0001 1 2 3 4 * * * * * * * * * * * * * * * * * * * * * * * * * * * 5 6 TEXAS LOTTERY COMMISSION 7 MEETING 8 9 June 30, 2003 10 11 * * * * * * * * * * * * * * * * * * * * * * * * * * * 12 13 14 15 16 17 18 19 BE IT REMEMBERED that the TEXAS LOTTERY 20 COMMISSION meeting was held on the 30th day of June, 21 2003, from 8:30 a.m. to 1:50 p.m., before Shelley N. 22 Jones, RPR, CSR in and for the State of Texas, 23 reported by machine shorthand, at the Texas State 24 Capitol, 1100 North Congress Avenue, Austin, Texas, 25 whereupon the following proceedings were had: 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly Kiplin 8 Executive Director: Mr. Reagan E. Greer 9 Director, Charitable Bingo Operations Divisions: 10 Mr. William L. Atkins 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL 0003 1 INDEX 2 3 Appearances....................................... 2 4 5 AGENDA ITEMS 6 ITEM NUMBER I.................................... 4 ITEM NUMBER II................................... 6 7 ITEM NUMBER III.................................. 10 ITEM NUMBER IV................................... 13 8 ITEM NUMBER V.................................... 20 ITEM NUMBER VI................................... 24 9 ITEM NUMBER VII.................................. 35 ITEM NUMBER VIII................................. 37 10 ITEM NUMBER IX................................... 25 ITEM NUMBER X.................................... 28 11 ITEM NUMBER XI................................... 33 ITEM NUMBER XII.................................. 34 12 ITEM NUMBER XIII................................. 37 ITEM NUMBER XIV.................................. 206 13 14 Reporter's Certification......................... 207 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL 0004 1 June 30, 2003 2 Texas Lottery Commission Meeting 3 CHAIRMAN CLOWE: Good morning. It's 4 8:30 a.m. Today is June the 30th, 2003. I'm going to 5 call the meeting of the Texas Lottery Commission to 6 order. My name is Tom Clowe. 7 On my right is Commissioner Whitaker. 8 On my left is Commissioner Cox. We're happy to be 9 able to convene this meeting today at the State 10 Capitol. And we want to thank Representative Solomons 11 for sponsoring this meeting at this location. 12 The primary purpose of meeting here 13 today is to obtain public input on the issue of multi- 14 jurisdictional lottery games, in addition to the 15 regular business of the commission in its June 16 meeting. We will take up that item at 10:00 a.m. 17 And, as I say, we have other business to conduct 18 between now and then. 19 We want to have certain rules relative 20 to the public input on the subject of multi- 21 jurisdiction participation by this state that we'll 22 take up at 10:00. And I want to just state some 23 general rules we like to follow. 24 We will hear from the two groups that 25 are interested in us joining their games at 10:00 a.m. 0005 1 We've asked them to make their presentations limited 2 to 30 minutes each. Following those presentations, we 3 will call on members of the public who have filed a 4 witness affirmation form in the order in which we 5 received them. We have no idea how many people will 6 be wanting to appear and testify before the commission 7 or give us their input. We may have to ask those 8 individuals to limit their presentation to five 9 minutes as a maximum. 10 We'll be asking if there's written 11 input, not to read it into the record but hand it in 12 for the record. And we're going to be asking those 13 individuals who wish to make comments that have been 14 made prior to their presentations to simply state that 15 they agree with prior input and not repeat. 16 This is a meeting where it is intended 17 that the commission hear input, and the commission 18 will not be in a position to answer questions from 19 individuals who testify. And we do not anticipate the 20 commission taking any action on the subject of the 21 multi-jurisdictional lottery issue at this meeting. 22 I'm going to move on now to the agenda 23 of the commission, and I will be repeating these 24 suggestions for an orderly meeting again when we take 25 up that subject at 10:00 a.m. 0006 1 At this time we'll move to Item II on 2 the agenda which is the report by the Bingo Advisory 3 Committee chairman, possible discussion and/or action 4 regarding the Bingo Advisory Committee's activities 5 during the June 19th, 2003 committee meeting. 6 Good morning, Virginia. How are you? 7 MS. BRACKETT: Good morning. I'm 8 Virginia Brackett, chairman of the Bingo Advisory 9 Committee. We met on June 19th here in Austin at the 10 Texas Lottery Commission. And the committee adopted 11 several things. One, the committee adopted a 12 recommendation of the subcommittee to propose for 13 amendments to the commission for publication in the 14 Texas Registry the following new rules: 402.591, 15 regarding location, verification, inspection; 402.595, 16 tax review. And the committee recommended that 17 comments made at the meeting be considered and 18 resubmitted at the next Bingo Advisory Committee. And 19 we have 402.590, which are the audit rules; the 20 committee heard a second reading on 402.584, relating 21 to the transfer of funds and recommended proposing 22 with amendments to the commission for publication in 23 the Texas Registry -- Register. 24 The committee appointed one 25 subcommittee to consider the two new rules related to 0007 1 the books and records compliance review. The 2 committee had a subcommittee which did a review of the 3 Bingo Bulletin and have made some specific suggestions 4 regarding the content of the Bingo Bulletin that will 5 benefit licensees. And the committee received a 6 report from the subcommittee and adopted their 7 recommendations. The study of alternative styles of 8 bingo not currently available in Texas, the Bingo 9 Advisory Committee will investigate, review, and 10 comment on alternative styles of bingo games that 11 would benefit licensees, including but not limited to 12 linked Bingo, Progressive Bingo, and all the other 13 things on the horizon. 14 Additionally, the Bingo Advisory 15 Committee will stay apprised of any technological 16 changes in the bingo industry. Additionally, at the 17 request of the commission, the committee appointed a 18 subcommittee to study the issue of internet bingo and 19 report back at the next Bingo Advisory Committee 20 meeting. The committee appointed a subcommittee to 21 study these issues and report back. The survey of 22 bingo players and licensees, the Bingo Advisory 23 Committee has initiated a survey and it has been sent 24 out and we have received some back. The committee 25 received an updated report from the subcommittee 0008 1 regarding the time lines for the entry of data and 2 analysis of the information gained from the survey. 3 The -- we also have a review of the web 4 site, the bingo web site. And the subcommittee is to 5 review that and commenting on usability of the 6 charitable bingo web site and offer suggestions for 7 it. The committee received a report from the 8 subcommittee and appointed to address -- the 9 subcommittee appointed to address the issue and 10 adopted their recommendation. 11 The committee also will revise -- work 12 on the revision of the -- well, that comes under 13 several things that we are going to do. I'll bring 14 that up later. Then also there is a subcommittee 15 appointed to consider the impact of smoking ordinances 16 in various cities on halls. And at the request of the 17 commission, the committee wanted the subcommittee to 18 evaluate the impact of smoking ordinances imposed by 19 units of local governments. Additionally, the 20 subcommittee was charged with evaluating halls that 21 elected to go nonsmoking voluntarily. Also, there is 22 an appointment of a subcommittee to study the 23 following areas associated with House Bill 2519, unit 24 accounting, use of net proceeds, registry of workers, 25 gift certificates, and license and issues. 0009 1 Then the things that are future tasked 2 that we're working with are to review the charitable 3 bingo cards, review of and recommended revision of the 4 operations manual. Also, review and comment on 5 charitable bingo gross receipts, charitable 6 distributions, expenses, attendance, and any other 7 area requested by the commission. 8 And then the last thing that we're 9 working on currently is the review of the operator 10 training program. And that will be reviewed and 11 comments made on that. Anything else I can provide 12 for you right now? 13 CHAIRMAN CLOWE: Any questions? 14 When is the next meeting, Virginia? 15 Have you said that? 16 MS. BRACKETT: Oh, I'm sorry. The next 17 meeting is August 21st, tentatively set for August 18 21st. 19 CHAIRMAN CLOWE: Great. Great. Well, 20 the committee is -- is looking very well under your 21 leadership. And I attended a portion of it, and I am 22 very pleased with the work that you're doing. And I 23 know the other commissioners are as well. We look 24 forward to the results that you're producing. 25 CHAIR BRACKETT: Okay. Well, thank you 0010 1 for your comments. And I appreciate your attendance. 2 It means a lot to the members and to everyone in the 3 bingo industry. 4 CHAIRMAN CLOWE: Thank you so much. 5 Next Item Number III is the 6 consideration and possible discussion and/or action on 7 appointing to the Bingo Advisory Committee, Billy 8 Atkins. 9 MR. ATKINS: Mr. Chairman, members, 10 on -- in January of this year, the SSP representative 11 on the Bingo Advisory Committee submitted his 12 resignation to the chair of the BAC. And at the 13 February 28th, 2003 Lottery Commission meeting, I 14 recommended that the commission postpone filling that 15 position due to pending legislation which would have 16 eliminated that position from the advisory committee. 17 The 78th Legislature regular session ended on Monday, 18 June the 2nd, and the proposed legislation which would 19 have eliminated that position from the BAC did not 20 pass. Therefore, the staff is requesting that the 21 commission vote to appoint a SSP representative to the 22 Bingo Advisory Committee. 23 You have in your notebook a nomination 24 form from the only person who is currently licensed in 25 this category. Mrs. Greenfield has been contacted 0011 1 regarding service on the advisory committee, and she 2 has expressed an interest in doing so. And she is 3 present today should you have any questions for her. 4 CHAIRMAN CLOWE: And, Mrs. Greenfield, 5 I think you filled out an appearance form. Did you 6 wish to address the commission at this time? I'm 7 sorry. I don't have the form in front of me. And 8 that's why I have to ask you. 9 MS. GREENFIELD: Thank you, 10 Mr. Chairman. I just wanted to thank you for your 11 consideration and say I'll be looking forward to 12 serving on the committee with your appointment. 13 CHAIRMAN CLOWE: And I think you told 14 me earlier this morning that you had been in the bingo 15 operations business for about ten years. Is 16 that right? 17 MS. GREENFIELD: About 18 years. In 18 1984 I worked in a bingo hall as an usher. 19 CHAIRMAN CLOWE: And you live in 20 Weatherford, Texas. 21 MS. GREENFIELD: Weatherford, Texas, 22 yes. 23 CHAIRMAN CLOWE: Great. Any questions? 24 Thank you, ma'am. 25 MS. GREENFIELD: Thank you. 0012 1 CHAIRMAN CLOWE: Counselor, is it 2 appropriate for a motion at this time? 3 MS. KIPLIN: Yes, it is. 4 CHAIRMAN CLOWE: I move the appointment 5 of Mrs. Patricia Greenfield to the Bingo Advisory 6 Committee for -- what term, Billy, is the 7 representation -- 8 MR. ATKINS: It would be -- I'm sorry, 9 Commissioner. It would the -- the unexpired term of 10 Mr. Tawil. And -- and I don't -- I'm sorry. I don't 11 have the exact dates in front of me. 12 CHAIRMAN CLOWE: For whatever that term 13 is. 14 MR. ATKINS: Yes, sir. 15 CHAIRMAN CLOWE: And she has appeared 16 before the commission this morning and has expressed a 17 willingness and eagerness to serve. And we would 18 appreciate her service. Is there a second? 19 COMMISSIONER WHITAKER: Second. 20 CHAIRMAN CLOWE: All in favor, please 21 say aye. 22 COMMITTEE MEMBERS: Aye. 23 CHAIRMAN CLOWE: Opposed? No. 24 Vote is 3-0 in favor. 25 Thank you, Mrs. Greenfield. 0013 1 The next Item Number IV, the report, 2 possible discussion or -- and/or action on lottery 3 sales and trends. 4 Toni Smith. 5 MS. SMITH: Good morning, 6 Commissioners. For the record, my name is Toni Smith, 7 and I'm marketing director of the Texas Lottery 8 Commission. 9 Commissioners, in front of you, you 10 have updated memos relative to the most current sales 11 for week ending June 20th, 2003. Total fiscal sales 12 to date are 2.6 billion. This is up 5 percent from 13 fiscal year 2002, total sales of 2.5 billion. And we 14 are currently at a weekly sales average of $60.4 15 million. 16 And I would be happy to answer any 17 questions that the commission may have with regard to 18 any of the sales information. 19 CHAIRMAN CLOWE: Toni, there have been 20 some comments that I've heard about the Lotto Texas 21 game since the new format has been adopted, increasing 22 when the jackpot rolls by noon in August, and it's not 23 a large increase. I -- I believe this last roll that 24 occurred Saturday night, it went from 12 to 15 25 million. But at the lower levels, the jackpot is 0014 1 increasing by smaller amounts. Do you have rationale 2 or logic that you could comment on to us about that? 3 MS. SMITH: Well, the two things I can 4 comment on, first of all, is that the rate of players 5 playing the game. And secondly, is the -- the 6 interest rate, it has a big impact on how quickly we 7 can grow the jackpot. It's a little early, in my 8 mind, to judge the game as far as it not working or -- 9 or having any problems with it because the jackpots 10 are rolling, which was the intent of the matrix 11 change. And we definitely have a lot of winners. We 12 have had in -- in several draws, over 99,000 winners 13 in -- in one draw at a time. So I think the game is 14 performing as we expected. With regard to the matrix 15 change, it -- it is because of the lack of players 16 playing right now. But the jackpots are not rolling 17 as quickly as we all would like for them to. 18 CHAIRMAN CLOWE: I think that's one 19 thing that needs to be pointed out, that this is a 20 different game in that there are so many more winners. 21 MS. SMITH: Yes, sir. 22 CHAIRMAN CLOWE: And I think the five 23 out of five without the bonus ball is paying the game, 24 what, 20 and 30 thousand dollars? 25 MS. SMITH: I believe so. 0015 1 MR. GREER: Up to 54 is the highest. 2 CHAIRMAN CLOWE: 54 has been the 3 highest? 54,000. 4 So what we have, if I understand it 5 correctly, is a much larger group of winners winning 6 as little as $3 for one of the five in the bonus ball, 7 if I'm remembering that correctly, and then the five 8 of five without the bonus ball. And that's a larger 9 universe of winners than we've ever had before. 10 MS. SMITH: Yes, sir. 11 CHAIRMAN CLOWE: And that has a 12 financial impact on the commission's ability to build 13 that jackpot even when it rolls. Is that correct? 14 MS. SMITH: Yes, sir. 15 CHAIRMAN CLOWE: Mr. Greer, do you have 16 any further comment on that? 17 MR. GREER: Chairman, obviously this is 18 something that we're monitoring on a daily basis. 19 We're watching the sales trends. I think it backs up 20 the fact that those lower jackpot levels that you 21 mentioned a moment ago, that was the reason that we 22 looked at it, because we wanted to get to the higher 23 jackpot. So we do have less players so it does roll a 24 little more slowly. But we are finding that there is 25 some momentum as the jackpot rates get higher. And 0016 1 certainly those added tiers of winners has proven to 2 be something that people are excited about. So I 3 think what Toni said is we've got to give it some 4 time, and I feel like we're moving in the right 5 direction. We're going to continue to make people 6 aware and educate them on what the new game is all 7 about. 8 CHAIRMAN CLOWE: And, in your opinion, 9 do the players now understand how to play this game, 10 and is it one that's easily understandable? 11 MR. GREER: We're getting there. If 12 I'm out and about, you know, continually, people come 13 up to me and ask questions. And there is still some 14 confusion about the game. I think as time passes, 15 that's getting better. And, you know, really the 16 truth of the matter is it's just a little bit 17 different play slip and that's what they're adjusting 18 to and the different tiers of winning. So it is still 19 a challenge that is out there, and we are doing 20 everything we can to get the word out. 21 CHAIRMAN CLOWE: Very good. Any 22 questions? 23 COMMISSIONER COX: Toni, it's -- it's 24 clearly true that a one-dollar ticket has a lower 25 expected value statistically now than it did under the 0017 1 old matrix. That value is something under .1, which 2 grows as the jackpot grows. I'm sure we took this 3 into account as we estimated what our sales would be. 4 Do you -- is there any evidence that our players 5 either are or are not conscious of the fact that the 6 expected value of those one-dollar tickets on a 7 4 million-dollar jackpot is lower? 8 MS. SMITH: Actually, sir, I'm not 9 aware of any evidence. That's definitely something we 10 can to -- look into as we talk to our players and -- 11 and I think that we can enhance teaching of the 12 players, how to play, produce brochures, and we talk 13 with the sales reps to make sure that the players are 14 aware of how the game is played. But that's 15 definitely a good point that we can probably try to 16 get that information out there and to the players 17 and -- 18 COMMISSIONER COX: Well, again, I -- I 19 think the information is out there. The -- well, 20 they've been told that this is going from one in 24 21 million, if that's what it, to one in 47.6 million. 22 So they know their chances of winning $4 million on a 23 one-dollar ticket are about half what they were 24 before. My question is, have we tempered -- have we 25 tempered our expectations with that same understanding 0018 1 that the players already have, that when we went into 2 this, our idea was to generate larger jackpots which 3 would generate larger sales at those levels. But we 4 must have known that sales at the four million-dollar 5 level and other correspondingly low levels would be 6 lower, because statistically the chances are very 7 different. 8 MS. SMITH: Yes, they are. And we 9 actually even looked at some other jurisdictions and 10 found that when they made this type of matrix change, 11 they also saw a decline in sales. 12 COMMISSIONER COX: Sure. 13 MS. SMITH: I think it was California 14 saw similar patterns in the beginning. And it's 15 through that winner awareness that players go back 16 into the game and the jackpot grows. 17 COMMISSIONER WHITAKER: Very briefly, 18 at the high point of interest rates, versus the 19 interest rates now, if we had the higher rates now, 20 what would the jackpot now be? 21 MR. GREER: It certainly gives you a 22 lot more flexibility. When the -- when the day comes, 23 which is, you know, obviously a number during the week 24 that I have to look up jackpot interest rates, which 25 is a hot topic. And we're looking at interest rates 0019 1 right now at one and a half percent, 1.6 percent, you 2 know, those type issues. And based on -- 3 COMMISSIONER WHITAKER: As opposed -- 4 as opposed to what we had, which was what? 5 MR. GREER: Well, in the twos and 6 threes, you know, out in that range, which is still 7 not a lot. But it has a -- every little percentage 8 point has a major impact on the market. 9 Toni, from your perspective the -- 10 prior to my arrival, what were some of the interest 11 rates that you -- 12 MS. SMITH: Well, I know we -- we did 13 look at them when they really started to fall. And I 14 remember Robert Tirloni, our online product manager, 15 shared with me an area that had the interest rates not 16 dropped just from the previous draw, not even the last 17 week but the previous draw. It made a difference of 18 two or three million dollars in that jackpot roll. 19 And so that -- that -- that small percentage that 20 Mr. Greer referenced can mean several million dollars 21 in just one roll to the next when that interest rate 22 falls that way. But if you would like, we can do an 23 analysis to share in the next meeting. 24 COMMISSIONER WHITAKER: I would 25 actually like to see it. 0020 1 MR. GREER: Great. Yeah. It's been 2 very interesting. Honestly, sometimes fresh eyes to 3 ask a lot of the questions that you've asked. And 4 though it's great that the interest rates are falling, 5 it does have an impact, you know, on what we do too. 6 So we have to take that into consideration. 7 MS. SMITH: And I would be glad to put 8 that together for the commission. 9 CHAIRMAN CLOWE: Thank you, Toni. I 10 believe that's everything. 11 Next Item Number V, report, possible 12 discussion and/or action on the 78th Legislature. 13 Ms. Trevino. 14 MS. TREVINO: Good morning, 15 Commissioners. For the record, I'm Nelda Trevino, 16 director of governmental affairs. 17 As you know, the regular legislative 18 session ended on June the 2nd, and during this regular 19 legislative session, more than 5700 bills were filed. 20 The governmental affairs division tracked 21 approximately 248 bills that we identified had some 22 impact on the agency. Of the bills the agency 23 tracked, over 40 bills have been enacted. We have 24 provided you with updated copies this morning of our 25 legislative tracking report, and I would like to 0021 1 highlight six bills which have been enacted that 2 impact the lottery or charitable bingo. 3 First of all, House Bill 1401 run by 4 Representative Tony Goolsby related to disseminating 5 Amber Alert information through the lottery Amber 6 Alert Network. House Bill 2292 by Representative 7 Arlene Wohlgemuth, this bill relates to health and 8 human services programs. And in this bill, there is a 9 provision related to the allocation of unclaimed 10 lottery prizes. And the funds shall be used in the 11 following priority: First of all, not more than 20 12 million each year may be deposited into the Texas 13 Department of Health's multi-categorical teaching 14 hospital account, which is The University of Texas 15 Medical Branch in Galveston; secondly, not more than 16 five million each year may be appropriated to the 17 Health and Human Services Commission to support 18 inpatient hospital services in hospitals located in 19 the 15 counties that comprise the Texas/Mexico border; 20 and lastly, all the remaining unclaimed prize funds 21 available would go to the general revenue fund and may 22 be appropriated for any purpose determined by the 23 legislature. 24 There's also a provision in this bill 25 repealing sections in the Lottery Act and in the Bingo 0022 1 Enabling Act, requiring the 1-800 compulsive gambling 2 hotline number to be printed on the back of lottery 3 tickets and posted in bingo halls. You may also 4 recall that funding that the lottery has been 5 providing to the Texas Commission on Alcohol and Drug 6 Abuse for the compulsive gambling hot line number was 7 eliminated in the appropriations bill. 8 House Bill 2455 by Representative 9 Warren Chisum related to governmental entities subject 10 to the Sunset Review process. There was a provision 11 added in this bill. And it extends the Lottery 12 Commission Sunset date to 2005. House Bill 2519 by 13 Representative Kino Flores relating to the bingo 14 regulations. House Bill 3459 by Representative 15 Jim Pitts. This is the bill that includes a provision 16 authorizing the Texas Lottery Commission to join the 17 multi-jurisdiction lottery game. And, finally, Senate 18 Bill six by Senator Leticia Van de Putte related to 19 extending the time to claim the lottery prize to 20 certain military personnel. 21 Also, in your notebook you have a 22 document related to the Agency Legislative 23 Implementation Project. And at our last commission 24 meeting I reported that we were in the process of 25 developing an action plan to track and manage the 0023 1 implementation of legislation. This action plan has 2 been developed and Melissa Villasenor in the 3 governmental affairs division is coordinating this 4 agency project. 5 There are over forty bills enacted that 6 have been identified as part of this project. And 7 committees have been formed for each of these bills to 8 identify and initiate any appropriate action required 9 to implement the bill. We have provided you an 10 updated copy of these implementation committee 11 assignments to you this morning. And as it was 12 previously reported, the Bingo Advisory Committee will 13 have some comment as it relates to the implementation 14 of House Bill 2519. We will continue to provide you 15 updated reports on the agency's legislative 16 implementation projects. 17 Also in your notebook, you'll find a 18 formal copy of the agency's bill pattern that's 19 contained in the appropriations bill. And at our last 20 commission meeting I highlighted provisions of our 21 agency's bill pattern and have that if you need a 22 report on this matter. 23 Lastly, the first call special session 24 does begin today, and we will be monitoring the 25 progress of the special session and will keep you 0024 1 apprised of any appropriate developments. 2 That concludes my report, and I will be 3 happy to answer any questions. 4 CHAIRMAN CLOWE: Any questions? Thank 5 you, Nelda. 6 And Representative Goolsby was here 7 earlier. And I had the opportunity to speak to him, 8 but I believe he's left the meeting room now. We 9 thank him for his assistance and involvement in the 10 bill that you mentioned. Thank you. 11 MS. TREVINO: Absolutely. 12 CHAIRMAN CLOWE: Thank you. 13 Next Item Number VI, report possible 14 discussion and/or action on the annual audit services 15 procurement. 16 Andy Marker. 17 MR. MARKER: Good morning, 18 Commissioners. For the record, for the record my name 19 is Andy Marker, assistant general counsel to the Texas 20 Lottery. I'm here to provide an update on the 21 agency's financial services request for proposals. On 22 April 15th, the Texas Lottery issued a request for 23 proposal for financial audit services. The evaluation 24 committee reviewed three proposals that were 25 submitted. And on June 18, the Texas Lottery withdrew 0025 1 the request for proposals and has instead decided to 2 exercise the one-year remaining option on its existing 3 contract with the firm McConnell & Jones. I would be 4 glad to answer any questions. 5 CHAIRMAN CLOWE: Any questions? Thank 6 you. 7 COMMISSIONER WHITAKER: I just want to 8 ask the reasoning for that. 9 MR. MARKER: I'm sorry? 10 COMMISSIONER WHITAKER: What was the 11 reasoning for doing it? 12 MR. MARKER: The committee found one of 13 the proposals to be nonresponsive. Another proposal 14 was from the current vendor. The committee decided 15 the better option was to exercise the remaining option 16 under that contract and to reevaluate the commission's 17 position to go forward. There was some concern with 18 regard to the third proposal being incomplete. 19 COMMISSIONER WHITAKER: Okay. 20 CHAIRMAN CLOWE: Thank you, Andy. And 21 I believe there are no further questions. 22 Next, Commissioners, with your 23 permission, we'll proceed to Item Number IX staying on 24 the public agenda, which is the consideration of the 25 status of possible entry of orders in dockets letters 0026 1 A through J. 2 Counselor, would you help us with that 3 item? 4 MS. KIPLIN: I would be glad to. 5 Commissioners, what you have before you are proposals 6 for decisions for those orders that were issued by the 7 administrative law judge in each of these cases for 8 the State Office of Administrative Hearings. They 9 were all contested case proceedings. Dockets A 10 through G are lottery-related cases. They -- the 11 recommended proposed order is to revoke the license 12 for insufficient funds at the time the lottery swept 13 their accounts. 14 Dockets H through J are bingo cases. 15 In two of those cases, VFW Post 7475 and Southwest -- 16 pardon me -- Oddfellows Lodge 410, those are the 17 recommended license revocations. Each are for failure 18 to timely file required reports and failure to pay 19 prize fees. Southwest volunteer -- volunteer -- 20 pardon me. Southwest Volunteer Fire Department, it is 21 a denial of a license renewal application for multiple 22 violations of the Bingo Enabling Act. 23 Be glad to answer any questions. 24 Ms. Wilkov, assistant general counsel for the Texas 25 Lottery Commission, is here in the event you have any 0027 1 questions on these cases or the proceedings. The 2 staff does recommend that you vote on each of these 3 cases to adopt the administrative law judge's proposal 4 for decision in their order. 5 CHAIRMAN CLOWE: So letters A through G 6 are lottery cases, and H, I, and J are bingo cases. 7 MS. KIPLIN: Yes, that's correct. 8 CHAIRMAN CLOWE: Are there any 9 questions, Commissioners? 10 COMMISSIONER WHITAKER: Is there no one 11 here from any of the parties? Someone from the 12 lottery. 13 MS. WILKOV: I actually had my auditor, 14 Sandra Garcia, who's on the Southwest Volunteer Fire 15 Department, and she's here today. She's looked around 16 and nobody from that organization and nobody from the 17 others, as far as we know. And I am Penny Wilkov, the 18 assistant general counsel for the Texas Lottery 19 Commission. 20 COMMISSIONER WHITAKER: Then I would 21 move to adopt the recommendation of the general 22 counsel of the Lottery Commission. 23 CHAIRMAN CLOWE: Which is the 24 recommendation of the law judge -- 25 COMMISSIONER WHITAKER: In each of 0028 1 those cases. 2 CHAIRMAN CLOWE: -- in each of these. 3 MS. KIPLIN: Yes. You'd be -- you'd be 4 voting to adopt the proposal for decision for a 5 proposed order by the administrative law judge in each 6 of these cases. 7 CHAIRMAN CLOWE: Is there a second? 8 All in favor, please say aye. 9 COMMITTEE MEMBERS: Aye. 10 CHAIRMAN CLOWE: No? 11 The vote is 3-0. 12 We will take a minute now to sign these 13 orders. 14 CHAIRMAN CLOWE: Next, we'll take up 15 Item Number X, report by the executive director and/or 16 possible discussion and/or action on the agency's 17 financial and operational status, FTE status, and 18 retailer forums. Mr. Greer. 19 MR. GREER: Mr. Chairman and 20 Commissioners, good morning. 21 Before you is the financial packet that 22 I would like for you to take a look at in reference to 23 things that have come out of the financial division. 