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 2   
 3   
 4                  TEXAS LOTTERY COMMISSION
 5                          MEETING
 6   
 7                       JULY 11, 2005
 8   
 9   *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *
10   
11   
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13   
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15   
16   
17               BE IT REMEMBERED that the TEXAS LOTTERY
18   COMMISSION meeting was held on the 11TH of JULY, 2005,
19   from 8:00 a.m. to 1:55 p.m., before Brenda J. Wright,
20   RPR, CSR in and for the State of Texas, reported by
21   machine shorthand, at the Offices of the Texas Lottery
22   Commission, 611 East Sixth Street, Austin, Texas,
23   whereupon the following proceedings were had:
24   
25   
0002
 1                        APPEARANCES
 2   
 3   Chairman:
                 Mr. C. Tom Clowe, Jr.
 4   
     Commissioners:
 5               Mr. Rolando Olvera
                 Mr. James A. Cox, Jr.
 6   
     General Counsel:
 7               Ms. Kimberly L. Kiplin
 8   Deputy Executive Director:
                 Mr. Gary Grief
 9   
     Charitable Bingo Executive Director:
10               Mr. Billy Atkins
11   
12   
13   
14   
15   
16   
17   
18   
19   
20   
21   
22   
23   
24   
25   
0003
 1                           INDEX
 2   
 3   Appearances....................................    2
 4   
     AGENDA ITEMS
 5   
     Item Number 1..................................    4
 6   Item Number 2..................................  101
     Item Number 3..................................  101
 7   Item Number 4..................................  102
     Item Number 5..................................   73
 8   Item Number 6..................................    4
                                                       41
 9   Item Number 7..................................  109
     Item Number 8..................................  114
10   Item Number 9..................................  118
     Item Number 10.................................  121
11   Item Number 11.................................  122
     Item Number 12.................................  123
12   Item Number 13.................................  123
     Item Number 14.................................  123
13   Item Number 15.................................  126
     Item Number 16.................................   71
14                                                    129
     Item Number 17.................................   62
15                                                     71
     Item Number 18.................................   63
16                                                     73
     Item Number 19.................................   30
17                                                     65
                                                      131
18   Item Number 20.................................  134
     Item Number 21.................................  107
19   Item Number 22.................................  135
     Item Number 23.................................  136
20   
21   Reporter's Certificate.........................  137
22   
23   
24   
25   
0004
 1                  CHAIRMAN CLOWE:  Good morning.  It's
 2   8:00 o'clock.  We'll call this meeting of the Texas
 3   Lottery Commission to order.  Commissioner Cox is
 4   here, Commissioner Olvera is here.  It is July the
 5   11th, 2005.
 6                  Commissioners, I want to acknowledge
 7   that as of Friday afternoon, I received a letter of
 8   resignation from Reagan Greer, the Executive Director
 9   of the Commission.  We will deal with that later in
10   this meeting, and I'll be asking you at that time if
11   you wish to deliberate in the public or if you wish to
12   go into executive session in regard to those matters
13   regarding Mr. Greer.  However, at this time I would
14   like to go to immediately to item six on the agenda,
15   consideration of, possible discussion and/or action on
16   procedures and/or rules relating to jackpot estimation
17   and/or advertising jackpot amounts for all Texas
18   Lottery games.
19                  This is an item that we are --
20   gentlemen, just stand down if you will.  I'm not ready
21   to call you up yet.  This is an item that we gave
22   extensive deliberation to at our last meeting on June
23   the 24th, and we said at that time we were not
24   finished with it and we wanted to continue.  Since
25   that time, I have appeared, at the request of
0005
 1   Chairman Flores, before his committee, and a number of
 2   his members as well as himself are here this morning,
 3   and I would like to call on the distinguished chairman
 4   for his remarks relating to that hearing, as well as
 5   the members of his committee that are here.
 6                  Chairman Flores, would you address us,
 7   please, sir.
 8                  CHAIRMAN FLORES:  Good morning,
 9   Mr. Chairman, members, Commissioners, and members of
10   the audience.  With me today is the vice chair,
11   Charlie Geren, and also in the audience -- but I don't
12   know if he wants to -- is Tony Goolsby, also from the
13   Dallas area.
14                  CHAIRMAN CLOWE:  Mr. Goolsby, will you
15   come up and join Chairman Flores and Vice Chairman
16   Geren, please?  Thank you.
17                  CHAIRMAN FLORES:  Mr. Chairman and
18   Commissioners, in light of what -- in light of what --
19   what has transpired, as all of us have been reading in
20   the -- the newspapers and such, this committee never
21   asked for anybody's resignation.  As a matter of fact,
22   I had two meetings with the Executive Director on two
23   times to try to create a proactive approach as to how
24   we could address not only the problems that were being
25   aired out, but some of the concerns that we had as a
0006
 1   legislative body, some of the recommendations that
 2   were made by Sunset, some of which got approved and
 3   some which not, and then the actual bill itself on the
 4   Sunset not passing for the second consecutive time and
 5   being put off 'til 2011.  And some of the issues of
 6   those as it relates to -- to personnel issues, as it
 7   relates to purchasing procedures, one of those things
 8   that I myself tried to do a little bit different from
 9   what the Sunset recommendation had done, and one of
10   those things being on the issue of the -- that the
11   Lottery conform, like any other State agency, to all
12   of the -- to the State Government Code in terms of
13   having to go through the regular process like
14   everybody else, and then creating an additional layer
15   between the Commission and the agency and the vendors
16   in allowing somebody else, like everybody else does.
17   But for X number of reasons, when the agency had its
18   start-up, there was an urgency to get it on-line to
19   start creating the revenues, and then it just stayed
20   like that.  And now it's like -- the Lottery is not
21   any different than any other agency coming in and
22   testifying before -- before the legislature, and
23   saying, well, we're a little bit different and we're
24   unique and we need to have this, or whatever.  I
25   personally have always felt that -- that there needed
0007
 1   to be the cushion -- that cushion there, having the
 2   background of coming from the State Comptroller's
 3   Office, heading up the Purchasing Division, I always
 4   felt that there was that need there.  And then the
 5   Texas House spoke.  We -- I myself offered up an
 6   amendment on the House floor to change the way the
 7   Lottery handled its purchasing procedures, which was
 8   an amendment against what the -- the Sunset Commission
 9   had recommended, and that passed on the Texas House
10   and then got included in the bill and went on to the
11   Senate and, as you know, the bill died over there.
12   But as it relates to what some of the concerns as what
13   was going on with the actual price -- prices and
14   estimations, the committee hearing, I thought, went
15   very well.  I think there was -- there was a lot of
16   issues that were uncovered.  I think, in a nutshell,
17   what we felt that even though there was some
18   documentation that showed how they had achieved the
19   estimation, at the same time, as -- as the Vice Chair
20   Geren pointed out is, in a lot of the terminations,
21   the proper documentation didn't exist.  And if you
22   looked at what -- some of the recommendations and you
23   looked at the evaluations and if -- if they were
24   taking, say, for example, the State Bar of Texas, the
25   exam there, if they were to be taking that exam, the
0008
 1   majority of the terminated employees start from the
 2   very top to the bottom, going back two years or more,
 3   everybody had a better than 85 percent, who were
 4   terminated.
 5                  And there was a major concern about the
 6   at-will situation.  We understand.  I was an at-will
 7   employee when I was at the State Comptroller's Office,
 8   except we had a difference between the front line
 9   employees who had a job to do every day and those of
10   us who were exempt status, who were managers, division
11   directors, we could go at any time.  But the front
12   line employees had -- had a different growth plan that
13   they were on.  They went through oral reprimands, they
14   went through written procedures, they went through a
15   growth plan.  If they were not doing well, they would
16   go on a growth plan, and they always had an
17   opportunity to come out of whatever little hole, dark
18   hole they had fallen into.  If they had a problem, we
19   could come out with that.  And I think from -- from
20   the -- not only the agency, but from the committee
21   itself, that was one of the concerns as -- as I met
22   with them individually.  And I don't think the
23   committee -- and as you read in the newspapers, we
24   were never asking for anybody's head.  That's up to
25   you all to decide that.  We didn't want anybody hired
0009
 1   or fired, but what we did want is, we wanted to win
 2   back the trust of Texans about how we were doing
 3   and -- how we were doing things and how we were
 4   operating.  And in the two meetings that I had with
 5   the Executive Director, it was about how we were going
 6   to come out of this.  And for me it's a concern
 7   because I've seen three Executive Directors being --
 8   resigned, terminated, moved on, or -- I guess the
 9   Lottery uses a word, separated?  Separated from the
10   agency, I guess is a new buzz word.  For me that's a
11   concern.  I was at the State Comptroller's Office when
12   this agency started, and I have a very unique
13   background and understanding of how we're here and --
14   and but, for me, that -- it raises another question.
15   Is it really the Executive Director.  You know, we
16   went through -- through the Nora Linareses, we went
17   through the Linda Clouds, and now we've got another
18   one.  So I think that -- my perspective is that I
19   would urge the -- Mr. Chairman, not only you, but the
20   Commission to take a real good look at -- because I
21   know we are.  From my perspective and the committee's
22   perspective, we're going to be looking at some things
23   that hopefully will help to -- to win back the
24   confidence of -- of the players in the state of Texas,
25   because I think there is research that shows that -- I
0010
 1   know your number one outlet in the state of Texas is
 2   in my legislative district.  And the players are
 3   there.  And it's those players that are -- that as
 4   y'all know, that are in the low -- low income bracket
 5   who are playing.  And one of the suggestions, and
 6   maybe I was trying to be funny, is that I said, I
 7   haven't seen anybody on the Commission that looks like
 8   they make less than 28,000 and that -- because that's
 9   who we prey -- prey on, so to speak.  And I mean, a
10   negative side of why we shouldn't have the Lottery.
11                  And so with all of that said, you know,
12   I want to assure the Commission and the folks at the
13   Lottery that I know from our -- from our perspective
14   that -- the oversight committee, is that we're going
15   to continue to work with this agency and ensure that
16   some of these things come -- come to light and that
17   we -- that we together fix them in a proactive manner.
18   And we wanted to reach out to the agency to,
19   Mr. Chairman, you and the Commissioners, to say, how
20   can we do this.  How can we do this together.  And I
21   know y'all have a role to fulfill, and we have a role
22   to fulfill, but we're certainly not going to overstep
23   our boundaries, and whatever y'all's recommendation is
24   today or next week or plan that y'all have, we'll sit
25   down with any of us -- with any of you and you all
0011
 1   with us and come up and say, okay, here is what we're
 2   going to do, and we can help to monitor it and you can
 3   help us and we could -- we can move forward.
 4                  They -- one of the things that I ask,
 5   in closing, one of the things that I was real
 6   concerned about and I mentioned them earlier, was the
 7   hiring, the dismissal process and the purchasing
 8   process here at -- here at the Lottery.  And those are
 9   some of the things that -- that I understand
10   personally, and from the committee's perspective,
11   that's one of the things I'm going to be looking at.
12   And we'll work with y'all with whatever your plan is
13   going to be to come out of this.  I mean, that's --
14   we'll work -- we'll work with that, and I'm sure that
15   the members feel the same way.  So with that,
16   Chairman.
17                  CHAIRMAN CLOWE:  Thank you,
18   Chairman Flores.  We appreciate you being here and are
19   very respectful of your remarks.
20                  Chairman Geren, may I ask you if you
21   would make a comment please, sir.
22                  REPRESENTATIVE GEREN:  I'll try to be
23   very brief, Mr. Chairman and Commissioners.  I want to
24   thank y'all for being so proactive in the -- in the
25   steps that you've already taken to bring some
0012
 1   confidence back to the Lotto jackpots.  And I
 2   appreciate the steps you've already taken and know
 3   you're going to go forward.  I -- still, as I said
 4   when you were in front of our committee, I would
 5   appreciate it if y'all would look at the -- at the
 6   personnel issues and especially making sure that we
 7   have plenty of backup when we terminate someone as
 8   we -- you know, I think that the lack of that concerns
 9   me.  I would like for it to be more -- resemble more
10   what we have to do in the private sector prior to
11   terminating, so we don't suffer an unemployment claim
12   later.  And I would just encourage y'all to look at
13   that more closely.  I would -- once again, I echo what
14   Chairman Flores said, I think y'all are being very
15   proactive in this, and I applaud you for that and look
16   forward to working with you and provide any help that
17   we might, as y'all go forward with this.  Thank you
18   for having us here today.
19                  CHAIRMAN CLOWE:  Thank you,
20   Chairman Geren.  We're also very respectful of your
21   comments and statements that you made during the
22   committee meeting.  That was very helpful.
23                  And Representative Goolsby, may I call
24   on you, please, sir.
25                  REPRESENTATIVE GOOLSBY:  Thank you,
0013
 1   Mr. Chairman.  I come here with no prepared remarks,
 2   but like Chairman Flores, I have -- I have been around
 3   when this started.  People in my district initially
 4   did not want the Lottery, and I didn't vote for it.
 5   But then they -- they got religion, and they saw what
 6   it could do for this state and what it has done, and
 7   I've been a very big supporter of the Lottery since it
 8   started.  I want to thank the -- this Commission and
 9   the past Commissioners for the great job you've done.
10   If this was a Fortune 500 company, and it would be at
11   almost four billion dollars a year in sales, you have
12   a -- almost a thankless job of trying to run something
13   this large.  You can't do it without great staff, and
14   although you've had a few bumps in the road along the
15   way, I don't know of any major corporation or any
16   organization this long, in government or out of
17   government, that hasn't had some problems.  So I thank
18   you and your staff for the great job they've done.  I
19   have a great deal of confidence in you and the lottery
20   and the people of Texas.  And I thank you for having
21   me here this morning.
22                  CHAIRMAN CLOWE:  Thank you,
23   Representative Goolsby.  We are respectful and
24   appreciative of your comments.
25                  Commissioners, do you have any
0014
 1   questions or comments that you would like to make to
 2   the members of the Licensing and Administrative
 3   Procedures Committee?
 4                  COMMISSIONER COX:  Mr. Chairman, I have
 5   no specific questions or comments, but in general, I
 6   am very pleased with the spirit and cooperation that
 7   we're talking about here and look forward to the
 8   opportunity to work more closely with Chairman Flores
 9   and his committee.
10                  COMMISSIONER OLVERA:  Mr. Chairman, I
11   would echo those sentiments.  As you well know,
12   gentlemen, I think you all touched on it briefly,
13   there is a fine line between balancing the -- the law
14   in the state of Texas, which is the employment at will
15   doctrine, and some of these procedures or -- that are
16   being perhaps theoretically proposed.  Once again, the
17   employment at will doctrine has been in place in the
18   state of Texas from time immemorial, so we have to
19   find a balance -- and I recognize your concerns and I
20   thank you for them, but on the same token, we -- we do
21   want to uphold the law and not limit ourselves in the
22   future.  And I look forward to your input on -- on how
23   to balance that.
24                  CHAIRMAN CLOWE:  Is there anything
25   further at this point, gentlemen?  We thank you again.
0015
 1   We're most appreciative of you being here at 8:00
 2   o'clock in the morning on Monday with the legislative
 3   activity that is underway.  And we invite you to stay
 4   on and we're going to go further into this subject in
 5   the public meeting and then we may go into executive
 6   session relative to some employment issues, but we are
 7   honored by your presence and we would invite you to
 8   stay on if your schedule allows.
 9                  REPRESENTATIVE GEREN:  Thank you,
10   Mr. Chairman.
11                  CHAIRMAN CLOWE:  Thank you.
12                  At this point while we're in this
13   agenda item, Gary, I want to call on you to give the
14   Commissioners any further information that you've
15   developed since our meeting on June the 24th, relating
16   to the estimated sales and the estimated jackpot issue
17   that we discussed at length.
18                  MR. GRIEF:  Good morning,
19   Commissioners.  We do have staff poised again this
20   morning with all of the voluminous information that
21   they had ready to present at the last meeting, so that
22   is certainly available and if you want to hear any
23   more about that particular information.
24                  What I thought might be helpful for you
25   this morning is to hear how the agency is currently
0016
 1   approaching the jackpot estimation process for all of
 2   our on-line games.  So if that pleases the Commission.
 3                  CHAIRMAN CLOWE:  Yes.  Go forward on
 4   that basis.
 5                  MR. GRIEF:  The first game I'll talk
 6   about this morning is the Lotto Texas.  The Lotto
 7   Texas jackpot estimation begins three to five days
 8   prior to the Lotto Texas drawing, depending on whether
 9   the next drawing is going to occur on a Wednesday
10   night or a Saturday night.  Currently, the sales
11   estimation process takes place in two different
12   divisions, the Lottery operations division and the
13   administration division.  The administration and the
14   accountant obtains investment cost information from
15   the Texas Treasury Safekeeping Trust Company to
16   determine the interest factor.  And then the
17   accountant compiles actual sales to-date for the
18   current drawing and estimates sales through the
19   upcoming draw date.  The accountant also estimates
20   sales for the next Lotto Texas drawing.
21                  In lottery operations, the other
22   division that works on this process, a staff member in
23   our products area obtains the interest factor from the
24   accountant in administration, and then the products
25   department staff member who is working on the estimate
0017
 1   also compiles actual sales for the current drawing and
 2   estimates sales through the upcoming draw date.  Now,
 3   I want to note that those two processes are done in
 4   those two divisions independent of each other.
 5                  After those estimates are independently
 6   compiled, the staff members from those two divisions
 7   meet and they compare their numbers.  And during this
 8   meeting, the staff members agree on the sales
 9   estimates.  Then they produce a document and that
10   document is called the Lotto Texas Jackpot Estimate
11   Working Paper.  And that's used to obtain the
12   appropriate approvals for the next advertised jackpot.
13   The following staff reviews that working paper and
14   recommends the advertised jackpot for the next
15   drawing:  The Financial Administration Manager, the
16   Administration Division Director, the Products
17   Manager, the Lottery Operations Director, the Deputy
18   Executive Director, and the Executive Director.  The
19   final approval of the advertised jackpot for the next
20   drawing is currently at the Commissioner level, and
21   that final approval is obtained with assistance from
22   the internal audit division.
23                  After the final approval of the
24   advertised jackpot is obtained, the signed-off working
25   paper is returned back to the products department.
0018
 1   The products department provides the jackpot
 2   information, the advertised jackpot amount, to agency
 3   staff, the lottery operator vendor staff, and also to
 4   our drawings production services vendor staff.  The
 5   only changes that have recently occurred in this
 6   entire procedure involve the additional staff members
 7   who now review the working paper and recommend an
 8   advertised jackpot.  New staff members in the process
 9   are the Administration Division Director, the Lottery
10   Operations Director, and myself, the Deputy Executive
11   Director.  Commissioner final approval is also a new
12   step in that process.
13                  Any questions about Lotto Texas?
14                  CHAIRMAN CLOWE:  I have a question,
15   Gary.  Commissioner Cox had requested, I think, quite
16   some time prior to this issue of jackpot estimation,
17   that this process be more visible to the public and
18   that these numbers be established in a public forum,
19   the website, or some other venue.  Where is that
20   process in regard to what you've just reported to us?
21                  MR. GRIEF:  Mr. Chairman, we have
22   today, on a different item, some proposed amendments
23   to the Lotto Texas On-line game rule that goes
24   specifically to that point, that go to posting the
25   jackpot estimate information on the website, as well
0019
 1   as any amount that the jackpot winner might be paid.
