 MS. RIENSTRA: One of the -- the recent 18 case that we had was a situation in which the deceased 19 prize winner did not have a will, had over 20 heirs 20 who were all in Mexico and a common law wife, and 21 there were several issues in the underlying matter 22 that caused us to look at this rule again. 23 MS. KIPLIN: Commissioner Clowe, can I 24 try to address the question that you asked, about what 25 other states do? 0075 1 COMMISSIONER CLOWE: Certainly. 2 MS. KIPLIN: And maybe put some more 3 historical information on the record. 4 This issue actually came to our 5 attention in -- Ms. Rienstra is correct about the 6 timeline, but it actually came to our attention years 7 ago, and it was -- I believe it was in '96, '97, was 8 the time frame, and it had to do with an estate where 9 the only asset -- this is only applicable where 10 there's only one asset in the estate and it's the 11 prize installment stream and also in the situation 12 where it's just -- it's an individual prize winner. 13 In that particular situation, the person 14 had passed away. The estate was subject to the 15 federal estate tax principle where the assets were 16 being taxed and all tax due then, and so the estate 17 was burdened with having to come up with the penalty 18 and interest. 19 COMMISSIONER CLOWE: Okay. I understand 20 the problem. 21 MS. KIPLIN: You understand that. 22 And so that's why the Commission carved 23 out this very narrow exception on the -- and allowed 24 the estate to accelerate. 25 Now, that was before there was a rule. 0076 1 The Commission then directed -- 2 COMMISSIONER CLOWE: So that was 3 practice. It wasn't rule. 4 MS. KIPLIN: Yeah. And the Commission 5 at the same time -- this was the estate of Johnny 6 Brewster. The Commission at the same time directed 7 the staff to begin a rulemaking, and that's -- that 8 was the rulemaking -- the rule in its form and now 9 it's come to you for an opportunity to refine even 10 further based on these current practices. 11 At that time -- 12 COMMISSIONER CLOWE: Okay. Well, she's 13 told us all that. 14 MS. KIPLIN: At that time -- the 15 question was "What do other lotteries do?" 16 COMMISSIONER CLOWE: Okay. 17 MS. KIPLIN: And so, at that time, there 18 was some research that indicated that some of those 19 other lotteries -- there were a few that had carved 20 out a narrow opportunity to allow the estate to cash 21 out these remaining prize payments. In terms of 22 current research, we'll certainly go back and do that, 23 but it was -- a similar question is, "What are other 24 lotteries doing," was at that time. 25 I don't know if that's helpful to you or 0077 1 not. 2 COMMISSIONER CLOWE: That's not any 3 help. 4 MS. KIPLIN: Okay. 5 COMMISSIONER CLOWE: I still want to 6 know -- 7 MS. KIPLIN: Sure. 8 COMMISSIONER CLOWE: -- what other 9 states do to the hope of defining best practice. 10 It sounds like we've looked at it before 11 but we didn't get an answer, and I think we'd like to 12 know what is the best practice as established in 13 consideration of the adoption of this rule. 14 Those are all the questions I have. 15 CHAIRMAN COX: Okay. Would it be your 16 pleasure, then, that we pass on this one this time -- 17 COMMISSIONER CLOWE: No. 18 CHAIRMAN COX: -- and hear that -- 19 COMMISSIONER CLOWE: No. Not at all. I 20 think, if you're amenable, we ought to get this 21 process started and move it along, but I would like 22 this answer to be -- is there a public hearing 23 scheduled on this? 24 MS. RIENSTRA: No, sir, there is not. 25 MS. KIPLIN: There's not, but we can 0078 1 certainly have a public hearing. 2 COMMISSIONER CLOWE: Well, I don't think 3 that's necessary. You know, I just want to be 4 careful. I want to make certain that we're 5 establishing a good policy here that doesn't take us 6 in the wrong direction but in the right direction. I 7 would like to have in the record somewhere along this 8 process what other states do so that the Commissioners 9 can be aware of that. And I think it might be 10 enlightening to the staff to do this as far as 11 identifying the best practice. 12 CHAIRMAN COX: And as you will recall 13 from my previous comments, that's exactly what I'm 14 asking our staff to do, and I think you found a 15 specific application right off the bat. 16 COMMISSIONER CLOWE: I listened to what 17 you said. 18 CHAIRMAN COX: And I think that's 19 totally appropriate. 20 Ms. Nettles would like to comment on 21 this item. 22 Counsel, is that appropriate? 23 MS. KIPLIN: Yes. 24 CHAIRMAN COX: Ms. Nettles, would you 25 like to share your thoughts with us? 0079 1 MS. NETTLES: Good morning, 2 Commissioners. For the record, my name is Dawn 3 Nettles. I'm with the Lotto Report out of Dallas, and 4 I have several comments about this rule. 5 Bobby sent me the draft night before 6 last -- yesterday. I passed it to a number of Lotto 7 Texas winners and I got feedback from them yesterday. 8 I read it and I see a golden opportunity here that I 9 want to make for certain that you-all can consider. 10 First of all, this applies to people who 11 come to collect their winnings in the individual 12 capacity, and I believe that every one of us in this 13 room knows that if you win the Lotto, millions, that, 14 really and truly, you need a lawyer and you need to 15 set up a legal -- either a trust or whatever. 16 I realize the State of Texas cannot 17 tell, if I win the Lottery, for me to do that. Okay? 18 I realize that you cannot control me to that degree. 19 However, given the fact that so many winners winning 20 became disastrous for -- it was not a good thing, and 21 I would say this has happened and occurs over 22 80 percent of the time. 80 percent of the people who 23 win the Lottery actually wish that they hadn't. Okay? 24 That has been a long-time problem. It's 25 being more highly publicized, and I believe that the 0080 1 States and our Federal Government has a moral 2 obligation to take care of the people in these games. 3 So while I realize you may need a 4 rule -- okay -- because this has been a practice, to 5 allow somebody to come in here and to collect in an 6 individual capacity, but I would like to see a change 7 in the future to where you do not allow that, or at 8 least you try your very best to try to take care of 9 the people who do win, for their best interest. 10 What I mean by that is I would like to 11 see it written or I would highly recommend that the 12 State write it into their rules that a person -- if 13 they win the Lottery, that they must see an attorney. 14 They must show proof that they have seen an attorney 15 and received legal advice before they collect their 16 prize, because if you can slow them down -- 17 CHAIRMAN COX: Excuse me. 18 Counsel -- Ms. Kiplin, do you think this 19 testimony is related to Item X? 20 MS. KIPLIN: Well, what I'm hearing 21 Ms. Nettles talk about is claiming a prize in general. 22 This really has to do with an individual prize winner 23 who's passed away where the estate has this one asset. 24 So I don't know what connection -- I'm listening to 25 see how that -- 0081 1 MS. NETTLES: I'm actually going to 2 comment on a couple of things that are wrong with this 3 rule as well, but because this rule has to do with 4 collecting of prizes in an individual capacity, 5 then -- and you perhaps need a rule and you perhaps 6 need these changes -- okay -- because it's been a 7 practice -- people -- you're still paying people that 8 won from 1992. 9 But what I'm seeing is the golden 10 opportunity to where you won't need this rule in years 11 to come, because you need to start protecting the 12 winners, and this is one good way to start. 13 CHAIRMAN COX: Okay. I'm okay with 14 this, Kim, but if you'll let me know if you get 15 uncomfortable -- 16 MS. NETTLES: Okay. 17 CHAIRMAN COX: -- then we'll go from 18 there. 19 MS. NETTLES: Do you-all understand what 20 I'm saying? 21 CHAIRMAN COX: Yes. 22 MS. NETTLES: Okay. I mean, you really 23 do -- if you -- could you sit in my shoes? And 24 you-all do. You just don't talk about it. You don't 25 come in here, maybe, and tell the stories that you 0082 1 really hear, but I talk to these people. They call 2 me. I mean, you just have no idea. And I've said for 3 years that something needs to change, and this is one 4 of them. 5 You can't stop somebody from wanting to 6 collect as an individual, but they need to be 7 protected. And they're not of sound mind when they 8 come here to collect in the first place; so they need 9 to be slowed down. 10 Pertaining to the rule itself -- oh, one 11 of the winners had a suggestion -- and, by the way, 12 the winners that I spoke to totally agree, because it 13 takes an idiot to come in here and collect as an 14 individual, for the tax reasons. Okay? And because 15 should they die. And especially when they die without 16 a will. And I know you've had winners that have died 17 without a will because I'm in touch with those people, 18 too. 19 But at any rate, one of the biggest 20 suggestions that came in yesterday was that at the 21 time a person does come in to collect, if he is 22 married or she is married, that some way or another 23 the spouse needs to sign something, even if the one 24 person is claiming it. And there was very good 25 reasons for that. 0083 1 My objection to the rule is -- and I 2 only read this once; so I'm sure that whenever I 3 reread it that I may find other things, but I realize 4 there will be time to comment. 5 And on Page 5, Paragraph 1, we have a 6 very vague statement that I am totally opposed to 7 where it says, "The net present value lump sum payment 8 to be distributed shall represent the lesser of the 9 Commission's book value or fair market value of that 10 portion of the unsigned future installment payments 11 that are to be paid to the estate, less any applicable 12 taxes or other offsets required by the State Lottery." 13 That "other offsets" bothers me because I think it 14 should be defined very specific what the offsets could 15 be. And I know that you-all know exactly what they 16 are. So I would like to see that not be quite so 17 vague. 18 The other objection I have is on Page 7 19 where it says, in Paragraph 5, that "any interest 20 earned during this period of time shall be kept by the 21 State of Texas." This is an incentive for the Texas 22 Lottery to drag the issue on. And I can cite -- I'm 23 not going to, but I can cite a whole bunch of cases 24 where I allege you-all drag things on, the Texas 25 Lottery does, with regard to paying prizes. 0084 1 I don't think that that's right if it 2 drags on and it can just -- I don't think that's 3 right; so I wanted that on the record. 4 And then Paragraph 7 where it says 5 "Based upon the facts and circumstances of the 6 underlying probate matter, the Commission may require 7 additional language or findings to be set forth in the 8 judicial order," that got my attention because I'm 9 thinking, "Does this mean you-all are telling the 10 Judges what they have to say?" I'm a little concerned 11 about that because that, to me, is another way to kind 12 of sort of drag things on. 13 And I swear I'm not trying to be ugly. 14 CHAIRMAN COX: We understand. 15 MS. NETTLES: Okay? I'm really not, but 16 I -- and I wanted you-all to really think about this 17 and think about what the Texas Lottery can do to 18 protect the citizens of this state when they win, and 19 this right here is a very good start, on this allowing 20 them to collect on an individual capacity without 21 attempting by law or by rule for them to seek counsel 22 prior to coming in here and showing proof that they've 23 done that. 24 This is a very touchy matter. I have -- 25 I realize that the Texas Lottery is not ever supposed 0085 1 to refer a lawyer or financial advisor, and I now 2 understand why, because I have a very large company 3 here in Texas that is -- alleged to me that a winner 4 did come in here and a staff member did refer them, 5 handed them a card underneath the table for them to 6 seek counsel from. I have not investigated this, 7 researched it, but as soon as I heard that story, I 8 knew right then why it was dangerous for any referrals 9 to come out of this agency. The company has told me 10 in no uncertain terms and provided the papers to me. 11 The cost to the winner was just astronomical and 12 totally out of line and they have suggested that there 13 have been kickbacks involved. 