24 There's no further report. And if you have any 25 questions, I would be happy to answer those. Since 0029 1 our last commission meeting, obviously, Nelda touched 2 on a number of these issues. But we've been very 3 focused on the legislative implementation plan, and 4 they've done a great job in getting us focused on that 5 entire issue. There is one matter of importance that 6 I would like to bring to your attention. As you know, 7 we went before the legislative general investigative 8 committee in the House recently. And as a part of 9 that process, I asked that the State auditor's office 10 get involved in that. And I did receive a letter back 11 in reference to that investigation by the State 12 auditor's office, and I'd like to read that into the 13 record. 14 This is from the State auditor 15 Lawrence F. Alwin, CPA: "Dear Mr. Greer, in response 16 to your request I reviewed the Texas Lottery 17 Commission's procurement of the goods and services 18 relating to the new Lotto Texas game. The objective 19 of this review was to determine if these purchases 20 were made in accordance with the state procurement 21 laws and regulations. We found that the lottery's 22 procurement of $139,485 in goods and services related 23 to the new Lotto Texas game complied with State 24 procurement laws and regulations, specifically, the 25 Texas Lottery Act, the Texas Administrative Code, and 0030 1 internal lottery policies. We limited our view to 2 goods and services procured by the board of 3 commission, approved the rule, changed authorizing the 4 new Lotto Texas game. The State Lottery Act, Chapter 5 466, Texas Government Code specifically exempts the 6 lottery from the Texas Building and Procurement 7 Commission's building requirements and thus all 8 procurement authorities with the executive director. 9 As a result, the executive director solely approves 10 all major expenditures and procurement decisions. The 11 act does not require the executive director to have 12 approval from the commission prior to making any 13 procurement. Title 16, Section 401.101 of the Texas 14 Administrative Code sets forth procedures for the 15 lottery to follow in making procurements. These rules 16 were adopted by the commission and mirror the 17 lottery's internal procurement procedures. As with 18 the Act, the code does not require the executive 19 director to have approval from the commission prior to 20 making any procurement. However, the code does 21 require the lottery to take certain actions when 22 seeking competitive solicitations and it specifies 23 requirements for purchases and contract terms. We 24 obtained and reviewed documentation related to the 25 purchases. Based on the results of our review, we 0031 1 conclude that the lottery complied with the code and 2 with commission policies governing procurement 3 procedures. Our conclusions are based on a limited 4 review of the lottery's procurements and have not been 5 subjected to all the tests and confirmations performed 6 in an audit. We appreciate the lottery's cooperation 7 during this review. If have you any questions, 8 contact Mr. Villalpando, audit manager. Signed, Larry 9 F. Alwin, CPA." 10 I was obviously pleased to receive that 11 and, you know, basically have moved to get that 12 information out to the legislative committees that 13 were involved, as well, as the members the State 14 leadership and other individuals that might have 15 interests. We are going to be posting that letter 16 because there was concern from the public. And 17 obviously I'm very focused on the integrity of the 18 lottery and our report sections so that members of the 19 public and anyone who has interest can take a look at 20 that. 21 One of the projects that is really 22 kicking in and I'm really excited about is an 23 e-Strategy room and e-Government. And we are moving 24 forward on that. I know that each of you were 25 interviewed, as well as members of the staff have been 0032 1 interviewed as we move forward on implementing and 2 coming up with a great plan on e-Government and how we 3 can be more responsive in the whole technology arena. 4 A lot of this month has focused around 5 in the multi-jurisdictional interviews, and I spent a 6 lot of time with the press relating to stories about 7 that. And I know we have a number of people here 8 today. Welcome. And we'll be addressing that issue 9 at 10:00 o'clock. 10 I did hold a press conference on June 11 the 11th, announcing the Governor's signing of the HB 12 3459. And I had a very good response from the press, 13 got a lot of good inquiry and questions from those 14 articles and interviews. 15 Today I will go into a little further 16 detail as to how we're going to move forward with that 17 whole process after your remarks, Chairman. I just 18 wanted you to be aware of that. 19 And on a lighter note, there are two 20 significant events that I would like to bring to your 21 attention. One is I wanted to congratulate 22 Commissioner Whitaker specifically for taking office 23 as president of the State Bar of Texas, which is a 24 huge thing, and we are very proud of you for doing 25 that. 0033 1 CHAIRMAN CLOWE: Yeah. 2 MR. GREER: Yeah. And, secondly, July 3 the 1st happens to be an important day in the life of 4 Commissioner Cox. And that's his birthday, and I have 5 a birthday card for him. 6 COMMISSIONER WHITAKER: It's his 7 birthday, but it doesn't tell us the pertinent 8 information. 9 MR. COX: They asked me yesterday -- 10 they asked me yesterday in Sunday school class what 11 birthday this was, and I told them I couldn't 12 remember. 13 MR. GREER: Mr. Chairman, I have no 14 further items at this point. And we'll come back at 15 10:00 o'clock to specify and get into some 16 requirements referencing the multi-jurisdiction. 17 CHAIRMAN CLOWE: Great. And, Reagan, I 18 will call on you when we take up that item at 19 10:00 a.m., as well as members of the public. 20 MR. GREER: Great. Thank you, sir. 21 CHAIRMAN CLOWE: Next then, we'll go to 22 Item Number XI, report by the charitable bingo 23 operations director and possible discussion and/or 24 action on the Charitable Bingo Operations Division's 25 activities. Billy Atkins. 0034 1 MR. ATKINS: Commissioners, I don't 2 have a lot to add to my report. Probably the biggest 3 event recently in the division, as you know, we did 4 implement the new automated Charitable Bingo system 5 this month. And we have begun parallel processing 6 with both the new system and the legacy system. And 7 that is part of the final testing phase where we work 8 to ensure that the new system is functioning properly, 9 since we're doing dual entry and dual processing. It 10 has slowed down some of our processing times a little 11 bit but not that bad, as you can tell from the pending 12 reports, et cetera. And that parallel processing 13 period is due to end on July 18th. 14 CHAIRMAN CLOWE: Very good. Nothing 15 further, Billy? 16 MR. ATKINS: No, sir. 17 CHAIRMAN CLOWE: Any questions? 18 Then next we go to Item Number XII, 19 public comment. Is there anyone wishing to make a 20 comment to the commission on any subject other than 21 the multi-jurisdictional item that we'll take up at 22 10:00 a.m.? 23 Then, Commissioners, with your 24 permission, I'm going to move that we go into 25 executive session. And we have arranged for a 0035 1 conference room in the Capitol building so that the 2 commission may move out of this room, vacate it. 3 There are presenters who will prepare themselves for 4 their presentations at 10:00 a.m. And the commission, 5 once it moves into executive session, I anticipate 6 will return timely to reconvene in this meeting just 7 prior to 10:00 a.m. 8 At this time I move the Texas Lottery 9 Commission go into executive session to deliberate the 10 duties of the executive director and/or deputy 11 executive director, internal auditor director, 12 charitable bingo operations director, general counsel 13 and securities director pursuant to Section 551.074 of 14 the Texas Government Code; to receive legal advise 15 regarding pending or contemplated litigations and/or 16 to receive legal advice pursuant to Section 551.071 17 paren, one, close paren, paren, A, close paren, R, 18 paren, B, close paren, of the Texas Government Code; 19 and/or to receive legal advise pursuant to Section 20 551.071, paren, two, close paren, of the Texas 21 Government Code, including but not limited to TPFV 22 Group, Inc., versus Texas Lottery Commission; Retired 23 Sergeant Majors' Association, et al., versus the Texas 24 Lottery Commission, et al; Scientific Games and 25 Pollard Banknote versus Texas Lottery Commission and 0036 1 Linda Cloud, executive director; Keane versus Texas 2 Lottery Commission; Patsy Henry versus Texas Lottery 3 Commission; Ieric Rogers and Doyle Mitchell, et al.; 4 Sandy Surber versus GTECH Corporation; Linda Cloud 5 versus Mike McKinney, et al.; matter involving the 6 Department of Justice pursuit of a complaint regarding 7 the Americans with Disabilities Act; Rob Kohler versus 8 Texas Lottery Commission; contract regarding the 9 charitable bingo system, employment law, personnel 10 law, procurement and contract law, evidentiary and 11 procedural law and general government law. 12 Is there a second? 13 COMMISSIONER WHITAKER: Second. 14 COMMISSIONER COX: Second. 15 CHAIRMAN CLOWE: All in favor, please 16 say aye. 17 COMMITTEE MEMBERS: Aye. 18 CHAIRMAN CLOWE: No? 19 The vote is 3-0 in favor. 20 The Texas Lottery Commission will go 21 into executive session in the Capitol conference room 22 E1, dot, 018. 23 The time is 9:10 a.m. The day is June 24 30th of 2003. Thank you. 25 (Recess.) 0037 1 CHAIRMAN CLOWE: It's 10:00 a.m., and 2 if everyone would take your seats so we can take up 3 the meeting. The Texas Lottery Commission is out of 4 executive session. The time is 10:00 a.m. Is there 5 any action to be taken as a result of the executive 6 session? 7 If not, we'll move on to Item XIII on 8 the agenda, which is the consideration of entry into a 9 multi-jurisdictional game on behalf of the Texas 10 Lottery Commission. 11 Good morning, again, to those of you 12 who have joined us since we initially convened this 13 meeting at 8:30 a.m. I want to repeat some of the 14 things that I said earlier so that we'll have a good 15 understanding of how this discussion is to proceed. 16 We're privileged to be here at the 17 Capitol this morning, and we want to thank 18 Representative Solomons for sponsoring our use of use 19 of this room. We're in the Capitol in this room for 20 the purpose of broadening the public input on the 21 issue of participation in the multi-jurisdictional 22 lottery game. And we appreciate your attendance here 23 this morning. 24 I want to make a couple of comments 25 about this process. We've asked that everyone who 0038 1 wishes to address the commission fill out a witness 2 affirmation form. And I have those which to this time 3 have been filled out, and that is a total of four. 4 Now, I would like to remind you that if you wish to 5 address the commission and give us your input on this, 6 you must fill out a form and see to it that -- that 7 one of the staff members has it so they can pass it on 8 to me. 9 After the presentations by the two 10 groups that are interested in having Texas join them, 11 we will be taking public comment. We're asking that 12 people limit their comments to five minutes or so. 13 Because we don't have any more than that, we will have 14 to adhere to that strictly. But we would like the 15 comments to be germane and pertinent to the subject of 16 the multi-jurisdictional lottery game. 17 If you have a written comment, please 18 don't read it to the commission; hand it to the 19 reporter and see that it's part of the record. We 20 would like for you not to repeat comments that others 21 have made. If you would, please, simply say that 22 you're in agreement with those items which have been 23 commented on and points made and that you support that 24 position. 25 We are asking that the commission not 0039 1 be asked questions. It's not our position today to 2 respond on this subject. We're simply taking public 3 input, and I don't anticipate any action on behalf of 4 the commission being taken today as a result of this 5 meeting. 6 At this point in time, that concludes 7 the comments that I have on. I want to thank all of 8 you for being here today and tell you that we're eager 9 to hear from these two groups. Their appearance, 10 we've asked each of them to stay within a 30-minute 11 period. And the commissioners, Commissioner Whitaker 12 and Commissioner Cox, are sitting in the front row so 13 they can see the Power Point presentations. I'm going 14 to join them. And then the commission will, at the 15 conclusion of these two groups' presentations, come 16 back up here and receive those public comments and be 17 in a position to ask questions. 18 At this point in time, I'll turn the 19 meeting over to you, Reagan. 20 MR. GREER: Thank you, Mr. Chairman. 21 For the record, I have a few things that I wanted to 22 mention as we move into this process. First off, I 23 want to welcome everyone this morning. Welcome from 24 out of state. Welcome from within the State. I thank 25 you for being here to be a part of this public input 0040 1 on the concept of commission participation in a multi- 2 jurisdictional lottery game, and if so, which one? 3 Secondly, it's an important moment in 4 the history of the commission because of the potential 5 opportunity presented by the passage of -- of HB 3459. 6 Commissioners, I just want to remind 7 you that in order for you and I to make an informed 8 decision regarding this matter, I've asked the two 9 groups here today, Powerball and Mega Millions to 10 appear and provide information on the multi- 11 jurisdictional game concept. The two groups, to 12 reinforce, is a multi-state lottery association that 13 conducts Powerball games and the Mega Millions group. 14 And I want to thank each of these groups for being 15 here and their willingness to travel to Texas to offer 16 this information. I ask each group to plan to make 17 about a 30-minute presentation, Mr. Chairman, as you 18 mentioned, and then be available to answer questions 19 from either -- either of you-all, the commissioners, 20 or myself to move forward. 21 The order of the presentation was 22 determined by a high card which was just drawn. And 23 Mega Millions got a seven, and Powerball got a five. 24 And in Texas that's the way we do things. And 25 Powerball will go first in a moment. 0041 1 I'm trying to keep the public informed 2 about the impact of the HB 3459, and the process we're 3 following regarding this matter. We have posted 4 information on the agency's web site about the concept 5 of the multi-jurisdictional game and the fact that 6 this matter will be a part of today's commission 7 meeting and also how the public can provide 8 information. The ability to provide public input 9 began on June 20th and will continue through July the 10 14th. We also other issued a media advisory on June 11 20th regarding today's meeting and this term today is 12 why we're here. 13 Currently, we have received about 2200 14 e-mails through the agency's web site and have put a 15 template up, to get the concept up and get the 16 information back to us. It's great to hear from many 17 Texans. I'm very impressed by the comments that are 18 coming in. I am personally reviewing those. I've 19 probably read about a thousand out of that group, so I 20 have a way to go, but it's been eye-opening and 21 appreciated for me personally. 22 It appears that a significant number of 23 these people that are providing input over the web sit 24 are in favor of participating in one of the two games. 25 Of course, there are also folks who are not in favor, 0042 1 and that's why we're having this meeting today. We 2 will continue to receive input again through the 14th 3 and will continue to provide updated information 4 regarding this matter. 5 The reason that we are -- the reason 6 that we are setting a cut off date, if you will, of 7 the 14th is because I need time to get my facts 8 together and get my questions together and informed 9 opinions for the late July commission meeting, 10 possibly early August, to decide in my own mind what 11 to recommend to the commission. And I think that it's 12 important to decide quickly and as soon as possible so 13 that we can proceed. 14 Because of this decision, I anticipate 15 that we will want to proceed as quickly as possible to 16 implement the legislation once we've made the 17 decision. My anticipated plans are to be able to come 18 before you, as I mentioned, with a recommendation in 19 our next commission meeting. 20 It's my pleasure to introduce to you at 21 this point the individual that will be presenting. 22 We're going to start with the Powerball group. I want 23 to thank them again openly for traveling to Texas and 24 look forward to listening to your presentation today. 25 The presentation is going to be by a 0043 1 number of individuals, but I did want to recognize 2 those who traveled to Texas for this. Mr. Gerald 3 Aubin who is executive director of the Rhode Island 4 Lottery, thank you, sir; Mr. Tony Cooper, chief 5 operating officer of the South Carolina Education 6 Lottery, thank you, sir; Mr. Randy Davis, president of 7 the Louisiana Lottery Corporation, thank you; 8 Mr. Edward Mahlman. Did I get that right? Executive 9 director of the Pennsylvania State Lottery, thank you; 10 Doctor Aretha Pigford, commissioner with the South 11 Carolina Education Lottery, thank you; Ms. Kathleen 12 Pushor -- 13 MS. PUSHOR: Pushor. 14 MR. GREER: Pushor. I knew it had 15 something extra to it. Executive director of the 16 Arizona Lottery, thank you for coming today; 17 Mr. Chuck Strutt, executive director of the Multi- 18 State Lottery Association. 19 Chuck, it's all yours. Thank you. 20 MR. STRUTT: Commissioners, Director 21 Greer, good morning. Thank you for the opportunity to 22 speak here today. You've given us 30 minutes, so I'm 23 going to start running now, see if I can keep up. 24 You've introduced the directors here, so we'll -- 25 we'll save that and go ahead. Why don't we invite 0044 1 them up again so you can -- those who didn't get to 2 meet them can see their faces. I hope you can see 3 this. Can you get the light? 4 You also have a handout that includes 5 information we're going to talk about today, plus a 6 little bit more. And that includes the names and 7 photos and bios of the -- of the other people here. 8 This morning we'll talk briefly about 9 the association, the advantage of being a member of 10 the association. And we'll get into Powerball, the 11 game design and the unique features and options of the 12 design. Then we'll spend a little time talking about 13 the draw day myths that are still prevalent out there. 14 And then, finally, we'll close up with a little -- 15 taking a look at performance for the two multi-state 16 games. 17 What is MUSL? The Multi-State Lottery 18 Association, or MUSL as we call it, is a nonprofit 19 association that is entirely owned and operated by the 20 state lotteries. The association's staff acts as the 21 direction of the MUSL board of directors. The board 22 is comprised with the lottery directors from each 23 state. So apparently we have a 28 state members. 24 There are 29 bosses that I have to listen to. The 25 association staff are highly skilled lottery 0045 1 professionals who are at will employees working for 2 and directly answering to the State lottery directors. 3 There are other ways to set up an organization, but we 4 believe it is extremely important that you have 5 lottery staff answering to the lottery directors. 6 These are the current members of the 7 MUSL organization, and these are the 27 state 8 lotteries that are now selling or soon will be selling 9 Powerball, excluding Texas, of course. And you see 10 we've saved you a spot up there in the middle. 11 MUSL currently operates five lottery 12 games and more are in development. Being a member of 13 the association gives you access to these new games. 14 Always at your option, of course. Some already are in 15 place; some in various stages of development. When 16 you join this group you have access to all of the 17 development and research that has gone on before. One 18 of the other big products that has brought us some 19 success is the weekly television show. It's a 20 30-minute weekly television game show called Powerball 21 Instant Millionaire. We bring players to Las Vegas, 22 one from every state, and they have a chance to play 23 the game to win one million dollars in cash. 24 This is an additional MUSL project that 25 Texas might be interested in. The product was 0046 1 developed to give the brand even more game -- even 2 more television time. 14 states currently participate 3 in this game. 4 MUSL also has a number of games and 5 other projects in development, multi-state bingo, 6 multi-state kino. There are two of them. Those 7 states that manage video slot terminals, most of them 8 are seen although some states in outlying areas are 9 developing a multi-state progressive video game. And 10 of course, the international game known as Superpool, 11 all under development. Again, you get the benefit of 12 this kind of work that's previous researched and -- 13 and patented areas. 14 To operate as efficiently as 15 possible -- and you can imagine -- director, you've 16 got three commissioners so that's pretty nice, but you 17 can imagine 28 bosses. To operate as efficiently as 18 possible, most of the board's work done is actually 19 done by committees. The directors serving on the 20 committees, those who have an expertise in a 21 particular area, auditors, accountants, CPAs, may be 22 on the finance committee. IT people on the developing 23 the communications committee -- I'm sorry -- I mean 24 the standards committee. The four committees are: 25 the development committees that develop and recommend 0047 1 new game ideas and promotions; security and integrity 2 committee to develop and recommend security standards 3 and to develop a code of ethics for the members; the 4 finance and audit committee to oversee the prize tier 5 funds and all MUSL revenues streams; and the 6 communications committee, that helps manage national 7 press coverage. 8 Security and integrity is the most 9 important aspect to a lottery, the most important 10 product the lottery sells. We all know that. Multi- 11 state games do bring a unique rest to the state's 12 general fund. While your lottery may have the best 13 security in the lottery industry; your partners may 14 not. To the very least, you have no assurance that 15 your partners have standards that can beat or exceed 16 yours. Errors and mistakes do happen as try -- as 17 much as we can try to prevent them, they do happen. A 18 vendor system, for example, could fail to recognize a 19 valid jackpot winner. The lottery might pay out 200 20 million dollar jackpot prize to a known winner, then 21 weeks or months later, an unknown winner may come up, 22 and the lottery may need to come up with another 23 hundred million dollars. 24 The member lotteries of MUSL take the 25 steps necessary to protect themselves and the state's 0048 1 general fund. The MUSL lotteries have agreed to 2 incorporate the highest standards of integrity and 3 security. The first step in the process is standards. 4 MUSL has a highly developed, highly skilled IT staff 5 who work with the security and integrity committee to 6 develop standards that will protect the member 7 lotteries and the game while still maintaining a 8 national rational approach to the members -- to -- to 9 the business we are in. Members have agreed to 10 establish standards for computer systems and physical 11 security from ticket stock and validation procedures 12 to ensure that the integrity of the game is 13 maintained. 14 The second step is to require that 15 every two years those standards are reviewed so that 16 the members are shown to be in compliance with those 17 standards. 18 And finally, the third step if somehow 19 those two steps fail. The third step is to have a 20 prizes reserve fund or self-insurance fund. Money for 21 the jackpot is collected from many states. That means 22 that a single state usually cannot cover that kind of 23 a jackpot for an unanticipated jackpot claim. If all 24 else fails, MUSL has a prize reserve fund and MUSL 25 will step in as a group to pay those funds. The money 0049 1 is already in the trust by the association. 2 Now, let's get to the brand. This is 3 where we -- the part we enjoy, all that dry security 4 stuff. Powerball is the most famous lottery brand in 5 the world. Since it began in 1992, the brand has been 6 synonymous with the big lotto game. It has become 7 synonymous in the national lexicon with anything. It 8 is big, important, successful, and desired. 9 Advertising is one way to build a brand, but 10 eventually, with proper brand management, a truly 11 successful brand becomes a part of the culture. 12 (Video feed of commercials.) 13 MR. GREER: These are a fair sample of 14 some of the headlines in Powerball states since the 15 new game design began, since we began the current 16 game. Paid advertising is one way to attempt to 17 inspire confidence in the game, but there is no 18 substitute for having a game that is good enough, that 19 raises enough money for your good causes, to bring 20 these kinds of headlines. Headlines tell the story of 21 Powerball boosting state revenues and setting lottery 22 records. The story has been the same for all 23 Powerball members. Powerball brings success to those 24 states lotteries. Powerball success means more money 25 for the good programs that the lotteries support. The 0050 1 worst kinds of headlines that you can have are the one 2 that report cuts in benefits, cuts in programs due to 3 reduced lottery sales. There are too many great 4 headlines of the Powerball to show -- to show you all 5 of them in the time we have here today, but these are 6 some of the words and phrases that have appeared in 7 headlines. There is a fair sample of headlines in 8 the -- in the packets that we handed out to the 9 commissioners and staff. So you can see full 10 headlines, including the citations and some of the 11 Texas ones. These are the kind of headlines you want 12 to see in Texas. 13 Of course, the press is not always 14 kind, and they will speak up when something goes 15 wrong. If the brand is not carefully managed and the 16 game is not designed to perform in a way demanded by 17 the players, the game can stumble. And the press will 18 notice. And the lottery takes the heat. You want 19 your state to make the right choice, the one that has 20 proven to be a winner. 21 Now, let's talk a little bit about game 22 design. If there's one message I want to leave with 23 you today: These games are not the same. They appear 24 to be the same, but they are actually quite different. 25 Besides, the differences in the organization's 0051 1 security standards, the prizes or funds and the power 2 of the brand, the games' designs and features make 3 them size and different. At first look, both games 4 look the same. They both use the same design invented 5 by the MUSL lotteries. The two games in one, the 6 combination Big Jackpot Game and Big Cash Game. The 7 key to making this game a success is it allows the 8 lottery to set jackpot on its high while keeping the 9 overall odds of winning any prize, any cash prize, 10 local. To make the best use of the game, you must use 11 the different numbers of balls in the two drawings. 12 Well, I know that it is the jackpot, the big jackpot, 13 that first attracts players to the game. The draw of 14 the multi-state lotto game is it will attract new 15 players and new customers to your -- to your state 16 lotto. Customers who never thought about playing the 17 lottery before. It expands the demographics. That is 18 definitely what you want. To help ensure that the 19 Powerball jackpot grows larger and faster, Powerball 20 puts more of the sales dollar toward the jackpot 21 prize. Powerball puts an additional two percent of 22 the sales dollar to the jackpot prize. The other game 23 was decided that it's more important to put money in 24 second prize level. We know a few play the lottery 25 hoping to win the second prize. 0052 1 Here to compare some of the lowest 2 prizes, the prizes for matching three numbers or 3 less. Players are attracted to the game by the 4 jackpot, but if they don't win, they won't stay long. 5 The overall odds in Powerball are one in 36. For the 6 other game, one in nearly 43. Every Powerball ticket 7 has a one in 36 chance of winning some cash prize. 8 Powerball puts 11.2 percent of sales in the prizes -- 9 it's these very important prize levels, the other game 10 9.2 percent. 11 Part of the Powerball success -- 12 success is understanding that we need to create this 13 barbell prize structure, heavy on the jackpot prize -- 14 jackpot end and heavy on the low prize end to attract 15 and keep the players into the game. 16 Power play is an option to Powerball. 17 Just before every Powerball drawing, we draw a number 18 from two to five. This is -- and we do it on this 19 spinning machine here. It's actually kind of a Keno 20 machine. A ball shoots out, bounces around, and falls 21 into one of those slots as the machine spins. 22 If a player spends an extra dollar, the 23 set prizes they win will be multiplied by the number 24 we draw. There are two chances to double their prize, 25 three chances to triple their prize, and three chances 0053 1 to quadruple, and six chances quintuple. It's a word 2 I've learned, when we say quintuple their prize. At 3 first blush this play seem a little confusing for the 4 players. And we, frankly, did have some concerns that 5 this would be difficult to explain. Retailers, as 6 always, found a way to explain it. They simply tell 7 players, you want to super size your Powerball ticket, 8 so they spend the extra dollar. 9 For the new states that have joined we 10 have seen additional sales of 25 to 38 percent in the 11 game. When a new state comes on, this is really a $2 12 game for them. Players also learn quickly when they 13 read about match five winners, who instead of winning 14 the regular second prize of a $100,000, instead win 15 200, 300, 400, or as their it second prize in 16 Powerball, even a half a million dollars. The current 17 average Power Play sales for new states that have 18 joined the game with this option is 27 percent. 