 2                  CHAIRMAN CLOWE:  And is that embraced,
 3   then, in the proposed rules that you want the
 4   Commission to consider at this meeting?
 5                  MR. GRIEF:  Yes, sir, it is.
 6                  CHAIRMAN CLOWE:  So publication is part
 7   of the rulemaking that you cover?
 8                  MR. GRIEF:  That is part of the new
 9   rulemaking that we're going to propose to the
10   Commission today.
11                  CHAIRMAN CLOWE:  Well, we've -- I think
12   we need a full discussion of that, and you want to
13   have it at that point in time?
14                  MR. GRIEF:  Yes, sir.
15                  CHAIRMAN CLOWE:  All right.
16                  Yes, sir.
17                  COMMISSIONER COX:  Mr. Chairman, when
18   we have that discussion, let's talk about the
19   possibility of going ahead and doing that, unless
20   there is something in the rule that would prevent our
21   doing it, even before the rule might become effective.
22                  MR. GRIEF:  Very good.
23                  CHAIRMAN CLOWE:  That's really where I
24   was headed, because I think that's a policy issue that
25   can be done without the rulemaking, subject to being
0020
 1   overruled by the General Counsel.  But if it's a
 2   policy issue, I think you're hearing from your
 3   Commissioners that we want this more open to the
 4   public and we want it in a venue where the workings of
 5   the estimation and the announcement of the jackpot can
 6   be there for everyone to see.
 7                  COMMISSIONER OLVERA:  And Mr. Grief,
 8   Mr. Chairman, Commissioner Cox, my input on the
 9   rulemaking process is, I would like -- you know,
10   subject to approval and this is my input, to include
11   as part of the rulemaking some -- perhaps some more of
12   a limitation on the discretionary issue on the
13   advertised jackpot.  Now, obviously, I want input from
14   staff on whether this idea should take hold or not,
15   but my theory is that when we see the estimated sales,
16   we've got a low end and a high end pursuant to this
17   sheet, and my suggestion would be that the advertised
18   amount never be greater than the low end of the
19   estimated sales.
20                  Now, that's just something to throw out
21   and is subject to discussion and, obviously,
22   Commissioners, something to consider.  And that may
23   hopefully, theoretically, avoid some of the over
24   estimations that we've seen in the past, at least on
25   these four occasions.
0021
 1                  CHAIRMAN CLOWE:  Very good.
 2                  COMMISSIONER COX:  Mr. Chairman.
 3                  CHAIRMAN CLOWE:  Sir.
 4                  COMMISSIONER COX:  The -- I have, as
 5   Gary said, been involved in the process for the last
 6   few draws.  And what staff has been doing is following
 7   your guidance at the previous meeting, where you
 8   expressed that you would like to see it lower than the
 9   lower of the two, and that's what has been done.
10                  COMMISSIONER OLVERA:  Thank you,
11   Commissioner.
12                  CHAIRMAN CLOWE:  Very good.
13                  MR. GRIEF:  All right.  If there are no
14   other questions about Lotto Texas, I'll move to the
15   Texas Two Step game.
16                  Again, that jackpot estimation process
17   starts three to four days prior to each drawing,
18   depending on whether the next drawing is on a Monday
19   or a Thursday.  And it's important to note that all
20   the jackpot prizes for the Texas Two Step game are
21   paid based on the advertised jackpot amount.  If the
22   jackpot prize pool available is greater than the
23   advertised jackpot amount, the difference is added to
24   the Texas Two Step prize reserve fund and is used for
25   future jackpot amounts.  If the jackpot prize pool is
0022
 1   less than the advertised jackpot amount, then the
 2   difference is taken from the Texas Two Step prize
 3   reserve fund to pay the player the advertised jackpot
 4   amount.
 5                  The jackpot estimation process is
 6   exactly the same as what I spoke about regarding
 7   Lotto Texas, as far as working through the sales
 8   estimates up to a final approval, and that final
 9   approval is currently performed by the Executive
10   Director.  The document that we use to perform that
11   final approval is called the Texas Two Step Jackpot
12   Estimate Worksheet.  And after the final approval of
13   that advertised jackpot is made and the signed-off
14   worksheet is returned back to the products department,
15   the products department staff, again, advises the
16   Lottery Commission staff, the Lottery operator vendor
17   staff and our drawings productions services staff of
18   the next advertised jackpot amount.
19                  The only changes that have recently
20   occurred regarding the Texas Two Step jackpot approval
21   process involve additional staff members who are now
22   reviewing the worksheet.  New staff members in the
23   process include the Administration Division Director,
24   the Lottery Operations Division Director, and the
25   Deputy Executive Director.
0023
 1                  I'll be happy to answer any questions
 2   about Texas Two Step.
 3                  CHAIRMAN CLOWE:  Thank you.
 4                  MR. GRIEF:  For Mega Millions it's a
 5   little bit of a different process.  Again, jackpot
 6   estimation begins three to four days in advance of the
 7   drawing, depending on whether the next drawing will be
 8   Tuesday or Friday.  And once again, the jackpot
 9   estimation process is done exactly the same in the
10   Lottery Operations and the Administration Division.
11   However, after the sales estimates are made for Texas,
12   the process is handled differently.  The sales
13   estimation data is entered into a document called the
14   Mega Millions Sales Projection document.  At that
15   point, the 11 other participating Mega Millions states
16   also provide their sales estimates, along with an
17   updated interest factor, which is provided by the
18   state of Virginia.  There is a conference call that is
19   held every Tuesday and Friday morning.  The finance
20   committee for the Mega Millions group makes a jackpot
21   recommendation to the Mega Millions state lottery
22   directors based on those sales estimates, the interest
23   factor, and anticipated sales growth.  According to
24   the Mega Millions finance and operations procedures,
25   approval of the advertised jackpot requires the
0024
 1   approval of four Mega Millions directors or their
 2   designees.  The directors of the participating Mega
 3   Millions states are informed of the sales estimate as
 4   well as the jackpot supporting data, and they then
 5   decide what to advertise for the next Mega Millions
 6   drawing.  And no procedural changes have occurred
 7   recently involving the Mega Millions jackpot
 8   estimation procedure.
 9                  I'll be happy to answer any questions
10   about that.
11                  CHAIRMAN CLOWE:  Yes, sir.
12                  COMMISSIONER COX:  Gary, you indicated
13   that four executive directors.  There are 12 states in
14   Mega Millions?
15                  MR. GRIEF:  Yes, sir.
16                  COMMISSIONER COX:  And is this a
17   particular four that is designated by the 12 or is
18   this the first four they could reach, or is -- how
19   does that work?
20                  MR. GRIEF:  My understanding is,
21   typically, it's the first four are the ones that are
22   available to take part in the conference call.
23                  COMMISSIONER COX:  So the rules of Mega
24   Millions delegate to the first four guys that the
25   Chair can reach, the Chair and the first three guys or
0025
 1   gals that the Chair reaches, the authority to set the
 2   jackpot?
 3                  MR. GRIEF:  You might want to hear from
 4   Andy Marker, our attorney, who is very well versed in
 5   the rules of the finance and operating procedures on
 6   that particular matter.
 7                  COMMISSIONER COX:  I would like to,
 8   Mr. Chairman.
 9                  CHAIRMAN CLOWE:  Yes.  Andy, will you
10   come up, please.
11                  MR. MARKER:  Good morning,
12   Commissioners.  For the record, my name is Andy
13   Marker, Deputy General Counsel for the Commission.
14                  Commissioner Cox, going to your point,
15   the Mega Millions finance operations procedures do not
16   designate who those four directors must be.  It is the
17   first four directors who participate in that call.
18   Some calls, as I believe, may have more than four
19   directors on them.  But it only requires four party
20   lottery directors to set a jackpot.
21                  COMMISSIONER COX:  Are you pretty
22   comfortable with that procedure, Andy?
23                  MR. MARKER:  I would have to defer to
24   the finance people on that.  I can tell you with
25   regard to the -- the legal aspect of that, when the --
0026
 1   excuse me -- the Mega Millions agreement was revised
 2   this spring to add California, there were changes made
 3   to the finance and operations procedures.  Some of
 4   those changes, I think, had been recommended by Texas
 5   and some other states.  One of the changes was to
 6   establish a threshold amount in the event that sales
 7   did not support the advertised jackpot.  I believe
 8   Texas believed that was a positive change to the
 9   agreement.  With regard to the actual mechanics of the
10   finance committee, I can't really comment on that.
11                  COMMISSIONER COX:  Mr. Chairman, maybe
12   this is not the right meeting, but at some point I
13   would like to hear more about that and -- and feel
14   more comfortable that four people are setting that
15   jackpot, when 12 states are involved.
16                  CHAIRMAN CLOWE:  Commissioner Cox, you
17   were on the Commission when we went into Mega
18   Millions, weren't you?
19                  COMMISSIONER COX:  I was.
20                  CHAIRMAN CLOWE:  And
21   Commissioner Olvera, you were not, if I recall.
22                  COMMISSIONER OLVERA:  Well, I came in
23   in the final stage.  I was here August of 2003, and I
24   believe we finalized the deal in December of 2003.
25                  CHAIRMAN CLOWE:  Right.
0027
 1   Commissioner Cox -- and I want to remind you and tell
 2   you, Commissioner Olvera, that I was the contrarian
 3   when we went into this, and I didn't like some of the
 4   aspects of the operation that I saw, and I expressed
 5   them early on.
 6                  The organization has been successful.
 7   It has not had problems.  But I am not easy with some
 8   of the procedures that are established and, frankly,
 9   not documented or adhered to as precisely as I would
10   like with my business background.  We discussed that
11   in this forum at the time that we voted to go into
12   Mega Millions.  There was the understanding that we
13   are one of a number of states, and we cannot control
14   the Mega Millions operation the way we control the
15   Lotto Texas.  Some might say that we haven't done a
16   very good job of that, but that's the subject we're
17   talking about here today.  I'm not totally at ease
18   with the Mega Millions operation, but I have urged the
19   Executive Director to be more influential and more
20   involved, but we're -- we're in an organization there
21   where we don't control and we certainly are one of a
22   number of players.  And so we have to have that
23   understanding.
24                  COMMISSIONER COX:  And I think that we
25   are working as best we can to improve things.  I know
0028
 1   Catherine Melvin has been involved with the audit
 2   committee and there have been some improvements there.
 3   And certainly, we recognized when we went into this,
 4   as you said, that we were doing it a bit differently.
 5                  CHAIRMAN CLOWE:  That is right.
 6                  COMMISSIONER COX:  But if there are
 7   some things that we would like at this point to press
 8   even more for, maybe at an early meeting we might be
 9   able to identify those and help the staff with what we
10   would like to see the agenda be.
11                  CHAIRMAN CLOWE:  And I think it's good
12   to have this discussion in the public forum because,
13   you know, we had the options of not joining Mega
14   Millions, of joining Powerball, and I raised the
15   option of joining both of them, which wasn't very well
16   received.  But, you know, I thought it was the right
17   time to look at all of our options.  And I think, in
18   retrospect, to this point in time, it's been a good
19   decision to join Mega Millions, it's had a beneficial
20   result to the State of Texas, but I think, in
21   reviewing these instances with Lotto Texas, it shows
22   that we need to do just what you're suggesting and,
23   that is, go back and re-examine and keep pressing for
24   better business practice, which is what we're
25   discussing.
0029
 1                  COMMISSIONER OLVERA:  And Mr. Marker,
 2   along those lines, I guess I would like input as to
 3   whether Mega Millions has some kind of formula as to
 4   how the advertised amount is calculated.  For example,
 5   I just recently reiterated a template that if the
 6   estimated sales are X that the advertised amount,
 7   which is Y, be less than that.  I'm not -- I would
 8   like to see if there is a template that they have as
 9   to how they arrive at that figure and...
10                  MR. MARKER:  Well, Commissioners, I can
11   tell you what is in the finance procedures.  The only
12   formula that appears in the finance procedures, again,
13   goes back to what I mentioned with Commissioner Cox,
14   which is, in the event that sales do not support the
15   advertised jackpot, there is a threshold amount or
16   minimum amount that is paid.  I can't speak to the
17   specifics of the worksheet that Mr. Grief referenced.
18   I believe that I have participated on some of the
19   finance calls.  There is a jackpot estimation as
20   performed by the finance committee.  It, in turn,
21   makes recommendations to the party lottery directors
22   who join the jackpot estimation calls.  But, again,
23   I'm not familiar with that formula that is used,
24   and -- but that is not written into the actual
25   agreement.
0030
 1                  COMMISSIONER OLVERA:  I see.
 2                  CHAIRMAN CLOWE:  Anything further,
 3   Gary, at this time?
 4                  MR. GRIEF:  I'll just touch on the
 5   other two on-line games.
 6                  CHAIRMAN CLOWE:  Before you do that,
 7   let me ask you to hold that for a minute.
 8                  Thank you, Andy.
 9                  MR. MARKER:  Thank you.
10                  CHAIRMAN CLOWE:  Commissioners, with
11   your permission, we have a -- a distinguished visitor
12   here who wishes to address the Commission on item 19,
13   the case represented by letter E.  He has a time
14   consideration.  Congressmen Kent Hance is here and he
15   has to depart shortly.  I'd like to move to that item
16   on the agenda and ask Mr. Hance to come forward, would
17   you please, sir.
18                  MR. HANCE:  Thank you, Mr. Chairman,
19   members of the Commission.  I appreciate you allowing
20   me to do this.  I did not realize until Friday that --
21   that I would need to be doing this, and I have a
22   flight to catch and I just -- I apologize, but I
23   appreciate your being kind enough to take me out of
24   turn.
25                  I am the one that negotiated the
0031
 1   settlement in the GameTech case, and so I figured that
 2   I'd better be here and explain to you, you know, what
 3   it was all about.  The settlement is an enforcement
 4   case, and 99.99 percent of all enforcement cases are
 5   settled or approved -- it's kind of a matter-of-fact
 6   thing.  This one is not -- and I would tell you the
 7   responsibility that it's here and there is a
 8   controversy is my fault.  I agreed to let Billy Atkins
 9   talk me into a 250,000 dollar settlement on something
10   that was worth at most 25,000 dollars.  Our position,
11   it's worth zero.  I thought that when the announcement
12   was made that probably the three Commissioners would
13   pick Billy up and put him on their shoulders and walk
14   him around the room, until I realized that Billy is a
15   little larger than that would allow.
16                  This case was a bit -- this was a
17   business decision that we made.  The client came to me
18   and they wanted to know what it could cost to try it.
19   We tried one just -- similar to this on price fixing
20   in 2002, and the verdict from SOAH was zero.  The
21   Commission got zero.  And they asked me to put
22   together a budget.  I put together a budget, and we
23   were talking about 650,000 to a million five to try
24   this thing, a million five being if it went all the
25   way to the Texas Supreme Court.  What has happened in
0032
 1   the legal profession -- and I think Commissioner
 2   Olvera will back me up on this -- with all of the
 3   changes in rules in discovery, it is extremely
 4   expensive to go all the way in a lawsuit.  Courts are
 5   not backed up like they used to be because businesses
 6   are making business decisions to settle lawsuits.  And
 7   that's what we decided to do, that it made more sense.
 8   The negotiations were tough.  I never talked to Billy
 9   that he didn't have their lawyer there.  We negotiated
10   back and forth probably four or five times.  And I
11   will just say this, regardless of what you do, Billy
12   Atkins and Kim Kiplin, they did a good job.  I respect
13   them.  They're honest.  I thought they pushed a little
14   hard on that amount of money, but it was a business
15   decision.
16                  The other thing that I would like to
17   point out is that this is opposed by Mr. Hieronymus,
18   who I have never met, but he was a distributor that
19   was fired by our company.  He's got lawsuits -- we've
20   got lawsuits against him in Arizona and Texas and
21   Virginia, and if we would settle this case for 100
22   million dollars, he would have been up here saying,
23   it's not enough.  You know, no matter what we've
24   settled for, this is an ongoing thing.  He is obsessed
25   with our company for firing him, and it's going to
0033
 1   continue regardless of what y'all do.  But I don't
 2   want the Commission to make decisions based on who is
 3   going to yell the loudest and run to the press.  This
 4   is a factual decision that you need to make.  You're
 5   appointed by the Governor, confirmed by the Senate,
 6   and you're out to do what you think is best.  There is
 7   a good chance, and our position is that if we go to
 8   trial on this, you're going to wind up with zero.  I
 9   think that -- and the question came up the other day,
10   should -- should we admit to wrongdoing.  We won't,
11   for two reasons.  Number one, we didn't do anything
12   wrong; and, number two, that would be against
13   everything that we stand for, to come out on a
14   settlement -- the reason you have a settlement is that
15   you're giving up some things, we're giving up 250,000
16   dollars we don't think we owe, and the other side is
17   giving up some things.  And so this is truly a
18   settlement.
19                  Now, there was also some talk that we
20   had been found guilty of price fixing.  That is
21   absolutely wrong.  Anything, anyone that tells you
22   that we've been found guilty of price fixing, that is
23   an outright lie.  What has happened -- the one case
24   where Mr. Hieronymus won was on a breach of contract.
25   He sued and included price fixing in the allegations.
0034
 1   But the finding had to do with breach of contract, and
 2   that's what the judgment was on.
 3                  This case -- also you have my friend,
 4   Steve Fenoglio, here representing charities that have
 5   all of the sudden, you know, said that they are
 6   damaged.  If everything they allege is true, their
 7   damages are still zero.  And everything they allege is
 8   not true.  And, you know, the funny thing about it,
 9   until I foolishly agreed to 250,000, we never heard a
10   word from them.  They weren't out here trying to shake
11   money out of us.  And now you've got a plaintiffs law
12   firm running a website trying to stir up lawsuits in
13   this case because they -- they smell money.  And I
14   mean, that's their job as plaintiffs lawyers to
15   advertise, and -- and try to get a bunch of lawsuits
16   going.  I understand that.  But, you know, all this
17   time, for the last three or four years, we didn't have
18   a charity write us and say, we're going to sue you.
19   We didn't have any of them call and say that, you
20   know, we've been damaged or anything like that.  But
21   once they saw this amount of money, they just -- you
22   know, it just scared them that somebody is going to
23   get something and they weren't going to get a part of
24   it.
25                  I guess the last question that I would
0035
 1   think the Commissioners have got to ask, and I think
 2   this is most important, is that it's a question of, do
 3   you believe -- me, I mean, that's not important -- do
 4   you believe Kim and Billy.  Now, I'm telling you, they
 5   negotiated hard and in good faith.  Or do you believe
 6   someone that's going to go out and just scream and
 7   yell the loudest.  I submit to you, the staff did an
 8   outstanding job on this.  And we probably overpaid and
 9   that's -- I guarantee you, if we had settled this case
10   for 5,000 dollars, no one would have shown up --
11   except Mr. Hieronymus -- no one would have shown up
12   saying anything.  But we settled for 250,000.  It --
13   this is a great deal for the Lottery Commission, in my
14   opinion.  And I just wanted to get that in.  I do have
15   to leave.  We have some of our co-counsel here.  James
16   McNally is here to answer any questions, and also,
17   Mr. Jay Stewart.  I know you'll be hearing from the
18   other side and I'll be more than happy to take any
19   questions.
20                  CHAIRMAN CLOWE:  Thank you, Mr. Hance.
21                  MR. HANCE:  Thank you very much.
22                  CHAIRMAN CLOWE:  Mr. Hieronymus, I've
23   seen you earlier.  Are you in the audience?