14 These are allegations only. I'm sharing 15 with you something that I have. I don't know for sure 16 because I haven't had time to do my research, to study 17 it and to make the calls. So I understand the real 18 fine points of all of this. 19 These winners need to be protected when 20 they win. Winning should be a fantastic experience, 21 not a nightmare, and this right here is a nightmare. 22 CHAIRMAN COX: Ms. Nettles, thank you 23 very much for those comments. I have a couple of 24 things I'd like to say in response. 25 My understanding of our process is that 0086 1 when someone comes to claim a major prize, we advise 2 them to seek professional assistance. 3 Is that correct, Ms. Kiplin? 4 MS. KIPLIN: Yes, we do. 5 CHAIRMAN COX: And my guess is that she 6 would tell me it's going to be unconstitutional to 7 require them to do that. 8 MS. KIPLIN: We'll research that. I 9 think it's a -- it's an inherent tension, in terms of 10 the position of the Lottery winners has been, in the 11 past, it's a property interest. It's their property 12 interest. Is that an unreasonable request that -- or 13 that it's impermissible for you to claim a prize until 14 you can prove that you've sought counsel? I don't see 15 the -- I understand Ms. Nettles has come forward and 16 provided these comments. As it relates to this 17 particular rulemaking, which is on the death -- this 18 rule doesn't even come into play until the death of an 19 individual prize winner -- I don't see the relevance. 20 I think she's making global comments. 21 We'll certainly be glad to go back and look at that if 22 that's the Commission's wish, but I'm afraid that 23 we're getting a little too far afield of -- 24 CHAIRMAN COX: I think it's -- now that 25 it's on the record, I think we should follow that up. 0087 1 MS. KIPLIN: Okay. 2 CHAIRMAN COX: The other thing I would 3 ask you to do, Ms. Nettles, is waste no time in 4 investigating these allegations and bringing them to 5 Ms. Kiplin. I don't want that hanging out there over 6 this Commission on this record for any longer than it 7 has to. Would you please do that for us? 8 MS. NETTLES: Yes, sir. It's one of 9 my -- several issues that I'm working right now. 10 And Kim is right. I mean, I understand 11 this rule is the death. Okay? But I see a golden 12 opportunity to -- 13 CHAIRMAN COX: And we thank you -- 14 MS. NETTLES: -- write it -- 15 CHAIRMAN COX: -- for that. 16 MS. NETTLES: -- into the rule. 17 MS. KIPLIN: If I may, we'll begin a 18 comment period -- 19 CHAIRMAN COX: Let's -- let me ask that 20 we do this a little differently. 21 MS. KIPLIN: Yes, sir. 22 CHAIRMAN COX: I'm persuaded by the 23 importance of Chairman Clowe's suggestion that we 24 explore best practices, and I'd like to see that done 25 before we -- 0088 1 COMMISSIONER CLOWE: Sure. 2 CHAIRMAN COX: -- espouse this rule. So 3 if that's okay -- and, also, please take into account 4 Ms. Nettles' concerns. So, again, let's look at best 5 practices in other states. Let's make this as good as 6 we can make it and bring it back. 7 MS. RIENSTRA: Yes, sir. 8 CHAIRMAN COX: Thank you, Ms. Nettles. 9 MS. NETTLES: Thank you, Commissioner 10 Cox. 11 COMMISSIONER CLOWE: Before we end this 12 subject -- 13 CHAIRMAN COX: Yes, sir. 14 COMMISSIONER CLOWE: -- I'd like a 15 definitive answer from General Counsel. 16 Has the witness made criminal or civil 17 allegations that constitute something this Commission 18 needs to act on? 19 MS. KIPLIN: The information Ms. Nettles 20 has put on the record is pretty broad. I am concerned 21 she used the word "kickback." That does have criminal 22 implications. 23 There's no specific factual information 24 that she has provided this agency for us to be able to 25 undertake our own investigation. There's no time that 0089 1 she's mentioned. There's no -- in connection with the 2 particular winner or activity that she's mentioned, 3 and so I'm concerned that it's so broad and general 4 that -- and I've been listening to the same 5 information, that the agency could undertake any kind 6 of specific fact-finding investigation at this point 7 in time. 8 The internal -- Mr. Chairman, I heard 9 you mention my name. I'd like to be able to confer 10 with the internal auditor and others within the agency 11 on this matter. And if you-all are fine with that, 12 follow up with Ms. Nettles rather than wait for 13 Ms. Nettles to come to us, but initiate reaching out 14 to her and getting whatever information she is 15 comfortable providing us. 16 I just -- I don't know what to do with 17 something that's so general in terms of the 18 allegations that are put on but no specific 19 information to follow up on. 20 COMMISSIONER CLOWE: Well, Mr. Chairman, 21 I'm not comfortable at all with what's happened here. 22 When a sworn witness appears before this Commission 23 and gives sworn testimony that there have been -- I'm 24 not sure whether it's criminal or civil violations of 25 the law, I don't think this Board can sit back and 0090 1 just act like allegations didn't occur. 2 And I think the General Counsel ought to 3 be instructed to pursue this with the sworn witness to 4 make a determination whether there's -- something has 5 occurred and should be turned over to the District 6 Attorney and pursued in a proper manner. We're on the 7 record here. This is sworn testimony. I think it's 8 very serious. 9 CHAIRMAN COX: And I totally agree. And 10 your idea is better than mine. I asked Ms. Nettles to 11 bring it to us as soon as possible. What I hear you 12 asking is for Ms. Kiplin to get with Ms. Nettles and 13 help her bring it to us immediately. 14 COMMISSIONER CLOWE: Or to the District 15 Attorney in the appropriate venue if it's a criminal 16 issue that she has knowledge of. 17 CHAIRMAN COX: Okay. Ms. Kiplin, are 18 you okay with that? 19 MS. KIPLIN: Yes. I will do that. 20 CHAIRMAN COX: Ms. Nettles, are you okay 21 with that? 22 MS. NETTLES: I'm fine with it. 23 CHAIRMAN COX: Great. 24 MS. NETTLES: I have attempted -- 25 CHAIRMAN COX: But I'd really like to 0091 1 get a report by our next meeting on this and get this 2 cleared up. 3 Good. Thank you very much. 4 MS. NETTLES: Thank you. 5 AGENDA ITEM NO. XI 6 CHAIRMAN COX: Item XI, Report, possible 7 discussion and/or action on Lottery sales 8 and revenue, game performance, new game 9 opportunities, market research, advertising, 10 dissemination of prize and game information, 11 and trends. 12 Ms. Pyka, Mr. Tirloni. 13 MS. PYKA: Good morning, Commissioners. 14 My name is Kathy Pyka, Controller of the Lottery 15 Commission. With me, to my right, this morning, is 16 Robert Tirloni, our Products Manager. 17 Our first chart that we have this 18 morning reflects revenue from sales and net revenue to 19 the State through the week ending May 5th of 2007. 20 Total sales through this 36-week period amounted to 21 2.55 billion while estimated net revenue to the State 22 for this period was 648.9 million. Net revenue to the 23 State does reflect a 3.1 percent decrease as compared 24 to the 669.3 million figure for Fiscal Year 2006 25 through the 36th week of sales. Our prize expense as 0092 1 a percentage of sales does reflect a slight decline 2 from what we were in Fiscal Year 2006. 3 Our next slide provides you a summary of 4 the change in sales by game from Fiscal Year 2006 to 5 Fiscal Year 2007. As noted, sales does reflect a 6 3.53 percent decline from Fiscal Year '06 sales. The 7 overall 93.3 million includes a 60.6 million decline, 8 or a little bit over 3 percent on our instant ticket 9 product, and then a 32.7 million decline, or 10 5 percent, for all of our on-line games. 11 And then our next slide -- 12 CHAIRMAN COX: Let's look at that one 13 for just a second, Kathy -- 14 MS. PYKA: Certainly. 15 CHAIRMAN COX: -- if we could. 16 18.95 percent in Mega Millions. Is that 17 jackpot driven? 18 MS. PYKA: That is jackpot driven. As 19 we noted last month, we had several large jackpots 20 during this time period in Fiscal Year 2006. We've 21 not seen the same jackpot level since Fiscal Year 22 2007. 23 CHAIRMAN COX: But even if Mega Millions 24 were flat, we've still got that 60 million up there to 25 overcome in the instant tickets. 0093 1 MS. PYKA: That is correct. 2 CHAIRMAN COX: Okay. Are you-all going 3 to comment at all on what you think that decline is 4 attributable to? 5 MS. PYKA: We're not going to talk 6 specifically about the 3 percent decline, but we will 7 provide an update at the close of the presentation on 8 the new $50 prize point ticket. 9 CHAIRMAN COX: Okay. And I think that 10 would be real helpful because I know that is a 11 positive sign. 12 Do you have any general observations 13 about what that 60 million decline in instants can be 14 attributed to? 15 MR. TIRLONI: Commissioners, for the 16 record, my name is Robert Tirloni. I am the Products 17 Manager for the Commission. 18 I think next month we're going to be 19 seeing some presentations from Drs. Huff and Jarrett 20 and from GTECH who have tried to wrap their arms 21 around the instant ticket sales decline. In terms of 22 our marketing efforts or our game-long schedule, we've 23 changed very little this fiscal year compared to last 24 fiscal year. So we don't have a definitive answer 25 about the $60.6 decline. 0094 1 CHAIRMAN COX: Okay. I heard you say 2 that the McCombs School and GTECH are addressing this 3 and they're going to report to us next month. 4 MR. TIRLONI: That's my understanding. 5 That's what we're on track for. 6 MR. GRIEF: Yes, sir. That is correct. 7 CHAIRMAN COX: Good. 8 MR. GRIEF: And I think what Robert 9 said, that he didn't have any specifics -- I think 10 what he did say was very telling, in that we have not 11 changed our product mix much from year to year. And 12 as long as our products stay the same, as Commissioner 13 Clowe has said many times on the record, interest 14 continues to wane gradually over time. 15 CHAIRMAN COX: And one thing I would say 16 to that, too, is that if we had been changing things 17 in the previous years, getting better, and that was 18 contributing to the increases and now we're at the 19 status quo and it's leveling off, maybe we need to be 20 looking, as I know you are, Gary, at new things, 21 things we can change to keep that growth in place. 22 MR. TIRLONI: Absolutely. 23 CHAIRMAN COX: Did you have something? 24 COMMISSIONER CLOWE: You're exactly 25 right. You're exactly right. Right on target. 0095 1 MS. PYKA: Moving to our next slide, 2 it's not much different from previous months. As we 3 look at our instant ticket sales, they reflect 4 75 percent of our total sales are 1.9 billion; 5 8.3 percent of our sales are 212.1 million from Pick 6 3; followed by 6.5 percent and 166.6 million from 7 Lotto Texas; and then followed by 4.9 percent, 8 124.7 million from our Mega Millions game. 9 And then the next slide provides you the 10 graphical presentation of sales by game, which was the 11 data that we just looked at. 12 And now Robert will move on to discuss 13 sales by prize point. 14 MR. TIRLONI: Commissioners, this next 15 pie chart represents the $1.9 billion we've realized 16 thus far this fiscal year in instant game sales. No 17 major changes. The $5 prize point is our leading 18 prize point, as it has been for quite some time, 19 followed closely by the $2 prize point and then the 20 10. 