19 People play the regular Powerball game. Those sales 20 dollars come to the state. And then an extra 21 approximate 27 percent come to the state. 22 The differences do not stop here. 23 There's a -- yet another option that Powerball offers, 24 and that is the bonus prize feature. This is a 25 feature that will occasionally, on a rare basis, but 0054 1 will occasionally create great excitement and media 2 coverage for the game. This is a no-cost-to-the- 3 player feature. Once Powerball reaches a new record 4 jackpot -- I know that's redundancy, but if I can say, 5 reaches a new record jackpot, the jackpot will 6 increase only by $25,000,000. At those levels, you'd 7 normally be seeing 50 to 100 million dollar increase. 8 But we limit it to $25,000,000. The extra that would 9 have gone to the jackpot goes to the match five prize. 10 The jackpot levels that we're talking 11 about here, statistically, we should see about a 12 hundred winners that will win $1,000,000 in cash. 13 That answers the common complaint that the lottery 14 should create more winners instead of one massive 15 winner. The bonus prize feature can create hundreds 16 of winners and millionaires in one night. Imagine the 17 national coverage that event will take. 18 The bonus prize also -- also helped to 19 control jackpot fatigue. And that's always -- that's 20 always a concern in a big jackpot. Again, this 21 feature helps keep the jackpot from getting out of 22 control. The curse of a big jackpot game is jackpot 23 fatigue. The public gets jaded by the big numbers, by 24 the big records. When you set a new record jackpot, 25 you've got to go something more to get the attention 0055 1 of the press. The worst thing the lotto game can do 2 is come out with a lot of errors. Powerball has a 3 governor on its jackpot engine, and this is the bonus 4 prize. This means extending the life of the game so 5 we can spend less money on attempting to rename or 6 rebrand the game. You can delay a catastrophic 7 jackpot fatigue. 8 Now, in these draw days, it's got a 9 name now. I read in the newspaper, the calendar. 10 Isn't there a calendar. There's been talk of maybe 11 changing the game to an unusual draw day. Days the 12 players is not used to. Players different from the 13 days we've taught them to play the lotto game will 14 reduce cannibalization . That is not true. And the 15 numbers show that. Changing the lotto game to an 16 unusual draw day will not reduce cannibalization; it 17 will only reduce sales. You can plan on both games 18 causing about 30 percent cannibalization of your 19 state -- I'm sorry -- 30 percent cannibalization a 20 month in the lotto game. Will not see any difference 21 really in instant games or other -- other online 22 games. 23 This is a quote made by a lottery in a 24 lottery conference that we're here to teacher each 25 other. Mega Millions has not performed as we 0056 1 originally had anticipated. Our other jackpot games, 2 Lotto Plus and Quinto, were anticipated to have about 3 a 25 percent cannibalization. They are now 30 percent 4 below what we anticipated. If you see a different 5 cannibalization number than 30 percent, you need to 6 look deeper. There's a reason why some states do 7 better than 30 percent or do worse than 30 percent. 8 Here's another quote from our 9 presentation made at the lottery conference. We've 10 had some feedback from our players, and our normal 11 jackpots are drawn on Wednesday and Saturdays. Mega 12 Millions is drawn Tuesday and Friday. And so we 13 were -- so they, the players, were confused even 14 though we put it in all of our advertising 15 everywhere. Lotto players are used to playing the 16 lotto on Wednesdays and Saturdays and are confused by 17 moving games to Tuesdays and Fridays. To defeat 18 player confusion, you need to spend more money to 19 advertising the change. And we've got one of the 20 directors here who can talk a little more about that 21 later. 22 When the Powerball jackpot brings your 23 customers in and your new customers in to play the 24 game, they will also buy state lotto tickets. They 25 will not buy those tickets if the clerk has to say, 0057 1 well, that drawing was last night. 2 Now the meat of the matter. Frankly, 3 whether you're talking big state, little state, 4 Tuesday, Wednesday, Saturday, Friday, this is what 5 matters. Sales are what matter. This is average 6 sales in both groups' new game, the current game that 7 they have. These are some quick comparisons. This is 8 the average sales per drawing. Powerball sells more 9 tickets. If you think that's unfair, we're doing this 10 on a per capita sales, just straight per capita 11 sales. Income level and different shopping patterns 12 in various states are different. The Powerball still 13 has higher average per capita sales. Why? Because of 14 the brand, because the game is sold on Wednesdays and 15 Saturdays when we talk to people to go in and play our 16 lotto game, because of the barbell prize structure 17 that attracts them to the game and keeps them playing 18 the game, and because of the Power Play option. 19 Here is a chart showing the average 20 jackpots in the current versions of the game. By the 21 way, this does include -- this is through last Friday, 22 so it does include Mega Millions big jackpot one. 23 Powerball is producing a higher average jackpot. 24 Jackpots attract players. Powerball puts more money 25 into the jackpot. Some may tell you that we've been 0058 1 lucky. And it's true, we've been lucky for 15 years. 2 And we would like to share some of that luck with you 3 folks. 4 You can see that adding a room with a 5 successful lotto game is not simply a case of adding 6 numbers, adding more population and making the game 7 more difficult to win. If that is all you do, then 8 you are depending on luck. 9 Here's another important slide. A lot 10 of numbers up there. We call this the Powerball 11 premium. The numbers on the right are the important 12 ones, the two columns over there. The Powerball 13 outsells any other game at the all important -- all 14 important jackpot levels. Not every jackpot run has a 15 200 million jackpot. Not every jackpot run has a 100 16 million jackpot. But I've done research in every 17 jackpot run as a starting jackpot, and that's where we 18 will outsell their game. The first three in that show 19 strong brand loyalty, that the players want to play 20 this game. They're looking for this game. 21 Powerball also has a 22 -- 26 percent 22 premium, one of the highest jackpot levels, due in 23 some part to the fact that just about every American 24 is within reach of a Powerball tournament. Power Ball 25 scope across the nation is so extensive that when we 0059 1 get those jackpots, just about every American can 2 play. 3 I've got this promotion idea I'm trying 4 to sell the directors. Power Ball sea to shining sea 5 where we put somebody in the car and we drive from the 6 Pacific to the Gulf to the Atlantic. They never leave 7 a Power Ball state. They interview players, they 8 interview retailers. I'm holding out for that summer 9 job in a nice mobile home. 10 Costs are important to you. Here's a 11 special deal for Texas, if you sign now. No cost to 12 join MUSL. Zero, zilch. When you join Power Ball, 13 there is no transfer of cash from Texas to MUSL or to 14 the other state lotteries. Powerball is best 15 described as simply another state lotto game. 16 Whenever we talk to a new state and they say, well, 17 how does this work. How does the advertising work. 18 How does -- how does validation work. The answer is, 19 I don't know, how does it work in your state. It is 20 simply another state lottery game. All the profits -- 21 and Power Ball is 50 percent prize game. All the 22 profits stay in Texas. And if you return a 33-percent 23 profit, and that's what your profit margin is in this 24 game. 25 It does take money to run the 0060 1 association, but we earn money. The association earns 2 money from nongame revenues. Earnings currently 3 exceed and have always exceeded MUSL boards and 4 Powerball group operations, except for the very first 5 year when we started. 6 The excess money, because we are a 7 nonprofit association, is returned to the states that 8 are members of the game. That money is actually owned 9 by the states and turned over to them for their uses. 10 MUSL income comes from interest 11 earnings on some of our bonds from capital gains, from 12 bond swaps. And you know what's been happening to 13 enter arrangements, so it's getting harder and harder 14 to earn money. We used to earn about 11 million a 15 year. We're down to about four and a half million a 16 year. So to make sure that we cover our -- make sure 17 that we continue to cover our expenses, we are looking 18 at other revenue security. We're looking into 19 licensing the brand. Video conferencing services to 20 the public. We looking toward other ways to earn some 21 money to make sure we continue to operate this game at 22 no cost to the states. 23 Ernie Passailaigue the director of the 24 South Caroline lottery wanted to be here today. He's 25 vacationing with his granddaughters, and we didn't 0061 1 have the heart to pull him away from that. So he's 2 going to do good. 3 MR. PASSAILAIGUE: Good afternoon. My 4 name is Ernie Passailaigue, and I'm executive director 5 of the South Carolina educational lottery. And I've 6 been to Texas a number of times, to your beautiful 7 City of Austin, your capitol city. And I tell you, 8 it's always been a pleasure going. I was in the South 9 Caroline state senate from 1988 to 2001, and there 10 were a number of conferences were held in Austin. And 11 you've got a beautiful State Capitol, a beautiful 12 city, a beautiful state. 13 Now, let me just mention a couple of 14 things that I think is important for you, the Texas 15 Lottery Commission to consider in regards to the 16 decision that you will make between two very fine 17 multi-state games. The Powerball game the most 18 recognized brand in the lottery -- lottery industry, 19 and of course the Mega Millions game. The most 20 important consideration I think in anything dealing 21 with the lottery is the integrity of the game. And 22 this is where I think the multi-state lottery 23 association and Powerball really comes to the 24 forefront. 25 Powerball has a prize reserve fund. 0062 1 Power Ball has standards, minimum standards, that each 2 lottery, member of the lottery, must meet and pass. 3 Powerball has an audit committee. So when you put all 4 this together, it's very important because of the 5 issue dealing with the integrity of the game itself. 6 Let me tell you, as former state senator, and I also 7 ran for governor of South Carolina, the one thing that 8 politicians don't want to here is negative surprises. 9 I would have been appalled, I think, to get a phone 10 call from my lottery commission in South Carolina, 11 indicating there was some sort of problem in another 12 jurisdiction and it was going to cost me 10 to 15 13 million dollars. That's something you can't budget 14 for. But beside that the political fallout of that 15 would be devastating. So I -- I think that when you 16 consider what Power Ball has to offer -- and there's 17 no slight on the other games, because we're all 18 friends in the lottery family. It's just a fact. And 19 the fact is that we have a prize reserve fund, and we 20 have minimum standards and those audited and verified 21 periodically. So there's a lot of comfort level that 22 me as a politician, if you will, in the State of 23 Texas, we can go -- you can go to sleep at night and 24 feel good about what's going on with your multi-state 25 association. 0063 1 Secondly, let me just talk about the 2 joyous occasion of our joining Power Ball October 3 5th, 2002. We started off with what we called 4 midnight madness and we have not looked back since. 5 Our sales have totaled, since October 5th, an 6 astounding $140 million. $140 million -- our 7 population in South Caroline is little over four 8 million, so per capita, just through the roof. And 9 there's another significant feature of Powerball, and 10 that's called Power Play. And let me tell you the 11 emphasis that South Carolina put on the Power Play 12 when we joined. We started off Powerball as 13 two-dollar bet. This is something that the other 14 games don't offer. And I can tell you, from our 15 experience with the additional bets from players 16 throughout the State of South Carolina, that extra 17 dollar has made a significant difference. So you will 18 see, I think, when you market a game to start with, 19 with the marketing effort to not have to re-education 20 players, but to talk about the initial launch of your 21 game, Powerball, you're going to start right away 22 seeing the benefits that Power Ball in the State of 23 Texas, ladies and gentlemen, is going to be a $2 bet. 24 And that's going to be great. 25 I can say so many other things about 0064 1 the Multi-State Lottery Association, but I can say 2 this. The 25 members, soon to be 26 with Vermont, are 3 all dedicated to having the most recognized brand in 4 the industry, the game that provides the biggest bang 5 for the entertainment buck, and most importantly, a 6 game that embodies integrity and security. So I know 7 you have a weighty decision, to take it from -- not 8 only from me, the state director of the South Carolina 9 lottery, but a former state senator, that your choice, 10 in my opinion, is easy. And that is to join the 11 Multi-State Lottery Association and become a member of 12 the Powerball family. Thank you, and God bless you. 13 MR. STRUTT: Finally, we can sum up. I 14 know I'm coming to the end here. Powerball, I read in 15 the paper this morning -- it was a Fort Worth paper. 16 There was a woman there with the web site and she was 17 saying that the states -- the Texas lottery will lose 18 money if they join the multi-state game. I can't sit 19 here and tell you that that's -- it's a no-brainer. 20 There is a risk; not with a Powerball state, but 21 there -- that's not ever been the case. But there is 22 a risk. But I think mostly that Texas is the kind of 23 state that's going to earn extra money. It's -- 24 that's a rare -- very rare event. I'm comfortable 25 that no matter what choice you make, you're going to 0065 1 earn extra money. But with the Powerball choice you 2 will meet and exceed your budget expectations. And I 3 know you have some -- some fairly aggressive ones here 4 to meet. You just need to do the math yourself. You 5 don't want to me trust me. You don't want to trust 6 another state. You don't want to trust your vendor. 7 The math is simple to do. Look at the -- look at the 8 average per capitas for those games, those members and 9 those games, and apply it to Texas. Assume an average 10 per capita, and you will be safe. 11 Brand and brand awareness is a key. 12 Texans already know Powerball. They already want to 13 play Powerball. Do you need -- do you not need to 14 spend more money to reeducate your players about the 15 game? You can save their money. Risk management, the 16 security and integrity are important to you. And I 17 know that it is. Powerball is your only choice. 18 Powerball is a successful game. It has 19 not always been a successful game. I cannot stand 20 here and tell you that it will continue a be 21 successful game. I mean, nobody can look into the 22 future, but when you need to make a serious financial 23 decision, you must base your decision on past 24 performance and on the capabilities of a company. The 25 Powerball lotteries understand how important the 0066 1 barbell part of that structure is to a multi-state big 2 jackpot game. The Powerball game has a Power play 3 option that acts to move you to that two-dollar prize 4 point. Powerball has the bonus prize feature that 5 limits jackpots and extends the life of the game. In 6 a response from a common player complaint that I know 7 you hear, we hear it all the time too. Let's share 8 the wealth. 9 And to the last point, the -- most of 10 the employees are a team working for you. They're not 11 coming first. They're loyalties are to the board of 12 directors; not to an individual lottery. It's 13 important that you have direct control over the people 14 who conduct the drawings, who manage the finances, and 15 accounting and who recommend gain designs and 16 promotions. MUSL employees answer to you. MUSL 17 provides a host of free services in their lotteries. 18 Every lottery decides from a menu of things they can 19 pick on at no cost to them. Free web posting, free 20 video conferencing, free fax service, all those things 21 are available to our members. We can set up in a bid 22 and manage new prizes for online or instant games. 23 Many states, since they're running a one-time cash 24 lottery will ask us to handle that process. 25 MUSL provides the latest communication 0067 1 technology to the lotteries, the directors, so they 2 can work better as a team. That's something I'm 3 personally very interested in. Technology is a must. 4 And we've always also set up automatic e-mail and a 5 telecom system, so the lotteries' directors can easily 6 contact each other without having to remember 7 addresses or phone numbers. 8 Lottery -- MUSL pays for lottery 9 conference trips and the registrations to encourage 10 directors to continue to learn and visit with other 11 lottery directors about what's going on in the 12 industry. MUSL staff updates, electronic billboard 13 signs, we do those things in the middle of the night. 14 Telephone systems from the press or from the state 15 lottery. Those things in the middle of the night, 16 we've got a staff working that can do those things if 17 you prefer to do that. We can also take over your 18 problem players in the press. Every lottery has some 19 of those folks who is demand information format in a 20 certain way, and every day are calling you for a 21 specific kind of information. As you can imagine, we 22 get a lot of that, and the lotteries turn those things 23 over to us because we pretty much answer those 24 questions before we have that information. 25 MUSL keeps the members apprised of news 0068 1 events that affect the industry and many other free 2 services. Our goal -- you can probably understand 3 that my goal is to make ourselves invaluable, 4 dispensable so that I can keep coming to work every 5 day. Our time is up. Thank you for your kind 6 attention. 7 I would like to introduce some of our 8 members here, but I also want to say that as -- as 9 Ernie said, even though we're here as competitors, I 10 work with the folks with the other game, and I have a 11 tremendous amount of respect for these people. And 12 I -- being a shy country guy, I wouldn't ever say that 13 out loud. But I regard them as are very good people 14 to know, and I am sure you will too. 15 We'll take a quick introduction from 16 some of the members here if they want to come up and 17 say something or answer any questions. Ed Mahlman, 18 he's here. He's the director of the Pennsylvania 19 lottery. Now, you know what his face looks like. 20 MR. MAHLMAN: Do we have a minute or 21 two, Chuck? 22 MR. STRUTT: If you've got something to 23 say, I think so. 24 MS. SMITH: Would you like to come up? 25 And you can answer any questions. 0069 1 MR. MAHLMAN: That would be fine. 2 MS. SMITH: Watch your step. 3 MR. MAHLMAN: Okay. Just at the desk 4 here? Well, perhaps in the interest of time, let's go 5 with Mr. Mahlman, just any questions or any comments 6 you would like to make, Ed. I got a minute or so. 7 MR. GREER: Turn on the lights. I want 8 to see who we're talking too. 9 MR. MAHLMAN: First of all, Chairman, 10 Commissioners, Counsel, director, pleasure to be 11 here. The issue on the table for you, really, is 12 incremental revenue and sales for the Texas lottery. 13 It's as simple as that. And it looks complicated. 14 Because both Powerball and Mega Millions are great 15 organizations. Great individual states, great 16 leadership. I've -- you know, we've learned a lot as 17 a new director for many of those directors, 18 incremental sales. So the issue has to be for you, 19 where is the edge. How can I get that much more from 20 the Texas lottery. I'll do a briefcase study. 21 A year ago in Pennsylvania, we were 22 newest Powerball state. We were the largest Powerball 23 state. And oh, by the way, our in-state game had 24 draws on Wednesdays and Saturdays. The situation 25 perhaps not more than familiar with one, and you've 0070 1 been speculating over the last couple of days. 2 I'll say first that we did change our 3 draw days for our in-state lotto game. And I'm not 4 sure if we had it to do over again if we would do that 5 again. But let me fast-forward. As of midnight 6 tonight when our fiscal year ends, we're going to have 7 total sales of $290 million. We're going to have $150 8 million in incremental sales. Tremendous success for 9 us. And more importantly, we've both got about $51 10 million -- and I don't know, but we'll know at 11 midnight -- $51 million in Power Play sales. About 12 $1,000,000 a week. And that has been tremendous for 13 us. It's helped to have the two-dollar prize point. 14 The extra dollar is very profitable. It's helped keep 15 sales in week in week out, regardless of where my 16 jackpot was -- our jackpot was. And players love a 17 chance to get double, triple, quadruple, quintuple 18 prizes. It's been a great feature for us. So again, 19 you -- you can get the game every place, but if you 20 are looking and asking yourselves, where is the 21 edge, from our point of view, the edge is the 22 Powerball. Particularly, because of the Power Play. 23 It's been terrific for us. And that feature, of 24 course, is not available on that. 25 MR. STRUTT: Next, we have Katie Pushor 0071 1 from the Arizona lottery. She's one of the newer 2 directors. 3 MS. PUSHOR: Members of the commission, 4 Director Greer, in Arizona, as I'm sure in any other 5 state, our issue is budget deficits, so expenditures 6 are very important to us. We watch every nickel. And 7 when you're introducing a new game with an 8 extraordinary amount in advertising expense to 9 establish a new brand and to educate players to play 10 on a different day of the week. So we really 11 appreciate in Arizona the fact that this is a national 12 brand. We don't have to spend additional advertising 13 dollars in educating our citizen on what the game is 14 and how to play or when to play. So I'd like you to 15 consider that in your deliberations, what it might 16 cost to launch and educate your players on a new brand 17 versus the kind of PR that none of us can afford to 18 buy, an episode on friends or mentioned by Jay Leno. 19 A national brand like that can really be a bonus. And 20 in addition -- I think I'll leave it at that. 21 MR. STRUTT: Next is 22 Doctor Aretha Pigford from the commissioner of the 23 South Carolina lottery. 24 MS. PIGFORD: Yes, sir, Commissioners 25 and Director Greer, it is certainly a pleasure for me 0072 1 to be here with you today. 2 Unlike the -- my colleagues, I am not a 3 lottery professional. I am an educator, and I feel 4 very privileged to be on the commission representing 5 the recipient of the money that is raised by the 6 lottery in South Carolina. I need to say to you that, 7 as a commissioner, there were two things that were 8 very important to us when you were making the 9 decision. One was, we wanted to make sure that we had 10 a lottery with integrity. And clearly want we wanted 11 to make as much money as we could. And our choice of 12 the Powerball, I think helped us achieve both of those 13 objectives. When we first saw the lottery, I was 14 surprised by the number of people who came up to me 15 and said, but when are we're going to get involved 16 with Powerball. So clearly we did not have to sell 17 Powerball; people knew about it and they were simply 18 waiting for it to happen. 19 Another thing that's been very 20 important to me also is that Powerball has changed the 21 mix of players. It's important to us in South 22 Carolina that we not have education being supported by 23 one segment of the population. And what we found that 24 people who play Powerball did not typically buy 25 lottery tickets, and so we were very pleased that 0073 1 Powerball was able to help us draw our player base. 2 So I hope that you will take both of these things into 3 consideration as you make the very important decision 4 regarding which group you go with. Thank you. 5 MR. COOPER: I would just like to -- 6 back up. My name is Tony Cooper. I'm the chief 7 operating officer of the South Carolina Educational 8 Lottery. I'm also from Washington, D.C., where for 9 eight years I also served as the executive director 10 for the D.C. Lottery, and for a year or so I also 11 served as the D.C. auditor where I audited the 12 activities of the D.C. government over a period of 13 time. But in any event, I always love to come to 14 Austin. I mean, Texas is rich in it's diversity and 15 it's geography, and it's -- I mean, it would really be 16 a welcome addition to the Powerball or to any of the 17 multi-state associations. And normally when I come 18 here, I -- you know, I always like to read a magazine 19 or something like that on the way out here. I just 20 happened to pick up Sports Illustrated, this weeks 21 issue. And it has Bo Jackson on the cover. You're 22 aware of Bo Jackson. He was a -- you know, like a 23 phenomenal sports person NFL football and multi-league 24 baseball. And he said -- and it's right in the 25 headline. He said, sure, it would be nice to be in 0074 1 the hall of fame, says Bo, but it would also be nice 2 to win the Powerball lotto too. So, you know, 3 obviously the brand is powerful. It's a very powerful 4 brand. And another thing, every time I travel to a 5 city, what I would like to do is I'd like to the most 6 knowledgeable people in the area. And really the most 7 profound person -- most profoundly knowledgeable 8 people you can meet in any city are the taxi cab 9 drivers. So all the way here from the Driscoll Hotel, 10 I asked Harold, who was my taxi cabdriver, I said, 11 Harold, I'm coming down here to make a presentation on 12 multi-state lottery, have you heard about it. Harold 13 said, oh, yeah, yeah. He was very knowledgeable. And 14 I said, well, if you had a choice between the two 15 lotteries, which one would you take, Powerball or Mega 16 Millions. And that's basically all I asked. I didn't 17 prompt him or anything else. He said, well, I think 18 I -- I take Powerball. And I said, well, why. He 19 says, well, mo' money. Mo' money. You know, that's 20 more money or whatever. So -- I mean, that was his 21 reaction, I mean, because Powerball is a very powerful 22 brand. Brand, brand, brand. The performance of the 23 two games are extraordinary. And as chuck said and as 24 everybody has alluded to, you can't go wrong by going 25 multi-state. But however, Harold also went to his car 0075 1 and got his telephone number, said, hey, if you want 2 anybody to ask me about your game, have them call me. 3 So for anybody in hear, if you want him as a witness 4 but I can't give you his card, so I have to go to the 5 airport this afternoon, as well, so I have to call him 6 in any event. But I'll turn it over to Jerry. Jerry. 7 MR. AUBIN: Thank you very much, Tony. 8 I'm Jerry Aubin the executive director of the Rhode 9 Island Lottery. Thank you very, very much, 10 commissioner members, for allowing us, the multi-state 11 group, to participate. I'm also chair of the 12 Powerball group as of this time. Also, Mr. Executive 13 Director, thank you for the occasion. And to my 14 distinguished peers who are very, very good friends of 15 all of ours from the great states of New York, 16 Virginia, and Georgia. So thank you. 17 You know, you've heard the words 18 security and integrity mentioned a number of times 19 this morning. My -- I've been executive director for 20 seven years. I spent 21 years with these folks and 21 rose through the ranks. And one of the -- one of the 22 things I learned early on in my career was that you 23 must be proactive to prevent an occurrence from taking 24 place unbeknownst to us, the unseen, the unknown, and 25 to be proactive to take whatever action is necessary 0076 1 to prevent those issues from taking place. 2 So we talk about security and 3 integrity, and we talk about the orderly process and 4 we talk about the what's in place in the state. I 5 sleep better at night knowing that my peers 6 scrutinized in the same way I am. I would never think 7 that when I don't have a problem, but recently we went 8 through an audit ourselves. Independent auditors from 9 MUSL came out and visited, in a very official way, our 10 error processes and our security and our central 11 systems to make sure there were no flaws. 12 Well, low and behold, there were. It 13 was some minor issues, issues that were dealt with 14 right away but issues that were resolved. But my 15 peers also have those same issues, and I don't know 16 that they have it unless we have someone out there 17 ensuring that they are adhering to our standards. I 18 trust all my fellow peers. I truly do, but with trust 19 we also must confirm that this is in compliance with 20 all of it. We have to be sure, as independent 21 lotteries, that our brother and sister lotteries that 22 we are dealing with also maintain the same standards 23 that we maintain. And in order to do that, it must be 24 some outside entity or someone in a separate 25 organization, someone outside our state, to check with 0077 1 other states to make sure they're in compliance. So 2 to me, that's of the utmost importance, security and 3 integrity of our system, constantly proactive as to 4 not be an embarrassment to others. 5 MR. STRUTT: And finally to Randy Davis 6 of Louisiana. 7 MR. DAVIS: And thank you. I want to 8 extend a formal invitation for Texas to join 9 Powerball. One of the other things is that the other 10 directors are sleeping well. I must be missing 11 something here because I don't sleep well. It's 12 always worried me what's going on. But I -- I don't 13 want to be redundant and speak too long, but I will 14 say this. That in Louisiana we have a mission state 15 which I think is very consistent with our former study 16 of lotteries that you see out there. You know, our 17 goal is to maximize revenues for the citizens in the 18 state of Louisiana but also to uphold higher standards 19 of integrity and public trust. 