24                  MR. HIERONYMUS:  I am.
25                  CHAIRMAN CLOWE:  I would imagine you
0036
 1   had a statement you wanted to make.  Would you like to
 2   make it now while this subject is before the
 3   Commissioners?  We're going to come back to it later,
 4   but in a sense of fairness, if you would like to speak
 5   now, I would like to offer you that opportunity.
 6                  MR. HIERONYMUS:  I'm Steven Hieronymus,
 7   a distributor, Trend Gaming Systems, for
 8   identification.  I don't speak quite as well as
 9   Mr. Hance, but I will try to cover just a few things.
10                  You know, I'm disturbed that Mr. Hance
11   can come in here -- and, you know, he says a lot of
12   different things.  The facts are, wrongdoing was
13   established.  And I think Mr. Atkins, who was asked
14   that point-blank, that wrongdoing was established,
15   whether his client wants to acknowledge it or not.
16   And that the -- you know, it did come out.  The last
17   time I was in front of you, I didn't know what the
18   terms of the settlement were.  I didn't know what the
19   calculated damages were.  That did come out at the
20   administrative hearing at the Capitol.  And, you know,
21   I know that the calculation was based on two and a
22   half million dollars worth of damages.  I would submit
23   to you that it is far greater than that.  Most of us
24   in the industry that have looked at that, and I
25   believe even Mr. Atkins referred to the -- global
0037
 1   calculations were limited in scope.  And I would
 2   submit that it would be at least triple that.  We are
 3   just now seeing some competitive aspects, because
 4   people have brought product back into the market now,
 5   here just since the fall of 2004, and you are seeing
 6   dramatic changes, which helps establish that there
 7   was, in fact, a control situation.  A 250,000 dollar
 8   settlement, in light of that, is -- you know, it's
 9   just very, very disturbing.
10                  This has no impact on me.  I won my
11   case.  I won a very large judgement because of
12   improper termination that -- you know, that's -- this
13   is not about me needing revenge upon GameTech.  It is
14   a matter of concern when it -- the licensee who the
15   agency has -- the Commission has determined did no
16   illegal activity, who they harmed was the charitable
17   organizations of Texas, and they won't acknowledge
18   that they've done it.  They say, oh, let's throw some
19   money.  They won't acknowledge that they've done it.
20   They won't even acknowledge the law.  They said it
21   doesn't apply, you know, when an administrative
22   hearing judge has said it does apply, an Attorney
23   General's opinion says it applies, a federal judge
24   says it applies.  This is an organization that throws
25   money and throws intimidation, and I'm aware of it,
0038
 1   and that's how they operate.  And they can hire all of
 2   the best top people, I agree.  But it's not right.
 3   And I would ask you to reject the settlement, allow
 4   the SOAH process to go forward.  That way you would
 5   get, at the end of the day, findings of fact where
 6   you're in a better position.  It's very frustrating
 7   for a licensee to be able to communicate and not
 8   improperly give you information that you're not
 9   supposed to have, evidently.  And that's the structure
10   we have and I understand it and I'm trying very hard
11   to respect it.  I submit, you know, it will not go the
12   way Mr. Hance said at the end of the day, knowing what
13   I know.  But you would at least have the -- the
14   information available.
15                  And Commissioner Olvera, I am not in
16   any way trying to step into the investigative process
17   or into your role, but I do know that a hearing is a
18   more public event.  The reason charities haven't been
19   in here screaming is because they didn't know about
20   it.  I mean, I didn't even know about some of this
21   stuff until very late.  I had to go through the Open
22   Records process, and I've been still fighting to get
23   information, because this has been very secret.  And
24   during -- all during the multiple year trial that I
25   was involved with, the evidence in that case was all
0039
 1   sealed, so nobody knew about it.  That's why nobody
 2   has been -- it's just now in the last month that this
 3   information is seeping out into the industry and
 4   everybody is very disturbed by it.  So you will hear a
 5   lot about it.  A lot of people that have looked at it
 6   and have access to information that unfortunately you
 7   evidently do not have, look at it, and as one person
 8   said to me the other day, you know, say it isn't so,
 9   this just isn't right.  And that's what is here.  And
10   so I would ask you to let the process go forward and
11   then you would get findings of fact that -- you know,
12   whatever you end up doing, then you're in a position
13   to appropriately make the determination.  I mean, I
14   think if there has ever been a case that deserved a
15   revocation, this would be it.  But you would be in a
16   position to assess whatever fine or whatever you did,
17   and I think it would serve the State well, and I think
18   it would make all of us in the licensed communities
19   feel better about the process.  And so I would
20   encourage that.  And I really appreciate you going
21   ahead -- I wasn't sure if I was going to speak or not,
22   but given the previous speaker, I thought I should.
23                  CHAIRMAN CLOWE:  Thank you,
24   Mr. Hieronymus.
25                  Commissioners, the reason I asked
0040
 1   Mr. Hieronymus and Mr. Hance to speak to us at this
 2   time is that, as I believe you are aware, by virtue of
 3   a copy you have received of a letter, Mr. Hance's law
 4   firm has requested that the Commission pass this item
 5   on its agenda today.  Now, I don't think this is the
 6   proper time to deal with that, but I wanted to give
 7   both sides their opportunity while, again, Mr. Hance
 8   was in the audience.  And I would like, in view of the
 9   fact that he was able to address the Commission, if
10   Mr. Stewart -- or Mr. Hance, maybe I should address
11   you on this.  Does your request to pass this item
12   still apply at this time?
13                  MR. HANCE:  You know, I think that's up
14   to y'all.  I mean, I had the chance to -- to say what
15   I thought was important and Mr. Hieronymus has
16   responded to that, and so I just want to make sure,
17   since I was the one that negotiated the settlement,
18   that I had the opportunity to tell you why.
19                  CHAIRMAN CLOWE:  And so you're
20   satisfied?
21                  MR. HANCE:  Yes.
22                  CHAIRMAN CLOWE:  And did you get his
23   response, madam reporter?
24                  THE REPORTER:  Yes, I did.
25                  CHAIRMAN CLOWE:  Then, Commissioners,
0041
 1   we will not deal with this further at this time, but
 2   back -- in the later, after the Lotto Texas issue is
 3   finished.  But we've satisfied those needs of
 4   individuals who had a time constraint.
 5                  Now, Gary, if you could pick up your
 6   train of thought -- and there are others, by the way,
 7   I might add, who have filed appearance forms who wish
 8   to comment on this subject, and we will call on you
 9   when we take that issue up later in the meeting.  But
10   for the time being then, let's return to the former
11   item on the docket, number six, and Gary, you have two
12   other on-line games, I think, that you wanted to
13   report to the Commissioners on.
14                  MR. GRIEF:  Yes, sir.  I'll just touch
15   briefly on both of those games.  The first is Cash 5.
16   Our Cash 5 game is not a rolling jackpot game, but
17   rather, it's a roll-down pari-mutuel game with only
18   the two out of five prize guaranteed at two dollars.
19   If no one correctly matches all five numbers in that
20   game, then the money set aside to pay the first prize
21   rolls down to the four of five prize and the four of
22   five prize is increased accordingly.  There is no
23   jackpot to estimate or advertise for that game.
24                  Likewise, Pick 3 is also not a rolling
25   jackpot game, but has guaranteed prize amounts based
0042
 1   on the wager type selected and the amount wagered.
 2   And, again, there is no jackpot to estimate or
 3   advertise.  And that concludes my report on those
 4   items, Mr. Chairman.
 5                  CHAIRMAN CLOWE:  Are there any
 6   questions?
 7                  Ms. Melvin, as the internal auditor, I
 8   think the Commission asked you to look into this
 9   subject and report back to us on what you were able to
10   determine in the time that you had.  Are you prepared
11   to do that now?  Would you come on up, please?
12                  MS. MELVIN:  Good morning,
13   Commissioners.  I am prepared do that now if you would
14   like.
15                  CHAIRMAN CLOWE:  Please.
16                  MS. MELVIN:  For the record, my name is
17   Catherine Melvin.  I'm the Internal Audit Director.
18                  Chairman, you asked that I report on
19   internal audit's review regarding the estimating and
20   final approval and publishing of the Lotto Texas
21   advertised jackpot, specifically, the advertising of
22   the June 8th jackpot.
23                  COMMISSIONER OLVERA:  Ms. Melvin.  Is
24   your mike on?
25                  MS. MELVIN:  It is now.
0043
 1                  When I became aware of this issue, I
 2   wanted to be sure that I understood the facts
 3   associated with the circumstances.  So at that time I
 4   notified Commissioner Cox, my liaison, and management
 5   that I would be gathering some data related to this.
 6   I was clear to all parties at the time, however, that
 7   I was not conducting an audit, but rather gathering
 8   the information to understand.
 9                  Specifically, internal audit reviewed
10   signed jackpot estimation worksheets, sales data from
11   ProSys, advertised jackpots, the actual advertised
12   jackpot from ProSys, and also held interviews with
13   various staff members involved to understand the
14   process better.
15                  For -- we examined the Lotto Texas
16   draws since May 2003, the rule change, to the present.
17   And in examining the data we noted the following:  As
18   management has already stated, there were two prior
19   instances in which the advertised amount was not fully
20   supported by the then estimate, estimated low end of
21   sales.  Each of the instances, as you're aware now, in
22   which the advertised amount was not fully supported by
23   the then estimated low end of sales occurred coming
24   out of the guaranteed rolls in the roll cycle.
25                  And then, thirdly, we also compared the
0044
 1   actual sales with the advertised amounts and found
 2   that 90 percent of the time, actual sales have
 3   supported the advertised jackpot.  And, of course,
 4   this does not include the guaranteed first four draws.
 5   And then comparing the actual sales with the
 6   estimations, we found -- and this would be excluding
 7   the first draw because there is no estimate -- we
 8   found -- I've got some more numbers -- 29 percent of
 9   the projected future value of actual sales was less
10   than the low end estimate, 18 percent of the projected
11   future value of the actual sales was within the low
12   and high end estimate, and then 53 percent of the
13   time, the projected future value of actual sales was
14   greater than the high end estimate.
15                  And, Chairman, you also asked that I
16   comment on representations that were made to the
17   Commissioners at the last Commission meeting regarding
18   the process of the Lotto Texas jackpot estimation and
19   the ultimate advertising of that jackpot.  And I have
20   reviewed that discussion and representations made at
21   that meeting, and in this meeting also, and did not
22   find anything during my review to contradict the
23   information that has been presented to you.  The -- as
24   to your -- as Mr. Grief has stated, the current
25   process for approval of the advertised Lotto Texas
0045
 1   jackpot amount has been slightly modified since your
 2   last meeting.  A Commissioner now signs final approval
 3   of the advertised amount and there have been a -- I
 4   think Mr. Grief has mentioned that there are some
 5   additional signatures to that estimation worksheet.
 6                  In conducting that review, I do have
 7   just a couple of comments to make about the current
 8   process if you're interested in hearing those.
 9                  CHAIRMAN CLOWE:  Yes.
10                  MS. MELVIN:  Okay.  Just -- the first
11   thing is that while written procedures do exist
12   regarding the Lotto Texas jackpot, the procedures
13   could be improved in a couple of ways, in my opinion.
14   One is that the procedures do not provide for
15   contingencies, and that, say, some disaster occurs
16   where we're not able to meet our obligation.  Or such
17   as what occurred here more recently when we guarantee
18   the first four and coming out of that roll cycle, we
19   find ourselves in a position of -- of not able to meet
20   the next roll forward.
21                  The other thing is, is that the written
22   procedures -- and this may speak to
23   Commissioner Olvera's concern -- the -- there is no
24   specific discussion in the procedures on how to select
25   the actual advertised amount.  That is, how do you go
0046
 1   from the estimation to what is actually advertised.
 2                  And my last comment is that, because
 3   more signatures have been added to the process, I
 4   recommended that the estimation sheet be ready earlier
 5   in the day.  And Mr. Grief asked staff to have the
 6   sheet ready by approximately 11:00 o'clock in the
 7   early afternoon.  I think it is important to be aware
 8   that this may result in less precise estimations.  In
 9   effect, staff will only be able to use actual sales
10   through approximately 10:00 o'clock in the morning of
11   the estimation rather than, I think, in the past they
12   went up to approximately 3:00 o'clock in the afternoon
13   to have that estimation ready from 4:00 -- later in
14   the afternoon.
15                  And that concludes my presentation
16   regarding those topics.  If you have any questions,
17   I'm happy to answer those.
18                  COMMISSIONER OLVERA:  I guess,
19   Ms. Melvin, assuming we incorporate a formula that
20   takes away a lot of the discretion, do you think there
21   is still a need for so many signatures?  I would think
22   we would need the signatures if we were going to vary
23   from the formula.  So that -- I guess my concern is, I
24   don't want to lessen the accuracy of these
25   calculations.  Obviously, we have some very precise
0047
 1   numbers and some very precise data, and the reason
 2   that my proposal is set forth is, I don't want to
 3   ignore that data.  And so that's my comment.  I guess,
 4   is there a way we can balance accurate numbers without
 5   so many signatures if we're going to implement a very
 6   precise formula?
 7                  MS. MELVIN:  I do believe we're -- you
 8   can do that.  And perhaps the staff that perform the
 9   estimations could speak more appropriately about this.
10   But there is obviously a certain amount of art in
11   estimation, and it cannot be completely distilled to a
12   formula, a mathematical process.  As an auditor, I
13   wish that could be true, but of course, that can't be.
14   But I think when you allow for some guidelines that,
15   after that, it becomes very clear of how you get to
16   the advertised amount.  You asked, you know, in
17   that -- in that scenario, would you continue to need
18   that many layers of sign-off on that.  I would say,
19   no.  I would say, no.  And the reason why is, if
20   not -- I certainly am for, you know, allowing for the
21   most accountability possible in any process, but I'm
22   not sure what value is added by having one signature
23   after another, after another.  However, I do think
24   that you have certain policies and procedures in
25   place, you hold those people that are responsible for
0048
 1   implementing those, you hold them accountable for
 2   those policies and procedures, and that you have some
 3   periodic review to ensure that they're being followed.
 4                  COMMISSIONER COX:  Mr. Chairman, I have
 5   signed off on this three or four times now, and I
 6   agree with what Catherine says.  I think that if we
 7   can, as a board, establish a policy that the jackpot
 8   to be advertised is to be the million dollars rounded
 9   down from the lower of the two estimates, and if that
10   is reviewed by the chief executive and audited
11   realtime by the auditors before it's advertised, then
12   I would certainly be comfortable stepping out of the
13   process.
14                  CHAIRMAN CLOWE:  And Commissioner Cox,
15   is that process embodied to your satisfaction in the
16   rules that Gary has pointed out that he wants to put
17   up for our consideration later in this meeting?
18                  COMMISSIONER COX:  I think it would
19   be -- not necessarily embodied.  All right?  If one of
20   the alternatives is selected, the consumer will be
21   protected no matter what, but I don't think it is
22   necessarily embodied.  And given that we have several
23   months before that could take place, if it were
24   appropriate for this board to say, we would -- we
25   instruct that the advertised amount be the million
0049
 1   rounded down from the lower of the two estimates,
 2   then -- and if Catherine or one of her staff looks at
 3   that after it's signed off and before it's advertised,
 4   I would be comfortable that the process is
 5   appropriate.
 6                  COMMISSIONER OLVERA:  I would add
 7   that -- that perhaps we should include the -- your
 8   signature would be required when there is a variance
 9   to that.  In other words, if there -- you mentioned
10   for -- if there was some kind of potential disaster
11   or -- whether it's a power outage or potential
12   hurricane, if there is any kind of possibility or
13   probability that there may be some variance to that
14   formula, then I would want to include Commissioner
15   Cox's signature, but otherwise...
16                  COMMISSIONER COX:  And if I may.  I
17   have no problem with that.  I would like for there to
18   be backup.  I would like for that to say, a
19   Commissioner rather than me specifically, because I
20   might be in Colorado somewhere without a telephone.
21                  COMMISSIONER OLVERA:  Or we may be in
22   the hurricane.
23                  CHAIRMAN CLOWE:  Commissioners, I think
24   we can continue this discussion when we get to that
25   item in the agenda where the rules will be -- the
0050
 1   proposed rules will be discussed, if that's agreeable.
 2                  Catherine, in summary, then, I would
 3   like to tell you what my understanding of what you've
 4   told us is.  First of all, the information that the
 5   Commission received at our last meeting on the 24th
 6   relative to the process of jackpot and advertised
 7   jackpot was accurate and true and correct?
 8                  MS. MELVIN:  Yes, it was.
 9                  CHAIRMAN CLOWE:  Furthermore, in your
10   review, there were four instances where there was a --
11   a disparity between what the sales indicated and what
12   the estimated jackpot as advertised was.  And that
13   was, in fact, in October of '04, February of '05, and
14   then twice in June of '05.
15                  MS. MELVIN:  That is correct, sir.
16                  CHAIRMAN CLOWE:  And based on your
17   review, there were no other instances of that type of
18   occurrence.  Is that right?
19                  MS. MELVIN:  No, sir.  And I went back
20   to May 2003.
21                  CHAIRMAN CLOWE:  Furthermore, you have
22   told us that the process that was instituted, really,
23   at my request, I think, by the Executive Director at
24   the time when these instances came into the knowledge
25   of the Commission from an outside source and the
0051
 1   investigation was instituted, have been put in place
 2   and there is that verification in process right now?
 3                  MS. MELVIN:  Yes, sir.
 4                  CHAIRMAN CLOWE:  So Commissioners, the
 5   information that we heard and the information that I
 6   gave the House Committee on Licensing and
 7   Administrative Procedures has now been verified as
 8   being correct by the internal auditor, and that
 9   process is in place.  So I want to make that point.  I
10   think where we are today is, we have dealt with our
11   situation, and then we must look at this going forward
12   and deal with it, hopefully, later in this meeting.
13   Are you satisfied with that?
14                  COMMISSIONER OLVERA:  I am, Mr. Chair.
15   I just want to point out and reiterate that, first of
16   all, nothing illegal was done.  These four instances
17   were variances to the rule, and I think we've done
18   everything to address that.  And there has been
19   discussion that perhaps there has been some mistrust
20   in the public.  I want to point out that last year was
21   one of the biggest years the Lottery has ever had and
22   the Texas public has demonstrated their confidence in
23   the Lottery by having a near record year last year.
24   And you jokingly said earlier today about us doing a
25   good job, Mr. Chair.  I think you're doing an
0052
 1   excellent job and I think the numbers from last year
 2   confirm that.
 3                  CHAIRMAN CLOWE:  I appreciate that
 4   comment, Commissioner.  And I think that was the theme
 5   of Representative Goolsby's comment.  I am perhaps my
 6   own and this Commission's harshest critic in that I
 7   want perfection when it comes to doing the business of
 8   the people.  And I think my facetious comment, maybe I
 9   shouldn't have made it, was one of perception rather
10   than fact.  And you're speaking about fact and you are
11   totally correct.  It is a perception that, I think, is
12   important, and I want this Commission and this
13   agency's honesty and integrity to be beyond question,
14   and that was the direction of my comments, and you put
15   balance in there, and I appreciate that very much.
16                  COMMISSIONER OLVERA:  You're welcome.
17                  CHAIRMAN CLOWE:  Thank you, Catherine.
18                  COMMISSIONER COX:  Mr. Chairman, if I
19   may.