21 I did want to give you an update, as 22 Kathy mentioned a moment ago. Our $50 game went on 23 sale on May 7th. That's why there's no information on 24 this pie chart, as this went through May 5th. 25 Sales through Saturday, May 12th, which 0096 1 is our weekend date, were 8.68 million, and the week 2 that ended Saturday, May 12th, was the second best 3 instant game sales week that we have realized thus far 4 this fiscal year, and we're attributing that to the 5 initial success of the $50 game that launched in that 6 week. 7 The game is currently available at 8 almost 10,700 retail locations around the state, and, 9 again, we only have about a little over a week's data 10 from that game, but we're pleased with the sales thus 11 far and we will continue to provide you-all updates. 12 And then, of course, next month, all of these charts 13 will be updated to reflect that new prize point and 14 the sales data and the percentages associated with 15 that game. 16 COMMISSIONER CLOWE: How many tickets 17 did you print in that game? 18 MR. TIRLONI: We ordered 3.6 million. 19 COMMISSIONER CLOWE: And what life does 20 that show as an expectancy? 21 MR. TIRLONI: We were thinking that that 22 game was going to potentially be out for almost a 23 year, but if the trend continues that we've seen this 24 first week, it will sell through much more rapidly 25 than that. I believe in the first week we've seen 0097 1 5 percent sell through. So, you know, if that 2 continues at about 5 percent a week, you know, 20 3 weeks, you could have 100 percent. 4 COMMISSIONER CLOWE: Thank you. 5 CHAIRMAN COX: How does the public know 6 about the $50 ticket? 7 MR. TIRLONI: We've had information 8 about it on our website now for a couple of weeks 9 right on the home page. Retailers received all the 10 regular promotional flyers and regular information 11 about it. And, of course, the GTECH sales staff 12 informs retailers about the new games that are coming 13 up. 14 MR. GRIEF: And Mr. Rivera is here, 15 Chairman, if you'd like to hear more about GTECH's 16 efforts in that regard. 17 CHAIRMAN COX: I would. 18 MR. RIVERA: Mr. Chairman, thank you for 19 the opportunity to talk about what GTECH has done in 20 conjunction with your staff in preparing for the $50 21 instant ticket. 22 I would first like to say that there is 23 national attention on how well this game will do 24 simply because Texas is a very large state, and the 25 $50 prize point is a highest it's ever -- not ever, 0098 1 but the state of the size of Texas has deployed. So 2 there is a great deal of interest in the industry as 3 to how we do on this ticket. 4 With respect to what the sales force has 5 done, the preparation for the game started several 6 weeks -- in fact, four weeks before the launch of the 7 game to ensure that the distribution of the game went 8 to the appropriate retailers. And there was a great 9 deal of discussion with your staff as to which 10 retailers would receive the game and the initial 11 distribution. It was important that we -- as we 12 looked at our whole distribution chain, that retailers 13 that could and would sell the product received it 14 while those that might not want to receive the product 15 did not. 16 Our experience now is that after the 17 first week of sales we have retailers who are now 18 requesting additional packs of the game and we also 19 have retailers who didn't receive the game who are now 20 requesting the -- that the game be shipped to them. 21 So we believe that the distribution strategy was 22 appropriate and well thought out and effective in this 23 particular case. 24 The second component of what was done to 25 prepare the retailers was the -- as Robert mentioned, 0099 1 there was point-of-sale material that was distributed 2 and displayed at every store front. Part of an 3 important component of introducing a new game, 4 especially one as important as a $50 -- the first $50 5 prize point, is to ensure that the retailers who are 6 going to receive it knew they were going to receive it 7 and had allocated appropriate space in their 8 dispensers so that when the game arrived there would 9 be an opportunity for the retailer to display the game 10 for the public. 11 CHAIRMAN COX: Is it a bigger ticket 12 than any of the other ones? 13 MR. RIVERA: Yes. 14 MR. TIRLONI: No, sir. It actually fits 15 into all of the existing dispensers. 16 CHAIRMAN COX: Thank you. 17 MR. TIRLONI: It's the same size as our 18 30. 19 MR. RIVERA: But a $30 ticket is larger 20 than a $1 ticket. So in relative scale, it's a bigger 21 ticket. 22 So we ensured that the retailers that 23 were going to receive the game, in fact, had space to 24 receive it. We followed up with a telephone survey 25 with some of our highest-volume retailers to ensure 0100 1 that they had received the game and to answer any 2 questions that they might have with regard to that. 3 We also instituted, at GTECH expense, a 4 sales contest that incented sales representatives to 5 ask retailers to not only receive the game but to 6 activate the game, and that sales contest is in effect 7 now. It will be in effect for the next -- it's a 8 four-week contest; so it will be in effect for the 9 next three weeks. And that has proven very effective 10 in terms of getting the game, getting it displayed and 11 asking retailers to start selling the product. 12 We are doing some follow-on work with 13 respect to the game. We're doing informal surveys to 14 determine player spending habits. We are also 15 following on with retailers to determine what players 16 are saying about the game, what components of it, 17 aspects of it they like, what aspects of it they do 18 not like. And, ultimately, we would like to prepare, 19 in conjunction with your staff, a complete report -- 20 as thorough as we can get under the circumstances, as 21 to what the impact of that $50 game was with respect 22 to our retailers and our players. 23 CHAIRMAN COX: Ramon, are you able to 24 observe anything about the 10,000 or so retailers who 25 took the game versus the 7,000 or so who didn't? 0101 1 MR. RIVERA: In a broad swath, the 2 10,000 retailers who took the game typically sold the 3 $30 ticket. And so we were fairly certain that those 4 retailers were accustomed to handling a higher prize 5 point ticket and had the clientele that would probably 6 purchase a ticket of that -- of that prize point, of 7 the $50 prize point. So on an overall basis, that was 8 the basic criteria. 9 The initial reaction from retailers 10 that -- the other 6,000 retailers who didn't sell the 11 $30 ticket was, "Thank you. We don't necessarily want 12 a game that's that expensive." So -- and we did some 13 field work with respect to how that game was going to 14 be distributed. However, the -- there was a great 15 deal of discussion, as you might imagine. Even though 16 the retailers that didn't receive it, didn't receive 17 it, didn't get the point of sale material, their 18 players were talking about and discussing the game. 19 Not 100 percent, but by and large, they were getting 20 information -- retailers that didn't get the game were 21 getting information about the excitement that the game 22 was generating, and, consequently, we are starting to 23 get orders from that component that did not receive 24 the game. 25 CHAIRMAN COX: So the customers are 0102 1 pulling it through the system. 2 MR. RIVERA: That's correct. 3 MR. TIRLONI: Chairman, could I -- 4 CHAIRMAN COX: Did you want to say 5 something, Robert? 6 MR. TIRLONI: Yeah. I just wanted to 7 add one thing. I spoke to some of Ramon's sales and 8 marketing people yesterday. I think there are about 9 4- to 500 retail locations right now that are part of 10 two chains that are going through a change of 11 ownership, and so that is part of the reason they are 12 not carrying that game, but we have been told that the 13 new owners will be accepting that $50 ticket once the 14 whole process goes through and that change of 15 ownership is complete. So I just wanted to add that 16 to the discussion as well. 17 CHAIRMAN COX: Okay. Now, are our 18 retailers required to pay prizes up to $600 or is that 19 optional for them? 20 MR. TIRLONI: Looking to Kim about the 21 word "require." 22 MS. KIPLIN: I think it -- the statute 23 does not require it. 24 CHAIRMAN COX: So they can sell it -- 25 they can sell it for a debit card; that doesn't put 0103 1 any cash in the till. And then a $500 prize comes out 2 and they've had to keep a bunch of money on hand; so 3 we're not going to require them to take that risk. Is 4 there any kind of encouragement to do that, any 5 incentive to do that? 6 MR. TIRLONI: Absolutely. We always 7 encourage them to pay all of the prizes up to the $600 8 level. What we've typically found -- and Ramon can 9 correct me if I'm wrong, is those retailers that do 10 pay prizes typically have better sales than those that 11 don't. 12 CHAIRMAN COX: Okay. But they don't get 13 paid any incentive to do that. 14 MR. TIRLONI: There's no incentive. 15 There's no bonus or percentage incentive for the 16 retailer to pay the prize. There's no cash-in bonus. 17 CHAIRMAN COX: Okay. Is -- I guess it's 18 obvious that carrying the $50 ticket would require you 19 to keep more money on hand if you're going to pay the 20 winners up to $600. Do you think that's a factor in 21 some of them not taking it? 22 MR. TIRLONI: I don't know if that's a 23 factor. I know that the cost for the $50 pack is 24 $1,000 and I know there are some retailers who have 25 expressed to us -- in some retailer meetings that we 0104 1 have attended, have said that they didn't want that 2 financial liability of having a pack at that value. 3 CHAIRMAN COX: So that would be 20 4 tickets. 5 MR. TIRLONI: There's 20 tickets in the 6 $50 pack. That's correct. 7 CHAIRMAN COX: $30 packs only have 10 8 tickets. Right? 9 MR. TIRLONI: No. The $30 pack has 25 10 tickets; so it's value is $750. 11 CHAIRMAN COX: 750. Okay. 12 MR. GRIEF: Mr. Chairman, to your 13 question -- and I'll let Ramon weigh on this, too. I 14 don't think the payment of prizes is a factor in 15 whether or not they would carry the $50 game. 16 CHAIRMAN COX: Okay. 17 MR. GRIEF: I mean, they're still only 18 focused on prizes less than $600, and, incrementally, 19 that would be a small incremental amount of money they 20 would have to pay out in prizes relative to the rest 21 of their games that they carry. 22 I don't know if Ramon agrees with me. 23 MR. RIVERA: I'll echo -- I'll echo 24 Gary's comments. 25 I believe, by and large, that any 0105 1 reluctance to accept the game is driven by the fact 2 that the retailer may believe that his customer base 3 will not purchase it. And, ultimately, when they 4 activate the game, there will be a liability, whether 5 it's -- within 45 days, that retailer knows they're 6 going to have to pay for that pack. 7 CHAIRMAN COX: So they don't want to 8 step in there, maybe, and be early adopters and run 9 the risk that this game is going to take a year to 10 sell. 11 MR. RIVERA: That's correct. Yes. 12 That's correct, Mr. Chairman. That's really the 13 primary driver. 14 MR. GRIEF: Or they also may be a little 15 gun-shy about the fact that one ticket is worth $50, 16 and the shrinkage risk in their particular store, in 17 their eyes, the perception is they're more at risk 18 from theft -- 19 CHAIRMAN COX: Sure. 20 MR. GRIEF: -- in that regard. 21 CHAIRMAN COX: Thank you very much. 22 MR. RIVERA: Thank you. 23 CHAIRMAN COX: Thank you, Ramon. 24 MR. TIRLONI: Commissioners, that 25 concludes the information we had for you this morning, 0106 1 but we're happy to answer any questions or any 2 additional questions you may have. 3 CHAIRMAN COX: We're done. 4 MR. TIRLONI: Very good. 5 CHAIRMAN COX: Thank you. 6 MR. TIRLONI: Okay. Thank you, sir. 7 AGENDA ITEM NO. XII 8 CHAIRMAN COX: Item XII, Report, 9 possible discussion and/or action on transfers to 10 the State. 