20 And just to really summarize it, I 21 think the strength of the MUSL organization is the 22 organization. We have a tremendous -- we have the 23 professionals that work for MUSL but also the 24 directors who work directly with them. And, you know, 25 we've -- we've been in Powerball since 1995, and I 0078 1 think it's just been a terrific relationship. And 2 Texas has been playing Powerball in Louisiana since 3 then. And I know they're going to be playing this -- 4 this Wednesday. So it's a pleasure to be here, and I 5 would be glad to answer questions specifically about 6 the -- you know, our role in -- with MUSL. Thank you 7 very much. 8 MR. GREER: Great. Well, thank you. 9 Am I up? I don't think I'm up. Can 10 you hear me? 11 MS. KIPLIN: You've got two buttons. 12 MR. GREER: Two buttons. Oh, I see. 13 I'm sorry. I'm not as technologically advanced as I 14 thought I was there. 15 I did have a few questions, and I 16 wanted to specifically address a couple of issues that 17 are something weighing heavy on my mind. One is how 18 many of you have a game similar to what our Lotto 19 Texas is where it's a large draw jackpot, like right 20 now we're at 15 million. I know some of you did, and 21 some of you didn't. How many of you have a draw so we 22 can compare apples to apples there. 23 MR. MAHLMAN: We happen to have a Super 24 Six -- Super Six game which right now is running at 25 about 35 million gives out 20 or so million in cash. 0079 1 And that's a game that, candidly, it did -- we did 2 change the draw dates. And so I was -- I was not in 3 this job then, but my staff and I have talked about 4 this and I'm not sure if we would do that all over 5 again. But we're not going to change it back now. 6 We're going to go full speed ahead. 7 That game did take a significant sales 8 drop. We've now come back to the point where it -- 9 pretty much we're at the figure that Chuck talked 10 about around 30 percent or better than that in terms 11 of what we've given up. But it's well over that for 12 the whole year. Even so, though, we're way, way ahead 13 incrementally. 14 MR. GREER: So it's 30 percent of 15 overall -- 16 MR. MAHLMAN: Overall. Oh, here, 17 it's -- it's double that. And it's -- it's -- the 18 whole games took -- I guess, it's 60 percent. So it 19 declined initially, but, again, we've come back and 20 we're about a third of that right now. 21 MR. GREER: So both games are on the 22 same night and -- 23 MR. MAHLMAN: Well, we -- no. The 24 in-state Wednesday, Saturday game shifted to Tuesday, 25 Friday. 0080 1 MR. GREER: Okay. I understand. And 2 somebody else nodded their head. Any of the rest of 3 you have a -- 4 MR. COOPER: Well, this is not the 5 entire consortium of Powerball states. So I know 6 others have talked about -- 7 MR. GREER: Right. But just to give me 8 a feel for what your personal experience has been. 9 MR. COOPER: Well, our personal -- we 10 didn't have a large game. We had a -- we had a -- a 11 small game where the top prize was $100,000 taxes 12 paid. It was drawn on a Friday. So that game didn't 13 make a major hit. There was some cannibalization but 14 not major. And when we put in an -- an additional 15 draw recently, that game is going back up to perform. 16 So we haven't seen, as a result, cannibalizing, but 17 then, again, we're in a new lottery state -- 18 MR. GREER: Right. 19 MR. COOPER: -- so the dynamics of a 20 new lottery state are completely different. You 21 probably want to look at mature states and see the 22 impact. I think we have given you information. 23 MR. GREER: Yeah. I've got -- 24 MR. COOPER: Good. 25 MR. GREER: I've got a good overview in 0081 1 here. 2 MR. COOPER: Good. 3 MR. GREER: But I just wanted your 4 personal perspective. Any of y'all have that? 5 MR. DAVIS: Well, you know, we have a 6 lotto -- the lottery game -- the lotto game, and one 7 of the things we do also which has some impacts, we 8 changed it to a purely cash game. There's no doubt 9 that we -- again, because of its size, we don't enjoy 10 the population that Texas does. That's one of the 11 reasons we joined a multi-state game was to be able to 12 offer the -- the type of jackpots and the type of game 13 that -- that -- that draw the players. It certainly 14 does. 15 But -- but the thing I would also add, 16 though, is we do draw on Wednesdays and Thursday -- 17 I'm sorry -- Wednesdays and Saturday nights with that 18 game. And there's no doubt that, you know, when -- 19 when Powerball does well and the jackpots are growing, 20 that all of our online games also follow along with 21 it. I mean, you -- you'll have a situation where the 22 lottery jackpot will be lower -- will actually get hit 23 during a Powerball run, but you'll still continue to 24 sell more of lotto in subsequent weeks even though 25 it's lower than it previously was because of 0082 1 Powerball. 2 MR. GREER: You touched on obviously 3 the budget issue, which is for sure a big deal here in 4 Texas, as well. And I think that you touched on the 5 zero up front, but I wanted to get an input from you. 6 And you might back up. I know that shared costs are 7 involved. And then what -- what is that? Tell me the 8 shared costs that we would participate in as a state. 9 MR. STRUTT: That comes from our 10 earnings. So no money is transferred from you folks. 11 MR. GREER: So there is no money up 12 front, and there is no money as far as paying for 13 advertising or any of those things like that. It's 14 based on -- 15 MR. STRUTT: Advertising is one of 16 those things -- this is a Texas Lotto game -- Texas 17 lottery game, so if you want to advertise it, you 18 advertise. That's -- however you decide you want to 19 do that. 20 MR. GREER: Okay. What specifically... 21 MS. PUSHOR: Right. There's no 22 surcharge, an amount, that you have to put in a joint 23 pot for advertising. The -- the brand has become 24 something that doesn't require advertising on a 25 national basis. What I meant with my comment is to 0083 1 establish the game in your state, to introduce players 2 to it, to teach them what nights to play, you won't 3 have to be putting out as much for -- on our brand as 4 you would for Powerball. And actually, the -- the 5 Powerball is such a draw for us that when we pick it 6 on Wednesday and Saturday, we do all our other draws 7 that night, and it sort of helps get attention to 8 those games, as well. 9 MR. GREER: Great. Those are my two 10 big issues. 11 CHAIRMAN CLOWE: Commissioner Cox. 12 COMMISSIONER COX: Mr. Davis, we know 13 that when the Powerball jackpots are high, then our 14 sales increase. Yet, Louisiana wants Texas in 15 Powerball? 16 MR. DAVIS: Yeah, in fact, you know, 17 it's -- I guess, to some extent, it's a catch-22 for 18 us. I guess, the best situation for us would be if 19 y'all did not join Powerball. But the fact of the 20 matter is y'all are -- y'all are moving forward with 21 this decision on a multi-state game. And -- and we 22 think that in -- in the long run, Texas would be a 23 tremendous addition to the Powerball game, and we 24 would love to have y'all be a part of that. 25 MR. STRUTT: If I may, we did provide 0084 1 some numbers to the Lottery Commission. That has been 2 the toughest sale for some of the members, 3 particularly as new directors turn over. They like 4 those border sales, and they're afraid they'll give 5 that up. But we have -- I think we have finally 6 proved to them that everybody makes more money. 7 I know when Pennsylvania came in, they 8 were -- they were concerned about the impact in -- in 9 Delaware and in West Virginia. We compared two runs 10 in that game, 17 -- 17 draws in the run. The whole 11 group was up 105 percent. Arizona was up 173 12 percent. West Virginia, even though they lost a lot 13 of that border play, was up 27 and a half percent for 14 those runs. 15 Now, those -- those retailers on the 16 border were certainly down. But overall their sales 17 were up 27 and a half percent. 18 COMMISSIONER COX: And you mentioned as 19 far as the sources of revenue for covering the common 20 expenses, capital gains from bond swaps. My 21 experience has been when you have capital gains, you 22 have exposure to capital losses. 23 MR. STRUTT: We don't. In the bond 24 swap market, we actually go out. We have billions of 25 dollars worth of -- of these kinds of securities that 0085 1 are approved by the board. There's about 20 different 2 types. And we are only interested in the -- in the 3 maturity dates and the amount they mature. The 4 brokers, for some reason, place different values on 5 different types of securities. So they will come to 6 us and say, we like 30 million dollars' worth of the 7 Refcos, and we'll give you 30 millions dollars' worth 8 of AIP bonds, maturing at the same time -- actually, 9 those two don't, but maturing at the same time in the 10 same amounts. So for us, we're covered with it. 11 Those bonds are given to an independent third party. 12 The swap is made, and they give us some cash. We are 13 not buying and selling investing bonds. We are truly 14 just swapping the bonds. 15 COMMISSIONER COX: Okay. What I hear 16 you saying is that you're selling your winners and 17 keeping your losers. So if you were marketing to 18 market, you would have losses that you're not 19 recognizing. 20 MR. STRUTT: No, because it -- it's not 21 a question of winners or losers. It's a question on 22 the value that, for some reason, brokers put on these 23 different bonds. We have had -- it was a one- or 24 two-week period where brokers came in and bought one 25 kind of bond and then the next week they came back and 0086 1 bought them back, and we made both -- both money in 2 both instances. It is truly a swap. 3 COMMISSIONER COX: Does anybody 4 understand my question? 5 MR. DAVIS: Well, I think -- 6 COMMISSIONER COX: Thank you, Betsy. 7 MR. DAVIS: I -- I think your question 8 is -- you're right in -- in terms of if you're -- 9 there are primers to mark, you know, your securities 10 to market, depending on what actually is happening out 11 there. Now, depending on whether you're planning to 12 hold those to maturity or not, you know, you would 13 expect to regain those losses. But when you are 14 making swaps, your -- your concern is that you would 15 actually be taking a lower valued security in place of 16 one that -- that currently has a higher value. 17 COMMISSIONER COX: Yeah. The whole 18 maturity idea used to work under a gap. There are 19 very few exceptions to market -- market rule, and I'm 20 wondering when you're auditors come in what kind of 21 treatment you're going to get for those losses you're 22 holding. 23 MR. DAVIS: Well, my theory -- 24 COMMISSIONER COX: With declining 25 interest rates, I suspect that you're holding losses. 0087 1 MR. STRUTT: You're looking at the 2 paper, paper value of those, and that's just not 3 something that concerns us. We're -- those bonds are 4 held in trust for the states, but they will mature on 5 a certain date and pay a certain rate, pay a certain 6 amount. 7 MR. DAVIS: I will tell you in the case 8 of Louisiana, we do not -- something I would like 9 point out too, all states have different requirements 10 in -- in terms of what they -- how they can finance 11 their prizes. Louisiana requires the purchase of -- 12 of government backed securities. And so MUSL actually 13 sets aside, they specifically go out and buy their own 14 type securities which we're allowed to purchase for -- 15 for financing our winners. 16 Also, in the situation in Louisiana, 17 you know, for instance, our own lotto game, you know, 18 we now have a cash game, but in the beginning we did 19 have an annuitized product. We are holding 20 securities. In -- in our -- in our particular 21 situation, we don't actually go out and try to make 22 money on this particular, buying and selling those 23 bonds in Louisiana. And we actually, through working 24 with auditors, we do not have to mark those to market 25 because they are being held to maturity, and -- and 0088 1 the actual value will be paid when they mature. 2 But you're right. You know, you have a 3 different situation -- slightly different situation 4 where the -- the bond swaps are taking place. But 5 based on the year-end, you know, I do often review 6 that information with Chuck and finance is looked at. 7 And -- and I think he's right in terms of that they -- 8 they literally are -- are looking for something at a 9 particular point, in a particular moment that 10 someone -- somebody out there in the market is looking 11 for. And -- and as he says, they come back sometimes 12 and buy back the bonds that they've already sold back 13 to us at a particular time, swapped with us at a 14 particular. So it really is a very low-risk 15 situation, and we always make positive income from 16 those swapped transactions. 17 MR. STRUTT: Generally, we find that 18 they are -- for some reason, everybody in securities 19 lending -- not laundering, securities lending -- and 20 they need to deposit a particular kind of securities 21 strips or Refcos in some deposit for a short period of 22 time. So they need to have that paper, and they're 23 willing to give us something of equal maturity, face 24 them off that. 25 MS. PUSHOR: And certainly audited 0089 1 financial statements are reviewed about once a year 2 with you, Mr. Commissioner. But also was your primary 3 concern that there might be a capital loss that would 4 be shared among the states? 5 COMMISSIONER COX: Exactly. 6 MS. PUSHOR: Because I don't think 7 that's been the case. There has not been an instance 8 where they've had to come back and ask for money from 9 the states. And they have so far managed among the -- 10 the different interest declines, a method where 11 they've been able to cover their expenses and we've 12 been able to participate without having to forward 13 money to the care of the organization. So I think 14 that was something we performed. 15 COMMISSIONER COX: Oh, okay. 16 MR. COOPER: If we haven't included 17 them in our package of information, we do need to 18 forward those to you -- we do have audit financial 19 statements for -- for all the years that MUSL has been 20 in business. We should get those to y'all. 21 MS. PUSHOR: That was a great question. 22 CHAIRMAN CLOWE: Commissioner Whitaker. 23 COMMISSIONER WHITAKER: Yeah. How do 24 y'all split up the voting power on the board? 25 MR. STRUTT: We would go -- we use a -- 0090 1 the system developed by the United States of America, 2 The great compromise. Every state gets one vote, and 3 then every state gets a vote according to its 4 population. Or it -- actually a share of sales. So 5 in that way, every group has some kind of say. It 6 takes a positive action by both methods to pass a 7 motion. 8 COMMISSIONER WHITAKER: And what's the 9 story with California is a member of MUSL but not in 10 Powerball. 11 MR. STRUTT: They're interested in some 12 of our other products. I don't want to talk too much. 13 They've been looking at a couple of our other 14 products. 15 CHAIRMAN CLOWE: I have some really 16 tough questions, and I'm going to wait until the other 17 group makes their presentation and then ask mine. Can 18 we have a break? 19 MR. GREER: Commissioners, any other 20 questions? 21 We're going to take a ten-minute break 22 and give Mega Millions a chance to get set up. 23 CHAIRMAN CLOWE: So the commission 24 meeting is recessed for 10 minutes. The time is now 25 11:09. 0091 1 (Recess.) 2 MR. GREER: Why don't we come back to 3 order and at that point get the Mega Millions people 4 back in. We've got a couple of minutes. I just want 5 to gather everybody back and move forward. 6 Thank you, again, to the Powerball 7 group. Those of you -- I know many of you have planes 8 to catch. Some of you are sticking around. And 9 thanks again for sharing information with us. We've 10 got a lot of stuff in the packet. We received other 11 things, so we're going to begin working through that 12 process. 13 I wanted to personally thank the 14 participants for Mega Millions for being here with us 15 today. I want to reinforce with them, we've kept 16 track of the time and we'll do a equal time thing 17 there. 18 Rebecca Paul is the president and CEO 19 of the Georgia Lottery Corporation. Thank you for 20 being here. Penny Kyle is the director of the 21 Virginia Lottery. Penny, thank you for being here. 22 And Margaret DiFransicso, director of the New York 23 State Lottery. Thank y'all, all three, for being here 24 today. We look forward to hearing from you. We're 25 going to turn it over to -- at this point. And we'll 0092 1 try to do the similar thing. And then we'd like y'all 2 to come up as a group, and we'll ask you questions. 3 MS. PAUL: Terrific. Thank you, 4 commissioners and Director Greer. It really is a 5 pleasure to be here with you again. This is the 6 second time we've had the opportunity just this year 7 to come to Austin and talk about Mega Millions and why 8 it has been exciting in each of every one of our 9 states. 10 I will start by acknowledging our 11 colleagues from the other game. And we are truly 12 friends, even though it certainly didn't sound like 13 it. I think we really have an advantage over them 14 because we have someone at our ten states who have 15 participated in both games, so we know how they 16 operate. None of their states have ever participated 17 in our game, so they truly don't understand how we 18 operate. 19 Each of the integrity and security 20 issues addressed by them are equally, if not more so, 21 important to each of us, and we have taken the same 22 steps that they have to ensure that integrity and 23 security. In fact, we believe so much so that that's 24 the case that we wouldn't allow any member of our 25 coalition not to have their own ICS system and have 0093 1 that operated by a vendor. We take all of those steps 2 very, very seriously and do all of the same things. 3 And I think they may be at a disadvantage because they 4 don't really know how we operate. But we are good 5 friends, and we operate very much the same way. 6 And we're ready to tell you about why 7 Mega Millions has been terrific for each and every one 8 of us. First of all, as you can see, there are 9 various kinds of information. In the beginning, 35 10 jurisdictions, ten in Mega Millions, 25 in Powerball. 11 Of those ten, we have 96 million in population, and 12 Mega Millions has 82. 13 You can see what our game looks like, 14 and unlike what you might have heard, we believe it is 15 important to have $175,000 in that second prize. And 16 often times in our states when you don't have a big 17 jackpot winner, you certainly get a lot of prizes from 18 that 175,000 second tier prize. So that has worked 19 very, very well for us. 20 We have jackpot winners in all of the 21 states that you see there, and New York, who has 22 similar population to you -- not quite as big, we know 23 that. You're bigger. But they've only been in the 24 game 12, 14 months and they've already had five 25 winners. So as you can see, it spreads across our ten 0094 1 states with frequency. Of the ten largest jackpots in 2 the country, five of them are Mega Millions jackpots. 3 Four of them are Powerball jackpots. One is a 4 California jackpot. And, of course, the two largest 5 jackpots ever are both Mega Million jackpots of 263 6 million and 331 million. 7 Now, one of the things that we've 8 talked a little bit about is your questions in terms 9 of a strong in-state lotto game. Now, we looked at 10 calendar year per capita sales because in calendar 11 year 2002 both Mega Millions and Powerball had big 12 jackpots. So rather than take a particular point in 13 time when you might be judging a big jackpot from one 14 game and not from another game, if you look at 15 calendar year 2002, you'll get pretty comparable 16 jackpot runs in both games. And what happens in both 17 of those games, we average 40 cents per capita. But 18 in our lotto style games, we averaged 42 cents per 19 capita, as opposed to their 24 cents per capita. 20 Now why do we think this is the case? 21 Well, certainly when Mega Millions was founded back in 22 1996, there were six of us: Georgia, Virginia, 23 Maryland, Massachusetts, Michigan, and Illinois. And 24 each of us had strong in-state Wednesday, Saturday 25 lotto games. So when we looked at what we wanted to 0095 1 do to raise the most money for our state, not the most 2 money from a multi-jurisdictional game, we looked at 3 what was best in the big picture of our state which 4 was trying to diffuse as much as possible that 5 cannibalization. 6 We turned to a future partner, New 7 Jersey, who at the time was having Tuesday, Friday 8 lotto games, and found they had some of the strongest 9 lotto per capita sales in the country. So we knew 10 from the New Jersey experience that Tuesday and Friday 11 worked and believed that would help diffuse the 12 cannibalization of our strong in-state lotto games. 13 And as you can see from these per capita sales, that's 14 what occurred. 15 Now, the other thing that happens is we 16 work very closely with NACS, which is the National 17 Association of Convenience Stores, and in their study, 18 their belief was the more often you can drive people 19 into the retailer location, the happier the retailer 20 would be. And, obviously, jackpots drive retailers 21 into retailer locations. So the retailers in each of 22 the ten Mega Millions states draw traffic into those 23 retailer stores Tuesday, Wednesday, Friday, Saturday. 24 And what actually happens is when someone walks in a 25 store on Wednesday after the Tuesday night jackpot 0096 1 draw to cash one of their lower tier tickets, they'll 2 play that on a game that's drawn that night. So we 3 find having winners in the Tuesday night game in low 4 tier winners going into the store to cash them on 5 Wednesday or waiting on Friday and going into their 6 store and cashing on Saturday has not only proven 7 practical, we are putting them into the retailer 8 environment, keeping our retailers happy but has also 9 increased sales of our games. 10 Now, we believe, certainly, that Mega 11 Millions cannot only coexist with Lotto Texas but can 12 make the overall picture of the Texas lottery much 13 longer. Mega Millions obviously is drawn on Tuesdays 14 and Fridays. Your game is drawn on Wednesdays and 15 Saturdays. It does all of the wonderful things that 16 we've talked about that create big sales for big 17 states. 18 Now, if you look at the media markets 19 that we're currently in, of the 12 largest media 20 markets in the country, Mega Millions is in seven of 21 them. We share Washington D.C. because 80 percent of 22 the Washington D.C. media market is either in Virginia 23 or Maryland, both of which are Mega Millions. San 24 Fransisco, Los Angeles, Dallas, Fort Worth, and 25 Houston are currently not in any of those. But we're 0097 1 in seven of the 12 largest markets. With Texas 2 joining us, that would make us in nine of the 12 top 3 media market. Next. I forgot to point. With you-all 4 joining us -- and we didn't just save a spot for you, 5 we put you there. But if you -- you join us we'll be 6 in nine of the 12 top media markets. 7 If you look at the strategic choice, we 8 believe that there is no choice. Mega Millions has 9 been terrific for each of us. We're all big states. 10 Nine of the ten of us do between one billion and six 11 billion in sales. Half of us do over two billion in 12 sales. We're big states with big staffs. We have 13 over 2,000 lottery professionals who work with the ten 14 states. We have our own security departments in each 15 of those ten jurisdictions. We have our own internal 16 auditors in each of those ten jurisdictions. We have 17 our own ICF staff in each of those ten jurisdictions. 18 And Penny will talk a little bit more about how that 19 works when she comes up right now and tells you how we 20 operate. Ms. Kyle. 21 MS. KYLE: Good morning, Texas Lottery 22 Commission and Mr. Director. I'm Penny Kyle, and I am 23 the executive director of the Virginia lottery. And 24 as Rebecca said, I'm one of the founding members of 25 Mega Millions. We were one of the original group that 0098 1 got together and dreamed up this game. 2 Let's go to the next slide, please. I 3 think you've got to go again. What I want to talk to 4 you about is how we do business. And as the folks 5 before us talked, this is where you do find a 6 difference. And so this is something that you folks 7 here in Texas do need to focus on because we do 8 business within our organization differently than they 9 do business within their organization. So I'll try to 10 hit on some of the key points that you can analyze and 11 determine which way it is you think you should go. 12 Next slide. Here is the committee 13 oversight. As has been pointed out, we do not have a 14 corporation or a partnership or an association that 15 represents the ten of us. We are ten state lotteries 16 that do business together, but we are independent to 17 ourselves. I do things like my governor wants things 18 done in Virginia. Rebecca does things like her 19 governor in Georgia wants her to do them, and Margaret 20 does things in her lottery like Governor Pataki wants 21 her to do them. And so each one of us is performing 22 under the governor of our state in playing this game, 23 offering this game to our citizens, but in the way 24 that our governor and our legislature and our boards 25 want us to do it in that particular jurisdiction. 0099 1 We have set up five standing committees 2 that oversee the policies and procedures of Mega 3 Millions. And here are the committees. Now, contrary 4 to what we heard earlier, our committees are not made 5 up of lottery directors. Our committees are made up 6 of the staffs at our lotteries. Each committee is 7 chaired by one of our directors, but, for instance, 8 right off the bat, you've got legal. Well, there she 9 is down there, Kim Kiplin. Or she can, I guess, 10 assign it to someone in her department. She can 11 become the 11th member of the legal committee, and 12 that legal committee wrestles with and decides all the 13 legal issues for us individually and as a group. We 14 have marketing. Well, Toni Smith right back there. 15 Toni or someone that she would designate would be on 16 that marketing committee and so on, with finance, 17 operations, and public relations. 18 So these committees -- now, we do 19 not -- we do not fly around and meet. As you noticed, 20 there are only three of us here today. Mega Millions 21 does not pay any of your expenses. We all pay our own 22 expenses. And so our travel is what our states would 23 deem appropriate, individually, because our own states 24 are paying our travel. Most of these committee 25 meetings take place by telephonic, by telephonic 0100 1 meeting, by telephone, lots of e-mails going back and 2 forth. But as a general rule, our employees are not 3 flying around the country to meet. It's either paid 4 for by our state or paid for by Mega Millions. That 5 -- that just really doesn't happen. 6 If it happens that we have, for 7 instance, the NASCAL meeting coming up in September in 8 New Orleans, I can imagine that the attendance may not 9 be what we usually have because so many of us are 10 under travel restrictions. But if a good lean number 11 of members, let's say, of the legal committee found 12 themselves at the NASCAL conference in September on 13 their -- because their states have allowed them to go, 14 they probably would try to set up a person-to-person 15 legal meeting. But these folks talk week in and week 16 out on the telephone. They e-mail each other. The 17 finance people are e-mailing each other every day, and 18 they know each other well. 19 We have members of these committees -- 20 I think Margaret was saying last night one -- one of 21 the members that represents New York, I believe, on 22 finance -- it might be operations -- has 30-something 23 years experience in the lottery industry. This -- 24 this is true in a lot of our lotteries, as -- as it 25 would be true here. Those experienced people are the 0101 1 ones helping make these decisions. And all decisions 2 are made by -- by employees who understand what their 3 states want them to do. It is not made by folks who 4 are not state employees at a state lottery. 5 Next slide. Here are our operation 6 procedures. We have conference calls -- conference 7 calls held each Tuesday and Friday morning to set the 8 advertised jackpot. These conference calls are 9 attended, telephonically attended by the director of 10 each state and by the finance committee members of 11 each state. At my state I have three staff members 12 who are on that conference call every Tuesday and 13 Friday, in addition to myself. And what we do in 14 those calls is we each report, by state, what we think 15 our sales are going to be for the next draw. And 16 that's how our jackpots are set. 17 The draws are currently held in Atlanta 18 at 11:00 eastern time. They were, originally when the 19 game began, at Super Station, W.G.N. in Chicago at 20 10:00 central time. You can still pick those drawings 21 up probably here in Texas on the Super Station, on 22 W.G.N., anybody that has cable access. We are very 23 much interested in moving the draws around for special 24 events, such as I think it would be ideal to have the 25 draw come to the Texas State Fair in October and maybe 0102 1 be there for the entire duration of the fair and have 2 the drawings every Tuesday and Friday night brought to 3 you live from the Texas State Fair. 4 We also are not wedded to the fact that 5 the drawings have to be held in Atlanta for the 6 future. We have talked over the past year about 7 whether or not we ought to set up some rotational 8 basis where, if a state is interested in hosting the 9 draw, we might think about a two-year rotation cycle. 10 If there are other states that might be interested, 11 such as maybe New York City, maybe Boston, maybe 12 Houston or Dallas. But that -- that's all up for 13 discussion and vote by the members of the Mega 14 Millions group. 15 Each state, as Rebecca pointed out, is 16 responsible for its own internal control system. That 17 means that we do not allow membership from a state or 18 jurisdiction that would have a vendor run the internal 19 control system. We are responsible for our own 20 systems. And when a new state comes in, we go to that 21 state, we check out their systems, we audit a draw or 22 two, we make sure that everything fits within what we 23 require. 