20                  CHAIRMAN CLOWE:  Yes, sir.
21                  COMMISSIONER COX:  Mr. Chairman,
22   following up on what Commissioner Olvera said.  I've
23   been looking for the opportunity to thank you for the
24   leadership that you are showing in this.  And it's
25   been a real asset to us and you've represented us very
0053
 1   well, and we appreciate that.
 2                  CHAIRMAN CLOWE:  Thank you,
 3   Commissioner.
 4                  COMMISSIONER COX:  Ms. Melvin, do you
 5   believe that the process -- the part that you're
 6   playing in this process in any way abridges your
 7   independence?  Will it keep your -- you and your staff
 8   from auditing jackpot calculations later on because
 9   you are looking at the boxes now and seeing whether
10   they're okay, or can you regard that as a, as I called
11   it, a realtime audit function?
12                  MS. MELVIN:  Commissioner, excellent
13   question.  As you're aware, my value to the
14   organization lies -- relies upon that independence
15   that I carry.  If my role is limited to auditing, and
16   that is, reviewing the information, there should be no
17   problem with -- or should not prevent me from auditing
18   that process in the future.  And as I -- if I
19   understand correctly, what you're proposing and you're
20   laying down is -- is currently the process I'm working
21   on now is basically reviewing the data, verifying
22   formulas, and auditing that is in accordance with
23   policies that have been laid out.
24                  COMMISSIONER OLVERA:  And Commissioners
25   and Catherine, just to follow up on what we said
0054
 1   earlier.  Currently, I count seven signature lines,
 2   including Commissioner Cox's, and we've expressed
 3   concern about timeliness and keeping the data
 4   accurate.  Are we now revising it to how many
 5   signatures?  Or are we going to --
 6                  COMMISSIONER COX:  I think --
 7   Mr. Chairman, didn't you say you wanted to talk about
 8   that a little later?
 9                  COMMISSIONER OLVERA:  Okay.
10                  CHAIRMAN CLOWE:  Yeah, if we could.  I
11   really wanted this item to bring us to completion on
12   what happened, what we've done about it, and where we
13   sit as of now, and then the next item relating to the
14   rules will be, how are we going to proceed.  And if
15   you're comfortable with that, I think we would cover
16   those seven signatures, which seems like maybe an
17   overabundance -- I think you're on the right track --
18   at that time.
19                  COMMISSIONER OLVERA:  That's fine,
20   Mr. Chair.
21                  CHAIRMAN CLOWE:  Thank you, Catherine.
22                  MS. MELVIN:  Thank you.
23                  CHAIRMAN CLOWE:  Commissioners, I
24   think -- Gary, you've covered everything on this
25   subject you wanted to, haven't you?
0055
 1                  MR. GRIEF:  Yes, sir.
 2                  CHAIRMAN CLOWE:  We have a member of
 3   the public who wishes to address us on this subject.
 4                  Mr. Gerald Busald, would you come up
 5   please, sir.
 6                  Good morning.
 7                  MR. BUSALD:  Good morning.  For the
 8   record, my name is Gerald Busald.  I'm a professor of
 9   mathematics at San Antonio College.  I make that point
10   only so that if it is in the record, it might explain
11   where some of my comments come from.  However, I want
12   to make it clear that I am speaking only for myself,
13   not the college, not the students, but I feel as a
14   member of the public I probably have a unique
15   perspective of what has happened and why these
16   jackpots were incorrectly advertised.
17                  My students -- and once again, once
18   again, these are my comments, but my first involvement
19   with the Commission was over eight and a half -- well,
20   about eight and a quarter years ago.  And at that
21   time, the reason we were involved, my students were
22   involved, was because jackpot amounts for a different
23   game were incorrectly advertised.  It goes right to
24   the point of where we are now.  And that was involving
25   the Cash 5 game where the advertisements were for
0056
 1   75,000 dollar average jackpot and it was more like
 2   57,575.  When my students made this revelation to the
 3   Commission, and I -- the other reason I think I have
 4   some perspective is, I have had opportunity to deal
 5   with every Executive Director, except Nora Linares,
 6   and my first action was immediately at the time that
 7   Ms. Kiplin became Acting Executive Director, when
 8   Ms. Linares left, but I have had some interaction with
 9   every Commission.  But as you know, I am not here at
10   every meeting, and I really wish I wasn't here now.
11                  However, when we made that
12   revelation -- and, of course, it hit the press, and
13   the response at the time -- and this is why I want to
14   talk about the culture that allowed these jackpots to
15   be advertised incorrectly, because there is a culture
16   here that I feel I'm uniquely qualified to address.
17   At the time, the response of the Commission was, we're
18   not saying the students are right.  They just did it
19   another way.  That was the official response to the
20   press of the Lottery Commission.  I later learned --
21   and, of course, eventually the students -- the fact
22   the students were right was revealed in a letter by
23   Ms. Kiplin to Lieutenant Governor Bob Bullock, because
24   he intervened on our behalf and made sure -- he wanted
25   to know what the truth was, and the truth was, we were
0057
 1   correct, even though it never appears in the records
 2   of the Lottery Commission, except when I say it.
 3   There has never been an admission to the students that
 4   they were correct.  I was later told by the person who
 5   was on-line sales director at that time that she
 6   wanted to just admit the students were correct, and
 7   she told me, she was overruled.  I think that's a
 8   pretty important point about the culture that exists.
 9   My students kind of felt that maybe there is not truth
10   in government, that the truth here is, no truth will
11   be told if it somehow has a negative impact on sales.
12   And that directly affected some of the decisions were
13   made in regards to advertising the Lottery Commission.
14   I know -- I was a friend of Mr. Greer before he became
15   commissioner, go to church together, been in plays
16   together.  He had some reservations about becoming --
17                  CHAIRMAN CLOWE:  Let me -- if I may, I
18   believe you misspoke.  You're speaking about
19   Reagan Greer?
20                  MR. BUSALD:  Right.  I'm jumping to
21   that point.
22                  CHAIRMAN CLOWE:  He was the Executive
23   Director.
24                  MR. BUSALD:  When he was the Executive
25   Director.  I'm sorry.
0058
 1                  CHAIRMAN CLOWE:  Just so we're clear.
 2                  MR. BUSALD:  Right.  When he became
 3   Executive Director, he had some concerns.  And I
 4   believe that culture of the Lottery Commission --
 5   maybe your hope was, being an outsider, he might
 6   change some of the culture and some of the things that
 7   have happened.  But, in fact, the culture changed
 8   Mr. Greer.  And that's kind of a sad thing.
 9                  The other interactions that I have
10   had -- and as you know, I'm not here all the time --
11   when -- and I know that there is some talk -- you have
12   a meeting later about who is going to run this
13   Commission and how it's going to be run and, you know,
14   you have to -- obviously, as Commissioners you have
15   some responsibility for those things.  I have just a
16   couple of other things that I can point out that might
17   be important.
18                  When we had the change to the current
19   matrix for Lotto Texas, we had the situation where the
20   drawing machines were purchased before the public
21   comment period.  And that is part of a culture that
22   ignores some things from the public.  Mr. Grief was in
23   charge of that, I believe.  Also, when we talked at a
24   recent meeting about going to computerized drawings --
25   and, of course, we've had some other mistakes in
0059
 1   computerized drawings since that time, one in
 2   California, one here in Texas -- he was unwilling to
 3   talk to the press about, was there a plan to go to
 4   computerized drawings.  One of the members of the
 5   press said, he will not talk to me.
 6                  The other recent interaction I have had
 7   was, of course, about the demographic report.  And the
 8   recent demographic report, and I wanted to just
 9   comment that the -- we submitted a large list of
10   numbers that could not be correct, and though the
11   record never reflected it, all those numbers were
12   indeed changed by Texas Tech when they resubmitted the
13   report.  But as part of the culture that I feel is not
14   quite right, the executive summary to that report,
15   which I pointed out numerous errors in the executive
16   summary, the executive summary was not changed and has
17   some half truths and untruths in it.  And that's on
18   the record from the March meeting that I pointed out.
19   I feel that's a culture that we don't want to speak a
20   truth that might have a negative impact.
21                  The other thing that I just wanted to
22   point out is, the reason we're all here discussing
23   this is because it was revealed by an outsider,
24   Ms. Nettles, in her letter to the Attorney General,
25   that all of this happened.  We might not even be here
0060
 1   discussing that if that hadn't happened.  I haven't
 2   heard the Commission thank Mrs. Nettles for making
 3   this a more honest and better process.  As a matter of
 4   fact, the only thing I've seen in the records that
 5   I've dealt with and read over time -- and I try and
 6   always read the transcripts -- is efforts to keep
 7   Mrs. Nettles from getting timely information on which
 8   some of this stuff is based.  And that's in the record
 9   many times.  They took away her press credentials,
10   made it more and more difficult for her to get this
11   information.
12                  The only last little comment I have was
13   an interesting letter to the editor in the San Antonio
14   Express News that said, the only person that the
15   Lottery Commission might have -- I mean, that the
16   public might have confidence in as far as running this
17   Commission is Mr. Deviney, who was fired for revealing
18   and expressing his concerns.  I just want to mention
19   that letter to the editor, because I thought it was an
20   interesting comment.
21                  Once again, I want to point out, these
22   are my comments as a member of the public who, I
23   think, has had a unique opportunity to observe actions
24   of the Lottery Commission over a very long time, and I
25   wish I wasn't here.  Thank you very much.
0061
 1                  CHAIRMAN CLOWE:  Thank you.
 2                  Commissioners, I think we've now
 3   concluded item number six, and I would like your
 4   direction on dealing with the employment and personnel
 5   matters relative to the Executive Director's
 6   resignation and duties and reassignment of various
 7   staff members as well as the appointment of an interim
 8   director.  We have a choice of dealing with this in
 9   two different ways.  One is to deliberate in the
10   public meeting and the other is to go into executive
11   session to deliberate a personnel matter.  What --
12   what is your pleasure?  I just remind you, before you
13   comment on that, no action can be taken in executive
14   session.  An action must be taken in the public
15   meeting.  So what would your pleasure be?
16                  COMMISSIONER COX:  Mr. Chairman, would
17   it be fair to ask you what your pleasure would be?
18                  CHAIRMAN CLOWE:  I think, due to the
19   requirement for fairness to all involved, it would be
20   appropriate to go into executive session and discuss
21   these personnel matters.  I think that is the correct
22   thing to do, and that would be my preference, if
23   you're in agreement.
24                  COMMISSIONER OLVERA:  Yes, sir.
25                  CHAIRMAN CLOWE:  Again, I'll say that
0062
 1   no action can be taken in executive session, so
 2   whatever the Commission might determine would be its
 3   action will be done following that session.
 4                  In light of that, at this time I move
 5   the Texas Lottery Commission go into executive session
 6   to deliberate the appointment, employment, evaluation,
 7   or duties of the Executive Director pursuant to
 8   Section 551.074 of the Texas Government Code; to
 9   deliberate the duties and reassignment of the Deputy
10   Executive Director, Administration Director, Lottery
11   Operations Director, Internal Auditor and/or General
12   Counsel pursuant to Section 551.074 of the Texas
13   Government Code; to deliberate the appointment,
14   employment and/or duties of an Acting Executive
15   Director pursuant to Section 551.074 of the Texas
16   Government Code; employment law, personnel law,
17   procurement and contract law, evidentiary and
18   procedural law, and general government law.
19                  Is there a second?
20                  COMMISSIONER COX:  Second.
21                  CHAIRMAN CLOWE:  All in favor, please
22   say aye.  The vote is three-zero.
23                  The Texas government -- the Texas
24   Lottery Commission will go into executive session.
25   The time is 9:20 a.m., the date is July 11th, 2005.
0063
 1                  MS. KIPLIN:  Mr. Chairman, could I
 2   offer one thing on the employment law, personnel law,
 3   and other areas of law, you're going to need to
 4   receive that legal advice pursuant to Section 551.071
 5   of the Texas Government Code.
 6                  CHAIRMAN CLOWE:  Thank you.
 7                    (EXECUTIVE SESSION)
 8                  CHAIRMAN CLOWE:  The Texas Lottery
 9   Commission is out of executive session.  The time is
10   11:05 a.m.  Is there action to be taken as a result of
11   executive session?
12                  I have a motion to accept the
13   resignation of Mr. Reagan Greer, Executive Director,
14   and to allow him to remain on the payroll to exhaust
15   available leave, including vacation leave and State
16   compensatory leave.  Is there a second?
17                  COMMISSIONER COX:  Second.
18                  CHAIRMAN CLOWE:  All in favor, please
19   say aye.  The vote is three-zero in favor.
20                  I would like to announce that the
21   Commission will shortly be posting a job description
22   for Executive Director.  I am asking Commissioner Cox
23   to work with the Director of Human Resources and
24   others as designated by him to develop a
25   comprehensive, complete, and adequate job description
0064
 1   for that position.  We hope to have that posted soon.
 2   The Commissioners have deliberated on it in the
 3   executive session and feel that the draft is very,
 4   very comprehensive.  I would also like to announce
 5   that the Commission will ask a number of individuals
 6   to serve on a search committee.  That search committee
 7   will be composed of a number of individuals in State
 8   government, in leadership positions, as well as
 9   members of the public.  I will serve as the
10   Commissioner who will be on the search committee.
11                  The Commission has listened to those
12   individuals who have spoken to us today and in the
13   past about the culture of this Commission, this
14   agency, and the need for openness and involvement of
15   other individuals within the State.  This formation of
16   a search committee is a definitive and real move
17   towards involvement of people outside this agency to
18   be involved in an improvement of the culture and be
19   involved in the selection process as we move towards
20   the selection of an Executive Director.  I want to
21   make it very clear that this position is a direct
22   report to the three Commissioners, and only the three
23   Commissioners, as empowered by their oath, are in a
24   position to employ or discharge the Executive
25   Director.  But the involvement of other individuals,
0065
 1   for the first time in my knowledge in this process, is
 2   definitely a reaching out and an involvement of
 3   others, which we hope will have a beneficial result.
 4                  Next, I would like to move to appoint
 5   Gary Grief, effective immediately, as the Acting
 6   Executive Director of the Texas Lottery Commission,
 7   with a salary of 110,000 dollars a year, and that will
 8   be increased to the cap as of September 1, 2005, to
 9   115,000 dollars a year.  Is there a second?
10                  COMMISSIONER COX:  Second.
11                  CHAIRMAN CLOWE:  All in favor, please
12   say aye.  The vote is three-zero in favor.
13                  Next, we will go to item 19, case
14   number 2005-4821, GameTech International.
15                  Commissioners, this case is one that is
16   somewhat unique in my experience on this board in
17   that, as we move into decision making on whether to
18   approve this agreement or not, we will, by virtue of
19   our questions, move it into the public realm.  To this
20   point in time, the agreement is confidential, it's a
21   working draft.  As we progress into settlement
22   discussions, if that's the Commissioners' will, we
23   will affect the public nature of this document.
24   Additionally, I would like to remind you that we have
25   a request for deferral of this case or this decision
0066
 1   until our next meeting.  I am open to whatever your
 2   thoughts are.
 3                  COMMISSIONER COX:  Mr. Chairman, I
 4   would again ask what your thoughts might be.
 5                  CHAIRMAN CLOWE:  I want to have a
 6   complete airing of this issue.  And in my mind, in
 7   order to be satisfied, the questions that I want to
 8   ask are going to take this document into the public
 9   realm.  I have been briefed by the Attorney General on
10   the impact of that, and I feel like it's a necessary
11   thing for me to be satisfied.
12                  Additionally, we have had Mr. Hance of
13   the law firm that represents GTECH make the statement
14   here this morning.  He has departed, I understand.  I
15   think I'm probably going to have some questions of
16   him.  He said he was responsible for the settlement,
17   if I remembered what he said correctly.  He said he
18   didn't like it and he thought he had made a mistake.
19   Well, in that venue, it was difficult for me to ask
20   him questions that his statement brought to my mind.
21   And so what I think I would like to recommend to the
22   Commissioners is that we pass this case until our next
23   meeting and we have all the participants -- I assume
24   Mr. Hieronymus can come -- and that we have a full
25   discussion before the Commissioners are asked to vote
0067
 1   on this.  That would be my response.
 2                  COMMISSIONER COX:  That's good with me.
 3                  COMMISSIONER OLVERA:  I have no
 4   objection.
 5                  CHAIRMAN CLOWE:  This case will be
 6   passed, then.
 7                  Now, Commissioners, there is one other
 8   item that I wanted to bring up before we move on to
 9   other business.  During this past week, there was a
10   letter written to the State Auditor's Office by then
11   Executive Director Greer regarding an audit of this
12   agency's personnel practices.
13                  Counselor, what item would that come
14   under properly?  Would that be the Executive
15   Director's duties?
16                  MS. KIPLIN:  Well, I probably have to
17   hear more about what you're wanting to discuss, but I
18   guess, is it related to the duties of the Executive
19   Director in sending a letter?
20                  CHAIRMAN CLOWE:  Yes.  And the request
21   that was made by the then Executive Director for the
22   State Auditor's Office to audit the personnel
23   practices of this agency.  I saw that letter when it
24   went out and I also saw the letter from Mr. John Keel,
25   in response.
0068
 1                  Commissioners, we were copied on this.
 2   It was -- it was done without my knowledge and I
 3   assume that may be the case with each of you.  I don't
 4   know.  But I am in favor of this.  And I would like to
 5   state on the record that I think this is an excellent
 6   idea, and that I for one, and as the Commissioners
 7   might or might not join into it, I would like to see
 8   the State Auditor's Office audit those individuals'
 9   termination from this agency, the personnel practices,
10   anything that they would like related to these
11   activities, which have been mentioned by numerous
12   individuals who have appeared here before us on the
13   24th and again today.  There is a wide disparity in
14   numbers about who the people are and what ethnic
15   background they've come from, and many questions have
16   been raised in my mind.  I don't think it's fair to
17   ask Ms. Melvin to make this audit.  I think the State
18   Auditor's Office is appropriate, and I intend, unless
19   you disagree, to write Mr. Keel and tell him that I
20   would like to see an audit in the terms that he wants
21   to conduct it and the scope that he feels is
22   appropriate in the time frame that he can manage it,
23   be conducted, and we would like to hear from him on
24   that.
25                  COMMISSIONER OLVERA:  And Mr. Chair,
0069
 1   are you referring in terms of scope of time from the
 2   time of reorganization to the present date?
 3                  CHAIRMAN CLOWE:  No.  I would like for
 4   him to pick that time frame.
 5                  COMMISSIONER OLVERA:  All right.
 6                  CHAIRMAN CLOWE:  In Mr. Greer's letter,
 7   I think he specified maybe a two-year period, but I
 8   think that's the auditor's decision and I would leave
 9   that up to them.
10                  COMMISSIONER COX:  I think the request
11   was the right thing do.  And I think it's appropriate
12   that, as Mr. Keel says, that thank you for asking.  I
13   will do it the way I want to and cover what I want to,
14   but I'll try to consider the things you asked for.
15                  CHAIRMAN CLOWE:  Right.  Being an
16   auditor, you would say that, wouldn't you?
17                  COMMISSIONER COX:  Yes, I would.
18                  CHAIRMAN CLOWE:  And then,
19   Commissioner Cox, before we leave the subject of the
20   search for an Executive Director, I think you had a
21   remark that you wanted to make.