11 Ms. Pyka. 12 MS. PYKA: Thank you, Mr. Chairman. For 13 the record, again, my name is Kathy Pyka, Controller 14 for the Lottery Commission. 15 The information that is included under 16 Tab XII for you includes transfers and allocations to 17 the Foundation School Fund and the allocation of 18 unclaimed prizes as of April 2007. Total transfers to 19 the State amounted to 681.6 million through the first 20 eight weeks of Fiscal Year 2007, and this does 21 represent a decline -- a minimal decline from where we 22 were in April of 2006. 23 The second page of your notebook 24 includes a detailed information for the monthly 25 transfers. Of the 681.6 million-dollar transfer to 0107 1 the State, $650.5 million was the amount transferred 2 to the Foundation School Fund, with a balance of 3 31.1 million transferred from unclaimed Lottery 4 prizes. 5 And then the last document in your 6 notebook includes a report of Lottery sales, 7 expenditures and transfers from Fiscal Year 1992 to 8 date. Total cumulative transfers to the Foundation 9 School Fund through April of this year amount to 10 9.3 billion. 11 Commissioners, this concludes my 12 presentation. I'd be happy to answer any questions. 13 CHAIRMAN COX: Thank you, Ms. Pyka. 14 MS. PYKA: Thank you, Commissioners. 15 AGENDA ITEM NO. XIII 16 CHAIRMAN COX: Okay. Item XIII, Report, 17 possible discussion and/or action on the Fiscal Year 18 2008-2009 Legislative Appropriation Request. 19 Ms. Pyka. 20 MS. PYKA: Thank you, Mr. Chairman. 21 Again, Kathy Pyka, Controller for the Lottery 22 Commission. 23 Commissioners, this morning, I provided 24 you a two-page handout which provides you an update on 25 the status of our LAR for Fiscal Year 2008-2009 and 0108 1 includes the update as a result of Conference 2 Committee action on Friday, May the 11th. I'd like to 3 provide you an overview of each of the pending budget 4 items and provide the status of those. 5 First, the budget decrease of $902,000, 6 which was an across-the-board budget decrease, had not 7 been recommended by the House or the Senate, and so it 8 was not something for Conference Committee debate. 9 The budget decrease, which was an administrative 10 reduction of $450,000, the Conference Committee 11 elected to go with the Senate recommendation and did 12 restore that administrative reduction back in our 13 budget. 14 The increase to the exempt position is 15 still pending. The Conference Committee has not taken 16 action on any of the exempt salaries at this point in 17 time. 18 And then the exceptional items that we 19 had requested on capital budget, which was Exceptional 20 Items 4, 5 and 6, there's no action on those. And 21 we'll talk about those in the next item of the 22 budget -- of the Commission Meeting agenda. 23 The next item related to new Rider 701, 24 Lottery Operator Plan B. The House had included 25 recommendation to incorporate this rider in the bill 0109 1 pattern. The Senate did not and the Conference 2 Committee elected to not include the rider in our 3 appropriation bill pattern. And if you'll recall, 4 this was a rider to allow us to ask for 5 transferability between appropriations above the 6 12-1/2 percent transfer limitation, as well as 7 increase our FTEs or capital budget line items should 8 we elect to bring back any of the Lottery operator 9 services. So, again, this was not included in the 10 bill pattern. 11 CHAIRMAN COX: Okay. Gary, do you see 12 that as having any negative impact on us? 13 MR. GRIEF: No, sir. I don't, 14 Mr. Chairman. I believe that that would not preclude 15 us from considering all possible options as we move 16 forward in the procurement process for the next 17 Lottery operator contract and any consultants that 18 might be associated with that contract. 19 CHAIRMAN COX: Okay. Thank you. 20 MS. PYKA: Rider No. 3, Bingo Indirect, 21 this is modifying Rider 3 to allow for funding of all 22 administrative expenses, including bingo. This 23 action -- or this item is still pending Article XI 24 action, and, of course, House Bill 3350 is before 25 State Affairs this morning, and so they're awaiting on 0110 1 movement of that bill before taking action. 2 Rider 3 which -- Rider 13, which 3 provided unspent administrative authority for Fiscal 4 Year '08-'09, the House had included funding of this 5 item. The Senate did not, and they elected to go with 6 the Senate on this item. 7 And then rider -- or the increase to 8 Strategy A.1.7 for instant ticket printing, this rider 9 was the one contingent upon the Commission adopting 10 rules governing the closing of instant ticket games. 11 The Conference Committee elected to go with the Senate 12 on this item and does provide for an additional 13 $3 million of appropriation in each year of the 14 biennium. 15 And, finally, the new rider that was 16 adopted on the House Floor to House Bill 1, which 17 stated that none of the funds appropriated to the TLC 18 could be used for the purpose of exploring, 19 investigating, negotiating, calculating or otherwise 20 taking any action that results in the selling of the 21 Lottery, the Conference Committee did elect to go with 22 the House version of that rider, and that has been 23 placed in our appropriation bill. 24 Commissioners, the conferees still have 25 a number of items to take within Article XI and 0111 1 Article IX related to across-the-board adjustments for 2 FTE's appropriation as well as exempt salaries. So 3 we're still awaiting final action on those items, but 4 I'll be happy to answer any other questions that you 5 might have. 6 CHAIRMAN COX: Thank you, Kathy. 7 Excellent report. 8 AGENDA ITEM NO. XIV 9 CHAIRMAN COX: Item XIV, Report, 10 possible discussion and/or action on Request for 11 additional FY 2007 Rider 2 Capital Budget Authority. 12 Ms. Pyka. 13 MS. PYKA: Thank you. Again, Kathy 14 Pyka, Controller of the Lottery Commission. 15 Commissioners, this morning, I'm seeking 16 your approval to submit a request to the Legislative 17 Budget Board and the Governor's Office of Budget and 18 Planning to exceed the transfer limitation on Fiscal 19 Year 2007 Rider 2, Capital Budget Appropriation 20 Authority. 21 The request in the amount of $479,845 22 would be submitted in accordance with Article IX, 23 Section 6.16(b), Limitation on Expenditures - Capital 24 Budget Authority, and it would be contingent upon us 25 not receiving our capital budget items by the 80th 0112 1 Legislative Session. And as we just noted, they have 2 not recommended funding on the three capital budget 3 items as of now. 4 Article IX, Section 6.16(b) includes the 5 following requirements: It states that request for 6 approval to exceed transfer limitation on capital 7 budget expenditures under Subsection (i) must be 8 submitted by the agency's governing board, must 9 include a minimum of at least -- or the date on which 10 the Board approved the request, a statement justifying 11 the need to exceed the limitation. Third, the source 12 of funds to be used to make the purchase. And then, 13 fourth, an explanation on why the expenditure cannot 14 be deferred. 15 If you were to approve this, the 16 following capital budget items, as submitted 17 originally in our '08-'09 LAR, would be submitted for 18 approval, the first being our hardware and software 19 infrastructure upgrade item of $395,000. This was 20 Exceptional Item No. 4 in the LAR and it would provide 21 us the ability to upgrade our infrastructure software 22 on Commission desktops, upgrade and/or replace 23 existing wide area network and local area network 24 hardware and software and upgrade the Commission's 25 network security device. 0113 1 The second item we'd be asking for is 2 $84,845 for video spectral comparator. This was 3 Exceptional Item 6 in our LAR. And our current 4 in-house forensic lab equipment requires replacement. 5 It's currently not under warranty nor is the software 6 that we're using supported any longer. 7 And then while our LAR included a third 8 item, which was an upgrade to our in-house -- our air 9 conditioning unit, we're not seeking this item in this 10 request simply because we would not have sufficient 11 time to procure it and have it ordered by the end of 12 August of this year. 13 This concludes my presentation. I'll be 14 happy to answer any questions that you might have. 15 COMMISSIONER CLOWE: No questions. 16 CHAIRMAN COX: Kathy, the request to 17 move these capital expenditures into '07 is asking the 18 Governor's Office and the LBB to redirect money that's 19 already there. Is that what we're doing? 20 MS. PYKA: That is exactly right. 21 CHAIRMAN COX: We're just moving it 22 around. We're not asking for new money. 23 MS. PYKA: Current Fiscal Year 2007 24 appropriation would be used and transferred into Rider 25 2, Capital Budget Authority, for these two items. 0114 1 CHAIRMAN COX: Okay. And I believe you 2 told me that this requires Board action. 3 MS. PYKA: It does. 4 CHAIRMAN COX: Okay. I move the 5 adoption of the staff request -- 6 COMMISSIONER CLOWE: Second. 7 CHAIRMAN COX: -- recommendation. 8 All in favor say "aye." 9 "Aye." 10 COMMISSIONER CLOWE: "Aye." 11 CHAIRMAN COX: Passes, 2-0. 12 MS. KIPLIN: Mr. Chairman, I have the 13 original T-bar memo for you-all's initial. 14 MS. PYKA: Thank you. 15 (Brief Pause) 16 AGENDA ITEM NO. XV 17 CHAIRMAN COX: Item XV, Report, possible 18 discussion and/or action on the 80th Legislature. 19 Mr. Haza. 20 I take it Ms. Trevino is with Director 21 Sadberry. 22 MR. HAZA: Yes, sir, Mr. Chairman. I'm 23 Colin Haza from the Governmental Affairs staff 24 substituting for Nelda who is at the Capitol with 25 Director Sadberry. 0115 1 The last day of the regular session is 2 May 28th. At this point in the session, however, the 3 House and Senate have their own internal deadlines 4 that can impact the advancement of bills. We have 5 provided you today with an updated legislative 6 tracking report listing bills filed that have 7 potential impact to the agency. We're tracking a 8 total of 154 bills. I'm going to provide you with the 9 status of just a few of them that may directly impact 10 the Lottery or Charitable Bingo. 11 The first one is House Bill 1156 by 12 Representative Kino Flores. This bill includes some 13 general provisions related to the regulation of Bingo 14 and also includes provisions to streamline the 15 licensing process. This bill was voted out of the 16 House Committee. As you heard from Mr. Fenoglio 17 earlier today, this bill was never scheduled on the 18 House Calendar. 19 House Bill 1179, also by Representative 20 Flores, amends the Lottery Act to remove the agency's 21 exemptions from contracting statutes. This is 22 consistent with one of the recommendations made by the 23 State Auditor's Office in their procurement audit. 24 This bill passed out of the House, and earlier this 25 week, was voted favorably by the Senate State Affairs 0116 1 Committee. 2 House Bill 1180, also by Representative 3 Flores, would change the agency sunset date from 2011 4 to 2009. This bill passed out of the House, was 5 considered in the State Affairs Committee where the 6 bill is still pending. 7 House Bill 2160 by Representative Flores 8 would have eliminated the limitation on the Lottery 9 advertising budget based on the prize payout 10 percentage. Following Floor debate last week, the 11 bill author used a procedural move to cease further 12 consideration of the bill for this session. 13 House Bill 2206 by Representative Pat 14 Haggerty would authorize the use of a card-minding 15 device to display and play a pull-tab ticket. This 16 bill was also voted favorably from the House Licensing 17 Committee, but it was never set on the House Calendar. 18 House Bill 2265, also by Representative 19 Haggerty, relates to prizes awarded in the progressive 20 bingo game. It passed the House, was heard in the 21 Senate State Affairs Committee, and it has been left 22 pending in the committee. 