24 We have legal documents that you-all 25 would have to review and sign should you choose to 0103 1 join Mega Millions. We have an operations document. 2 We have a finance agreement, and then we have just our 3 general legal multi-state agreement. But all of those 4 agreements, I do not believe put us in any greater 5 jeopardy regarding this whole issue about integrity 6 than any other multi-state game that's made a 7 presentation today. I mean, I -- I can tell you our 8 governors would not have allowed us to join a multi- 9 state organization if they felt like that there was an 10 integrity issue in that organization. 11 Illinois and Virginia each compile all 12 state sales and prize data after each draw. Two 13 states do it. We double check each other. And then 14 it's reported out. Totals and prize reports are 15 usually available by 2:00 a.m. central time after each 16 draw. As you can imagine, as the jackpots get larger 17 and larger, when you get up as we were a week or so 18 ago to a 183 million, it takes a little bit longer to 19 -- to count, and sometimes that 2:00 a.m. might slip a 20 little bit later. But that's generally when we have 21 everything done by the ten states' employees who are 22 working that night. 23 Next slide. Our settlement 24 procedures. All prize costs are shared among states 25 based on each state's proportion of sales. And -- and 0104 1 Chuck said this earlier. This is true for all of us. 2 For the members of the public who are concerned that 3 your dollars are leaving the state, that is simply not 4 the case. You are only contributing your proportion 5 of that prize amount. And those prizes are generally 6 paid out in proportion in your state. Cash is 7 transferred among states to settle each of the state's 8 cost of prizes. 9 The jackpot is settled after each win, 10 and then secondary prizes and expired prizes are 11 settled at least annually or when a particular state 12 requests that they want a settlement. It can be done 13 at anytime. Or when somebody is due a million dollars 14 or more, we'll do a settlement. But if you are in a 15 situation where you're -- you're owed a million, you 16 can request that you want a settlement. And we'll do 17 that, but we've provided in our document it has to be 18 held at least annually. 19 We in Virginia prepare the prize 20 settlement reports, and we manage the bank clearing 21 account. If you have a winner, all of that money is 22 wired through our account in Virginia, and then it's 23 sent to the state that has the jackpot winner. And 24 obviously, as I said earlier, e-mail is used for most 25 of our correspondence. 0105 1 Next slide. Here are our operating 2 costs. We are not making a special deal for Texas. 3 I'm sorry to tell you that. We have never charged 4 anybody anything to join our game. And so you are not 5 a special deal to us. There is no cost to joining 6 Mega Millions, and there never has been for any of the 7 ten of us. We share operating costs equally. In 8 fiscal year '03, each state's share was about $23,000 9 a state. If Texas were to join, we've already done 10 the budget for next year. That number would be about 11 21,000, and you can see what that includes. Not much, 12 there are not many expenses: production and 13 transmission of drawings, the web site maintenance, 14 which occurs in Virginia. Production and transmission 15 of drawings occurs in Georgia, and then the national 16 distribution of new releases which also occurs in 17 Virginia. Michigan coordinates the payments and 18 reimbursements. So as you can see, everybody gets 19 involved. And we would hope that if Texas joins, that 20 you-all would want to offer to conduct one of these 21 responsibilities in Texas. We like for every state to 22 be involved in one of the activities. 23 Next slide. Here is just the home page 24 of our web site. I am proud to tell you that this web 25 site was developed entirely by my own in-house 0106 1 employees at the Virginia lottery. We did not hire a 2 consultant. We do not have a consultant on staff. We 3 don't have anybody helping us out after a draw. This 4 is run entirely by Virginia lottery employees. We 5 think that this web site is pretty fantastic. As you 6 can see, we have ways in which people can register for 7 e-mails. 8 Let's go to the next slide, and I 9 believe I detailed those for you. Here. Over 36,000 10 visitors daily with an average visit of seven 11 minutes. So that shows you that they're not just 12 coming in to see what the jackpot is for the next 13 drawing. They're actually staying there to find out 14 more about the game, maybe check to see if they have 15 won a 175,000-dollar second prize, et cetera. It's 16 updated regularly with features that encourage 17 visitors to return and to stay. 18 We provide a direct link to every Mega 19 Millions member's web site. So if a player comes in 20 from Virginia and wants to look at Mega Millions and 21 then wants to go to the Virginia lottery and look at 22 the Virginia lottery, that linkage is already there. 23 We have a full-service media center for media 24 professionals only. And I suspect that most of the 25 media folks in the room today have probably already 0107 1 registered on our media center. They can sign up to 2 get news releases, jackpot alerts, whatever they want 3 so they don't have to go and find that information. 4 And then lastly, we have a full-service 5 players center. Registration is required. We will 6 automatically send you an e-mail after the drawing and 7 let you know what the numbers were and what the 8 jackpot is going to be for the next draw. So that is 9 the Mega Millions web site, megamillions.com. 10 Next slide. And here's a recap of what 11 we think are our benefits. As Rebecca pointed out, 12 the drawings are not on the same nights as Texas 13 Lotto. Exposure in the largest media markets and you- 14 all have two of the ones we covet, here in Houston and 15 Dallas. No entry fee. Never has been. Very low 16 annual management costs, approximately 21,000 a year. 17 Each state has direct input in decisions and not just 18 from the director's level but from your staff's 19 membership on those five committees. And we think 20 that as has been pointed out, that the Texas profile 21 most closely resembles the current Mega Millions 22 states. As Rebecca said, all but one of us has sales 23 in excess of $1 billion a year. And half of us, five 24 out of ten, have sales in excess of $2 billion a 25 year. And that certainly fits right where you-all 0108 1 are. 2 And then lastly, each state maintains 3 significant autonomy. We feel that we are a -- a 4 group of states representing what our states want out 5 of the multi-state game. It is -- it is done the 6 Virginia way in Virginia. It is done the Georgia way 7 in Georgia, the New York way in New York, et cetera. 8 And that was critical to -- to my state when looking 9 at a game to join, with that it be played in our state 10 but being run in our state as -- as an in-state game 11 would be. 12 Additionally, we do not have any 13 procurement issues, which is a major concern in 14 Virginia because anything that we do with Mega 15 Millions is done internally on our state. We are not 16 procuring with a third party vendor or anybody like 17 that to make decisions for us or to run any aspect of 18 the game. 19 And with that, I'll turn it over to one 20 of our newest members, Margaret D. Francisco, the 21 director of the New York State Lottery. Margaret. 22 MS. DEFRANCISCO: If you could bring 23 the house lights up, I don't have Power Point. I'm 24 just going to talk. 25 Thank you. Well, good morning, ladies 0109 1 and gentlemen, commissioners, and Director Greer. You 2 won't get to see a whole lot. This is actually my 3 first trip ever to Texas. We don't get to travel very 4 much, so I'm really grateful to be here. And to 5 share -- I really want to share the New York story 6 about joining the multi-jurisdictional jackpot game 7 with you. I think you will find some similarities. 8 And I thought I would have to do this in a New York 9 minute, but -- I had this timed to like seven minutes, 10 50 seconds. 11 For starters, Texas and New York, has 12 the largest population. We have 19 million people. 13 We are number three behind you. You are number two. 14 We have 14.2 million adults over 18 years of age. We 15 are an old lottery, however. We're 36 years old. We 16 actually had the first successful lotto game that was 17 ever marketed, marketed by a fellow who is going to be 18 retiring. He has over 30 years in -- in the lottery 19 industry, but it started in New York. We have the 20 finest staff, I think, of -- of any lottery probably 21 in the world. And if you ever want to have a side 22 conversation about state legislatures, we can talk in 23 the hallway afterwards, as far as dysfunctionality we 24 can compare. 25 And just 20 months ago we faced the 0110 1 decision that Texas is now facing, and we had many 2 questions like -- certainly, like you do. And we had 3 a revenue mandate and a very pressing deadline. 4 Ultimately, we had to decide what was best for New 5 York from a revenue standpoint and for our customers 6 and for our retailers, and it was really a business 7 decision of great magnitude, which I think you are -- 8 you can absolutely relate to. 9 In late October of 2001, already 10 recognizing the impact of 911 on the economy of New 11 York State, the state legislature passed and the 12 governor signed legislation authorizing the New York 13 lottery to participate in a, quote, joint multi- 14 jurisdictional and out-of-state lottery in cooperation 15 with the government authorized lottery with one or 16 more jurisdictions. Our customers and lottery 17 retailers had been asking for a mega jackpot game for 18 year years. Our legislation has been proposed several 19 times but hadn't -- hadn't moved. So with the success 20 of two in-state New York only promotional Mega jackpot 21 games in 1999 and 2000, called Millennium Millions, we 22 really knew that our customers and retailers would 23 respond to a multi-jurisdictional game. Like you, 24 soon after the legislation was passed, we set up 25 interviews with both existing games at the time, which 0111 1 was the big game group. And we met with them on 2 November 2nd, 2001, and MUSL, the Powerball group on 3 November 16th. I would like to once again publicly 4 recognize, acknowledge, and thank both groups for 5 their help on their sharing of important information, 6 and the collegial working relationships that we had 7 through this entire process. 8 Early on in the legislative process, 9 representatives from both groups actually came to 10 Albany, to our capital, to speak before a joint 11 legislative committee about their games. So in -- in 12 anticipation of their presentations to us, New York 13 lottery's operations, marketing, and finance units 14 evaluated the two groups composition, their player 15 population profile, game profile and performance, and 16 retail profile. We looked at the potential impact of 17 the addition of New York in each group's game 18 performance in terms of per capita sales, as well as 19 the reverse, the impact of each group's sales on New 20 York sales. We also evaluated through our annual 21 player and attitude usage survey of the current 22 awareness, the playership, and the board of traffic 23 analysis. 24 The seven states in the big game at the 25 time, this was, again, in 2001, Michigan, Illinois, 0112 1 Massachusetts, New Jersey, Virginia, Maryland, and 2 Georgia, really more closely reflected the profile of 3 New York. These states had larger populations with an 4 average of 8.2 million at the time as compared to 5 Powerball at the time which has an average of three 6 million. The big game states have major metropolitan 7 areas like New York. And in terms of the group 8 compatibility, the big game offers a smaller, more 9 manageable number of decision makers in the group and 10 minimal up-front cost of entry. 11 The player profile of the big game 12 group also reflected more closely the profile of New 13 York. Among other characteristics, the average 14 household income for the big game was higher than 15 Powerball. That meant more disposable income to spend 16 on the game with household incomes of $68,800 in the 17 big game states versus 58,300 in the Powerball 18 states. The concentration of player based and the 19 lottery retailers in major markets for the big game 20 had really significant relevance to expected New York 21 player performance. For example, the performance of 22 lotto in New York City -- in the New York City Metro 23 Market on a per capita basis is three times higher 24 than it is in up state New York. Also, New York 25 Millennium Millions, the big game that I had talked 0113 1 about that we had in 1999 and 2000, had a 50 percent 2 higher performance in the New York metro area than in 3 upstate New York. 4 In addition to the metropolitan 5 characteristics and the higher disposable income per 6 household and the higher population averages, the big 7 game states, as -- as Rebecca and Penny pointed out, 8 were in five of the top ten media markets. And 9 here's -- no one has talked about this, but this 10 really provides much greater flexibility to max market 11 to and create excitement for the greatest number in a 12 short -- in a short span of time. So Boston, Detroit, 13 Chicago, Atlanta were more similar to our metro areas 14 than the cities in the Powerball states. And that's 15 not to disparage Montana, which is my favorite place 16 on earth. 17 In terms of the impact of a multi- 18 jurisdictional game on New York games, we also very 19 carefully considered those drawing dates, and you've 20 heard both sides. We really felt that the Tuesday, 21 Friday draw days would provide less competition to our 22 lotto game, which has its drawing on Wednesday and 23 Saturday. Our goal was to air a game that would not 24 compete head on with our very profitable lotto game. 25 An additional consideration was it was 0114 1 a smaller membership. The group is more streamlined 2 in terms of decision-making, in terms of jackpot roll 3 ups and game changes. Historically, the New York 4 lottery has been accustomed to evaluating, planning, 5 and executing game improvements within a very short 6 time frame in order to respond to marketplace 7 dynamics. We do things. We really do things in a New 8 York minute. But this flexibility and responsiveness 9 to the market place has played a key role in achieving 10 our record sales. 11 In late 2001, we were also faced with a 12 sizeable entry fee with MUSL, which I'm glad to see 13 they've waived in your case. But we were assessed 14 $17.8 million of fund reserves, which we would not 15 have been able to use for other games within New 16 York. It would have to be -- it would have to be for 17 the Powerball. Also, there were expenses for fixed 18 assets, board operating costs, and drawing costs. 19 Again, at the time the operating costs for the big 20 game was about $45,000 a year. And as -- as 21 Penny Kyle pointed out earlier, now it's about 22 $23,000. More states, lower costs because it's -- the 23 costs really don't change that much. 24 So ultimately it was a business 25 decision for New York. And the factors are similar 0115 1 size, the manageable work group, the similar profile, 2 the lower cost really allowed us to join the seven 3 states, now ten because Ohio and Washington also 4 joined, that make up Mega Millions. So in October, 5 2001, to the introduction of Mega Millions in May, 6 2002, with Ohio and New York, the time -- the time 7 span was six and a half months. We went from 8 legislation to actually selling in six and a half 9 months. 10 So the question is, was it the right 11 decision? The current fiscal year average weekly per 12 capita sales was 50.8 cents. We met our sales goals 13 on Mega Millions of 375 million. Now, remember our -- 14 we have a very strange fiscal year. The budget is due 15 on the 1st of April, and it never gets passed on the 16 1st of April, April Fool's Day. Again, it goes back 17 to -- anyway. So we did not have a full 12 months of 18 selling, but we did sell 375 million dollars' worth of 19 tickets, and the revenue goal was met of 160 million. 20 We're now on track to exceed the goal that we have for 21 this current fiscal year which began April 1st of $450 22 million and $188.4 million to education. Mega 23 Millions was indeed a significant contributor to a 24 national record sales and revenue of $5.4 billion in 25 gross sales and a $1.8 billion in revenue to 0116 1 education. 2 Cannibalization of our lotto game, our 3 most profitable game was held below the expected level 4 of 30 percent. In fact, the per capita performance 5 for this calendar year, New York ranked number four 6 among U.S. lotteries, behind Florida, Texas 7 lotteries. And that's a lotto game with 40 percent 8 prize payout. So the two jackpot games in New York 9 netted over $210 million in additional sales. 10 And while "Friends" may be supposedly 11 in New York City, it's shot in L.A. Leno is in L.A. 12 But on February 21st, 2003, the top ten list on David 13 Letterman's show was our Megaball mascot. The ten 14 good things about being this woman, and we have that 15 on our web site if anyone is interested in seeing it. 16 As we were driving back from the state- 17 wide Mega Millions' launch event, the question most -- 18 as you might expect -- most often asked as we answered 19 the calls on our cell phones was, "Why Mega Millions? 20 Why not Powerball?" And we knew because of the name 21 recognition, it's like Kleenex. It's like Xerox. 22 And -- and it's wonderful. It's a wonderful brand 23 name. Because of it's longevity, Powerball has the 24 name recognition in New York player runs of 79 25 percent, while the big game was at 29 percent. And 0117 1 while initially our folks may have seemed to have 2 preferred the name Powerball, New York has preferred 3 Mega Millions from the very start. 4 In August, 2002, only just a few short 5 months after the first tickets went on sale, Mega 6 Millions brand awareness had surpassed Powerball in 7 New York. 88 percent for Mega Millions, 85 percent 8 for Powerball. Among lottery players, nearly six in 9 ten have played Mega Millions since its introduction. 10 Among frequent lottery players, nearly six in ten have 11 played Mega Millions in the last 30 days. And as far 12 as cross-playership, more than eight in ten Mega 13 Millions players also play lotto on a frequent basis 14 and over half also play instant games on a frequent 15 basis. 16 The statistics indicate we've made the 17 right decision, and New York would welcome the great 18 state of Texas as part of Mega Millions and believe 19 that the same reasons apply. 20 And, again, I want to thank you very 21 much for this opportunity to present to all of you, 22 and the -- the charts are in your little handouts. 23 Okay. Thank you. 24 Oh, we had -- the winning ticket 25 thing. We had 206 second prize winners of a $175,000, 0118 1 and that's a big deal. And that has played very, very 2 well. And, in fact, in the fiscal year we had 9.3 3 million winning Mega Millions tickets. So Ms. Kyle. 4 MS. KYLE: We have one last thing to 5 show you. One of the earlier speakers said that 6 you-all ought to be considering, where is the edge as 7 you make your decision today. We think you ought to 8 be considering, where is the fit? Where does Texas 9 fit in each of these games? And so we think we have a 10 little something here -- you'll have to bring the 11 lights down -- to help show you that we think the fit 12 is with Mega Millions. 13 (Video feed of commercials.) 14 MR. GREER: There we go. Well, Thank 15 you. That was great. We appreciate it. We do have 16 some questions for you. 17 MS. KYLE: That was prepared totally 18 in-house at the Virginia lottery. 19 MR. GREER: I had a couple of things 20 while Margaret is up there. First off, I noted in the 21 earlier presentation there specifically was some 22 swipes by the New York press when y'all got in there. 23 And those kind of stood out to me, and I was glad you 24 came because I wanted you to identify and talk about 25 that for a minute. 0119 1 MS. DEFRANCISCO: Reagan, you have a 2 lot of experience with the New York Post. They love 3 taking swipes. 4 MR. GREER: All right. 5 MS. DEFRANCISCO: It's their favorite 6 hobby. So, no, once the game was established, as I 7 said, people really embraced it. And -- and Powerball 8 is the word. But when people are buying a ticket, 9 they don't care what they are. They just know the 10 jackpot amount. What kind of jackpot is it. And some 11 people to this day, don't necessarily say Powerball or 12 Mega Millions. They'll say, I want that ticket for 13 tonight. And, again, I think it is absolutely true 14 that -- and it's been pointed out -- that people who 15 don't usually play the lottery at all or are very 16 infrequent players come in at that point. And, again, 17 they don't care what the name -- what the name of the 18 game is. All they care is they want to lay down the 19 dollar for the jackpot. 20 MR. GREER: And along those same lines, 21 you touched on it a minute ago, but you went quick, 22 and I was just wondering if -- 23 MS. DEFRANCISCO: Sorry. 24 MR. GREER: Well, that's fine. You did 25 great. And -- and what I wanted to ask you about 0120 1 specifically was the numbers you ran through on the 2 cannibalization and the name ID and -- 3 MS. DEFRANCISCO: Right. 4 MR. GREER: Give me those again. 5 MS. DEFRANCISCO: Well, it was 6 essentially -- it was 29 percent for the big game, 7 when it was the big game, and Powerball hit 79 8 percent. But by the time we had Mega Millions out for 9 just a couple of months, the -- the brand awareness 10 had -- had totally surpassed by 88 -- 88 percent 11 awareness of Mega Millions and 85 percent awareness of 12 Powerball. So we were able to plant that seed pretty 13 quickly. 14 MR. GREER: And that was one of my 15 questions for all of y'all. Who -- who planted the 16 seed? Did you -- do you plant your own seed in New 17 York? And you in Georgia? And you in Maryland? Is 18 there anything y'all -- because -- y'all did as a 19 group? 20 MS. KYLE: Well, we -- we started 21 something new with Maryland. We are the -- the two 22 jurisdictions that touch. And the Maryland lottery 23 and the Virginia lottery have gotten together to do 24 Mega Millions promotion. We could -- we, Virginia -- 25 and I think this was true for Maryland too -- could 0121 1 not afford the Washington D. C. market. It is so much 2 more expensive than what we experience in Maryland and 3 in Virginia, but we wanted to be there. And what 4 we've done over the past two years is Maryland and 5 Virginia have put their advertising budgets together 6 for Mega Millions. We are running the same television 7 spots. We're running the same radio spots, and we are 8 buying in Washington D.C. now when -- the Virginia 9 lottery will be 15 years in September. We had never 10 bought in the D.C. market before on TV and radio 11 because we couldn't afford to, but we're sharing that 12 experience with Maryland. It's costing us 50 percent, 13 and it's turned out to be great. But normally, 14 everybody -- if you don't have a neighboring 15 jurisdiction you want to work with, I think everybody 16 is working independently. 17 MS. DEFRANCISCO: Well, we do talk 18 about ideas -- marketing ideas together, especially 19 when we -- when we launch or when the jackpot is 20 getting -- getting up there like it was, we will have 21 a marketing committee meeting and talk about just 22 different ideas that maybe can be implemented in each 23 individual state. 24 MR. GREER: Okay. 25 MS. KYLE: One thing that -- that hurts 0122 1 that a little bit -- and I'm the one, so I might as 2 well acknowledge it. You-all may have heard that 3 Virginia has the most restrictive advertising statutes 4 on the books, and so I am governed very tightly by 5 what I can do or say in advertising. And so if we 6 were to do anything, the ten states, hopefully 11 7 states together, it would have to be done in a way 8 that it could -- could pass the statutory requirements 9 that I'm under in Virginia, which I think are more 10 strict than they are in any of the other states. I 11 have to talk about the odds of every game in every 12 advertisement, and if I focus on the top prize, and 13 they would say that in Mega Millions I am, I have to 14 tell the odds of winning just the top prize, not the 15 overall odds of winning. I -- I have all kinds of 16 very specific requirements like that in Virginia. 17 MS. PAUL: And if I might add to that. 18 I -- I'm one of those people who is a traveling 19 lottery nomad. I ran the Illinois lottery. I started 20 the Florida lottery, and then I started the Georgia 21 lottery. And one of the things I already know in the 22 almost 20 years I've been in this business is what's 23 right for Chicago is not what's right for Miami, which 24 is not what's rights for Atlanta. So it's very 25 important for each of us that we do what is best in 0123 1 our state and certainly in Texas. What's right for 2 Texas is what the Texas lottery will do. 3 MR. GREER: Penny, specifically, you 4 touched on the shared cost thing up front. I'm sure 5 y'all talked a lot about it. But you -- how is 6 that -- how did you figure that? 7 MS. KYLE: We put a budget together, 8 and we are in the process right now of -- of getting 9 our budgets together. Not all of us have -- as 10 Margaret pointed out, not all of us have year-end on 11 June 30th, but most of us do. It will end tonight. 12 And so our staffs, the finance committee and -- and 13 all of the other staffs have been working to put 14 together the Mega Millions' budget for the coming 15 year. And there are not many items on it. We'll be 16 glad to share that with. I think we have the cost of 17 producing the draw show and -- and getting it cabled, 18 uplinked on satellite so that it can be picked up in 19 the state, the auditors, the cost of -- of Virginia 20 doing and -- and manning the web site, the cost of us 21 doing the media center there. I -- I mean, it's -- 22 it's minimal. 23 What we do is we each put down what -- 24 what it's costing us at our state to do that with no 25 override on it, no overcharge, or anything. It's just 0124 1 actually some person's time and how much that's 2 costing. And we bill that to Mega Millions and we 3 divide it by ten, which is the 23,000 -- 21,000 if it 4 were 11. And the cost has been fairly stable. I 5 mean, we don't -- we haven't done anything 6 extraordinary that would cause a huge uplift in those 7 costs. Obviously, one of the things I forgot was 8 moving the draw show around. If -- if the draw show 9 came to Texas for the state fair, that would cost a 10 little bit. But it's being shared 11 ways. I can't 11 imagine how much it would cost each -- very minimal. 12 MS. PAUL: If I might add to that. And 13 you said something -- one of the questions, 14 Commissioner, you asked earlier. Depending on each 15 state's rules and regulations and -- and each state's 16 statutes, many of us have our own reserve funds. I 17 have a reserve fund in Georgia for Mega Millions, but 18 I keep the interest on that, which more than offsets 19 the $21,000 as opposed to that four and a half million 20 interest on those reserve funds going to manage an 21 outside group. So I keep the interest on my reserve 22 funds in my state. And obviously the interest on -- 23 on those reserve funds more than pay for our operating 24 costs. 25 MR. GREER: I'm glad that you addressed 0125 1 that because that was my next thing I was going to -- 2 that -- that was a good point and a clarification. 3 MS. KYLE: Well, and -- and may I 4 follow up on that? That -- that's a touchy subject in 5 Virginia. Virginia feels that any money that comes 6 from its treasury or its lottery is its state's 7 money. And so if that money went somewhere to a large 8 reserve fund, we would feel like -- you know, I know 9 it gets all mixed up in there, but Virginia wouldn't 10 feel that way. Virginia would be saying we sent -- 11 what was Margaret saying -- 17 and a half million 12 dollars to a reserve fund that's out of state. My 13 state would be expecting the return, the interest 14 return on that 17 and a half million. And my state 15 would want to know how that money is being spent. 16 Just because it's sent out of state to reserve fund in 17 Virginia, it would not be considered no longer state 18 money. It would be considered the Commonwealth of 19 Virginia's money. 20 MR. GREER: I only have one more, and 21 then I'll turn them loose. 22 MS. PAUL: Oh, dear. 23 MR. GREER: Yeah. Look out. 24 Specifically going back, because I know you touched on 25 it but I want to go there again on this whole 0126 1 cannibalization thing. Go over that, you know, just 2 one more time to give another perspective on what did 3 it do as far as percentages to your numbers. 4 MS. DEFRANCISCO: Well, that is what is 5 happening right now is that -- that -- that both -- 6 having both games actually brought in 210 million 7 extra dollars, which we didn't have before. And we 8 were able to hold lottery cannibalization below 30 9 percent, which is what -- what everyone expects to 10 happen. And they've both been -- been chugging along 11 greatly. And I think that they -- in fact, this point 12 was made earlier. With different draw nights, we know 13 that people are taking their winnings from one game 14 and putting it into the other, which is one night 15 going in to buy lotto tickets and taking the money 16 they win and reinvesting it, which is a great thing. 17 And we have -- again, we are a very old lottery with a 18 very old lotto game. 19 COMMISSIONER WHITAKER: How do you, you 20 know, determine your starting prize? Do you have like 21 a set minimum, or is it based on just a dissipated 22 pool of contributions for that particular draw. 23 MS. KYLE: Well, the -- the ten million 24 dollar start is -- is new to Mega Millions. We had a 25 five million dollar start in the big game, and that 0127 1 was determined by the ten states together, looking at 2 what the expected sales would be. What did we need to 3 advertise in order for people to believe that it is a 4 big jackpot game. But that's the kind of decision 5 that can be looked at on a regular basis with the -- 6 the ten states. I mean, if we were to think, gee, ten 7 million is too high, we ought to be advertising seven 8 million, we would have a conference call tomorrow and 9 ask the finance committee to look at, should we be 10 advertising ten instead of seven. In fact, is that 11 what you're asking? 