22                  COMMISSIONER COX:  And I think this
23   remark relates to that subject and to a more general
24   subject and, particularly, it's a subject that I had
25   already made notes on, but Professor Busald brought up
0070
 1   this morning, and that was the issue of the culture in
 2   this agency.  Now, I'm not here every day and I don't
 3   know what the culture of this agency is like every
 4   day.  But I do know that last year, we spent a good
 5   deal of time working with some very capable people
 6   from the University of Texas Graduate School of
 7   Business who helped us develop a business plan, along
 8   with core values and a mission statement.  And I was
 9   disappointed to find when I looked on our website that
10   those core values aren't there.  At least I couldn't
11   find them.  But I did find them on a sign out in our
12   lobby.  And among them are integrity, responsibility,
13   fiscal accountability, excellence, teamwork, and
14   responsibility and responsiveness to customers.  Now,
15   they're out there in big letters.  And I think that
16   what we need to do is, rather than posting them on a
17   sign out there, that we need to put them on a card
18   that everybody is carrying, or a card that is on every
19   desk, and I think we need to incorporate those values
20   into every decision that we make.  So I'm hoping that
21   when the job description for the new Executive
22   Director is written, that it will include the -- those
23   values as being things that we want the successful
24   candidate to exemplify.  And meanwhile, Gary, I ask
25   you to do everything that you can to be sure that this
0071
 1   agency is guided by those principles.
 2                  MR. GRIEF:  Will do.  Yes, sir.
 3                  MS. KIPLIN:  Mr. Chairman, just going
 4   back and reviewing the open meetings notice, I think
 5   your comments regarding a request for an external
 6   audit are also and probably more appropriate under
 7   item 16.
 8                  CHAIRMAN CLOWE:  Under what?
 9                  MS. KIPLIN:  Item 16.
10                  CHAIRMAN CLOWE:  Very good.  Yeah.
11   That's correct.  Thank you.
12                  Commissioners, that includes the
13   subjects that I wanted to -- to be dealt with this
14   morning.  Commissioner Olvera has a departure time
15   of -- in about an hour or so, and we have other
16   matters in executive session.  I am thinking that we
17   probably ought to go back into executive session now
18   and finish that business and then come back into the
19   public forum.  Is that agreeable to each of you?
20                  COMMISSIONER COX:  Yes, sir.
21                  CHAIRMAN CLOWE:  At this time, I move
22   the Texas Lottery Commission go into executive session
23   to deliberate the duties of an acting Executive
24   Director pursuant to section 551.074 of the Texas
25   Government Code, to deliberate the duties and
0072
 1   evaluation and/or of Deputy Executive Director,
 2   Internal Audit Director, Charitable Bingo Operations
 3   Director, pursuant to Section 551.074 of the Texas
 4   Government Code.  To deliberate the duties of the
 5   General Counsel pursuant to Section 551.074 of the
 6   Texas Government Code.  To receive legal advice
 7   regarding pending or contemplated litigation and/or to
 8   receive legal advice pursuant to Section 551.071 (1)
 9   (A) or (B) of the Texas Government Code and/or to
10   receive legal advice pursuant to Section 551.071 (2)
11   of the Texas Government Code, including but not
12   limited to:
13   Patsy Henry versus Texas Lottery Commission
14   Linda Cloud versus Mike McKinney, et al.
15   James T. Jongebloed versus Texas Lottery Commission
16   Russell Vierney versus Carol Keeton Strayhorn, Greg
17   Abbott, and Reagan E. Greer, in their individual and
18   official capacities
19   GameTech International versus Greg Abbott, Attorney
20   General of Texas, et al.
21   Case number 2005-4821, GameTech International
22   Michael McDaniel, Jeff Shuckers, and William Wilson
23   versus Northstar Bank of Texas, et al. and Northstar
24   Bank of Texas versus Elite M&S, 5395 Partners Limited,
25   and Faye Lynn Wilson.
0073
 1   Employment law, personnel law, procurement and
 2   contract law, evidentiary and procedural law, and
 3   general government law.  Lotto Texas on-line game.
 4                  Is there a second?
 5                  COMMISSIONER OLVERA:  Second.
 6                  CHAIRMAN CLOWE:  All in favor, please
 7   say aye.  Opposed, no.  The vote is three-zero.
 8                  The Texas Lottery Commission will go
 9   into executive session.  The time is 11:20 a.m.  Today
10   is July 20th -- July the 11th, 2005.
11                    (EXECUTIVE SESSION)
12                  CHAIRMAN CLOWE:  The Texas Lottery
13   Commission is out of executive session.  The time is
14   12:22 p.m.  Is there any action to be taken as a
15   result of the executive session?  If not, let's move
16   on to item number five, consideration, possible
17   discussion and/or action on Lotto Texas on-line game,
18   including proposal of amendments and/or new rule
19   and/or repeal of existing rule, and/or procedures.
20   Mr. Grief.
21                  MR. GRIEF:  Good afternoon,
22   Commissioners.  Today staff is presenting you with two
23   different proposed rule amendments for your
24   consideration regarding the Lotto Texas on-line game.
25   The main purpose of these proposed amendments is to
0074
 1   allow for improved jackpot management on the part of
 2   staff.  In the first version, the amendments provide
 3   that a jackpot prize winner will receive at least the
 4   amount advertised for the first 20 drawings in a roll
 5   cycle, after which time the jackpot will be based on
 6   sales based in part on the applicable interest factor.
 7   In the event that sales do not support the advertised
 8   jackpot during the first 20 drawings in a roll cycle
 9   and an apparent winning ticket was sold, any shortfall
10   between the jackpot amount the sales would support and
11   the advertised jackpot would be covered by money from
12   the Texas -- Lotto Texas prize reserve fund.
13   Currently, the balance in the prize reserve fund is
14   approximately 13 million dollars.  Under current rule,
15   funds are established in the reserve fund by
16   approximately one percent of total sales per each
17   drawing being directed into the prize reserve pool.
18   Staff anticipates that by the 21st drawing in the roll
19   cycle that sales would support the advertised jackpot,
20   and would continue to do so through the end of the
21   cycle.
22                  In the second version, the amendments
23   provide that a jackpot prize winner will receive at
24   least the amount advertised for all of the drawings in
25   a roll cycle.  And as in the first version, any
0075
 1   shortfall between the jackpot amount that sales would
 2   support and the advertised jackpot would be covered by
 3   the prize reserve fund.
 4                  In considering either one of staff's
 5   proposals, there are policies and decisions to
 6   consider.  In a number of other state lotteries, a
 7   jackpot prize winner will receive at least the jackpot
 8   amount advertised, or more, if sales drive a larger
 9   jackpot.  In effect, this lets the players know
10   without a doubt exactly, at a minimum, what amount
11   they're playing for.  On the other hand, the higher a
12   jackpot rolls, for example, 100 million dollars, the
13   more challenging it becomes for staff to estimate what
14   jackpot sales will support.  The higher jackpot
15   levels, the risk becomes greater that sales might fall
16   short of supporting an advertised jackpot, thus
17   causing the agency to dig deeper into the prize
18   reserve fund to pay the advertised jackpot amount.  A
19   potential risk that comes to mind immediately is a
20   catastrophic situation such as a power outage.  In
21   light of that heightened risk, the Commission may want
22   to direct staff to provide, by rule, some additional
23   funding mechanism that would act to ensure funding in
24   the event that sales plus the prize reserve fund might
25   not be able to fund an advertised jackpot.  Assuring
0076
 1   players will be paid on the advertised jackpot for the
 2   first 20 rolls, versus all the rolls, is the
 3   significant difference between the two versions of the
 4   rules in front of you today.
 5                  Additionally, both versions of the
 6   proposed amendments will require that information
 7   associated with each jackpot estimation be posted to
 8   the agency's Website as soon as the appropriate
 9   approvals are obtained for those jackpot -- for those
10   advertised jackpot amounts.  And in addition, if there
11   is an apparent winning jackpot ticket, the information
12   relating to the amount that will be paid to any
13   prospective winner will also be posted to the agency
14   Website as soon as it's available.
15                  And, finally, there is clarification in
16   both versions of the rule that specifies that all of
17   the interest factors used by the agency in estimating
18   jackpots and paying winners, those interest factors
19   are obtained from the Texas Treasury Safekeeping Trust
20   Company.  I stress to the Commission that staff will
21   use either one of these proposed amendments as a
22   short-term solution to the overriding issue of how to
23   eventually change and improve the Lotto Texas game.
24   And we anticipate additional proposed rule changes to
25   the game in the near future, including addressing
0077
 1   additional concerns that have been raised by
 2   Commissioners in recent meetings.  And with that,
 3   staff or I will be happy to answer any questions.
 4                  COMMISSIONER COX:  Let's talk for a
 5   moment initially, Gary, about what hasn't been
 6   addressed here, and I know you said that you would be
 7   responsive to the things we talked about in previous
 8   meetings.  One of the things I think that we haven't
 9   addressed, for lack of time, is the indirect, direct
10   wording.  And so that's one of the things that you
11   plan to address in the future rulings?
12                  MR. GRIEF:  Yes, sir.
13                  COMMISSIONER COX:  To see if that can
14   be simplified?
15                  MR. GRIEF:  And any other terminology
16   or wording in the rule that might be simplified to
17   make it easier to understand or more transparent.
18                  COMMISSIONER COX:  Good.
19                  Mr. Chairman, I -- I believe that I was
20   on this board when we voted to change the rule so that
21   we would pay the advertised jackpot only in the first
22   four rolls, and that after that, we would pay the
23   jackpot supported by sales.  And I supported that rule
24   at that time because I believed that the State of
25   Texas needed to be protected against advertising too
0078
 1   little and thus hurting sales.  I -- my feeling now is
 2   that the players need a protection that they will
 3   receive at least the advertised amount, and that the
 4   State of Texas is afforded its protection by having a
 5   competent staff to make that estimate.  So I am
 6   strongly in support of the version of the rule that
 7   would pay the advertised or a percentage of sales,
 8   whichever is higher, at all levels.
 9                  COMMISSIONER OLVERA:  Commissioner Cox,
10   I agree.  In addition, in conjunction with the -- the
11   notion that I set forth earlier today, I think
12   theoretically, if we advertise a conservative amount
13   based on the lower end of the sales estimates,
14   hopefully, the scenario would not arise wherein the
15   jackpot amount is less than the advertised amount.
16   But I agree that it should -- there should not be a
17   limit on the roll cycles.  If the citizens of Texas
18   win a jackpot amount beyond that, beyond 20 rolls or
19   25, I think they want their full amount as advertised.
20   So I agree with that.
21                  With respect to your comments,
22   Mr. Grief, I think we need to make -- we do need to
23   make some kind of definition or clarification in terms
24   of the issue of major disaster or crisis.  However
25   that should be defined, I don't have any specifics on
0079
 1   that.  But perhaps in that kind of a scenario, we
 2   would set a cap in terms of how much of the funds from
 3   the general reserve fund could be used, and I am
 4   arbitrarily throwing out anywhere between one million
 5   and five million.  I don't know.  I'm just throwing
 6   those numbers out.  But if, in fact, we are hit with a
 7   true disaster, in that case, I think the citizenry
 8   would understand where we could not fully complete the
 9   fund because of a disaster.  So something like that
10   may be considered.
11                  CHAIRMAN CLOWE:  Is this proposal in
12   final form?  Is it ready to be considered by the
13   Commission?
14                  MR. GRIEF:  I believe it is,
15   Mr. Chairman, with the possible exception of something
16   that I mentioned, and that is, if the Commission would
17   like the staff to try to develop -- because I'm
18   hearing what the Commission is saying, and it sounds
19   like you're leaning towards the advertised jackpots
20   for the entire roll cycle in the event of some type of
21   catastrophic event.  If you would like us, we can
22   entertain the concept, at least in discussions the
23   General Counsel and I had, about trying to develop
24   some language that could address other funding for the
25   jackpot other than sales and the prize reserve.  We
0080
 1   would be happy to try to develop that more, if the
 2   Commission so desires.
 3                  COMMISSIONER COX:  Now, Gary, let me
 4   see if I'm hearing -- I think I'm hearing you say one
 5   thing and Commissioner Olvera say another.  I think I
 6   hear you saying that should the entire reserve fall
 7   short of funding an advertised jackpot because of a
 8   catastrophe, that you might provide in the rule for
 9   the money -- additional money to come from someplace
10   else and still pay the advertised.  Was that --
11                  MR. GRIEF:  That was my -- that was my
12   concern, yes.
13                  COMMISSIONER COX:  I believe that's --
14   so, Commissioner, you may want to --
15                  COMMISSIONER OLVERA:  Well, and I did
16   not catch that.  I was thinking perhaps there should
17   be some limit because of whatever the catastrophe is.
18   Of course, I think we do need to define what that
19   entails, and I guess I'm unclear as to how the
20   estimation of sales would not take into account the
21   potential disaster that we're speaking of.  So I would
22   assume that if our data is as accurate as it should
23   be, that if there is some kind of looming or potential
24   disaster out there, that would be taken into
25   consideration into the estimates, and then the
0081
 1   advertised amount would reflect the estimations.
 2   But -- so...
 3                  MR. GRIEF:  Could I lay out an example
 4   of what I'm talking about?
 5                  COMMISSIONER OLVERA:  Sure.  Sure.
 6                  MR. GRIEF:  Well, let's say we have
 7   a -- somewhat of a high Lotto Texas jackpot, say,
 8   it's a -- it is at a hundred million.  About 25
 9   percent of our sales, give or take, come from the
10   Harris County area.  And if that were -- that drawing
11   were to take place on a Saturday night, the bulk of
12   those sales takes place on Saturday.  If something
13   were to happen in Harris County, or a power outage in
14   that particular area, we might lose out on a
15   significant portion of our sales, even to the point
16   where sales might not support the jackpot that had
17   been advertised several days earlier.  That was the
18   situation.
19                  COMMISSIONER OLVERA:  So the estimation
20   would already be in place --
21                  MR. GRIEF:  Yes, sir.
22                  COMMISSIONER OLVERA:  -- so they could
23   not take into account that?
24                  MR. GRIEF:  In fact, from this -- what
25   we're doing with this rule is we're assuring the
0082
 1   players that you will receive at least the amount that
 2   they see up on the billboards, so we could -- under
 3   that situation, we might fall significantly short.
 4                  COMMISSIONER COX:  Gary, one of the
 5   things that I know has been done in the past when
 6   you -- particularly when you get up at this very high
 7   level, is that on Thursday, we might advertise one
 8   level, and monitor sales, and we might up that on
 9   Friday, and monitor sales, and might up that on
10   Saturday.  Has there ever been a case where we started
11   with one, monitored sales that weren't so good, and
12   then lowered that advertised jackpot?
13                  MR. GRIEF:  No, sir.
14                  COMMISSIONER COX:  And you don't
15   contemplate that there would be such a case?
16                  MR. GRIEF:  No.  And if this rule, for
17   example, were put into effect, I would be looking for
18   some guidance from the Commission and from the General
19   Counsel as to what -- communicate with players, at
20   what point does that advertised jackpot -- at what
21   point is that the minimum that we see.  Is it when
22   they see the billboard on Thursday morning or is it
23   the billboard they see on Saturday evening.  I think
24   there might be some confusion on the parts of players
25   if we go up and then go down in the advertised
0083
 1   jackpot.  Counsel?
 2                  MS. KIPLIN:  Well, what I'm thinking of
 3   is the -- going back to the discussion in terms of
 4   a -- a, quote, catastrophe or disaster.  And Mega
 5   Millions -- the Mega Millions game -- I offer this by
 6   way of analogy -- part of the rule change that
 7   occurred on the most recent rule amendment took that
 8   into consideration, because as I understood it, there
 9   was a -- and Mr. Marker is here in the audience and if
10   you would like to hear more about why the -- I guess,
11   the lawyers for those states landed on what they did
12   along with the financial committee, he is available.
13   But it really had to do with the problem with defining
14   what was a catastrophe and a disaster.  Because what
15   could be considered that in one location may not be in
16   another, and so really the approach was more of
17   what -- what I have characterized as a financial
18   trigger, to where if the actual sales fall below a
19   particular threshold, then -- then there would be a
20   different approach on payment of the advertised
21   jackpot amount.
22                  And we're happy to work on trying to
23   define what is a catastrophe or disaster, but it would
24   be something that I think we should recognize would be
25   subject to being a question of fact, what we consider
0084
 1   versus what someone else might consider in terms of
 2   challenging what we pay versus what was advertised.
 3                  COMMISSIONER COX:  Ms. Kiplin, at one
 4   point our reserve fund was quite low, and I don't know
 5   whether any planning was done at that time or any
 6   discussion was held at that time or any other time,
 7   for that matter.  Where would we be right now if we
 8   exhausted the reserve fund and had to go somewhere
 9   else, if you will, for more money to fund a jackpot?
10   Is there any place we could go for more money under
11   the present rule?
12                  MS. KIPLIN:  I think the present rule
13   is -- actually, one could argue, it imposes a
14   limitation or restriction on being able to use other
15   funds, because of what, I think, the plots were at the
16   time the rule was proposed, and along with the
17   testimony and interpretation by the agency staff.  But
18   I do think you have the broad authority in the State
19   Lottery Act to not impose that kind of limitation in
20   your own rule.  It's your rule and you establish it by
21   policy as long as it's not inconsistent or in conflict
22   with State law.  And I think the State lottery
23   account, which is Section 466.355 of the Government
24   Code, makes it clear that money that is in that
25   account is used to pay the holders of the winning
0085
 1   tickets, to pay the prize amounts.  I think what has
 2   occurred is the -- the interpretation and the
 3   limitation that's been imposed in this current rule,
 4   the Lotto Texas rule.
 5                  COMMISSIONER OLVERA:  Commissioners, at
 6   this time I do need to take my leave.  My parting
 7   comment is, I would like a transcript of this hearing
 8   post my departure.  I don't need the transcript from
 9   everything that has gone on before this time.  But in
10   summary, I am in favor of no limits on the roll cycle.
11   And I don't see a problem or have an objection to some
12   kind of exception to the rule when there is a clearly
13   defined catastrophe or disaster.  I don't have the
14   answers to what that is or what that exception may be,
15   but I look to staff for some resolution on that.  I
16   look forward to working with y'all to determine some
17   kind of resolution on this issue.  And thank you all.
18                  CHAIRMAN CLOWE:  Thank you,
19   Commissioner.
20                  Let the record reflect that
21   Commissioner Olvera excused himself at 12:40 p.m.,
22   please.
23                  Well, I don't think we have a rule that
24   is in final form, then, at this point in time.  It
25   would appear there is some more work to be done.
0086
 1                  COMMISSIONER COX:  I would agree with
 2   that.  I wonder if there is some progress that we can
 3   make in this area.  One part of the proposed rule is
 4   that the jackpot computation worksheet be posted on
 5   the website.
 6                  CHAIRMAN CLOWE:  Absolutely.
 7                  COMMISSIONER COX:  And I would like for
 8   that to be immediate.  And I would like to go further
 9   and say that as key elements that enter into that
10   computation become available to this agency, that they
11   be posted on the website in advance of the worksheets'
12   availability.  For instance, as soon as we get the
13   interest rate factor from the Comptroller's Office, I
14   would like for it to be posted on the website.
15                  CHAIRMAN CLOWE:  Very good.  And I'm in
16   agreement.
17                  Any problem with that, Gary.
18                  MR. GRIEF:  None at all.
19                  CHAIRMAN CLOWE:  Okay.  Then you'll see
20   to that --
21                  MR. GRIEF:  Yes, I will.
22                  CHAIRMAN CLOWE:  -- being accomplished?
23                  MR. GRIEF:  Yes, sir.
24                  CHAIRMAN CLOWE:  Then do you have the
25   sense of the discussion among the Commissioners as to
0087
 1   the rule they would like to see?