23 House Bill 2739 by Representative Chente 24 Quintanilla would amend the Lottery Act to allow for 25 the sale of Lottery tickets at bars and restaurants. 0117 1 This bill has been voted out of the House and was 2 referred just yesterday evening to the Senate State 3 Affairs Committee. 4 House Bill 3186 by Representative 5 Menendez would authorize poker gaming in the state and 6 would create a poker gaming division at this 7 Commission for regulation of these activities. This 8 bill was voted favorably from the Licensing Committee 9 and was scheduled on the House Calendar, but because 10 it was not taken up prior to an internal House 11 deadline, it cannot move forward this session. 12 House Bill 3350 by Representative 13 Charlie Geren -- we had heard reference to that 14 earlier this morning -- would allow funds from the 15 State Lottery Account to be used for the operation and 16 administration of the Commission, including certain 17 indirect overhead and administrative expenses of the 18 Charitable Bingo Division. The bill passed the House. 19 It was heard this morning in the Senate State Affairs 20 Committee. Executive Director Sadberry testified as a 21 resource witness and he responded to questions. I 22 expect that the committee will vote on this bill 23 before today is over. 24 House Bill 1200 by Senator Patrick, you 25 heard reference to this also earlier today. This bill 0118 1 conforms with what the Commission has just put into 2 practice as it relates to the closing of instant 3 games. The bill has passed the Senate and was voted 4 favorably from the House Licensing Committee. It has 5 not yet been scheduled on the House Calendar. 6 Lastly, Senate Bill 1751 -- I may need 7 to correct the record. I believe I referred to House 8 Bill 1200. That is Senate Bill 1200 by Senator 9 Patrick. 10 Lastly, Senate Bill 1751 by Senator 11 Royce West would authorize the sale of Lottery tickets 12 over the Internet. The bill was heard last month in 13 the Senate State Affairs Committee and is still 14 pending in committee. 15 Kathy Pyka has just provided you with a 16 comprehensive report on the appropriations bill for 17 the next biennium. Once the session has concluded, 18 our division will be working with the other divisions 19 to coordinate the implementation of legislation 20 enacted. 21 This completes our prepared remarks and 22 I'll be happy to answer any questions. 23 CHAIRMAN COX: Excellent report, Colin. 24 Thank You. 25 MR. HAZA: Thank you, sir. 0119 1 AGENDA ITEM NO. XVI 2 CHAIRMAN COX: Item XVI, Report, 3 possible discussion and/or action on the agency's 4 contracts. 5 Mr. Jackson. 6 MR. JACKSON: Good morning, 7 Commissioners. For the record, my name is Tom 8 Jackson. I'm the Purchasing Contracts Manager for the 9 Commission. 10 Commissioners, in your notebook, under 11 Tab No. XVI, is a report on prime contracts that has 12 been updated for your review. I'll be happy to answer 13 any questions you may have. 14 CHAIRMAN COX: No questions, Tom. 15 AGENDA ITEM NO. XVII 16 CHAIRMAN COX: Item XVII, Report, 17 possible discussion and/or action, including 18 extension, on the drawings studio and production 19 services contract. 20 Mr. Jackson. 21 MR. JACKSON: Commissioners, the current 22 contract with M&S Works for the drawing studio and 23 production services expires on August 31st of this 24 year. We're recommending that the Texas Lottery 25 Commission exercise the first renewal option which 0120 1 will cover September 1st through August 31st, 2008. 2 It doesn't require any action on your part. It's just 3 an information to you on that contract. 4 CHAIRMAN COX: Okay. Now, this is one 5 where those services will be expanded to cover the new 6 games. Is that correct? 7 MR. JACKSON: That is correct. 8 CHAIRMAN COX: And there's provision 9 within the contract that you're extending for 10 additional services. 11 MR. JACKSON: We will be discussing that 12 in the next item, but, yes, we will be amending that 13 contract. 14 CHAIRMAN COX: Thank you. Let's take it 15 to the next item. 16 AGENDA ITEM NO. XVIII 17 MR. JACKSON: Okay. Commissioners, 18 earlier today you approved the adoption of the Daily 4 19 on-line game rules -- 20 CHAIRMAN COX: Do I need to call -- let 21 me call this one, Tom -- 22 MR. JACKSON: Okay. 23 CHAIRMAN COX: -- if I may. 24 MR. JACKSON: Sure. 25 CHAIRMAN COX: This is Item XVIII. Is 0121 1 that right? 2 MR. JACKSON: That's correct. 3 CHAIRMAN COX: Okay. Report, possible 4 discussion and/or action, including amendments, on the 5 statistical consulting services, lottery drawings 6 audit services, drawings studio and production 7 services, and/or security systems and services 8 contracts. 9 MR. JACKSON: Yes, sir. Commissioners, 10 earlier today, you approved the adoption of Daily 4 11 on-line game rule. There are four service contracts 12 that may be directly affected by the rule adoption and 13 may need to be amended. Those would be ADT Security 14 Systems; that may include some addition of some 15 cameras, different items for the production of those 16 to show the Daily 4 game. Also, the statistical 17 consulting contract with Randall Eubank probably will 18 not be amended because of the expiration of that 19 contract on August 31st of this year. An RFP has been 20 issued for those services, and so we probably won't 21 have to amend that contract. It depends on timing. 22 CHAIRMAN COX: So that one you've 23 already exercised all the options? 24 MR. JACKSON: Yes. That's correct. 25 CHAIRMAN COX: Okay. 0122 1 MR. JACKSON: The Davila, Bushhorn & 2 Associates, the drawing audit services contract, that 3 also will expire on August 31st. The SAO has 4 delegated authority for us to extend that contract for 5 another year. We have gone back to them to ask if we 6 could extend it for two years. That is pending, but 7 we do have authority to extend it for one more year. 8 And then the third -- the fourth one 9 would be M&S Works, the drawing audit studio and 10 production services that you mentioned earlier. That 11 is one of our prime contracts and we will need to 12 amend that contract. 13 CHAIRMAN COX: Okay. And this is your 14 report? 15 MR. JACKSON: Yes. 16 CHAIRMAN COX: Thank you, Tom. 17 (Brief Pause) 18 CHAIRMAN COX: Does that do it? 19 MR. JACKSON: I'm up again. 20 (Laughter) 21 CHAIRMAN COX: Are you, really? 22 (Laughter) 23 CHAIRMAN COX: Well, now, I got ahead of 24 myself, then, because I read all three of the items 25 that you're on. 0123 1 MR. JACKSON: That's correct, but I will 2 be filling in for Joyce on the HUD report. 3 CHAIRMAN COX: Okay. 4 (Laughter) 5 AGENDA ITEM NO. XIX 6 CHAIRMAN COX: Report and possible 7 discussion and/or action on the agency's HUB program 8 and/or minority business participation, including the 9 agency's Mentor Protege Program. 10 Mr. Jackson. 11 MR. JACKSON: Commissioners, again, for 12 the record, my name is Tom Jackson, Purchasing 13 Contract Manager. Joyce is out on funeral leave 14 today; so I'll be providing the HUB report for Joyce. 15 Due to the timing of the agency's 16 deadline to submit subcontracting reports, which are 17 due by the 10th of each month, the April HUB minority 18 contracting activity report will be provided to you at 19 the next Commission Meeting. At that point, Joyce 20 will continue to provide a monthly report for each 21 Commission notebook so that you will have time to 22 review the information prior to the meeting. The time 23 period covered by each report will be cumulative 24 through the end of the month, two months prior to each 25 meeting. That way, you'll have the time to review it. 0124 1 And the timing of this, due on the 10th, 2 doesn't give her time to get in the report into the 3 notebook and everything; so this will give you a 4 comprehensive report each meeting that you'll have in 5 time to review so she won't have to bring in a report 6 each month and hand it to you the day of the meeting. 7 CHAIRMAN COX: Good. 8 MR. JACKSON: Regarding the agency's 9 Mentor Protege Program, to date, we have four eligible 10 mentors available. Joyce continues to distribute 11 applications to potential proteges and is still 12 receiving responses. 13 Once all of the protege applications 14 have been received and reviewed for eligibility, they 15 will be distributed to the mentor companies, the four 16 that I mentioned previously. Joyce anticipates that 17 this will take place within the next few weeks. And I 18 believe currently we have between eight and ten 19 proteges that have expressed an interest in this. So 20 it's looking very favorable. 21 COMMISSIONER CLOWE: That's good. 22 CHAIRMAN COX: Good. 23 MR. JACKSON: And that's all I have 24 today, but I'll be happy to answer any questions you 25 may have. 0125 1 CHAIRMAN COX: Who are the four mentors? 2 MR. JACKSON: I do not have that 3 information. I'll be happy to get it for you. 4 CHAIRMAN COX: Would you give it to 5 us -- 6 MR. JACKSON: Yes, sir. 7 CHAIRMAN COX: -- next meeting, please? 8 MR. JACKSON: Yes. 9 COMMISSIONER CLOWE: She named those for 10 us -- 11 CHAIRMAN COX: She did. 12 COMMISSIONER CLOWE: -- Mr. Chairman. 13 And I remember GTECH was one and I can't remember the 14 other three, but -- 15 CHAIRMAN COX: Tracey Locke was one, I 16 think. 17 MR. JACKSON: Tracey Locke is one. 18 GTECH is one. I'm not sure who those other two are. 19 I'll be happy to look -- 20 CHAIRMAN COX: Okay, but let's keep 21 those names up there. That's important work and we 22 really appreciate our contractors participating in 23 those things. 24 COMMISSIONER CLOWE: Yes. 25 CHAIRMAN COX: Is that all? 0126 1 MR. JACKSON: That's it for me. 2 CHAIRMAN COX: Okay. Thanks, Tom. 3 AGENDA ITEM NO. XX 4 CHAIRMAN COX: Item XX, Consideration of 5 and possible discussion and/or action on external and 6 internal audits and/or reviews relating to the Texas 7 Lottery Commission and/or on the Internal Audit 8 Department's activities. 9 MS. Melvin. 10 MS. MELVIN: Again, for the record -- 11 COMMISSIONER CLOWE: Before you begin, I 12 want to nitpick a little bit. 13 MS. MELVIN: Yes, sir. 14 COMMISSIONER CLOWE: Mr. Chairman, I 15 don't think it's proper to use a nickname in the 16 publishing of the agenda and I think Catherine is a 17 pretty name and I think it ought to be used in 18 identifying Ms. Melvin. And whoever is responsible 19 for this agenda I wish would observe proper protocol 20 and not use a nickname. 21 MR. GRIEF: We'll take care of that, 22 sir. 23 CHAIRMAN COX: Thank you. 24 CHAIRMAN COX: It's done. 25 COMMISSIONER CLOWE: Ms. Melvin, thank 0127 1 you, ma'am. 2 MS. MELVIN: Thank you, Commissioner. I 3 thought that was a secret nickname I had. 4 (Laughter) 5 MS. MELVIN: For the record, again, my 6 name is Catherine Melvin. I am the Director of the 7 Internal Audit Division. I have no items of update 8 for you at this time, but I'm happy to answer any 9 questions you may have. 10 COMMISSIONER CLOWE: I said my piece. 11 (Laughter) 12 CHAIRMAN COX: Okay. Thank you, 13 Catherine. 14 MS. MELVIN: Thank you. 15 AGENDA ITEM NO. XXI 16 CHAIRMAN COX: Okay. Item XXI, Report, 17 possible discussion and/or action on the Mega Millions 18 game and/or contract. 19 MR. Grief. 20 MR. GRIEF: I have but one item to 21 report to you for Executive Director Sadberry today, 22 Mr. Chairman and Commissioner Clowe, and I have asked 23 Robert Tirloni to make that brief report. 24 MR. TIRLONI: Good morning. Again, 25 Commissioners, again, for the record, my name is 0128 1 Robert Tirloni. I'm the Products Manager for the 2 Commission. Commissioners, Executive Director 3 Sadberry asked that I give you information related to 4 a proposed Mega Millions TV game show. 5 Television producers have approached the 6 California Lottery with a TV game show concept for the 7 Mega Millions party lotteries to consider. At this 8 time, there have been two conference calls with the 9 Mega Millions party lotteries to discuss this concept, 10 and the second of the two conference calls included 11 the television producers. The proposal as it stands 12 at this point in time would draw on the Mega Millions 13 player base to generate contestants for the show and 14 the party lotteries would fund the prizes for the game 15 show through ticket sales. There was discussion that 16 all party lotteries must participate to make the 17 proposal viable. 