12 COMMISSIONER WHITAKER: The whole -- 13 MS. KYLE: Or ten instead of 12. 14 COMMISSIONER WHITAKER: Yeah. The 15 whole cluster it was actually. But is your intention 16 to set a number that will actually be matched by sales 17 for that particular draw? 18 MS. KYLE: Yes. 19 COMMISSIONER WHITAKER: And if your 20 experience is different, then you would very quickly 21 adjust it. Is that what you're thinking? 22 MS. DEFRANCISCO: Yes. Yes. 23 COMMISSIONER WHITAKER: Okay. 24 MS. DEFRANCISCO: And actually with the 25 addition of Texas, we would probably be looking at the 0128 1 beginning jackpot -- again, with your anticipated 2 sales -- and it not might not stay at ten million. It 3 could go higher. 4 COMMISSIONER WHITAKER: Did your 5 starting jackpot for your regular lottery in New York 6 suffer because the dollars were drawn to the Mega 7 Millions? 8 MS. DEFRANCISCO: No. 9 MS. KYLE: It -- it's -- it's almost 10 like you get -- at least in Virginia, it's almost like 11 you get two different groups of players. You'll get 12 the player that is -- is sort of your traditional, 13 regular player who, in Virginia, has been playing our 14 Lotto Virginia, now Lotto South, and they like the 15 lower odds and they know it's easier to win, by far 16 easier to win, and they're -- they're not the people 17 that think they need a 100 million to have a win, and 18 they continue playing. 19 We have subscriptions in Virginia, and 20 so I have a subscription base on my lotto game. I 21 also sell subscriptions to Mega Millions too, but -- 22 but I have a subscription base of the regular folks 23 that just like the -- the lotto game with an easier 24 chance to win and the jackpots are lower, but they 25 understand that. They understand that trade off. 0129 1 Then you've got your other group who 2 may only want to play Mega Millions, and the fact that 3 there are differences in those jackpot levels, my 4 educated consumer in Virginia -- because we have to 5 talk about odds so much -- and you can walk up to a 6 person on the street, and they'll tell you just like 7 that. It's a two million starting jackpot for Lotto 8 South. It's a ten million for Mega Millions and 9 they'll tell you why that is and they know it's 10 because of the odds. 11 COMMISSIONER WHITAKER: What do you do 12 with unclaimed prizes if the unclaimed -- unclaimed 13 prize came, for instance, from Georgia? 14 MS. PAUL: Well, each state's unclaimed 15 prize pool is determined by that state's own unclaimed 16 prize. So in if it's a jackpot game and that prize 17 goes unclaimed, then the money gets sent back to the 18 state in the same proportion from which it came. 19 MS. DEFRANCISCO: We actually have that 20 instance. We have two unclaimed Mega Millions jackpot 21 from Brooklyn, and they're -- one was Christmas Eve. 22 So when -- when it gets to a year -- because New York 23 rules apply, when it gets to a year, that money will 24 be then disbursed back. 25 MS. KYLE: And if it were Virginia, 0130 1 we're six months. 2 COMMISSIONER WHITAKER: Then Virginia 3 would be happy with -- if it did have an unclaimed 4 prize, then it goes back to all ten states. 5 MS. KYLE: I get my share back, but -- 6 but everybody gets their share. 7 MS. DEFRANCISCO: And with unclaimed 8 prizes, it varies from state to state what each state 9 would do with it or whatever -- when it gets returned, 10 it's whatever they're allowed do with within their own 11 states. 12 COMMISSIONER COX: I believe your odds 13 are 135 million to one, and the -- the Powerball is -- 14 Powerball is about 120 to one. If Texas were to come 15 into your game, would you see revising the matrix, 16 taking into account the 20 percent increase in 17 population? 18 MS. KYLE: Well, we've -- we've been 19 asked that before. And our answer has been, we would 20 rather wait and have Texas be voting at the table and 21 make that decision. We want -- we don't want to make 22 a decision for the Texas lottery, and so we have left 23 it like it is. We would like to have you-all come to 24 the table and get your thoughts. I mean, no one knows 25 better than you-all about what a matrix change -- 0131 1 what -- what kind of -- what kind of reaction a matrix 2 change would cause in your jurisdiction. And so 3 that's not the kind of decision we think we ought to 4 make without you guys voting at the table. 5 MS. PAUL: And we're real anxious for 6 you to come to that table and vote with us. 7 COMMISSIONER COX: Is your -- is your 8 voting the same as Powerball -- 9 MS. KYLE: No. 10 COMMISSIONER COX: -- said there was? 11 How is your voting? 12 MS. DEFRANCISCO: One state, one vote. 13 MS. PAUL: But we also equally share 14 all the expenses. We don't have two -- you know, we 15 don't have a second tier of voting. It's just 11 16 people at the table. One state, one vote. 17 MS. DEFRANCISCO: And I just pummel the 18 smaller states when I want what I want. 19 MS. PAUL: Yeah. So we want Texas to 20 come pummel New York. 21 MS. DEFRANCISCO: And -- and actually 22 the one thing I didn't say is that I was actually 23 quite worried as for the folks of the New York 24 lottery, about -- about us being an 800-pound gorilla 25 in the Powerball organization because we would be so 0132 1 much massively larger with -- with such massive 2 sales. And that's -- that's really -- that was 3 another thing, minor but still played in it. And I 4 did worry about having to be the big gun, as it were, 5 where the states that we have now have populations 6 that are much higher, as I said, with metropolitan 7 areas that more closely resemble New York. 8 MS. PAUL: And sales, although, we 9 would all like to do six billion. That's a target to 10 be there. There are five of us that do over two 11 billion, half of us. 12 COMMISSIONER COX: Well, I guess my 13 concern in your position would have been that I would 14 be the 800-pound gorilla, but be treated like an 15 average gorilla. 16 MS. DEFRANCISCO: But I hoped certainly 17 that -- there -- there certainly was some concerns. 18 And when you have -- I just think it's much more 19 manageable in a smaller group to be able to make 20 decisions and, again, to turn on a dime, which we are 21 required to do. And then that becomes ever more 22 critical since September of 2001, that we would have 23 to react to the marketplace very quickly. 24 COMMISSIONER COX: Now, how -- how does 25 equal voting help you react more quickly? 0133 1 MS. DEFRANCISCO: Well, just the whole 2 group because it's small, because there are ten of us, 3 we are able to make decisions much more quickly and to 4 get things going and make things happen. As I said, 5 it was six and a half months from the time our 6 legislation passed it to the time we were selling a 7 ticket. 8 COMMISSIONER COX: And one other 9 question on the annuitizing of the jackpots. When you 10 buy those annuities, I -- I guess you don't have a 11 balance sheet, but if you had one, would those 12 annuities be totally off your balance sheet. They're 13 gone. They're not your concern. You're not going to 14 sell them for gains. You're not going to have to sell 15 them for losses. They're gone. 16 MS. PAUL: We're very different than 17 the other group, in that if the jackpot winner is from 18 Texas, Texas would purchase that annuity and it would 19 be on Texas' books. If New York has the winner, New 20 York purchases it. If Georgia has the winner, Georgia 21 purchases it. So it's not a thing off there that 22 isn't on each and every one of our individual books. 23 MS. KYLE: And now there are a couple 24 of states that didn't feel comfortable doing that, and 25 then they asked Virginia to purchase the annuity 0134 1 streams for them. And so we do occasionally purchase 2 an annuity for another state that's had a jackpot 3 winner that didn't want to go in the market and do it 4 in sales. But ordinarily, everybody purchases their 5 own annuity to fund their own jackpot winner in that 6 state. It's not something that another group of 7 people does for you. 8 CHAIRMAN CLOWE: I think those are the 9 questions we have for you-all. Why don't we thank 10 these ladies and ask the commission to go back up and 11 enter into a discussion. And as I mentioned earlier, 12 I have some questions I'd like to ask both groups 13 together. Okay. 14 MS. KYLE: Thank you. 15 MS. PAUL: Thank you-all very, very 16 much for your time. 17 MS. DEFRANCISCO: Thank you. 18 (Recess.) 19 CHAIRMAN CLOWE: Commissioners, we have 20 a number of people who have signed up who want to 21 speak to us. We have also the representatives of 22 these two groups. I'm looking for some indication as 23 to your willing to press forward and try to complete 24 our agenda before we take a lunch break. What's your 25 pleasure? 0135 1 COMMISSIONER COX: Commissioner, you're 2 traveling. What's your pleasure? 3 COMMISSIONER WHITAKER: Continue on. 4 CHAIRMAN CLOWE: Let's press forward 5 then. 6 For the record, the commission returned 7 from it's recess at 11:19 a.m., and the meeting was 8 then started off by Reagan Greer only. I want to make 9 sure that everything that's happened is on the record 10 since we returned from that short ten-minute recess. 11 Any comment, Counselor? 12 MS. KIPLIN: I'm sorry. I was talking 13 to the executive director. I apologize. 14 CHAIRMAN CLOWE: You missed it. 15 Reagan, I want to -- we're going to 16 have a discussion, but we want to hear from the public 17 individuals -- 18 MR. GREER: Yes, sir. 19 CHAIRMAN CLOWE: -- who want to testify 20 first. But at this juncture, I want to ask you. 21 We've had presentations from two groups. This law 22 that's been passed and signed by the governor is 23 permissive. 24 MR. GREER: Yes, sir. 25 CHAIRMAN CLOWE: It does not direct us 0136 1 in any direction. Are there any other choices the 2 commission has to look at this time? 3 MR. GREER: There are other games that 4 are out there that we have examined, and from our 5 perspective because of the starting assets of what 6 these jackpots come forward with is up around two 7 million, they're not in a comparable -- comparable 8 capacity. We did get word out to the other groups if 9 they wanted to participate, and they did not express 10 an interest. So these were the two groups that have 11 stepped to the table today and have given us 12 consideration. 13 CHAIRMAN CLOWE: So, in your opinion, 14 this is it. 15 MR. GREER: In my opinion, this is it. 16 CHAIRMAN CLOWE: I mean, we have -- we 17 have three choices here. 18 MR. GREER: As far as what's best for 19 the state today, these two groups are established. 20 They obviously made good presentations as to what they 21 bring. And from my perspective, these would be the 22 two best choices. 23 CHAIRMAN CLOWE: Okay. So we have 24 those two choices or not. 25 MR. GREER: Yes, sir. 0137 1 CHAIRMAN CLOWE: Okay. 2 COMMISSIONER COX: Or -- 3 MR. GREER: Or none. 4 COMMISSIONER COX: -- both. 5 CHAIRMAN CLOWE: Well, we're going to 6 talk about that. 7 COMMISSIONER COX: Okay. 8 CHAIRMAN CLOWE: We're going to talk 9 about that. 10 Could we ask -- since you-all love each 11 other so much. Could we get Chuck and -- and one of 12 the ladies to come up to the podium so we can ask you 13 joint questions. Or two to one and three to one, it 14 doesn't make any difference. 15 MS. KYLE: We do have men in our group. 16 CHAIRMAN CLOWE: But they're -- 17 MR. MAHLMAN: Wait a minute. Are we 18 evening this? 19 MS. DEFRANCISCO: In our -- in our 20 organization -- in the Mega Millions' organization, 21 Penny is the elected chair -- 22 CHAIRMAN CLOWE: Okay. 23 MS. DEFRANCISCO: -- for the year so... 24 CHAIRMAN CLOWE: Great. I'm a little 25 confused about your corporate structure, Penny. And 0138 1 I'm not certain what the entity is that you make an 2 agreement with when you sign the documents that you 3 talked about. And -- and could you help me 4 understand? It's not a corporation? 5 MS. KYLE: No. It's a consortium. 6 It's not -- it's not, so to speak, a legal entity 7 that's incorporated anywhere. But all of our states 8 bind themselves to the agreement, and we -- I -- 9 where's Kim? Yeah. I think you've -- you've seen the 10 agreement. 11 MS. KIPLIN: Yes, I have. Yes, I 12 have. Mr. Chairman, it's an agreement among the party 13 states. There is no association that's been created. 14 There is no entity. It's -- it's an agreement among 15 several states. 16 CHAIRMAN CLOWE: Okay. In that regard, 17 if a disgruntled individual who has justiciable rights 18 and can prove damages, sues you as the Mega Million 19 group jointly and severally in states. And let's say 20 that there are legal expenses of a million and a half 21 dollars, and then there's an award of $50 million. 22 Who pays for that? 23 MS. KYLE: I'm a lawyer, but when they 24 hired me at the lottery, they told me not to be the 25 executive director and practice law for my lottery. 0139 1 So I have -- I have a lawyer at home who did this. 2 And I am told by my representative from the AG's 3 office that we cannot be sued jointly and severally. 4 Kim? 5 MS. KIPLIN: I've taken a -- 6 Mr. Chairman, I've taken a look at their agreement. 7 Only Mr. Marker will be the chief counsel on the 8 agreement part should the decision by the commission 9 be to -- to enter into a -- into a multi-state lottery 10 game. And as I read it, it's each state is -- is sued 11 in their own capacity. And, of course, Texas enjoys 12 several defenses. Other states may not because of the 13 sovereign duty. There are some states that I think 14 are corporation run. I'm not that familiar with your 15 own organic law, but ours is -- is pretty clear. 16 We're a state agency and so we enjoy the rights and 17 privileges of a state agency. We do have our own 18 statutes, our own rules, that if either one of these 19 games would -- including the Mega Million game, that 20 if anybody wanted to sue who has purchased a ticket in 21 Texas and is making a claim in Texas, it would have to 22 follow the state -- the Texas law and Texas rules, 23 Texas policies, and Texas records procedures. 24 MS. KYLE: And -- and we were advised, 25 at least by my attorney general's office, not to make 0140 1 this an -- a legal entity because my AG's office did 2 not want joint and several liability. And so the way 3 that it is understood in Virginia at the attorney 4 general's office is, should a dispute arise in 5 Georgia, they're going to have to take their claim up 6 with the Georgia lottery. They cannot sue the 7 Virginia lottery because we don't have any mechanism 8 by which we are all captured together that they can 9 sue. If the complaint arises in Virginia, they're 10 going to have to sue the Virginia lottery, not these 11 others. And we enjoy the same privileges that you do, 12 being protected as a state agency. And, of course, 13 our risk management of the state would step forward to 14 fund any kind of -- of claim, if any, that would be 15 awarded. 16 CHAIRMAN CLOWE: Okay. Well, we really 17 need to understand the down sides. You know, you've 18 been very upbeat this morning as have the Powerball 19 folks. And I understand that it's all good news from 20 your standpoint. The fact is, in this state, there 21 are about a third of the people who really don't want 22 the state to be in the gaming business. 23 MS. KYLE: Well, and, you know, I -- I 24 meant -- 25 CHAIRMAN CLOWE: Now, wait. You didn't 0141 1 let me finish. 2 MS. KYLE: Okay. I'm sorry. 3 CHAIRMAN CLOWE: And we have to be 4 respectful and mindful of that group of people in this 5 state and be certain that we protect the state and 6 their interests. So I know there are some down sides 7 to this, and I'm trying to flesh those out so that we 8 can understand them. 9 MS. KYLE: It's -- two things, and I 10 didn't mean to interrupt. We were not here to 11 convince Texas to join our multi-state game. That's 12 the decision you-all need to make. We were just 13 invited to come down and should you choose to join 14 one, we would like for you to consider us. But we're 15 certainly here to tell you or to tell the public that 16 you-all absolutely have to have a multi-state game, 17 first of all. I mean, and there are other big states 18 out there. California and Florida, two others that 19 don't have a multi-state game. So that's got to be 20 your decision. But once you cross that bridge and you 21 are looking at a multi-state game, we would like to be 22 considered. 23 On the legal issue, I can certainly get 24 for Kim or -- or for anybody that would want here, I'm 25 sure I can get some sort of opinion even in -- 0142 1 informal or formal opinion from our attorney general's 2 office as to what we looked at legally in 1996 when we 3 joined this game, and what at least the Virginia 4 attorney general's office believes, as far as the 5 rights based on just what questions you've asked. I 6 know that that doesn't mean -- each AG wants to have 7 their own opinion. But if your attorney general's 8 office would like to have an opinion from us or an 9 opinion from New York or something, I'm sure we can 10 furnish that to you and let you know what the legal 11 thinking on those liability issues are in another 12 state. 13 CHAIRMAN CLOWE: I -- I would imagine 14 that it would be helpful, but I think you're right. 15 Our own attorney general values their own opinion more 16 than anyone else's, and that's understandable. But 17 these are issues that we have to look at -- 18 MS. KYLE: Right. Absolutely. 19 CHAIRMAN CLOWE: -- before. And just 20 in regard to the remark that you made, how did we get 21 invited to join your organization? Was there a formal 22 vote, and did someone put us up for membership and -- 23 would you say how that occurred? 24 MS. KYLE: Yes. I think we were 25 contacted initially by Texas when you-all were -- when 0143 1 your legislation was progressing. We received word 2 that if you-all did get legislation allowing you to 3 have a multi-state game that you would want 4 presentations made by all the parties, both of us and 5 perhaps any others that are out there. So it wasn't 6 a -- a target inquiry. I think all of us got the same 7 information as your legislation was progressing. Once 8 we got that information, then we had a meeting at 9 which time we voted on -- one state, one vote -- on 10 whether or not we would want to admit Texas to the 11 Mega Millions game should you get your legislation and 12 should you decide that it's Mega Millions. 13 Now, obviously, we're months ahead of 14 this. That meeting was December the 13th in New York 15 with the New York lottery, but we had representatives 16 from each one of the states there, and we had that 17 vote taken at that time. That was just to get us 18 prepared for if we were invited to come down for a 19 trip to make a presentation. We didn't want to waste 20 your time and come here and not know how our group 21 would vote. And so I don't want it to be read into -- 22 to anything that the reason we had the meeting on 23 February 13th indicated that we knew anymore than what 24 we would know living in Virginia, Georgia, and New 25 York. But just that we received word that if you-all 0144 1 did have legislation, you would like for us to come 2 down and make a presentation. So before we came, we 3 had the vote taken. 4 CHAIRMAN CLOWE: So you're -- clearly, 5 you are here on our invitation, but there was a vote 6 and -- 7 MS. DEFRANCISCO: We are clearly here 8 with the vote of our other members. 9 CHAIRMAN CLOWE: Has anybody ever been 10 voted out? 11 MS. KYLE: Let me tell you what 12 happened. 13 CHAIRMAN CLOWE: You see, these 14 questions have to be asked. 15 MS. DEFRANCISCO: They should -- they 16 should be asked. 17 MS. PAUL: Absolutely. 18 MS. KYLE: What usually happens is 19 something like what happened in your situation. 20 People just don't -- you just don't pick up the phone 21 one day and somebody say we want to apply for 22 admission to Mega Millions. You'll get that first 23 phone call from an entity that says we are thinking 24 about a multi-state game, and we would like to know if 25 we wanted to apply to Mega Millions, how do you do 0145 1 that and would you-all consider us? Right then on 2 that first call is when we dissuade candidates that we 3 think would not fit the mix. And that has happened 4 twice in the last 12 to 14 months, where we've gotten 5 phone calls from smaller jurisdictions who were just 6 feeling us out to see if they might want to apply. 7 And up front I say, you know, there are other multi- 8 state games I think you ought to consider because if 9 you look at who we are and what size we are, I don't 10 quite see how you-all fit. And in both those cases, 11 we gently let them know that they ought -- they ought 12 not to apply. 13 CHAIRMAN CLOWE: That's a good answer. 14 And those were states? 15 MS. KYLE: One was a jurisdiction, and 16 one was a state. And they both belong in the MUSL 17 jurisdiction game now. 18 CHAIRMAN CLOWE: And what would your 19 reaction be as a chairperson, if you can speak for 20 your organization, if a country approaches you or some 21 entity like that and wanted to join? 22 MS. KYLE: Well, in the three of us you 23 have three jurisdictions that are not currently 24 actively looking at that international game. And so 25 there are some in Mega Millions that are attending the 0146 1 enter -- paid their up front fee and are attending the 2 international game meetings with MUSL to look at 3 joining something with other countries. And I don't 4 know how -- 5 MS. DEFRANCISCO: What if Spain called 6 tomorrow and wanted to do Mega Millions? What -- what 7 process, is that what you're after, what process we 8 use? 9 MS. KYLE: Well, the first thing 10 is currency, but -- but I know -- 11 CHAIRMAN CLOWE: Not -- not so much as 12 process -- 13 MS. KYLE: Okay. 14 CHAIRMAN CLOWE: -- to answer your 15 question, but the philosophy. If Canada or Mexico 16 approached you and said, we want to be a part of this 17 organization. What philosophically would you say -- 18 MS. KYLE: It would end up before us 19 and then vote on a discussion because we have never 20 had a discussion like that in our Mega Millions game. 21 We have never looked at admitting a jurisdiction that 22 doesn't use U.S. currency. That's not to say we 23 wouldn't, but it would be the first of that kind of 24 discussion if someone called us tomorrow. In fact, we 25 only have jurisdictions that are using U.S. currency 0147 1 right now. 2 CHAIRMAN CLOWE: Okay. What would your 3 reaction be philosophically merging with Powerball? 4 MS. KYLE: Is the U.S. ready for that? 5 CHAIRMAN CLOWE: A national lottery. 6 MS. KYLE: A national lottery but not a 7 national beneficiary, so really not a national 8 lottery. Maybe national geographically but not a 9 lottery whose funds go to benefit a national 10 beneficiary. We've called and still that would be 11 benefiting our own beneficiary. It seems to me that 12 having Powerball and Mega Millions join doesn't get 13 you that national lottery that they've sometimes 14 talked about in Washington D.C. because they're 15 looking for a lottery to fund a national beneficiary. 16 I -- I don't know. We've -- we've not ever talked 17 about it. 18 MS. PAUL: My thing -- I would be 19 concerned with the Wednesday and Saturday draw. 20 CHAIRMAN CLOWE: If you could get on 21 the mike so we can have your answer on the record. 22 Thank you. 23 MS. PAUL: We have -- we're very active 24 one state, one vote. We've had long discussions on 25 those issues. I would be concerned about a Wednesday, 0148 1 Saturday draw and what it would do to our own in-state 2 lotto games. And we purposely did that that way, and 3 it's on purpose that we have strong in-state games. 4 And if they're willing to join us and do Tuesday, 5 Friday, we might look at it, but I don't think that 6 would happen. 7 CHAIRMAN CLOWE: Well, if I was on your 8 board, you know, Mercedes bought Chrysler and the 9 airlines are merging, and there can be some benefits 10 and -- and you might want to be open-minded to 11 something like that, if there are benefits. 12 MS. PAUL: Absolutely. 13 CHAIRMAN CLOWE: And not take a 14 provincial view. And -- and this is laying a 15 predicate to some questions which are going to follow. 16 Chuck, could I ask you, then, the same 17 questions that Penny and Rebecca have answered and in 18 the same order if you remember what they were. 19 MR. STRUTT: I think they pretty much 20 did it all, but that's about it. We are -- 21 CHAIRMAN CLOWE: First, the -- the 22 lawsuit aspect. 23 MR. STRUTT: We are -- I think if 24 somebody sues you, they're going to automatically name 25 everybody. No matter who they sue, they're going to 0149 1 name everybody. We are an unincorporated, nonprofit 2 government benefit voluntary association. 3 CHAIRMAN CLOWE: But you are 4 incorporated? 5 MR. STRUTT: No. Unincorporated. 6 CHAIRMAN CLOWE: You are 7 unincorporated? 8 MR. STRUTT: Unincorporated. 9 CHAIRMAN CLOWE: How do you do 10 business? Under what -- how do you -- how do you get 11 a license? How do you apply for a license? How do -- 12 how do you register a car? How do you do business? 13 MR. STRUTT: We put it in the name as 14 an association, but it's -- it's more like a 15 cooperative. It would cooperate down here. That's a 16 pretty close approximation, although, we don't have 17 any legal standing. Now, we service sometime. We 18 are, again, a multi-state agreement between states, 19 and that's what we eventually go back to. When we 20 talk to the federal government, we're able to stay a 21 state agency and so... 22 CHAIRMAN CLOWE: And those bonds that 23 Commissioner Cox was asking you about, whose name are 24 those in? 25 MR. STRUTT: Those are in the names of 0150 1 the state lotteries. 2 CHAIRMAN CLOWE: The state lotteries. 3 MR. STRUTT: They actually appear in 4 the state lotteries books. We hold them in trust. We 5 have some limited activities. We can do a book bond, 6 but they actually belong to the state lotteries and 7 they appear on their books. 8 CHAIRMAN CLOWE: And then the next 9 question is relative to how you -- you came to invite 10 us in, and we're glad that you're here but was that 11 similar to the explanation that Penny gave us? Was 12 there a vote? 13 MR. STRUTT: Yes, it was, and it was 14 unanimous. Our vote was unanimous to -- to welcome 15 Texas in. Because we've -- we've gone through the 16 process of exploring and wondering who to bring in and 17 who not to bring in, but we have come finally to -- to 18 the conclusion that the more people you add, the more 19 you can do to design a game that's going to be 20 successful. I'm not saying it's always going to be 21 this kind of a big jackpot game. As you increase your 22 population, you can come up with something. It gives 23 you the opportunities to be creative. 24 CHAIRMAN CLOWE: And have you ever 25 invited anybody out? 0151 1 MR. STRUTT: Well, we've been -- been 2 around a long time. There have been states that have 3 sought to get in, and we excluded them. And the Mega 4 Millions or the big game was one before. 5 MS. KYLE: I was one. They wouldn't 6 let me in, so I had to design another game. 7 MR. STRUTT: Well, we'll let you in 8 now. 9 CHAIRMAN CLOWE: Well, I'm trying to 10 gauge, you know, how much stability there is in these 11 groups. And -- and, as I say, it's all been good news 12 and everybody is happy and everybody is making a lot 13 of money. It's just a question of who's making more 14 money and -- and there -- there have got to be some 15 family quarrels, and -- and I wondered how you settle 16 those and how you discipline and -- and where the 17 organization strength is when you have issues that are 18 unpleasant. 19 MR. STRUTT: Well, as -- as you can 20 imagine, you have lottery directors. And I know 21 Mr. Greer is very even -- even-handed. You wouldn't 22 have a level-headed kind of person, but sometimes 23 directors do have an ego. And when they get in the 24 room, they are used to being bosses there. They're 25 the boss of other people, a bunch of other bosses, and 0152 1 like every family, I think early on, you go through 2 those rougher times, but you -- you eventually learn 3 to respect each other and -- and work it out. And for 4 the past several years, we have had a very good 5 working relationship with all these people. 6 CHAIRMAN CLOWE: And you do have, 7 apparently, in these other states in the Powerball, 8 other jurisdictions. 9 MR. STRUTT: The District of Columbia, 10 they come out of state, and the United States Virgin 11 Islands, which is a territory. 12 CHAIRMAN CLOWE: And have you ever 13 considered an entity like a foreign country? 14 MR. STRUTT: We -- we have had foreign 15 countries apply to the Powerball game. We were 16 limited somewhat until we had some members who still 17 have, they use their authority as an authority to join 18 only with other states, and they interpret territory 19 or the District of Columbia as close enough to a state 20 that they have the authority. So until and unless 21 those members change, we probably won't see the 22 Powerball game going international. Several members 23 have passed a law to get that done that we set off 24 until later. That was our impetus in coming up with 25 the international kind of feel. 0153 1 CHAIRMAN CLOWE: And what's your 2 thought about merging with Mega Millions? 3 MR. STRUTT: Well, I'm a -- I'm a fan 4 that can be creative. You get the population to a 5 certain point, and there's something you can, 6 something you can come up with. I don't -- I don't 7 think we should come up with a game that is 300 8 million to one odds, but there are other things. 9 Sometimes we spend a lot of time marketing both games, 10 and wouldn't it be nice if there was only one brand 11 name to put out there on the street. 12 CHAIRMAN CLOWE: Have you each had time 13 to fairly answer those questions? Are you each 14 satisfied with your responses to this point? 15 CHAIRMAN CLOWE: Okay. I don't want to 16 take the phone out of your mouth. Go ahead. I think 17 I'm reading your mind. 18 COMMISSIONER COX: Well, I -- I -- is 19 it true that Powerball declined membership to 20 Virginia? 