 2                  MR. GRIEF:  I believe I do.  You're
 3   looking for that additional funding mechanism, if I
 4   understood you correctly.  And I'll pose this question
 5   to counsel.  It may -- might it be possible that we
 6   might have that before the end of the day?
 7                  MS. KIPLIN:  No, I don't think so.  I
 8   would like to visit with people within the legal
 9   division and try to land on -- I want to make sure
10   that what we bring back is -- meets the needs of the
11   Commission.  In particular, what I heard
12   Commissioner Olvera focus on was disaster and
13   catastrophe, and I think that's something we need to
14   talk about.
15                  COMMISSIONER COX:  Well, now, I heard
16   him say that and yet, I -- as I see this thing, the
17   risk of the jackpot being less than advertised by
18   virtue of some catastrophe or disaster, I hesitate to
19   shift to the player.  I think that we are in a far
20   better position than any citizen of the state of
21   Texas, or noncitizen who might buy a ticket, to
22   foresee these things to the extent they should -- can
23   be foreseen.  And I really hesitate to say that, well,
24   you know, we had a hurricane down in Houston and,
25   sorry, but we're not going to pay the advertised
0088
 1   amount.  I would really like to see if there is any
 2   way, Mr. Chairman, that we pay the advertised no
 3   matter what, and the question only be where we get the
 4   money.
 5                  CHAIRMAN CLOWE:  Well, that's the
 6   question.  If we go that route, if we exceed the prize
 7   reserve fund, where do we go?
 8                  MS. KIPLIN:  You would go to the State
 9   Lottery account.  Mr. Navarro is here on a -- from a
10   financial perspective, and I certainly wouldn't want
11   to say something that would be in error.
12                  MR. NAVARRO:  Good afternoon,
13   Commissioners.  For the record, my name is Benito
14   Navarro.  I am the Acting Financial Administration
15   Manager.
16                  General Counsel is correct.  I mean,
17   you know, there is -- there is internal imposed
18   limitations on what, you know, the prize expense
19   should be, but the overlying factor here, the Lottery
20   account is not limited in that fashion.  You know, it
21   does state that we shall use State funds to pay
22   prizes.  What those prizes may be is determined by
23   what advertised jackpot we have out there.  And so to
24   the extent that we deplete the reserve fund, any
25   excess prize expense would just come from the bottom
0089
 1   line, any sales.  And, you know -- and so to the
 2   extent that we have to do that, I don't think there is
 3   a limitation on that.
 4                  MS. KIPLIN:  And the only thing that I
 5   would say is that it's my view that under the current
 6   rule, the agency by -- the Commission, by its own
 7   policy, restricted that ability to go beyond the Lotto
 8   sales, Lotto Texas sales.
 9                  MR. NAVARRO:  Correct.
10                  MS. KIPLIN:  And use the money in the
11   State lottery account.  So it would require a rule
12   change to be very clear what your -- to be an
13   expression of your policy.  Now, the question that
14   Mr. Grief posed and what I was focused on, of trying
15   to define what was a catastrophe or a disaster, and I
16   know that -- just by way of background, that that was
17   the subject of several conference calls with lawyers
18   on the Mega Millions matter.  And in terms of going to
19   something where it was a -- an ability to go to the
20   State lottery account, I think it would be easier to
21   draft language.  And I don't know if the Commission
22   would entertain a motion to where you would vote to
23   propose and give the staff to -- clear direction on
24   language that would address that particular issue.
25   You know, we've missed the filing deadline for the
0090
 1   Texas Register today.  It was by noon.  It's every
 2   Monday at noon, and so we have -- we have this week to
 3   work out language that would be clearer and be
 4   thoughtful and not be done in such a rush on the -- on
 5   today with y'all's okay.  I don't know if you would
 6   entertain that.
 7                  COMMISSIONER COX:  Mr. Chairman, I
 8   think that, given the understanding that Commissioner
 9   Olvera had when he left, out of respect for him, I
10   would want to defer this to the next meeting.  But I
11   would sure like to be able to have that discussion at
12   that next meeting and be sure we publish something
13   after that.  So I think he and I at least had
14   different understandings of what this provision might
15   be.
16                  CHAIRMAN CLOWE:  Well, I don't see any
17   problem with the staff working on what they deem to be
18   the version of the rule that has come out of this
19   discussion, and giving the Commissioners that draft
20   copy, and publishing that for consideration at our
21   meeting in August.  That's adequate time, I would
22   think.
23                  COMMISSIONER COX:  It is.  And I --
24   from what I heard Gary say, and I want him to confirm
25   this for us, but I heard him say that in other states,
0091
 1   and I believe it's all other states with substantial
 2   state lotteries, state Lotto games, that there is no
 3   provision to pay less than advertised.
 4                  MR. GRIEF:  We looked at the states
 5   that are members of Mega Millions, plus the state of
 6   Florida, which we consider to be most of the larger
 7   states, and, yes, sir, that is indeed the case.
 8                  COMMISSIONER COX:  And there were no
 9   disaster outs at all.  It's we pay those states -- all
10   of those states with big state Lotto games pay at
11   least advertised, no matter what.
12                  MR. GRIEF:  Is that correct?  I'm
13   asking the question of staff.
14                  MR. TIRLONI:  From the information that
15   we -- that we received from all of those states, they
16   pay advertised and if sales warrants a higher jackpot,
17   they -- they pay the excess to the player.
18                  COMMISSIONER COX:  Well, I would ask
19   you, Gary, to confirm the specific question, what if
20   there were a hurricane in your major city and you fell
21   far short, would you still pay advertised, and I would
22   like you to come back to us next time with that
23   information and find out -- so that we would know, if
24   this board chose to have a disaster out, we would know
25   whether we have company or don't.
0092
 1                  MR. GRIEF:  Yes, sir.
 2                  CHAIRMAN CLOWE:  And I agree with you,
 3   Commissioner Cox, that this is a matter that we would
 4   want, I think, all three Commissioners to be
 5   comfortable with and be in a position to act on.
 6                  Okay.  Gary, is this clear to you,
 7   then?
 8                  MR. GRIEF:  Yes, sir.
 9                  CHAIRMAN CLOWE:  Okay.
10                  COMMISSIONER COX:  Let me --
11                  CHAIRMAN CLOWE:  Yes.
12                  COMMISSIONER COX:  But, Gary, as far as
13   the jackpot worksheet and the factors that go into
14   determining the jackpot, they'll go on the website
15   just as soon as we can get them on there?
16                  MR. GRIEF:  Yes, sir.
17                  COMMISSIONER COX:  And they'll be kept
18   up to date, just as rapidly as we get that
19   information, we'll put it on the website?
20                  MR. GRIEF:  Yes, sir.
21                  CHAIRMAN CLOWE:  That's understood.
22   And furthermore, the procedure, which we had a lengthy
23   discussion about this morning, in the interim, stays
24   in place.
25                  MR. GRIEF:  Yes, sir.
0093
 1                  CHAIRMAN CLOWE:  Are you comfortable
 2   with that, Commissioner Cox?
 3                  COMMISSIONER COX:  As long as you'll do
 4   it when I'm in Colorado.
 5                  CHAIRMAN CLOWE:  Yes.  Yes.  And if I'm
 6   somewhere, Commissioner Olvera.  Any one of the three
 7   of us.
 8                  Okay.  Are we understood?
 9                  MR. GRIEF:  Yes, sir.
10                  CHAIRMAN CLOWE:  Very good.
11                  Ms. Nettles, are you in the audience?
12   Did you want to speak on this matter?
13                  MS. NETTLES:  Good morning,
14   Commissioners.  For the record, my name is Dawn
15   Nettles and I'm with The Lotto Report out of Dallas.
16                  And it's unfortunate, but I did not
17   hear the beginning of y'all's comments and
18   conversation with regard to the Lotto Texas rule.  You
19   caught me off guard coming out early.
20                  At any rate, am I to understand that
21   y'all are not going to do anything on this today,
22   you're going to wait until next month?
23                  CHAIRMAN CLOWE:  That's correct.
24                  MS. NETTLES:  Okay.  Good.  Okay.
25   Because I am hugely opposed to this, and I would like
0094
 1   to explain why, if you'll allow me.
 2                  First of all, I heard Gary just say
 3   that the other states all guarantee their advertised
 4   amounts, but he failed to tell you that California
 5   does not.  It is in their law, they have legislation
 6   that forbids them from paying anything guaranteed.
 7   All of their prizes in that state are pari-mutuel
 8   prizes, and that is due to the fact that that is the
 9   only way that a lottery can guarantee the people that
10   they get their share of sales.
11                  This rule, from what I have read of it,
12   and I have not read it, but I'm assuming that it says
13   that y'all want to pay the greater of either the
14   amount advertised or the amount in the prize pool,
15   whichever is greater.  I would like to remind you all
16   that that was the philosophy that this agency was
17   working under when they overpaid winners by a hundred
18   million dollars.  But the problem with it is is while
19   you're taking it out of reserves, this is prize money
20   that really should go to the players, the low-tier
21   winners, for the game.  We need the game to be a
22   complete pari-mutuel calculation, all prizes based on
23   pari-mutuel calculations.  The problem with your
24   inflated eight million dollar advertised jackpot is
25   not that the staff did not know what was going on.
0095
 1   They knew clearly what it was.  They knew that they
 2   didn't have enough to fund.  We need to discuss more
 3   not of how to -- the extra trouble you go through for
 4   jackpot calculations, you need to concentrate more on
 5   truth in advertising.  Because they knew all the way
 6   from -- I mean, I've talked watched it for the last
 7   several years and have commented before that you did
 8   not have enough to fund the amount you were
 9   advertising.  This was not the first time I had
10   brought this to you all's attention.  To me this is in
11   advertising.  Under no circumstances is it good for
12   the people to have a game with any guaranteed prizes.
13   The State makes out like a champ on it, but that's not
14   fair to the people.  The people need to get a return
15   of a set percentage of sales, which in all fairness,
16   needs to be 50 percent to the people and 50 percent to
17   the State.  There is nothing wrong with 50/50.  But
18   the people need a guarantee to get their money back,
19   and we don't have it when you have guaranteed prizes.
20   And you certainly don't want guaranteed jackpots, and
21   I'll tell you why.
22                  I have proof of inflated and deflated
23   rates that's used to calculate the amount to pay a
24   prize winner.  That's what this cheated winners issue
25   is all about and the overpayments of a hundred
0096
 1   million.  The Lottery did not comply with the written
 2   rule when they calculated the amount of money to pay
 3   those people.  I would like to see a clean lottery, an
 4   honest lottery.  I would like to see the State get
 5   their share of sales.  I would like to see the people
 6   get their share of sales, and I don't want anything
 7   stuck in a piggy bank over here to pay whenever you
 8   want to inflate the amount on the billboard.  That's
 9   wrong and it's not fair and it's not right.  And since
10   you're changing the Lotto Texas rules, I would also --
11   I was kind of hopeful that you would offer a fair game
12   for the people of Texas.  You're going through a rule
13   change, supposedly because of the inflated jackpot,
14   and you've written in here to do something about the
15   factors and to guarantee that jackpot, but you haven't
16   done anything about the matrix.  And the matrix is
17   what is costing you all a lot of money.  And I gave
18   you all a Lotto Report, and the reason I gave that to
19   you was because there is an editorial in there.
20                  May I step over there and get my copy
21   so I can -- I have one over here.
22                  I know you all know I track sales.  And
23   I'm not sure if you all track it or see it in the
24   perspective that I have it laid out here.  But just
25   for your information, there have been 228 draws as of
0097
 1   today for Lotto Texas under this new matrix.  The
 2   sales for those 228 is 902 million.  If you compare
 3   that to the last 228 draws, under six of 54, there is
 4   a 402 million dollar loss.  Now, the Commission likes
 5   to come back and say, well, that's because of Mega
 6   Millions.  Commissioners, that's not so.  Before Mega
 7   Millions came to Texas, there were 61 draws under the
 8   new matrix.  The sales for those first 61 draws under
 9   five in 44 and one in 44 was 258 million.  The
10   previous 61 draws under the old matrix was 333.9
11   million.  That was a loss of 75 million.  When you all
12   had cost-benefit analysis up here, you were projecting
13   that you were going to see a 600 million increase in
14   sales for the first -- for the first year under that
15   new matrix, but you didn't.  You went 75 million in
16   the hole.  All right.  Now, I also went and I said,
17   okay, 402 million in the hole from the -- the 228
18   draws, let's just throw in sales from Mega Millions.
19   Complete sales for all the draws in Mega Millions.
20   Well, Mega Millions has sold 340 million tickets.  The
21   State is still with a 61.9 million dollar loss,
22   compared to just the last 228 draws under six of 54.
23   If you add in Megaplier sales, which really isn't
24   fair, because Megaplier sales is a completely
25   different game.  It can be attached to Lotto Texas, it
0098
 1   can be attached to Cash 5, it can be attached anywhere
 2   you want it.  It's a totally separate game.  But all
 3   the same, if you add in Megaplier sales, it only sold
 4   78.3 million tickets.  So right now as of today, there
 5   are like -- the State has seen an increase in on-line
 6   sales between these two games of about 16 million.  By
 7   the end of the week, it's going to be in the red.  In
 8   one week, you will have seen zero from these two games
 9   compared to just the last 228 draws under six of 54.
10                  Y'all don't listen to the people.  We
11   screamed and ranted and raved and tried to not get you
12   to give us this bonus ball game and the odds of 47
13   million to one odds.  You're only selling two million
14   tickets.  Now, I told Kim, in the comment hearing on
15   this thing, that they would see sales in the two
16   million dollar range.  And I was right, you did.
17                  Please, if y'all want to get your sales
18   up, you have the people who want to play the games.
19   And you can get them out.  All you've got to do is
20   give the people of Texas a fair shot at winning.  And
21   a six of 52 matrix would probably be acceptable.  It's
22   a compromise between the six of 50 and six of 54.  But
23   we're not here -- I hate to see y'all be here to give
24   the people of Texas games that you know they can't
25   win.  And this rule proves that that's their thought.
0099
 1   It would take a complete idiot to guarantee any
 2   jackpot amount, disaster or no disaster, if you can't
 3   fund it.  Fund only what you have.  This staff knows
 4   how to estimate sales.  I estimate sales.  And I'm
 5   always right on target.  That's all you have to do to
 6   figure out what you have got.  But along with that,
 7   you've got to do truth in advertising, and you've got
 8   to put the amount on the billboard that you really
 9   have enough money to get.  It's a two-step process.
10   Add up sales -- to figure out how much a winner has
11   coming, add up sales for all of the draws, you get to
12   39 percent, as this rule.  Step one, you know he has
13   got what he has got coming, you know how much.  Then
14   you call the Comptroller and say, hey, how much will
15   it cost us to fund eight million over 25 years.  The
16   Comptroller sends it back to you and says, it's going
17   to cost you 5.1 million.  Well, if you only have 4.2
18   million, but it's going to cost 5.1, you know that
19   you're falsely advertising.  All they had do was
20   advertise the right amount, which this Commission
21   doesn't want to do, and they haven't done it for a
22   very long time.  And I don't -- I mean, and it would
23   be very dangerous, even though the people can't win
24   the game, please, change the rule and give us fair
25   odds.  Don't give us any guaranteed prizes.  Give us
0100
 1   50 percent of sales.  That's fair to the people.  And
 2   if y'all want to have the consumers doing business
 3   with you, you need to give them what is fair.
 4                  I am curious.  Out of everything that
 5   I've heard today, I know y'all have to be aware of the
 6   lawsuit that's been filed in California to shut down
 7   California's participation in Mega Millions.  And
 8   since we're talking about rules, I'm just wondering if
 9   y'all have considered and have a backup plan for what
10   Texas or the Mega Millions states will do in the event
11   that they are successful in shutting down California.
12   I've not heard any talk on that.  Have y'all
13   considered it?  Do you know about the lawsuit?  Surely
14   you do.
15                  CHAIRMAN CLOWE:  Ms. Nettles, that's
16   not covered under this item.
17                  MS. NETTLES:  I knew you were going to
18   say that.
19                  CHAIRMAN CLOWE:  You know what the
20   situation is on that.
21                  MS. NETTLES:  Okay.  Well, that's my
22   comments on the rule.
23                  CHAIRMAN CLOWE:  Thank you very much.
24                  MS. NETTLES:  Thank you.
25                  CHAIRMAN CLOWE:  Next we'll go to --
0101
 1   Commissioner, I think we're back to the regular agenda
 2   now, if that's your pleasure.
 3                  Next is item number three,
 4   consideration of, possible discussion and/or action
 5   relating to the continuation of the Bingo Advisory
 6   Committee.
 7                  COMMISSIONER COX:  Mr. Chairman, did we
 8   do item two?
 9                  CHAIRMAN CLOWE:  I was going to pass
10   that.
11                  COMMISSIONER COX:  Okay.
12                  CHAIRMAN CLOWE:  I tried to get away
13   with it and you called my hand.
14                  Billy, this is the second time we'll be
15   passing it.  But in light of the hour and the material
16   we have yet to cover, let's pass it, and see where we
17   are more towards the end of the day.  And if you have,
18   because of another commitment, to depart, we may pass
19   it until our August meeting when you will be here.  Is
20   that all right?
21                  MR. ATKINS:  Yes, sir.
22                  CHAIRMAN CLOWE:  Very good.  Item
23   number three.
24                  MR. ATKINS:  Commissioners, it is time
25   for the Commission to consider the continuation of the
0102
 1   Bingo Advisory Committee, and you have two items in
 2   your notebook.  Mr. Chairman, if it's all right with
 3   you, if we take up items three and four together.
 4                  CHAIRMAN CLOWE:  Yes.
 5                  MR. ATKINS:  They are somewhat
 6   interrelated.
 7                  CHAIRMAN CLOWE:  Yes.
 8                  MR. ATKINS:  Ms. Kiplin will be able to
 9   speak more to item number four.
10                  CHAIRMAN CLOWE:  Item four is,
11   consideration of and possible discussion and/or
12   action, including proposal, on amendments to 16 TAC
13   402.102 relating to the Bingo Advisory Committee.
14                  MR. ATKINS:  Commissioners, what you
15   have in your notebook, under item three, is a copy of
16   a report that was provided to you last year when you
17   took up the consideration of the continuation of the
18   Bingo Advisory Committee.  And essentially, all staff
19   is seeking under this item is guidance from the
20   Commission that this is the type of information that
21   you would like to be provided with in the future as
22   you begin this process of considering whether to
23   continue the Bingo Advisory Committee.  I will let you
24   know there is tentatively scheduled an Advisory
25   Committee Meeting for August 3rd, so if there were
0103
 1   specific information that you wanted from the BAC on
 2   this matter, for them to submit for your
 3   consideration, then I think the time would be
 4   appropriate to request that information.
 5                  CHAIRMAN CLOWE:  Have you any comments,
 6   Commissioner Cox?
 7                  COMMISSIONER COX:  No, sir, I do not.
 8                  CHAIRMAN CLOWE:  Nor do I.  Is this
 9   issue ripe to be voted on in August?
10                  MR. ATKINS:  The rule currently states
11   that unless continued, the Advisory Committee will
12   cease to exist, I believe, it's August 31st.