18 A draft letter of intent will be sent to 19 all party lotteries for their individual review and 20 the proposal will be an agenda item at next month's 21 directors' meeting in Maryland, and that's the -- 22 that's the meeting for the Executive Directors of all 23 the party lotteries. And I believe Executive Director 24 Sadberry is planning to attend that meeting. 25 CHAIRMAN COX: Okay. 0129 1 MR. TIRLONI: And that's the information 2 I have for you at this time. 3 CHAIRMAN COX: Go ahead. 4 COMMISSIONER CLOWE: Counselor, does 5 that fall within our authorization by statute? 6 MS. KIPLIN: In terms of the Mega 7 Millions meeting and the directors' meeting, I think 8 it does. Is that the -- was that the issue? 9 CHAIRMAN COX: Well, if this wasn't 10 Chairman Clowe's question, this is mine. 11 MS. KIPLIN: Okay. 12 CHAIRMAN COX: Do we have statutory 13 authority to play this game? 14 MS. KIPLIN: Oh, you're talking -- I'm 15 sorry, the new game show. 16 CHAIRMAN COX: Uh-huh. 17 MS. KIPLIN: That is something that 18 we're researching right now. The issue for us is 19 trying to obtain enough information about this game 20 show to be able to render that kind of a legal 21 analysis. 22 I think our sense is at this point -- 23 Mr. Marker is in the audience, and certainly I'll rely 24 on him -- that to participate in this game show would 25 require this agency to more likely than not need to 0130 1 amend its rule. It goes back to how this game is 2 going to be played, and I think it's also going to 3 require a contract amendment. 4 So there are quite a few issues that 5 will need to be addressed and be attended to. 6 Obviously, the first one is once we get enough 7 information about how this game is -- game show is to 8 actually work, determine whether we got the legal 9 authority to participate. 10 COMMISSIONER CLOWE: Okay. That's the 11 answer -- thank you, Mr. Chairman -- I was looking 12 for. And, of course, the legal authority is first and 13 foremost. Secondly, the issue of practice is a 14 concern here. And I appreciate the early heads-up. 15 And I my understanding is you've told us what you 16 know. 17 MR. GRIEF: Yes, sir. 18 COMMISSIONER CLOWE: That's not much. 19 MR. GRIEF: That's correct. 20 COMMISSIONER CLOWE: So my sense is that 21 if you examine this further, you'd better be careful 22 about the response in regards to the acceptability of 23 this consideration. And I would think the Executive 24 Director and staff would want to reach out to those 25 people who are responsible for the guidance in this 0131 1 state of this agency beyond the Commissioners and see 2 what the feeling is in regard to this type of a move. 3 This is substantial, is my first 4 reaction, to being involved in a nationally advertised 5 game show relative to a Lottery ticket that's sold 6 within this state. That's a quantum leap beyond what 7 we are currently doing. It's like being involved in 8 "Deal or No Deal" and -- is that the name of that 9 show? 10 CHAIRMAN COX: Yes, it is. 11 COMMISSIONER CLOWE: Okay. My sense, 12 Mr. Chairman, is this is a big deal, and I'm not doing 13 anything other than advising that we need a lot more 14 information and we need to get a sense of what the 15 response would be outside of this agency about this 16 kind of involvement. 17 CHAIRMAN COX: I totally agree with 18 that. 19 MR. GRIEF: My clear sense from 20 Executive Director Sadberry is that he is moving very 21 cautiously and trying to get a thorough understanding 22 of all of the parameters of this game show, how it 23 works, how much it will cost us, how much benefit 24 there might be to be gained. And I feel confident he 25 will touch base with not only the Commission but also 0132 1 those outside the agency who would need to be 2 consulted before he made even the smallest step 3 forward on this. 4 COMMISSIONER CLOWE: Well, you know, 5 Gary, it's an interesting idea and it certainly is 6 something along the lines of product appeal, 7 broadening the marketing aspect, and it's the kind of 8 thing that we should be prepared to deal with and we 9 had a very full and complete discussion about when we 10 joined Mega Millions. We said, "We don't control 11 this. We're one of" -- at that time, I think it was 12 10. Now we're one of -- what is it? 12? 13 (Simultaneous discussion) 14 MR. TIRLONI: There's 12. 15 COMMISSIONER CLOWE: 12. Yeah. And, 16 you know, we don't control those other states. And if 17 they want to do this, we should make an independent 18 decision about what's right for this state, and we 19 have to do that because that's our obligation. It's 20 very different from any other game that we conduct. 21 I'm not saying it's not a good idea for 22 Mega Millions. My question will always be "Is it a 23 good idea for Texas?" And that's where I'll be 24 watching the development of this interesting idea. 25 CHAIRMAN COX: Well said. 0133 1 Gary, is that all on the Mega Millions 2 item? 3 MR. GRIEF: Yes, sir. 4 AGENDA ITEM NO. XXII 5 CHAIRMAN COX: Item XXII, Report, 6 possible discussion and/or action on GTECH 7 Corporation. 8 Mr. Grief. 9 MR. GRIEF: I have nothing to report 10 under that item, Mr. Chairman. 11 CHAIRMAN COX: Okay. Chairman Clowe, 12 with your permission, we might go ahead and take XXV 13 and XXVI -- 14 COMMISSIONER CLOWE: Yes, sir. 15 CHAIRMAN COX: -- before we go into 16 Executive Session. 17 COMMISSIONER CLOWE: Yes, sir. 18 AGENDA ITEM NO. XXV 19 CHAIRMAN COX: Item XXV, Consideration 20 of the status and possible entry of orders. 21 Ms. Joseph. 22 MS. JOSEPH: I'm sorry, but I'm not -- 23 CHAIRMAN COX: Well, here comes -- 24 you're being rescued. 25 MS. JOSEPH: Thank you. 0134 1 (Laughter) 2 MS. KIPLIN: I'm sorry. 3 CHAIRMAN COX: Item XXV, Consideration 4 of the status and possible entry of orders. 5 Ms. Kiplin. 6 MS. KIPLIN: Oh, yes. 7 Thank you, Ms. Joseph. 8 Commissioners, all of these are Lottery 9 retail or revocation cases, and each one of these, the 10 staff is recommending that you revoke the license of 11 the licensee. They're all based on the fact that the 12 money that was due and owing to the Lottery was not 13 available at the time the Lottery swept the account. 14 That's consistent with the Administrative Law Judge's 15 findings and conclusions of law and recommendation, 16 and so the staff does recommend you adopt those 17 orders. 18 COMMISSIONER CLOWE: Move the adoption 19 of the staff recommendation. 20 CHAIRMAN COX: Second. 21 All in favor say "aye." 22 "Aye." 23 COMMISSIONER CLOWE: "Aye." 24 CHAIRMAN COX: Motion passes 2-0. 25 0135 1 AGENDA ITEM NO. XXVI 2 CHAIRMAN COX: Item XXVI, Report by the 3 Executive Director and/or possible discussion and/or 4 action on the agency's operational status, activities 5 relating to the Charitable Bingo Operations Division, 6 agency procedures, and FTE status. 7 Mr. Grief. 8 MR. GRIEF: Commissioners, Mr. Sadberry 9 has asked me to let you know that there are materials 10 in your notebooks under this tab for your review, 11 first regarding the status of agency positions as of 12 May 7, 2007, and the second item that you may find of 13 interest is regarding the TLC ombudsman position. 14 That concludes the report and I would be happy to 15 answer any questions at this time. 16 COMMISSIONER CLOWE: No questions. 17 CHAIRMAN COX: Gary, talk a little bit 18 about the ombudsman position process. 19 MR. GRIEF: Commissioners, Dale 20 Hernandez, who currently serves as the agency 21 ombudsman, had submitted a draft charter and procedure 22 for the ombudsman position. The objective of both of 23 these proposed documents is to more clearly define the 24 ombudsman's role and responsibilities within the 25 organization. That draft was submitted to the 0136 1 Executive Director and he subsequently requested 2 comments regarding those drafts from the Ombudsman 3 Committee. 4 As you know, the ombudsman position has 5 been posted and the HR -- and HR has received several 6 applications for that position. A search committee 7 was put together and has reviewed the ombudsman 8 applications. The search committee is comprised of 9 both internal and external folks in accord with the 10 SAO audit recommendations. Members of that search 11 committee are Beverly Reeves, who is the ombudsman for 12 the Austin Independent School District; John Shaw, who 13 is our own employee relations specialist; and Anthony 14 Sadberry, our Executive Director. And Anthony will be 15 Chairing that committee. 16 And I believe those interviews take 17 place -- 18 MS. MAYS: Thursday. 19 MR. GRIEF: -- Thursday of this week. 20 Tomorrow. 21 COMMISSIONER CLOWE: Mr. Chairman, if I 22 may. 23 CHAIRMAN COX: Go ahead. 24 COMMISSIONER CLOWE: Were there external 25 applications as well as internal? 0137 1 MR. GRIEF: I'd ask Janine Mays, our 2 Director of Human Resources, to come forward and 3 answer that question for you, Commissioner Clowe, if I 4 might. 5 MS. MAYS: Good morning. Janine Mays, 6 HR director. Yes, there was some external applicants 7 that applied for the position. 8 CHAIRMAN COX: Good. Were there 9 internal applicants as well? 10 MS. MAYS: I don't believe -- I believe 11 there was, maybe, one internal applicant, but the 12 majority of them were external. There are two that 13 will be interviewed tomorrow. Three interviews were 14 set up for tomorrow; one has pulled her application 15 and decided that she does not want to be considered at 16 this time. So we have two interviews set up for 17 tomorrow afternoon. 18 CHAIRMAN COX: And this is a half-time 19 position, if I remember correctly. 20 MS. MAYS: Half-time position. Yes. 21 CHAIRMAN COX: Now, Gary, you mentioned 22 an ombudsman committee and you mentioned a search 23 committee. Are those one and the same? 24 MR. GRIEF: I'd have to double-check my 25 facts on that, Mr. Chairman. I'm not certain. 0138 1 Can anyone -- Catherine or -- 2 CHAIRMAN COX: Does anybody know? 3 MR. GRIEF: -- Janine, do either one of 4 you know? 5 MS. MAYS: The search committee is the 6 group that was pulled together strictly for reviewing 7 the applications and making recommendations for 8 hire -- for selection, but the group that Gary is 9 referring to is an internal group that is comprised of 10 myself and Gary, Anthony, and I believe Dale -- 11 right -- is that right -- to review the charter and 12 the procedure. It's an effort to help develop the 13 procedure. 14 CHAIRMAN COX: Okay. So that's an 15 ad hoc committee -- 16 MS. MAYS: Ad hoc. That's a good word 17 for it. 18 CHAIRMAN COX: -- not a standing 19 committee. And then we also have the ad hoc search 20 committee. 21 Okay. I think I understand the process. 22 COMMISSIONER CLOWE: Janine, the 23 Commission has a high level of interest in this 24 position, and we see, as we talked about it with you 25 and Dale in a prior meeting, that this is going to be 0139 1 a way to achieve some of the goals that the State 2 Auditor laid out and we adopted. And I hope that 3 you'll be active in supporting this committee by way 4 of bringing your HR experience and training to bear, 5 and, further, that you will help them with the 6 qualifications of these applicants. And beyond that, 7 when and if a selection is made, that training and 8 effort will go in to helping that person who is 9 appointed to that position. 10 By that I mean that a person who serves 11 as an ombudsman ought to have some specialized 12 training as well as experience, and I would hope that 13 we have the funds to support that training need and 14 see to it that that person is skilled in the method of 15 communication and implementation of these functions. 