21 MR. STRUTT: Well, she should have 22 talked to me about it. 23 MS. KYLE: The way Mega Millions got 24 started was Maryland, Illinois, Michigan, and Virginia 25 were looking for a multi-state game to join and all 0154 1 four of us were told no. I was told that my vote did 2 not go to an official vote, that they did a straw vote 3 and they called and told me what the outcome of the 4 straw vote was and it was negative. That -- now, 5 bordering Powerball states did not want me in there, 6 which were Kentucky, West Virginia, and Washington 7 D.C. And so the -- the then directors -- I'm the only 8 one left. The then director of Illinois, Michigan, 9 Maryland, and I got together and started talking 10 about, well, why don't we just create our own game and 11 design our own game, which is what we did and we added 12 Massachusetts and Georgia. Georgia at the time was in 13 Powerball, and so we created the big game mainly out 14 of necessity because we knew that we were a large 15 state. We had strong lotto games and we wanted to 16 have a multi-state game and we couldn't get in their 17 game. And so we just started our own, and that's -- 18 this all began in 1996. 19 MR. STRUTT: And that -- that has been. 20 MS. KYLE: You've changed your rule, I 21 know. 22 MR. STRUTT: Well, that hasn't been an 23 issue, apparently. It's not so much a rule change as 24 a -- as a -- as a way of thinking. Those states, 25 particularly Illinois was looking, Indiana, Missouri, 0155 1 Wisconsin enjoyed feeding off of the other folks. 2 They enjoyed feeding off the other states. So it -- 3 it -- it was a selfishness that the -- those directors 4 at that time couldn't see beyond. We eventually 5 convinced them that it was a variable to keep going. 6 MR. COOPER: And I was part of it. I 7 was the director of the D.C. lottery when that -- the 8 straw vote was taken. And there was a competitive 9 atmosphere among lotteries. The lotteries feared the 10 border sales. However, as we have shown you from the 11 statistics that when you add populations, you can 12 increase sales. And even though your border agents 13 may not do as much, your entire state will benefit 14 from additional population in a multi-state game. So 15 there was one paradigm then. That paradigm has 16 shifted. That's why the multi-state lottery 17 association has -- has open arms to Texas and a number 18 of other jurisdictions, regardless of the -- the 19 territorial borders. We are not fighting territorial 20 wars anymore. We welcome everyone. Thank you. 21 MR. STRUTT: It's an educational 22 process. 23 COMMISSIONER COX: The issue of funding 24 the jackpots is still not clear to me. You use the 25 term "bond." How does Powerball fund the jackpots? 0156 1 How do you deal with that obligation? And how would I 2 be sure that one of your states that addresses an 3 obligation, doesn't obligate the state of Texas 4 somewhere down the line. 5 MR. STRUTT: It -- it really operates 6 like any other state lotto game. We estimate what 7 sales will be, take a look -- take a look every Friday 8 what the purchase price of the various funds with -- 9 that the states allow us to buy are and come up with 10 an annuity estimate. That is an estimate. 11 COMMISSIONER COX: Okay. Now you've 12 got me to how you make the estimates. I want to go to 13 the next step. In the State of Texas, the next step 14 is the comptroller of Texas buys the annuity. What's 15 your next step? 16 MR. STRUTT: These days almost 17 everybody takes cash, but if somebody does step 18 forward and takes the annuity, and they -- and they 19 advise us that they wish to take the annuity under 20 that state's rules, then we go out to competitive 21 bidding from the brokers that we have pre-qualified. 22 They have to fill out, and they are taken a look at in 23 a couple of years. 24 COMMISSIONER COX: And "we" in this 25 case is the central organization? 0157 1 MR. STRUTT: The central office. And 2 then we purchase the annuities, and those drop into 3 that trust account fund or it drops in that state as 4 they mature. But just like you, I interview my one 5 set of maturities. Annuities, bonds mature in two 6 years or three years. 7 COMMISSIONER COX: And I'm -- the 8 question I'm going to ask our financial people to 9 pursue is what is this trust account and how is that 10 different from the way Texas does it, like what 11 exposure is likely to occur. And I would like you to 12 try and answer that because I wouldn't know the 13 following question. 14 I'm done. 15 CHAIRMAN CLOWE: Are you sure? 16 COMMISSIONER COX: For the moment. 17 CHAIRMAN CLOWE: Is your offer to us to 18 join exclusive? 19 MR. STRUTT: No. You mean can you join 20 both games? No. 21 CHAIRMAN CLOWE: And what's your 22 thought about that? 23 MS. KYLE: You can say that? 24 MR. STRUTT: Oh, yes. 25 MS. KYLE: Y'all had that vote? 0158 1 MR. STRUTT: Unanimously. 2 MS. PAUL: The question is, can they 3 join both games? 4 MS. KIPLIN: Can I get you-all to come 5 to a mike? I've -- I've got an audio recording, and I 6 mean, I've really tried to constrain myself here. 7 I've got an audio recording, and that's our actual 8 record. 9 CHAIRMAN CLOWE: Okay. Suppose we 10 said, gosh, you've both come down. You've made a 11 wonderful presentation and -- 12 MR. COOPER: We would -- 13 CHAIRMAN CLOWE: Let me finish my 14 question. And, you know, one of y'all draw on 15 Wednesday and Saturday nights. And one of you draws 16 on Tuesday and Friday nights, and -- and we just think 17 you have both have wonderful things going. And -- 18 and, yes, the costs are very reasonable. And we don't 19 see any way that we can lose if we join both of you. 20 We would like to join both. What would your reaction 21 to that be? 22 MR. COOPER: We would have to -- we 23 haven't taken a formal vote, so we don't have a formal 24 vote. But I can tell you now just talking to the 25 other lottery directors, we would probably welcome 0159 1 that opportunity, and we would certainly put that 2 forward as an issue or question to the membership of 3 the multi-state lottery association and particularly 4 the Powerball game group. 5 MR. STRUTT: By formal vote -- by 6 formal vote, Tony means when we say, somebody moved, 7 somebody seconded. Instead, we said, what if we want 8 to join both games? And everybody said, yeah, we 9 would like to do both games. Two opportunities to 10 have a top game in the state. So there are times we 11 get them operating like that. 12 MS. KYLE: We would have to take a 13 vote. Because when we took our vote, it was not -- 14 back on December the 13th, no one foresaw that the 15 decision might be Mega Millions Tuesday, Friday, 16 Powerball Wednesday -- Wednesday, Saturday. So we 17 would have to go back and -- and actually have a vote 18 of our membership. 19 CHAIRMAN CLOWE: Well, let me ask you. 20 You know, you've laid out two very attractive 21 proposals. They -- they're both winning. They're 22 both making money for their members. The cost to 23 enter either one of them is negligible. They have 24 different drawing nights. The state would manage its 25 own resources, its own revenue, its own pay out in 0160 1 both cases. If our statute allows us to consider 2 this, is there any reason we shouldn't consider it? 3 MS. KYLE: Well, I'm not -- what we 4 would have to look at -- and your forecasting 5 department would have to do this. You've got to make 6 sure that you make enough off that second game to 7 account for the fact that you're basically going to 8 kill your Texas lotto game. Because if you're going 9 to have four mega draws a week: Tuesday, Wednesday, 10 Friday, Saturday, I don't see Lotto Texas existing 11 under that scenario, and your forecasters are going to 12 need to tell you, are you going to make so much money 13 off of having both of these, that you will be where 14 you would have been if you had picked one mega game 15 and kept your Lotto Texas game surviving. That's the 16 difference. 17 CHAIRMAN CLOWE: So -- so you see a 18 higher rate of cannibalization if you had four mega 19 drawings every week. 20 MS. KYLE: Oh, yes. 21 MR. COOPER: Let me answer that 22 question. I kind of agree that there would be some 23 cannibalization, but I think you really have to 24 forecast -- and I don't think that the five minutes 25 you gave us to consider that question, we could 0161 1 probably do an adequate forecast. You may -- you may 2 end up with a net gain. And I think that that's what 3 you're talking about is that at the end of the day, 4 that you ended with a net gain. And, again, you would 5 have to run the numbers, and you would have to 6 understand. 7 But also let me just tell you there 8 might be an undercurrent here. There is -- although 9 we respect each other, I think there is a degree of 10 competition between Mega Millions and Powerball. And 11 the -- the question is -- I mean, the fact of the 12 matter is there are still borders, and we are still 13 competing. South Carolina competes against Georgia 14 for their sales. So obviously if our Powerball game 15 was performing better than their Mega Million game, 16 then we would have an opportunity and a chance to draw 17 more people into South Carolina and therefore give 18 more to education -- to South Carolina education. The 19 converse on the -- converse -- conversely, if Mega 20 Million is performing better than Powerball, obviously 21 that's more money going into education in Georgia. So 22 there is a degree of competition. 23 So when you ask that question -- 24 because we're here, obviously to bring Texas into our 25 mix, so we can increase our jackpots so that border 0162 1 competition would -- would probably, you know, have 2 someone at an advantage or a disadvantage. If both 3 games were allowed to operate in Texas, that would 4 pretty much -- I think that would benefit both games, 5 but it would take out some of the competitive edge. 6 And that's just -- that's just the kind of answer, the 7 undercurrent and -- of that question, what that 8 question kind of brings out. Just to give you an 9 honest answer. 10 CHAIRMAN CLOWE: That's great. Well, 11 you know, I think we're only going to make this 12 decision once. And we have changed Lotto Texas a 13 couple of times, and we have some players and some 14 folks in this state that didn't like it when we 15 changed it the first time and didn't like it when we 16 changed it the next time. And when you start changing 17 the games, you have to be respectful of those people 18 who have gotten comfortable with it and don't want 19 that. But when a game is not producing -- we found 20 particularly in our instant ticket sales, if you don't 21 keep changing them and making variety there 22 attractive, you don't get the kind of growth that 23 we've experienced. And our growth has been great 24 there. 25 And so, as I said, we get to make this 0163 1 decision one time and I recognize that's going to be 2 it. I wanted to put the thing on the table, and I 3 thought Commissioner Cox was thinking of it and I -- 4 tried to give you the opportunity if you wanted to -- 5 COMMISSIONER COX: I appreciate that. 6 CHAIRMAN CLOWE: But I think it's 7 something we ought to -- we ought to really seriously 8 think about and maybe you-all want to think about it. 9 And if you, "Well, we don't want them to do that, and 10 we just really want you all or nothing at all," then 11 maybe you ought to tell us that. 12 MS. KYLE: Well, when we took that 13 vote, what we've got to be thinking is that it's not 14 just a Texas decision. 15 CHAIRMAN CLOWE: Right. 16 MS. KYLE: It's setting a precedent for 17 the future. 18 CHAIRMAN CLOWE: That's right. 19 MS. KYLE: And so we would need to 20 think about more than just how badly do we want Texas 21 because the decision that we would make regarding 22 Texas, we would have every other state asking if they 23 could do the same thing. So, I mean, that's -- that's 24 got to be part of your decision-making process. 25 CHAIRMAN CLOWE: You see, you're in and 0164 1 we're out. And my interest is making the best 2 decision for Texas. I don't care about you right now. 3 And if we join you, then I'll care about you. But 4 right now I'm debating the best deal for Texas that I 5 can -- or this commission can and Director Greer can. 6 So now is the time to be asking these kind of 7 questions, I think. 8 MS. KYLE: Oh, absolutely. 9 CHAIRMAN CLOWE: And I -- I would like 10 you to think about it. And, you know, it's not 11 adversarial. It's -- it's a collegial atmosphere. 12 Help us with it. And maybe you would like to suggest 13 to us, yeah, do that. 14 MS. KYLE: So -- so you -- 15 CHAIRMAN CLOWE: Maybe you wouldn't. 16 MS. KYLE: But -- but I -- I take it 17 that from what you've said that we ought to go back 18 and at least have a vote on that so that we could 19 represent to you whether or not -- how -- how we can 20 answer that question. Because I couldn't answer your 21 question because I don't have the authority to do 22 something today that I -- that I wasn't authorized to 23 do before I came here. 24 CHAIRMAN CLOWE: At the beginning of 25 the meeting, we're not prepared to answer questions, 0165 1 and we don't anticipate any action being taken. We're 2 taking input, but now is the time, I think, to ask 3 these kind of questions. And, you know, I've been 4 married to one woman for 48 years, and I asked her one 5 time and she said yes and that was it. And so I've 6 learned from that to get the questions out and get the 7 answers, and then when you make a decision hopefully 8 it will last for 48 years. 9 Commissioner Cox? 10 COMMISSIONER COX: I -- I have nothing 11 else on that subject. 12 CHAIRMAN CLOWE: You don't want to talk 13 about your marriage? 14 COMMISSIONER COX: Well, I -- we were 15 about to have an anniversary here, and it doesn't 16 match yours, but it's 33 years. 17 CHAIRMAN CLOWE: Congratulations. 18 COMMISSIONER COX: Thank you. 19 The -- did I understand you to say 20 that -- that Powerball was going to assess the state 21 of New York a 17 million dollar initiation fee? 22 MS. DEFRANCISCO: For reserves, yes, 23 sir, and there were also operating costs. 24 CHAIRMAN CLOWE: You have to get on the 25 mike. 0166 1 MS. DEFRANCISCO: Chuck is already 2 ready to answer that. It was $17.8 million dollars in 3 reserve funds and then also operating costs that adds 4 up at that time. Again, at that time. I get the 5 sense that their rules have changed. It was $267,000 6 in operating costs. At that point, again, think about 7 the timing of this. This was right after 911. There 8 was no way we could commit $17.8 million in reserve 9 funds that we would not be able to touch to use for 10 our games. 11 COMMISSIONER COX: Right. 12 MS. DEFRANCISCO: Okay. Does that 13 answer it? 14 COMMISSIONER COX: Chuck. 15 MR. STRUTT: And that's why we went 16 back to New York and said zero, nothing. We've 17 changed the method we operate. When we began the 18 organization, the lotteries kicked in money to start 19 with their share but after a while we -- we became 20 self-operating. They saw this as a deterrent. The 21 prize reserves of the game became so big, it was a 22 deterrent so we dropped those -- those shares. We -- 23 we find money other ways. 24 COMMISSIONER COX: So you don't have 25 central reserves at this point. Each state has its 0167 1 own reserves. 2 MR. STRUTT: No. There is a central 3 reserve held trust owned by the lotteries. It builds 4 up the reduction on the grand prize pool, and until it 5 builds up your share of that, it stays stable. And 6 that state owns those reserves. If that state should 7 decide to leave, they take their money with them. 8 COMMISSIONER COX: So is Texas being 9 offered to carry interest in that trust? 10 MR. STRUTT: In about two years you 11 would have a fully funded share in that trust. If you 12 sold 25 percent of game, then you would own 25 percent 13 of that trust. And that interest would go into 14 your -- your account. So it would be transfered to 15 you as a nonprofit. 16 COMMISSIONER COX: What about day one? 17 MR. STRUTT: Day one you would have no 18 money in the account so you would have negative 19 interest. 20 COMMISSIONER COX: So you've done -- 21 you've changed the way you've done business, but you 22 haven't changed the structure of the deal. We're -- 23 the fact that we're having to pay nothing -- would 24 have to pay nothing to get into your game, whereas she 25 would have had to pay 17 million is not a substantive 0168 1 change, it's a change in forms. Because we're not 2 getting anything for nothing. You just don't -- 3 because I would like to, but I think you just said we 4 weren't. 5 MR. STRUTT: No. You would over time 6 build up in the prize reserves, not to -- 7 COMMISSIONER COX: From our money? 8 MR. STRUTT: From -- from a deductions 9 from the -- from the grand prizes. 10 COMMISSIONER COX: From our money? 11 MR. STRUTT: No. 12 COMMISSIONER COX: Well, that's the way 13 it works here. 14 MR. STRUTT: From jackpot money. 15 COMMISSIONER COX: Right. Our money. 16 MR. STRUTT: Okay. Maybe you view the 17 players money -- 18 COMMISSIONER COX: Okay. In the Mega 19 Millions, each state has its own reserves. Is that 20 correct? 21 MS. PAUL: Some states do. 22 MS. KYLE: It's real important to us 23 that we have that anonymity and follow our own state 24 statutes. It depends on the state's, statutes, rules 25 and procedures. Georgia has a prize reserve. I think 0169 1 New York has a prize reserve. Some do. Some don't. 2 It depends on its statute. Some states feel very 3 strongly that at the end of their fiscal year, 4 everything should be transferred and you shouldn't 5 have a reserve. Because that's money that belongs to 6 the Georgia Hope Scholarship for education or 7 whatever. So you zero out your account at the end of 8 the fiscal year and then start building reserves that 9 are in a risk management account for the whole state, 10 but some of the states in Mega Millions have a 11 specific reserve. Some of that reserve may come from 12 a bigger state risk management pool. But each state 13 makes its own determination how they wish to do that. 14 MS. PAUL: Yeah. I have my own reserve 15 in Georgia, and I keep the interest off that reserve, 16 and that interest gets transferred every year to the 17 Lottery for Education account. 18 COMMISSIONER COX: Okay. Since you 19 have no balance sheet, if you will, for Mega Millions, 20 there's no central reserve fund? 21 MS. PAUL: No. 22 COMMISSIONER COX: Each state has its 23 own reserves to the extent its statute requires it to 24 have its own. 25 MS. PAUL: That's correct. To whatever 0170 1 their state requires, Chuck, and in some states it 2 would be zero and some states it would not be. But 3 it's whatever the state would require. 4 COMMISSIONER COX: Okay. Chuck, you 5 have the only reserves in the group. What are your 6 reserves for? 7 MR. STRUTT: They are divided into 8 various sections. One is a set aside account used to 9 guarantee the starting prize if we should get hit with 10 that prize because neither one of us fund that first 11 prize. 12 COMMISSIONER COX: Right. 13 MR. STRUTT: The second is a set 14 aside -- or a set prize in your account which 15 guarantees a payment of -- we pay set prizes, as does 16 the other game, so we guarantee if there is a 17 statistical apparition, we have many more winners than 18 expected, we can pay those winners. And the third 19 section is for the grand prize itself. And these 20 two -- these can draw upon each other because the -- 21 the jackpots, you've got -- you've got to get such a 22 large group going and have a large amount of money 23 available that -- and events occur so rarely that we 24 think we can use the funds and match them together. 25 COMMISSIONER COX: So this would work 0171 1 the same our reserve works. Correct me if I'm wrong. 2 You start your jackpot at what -- what level? Is it 3 ten million? 4 MR. STRUTT: Right now, ten million. 5 COMMISSIONER COX: Ten million. It's 6 hit the first time. You plunk in eight. Two comes 7 out of reserve. We get six. 8 MR. STRUTT: Exactly. 9 COMMISSIONER COX: So even though we -- 10 we're zero, we're now negative. We have a negative 11 reserve with you now that we're going to have to pay 12 off. 13 MR. STRUTT: If -- if you were a 14 member, yes. 15 COMMISSIONER COX: If we became a 16 member and the winner -- 17 MR. STRUTT: Yes, your account -- your 18 account actually goes negative. 19 COMMISSIONER COX: Right. But every 20 state has a reserve that's got money to come out as we 21 just described. 22 MR. STRUTT: Yes. They have a share of 23 that. Those are what they own from their funds. 24 COMMISSIONER COX: So their share 25 begins the day they join. They don't have to buy into 0172 1 the common reserve that already exists. 2 MR. STRUTT: That's correct. 3 COMMISSIONER COX: Thank you. 4 CHAIRMAN CLOWE: And then Rebecca, 5 Penny, and Margaret, if you don't mind telling us, 6 what amount do you-all spend in your states 7 advertising Mega Millions? 8 MS. PAUL: In Georgia, we spend one 9 percent of sales on all advertising, and any state 10 that I would tell you about what percentage of that 11 goes to Mega Millions would be a best guesstimate 12 because we do multiple advertising in the same 13 commercial or multiple newspaper ads that will talk 14 about both jackpots so... 15 CHAIRMAN CLOWE: You bring a player in 16 to buy. You don't bring the player in just to buy 17 Mega Millions tickets. 18 MS. PAUL: Well, certainly when we have 19 a $300 million jackpot, the person would probably come 20 in just to buy Mega Millions, but we find they, you 21 know, also increase our ticket sales. And then they 22 cash their ticket the next day to purchase our lotto 23 games, but we don't have specific line items for each 24 game in advertising. 25 CHAIRMAN CLOWE: Well, what's your one 0173 1 percent last fiscal year? 2 MS. PAUL: Well, we did 2.6 billion so 3 that was 26 million we spent on advertising of all 4 products. 5 CHAIRMAN CLOWE: And, Margaret, what 6 was yours? 7 MS. DEFRANCISCO: For Mega Millions I 8 just know that we did not spend any incremental 9 dollars on launching or advertising Mega Millions, as 10 we did the same budget. The incorporation -- the 11 incorporation this year will be $17 million. 12 CHAIRMAN CLOWE: Penny, you have a 13 smaller state so... 14 MS. KYLE: Ours is 15 million for the 15 entire advertising budget. We spent less and budgeted 16 for Mega Millions this year because the way we 17 advertise for Mega Millions is we have levels. We 18 don't advertise the game itself because it doesn't 19 need advertising. We just advertise when the jackpot 20 gets to a certain level. We start radio at 50 21 million, and we start television at 70 million. And 22 so that's when we spend the advertising dollars for 23 Mega Millions. 24 CHAIRMAN CLOWE: Okay. Thank you, 25 ma'am. And Tony and Ed, what -- what do you-all 0174 1 spend? 2 MR. COOPER: Okay. We're limited to 3 one percent of sales so we have a seven million dollar 4 total budget. I would assume that -- you know, our 5 jackpot is -- I mean, we do the same thing Virginia 6 does when we reach a certain jackpot, we'll start 7 spending more. I would say we probably spent on 8 Powerball probably -- and this is just -- just based 9 on what I think we did -- is maybe about a million 10 dollars, maybe probably less. 11 MR. MAHLMAN: If I may beg your 12 indulgence. Thank you for bringing up the topic of 13 wedding anniversaries. Mine is this Friday, July the 14 4th. And I now have a mission to accomplish when I 15 get back home. Thank you. 16 Our total budget -- 17 CHAIRMAN CLOWE: Congratulations. 18 MR. MAHLMAN: Well, thank you. Thank 19 you. It will be 27, July 4th, 1976, bicentennial 20 day. 21 $30 million is our current annual 22 advertising budget. We will have spent about five and 23 a half million in the year ending tonight on our 24 Powerball game. It is our first year, so we did put 25 some particular emphasis behind it. I'll tell you my 0175 1 philosophy, though, is that I -- I don't want to 2 create, if you will, jackpot junkies who are just -- 3 just waiting for that big number. And previously with 4 our in-state game and certainly now with Powerball, I 5 wanted to create the sense that week in, week out, 6 this game is a fun, fun activity for you. And it 7 helps in our case older Pennsylvanians, the 8 beneficiaries of our lottery. And for both of my 9 lotto games, I wanted to build in that impression. A 10 couple of years, I'm a veteran of the lottery. We 11 were able to have a program that addresses my in-state 12 game in just that fashion, and I was able to increase 13 that number by a couple of hundred thousand dollars 14 per draw by emphasizing the week in, week out nature, 15 and that's the reason why I like Power Play. With 16 Powerball, it helps me create that week in, week out 17 with a great place to go. 18 CHAIRMAN CLOWE: Thank you very much. 19 COMMISSIONER WHITAKER: I have a 20 question. 21 CHAIRMAN CLOWE: Yes, ma'am. 22 COMMISSIONER WHITAKER: All three of us 23 have in different ways tried to have both groups tell 24 us about what the real tensions are behind the 25 scenes. My impression is that Powerball has more 0176 1 significant conflict of interest issues, simply 2 because of the various sizes and the greater number of 3 state laws involved. And it seems, frankly, that -- 4 that the other big game has thought through some of 5 those conflict of issues more profoundly. What could 6 both sides, both groups tell us that would help 7 satisfy our ongoing concern about those issues? 8 MS. PAUL: I want to understand the 9 question and then decide which one of us is to draw. 10 Do you want to know conflicts between the two groups 11 or conflicts within the groups? 12 COMMISSIONER WHITAKER: Within the 13 group. 14 MS. PAUL: Okay. You can go first. 15 MR. COOPER: First of all, Commissioner 16 Whitaker, I don't necessarily agree with your premise. 17 COMMISSIONER WHITAKER: I don't have a 18 premise. I just have a thought. I'm just trying to 19 react to what I'm hearing. 20 MR. COOPER: We have -- I think over 21 the years we have matured as an association. Yes, we 22 do have more members but we react just as quickly as 23 to issues as the Mega Millions' organization can. I 24 think both organizations are strong organizations. I 25 don't think the difference in whether Texas should 0177 1 join Mega Millions or Powerball should rest in the 2 governance of the two organizations because I think 3 both are strong and both have the ability obviously to 4 put good games on the street, and both games have 5 offered to its members a significant amount of 6 revenue. But I think you do have to look at some of 7 the other issues such as your ability to enter a game 8 where you can brand it; where you can look at the per 9 capita; where you can look at your individual player's 10 preference; in other words, to do a game which is good 11 for Texas. And that's something that only you the 12 commissioners can -- or the Texas lottery can come up 13 with an answer. 14 We've given you numbers, and we'll 15 provide you with more numbers. And after today, the 16 issues that you have raised today, we'll give you some 17 even more numbers during the course of week. But when 18 all is said and done, you have to understand what the 19 lottery is about, and I think you do just based on 20 your questions. And it's about public gaming for the 21 public good in character with the community. And you 22 will address those questions as you begin to get the 23 information from us. But there's not the conflict. I 24 don't see the conflict that you've seen or maybe I 25 just misunderstood your question. 0178 1 COMMISSIONER WHITAKER: It -- it's more 2 of just a concern that we've heard wonderful 3 presentations from most presenters. And, as a lawyer, 4 I also -- also know there are additional issues. And 5 so to the extent that either one of you can be 6 satisfying us that there -- those down sides have been 7 thought about and have been protected against. For 8 example, joint web site or a single web site is an 9 issue. To the extent that -- that either presenter 10 has thought those through and share with us your 11 experiences that would obviously help, I think, 12 satisfy certainly my sense -- and I can't speak for 13 the other commissioners but their sense as to, do we 14 really understand all the angles. 15 MR. COOPER: Now, I understand your 16 question. And I think probably during the next couple 17 of weeks, we will do the best we can to give you the 18 kind of information that you need to make those 19 decisions for what's in the best interest of the 20 citizens of Texas. 21 MS. PAUL: Okay. I'm going to attempt 22 do this. One of the things that works extraordinarily 23 well in the Mega Millions group is that we all have so 24 much in common. We're all big states with experienced 25 staff that have similar problems that may be different 0179 1 from, you know, a state that may have six employees 2 where we all have 300 or a state that doesn't have 3 their own ICS system where we all operate our own, or 4 the state that maybe doesn't -- it doesn't operate the 5 way a big state that does a billion to six billion a 6 year in sales operate. So we have many, many, many 7 things in common. So that in and of itself make us 8 closer than if we were very different in -- in how we 9 operate and the sizes of what we do. I will tell you, 10 and this is not because she's sitting here, but Kim is 11 considered one of the best legal minds in the lottery 12 industry. 13 CHAIRMAN CLOWE: Who? 14 MS. PAUL: Kim. 15 MS. KIPLIN: That's the respect I get. 16 MS. PAUL: But Kim would be a part of 17 any legal decision made and be a part of all of the 18 lawyers from all the Mega Millions states when those 19 legal issues are discussed, and we would look forward 20 to having Tim and Toni and Gary and -- and Reagan as a 21 part of our group because they just add to a very 22 strong group that works well together. 23 Now, I will tell you if you want an 24 example our closeness, Ms. Kyle back here has a 25 14-year-old son and I'm his godmother so we're family. 0180 1 CHAIRMAN CLOWE: All done. Any 2 questions of mystery? 3 MR. MAHLMAN: May -- may I have a 4 response to that? 5 CHAIRMAN CLOWE: Certainly. Certainly. 6 MR. MAHLMAN: We're only a year into 7 the Powerball group, and I'm only director since 8 February the 10th, about the -- very close in time. 9 There may be these -- these histories which are rather 10 hard to understand as you go through them. And I 11 applaud you for really trying to make a deep dive, and 12 I understand what -- you said you only launch once, 13 very good comment. 