13                  MS. KIPLIN:  Commissioners, if I might
14   direct your attention to the materials in your
15   notebook.  On advisory committees, there is a chapter
16   in the Government Code, in particular, duration of
17   advisory committees.  It's Section 2110.008.  And what
18   it -- what it indicates is that a State agency that
19   has established an advisory committee may designate
20   the date on which the committee will automatically be
21   abolished.  The designation must be by rule.  You've
22   done that.  The committee may continue in existence
23   after that date only if the agency amends the rule to
24   provide for a different abolishment date.  So the way
25   that I interpret that is that you have to -- the
0104
 1   Commission has to decide whether they want to continue
 2   in existence the Bingo Advisory Committee, and then if
 3   you vote to do that, then we'll need to propose a
 4   different abolishment date in the rule and go ahead
 5   and propose that rule.
 6                  CHAIRMAN CLOWE:  For the August
 7   meeting.
 8                  MS. KIPLIN:  Yes.  I think --
 9                  CHAIRMAN CLOWE:  So we need to vote on
10   this today.
11                  MS. KIPLIN:  It will --
12                  MR. ATKINS:  Well, I was just going to
13   say, I don't believe the effective date affects the
14   August 3rd BAC meeting, so --
15                  CHAIRMAN CLOWE:  But the expiration --
16                  MR. ATKINS:  But the meeting after
17   that.
18                  CHAIRMAN CLOWE:  The expiration is
19   mid-August and if the Commission did not meet prior to
20   that, then it would expire by operation of the law,
21   would it not?
22                  MS. KIPLIN:  The expiration that is in
23   your rule is August 31, 2005.
24                  CHAIRMAN CLOWE:  So we've got to the
25   end of the month.
0105
 1                  MS. KIPLIN:  So you really -- you need
 2   to have the Commission add no later than the August
 3   meeting -- if it's the Commission's desire to have
 4   that proposal filed and in the Register.
 5                  COMMISSIONER COX:  Let me see if I
 6   understand.  It's going to turn into a pumpkin on
 7   August 31st.
 8                  MS. KIPLIN:  Yes, sir.
 9                  COMMISSIONER COX:  Unless we propose a
10   rule in August that probably won't become effective
11   until when?  October or November?
12                  MS. KIPLIN:  Unless you vote.  You may
13   continue only if the agency amends.  You may vote, you
14   may designate the date on which it will automatically
15   be abolished and that designation then has to be by
16   rule.  And you have to amend the rule.  I don't
17   interpret it to mean that you have to have the
18   rulemaking concluded, but would have to move forward
19   to vote to change the date in the rule, and then
20   proceed to get the rule accomplished.
21                  COMMISSIONER COX:  So there is going to
22   be a limbo period between August 31st and the
23   effective date of the amendment to the rule?
24                  MS. KIPLIN:  I'm thinking a vote will
25   address that, the vote to continue the BAC and
0106
 1   identify a different date of abolishment.
 2                  CHAIRMAN CLOWE:  Can we go ahead and
 3   vote on it today?  Is it noticed properly for a vote
 4   today?
 5                  MS. KIPLIN:  I believe it is.  Let me
 6   just check and make sure.
 7                  CHAIRMAN CLOWE:  If it is, I'm going to
 8   move to continue it for one year.
 9                  COMMISSIONER COX:  Second.
10                  CHAIRMAN CLOWE:  I believe that is a
11   motion and a second.  All in favor, say aye.  Opposed,
12   no.  The vote is two-zero in favor.
13                  MS. KIPLIN:  May we also move forward,
14   will you take action on the rule to change the
15   abolishment date --
16                  CHAIRMAN CLOWE:  Yes.
17                  MS. KIPLIN:  So your vote would be to
18   propose an amendment to the Bingo Advisory Committee
19   rule to change the date of abolishment that is in
20   there from August 31, 2005 to August 31, 2006.
21                  CHAIRMAN CLOWE:  That was my motion.
22                  MS. KIPLIN:  And a second and a --
23                  COMMISSIONER COX:  That was the motion
24   I seconded.
25                  MS. KIPLIN:  Okay.
0107
 1                  CHAIRMAN CLOWE:  And that was the vote
 2   two-zero in favor.
 3                  MS. KIPLIN:  I'm sorry.  I thought you
 4   hadn't combined both of them, so I wanted to make
 5   sure.
 6                  CHAIRMAN CLOWE:  Okay.
 7                  MR. ATKINS:  Thank you, Commissioner.
 8                  CHAIRMAN CLOWE:  Is that all of your
 9   items, Billy?
10                  MR. ATKINS:  Except for my report.
11                  CHAIRMAN CLOWE:  Would you make that
12   now?  That is item number 21, is it not?
13                  MR. ATKINS:  Yes, sir.  And just to
14   update you briefly on some of the staffing positions.
15   We have submitted to HR one individual to begin a
16   background check for one of the vacancies in our
17   Dallas regional office.  Additionally, the background
18   has been completed for the vacancy in the Accounting
19   Services section, and we are ready to make an offer
20   for that position.
21                  Regarding the website enhancements,
22   we've identified that there are seven additional
23   interactive forms that have been placed on the
24   website.  That brings the total up to 30, and we
25   continue to work on those.  I did want to point out,
0108
 1   as you know, we have on our website a graphic that
 2   licensees can download, which shows the amount of
 3   charitable distributions that have been made since the
 4   beginning of charitable bingo.  We are following that
 5   amount as it reaches one billion dollars.  That has
 6   been updated with information from the first quarter
 7   of 2005.  Additionally, I don't know if you have had
 8   the opportunity to see it yet, but we also have a
 9   poster that we placed in the lobby that we will keep
10   on permanent display and update each quarter as
11   additional charitable distributions are made.
12                  And then finally, Commissioners, I just
13   wanted to update you briefly on the NAGRA conference
14   that was held in June.  We had approximately 151
15   registrants, total participation of just over 190
16   individuals.  We were very pleased with the
17   attendance, both from the United States and Canada.  I
18   did want to report that one of the representatives
19   that attended from the D.C. lottery and the Charitable
20   Games Commission was Ridgely Bennett, a former
21   attorney from the Lottery Commission, and we're hoping
22   that he becomes more involved in the organization.
23   But overall, I believe that the conference was a
24   success and was very pleased with the results.
25                  CHAIRMAN CLOWE:  Very good.
0109
 1                  Any questions.
 2                  COMMISSIONER COX:  No, sir.
 3                  CHAIRMAN CLOWE:  Thank you, Billy.
 4   Let's take a ten-minute recess, please.
 5                    (RECESS.)
 6                  CHAIRMAN CLOWE:  Let's come back to
 7   order.  We'll now take item seven, report, possible
 8   discussion and/or action on lottery sales and revenue,
 9   game performance, new game opportunities, and trends.
10                  MR. NAVARRO:  Good afternoon,
11   Commissioners.  Again, for the record, my name is
12   Benito Navarro.  I'm the Acting Financial
13   Administration Manager.  To my right is Robert
14   Tirloni.  He is the Products Manager.
15                  We'll start our presentation today with
16   the revenue from sales and the net revenue to the
17   State presentation, comparing 44 weeks, ending July
18   3rd, 2004 to July 2nd, 2005.  We show sales
19   contribution has decreased by about 2.5 percent from
20   39.6 to 37.4 for the same period in '04 to '05.  Our
21   estimated net revenue to the State has also decreased
22   from 835.3 million to 819.7 million dollars for the
23   same time frames, '04 to '05.  I think it's important
24   to mention here that during the month of June of 2004,
25   we had our two highest jackpots in Texas history, a
0110
 1   145 million dollar Lotto Texas jackpot and a 290
 2   million dollar Mega Millions jackpot.
 3                  Next slide.  This is fiscal year 2005
 4   year to date sales and revenue by game.  Again, we see
 5   our instant tickets bringing in 2.3 billion dollars or
 6   73.9 percent of our sales; 505 million dollars and
 7   61.6 percent of our revenue.  Total sales to date,
 8   total 2.1 billion.  Again, year to date revenue is
 9   819.7 million dollars.
10                  Lotto Texas has brought in 8.4 percent
11   of our sales and 11.8 percent of our revenue, followed
12   very closely by Pick 3, bringing in 7.8 percent of our
13   sales and 11.6 percent of our revenue; followed by
14   Mega Millions, at 4.8 percent of sales and 7.2 percent
15   of revenue.
16                  This is a graphical depiction of our
17   sales by game.  Again, you can see instant tickets
18   bringing in 2.3 billion dollars of our total sales of
19   3.1 billion; Lotto Texas at 261.2 million; Pick 3 at
20   240; and Mega Millions at 147.5.
21                  This is a graphical representation of
22   our revenue.  Instant tickets bringing in 505 million
23   dollars in revenue, followed by Lotto Texas, 96.9,
24   very closely followed by Pick 3 at 95.2, and Mega
25   Millions at 58.7.
0111
 1                  MR. TIRLONI:  Commissioners, for the
 2   record, my name is Robert Tirloni.  I am the Products
 3   Manager for the Texas Lottery Commission.
 4                  We continue to show you this slide to
 5   show you a depiction of instant sales by price point.
 6   There is really no change.  We continue to see the
 7   bulk of the sales coming in from the two-dollar and
 8   the five-dollar price point, followed very closely by
 9   the one-dollar price point.  For the week that just
10   ended, our highest selling two-dollar game was Break
11   the Bank and our highest selling five-dollar game was
12   Bonus Break the Bank.  And if you remember, a month or
13   two ago we talked about that -- that family of games
14   and how we have expanded that family of games, and
15   it's proving to be successful for us.
16                  In another graphical depiction of the
17   revenue by price point, and again, you see the
18   two-dollar and the five-dollar making up the majority
19   of the revenue, again, followed closely by the
20   one-dollar.  Very little change in these charts month
21   to month.
22                  Commissioners, next month we plan to
23   have an update for you on the Mega Millions game with
24   California as a participating state.  We hope to have
25   an analysis of the roll cycle that we are currently in
0112
 1   and that California is participating in, and to
 2   compare that to some previous roll cycles, so we can
 3   show you that information and make some comparisons.
 4                  And Ben or I would be happy to answer
 5   any questions that you have.
 6                  CHAIRMAN CLOWE:  Any questions?
 7                  COMMISSIONER COX:  Ben, was last fiscal
 8   year the best year ever for the Texas Lottery for both
 9   sales and net revenue?
10                  MR. NAVARRO:  No, sir.  But very close,
11   I believe second.  1997 is still our highest sales and
12   revenue year.
13                  COMMISSIONER COX:  So as compared to
14   last year, which was our second best ever, what I saw
15   is, we're still slightly ahead in sales, but we have
16   fallen behind in revenue.
17                  MR. NAVARRO:  Correct, sir.
18                  COMMISSIONER COX:  Thank you.
19                  MR. NAVARRO:  I would like to add to
20   that, that we are currently in a hundred million
21   dollar roll cycle for Mega Millions and Lotto Texas is
22   still rolling at 20.
23                  MR. TIRLONI:  21.
24                  MR. NAVARRO:  21 -- sorry -- and we've
25   got a month and a half left in the fiscal year, and it
0113
 1   remains to be seen whether or not we can continue to
 2   roll, and if we do, we may, you know, bring in some
 3   additional funds to the State.
 4                  CHAIRMAN CLOWE:  And in the prior
 5   agenda item, Robert, Ms. Nettles asked about a lawsuit
 6   against Mega Millions in California.  What can you
 7   tell us about that?
 8                  MR. TIRLONI:  I actually have no
 9   information about that.  I have not heard any
10   information about that.
11                  CHAIRMAN CLOWE:  So you're not aware of
12   it?
13                  MR. TIRLONI:  I'm not personally aware
14   of that.
15                  CHAIRMAN CLOWE:  Would you develop that
16   information and report it to the Commissioners?
17                  MR. TIRLONI:  I will.  I'll work with
18   General Counsel on that.
19                  CHAIRMAN CLOWE:  Okay.
20                  COMMISSIONER COX:  Mr. Chairman, there
21   may be somebody here who knows something about that.
22   I remember hearing about it from staff when they were,
23   I think, seeking injunctive relief to keep California
24   from entering and we were concerned about whether we
25   might have to amend a rule.  So I think some attention
0114
 1   has been directed to that.
 2                  CHAIRMAN CLOWE:  I agree with you.
 3   That's my recollection as well.  But, again, I'm
 4   looking for facts.  I -- you know, you just hear all
 5   kinds of things, and I would like a factual report to
 6   the Commissioners so that subject can be dealt with
 7   factually.
 8                  MR. TIRLONI:  We will do that for the
 9   August meeting.
10                  CHAIRMAN CLOWE:  Prior to the August
11   meeting.
12                  MR. TIRLONI:  Yes.
13                  CHAIRMAN CLOWE:  As soon as possible.
14                  MR. TIRLONI:  Yes.
15                  CHAIRMAN CLOWE:  Very good.  Thank you.
16                  MR. NAVARRO:  Thank you, Commissioners.
17                  CHAIRMAN CLOWE:  Next item number
18   eight, report, possible discussion and/or action on
19   the Lottery terminal functionality, including the
20   quick pick feature for all games and/or impact to
21   players.
22                  MR. ANGER:  Good afternoon,
23   Commissioners.
24                  CHAIRMAN CLOWE:  Good afternoon,
25   Michael.
0115
 1                  MR. ANGER:  For the record, my name is
 2   Michael Anger and I'm the Lottery Operations Director.
 3                  Commissioners, I would like to update
 4   you on the agency's progress related to the review of
 5   the GTECH terminal functionality issue that affected
 6   Pick 3 sales on June 16th.  As I reported in the last
 7   Commission meeting, the agency has requested
 8   additional analysis of this matter and would like to
 9   update you on the status of those actions and provide
10   you with an initial report of information from Doctor
11   Randy Eubank, the vendor that provides statistical
12   consulting services to the agency.
13                  As I reported previously, GTECH has
14   entered into an agreement with Gaming Laboratories
15   Incorporated, or GLI, to conduct a third party
16   certification of the quick pick ticket generation at
17   the terminal level for all Texas on-line games.  GTECH
18   has indicated that the work is underway to provide GLI
19   with the data necessary to complete this testing.  And
20   Catherine Melvin and other internal audit staff are in
21   discussions with GTECH regarding the GLI testing to
22   establish standards surrounding the testing protocol
23   and the transfer of the data from GTECH to GLI.
24   Additionally, Randy Eubank will be asked to review the
25   testing processes used by GLI and the resulting data
0116
 1   provided by GLI in their report to confirm the
 2   statistical validity of these tests.  As previously
 3   reported, the agency has also requested an independent
 4   third party to complete a thorough review of this
 5   matter.  GTECH has contacted Deloitte & Touche
 6   regarding this engagement, and the internal audit
 7   staff here at the agency coordinated with Lottery
 8   management staff in an effort to work with GTECH and
 9   Deloitte & Touche to completely define the scope of
10   services for this engagement, so that it is ensured
11   that a comprehensive review of the quick pick
12   functionality for all of Texas on-line games is
13   completed.
14                  And then finally, Randy Eubank has been
15   asked to review and report on the impact of the quick
16   pick functionality issues related to the Pick 3 game.
17   Doctor Eubank has requested a significant amount of
18   transaction data in order to conduct a full
19   statistical analysis of this matter.  GTECH is
20   currently collecting this data in response to
21   Doctor Eubank's request, and it's my understanding
22   that the retrieval of this data will be completed by
23   GTECH no later than July 22nd.  However, Doctor Eubank
24   has reviewed the reporting issue and evaluated the
25   information that GTECH has reported to us with regard
0117
 1   to this matter and provided a written response to two
 2   of the significant questions posed by the agency
 3   related to this matter.  And with your permission, I
 4   would like to read the questions that were posed and
 5   the answers that he provided.
 6                  The first question, would bias in the
 7   generation of quick pick tickets with the Pick 3 game
 8   affect the players' opportunity to win a prize on that
 9   game.  The answer from Doctor Eubank:  The short
10   answer here is, no.  To expand on this a bit, in a
11   Pick 3 game there are 1,000 possible outcomes
12   corresponding to all possible ways to order three
13   digits, each having values between zero and nine.
14   Assuming that every such outcome is selected with the
15   same probability, that is, one in 1,000, any given
16   three-digit number between 000 and 999 will have the
17   same chance of selection.  It makes no difference how
18   the player's numbers were chosen, the chances of
19   winning are always the same.
20                  And the second question, did the issue
21   as identified by GTECH affect the outcome of any
22   drawings for the Pick 3 game.  The answer from Doctor
23   Eubank:  Again, the answer here is, no.  The physical
24   drawings of the Pick 3 balls are conducted by lottery
25   personnel using stand-alone drawing machinery in a
0118
 1   secure studio environment.  There is no physical
 2   connection between this environment and the GTECH
 3   terminals, so the GTECH incident could in no way
 4   affect the Pick 3 drawing's results conversely.
 5                  And this concludes my report.  I plan
 6   to provide you with further updates at future meetings
 7   as that becomes available and as we proceed through
 8   reviewing this matter.  I would be happy to answer any
 9   questions that you have or receive any feedback.
10                  CHAIRMAN CLOWE:  I don't believe there
11   are any questions, Michael.  But I testified before
12   Chairman Flores' committee about this item last week
13   and made part of my testimony a promise of further
14   developments as they are reported to the Commission.
15                  MR. ANGER:  Yes, sir.
16                  CHAIRMAN CLOWE:  So would you see that
17   your report is forwarded to Chairman Flores and the
18   other members of that committee?
19                  MR. ANGER:  I will, sir.
20                  CHAIRMAN CLOWE:  And then keep them up
21   to date as you update the Commissioners, if you will.
22                  MR. ANGER:  Yes, sir.
23                  CHAIRMAN CLOWE:  Thank you.
24                  Next, item nine, report, possible
25   discussion and/or action on the lottery advertising
0119
 1   and promotions.
 2                  MS. McCULLOUGH:  Afternoon,
 3   Mr. Chairman and Commissioner.  For the record, my
 4   name is Chelsea McCullough.  I am the Creative
 5   Coordinator for the Texas Lottery.
 6                  In regards to current advertising
 7   initiatives, both DDB and The King Group are running a
 8   Mega Millions campaign that focuses on the Megaplier
 9   feature.  The DDB TV and radio flight will run until
10   July 16th, and The King Group flight will continue
11   through July 23rd.  Light reads are currently at 100
12   percent Mega Millions through July 16th.  They will
13   resume back to Lotto Texas unless the Mega Millions
14   jackpot is more than 100 million.
15                  In regards to current promotions, eight
16   promotional events will be conducted across the state,
17   and additional details are available in the agenda
18   memo.
19                  In closing, Commissioners, I would like
20   to take this opportunity to provide you with an update
21   in regard to the UT interagency cooperative agreement.
22   On July 6th, 2005, a contract was executed with the
23   University of Texas at Austin to retain services of an
24   advertising consultant.
25                  This concludes my presentation.  I
0120
 1   would be happy to provide any additional information
 2   or answer any questions at this time.
 3                  COMMISSIONER COX:  Chelsea, I have seen
 4   several of the advertisements in the current
 5   Mega Millions advertising series.  In fact, I think
 6   I've seen them all in Gary's office.  I haven't seen
 7   them all yet on television or heard them all yet on
 8   the radio.  The idea of making a negative and a
 9   divisive matter of a family out of winning a jackpot
10   or a major prize, to me, is not a way to advertise the
11   Texas Lottery.
12                  These advertisements, Mr. Chairman, I
13   don't know whether you've seen them, but the wife
14   becomes very angry with the husband because even
15   though he won 250,000, he didn't Megaply.  And in one
16   case, I think she has a rolling pin in her hand and it
17   looks like she is going to hit either him or the
18   picture.  And I think making something negative out of
19   winning an important Texas Lottery prize is not a way
20   that we should be advertising.