16 It's just not satisfactory in my mind to reach outside 17 and say, "Okay. You're the ombudsman. Start being an 18 ombudsman." We need to have somebody who really knows 19 what that function is and how to communicate, because, 20 in my mind, it's just not from the person who comes to 21 them. It's equally important what goes beyond and how 22 that word is achieved in implementation and judgmental 23 activities that are involved in that. This is very 24 important. 25 MS. MAYS: Absolutely. In fact, we've 0140 1 had a lot of discussion about the development of the 2 applicant pool and what it looks like, because at the 3 very beginning of the process, we had very few 4 applications. And that could be contributed to the -- 5 well, to part of it being part-time, but some of it 6 being the salary. 7 The good thing is that -- I think I can 8 say this for Dale -- some of her traffic has lessened, 9 but the HR traffic has increased. So that's a good 10 thing. But the reality is -- and this is something 11 that we've been stressing, is that we don't want to 12 just pick someone just for the sake of picking it. We 13 have a concept that was introduced to the agency. 14 Dale has been instrumental in helping people to 15 embrace that concept, and they're doing so. So it 16 might mean that after the interview process tomorrow, 17 that no one in that applicant pool can fit what we're 18 expecting the ombudsman to do, and that's okay. We've 19 completed the process. We've assessed the applicants. 20 And if that's the case, then we'll use what we 21 currently have, because it is working. 22 So -- and Anthony has asked that HR be 23 involved in the process. Lisa Glenn is actually going 24 to be participating tomorrow. Not as a reviewer or a 25 scorer of the interview questions, but to be in there 0141 1 as a resource. 2 COMMISSIONER CLOWE: And I certainly 3 agree with what I think I heard you say, and that is 4 that no choice would be better than a bad choice. 5 MS. MAYS: That's right. Absolutely. 6 COMMISSIONER CLOWE: And, Mr. Chairman, 7 I see this position as critically important, although 8 every position here is important. But it's critically 9 important in the way that we are going to work to 10 improve the attitudes and the commitment level of all 11 of our employees of this agency relative to the 12 results of the survey, which we discussed in a prior 13 meeting. 14 This is sort of like, in my mind, the 15 internal audit position where you touch everybody in 16 the organization perhaps one way or another, and we 17 want a person who is very skilled and knowledgeable, 18 has the right style and technique to achieve the best 19 results. 20 MS. MAYS: And it's a very unique 21 position because it's requiring interfacing with 22 several people, with HR and the complete HR function, 23 but it also reports to the Executive Director. So for 24 that reason, that's why we've encouraged Anthony to 25 participate in all of the rounds involved in 0142 1 developing the position, the actual interview process, 2 and he's doing so, because it is so unique and it does 3 report directly to the ED. So I think that's real 4 important to consider. 5 COMMISSIONER CLOWE: Mr. Chairman, I'd 6 like to make one more comment. 7 I understand the part-time aspect of 8 this. 9 And, Gary, I think it's important that 10 you carry these thoughts back to Director Sadberry, if 11 Chairman Cox agrees. 12 I understand an ombudsman just can't sit 13 around and wait for people to come in. That would not 14 be a good activity. But the part-time aspect of it is 15 a concern relative to, I think, internal and external 16 applications, and I think we need to look at that 17 aspect of it so that we style and create the position 18 to be attractive and beneficial to the agency. 19 And I think the fact that you've reached 20 out to the ombudsman of the school district is an 21 excellent sign. There should be some good information 22 from that individual about how that works in that 23 situation. 24 CHAIRMAN COX: Sure. 25 MS. MAYS: The AISD ombudsman is the 0143 1 first ombudsman for the school district. So she and 2 Dale had quite a bit in common in their 3 responsibilities, because they both created it from 4 the ground up. 5 In developing the posting, I chose to 6 reach out to some ombudsmen within our community, like 7 the ombudsman at Dell Computers who also did the same 8 thing. 9 COMMISSIONER CLOWE: At where? 10 MS. MAYS: Dell Computers. He also was 11 the very first ombudsman and is one for 30-plus 12 thousand employees, as well as Beverly Reeves at AISD. 13 Those are the two resources that we used in developing 14 that, and we discussed in detail part-time versus a 15 whole. 16 The difficult thing for us is that -- 17 what makes this unique is that this is an 18 employer-relations ombudsman. AISD is open to all 19 aspects, public and the issues within the -- within 20 AISD. This one is specific to internal; so that's one 21 of the reasons why we considered part-time, for 22 exactly what you said. The busy time, of course, will 23 be with the development of the surveys that we have, 24 but we didn't want to create a position where, like 25 you said, someone is just sitting there just for the 0144 1 sake of having the name. 2 So one of the things we're looking at 3 is, if there's a person that we select, the time that 4 they will be available so that they can be available 5 across the board for all employees at all times. And 6 because it is a part-time position, that's something 7 that we'll have to work out. The advantage of Dale 8 now is that she is here at all times and she can put 9 that ombudsman hat on during her 8:00 to 5:00 hours. 10 So it is a challenge, but it's something that we can 11 certainly address. 12 COMMISSIONER CLOWE: That's great. I 13 wouldn't want to leave this subject without stressing 14 a basic belief that I have to you, Gary, and I hope 15 you'll communicate it to Director Sadberry. 16 As important as an ombudsman is, the 17 ombudsman is the safety valve or the relief valve when 18 there is a failure to communicate and reach a 19 satisfactory conclusion of the resolution of an issue 20 between parties, and my belief is that it is the 21 primary burden of the leadership of any organization 22 to resolve those issues with employees that report to 23 them. So the establishment and the discussion about 24 the importance of this position doesn't take any 25 responsibility, in my mind, away from leadership in 0145 1 this agency towards communication with employees and 2 resolving issues and giving answers that are 3 straightforward, creditable and meaningful from them 4 to the employee that has an issue. That's where the 5 basic responsibility lies, and we don't want even a 6 shadow of a thought that, "Well, that" -- you know, 7 "You go talk to the ombudsman about that." That's not 8 what we want in this agency. That won't get us the 9 kind of results -- 10 MS. MAYS: And sometimes -- 11 COMMISSIONER CLOWE: -- we're looking 12 for. 13 MS. MAYS: Sometimes, too, those 14 solutions can immediately be resolved -- be given and 15 resolved when they have a very clear answer. It can 16 stop right at that point. Sometimes employees come 17 just for an answer. Not so much for a resolution, but 18 just for a clear and concise answer. 19 COMMISSIONER CLOWE: Thank you. 20 MR. GRIEF: And I'll be sure and pass 21 those comments along. 22 CHAIRMAN COX: And I've got some more 23 I'd like for you to pass along, too, Gary. 24 If I recall, the way we structured the 25 ombudsman position when Dale took it, there was a 0146 1 reporting relationship not only to the Executive 2 Director but to this Board. 3 MR. GRIEF: Reports to the Executive 4 Director -- 5 CHAIRMAN COX: Right. 6 MR. GRIEF: -- with access to the 7 Commission. 8 CHAIRMAN COX: And for that reason, and 9 because it is such an important position, I would like 10 to see that charter, and I would like for Chairman 11 Clowe to see that charter as well. 12 MR. GRIEF: I can give you a little bit 13 more information about the charter. We -- the 14 committee -- I believe it's the ombudsman committee -- 15 met with Dale and discussed that charter. 16 And I don't know if Dale is here today. 17 MS. MAYS: She's actually at an 18 ombudsman meeting this morning. 19 MR. GRIEF: We discussed that with her. 20 And the committee came to the recommendation that I 21 think Dale was acceptable to, to stand down on putting 22 forward that charter at this time. She had built her 23 draft charter on the premise of Dale being in that 24 position; that is, currently reporting to the Internal 25 Audit Director and everything that comes with not 0147 1 being the true ombudsman in the total sense of posting 2 as it stands. Dale was concerned that -- she wanted 3 to be sure that the Commission, Anthony, the person 4 who does come in and take this job knew that she had 5 done quite a bit of work and was on top of developing 6 all the needed procedures and related items relative 7 to the ombudsman position. And so we left it as a 8 draft document that we were going to offer some 9 comments on but that she would ultimately not put 10 forward until the new person comes on and offer it to 11 the new person as a template, if you will, for a 12 charter to be developed at that time based on the 13 person who was ultimately hired into the position. 14 CHAIRMAN COX: I don't have any problem 15 with that process. I reiterate, however, that before 16 that charter is written in stone, I'd like for 17 Chairman Clowe and me to have an opportunity to review 18 that and comment. 19 There are some other aspects of this 20 that I hope will be considered. Physical location is 21 one of these. It's very important that this person 22 have a physical location such that, "Oh, I saw you go" 23 kind of thing, that they be able to do this 24 discreetly. 25 So this is a process, Gary, that I think 0148 1 comes under the leadership rather than management and 2 involves change, and that's the kind of thing that I 3 want us to get involved in. 4 MR. GRIEF: Very good. 5 CHAIRMAN COX: Okay. 6 Okay. Does that -- 7 COMMISSIONER CLOWE: I think -- 8 Mr. Chairman, there may be another -- 9 CHAIRMAN COX: Oh. Catherine, did you 10 have something? 11 MS. MELVIN: Chairman, Catherine Melvin 12 again. 13 You mentioned the charter, and I'm here 14 only to clarify any questions you might have about 15 that charter. I've reviewed that draft charter with 16 Dale, and as Mr. Grief says, there is specific 17 language to the current relationship and 18 organizational placement where Dale resides in 19 Internal Audit, and that is reflected in the current 20 draft of that charter. However, she did quite a bit 21 of work on that charter researching other ombudsmen's 22 charters and found different examples. 23 And the other thing is I believe she 24 tried to style it similar to the Internal Audit 25 charter where it outlines the purpose, the authority, 0149 1 the expectations on both sides related to ensuring a 2 successful ombudsman function, and to that extent, 3 that charter would contain signatures of the Executive 4 Director, the ombudsman and the Commissioners. 5 CHAIRMAN COX: Okay. Good. Thank you 6 for that. 7 COMMISSIONER CLOWE: Thank you, Janine. 8 AGENDA ITEM NO. XXIII 9 CHAIRMAN COX: Okay. I guess we're 10 ready to go into Executive Session. 