14 But I'll tell you in my short period in 15 recent history, I have not seen the kinds of tensions 16 that have been exhibited in the past and probably 17 don't exist for Mega Millions, as well. I -- I think 18 perhaps both our organizations have matured, 19 stabilized, if you will and -- and are both looking 20 forward to, I think, different kinds and adding. And 21 certainly to repeat, like I said before, incremental 22 sales and what's driving down a very dull, methodical 23 kind of guy despite the exuberance of my wedding date 24 perhaps. But I -- I am looking for incremental sales 25 and that's what driving everything in membership these 0181 1 days. So I -- I just wanted to say that may be the 2 recent history is different than the -- the past 3 history. 4 CHAIRMAN CLOWE: Is there anything 5 further, Chuck? 6 MR. STRUTT: We certainly had a long 7 history, and that allows for a lot -- many, many 8 things to happen. But I think it can only be the 9 maturing of those. So you may be hearing innuendos 10 but those have not existed for many years. 11 COMMISSIONER WHITAKER: Can I ask 12 Mr. Pennsylvania, why did you choose Powerball over 13 Mega Millions? 14 MR. MAHLMAN: Well, I think some of 15 this past history may come into play. I can only 16 answer that at the time of entry I was not director. 17 I picked up a relationship with the lottery as a 18 vendor, so I can't answer that question. What I can 19 just say now and back to what I said a moment ago is 20 that when I -- when I look at the sales -- I'm a dull 21 kind of guy, Commissioner, I see the edge. 22 And even I -- Margaret and I don't even 23 know each other that well, but I'm just thinking 24 through your figures, you finished up at 210 25 incremental not long ago. Was that annual or was that 0182 1 eight months? 2 MS. DEFRANCISCO: No, it would have 3 been for this -- this past fiscal year. 4 MR. MAHLMAN: So a year? 5 MS. DEFRANCISCO: Yeah. 6 MR. MAHLMAN: Okay. It's a strong 7 number. It -- 8 MS. DEFRANCISCO: It's only ten months. 9 It's not a full amount of time. 10 MR. MAHLMAN: Okay. A strong number. 11 And I can only say that in Pennsylvania, like New 12 York, it's a mature state. We're completely 13 surrounded by either Powerball or Mega Million states 14 except for Lake Eerie, and in Lake Eerie we're 15 empowered. Joining the lottery probably would be 16 wonderful to be a member of one of those two 17 organizations. It's -- was a tough marketing 18 environment for us. And while it's apples to oranges, 19 you know, our 150 and growing per incremental edge, it 20 actually -- of course, it would be a better per capita 21 against ten months. But when we realized we started 22 and changed our draw day, which I said off -- 23 candidly, I think that might not have been the best 24 way to go. We started 20 yards behind the start line, 25 and now in my last six months, I'm catching up and I'm 0183 1 doing well. If it hadn't been for that, I feel 2 confident and taken care of, that my incremental sales 3 goal will be more than met. They have been more than 4 met but even on the per capita basis. And that would 5 equal or exceeding that of New York. So I'm a dull 6 guy. Incremental sales is driving me. 7 MR. GREER: Commissioner. 8 CHAIRMAN CLOWE: Reagan. 9 MR. GREER: I had a couple of things 10 that -- 11 CHAIRMAN CLOWE: Yes. 12 MR. GREER: -- I wanted to get out. 13 One -- it's for both groups. The first one is walk me 14 through if there's like a ticket resolution or 15 dispute, something comes up that's a questionable 16 scenarios that we deal with. How do y'all take on a 17 ticket that's a problem? Is there a group that does 18 that? 19 MR. COOPER: Well, I think -- first of 20 all, I think I can speak for both offices. We handle 21 all disputes in accordance with our own state lottery 22 procedures and rules. And, again, I think this point 23 has come across. These are multi-state lottery 24 associations. Each and every state is an entity unto 25 itself. It follows its own rules. It follows its own 0184 1 laws. It has its own staffing. The thing we 2 basically share is a jackpot pool and a draw, but 3 every single other aspect of the lottery applies to 4 disputes, to rules, regulations. 5 MR. GREER: Would it go to like the 6 legal -- a legal committee or is that something to -- 7 say a scenario, would you take it before a group to 8 come up with a determination? 9 MR. STRUTT: There -- there is a prize 10 review committee. Since all the members have 11 ownership in the prize reserves, they wanted a chance 12 to meet and look at an issue and make a recommendation 13 to the state. Certainly, state law controls and 14 that's going to make the decision. But the members -- 15 because they'll -- they'll be turning part of the 16 money that they own, we wanted to give that state some 17 recommendations. 18 MR. GREER: I think Kim has some 19 litigations. 20 MS. KIPLIN: I'll -- I'll show you 21 where -- I'll just put mine in writing. I'll send it 22 out to each of you by e-mail. Mainly, I interpreted 23 the process -- I understand Powerball is an 24 association. And so -- and I -- I've asked these 25 questions before in the other presentation in terms of 0185 1 reunity issues. And I -- I'm not comfortable with the 2 comments I've received. And so I -- I need to have 3 that vetted so I can advise in terms of the -- of the 4 legal issues and my -- an my main concern with an 5 association, albeit the person that I'm not that 6 familiar with unincorporated associations. But when 7 you join together as an unincorporated association -- 8 and I understand that you said that, you know, you 9 talked about it earlier about getting sued. But what 10 I'm interested in at -- is at the end of day, what 11 kinds of defenses can be raised in your capacity as an 12 association. What happens to the state's sovereign 13 immunity rights and the right to claim that. And if - 14 - if you're being sued in your capacity as an 15 association and you -- you do have a judgment entered 16 against you, how are you expecting people to share 17 that, if any, your member states. 18 On the Mega Millions, it's the same 19 question but I recognize that it's not an 20 association. It's -- it's states that come together 21 and the -- the one thing that is in the back of mind, 22 just so y'all can think about, is if, for example, you 23 had a problem with a draw. I'm aware of some -- you 24 know, some time back in history where there was a draw 25 and there was issues so they did another draw. It was 0186 1 a decision that was made right then and there. How -- 2 how are y'all -- how you are you-all going to satisfy 3 if, in fact, both of those number combinations hit, 4 how would you satisfy those? Because they're a bit 5 hypothetical. I'll be glad, if you point me in the 6 right direction, with an attorney within each of your 7 association -- with it -- with your association and 8 with your group to vet those kind of issues. 9 CHAIRMAN CLOWE: Anything further, 10 Reagan? 11 MR. GREER: No, sir. 12 CHAIRMAN CLOWE: Yes, sir. 13 COMMISSIONER COX: We've seen a couple 14 of very upbeat presentations, a lot of very happy 15 folks. The Fort Worth Star Telegram this morning 16 tells us about an unhappy person in the state of 17 Washington whose expected sales from Mega Millions are 18 a fraction of what he expected. Can you help us with 19 that? 20 MS. KYLE: Yes. That's a forecasting 21 problem. We have, as we've said earlier, a great team 22 put together who forecasts our games for us. If 23 you-all were to decide to join Mega Millions, the 24 first thing we would recommend to you is that you and 25 your forecasters have a telephonic conference call 0187 1 with the forecasters from Mega Millions and let our 2 folks tell you what we have experienced in the past as 3 far as jackpot growth. 4 What happened in the case of Washington 5 state was they wanted that game very badly. They 6 wanted a game very badly. They wanted a multi-state 7 game, either one of us. They wanted a game, and 8 they -- someone felt -- and this is not the current 9 director. Someone felt that the way to get that done 10 was to promise the state millions and millions and 11 millions of dollars and that that would grease the 12 wheel, which is, as you-all know, the last thing you 13 ever want to do is to promise your legislature that 14 you're going to produce X millions of dollars more 15 like than you likely think you're going to. And 16 that's what happened. And so they forecasted for that 17 first year of Mega Millions an amount of money that 18 probably would equal what I would turn over, and it's 19 just -- it was purely a forecasting issue. 20 I think if you look -- if you talk to 21 the state's current director and to his finance staff 22 now, they would tell you that that game is performing 23 like it should perform at that location and in that 24 small of a state. But that wasn't what was submitted 25 in order to get the approval to join any multi-state 0188 1 game. So it's not the game, per se. The numbers that 2 were submitted would have applied to Powerball if they 3 had started Powerball. They applied to us. It was 4 the lottery trying to get approval to join a game 5 and -- and I don't know whether they inflated the 6 numbers or whether they had someone doing the 7 forecasting that had never researched multi-state 8 games before and just picked up another state's 9 numbers and said, oh, we'll use approximately these. 10 But that problem, once they get through this first 11 year, shouldn't occur again. 12 COMMISSIONER COX: And your -- your 13 answer raised another question. You indicated that 14 should we choose to join your association you would 15 then sit down with us and help us estimate. 16 MS. KYLE: If you wanted to. 17 COMMISSIONER COX: Okay. We're going 18 to ask Reagan and his staff to make those kinds of 19 estimates in the next few weeks. Are your people 20 available to provide their input as to what you think 21 will happen in Texas for them to consider as they make 22 their computations. 23 MS. KYLE: Absolutely. Because we've 24 seen some numbers in the press reported, and -- and 25 we've been saying to ourselves, well, where are these 0189 1 numbers coming from? Are they six months of sales? 2 are they four months of sales? We have a lot of 3 questions just about the numbers that we've seen in 4 the press that I guess reporters have ascribed to -- 5 to the Texas lottery. And -- and we kind of looked at 6 those numbers and wondered what they meant. And so we 7 would be delighted as you-all are making your decision 8 to have our forecasters work with your staff and tell 9 us, well, how much; what are the predicates; when do 10 you expect to start selling; how many months in until 11 the end of your fiscal year, whenever that is; and how 12 would that be reported. And so we would be delighted 13 to help you with the sales forecast. And then you-all 14 would do your net revenue forecast based on the 15 percent that you normally turn over, which -- which we 16 would not be involved in. 17 COMMISSIONER COX: And, Chuck, would 18 y'all be willing to do the same? 19 MR. STRUTT: Well, that's -- that -- 20 that -- yes, that's a service we provide. And we are 21 happy do that. Looking at the forecasting problem, 22 that's -- that's a good answer. But you might want to 23 look at the numbers that they came up with and compare 24 it to a number that you've come up with, any state 25 would come up with. Look at Ohio. Look at their 0190 1 numbers. See if they seem reasonable to yours. 2 MR. GREER: I'll pursue that. 3 CHAIRMAN CLOWE: Anything further, 4 Reagan? 5 MR. GREER: No, sir. 6 CHAIRMAN CLOWE: We want to thank each 7 and every one of you. You -- you've been with us now 8 three and half hours just about. 9 COMMISSIONER WHITAKER: Over the lunch 10 hour too. 11 CHAIRMAN CLOWE: And your presentations 12 were excellent. They were meaningful and thoughtful, 13 and we are most grateful that you have tried to ask 14 questions that we think will be beneficial to us. 15 And -- and we're taking this very seriously, as you 16 can tell. And we really express our appreciation for 17 the in depth proposals and the time to interview you. 18 We have some public members who would 19 like to comment on this. And, I think, at this time 20 we'll ask them to come forward. Mr. Charles Strutt is 21 the first individual I have on the witness affirmation 22 form. Oh, excuse me. I've heard enough from you. 23 Let me see. I've got two lists, and I guess they got 24 mixed up. Wayne Doyle and Aretha Pigford. 25 MS. KIPLIN: They're -- they're both 0191 1 with MUSL. 2 MR. STRUTT: Right. They asked us to 3 fill out those forms. 4 CHAIRMAN CLOWE: And Tony Cooper. 5 Okay. And then Gerald Aubin and Charles Davis, and 6 that's another one. This looks like Edward Mahlman. 7 MR. STRUTT: That's us. 8 CHAIRMAN CLOWE: Kathleen Pushor. 9 Rebecca Paul. You can't talk anymore, Rebecca. 10 Penny. Margaret is here. Weston Ware, and Virginia. 11 Okay. That's Mr. Ware. Okay. Is there anybody else 12 besides Doctor Ware? There was just one individual? 13 Doctor Ware, we thank you for staying 14 with us. Would you introduce yourself, please, sir. 15 MR. WARE: My name is Weston Ware, and 16 I'm the -- a consultant with Texans Against Gambling, 17 one of those 30 percent of Texans that -- who -- who 18 don't want gambling in Texas at all as you mentioned. 19 CHAIRMAN CLOWE: Yes, sir. 20 MR. WARE: I -- I thank you for your 21 courtesy in letting me have testimony today. I've 22 worked with Kim on a task force and visited with 23 Mr. Cox before. And, Mr. Chairman, I appreciate very 24 much the questions. It's an education to me. I -- I 25 think I've been on the program with Ms. Paul before 0192 1 and probably met some of these other folks, as well. 2 It appears that the selection of one of 3 these applicants or maybe even two is already a done 4 deal because the legislature has said you can do it 5 and because the comptroller has approved a budget 6 that -- that has money in there already. So it 7 appears that either the 101 million that's projected 8 by one newspaper or the 64 million that's projected by 9 another newspaper are the figures that will come out 10 of discussions, will come forward. And apparently we 11 will have either Mega Millions or Powerball in Texas. 12 I didn't plan to testify when I came 13 today. I wanted to hear what was said. But I -- I 14 will be very brief in my comments. First, every 15 gambling game cannibalizes the previous gambling 16 game. You handled bingo. Bingo started out, it was 17 cannibalized by raffles, paramutual, and other kinds 18 of games. The games that you have prepared in -- in - 19 - for lottery, each one has had to be a new -- a new 20 and exciting game, and I basically see these 21 extensions of the lottery as -- as just another effort 22 to get more people to buy tickets. I was interested 23 in the quote by Mr. Lavasse who says, I think the 24 excitement of a new game will rejuvenate the old, 25 tired game. And I don't think that -- you know, the 0193 1 old, tired game does not get rejuvenated by a new 2 game. 3 Now, it's ironic to me Mr. Chairman 4 that -- that we're discussing all these things when 5 the legislature has just defunded the commission on 6 the problem of compulsive gambling in Texas. And I 7 don't think that would be a concern to you, probably 8 not today. But I would urge you to consider the fact 9 that we have a lot of people in Texas who are addicted 10 to playing the lottery, just as they are addicted to 11 playing other forms of gambling. 12 When the national gambling impact study 13 commissioned its report in 1999, I heard Phillip Cook 14 speak. He's one of the authors of the book "Selling 15 Hope," which I'm sure you have -- you have seen or 16 probably have a copy of. Doctor Cook pointed out in 17 his testimony before that commission that in some of 18 the studies or in one of the studies in particular, 5 19 percent of the players in the lottery were buying 51 20 percent of the tickets. So this is either a tax on 21 people who are not very good at math and here we are 22 raising the odds even more, or perhaps it's a tax on 23 people who are addicted. Because most forms of 24 gambling, whether it be casino gambling or the 25 lottery, would not be successful without people who 0194 1 are addicted to the games. 2 I -- I was just wondering. Now, I 3 understand that lottery officials are not allowed to 4 play the lottery, but how many of us here have spent 5 500 or a thousand dollars a year on lottery tickets? 6 I want to ask for a show of hands, but I doubt that 7 very many of us here have spent 500 or a thousand 8 dollars on lottery tickets. There are a lot of people 9 out there who are doing that, and the State of Texas 10 is the promoter. 11 And -- and I appreciate the fact that 12 you are seriously doing your job for the State of 13 Texas. But I think that a part of your job also has 14 to be to consider the impact of gambling. The people 15 who are compulsive addicted gamblers and vetters in 16 the state of Texas. And I guess I would say that 17 these kinds of games should not be promoted by 18 government. 19 And I will close with just this. Thank 20 you for what you are doing. I mean, you're trying to 21 do your job well. But I would urge you to remember 22 that there are significant moral issues, moral issues, 23 associated with selling hope to people. We are 24 selling hope in Mega Millions and in Powerball and in 25 Lotto Texas and people need to be investing in 0195 1 education and work, in their marriages, in their 2 lives, investing in those things, rather than selling 3 hope in order to support a state budget. Thank you 4 for your courtesy. 5 CHAIRMAN CLOWE: Thank you, Doctor. 6 And as I remarked, there is a population number in the 7 state that shares many of the comments that you've 8 made. And as I said earlier, I am and I think these 9 commissioners are very respectful of that position and 10 mindful of it. And I can tell the depth of your 11 sincerity, and you have certainly worked to have an 12 impact in your way. I -- I do have to in all fairness 13 direct you back to the legislature. 14 MR. WARE: I have been there. 15 CHAIRMAN CLOWE: I know you have. I 16 know you have. But you understand. 17 MR. WARE: Yes. 18 CHAIRMAN CLOWE: I think it's only fair 19 for me to tell you that this commission acts within 20 the bounds of the statute that's set out by the 21 legislature. The action, which you mentioned, was 22 done by the legislature at this time and the funding 23 came. And so many times people come to this 24 commission and the other commissions and ask for 25 things that really those choices lie with the 0196 1 legislature. 2 You understand that. 3 MR. WARE: Yes, I do understand that. 4 And one choice that I think you have, I have seen 5 multiple studies of -- of lottery players in the last 6 ten years since 1991 on who the players are, who are 7 the players of the lottery. And generally the 8 impression given to the public is that, you know, 60 9 percent of the people in Texas play the lottery, 10 and -- and I'm sure maybe 70 percent play the lottery 11 at least once or twice or three or four times. But 12 these are not the people who are funding the state 13 lottery of Texas. 14 The people who are funding the state 15 lottery of Texas are the people who are buying 16 multiple tickets several days a week and spending -- 17 you know, I -- I don't know what the per capita figure 18 is for Texas right now. I know in Massachusetts 19 several years ago, there were some areas where the per 20 capita was approaching $500. But I do know that 21 there's a lot of people that don't ever buy a ticket. 22 There are a lot of other people who only buy one 23 ticket or -- or even just a few. But in the studies 24 that you do for the legislature, I would urge you to 25 look carefully at who the heavy players are. They're 0197 1 not all poor. But if they're the heavy players, 2 they're all addicted and most of them are hurting. 3 Thank you. 4 CHAIRMAN CLOWE: Thank you, Doctor. 5 COMMISSIONER COX: Thank you, Doctor 6 Ware. 7 CHAIRMAN CLOWE: I have another 8 appearance form. Ms. Dawn Nettles. 9 Good morning. 10 MS. NETTLES: Good afternoon, 11 Mr. Clowe. For the record, my name is Dawn Nettles, 12 and I'm the publisher of the Lotto Report and I have 13 been entertained today. I have done a lot of 14 laughing. It's been a very focused meeting. The 15 Powerball people, the Mega Million people have done an 16 outstanding job in laying out the presentations, so 17 this has really been a nice meeting. 18 Commission Cox, a while ago you were 19 talking about the reserve funds and you were 20 questioning the bonds and would the state get their 21 interest, and you were going into great length detail 22 in your questioning, and I was very impressed with 23 that because that is exactly the stand that I take on 24 behalf of the players of Texas. Do the players see 25 their share of sales? That has always been where I've 0198 1 gotten let down. So I was quite impressed with the 2 depth that you did that. 3 One of the things that I did notice in 4 today's meeting is that I did not see any in depth 5 detail questions with regard to the percentages 6 allocated for each of the prizes, and I was a little 7 disappointed that you didn't get a bigger breakdown on 8 the jackpot prize, the -- and how or if the state went 9 in the hole on maybe some of their five plus zero 10 wins, if they had too many or whatever. Because both 11 of their rules allow to convert from the set prizes to 12 a paramutual should that ever happen. 13 Now, I know that Powerball has told me 14 that has never happened with Powerball where they had 15 to convert back and start paying paramutually, but I 16 haven't received the rules, and I was dealing with 17 Georgia, the Georgia lottery, but I haven't received 18 their rules that I requested about three weeks ago. 19 So I haven't studied everything, though, I did 20 accidentally stumble upon their rules on one of the 21 other web sites. So I don't exactly know how that is, 22 but I would really hope that you-all would really 23 seriously look at the allocations on the prizes and 24 how many winners there are. 25 I'm still in the midst of studying 0199 1 these games, and I have not drawn any conclusions 2 other than to tell you that -- also, one of these 3 people said that all the states are different and so 4 what may be good for one may not be good for another 5 one. Texas is different than all the other states. 6 The people and the players of Texas have spoken for 7 the last several years and tried to say what they did 8 or didn't want and have not really been heard so 9 they're already trained on these odds. 10 Whichever game or both that you go with 11 will kill Lotto Texas. It's already close to death 12 anyway. And it was your money making game, so I hate 13 to see -- my fear is that Texas is going to lose. A 14 while ago somebody said that -- that they wouldn't 15 lose the money, but that clearly isn't true because 16 the jackpot prize winner, if it comes -- let's say in 17 it's in New York, if they win $300 million, that's 18 300 million is not going to get pumped into the Texas 19 economy. That's going to be lost revenues and taxes, 20 real estate, investments that Texas would earn from. 21 And I don't believe that you're really going to see a 22 $101 million in fiscal 2004 because I think you're 23 going to lose some along the way. 24 Now, I see advantages to these games 25 too. I mean, shoot, I would play Powerball, and I 0200 1 would -- I -- I would not play it regularly. Wait. 2 Let me -- let me correct this real fast. The odds are 3 entirely too high for both games. Powerball's is 4 better. Powerball, they have the Power play which is 5 an incentive. And Texas is big. Texans like to dream 6 big. Texans would spend $2 to double their prizes. 7 So that puts Powerball number one in my books. 8 The advantage to me as a person, unlike 9 Powerball, I'm not going to play it. I'm not going to 10 build a pot, and I I don't think Texans are going to 11 build it excessively either, but I am going to go buy 12 a 300 million dollar ticket. But it's not going to be 13 long before it's a 500 million dollar ticket. And 14 it's not going to be much further before it's a 15 billion dollar ticket at the rate things are going and 16 with these odds. 17 Somebody has got to draw a line on the 18 odds of these games. Texas is not going to support 19 both games. And you're going to lose a lot of revenue 20 to out of state, and I'm referring to what the winner 21 wins that it's not going to be spent in Texas. 22 So I have not finished my evaluations. 23 I still don't have the rules for Mega Millions to 24 figure out, to read. I've had to request all the 25 sales from each of the states to look at the sales. 0201 1 What I saw real fast is they're declining sales for 2 all of them. If they're out of state, their sales 3 pick up a little bit. So I had to break it down by 4 state to see when those states were added to -- to 5 look at their total sales. But overall for both 6 games, the reason that they had the matrix changes is 7 because their sales were declining. And that ought to 8 tell y'all something. That's a big red flag about 9 these games. I hope you really analyze that too. 10 Anyway, I think that's all. 11 CHAIRMAN CLOWE: Thank you very much. 12 MS. NETTLES: You're welcome. 13 CHAIRMAN CLOWE: Is there anyone else 14 wishing to appear before the commission and make a 15 comment at this time? 16 Ms. Kiplin, I think you have a 17 statement you want to make. 18 MS. KIPLIN: Thank you, Mr. Chairman. 19 I just wanted to summarize where we were, the process 20 we're in. I think there's been some reference to New 21 York authorized to participate in a multi- 22 jurisdictional lottery game or games. I know that, 23 Mr. Chairman, you had a question or comment on that 24 regarding whether you had that authority. 25 CHAIRMAN CLOWE: I think I made the 0202 1 statement that as I understand the statute, it's 2 permissive. 3 MS. KIPLIN: It is permissive. It's 4 not exclusive to just one game at a time. 5 CHAIRMAN CLOWE: Right. 6 MS. KIPLIN: You can enter in more. 7 House Bill 3459. The provisions of House Bill 3459 8 that relate to multi-jurisdictional lottery games take 9 effect September 1. 10 At this point what the staff is doing 11 and the commission is doing is undertaking to receive 12 information, both from the public by way of public 13 input and also by the two groups that have come today 14 and offered quite a bit of information. I know we all 15 appreciate that. 16 The staff will continue to gather 17 further information. And at some point in a later 18 commission meeting, the executive director -- and I'm 19 kicking in the process now will come before the 20 commission and will make a recommendation. It will be 21 a reason -- well-reasoned decision, well-reasoned 22 recommendation based on all the information as 23 presented. 24 If the executive director's 25 recommendation is, in fact, to enter into a multi- 0203 1 jurisdictional lottery game, I'm anticipating that 2 there will be two actions that will occur to implement 3 that game or games. One, will be the adoption of the 4 federal rule. The other one will be the execution of 5 an agreement. The rule, we do have the authority 6 under the -- one of the sections in House Bill 3459 to 7 adopt an emergency rule and I'm anticipating that that 8 will be the recommended action on weighing this out in 9 the public and -- and for those who have an interest 10 in the process. 11 I will let you know that I have been in 12 consult with the Texas attorney general's office, 13 specifically the administrative law division chief. 14 His name is Don Walker and also the attorney that's 15 assigned to us. The purpose of that conversation is 16 to ensure -- on the new legislation, to ensure that 17 we're moving forward in a legally authorized manner. 18 And so I want you to know about that, and I want you 19 to continue. 20 CHAIRMAN CLOWE: And I believe the 21 deadline for public input is July the 14th. 22 MS. KIPLIN: Yes, sir. That is 23 correct. July the 14th. 24 CHAIRMAN CLOWE: So anyone wishing to 25 visit the web site or communicate in any other way, 0204 1 you should do it prior to the 14th. 2 MS. KIPLIN: Yes, sir. That's right. 3 CHAIRMAN CLOWE: And then, Reagan, you 4 indicated that you were hopeful that you might come to 5 the commission with a recommendation in our July 6 meeting that which I anticipate would be towards the 7 end of July or early on. 8 MR. GREER: Yes, sir. 9 CHAIRMAN CLOWE: Commissioners, do you 10 want to try to set a July date now? With this public 11 meeting, I think there's a high level of interest and 12 it would be well if we could tentatively select a date 13 that we might make our meeting so the people can plan 14 on it. 15 Commissioner Whitaker, I think you're 16 the lead one in this. 17 CHAIRMAN CLOWE: Somehow this little 18 black book looks good. May I share it with you? 19 COMMISSIONER WHITAKER: Please. 20 CHAIRMAN CLOWE: Commissioner Whitaker 21 has suggested Thursday, July the 24th. 22 Reagan -- 23 MR. GREER: Yes, sir. 24 CHAIRMAN CLOWE: -- is that okay with 25 you? 0205 1 MR. GREER: That's fine with me. 2 CHAIRMAN CLOWE: All right. We're 3 tentatively down, scheduling subject to change, the 4 next meeting which would be a very important one for 5 Thursday, July the 24th. 6 Is there any other business to come 7 before this commission at this time? 8 MR. GREER: Mr. Chairman? 9 CHAIRMAN CLOWE: Sir. 10 MR. GREER: I would like to thank the 11 members of our staff. Coming to the capitol is not 12 something we do on a regular basis, and there was a 13 lot of coordination that went into the process. Also, 14 to reinforce my thanks to Representative Solomons for 15 helping us get that as well, with the capital staff. 16 This was a great place to have a meeting, and I'm very 17 appreciative of the extra effort that went in to 18 making this happen today. So I just wanted to put 19 that on the record. 20 CHAIRMAN CLOWE: So noted. Thank 21 you-all. We are adjourned at ten minutes until 2:00. 22 (Adjourned at 1:50 p.m.) 23 24 25 WRIGHT WATSON STEN-TEL 0206 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, SHELLEY N. JONES, Certified 7 Shorthand Reporter in and for the State of Texas, do 8 hereby certify that the above-captioned matter came on 9 for hearing before the TEXAS LOTTERY COMMISSION as 10 hereinafter set out, that I did, in shorthand, report 11 said proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 16 Witness my hand on this 3rd day of 17 June, 2003. 18 19 ________________________________ 20 Shelley N. Jones, RPR, CSR #8058 Expiration Date: 12/31/04 21 1609 Shoal Creek Boulevard, Suite 202 22 Austin, Texas 78701 (512) 474-4363 23 24 25 JOB NO. 030630SNJ