21                  MS. McCULLOUGH:  Yes, sir.
22                  COMMISSIONER COX:  Thank you,
23   Mr. Chairman.
24                  CHAIRMAN CLOWE:  Thank you, sir.  Thank
25   you, Chelsea.
0121
 1                  Next item ten, report, possible
 2   discussion and/or action on HUB and/or minority
 3   business participation, including the agency's
 4   Mentor/Protege program.
 5                  MS. BERTOLACINI:  Good afternoon,
 6   Commissioners.
 7                  CHAIRMAN CLOWE:  Good afternoon.
 8                  MS. BERTOLACINI:  For the record, my
 9   name is Joyce Bertolacini, coordinator of the Texas
10   Lottery Commission's Historically Utilized Business
11   program.
12                  The TLC's subcontracting deadline did
13   not allow time to develop a June monthly report for
14   you today, so we have included the May report in your
15   notebooks.  And this report includes all expenditures
16   for fiscal year 2005, from September 1st of 2004
17   through May 31st of 2005.  Our total qualifying
18   expenditures as of May 31st, 2005, were 113.2 million,
19   and our estimated HUB minority utilization was nearly
20   27.9 million, which equates to 24.62 percent.  So
21   we're running close to 25 percent so far this year.
22                  Regarding the agency's Mentor/Protege
23   program, I just wanted to let you know that we did
24   receive several applications from potential proteges
25   at our HUB forum last month, and I will keep you
0122
 1   informed of any new relationships that may develop as
 2   the result of that.  And I would be happy to answer
 3   any questions.
 4                  CHAIRMAN CLOWE:  Joyce, thank you.
 5   This is very important work and you continue to be
 6   diligent in it, and we want to maintain these good
 7   numbers.  So keep steady on and whatever the
 8   Commissioners can do to support this effort, we stand
 9   ready.
10                  MS. BERTOLACINI:  Thank you.
11                  CHAIRMAN CLOWE:  Thank you.
12                  Next, item number 11, report, possible
13   discussion and/or action on the agency's contracts.
14                  MS. ZGABAY-ZGARBA:  Good afternoon,
15   Chairman and Commissioner.
16                  CHAIRMAN CLOWE:  Good afternoon.
17                  MS. ZGABAY-ZGARBA:  For the record, my
18   name is Angela Zgabay-Zgarba.  I'm the Contract and
19   Procurement Specialist for the agency.
20                  In your notebook under agenda item
21   number 11 is a report that has been updated through
22   June 16th.  If you have any questions, I would be
23   happy to answer them.
24                  CHAIRMAN CLOWE:  I think there are
25   none.  Thank you.
0123
 1                  Next, item number 12, report, possible
 2   discussion and/or action on the Audit Services
 3   procurement.
 4                  MS. ZGABAY-ZGARBA:  I mentioned in the
 5   last meeting that the evaluation committee has
 6   completed the evaluation process and an announcement
 7   of an apparent successful proposer has been made.  At
 8   this time, initial contract negotiations have
 9   concluded and contract drafting has commenced.
10                  CHAIRMAN CLOWE:  Thank you.  And I
11   believe the next item, 13, is yours as well.
12                  MS. ZGABAY-ZGARBA:  That's right.
13                  CHAIRMAN CLOWE:  Consideration of and
14   possible discussion and/or action on the Broadcast
15   Studio and the Production Services procurement.
16                  MS. ZGABAY-ZGARBA:  Uh-huh.  And this
17   procurement process is still pending and open.
18   Proposals are still under review by the evaluation
19   committee, and I have no further updates on that at
20   this time.
21                  CHAIRMAN CLOWE:  Thank you.
22                  MS. ZGABAY-ZGARBA:  Thank you.
23                  CHAIRMAN CLOWE:  Next, item 14, report,
24   possible discussion and/or action on the agency's
25   financial status.
0124
 1                  MR. NAVARRO:  Good afternoon,
 2   Commissioners.  For the record, again, my name is
 3   Benito Navarro, the Acting Financial Accountant -- or
 4   Administration Manager.  Sorry about that.
 5                  With this short time between the
 6   Commission meetings, we were unable to provide you
 7   with the most current information for your notebooks.
 8   However, this morning we did provide you with updated
 9   information.  Inside this packet you will find a
10   report on transfers made to the Foundation School Fund
11   and allocations of unclaimed prizes.  June's lottery
12   sales revenue and other amounts transferred to the
13   Foundation School Fund in the month of July for June
14   sales amounted to 80.8 million dollars.  I mentioned
15   earlier that in June 2004, we had our two largest
16   jackpots in the history of the Texas Lottery, 145
17   million for Lotto Texas and the 290 for Mega Millions.
18   And just for a point of reference, I wanted to mention
19   to you that in the month of June of 2004, sales
20   generated 136.4 million dollars to the Foundation
21   School Fund.  So earlier when we showed you that sales
22   contribution margin report that showed revenue to the
23   State being at a lower level, the biggest part of that
24   is this 136.4 million dollar transfer for the month of
25   June 2004.
0125
 1                  Behind the transfer report you'll find
 2   a report of lottery sales, expenditures and transfers
 3   from the year 1992 through today.  Total cash
 4   transfers to the State through June total 12.7 billion
 5   dollars.  Of this amount, 7.4 billion has been
 6   transferred to the Foundation School Fund.
 7                  Behind the divider page, you'll find
 8   the Texas Lottery Commission's budget reports for the
 9   period September 1st, 2004 through June 30th, 2005.
10   Both lottery and charitable bingo operation
11   expenditures and commitments are tracking at expected
12   rates, except for the Lottery operator contract.  This
13   contract is running at approximately 95.7 percent of
14   budgeted amounts.  This is due to higher than expected
15   lottery sales thus far in the history of 2005.
16   Because the agency has appropriated additional funds
17   in the event of higher sales, there are no budget
18   concerns to report to you at this time.  I would like
19   to note, however, that through the month of June, the
20   Commission has received an additional 16.2 million
21   dollars in Rider 4 funding.  Of that amount, 10.4
22   million has been allocated to the lottery operator
23   contract to pay for increased sales.
24                  Commissioners, this concludes my report
25   and I will be pleased to answer any questions that you
0126
 1   have regarding these reports.
 2                  CHAIRMAN CLOWE:  We're approaching very
 3   rapidly, it seems to me, the end of the fiscal year.
 4                  MR. NAVARRO:  Yes, sir.
 5                  CHAIRMAN CLOWE:  Are all costs in line
 6   regarding budget and are we --
 7                  MR. NAVARRO:  As far as I can tell,
 8   yes, Commissioner.
 9                  CHAIRMAN CLOWE:  We are looking like
10   we're going to come in right where we anticipated?
11                  MR. NAVARRO:  Right where we
12   anticipated.  We will have some additional funding
13   based on the Rider 4 and sales so -- but the original
14   budget amounts are on target.
15                  CHAIRMAN CLOWE:  Good.  Thank you very
16   much.
17                  MR. NAVARRO:  Yes, sir.
18                  CHAIRMAN CLOWE:  Next, item 15, report,
19   possible discussion and/or action on the 79th
20   legislature.  Ms. Trevino.
21                  MS. TREVINO:  Good afternoon,
22   Commissioners.  For the record, I'm Nelda Trevino, the
23   Director of Governmental Affairs.
24                  As I reported at the last Commission
25   meeting, staff has been working on the agency's
0127
 1   legislative implementation project from the regular
 2   legislative session.  Each division has formed
 3   committees to identify any necessary actions that the
 4   agency would need to take in order to be in compliance
 5   with bills that were enacted during the regular
 6   session, and we will keep you posted on the progress
 7   of this implementation project.
 8                  The last day of the first called
 9   special session of the 79th legislature is July the
10   20th.  Governmental Affairs Division is tracking and
11   monitoring bills filed during this special session
12   with potential impact to the agency.  There have been
13   207 bills filed and we are currently tracking 17 of
14   those bills.  We did provide you today with an updated
15   legislative tracking report and I would like to
16   mention five of these bills.  House Bill 3 by
17   Representative Keffer relates to the property tax
18   relief proposals that the legislature is considering.
19   And it was amended in the Senate very early this
20   morning to include several provisions that impact the
21   agency.  Senator Ken Armbrister's amendments relating
22   to electronic pull-tab bingo and tribal bingo were
23   adopted by the Senate.  Additionally, an amendment
24   introduced by Senator Jane Nelson relating to the
25   Texas Lottery's advertising and procurement practices
0128
 1   was also added to the bill.
 2                  House Bill 58 by Representative Flores
 3   authorizes the operation of video lottery games on
 4   behalf of the State and creates a Gaming and Boxing
 5   Commission.
 6                  House Bill 80, also by Representative
 7   Kino Flores, relating to the Lottery Commission's
 8   Sunset date, that you may recall from the regular
 9   session that the agency's Sunset date was extended to
10   2011, and this bill would amend the agency's Sunset
11   date to 2007.
12                  House Bill 38, by Senator
13   Ken Armbrister goes to authorizing the operation of
14   video lottery at racetracks and on Indian tribes.  And
15   House Bill 52 by Senator Nelson requires the agency to
16   identify applicable laws governing consumer
17   information and protection, including laws governing
18   deceptive trade practices and deceptive advertising,
19   and requires the agency to develop policies to ensure
20   the Commission complies with the requirements of those
21   laws.  Additionally, the bill amends the agency
22   procurements procedures.  And as I mentioned earlier,
23   this language is now contained in House Bill 3 as it
24   was voted out by the Senate earlier this morning.
25   House Bill 3, in all likelihood, will end up in a
0129
 1   conference committee, and we'll certainly keep you
 2   posted on the developments of the language in that
 3   bill.
 4                  And this concludes my report and I'll
 5   be happy to answer any questions.
 6                  CHAIRMAN CLOWE:  Thank you.
 7                  Next, item 16, consideration of and
 8   possible discussion and/or action on external and
 9   internal audits and/or reviews relating to the Texas
10   Lottery Commission and/or the Internal Audit
11   Department's activities, including a review of the
12   advertised estimated Texas -- Lotto Texas jackpot
13   amounts, which we have covered previously.
14                  MS. MELVIN:  Chairman, Commissioner, as
15   you indicated, most of my item has been covered.  You
16   did discuss previously the request to the State
17   Auditor's Office and I just wanted to mention that
18   should the State Auditor decide to come into the
19   agency, internal audit stands ready to provide liaison
20   assistance or any other assistance that's necessary.
21                  The only other item I have is regarding
22   the Comptroller's post payment audit, and we are still
23   in a -- a position of awaiting their final results.
24   And that's all I have.
25                  COMMISSIONER COX:  Catherine,
0130
 1   Chairman Flores suggested in the hearing last week
 2   that it might be a good idea, in order to put some of
 3   the questions about overpayment and underpayment of
 4   jackpots to previous winners, that it might be
 5   worthwhile to ask the State Auditor to take a look at
 6   that.  Have you thought about whether you think that
 7   would be helpful?
 8                  MS. MELVIN:  I think that would be an
 9   excellent idea.  I have reached out to the State
10   Auditor's Office and offered up our working papers and
11   any other information we could provide related to the
12   audit work that we did, and welcome certainly their
13   review of that audit.  And to date they haven't taken
14   me up on it, but that's not to say they won't.
15                  COMMISSIONER COX:  Mr. Chairman, I
16   guess the question then I would ask is, do you think
17   we should be more proactive and ask the State Auditor
18   to take a look at that, or do you think that
19   Catherine's offering up her papers is as good as we
20   can do?
21                  CHAIRMAN CLOWE:  I think we ought to
22   ask for it, and I think it falls right in line with
23   the announcement I made earlier today, that I would
24   send Mr. Keel a letter asking for the audit regarding
25   personnel practices.  And I think to add this item to
0131
 1   it as well would be the appropriate time and venue to
 2   do it in.
 3                  Would you work with the General Counsel
 4   to draft that letter for my signature?
 5                  MS. MELVIN:  Absolutely.
 6                  CHAIRMAN CLOWE:  And you have a sense,
 7   from the announcement I made earlier and Commissioner
 8   Cox's comments, of how we would like to make that
 9   request in the letter.
10                  MS. MELVIN:  I do.
11                  CHAIRMAN CLOWE:  And, Counselor, in
12   that letter, can I sign that and the Commissioners be
13   copied on it?
14                  MS. KIPLIN:  I think if you have
15   already sent the letter and it's just a by way of
16   information to them, you're not seeking any
17   deliberation or any action from them.
18                  CHAIRMAN CLOWE:  Very good.  I would
19   like that it be a part of the record when we send the
20   letter.
21                  Thank you, Catherine.
22                  MS. MELVIN:  Thank you.
23                  CHAIRMAN CLOWE:  Next is item 19,
24   consideration of the status and possible entry of
25   orders in four cases, represented by the letters A
0132
 1   through D.  Mr. White.
 2                  MR. WHITE:  Yes, sir.  Good afternoon,
 3   Chairman, Commissioners.  For the record, my name is
 4   Stephen White.  I'm Chief of Enforcement.
 5                  I do have two proposals for decisions
 6   involving the lottery retailer sales agent cases.  In
 7   both those cases, the retailers had insufficient funds
 8   in their accounts on four occasions to cover the cost
 9   of the sale of tickets, and in both cases, the
10   administrative law judge has recommended revocation of
11   their licenses.  In both cases, the staff is
12   recommending that you adopted those proposals for
13   decisions revoking the agent's licenses.
14                  Now, you also have two agreed orders
15   involving bingo, one involving Khiva Shrine.  That
16   involved the case in which there was approximately
17   3200 dollars in bingo proceeds that were determined to
18   be -- had not been used exclusively for charitable
19   purposes.  The terms of the agreed order basically
20   require the organization to refund -- repay the funds
21   to their charitable bingo account from nonbingo
22   source.  And the staff recommends that you adopt that
23   proposed agreed order.
24                  The second agreed order involves VFW
25   Post 1815.  In that case, there were numerous
0133
 1   violations involving rather substantial amounts of
 2   money.  It's some somewhat unique, I suppose -- maybe
 3   perhaps not unique -- in that the errors were
 4   attributed to pretty -- the individual, the bingo hall
 5   manager, whose wife was also the bookkeeper, who also
 6   owned the corporation that provides the security.  It
 7   was also, I believe -- and Mr. Atkins can correct me
 8   if I'm wrong -- was on the payroll of the commercial
 9   lessor.  And it -- bottom line, it's a situation that
10   I do see -- it seems a recurring scenario, where the
11   organizations depend too much on the lessor as the
12   bingo hall manager.  In this case, many errors were
13   made.  Bottom line, the organization has agreed to
14   repay the funds that were wrongfully disbursed, and
15   also have agreed that this one particular bingo hall
16   manager will not work for them any more.  And, again,
17   the staff is recommending that the Commissioners adopt
18   this agreed order.
19                  CHAIRMAN CLOWE:  Any questions?
20                  I move the adoption of the four cases
21   represented on the agenda by letters A through D as
22   recommended by the staff.
23                  COMMISSIONER COX:  Second.
24                  CHAIRMAN CLOWE:  All in favor, please
25   say aye.  Opposed, no.  The vote is two-zero in favor.
0134
 1                  We will sign those orders right now.
 2                  Next we'll take up item 20, report by
 3   the Acting Executive Director and/or possible
 4   discussion and/or action on the agency's operational
 5   status and FTE status.  Mr. Grief.
 6                  MR. GRIEF:  Mr. Chairman, I don't have
 7   a prepared report this morning -- this afternoon,
 8   rather, obviously, but I did want to say that I
 9   appreciate the confidence the Commission has shown in
10   the staff and in me today.  And I can assure you, I
11   will be paying attention.  We're going to be mindful
12   to the things that the Commissioners have mentioned
13   today, going forward.  And today I am focused on
14   working with the State Auditor's Office, the
15   legislative committee, and I heard Commissioner Cox
16   mention some concerns about advertising.  I want to
17   focus on that as well.  We're going to be working hard
18   to get that Lotto Texas rule to a form that the
19   Commissioners can review, and we're going to implement
20   immediately the things that the Commission mentioned
21   today regarding not just Lotto Texas, but all of our
22   jackpot estimations.  So with that, I'll conclude my
23   remarks.  That's all I have to report today.
24                  CHAIRMAN CLOWE:  Thank you, Gary.
25                  There were two individuals who filled
0135
 1   out witness affirmation forms who indicated they
 2   wished to speak in regard to the GameTech settlement.
 3   I promised to call on them.  James F. McNally and
 4   Carolyn Scott.  Are any of those folks still here in
 5   the audience?  And Jane Thompson.  There were three
 6   individuals.  I apologize for the lateness of the time
 7   in calling on those individuals.  If there is anybody
 8   in the audience that knows these individuals, I would
 9   appreciate it if they be informed that this subject
10   was passed until the August meeting, and the
11   Commission will welcome their appearance at that time.
12                  Next item 22, public comment.
13                  Mr. Busald, you have indicated a desire
14   to address the Commission.
15                  MR. BUSALD:  Yes.  And I just wish to
16   thank you, Mr. Chair, and Commissioner, for hearing
17   what I said.  I thought I might --
18                  CHAIRMAN CLOWE:  You'll need to get on
19   the mike.
20                  MR. BUSALD:  Oh, I'm sorry.
21                  Yes.  I thought I might have to make
22   the comment about the students' information on the
23   demographic report being correct.  I didn't really
24   know if I could work that into the statements I made
25   previously, so that's why I wanted that separate --
0136
 1   put in a separate form.  But I really have no
 2   comments, other than I really appreciate the manner in
 3   which you seem to be going forth, both of you.  And I
 4   know you have a tough and sometimes thankless job, and
 5   I think a lot of positive steps are being made today.
 6   Thank you very much.
 7                  CHAIRMAN CLOWE:  Thank you, sir.  We're
 8   highly paid, as you know.
 9                  MR. BUSALD:  Yes, I know.
10                  CHAIRMAN CLOWE:  Is there any other
11   business to come before the Texas Lottery Commission
12   at this time?  This meeting is adjourned.  The time is
13   1:42.  Thank you all very much.
14   
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25   
0137
 1                  REPORTER'S CERTIFICATION
 2   
 3   STATE OF TEXAS       )
 4   COUNTY OF TRAVIS     )
 5   
 6               I, BRENDA J. WRIGHT, Certified Shorthand
 7   Reporter for the State of Texas, do hereby certify
 8   that the above-captioned matter came on for hearing
 9   before the TEXAS LOTTERY COMMISSION as hereinafter set
10   out, that I did, in shorthand, report said
11   proceedings, and that the above and foregoing
12   typewritten pages contain a full, true, and correct
13   computer-aided transcription of my shorthand notes
14   taken on said occasion.
15               Witness my hand on this the 27TH day of
16   JULY, 2005.
17   
18   
19   
                      BRENDA J. WRIGHT, RPR,
20                    Texas CSR No. 1780
                      Expiration Date:  12-31-06
21                    WRIGHT WATSON & ASSOCIATES
                      Registration No. 225
22                    Expiration Date:  12-31-05
                      1801 N. Lamar Boulevard
23                    Mezzanine Level
                      Austin, Texas  78701
24                    (512) 474-4363
25   JOB NO. 050711BJW