11 COMMISSIONER CLOWE: Yes, sir. 12 CHAIRMAN COX: Okay. At this time, I 13 move the Texas Lottery Commission go into Executive 14 Session: A, to deliberate the duties and evaluation 15 of the Executive Director, Deputy Executive Director 16 and Internal Audit Director; to deliberate the duties, 17 appointment, and/or employment of the Charitable Bingo 18 Operations Director; to deliberate the duties, 19 appointment, and/or employment of an Acting Charitable 20 Bingo Operations Director; and, to deliberate the 21 duties of the General Counsel pursuant to Section 22 551.074 of the Texas Government Code; 23 B, to receive legal advice regarding 24 pending or contemplated litigation pursuant to Section 25 551.071(1)(A) and/or to receive legal advice regarding 0150 1 settlement offers pursuant to Section 551.071(1)(B) of 2 the Texas Government Code and/or to receive legal 3 advice pursuant to Section 551.071(2) of the Texas 4 Government Code, including but not limited to: 5 Cynthia Suarez v. Texas Lottery 6 Commission; 7 Shelton Charles v. Texas Lottery 8 Commission and Gary Grief; 9 Stephen Martin v. Texas Lottery 10 Commission; 11 First State Bank of DeQueen, et al v. 12 Texas Lottery Commission; 13 Employment law, personnel law, 14 procurement and contract law, evidentiary and 15 procedural law and general government law; 16 Mega Millions game and/or contract. 17 Is there a second? 18 COMMISSIONER CLOWE: Second. 19 CHAIRMAN COX: All in favor say "aye." 20 COMMISSIONER CLOWE: "Aye." 21 CHAIRMAN COX: The vote is 2-0 in 22 favor -- I didn't vote. 23 "Aye." 24 (Laughter) 25 CHAIRMAN COX: The vote is now 2-0 in 0151 1 favor. 2 Texas Lottery Commission will go into 3 Executive Session. The time is 12:08 p.m. Today is 4 May 16, 2007. 5 (Executive Session: 12:08 p.m. to 2:10 6 p.m.) 7 AGENDA ITEM NO. XXIV 8 CHAIRMAN COX: The Texas Lottery 9 Commission is out of Executive Session. The time is 10 2:10 p.m. 11 Is there any action to be taken as a 12 result of Executive Session? 13 I move to appoint and employ Phil 14 Sanderson as the Charitable Bingo Operations Director, 15 effective today, 5/16 of 2007, at an annual salary of 16 $108,000. 17 Is there a second? 18 COMMISSIONER CLOWE: Second. 19 CHAIRMAN COX: All in favor, say "aye." 20 COMMISSIONER CLOWE: "Aye." 21 CHAIRMAN COX: "Aye." The vote is 22 2-0. 23 Is there any other action to be taken as 24 a result of Executive Session? 25 CHAIRMAN COX: If not, let's move to -- 0152 1 COMMISSIONER CLOWE: Mr. Chairman? 2 CHAIRMAN COX: Yes, sir. 3 COMMISSIONER CLOWE: I'd like, at this 4 point in time, to return to an earlier agenda item 5 which I mentioned to you at the time we were 6 discussing it. 7 CHAIRMAN COX: Yes. 8 COMMISSIONER CLOWE: And that's Item IV. 9 And if I may, I'd like to address some remarks to 10 Phil. 11 CHAIRMAN COX: Please. 12 AGENDA ITEM NO. IV 13 COMMISSIONER CLOWE: Phil, 14 congratulations or condolences on your appointment. 15 MR. SANDERSON: Thank you, Commissioner. 16 COMMISSIONER CLOWE: The 17 Commissioners -- and, Mr. Chairman, I don't mean to 18 say anything that you want to say. 19 CHAIRMAN COX: I want you to say what 20 you want to. 21 COMMISSIONER CLOWE: Okay. The 22 Commissioners have watched your performance as acting 23 director since you've assumed those duties, and, 24 obviously, by the vote that's been taken today, the 25 Commissioners feel you are the best qualified 0153 1 candidate of those who applied and those who were 2 interviewed, and we want to congratulate you, in all 3 seriousness, on your appointment. 4 I think it would be proper for us to 5 thank Director Sadberry, as Chair of the Search 6 Committee, and for those members of the Search 7 Committee who served, to bring this to the conclusion 8 that we've reached. So we look forward for you to 9 working with you and having you complete the work that 10 you started as the assistant director. 11 Now, I don't know about your interview 12 with Chairman Cox, but in your interview with me, you 13 made some comments about what you would do if you were 14 appointed director. 15 MR. SANDERSON: Yes, sir. 16 COMMISSIONER CLOWE: And I remember 17 those. And if you made similar comments to the 18 Chairman, I'm sure he remembers them as well. And in 19 the work that you have done since you took over as the 20 assistant director in the area of correcting problems 21 that were discovered and identified by the internal 22 auditor in her report, there has been, in my opinion, 23 substantial progress. Not progress that has reached a 24 conclusion at this point in time; there's more work to 25 be done. 0154 1 My sense is there has been a great deal 2 of attention devoted to form, in that you've laid out 3 these programs for us to improve the auditing and to 4 improve other activities, but, in my opinion, there 5 hasn't been substantive effort or results created in 6 the field of organization and whether or not it is a 7 correct organization and the performance of 8 individuals past and present. 9 Now, it may be that you were hesitant to 10 do that as the assistant director, and if that's the 11 case, I would understand that, because, obviously, the 12 search was going on for the director and your role was 13 not as it is as of today, but I want to tell you by 14 way of congratulations that I, for one -- and the 15 Chairman will speak for himself -- expect now you to 16 re-examine the audit report as it relates to the 17 functions of the Bingo Division. And I would want you 18 to look at the organization to see whether it's the 19 best one or not. And I would want you to look at the 20 performance of individuals and determine what level of 21 performance is being turned in by people who have very 22 important jobs in that division. 23 There is, in that measurement process, 24 the need, in some cases, for assistance, education and 25 training and improvement, and you've instituted some 0155 1 training during this past time. There may be a need 2 for promotion and additional duties for some people. 3 There may be needs for other actions. You have the 4 resources and our HR department and in our internal 5 audit function to call on to help you in that, and you 6 have been doing that. But the message that I want to 7 give you is that you are now the Director, and the 8 Commission looks to you to examine that division and 9 to see where you can make it better. 10 That is one of your job description 11 items, in my mind, as of today. It is not, I hope, to 12 be accepted just the way it is and go forward on an 13 as-is basis. Take a look at everything and see how it 14 can be improved. 15 That's all I wanted to say, 16 Mr. Chairman. 17 CHAIRMAN COX: You know, I -- I'm trying 18 to think of something to add to that, but I really 19 think you covered it perfectly. Phil and I have had 20 some of those discussions. 21 Now, Phil, you've got an opportunity to 22 do the things that you've probably seen needed to be 23 done as you're sitting there as the deputy. You know, 24 you've been sitting in a unique position to observe 25 what's working and what isn't working and to develop 0156 1 your ideas as to what, if you got this opportunity, 2 you would do. 3 And I share Chairman Clowe's suggestion, 4 that you take decisive action and take it quickly, and 5 I -- with the goal that your department is as good as 6 any department in this building and the ultimate goal 7 that your department -- your division is as good as 8 any division in state government. That's what we've 9 set out to do here, and I think, by golly, you've got 10 an excellent opportunity to move things forward. 11 MR. SANDERSON: Thank you, and I look 12 forward to that opportunity. 13 And I have briefly discussed with you, 14 Chairman Cox, the restructuring possibilities. I 15 haven't had the opportunity to discuss those with 16 Chairman Clowe yet, but I'm ready to move forward on 17 those recommendations that we've received from the 18 restructuring work group. And like I said before, I 19 look forward to this opportunity. I appreciate the 20 vote of confidence and I will do what I think I can in 21 the best way I can to make Bingo a very, very 22 efficient and successful division and also to help the 23 Lottery Commission as it regulates Bingo. 24 There are other divisions that we count 25 on, you know, quite heavily, as in legal services and 0157 1 enforcement, as well as, you know, information 2 resources and support -- facility supports, but I 3 really look forward to this opportunity to help move 4 Bingo into the future and with my -- in my mind, the 5 best results that I can achieve. 6 CHAIRMAN COX: Excellent. 7 COMMISSIONER CLOWE: I have a friend who 8 works for another state agency who is in a department 9 or division that just got a new boss. I say "just got 10 a new boss." Two weeks ago, they got a new boss and 11 they haven't met that person yet. 12 I hope that one of the things that you 13 will do first off, maybe this afternoon, is go through 14 the division and ask everyone's help and open yourself 15 to suggestions and to the opportunity to build a team, 16 because the success that you will have will be in no 17 small measure the loyalty and the support that you get 18 from the team that you build. 19 MR. SANDERSON: I will certainly do 20 that. And I think I had mentioned that to both of 21 you-all, I believe, in my interview process. 22 And I would like to thank the Bingo 23 staff for their support in this time that I was 24 serving in the capacity of the assistant director, as 25 well as other agency staff that has assisted myself 0158 1 and other members of the division during this time of 2 transition, so to speak. It's been very useful and 3 beneficial. And like I said, I look forward to 4 working with the other division directors now in this 5 capacity, as well as Executive Director Sadberry and 6 yourself. And I will reach out to the staff, and I -- 7 as I mentioned earlier, I plan on having discussions 8 with staff about their -- having their input on 9 decisions. 10 AGENDA ITEM NO. XXVII 11 CHAIRMAN COX: Okay. Let's see. 12 Item -- the only item remaining is Item No. XXVII, 13 Public Comment. Is there anyone wishing to offer 14 public comment? 15 (No response) 16 AGENDA ITEM NO. XXIII 17 CHAIRMAN COX: Okay. Chairman Clowe, 18 we've never done this before, at least as long as I've 19 been here, but I wonder if you would have the time to 20 go back into Executive Session and deliberate the 21 duties of the Charitable Bingo Division Director. 22 COMMISSIONER CLOWE: Certainly. 23 CHAIRMAN COX: Okay. So, now, Kim, help 24 me with a motion. 25 MS. KIPLIN: You would make a motion -- 0159 1 hang on one second. 2 You would make a motion to deliberate 3 the duties of the Charitable Bingo Operations Director 4 pursuant to Section 551.074 of the Texas Government 5 Code. 6 CHAIRMAN COX: So moved. 7 COMMISSIONER CLOWE: Second. 8 CHAIRMAN COX: All in favor say "aye." 9 COMMISSIONER CLOWE: "Aye." 10 CHAIRMAN COX: "Aye." Motion passes 11 2-0. 12 MS. KIPLIN: And if you will announce 13 the time and the date on the record. 14 CHAIRMAN COX: It is 2:21 p.m. Today is 15 May 16th, 2007. 16 (Executive Session: 2:21 p.m. to 2:30 17 p.m.) 18 AGENDA ITEM NO. XXIV 19 CHAIRMAN COX: The Texas Lottery 20 Commission is out of Executive Session. The time is 21 2:30 p.m. 22 Is there any action to be taken as a 23 result of Executive Session? 24 (No response) 25 0160 1 AGENDA ITEM NO. XXVIII 2 CHAIRMAN COX: If not, this meeting is 3 adjourned. 4 COMMISSIONER CLOWE: Yes, sir. 5 (Proceedings concluded at 2:31 p.m.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0161 1 C E R T I F I C A T E 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, Patricia Gonzalez, a Certified 7 Shorthand Reporter in and for the State of Texas, do 8 hereby certify that the above-mentioned matter 9 occurred as hereinbefore set out. 10 I FURTHER CERTIFY THAT the proceedings 11 of such were reported by me or under my supervision, 12 later reduced to typewritten form under my supervision 13 and control and that the foregoing pages are a full, 14 true and correct transcription of the original notes. 15 IN WITNESS WHEREOF, I have hereunto set 16 my hand and seal this 30th day of May 2007. 17 18 _______________________________ 19 PATRICIA GONZALEZ Certified Shorthand Reporter 20 CSR No. 6367-Expires 12/31/07 21 Firm Certification No. 276 Kennedy Reporting Service, Inc. 22 Cambridge Tower 1801 Lavaca Street, Suite 115 23 Austin, Texas 78701 512.474.2233 24 25